N Pty Ltd & A Pty Ltd
[2021] FamCAFC 134
•29 July 2021
FAMILY COURT OF AUSTRALIA
N Pty Ltd & A Pty Ltd [2021] FamCAFC 134
Appeal from: A Pty Ltd as Trustee for the Storrer Family Trust and Anor & N Pty Ltd and Ors [2019] FamCA 1046
A Pty Ltd as Trustee for the Storrer Family Trust and Anor & N Pty Ltd and Ors [2020] FamCA 87
Appeal number: NOA 20 of 2020 File number: BRC 7225 of 2009 Judgment of: STRICKLAND, ALDRIDGE & KENT JJ Date of judgment: 29 July 2021 Catchwords: CORPORATIONSLAW – APPEAL – OPPRESSION – Oppressive conduct – Whether primary judge erred in finding that the appellants’ conduct was oppressive to the respondents – Whether it ought to have been found there was a “consensus” that if a member was no longer committed to the business, they would sell their shares – Failure to make an offer to acquire the shares at fair value – No reasonable exit mechanism – Entire context considered – The primary judge was correct in according the “consensus” no weight – No error in finding that the appellants’ conduct was oppressive.
CORPORATIONSLAW – APPEAL – OPPRESSION – Relief – Where the primary judge ordered that the respondents’ interests be acquired at a value as at a specific date – Procedural fairness – Where the appellants sought to adduce evidence relevant to the valuation of shares – Evidence likely to be extensive and controversial – The primary judge erred in not giving the appellants the opportunity to adduce further evidence identified – Orders in respect of relief set aside – Leave to appeal granted – Appeal allowed in part – Matter remitted for rehearing in respect of final relief – Written submissions to be provided as to costs.
Legislation: Corporations Act 2001 (Cth) ss 232, 233 Cases cited: Aldi Foods Pty Ltd v Moroccanoil Israel Ltd (2018) 261 FCR 301; [2018] FCAFC 93
Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd (2003) 214 CLR 51; [2003] HCA 18
Australian Securities and Investments Commission v Kobelt (2019) 267 CLR 1; [2019] HCA 18
Batistatos v Roads & Traffic Authority of New South Wales (2006) 226 CLR 256; [2006] HCA 27
Bennett and Bennett (1991) FLC 92-191; [1990] FamCA 148
Catalano v Managing Australia Destinations Pty Ltd (2014) 314 ALR 62; [2014] FCAFC 55
Campbell v Backoffice Investments Pty Ltd (2009) 238
CLR 304; [2009] HCA 25
Dynasty Pty Ltd v Coombs (1995) 59 FCR 122; [1995] FCA 610
Ebrahimi v Westbourne Galleries Ltd [1973] AC 360
Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (2001) 37 ACSR 672; [2001] NSWCA 97
Ghosh v NineMSN Pty Ltd (2015) 90 NSWLR 595; [2015] NSWCA 334
House v The King (1936) 55 CLR 499; [1936] HCA 40
Joint v Stephens (2008) 26 ACLC 1467; [2008] VSCA 210
Lee v Lee (2019) 266 CLR 129; [2019] HCA 28
Minister for Immigration and Border Protection v SZVFW (2018) 264 CLR 541; [2018] HCA 30
Minister for Immigration and Border Protection v SZVFW (2017) 248 FCR 1; [2017] FCAFC 33
MMAL Rentals Pty Ltd v Bruning (2004) 63 NSWLR 167; [2004] NSWCA 451
Mopeke Pty Ltd v Airport Fine Foods Pty Ltd (2007) 61 ACSR 395; [2007] NSWSC 153
Nassar v Innovative Precasters Group Pty Ltd (2009) 71 ACSR 343; [2009] NSWSC 342
Norbis v Norbis (1986) 161 CLR 513; [1986] HCA 17
O’Neill v Phillips [1999] 1 WLR 1092
Pollard v RRR Corporation Pty Ltd [2009] NSWCA 110
Robinson Helicopter Company Inc v McDermott (2016) 331 ALR 550; [2016] HCA 22
Re London School of Electronics Ltd [1986] Ch 211
Singer v Berghouse (1994) 181 CLR 201; [1994] HCA 40
Stead v State Government Insurance Commission (1986) 161 CLR 141; [1986] HCA 54
Tomanovic v Global Mortgage Equity Corporation Pty Ltd (2011) 288 ALR 310; [2011] NSWCA 104
Warren v Coombes (1979) 142 CLR 531; [1979] HCA 9
Wilmar Sugar Australia Ltd v Mackay Sugar Ltd (2017) 345 ALR 174; [2017] FCAFC 40
Ramsay, Ian and Robert Austin, Ford, Austin and Ramsay’s Principles of Corporations Law (LexisNexis Butterworths, 17th edition, 2018)
Division: Appeal Division Number of paragraphs: 266 Date of hearing: 17–18 March 2021 Place: Heard in Brisbane, delivered in Sydney Counsel for the Appellants: Mr Looney QC with Ms Nichols Solicitor for the Appellants: McCullough Robertson Lawyers Counsel for the Respondents: Mr J Green Solicitor for the Respondents: Bridge Brideaux Solicitors ORDERS
NOA 20 of 2020
BRC 7225 of 2009APPEAL DIVISION OF THE FAMILY COURT OF AUSTRALIA
BETWEEN: N PTY LTD
First Appellant
N INVESTMENTS PTY LTD
Second Appellant
R PTY LTD ATF THE MR O FAMILY TRUST (and others named in the Schedule)
Third Appellant
AND: A PTY LTD ATF THE STORRER FAMILY TRUST
First Respondent
MR STORRER
Second Respondent
ORDER MADE BY:
STRICKLAND, ALDRIDGE & KENT JJ
DATE OF ORDER:
29 JULY 2021
THE COURT ORDERS THAT:
1.The application for leave to appeal the orders made by the primary judge on 31 May 2019 and 18 February 2020 be granted.
2.The appeal be allowed in part.
3.Orders 4, 5, 6, 7, 8, 10, 13, 14, 15, 16 and 17 made on 18 February 2020 and varied on 12 March 2020 be set aside.
4.The question of final relief be remitted for rehearing at first instance.
5.Costs be reserved.
6.The appellants file and serve written submissions dealing with the issue of costs within fourteen (14) days of these orders, with the respondents to file submissions in response within a further fourteen (14) days. The appellants have the option to file submissions in reply within a further seven (7) days.
Note: The form of the order is subject to the entry in the Court’s records.
Note: This copy of the Court’s Reasons for judgment may be subject to review to remedy minor typographical or grammatical errors (r 17.02A(b) of the Family Law Rules 2004 (Cth)), or to record a variation to the order pursuant to 17.02 Family Law Rules 2004 (Cth).
IT IS NOTED that publication of this judgment by this Court under the pseudonym N Pty Ltd & A Pty Ltd has been approved by the Chief Justice pursuant to s 121(9)(g) of the Family Law Act 1975 (Cth).
REASONS FOR JUDGMENT
STRICKLAND, ALDRIDGE & KENT JJ:
INTRODUCTION
This is an appeal against a series of orders made by a judge of the Family Court of Australia on 18 February 2020 (and varied on 12 March 2020) pursuant to s 233 of the Corporations Act 2001 (Cth) (“the Act”) based on findings made in the reasons for judgment delivered on 31 May 2019. Those findings were that the affairs of N Pty Ltd had been conducted in a manner which was oppressive of the rights of one of its shareholders, A Pty Ltd in its capacity as trustee for the Storrer Family Trust (“A Pty Ltd”). The affairs of N Investments Pty Ltd (“N Investments”) in its capacity as trustee for the N Property Trust (“the Property Trust”), along with its directors, were also found to have been conducted in a manner which was oppressive of the rights of one of its shareholders, Mr Storrer.
N Pty Ltd had five shareholders. Mr O was the sole director. Each shareholder was a corporate trustee of a trust, and behind each trust were the key individuals who provided services to N Pty Ltd. A Pty Ltd provided the services of Mr Storrer, who was the Sales Director. Mr Storrer left that position on 31 July 2013 and thereafter, save for payments of dividends up to 2014, N Pty Ltd and the remaining shareholders treated A Pty Ltd as if it was no longer a shareholder. The shareholders of N Pty Ltd and N Investments other than A Pty Ltd (“the remaining shareholders”) contended that the active provision of services to N Pty Ltd was a condition of being a shareholder, and as that had ceased they were entitled to act and remove Mr Storrer as a director of N Investments. That contention was rejected by her Honour. Instead the primary judge found that Mr Storrer and A Pty Ltd had been treated in a commercially unfair manner and that the claimed oppressive conduct had been established.
In general terms, the orders made on 18 February 2020 (and varied on 12 March 2020) required N Pty Ltd to purchase the shares held in it by A Pty Ltd, at the value those shares had at 31 December 2019 (Order 6). A valuer was to be engaged to value the shares in accordance with the mechanism set out in the orders (Order 15). N Pty Ltd was also required to pay to A Pty Ltd all outstanding unpaid fully franked dividends since 2014 with interest (Order 5), $25,000 which had been wrongly retained by N Pty Ltd with interest (Order 1), and unpaid leave entitlements of $8,461.54 and $1,525.32 with interest (Order 2).
The business of N Pty Ltd was conducted at a property situated at 1 F Street, Suburb KK (“1 F Street”). Until 2 August 2016 it was owned by N Investments as trustee for the Property Trust. Mr Storrer was a director of N Investments, until he was removed on 9 October 2013. A Pty Ltd was one of the unitholders in the Property Trust, as were the other shareholders in N Pty Ltd. By 30 June 2016, each of the other unitholders had asked for and received payment of their outstanding loans and beneficiary entitlements.
N Property Pty Ltd (“N Property”) was incorporated on 14 August 2015 and became the trustee of the N Investment Trust (“the Investment Trust”). The four individuals behind the four remaining shareholders of N Pty Ltd are the beneficiaries of the Investment Trust. On 6 January 2016, N Property as trustee of the Investment Trust acquired a property situated at 3 F Street, Suburb KK (“3 F Street”) with funds provided by N Pty Ltd, which also pays rent to the Investment Trust for the use of that property. Pursuant to a resolution made on 2 August 2016 to transfer 1 F Street to the Investment Trust, N Pty Ltd also pays rent for the use of that property to the Investment Trust.
The primary judge found that this conduct was oppressive of Mr Storrer and A Pty Ltd. N Investments, or alternatively N Property was to pay A Pty Ltd $489,762.70 together with any outstanding unitholder entitlements to 31 March 2019 (Order 3). N Pty Ltd was ordered to acquire all of the units held by A Pty Ltd in the Property Trust at the value those units had at 31 December 2019 (Order 7).
The appellants are N Pty Ltd, the two trustees of the trusts, the four remaining shareholders and the four individuals behind them. The respondents are Mr Storrer and A Pty Ltd.
BACKGROUND
We shall first set out the structure of the N Group before identifying the events which were found to constitute oppressive conduct.
N Pty Ltd
N Pty Ltd had five shareholders, each of which is a company as trustee of a trust associated with one of five contractors of N Pty Ltd. That arrangement came about in the following way.
In July 2003, Mr O, Ms Z, Mr J and Mr C (the seventh to tenth appellants respectively) were employed by G Pty Ltd. Mr O was the CEO and managing director of that company and owned 30 per cent of the shares in it. The remaining shares were held by a foreign entity. Mr Storrer was engaged as a sales manager on 14 July 2003.
Pursuant to a management buy-out of the foreign shareholder which took place in early 2004, companies associated with the above five contractors became the shareholders of G Pty Ltd. R Pty Ltd (associated with Mr O) held 52 per cent of the ordinary shares. A Pty Ltd (associated with Mr Storrer), T Pty Ltd (associated with Ms Z), M Pty Ltd (associated with Mr J) and B Pty Ltd (associated with Mr C) each owned 12 per cent of the ordinary shares. These five individuals became the directors of N Investments.
G Pty Ltd was renamed N Pty Ltd in June 2004. Each of the above shareholders agreed to provide the services of the person associated with it to N Pty Ltd in return for payment of a monthly management fee. Dividends were also paid on the shares each year.
Mr O continued in the position of CEO of N Pty Ltd.
The N Pty Ltd Constitution and the Shareholders’ Agreement
On 26 August 2004, the members of N Pty Ltd adopted a constitution (“the Constitution”). Rule 15 of the Constitution set out a procedure for the sale of shares. Unless otherwise agreed by the members, a shareholder who wished to sell its shares must give notice of that intention to N Pty Ltd and the other members. The notice is taken to be an offer to the remaining members to transfer shares to them at the price nominated in the notice. Only if none of the remaining members takes up the offer may the shares be transferred to a non-member, but not at a price more favourable than that offered to the members.
Importantly therefore, the Constitution envisages the sale of shares to non-members.
The Shareholders’ Agreement was entered into on 22 November 2007 (at [37]). It prevails over the Constitution where there is an inconsistency between them, per clause 2.3 of the Shareholders’ Agreement.
Clause 4(c) of the Shareholders’ Agreement provided that any decision to pay dividends other than in accordance with the Income Distribution Policy (defined to mean the policy promulgated by the Board from time to time) by N Pty Ltd must be approved by at least 75 per cent of the shareholders. Clause 6.2 provided that each shareholder was to receive copies of the annual balance sheet, the flow of funds statement and the profit and loss statement, as soon as possible following the end of each financial year, but no later than 90 days after the end of the financial year.
Clause 9 dealt with the sale of shares. It was agreed that there would be a “no sale period” during which there could be no sale or transfer of shares, except as provided by clause 11. The “no sale period” ended on the happening of a “realisation event”, which was either five years from the agreement date, or when the gross revenue of N Pty Ltd reached $50 million, or when 75 per cent of the shareholders agreed to sell. Clause 10 dealt with the sale of shares at the end of the “no sale period”, with existing members able to acquire shares on the same terms as third parties.
It is clear enough from these provisions that the intention of the shareholders was to develop the business with a view of selling it in due course.
The first “realisation event” occurred on the five year anniversary of the agreement, without any steps being taken to effect a sale as envisaged (at [103]).
Clause 11 allowed for the sale of shares during the “no sale period”. It was described by the primary judge in the following terms:
49.… Clause 11.2 provides, in part, that the transferring shareholder may offer his shares to a bona fide third-party, provided he has first given a Transfer Notice to N Pty Ltd and the other shareholders that he elects to transfer the shares to a bona fide third-party and the transfer of the shares is approved by at least a 75% majority of the remaining shareholders. Clause 11.2(c) provides that, where there [sic] transferring shareholder wishes to transfer the shares to a person who is not a party to the Shareholders’ Agreement, the transferring shareholder must ensure that the transferee becomes a party to the Agreement or enters into an Agreement substantially in the same form of the Shareholders’ Agreement. Clause 11.2(d) notes that nothing in the Clause obliges the remaining shareholders to act reasonably in refusing to accept the transfer of shares, nor to approve a transfer to a proposed transferee.
Importantly, the clause envisages the possibility of a sale to an outside party, albeit on limited terms. There is, however, no term in the Shareholders’ Agreement requiring a shareholder to provide services to N Pty Ltd.
The departure of Mr Storrer
Mr Storrer and his wife became engaged in family law proceedings in 2009. In May 2012, Mrs Storrer sought to join N Pty Ltd to the proceedings which caused it to incur legal expenses.
Mr O formed the view that Mr Storrer should bear those expenses. Mr O had N Pty Ltd issue an invoice to A Pty Ltd for $25,000 (being fees paid of $9,564.15, provision for future fees of $13,163.12 and GST of $2,272.73) and resolved to deduct that sum from the next dividend payable to A Pty Ltd ([76]–[77]). Whilst Mr Storrer strongly disagreed with this course (at [87]), he took no action in relation to it (at [91]).
In 2012 and 2013, disagreements arose between Mr O and Mr Storrer as to annual leave entitlements. Mr Storrer was required to file leave forms, even if he left the office early (at [92]). Mr O also directed that the sales staff, headed by Mr Storrer, submit monthly sales reports directly to him (at [63]).
Mr O met Mr Storrer for a “performance review” on 4 July 2013. He told Mr Storrer that he was being paid more than he returned in gross profits, that he needed to increase his sales revenue to around $7.2 million annually and that he had four weeks “to turn things around” or he would be “looking for another… job” (at [126]).
At a management meeting on 19 July 2013, Mr O identified what he considered to be a significant underperformance by the sales team, which was said to be under budget. He asserted that not enough resources were being applied in Asia, the Middle East and North America, each an area for which Mr Storrer was responsible (at [130]). He proposed that the sales department be split so that one person would be responsible for each area with clearly identified budgets and targets to be met. Mr Storrer was given the task of implementing a revised structure within 30 days (at [131]).
Mr Storrer wrote to Mr O on 31 July 2013 informing him that he had been off work for four days due to illness related to stress, and complained that work was being directed away from him as Sales Director. He attached a letter from A Pty Ltd which purported to accept the termination of A Pty Ltd’s services at the end of July (at [138]).
Shortly after Mr O replied. He said that Mr Storrer was mistaken in that no notice of termination had been given, but to the contrary, he had been given one month to improve his “attitude and performance” (at [141]).
The primary judge found that in this email Mr O had encouraged Mr Storrer to turn things around. He proceeded to say that he had discussed the matter with the other shareholders and that, if it was truly Mr Storrer’s desire to leave, a plan needed to be developed for him to leave the business and dispose of his interests in N Pty Ltd and the Property Trust (at [142]).
Mr Storrer reiterated his view that he had been dismissed in an email sent by him to Mr O on 2 August 2013 (at [157]). He pointed to his sales record but said that due to his treatment at the hands of Mr O, he had no option but to accept the notice issued (at [159]).
Later that day, Mr O replied and said that if Mr Storrer wished to terminate A Pty Ltd’s involvement that was his decision but that it was inappropriate (at [162]). Mr O added he was happy to meet Mr Storrer to agree on an appropriate settlement contract including a buyout of A Pty Ltd’s interest in what he described as the “N Group” (which collectively included N Pty Ltd, N Investments and the Property Trust) (at [163]).
On 4 August 2013, Mr O wrote to Mr Storrer suggesting two options. The first was for Mr Storrer to take one month’s leave, with the option of returning to work remaining open and the majority of shareholders agreeing to his return. If he did not wish to stay in the business, the appropriate announcement would be made to the staff. The second option was to immediately announce Mr Storrer’s resignation (at [164]).
No response was received and the second option was followed.
On 9 October 2013, the members of N Investments removed Mr Storrer as a director of N Investments (at [182]).
At the same time these events were occurring, valuations of Mr Storrer’s direct and indirect interests in N Pty Ltd, N Investments and the Property Trust were being undertaken for use in the family law proceedings. On 19 September 2013, Mr L, acting on instructions from Mr Storrer, valued those interests at $737,772 (at [174]). On 27 September 2013, Mr FF, acting on instructions from Ms Storrer, valued the interests in N Pty Ltd held by A Pty Ltd at $2.9 million and Mr Storrer’s interest in the Property Trust at $116,874, in addition to the beneficiary loan account of $341,921 (at [175]).
It is safe to say that Mr O was not impressed with the valuations. Her Honour described his response as follows:
179.I accept that, by correspondence dated 4 October 2013, Mr O (on behalf of N Pty Ltd) told Mr FF that he wanted to provide additional information that would “materially change” his conclusions about the value of the Storrer Family Trust’s interest in N Pty Ltd. I also accept that he asked that Mr FF issue a new report based on the information he was going to provide. I accept that Mr O outlined that, because of his asserted actions in allegedly resigning without notice, deleting all emails and computer files from the servers and his company computer before returning it and taking with him or destroying all files (including his business card files), Mr Storrer should be considered to be a “bad leaving shareholder.”
180.I also accept that, having attached Clause 30 of the N Pty Ltd Constitution to the correspondence and having referred to the same, Mr O advised Mr FF as follows:
3.… As sole Director of N Pty Ltd I can confirm that no further revenue stream will be received by A Pty Ltd in Trust for the Storrer Family Trust from N Pty Ltd. This includes dividends from the share classes held by A Pty Ltd in Trust for the Storrer Family Trust. [my emphasis]
4.A Pty Ltd will receive no further contract fees for services rendered from N Pty Ltd.
As a significant portion of the valuation that you have determined is based on future revenue stream and there will be no future revenue stream, we would therefore request that as this has a significant material change to the information you have previously had at hand, your valuation should be adjusted accordingly.
181.I consider this correspondence to be clear expression by Mr O of his intention to ensure that, irrespective of the state of its financial position over time, N Pty Ltd would not pay A Pty Ltd any dividend on either its ordinary or “C” class shares from this time on: an intention that, but for two payments on ordinary class shares in 2014, he ensured that N Pty Ltd implemented. The decisions made and actions subsequently taken by Mr O in his role as N Pty Ltd’s sole director and the over-arching controller of the N Group need to be considered in the context of this unequivocal statement of position.
(Footnotes omitted) (As per the original)
On 14 October 2013, Mr O wrote to Mr L in identical terms (at [183]).
Mr L prepared a further report on 31 October 2013. He opined that Mr Storrer’s interest in the Property Trust was $130,000 in addition to the sum of $341,921 owed to him as described in the account. He valued the interest of A Pty Ltd in N Pty Ltd at $1,585,300 (at [188]).
This report was sent to N Pty Ltd on 1 November 2013 (at [189]). It was coupled with an invitation to meet to discuss the purchase of Mr Storrer’s and A Pty Ltd’s interests. An application asserting oppressive conduct was foreshadowed.
On 6 November 2013, in line with the valuation given by Mr L, A Pty Ltd offered to dispose of its interests in N Pty Ltd for $1,585,300 and Mr Storrer his interest in the Property Trust for $471,921, totalling $2,057,221 (at [192]).
The offer was rejected on 7 November 2013 (at [194]). The letter went on to assert that Mr Storrer had damaged N Pty Ltd’s business by deleting files and emails before he returned his computer, that his performance had deteriorated over several years, and that he failed to generate business. It is alleged that he had spent an enormous amount of time on his family law proceedings and took excessive leave (at [196]).
Notwithstanding these assertions of poor conduct and the letters of Mr O to the valuers, N Pty Ltd declared a dividend of $227,500 to be divided among all the shareholders including A Pty Ltd. It was paid on 18 February 2014 (at [203]).
It is now necessary to backtrack somewhat.
N Pty Ltd entered into deeds with each of R Pty Ltd, T Pty Ltd, M Pty Ltd and B Pty Ltd for the provision of services by Mr O, Ms Z, Mr J and Mr C respectively (at [144]–[145]). Although each deed was dated 1 August 2013, the primary judge found that they had been entered into at a later time and back dated (at [147]–[152]). The Agreement and Intellectual Property Protection Deeds (“the IP Deeds”) provided for fixed management fees until 31 July 2023 (at [153]). Each of the four shareholders was to receive a special class fully franked dividend each quarter (at [155]).
Her Honour described the effect of the IP Deeds as follows:
155.I accept that, after the terms of the IP Deeds were implemented and consequent on Mr O’s determination that N Pty Ltd would not declare dividends on ordinary shares (because he concluded this would no longer be appropriate “as there was no longer commonality between the contribution” made by all of the shareholders to the N Pty Ltd business – about which more is said later), N Pty Ltd made the following payments to its shareholders (other than A Pty Ltd – save for in 2014 when dividends were declared on the ordinary shares in February and September): monthly payments of $10,000.00 (ex GST) for management fees and quarterly payments of fully franked dividends on the “A”, “B”, “D” and “E” special class shares (being $212,500.00 per quarter to R Pty Ltd and $62,500.00 per quarter to each of T Pty Ltd, M Pty Ltd and B Pty Ltd) and, save for in February and September 2014, no dividends have been paid on the ordinary class shares.
156.I accept that Mr Storrer was not told about the decision made and implemented by N Pty Ltd to enter into IP Deeds with each of R Pty Ltd (and Mr O), T Pty Ltd (and Ms Z), M Pty Ltd (and Mr J) and B Pty Ltd (and Mr C) until the [appellants] disclosed their tender bundle of documents with their affidavits filed on 16 January 2017. I accept that, until then, neither he nor A Pty Ltd were made aware by N Pty Ltd or any of its shareholders (other than A Pty Ltd) or by Mr O, Ms Z, Mr J or Mr C personally of the existence of the IP Deeds or their terms.
The dividend paid on 18 February 2014 did not conform to the intended effect of the IP Deeds (at [203]–[204]).
Clearly enough, the issue of certain special class shares being chosen, along with the other clauses of the IP Deeds, had the effect of permitting the payment of management fees and dividends to the shareholders other than A Pty Ltd.
The oppression proceedings commenced on 27 November 2013. Thereafter a long running dispute as to what disclosure should be made in those proceedings by N Pty Ltd and N Investments commenced.
On 26 August 2014, the solicitors for the appellants forwarded an offer to purchase the interests held by Mr Storrer and A Pty Ltd “for fair value” (at [214]).
On 30 September 2014, N Pty Ltd declared and paid fully franked dividends to all shareholders, including A Pty Ltd, again notwithstanding the intended effect of the IP Deeds (at [217]–[218]).
The dispute about disclosure continued with N Pty Ltd and the remaining shareholders refusing to disclose documents that went to N Pty Ltd’s profitability (at [221]). Eventually, on 20 October 2014, the “N Pty Ltd Business Plan and Budget for 2013” was provided (at [227]). This did not quell the dispute as to disclosure.
The primary judge said:
230.I accept that, on 4 March 2015, the solicitors for A Pty Ltd and Mr Storrer replied to correspondence from the [appellants’] solicitors dated 19 February 2015; I accept that they disagreed with the assertions outlined in that letter and reiterated that the proposal (which I infer was contained in that letter) was incapable of being accepted and/or considered without full and frank disclosure in relation to the value of the N Group. I accept they also asked the [appellants] to provide information about whether any negotiations had taken or were taking place in relation to any proposed, anticipated or negotiated sale of any or all of the N Pty Ltd entities, assets or businesses within the Group.
231.I accept they said they were still awaiting disclosure of the details of dividends and distributions paid by the N Group entities (including: to whom they were paid; the amounts paid to each shareholder/beneficiary/unit trust holder; and any amount or amounts received) for the previous two financial years at a minimum. I accept they asserted that A Pty Ltd and Mr Storrer were entitled to the true value of the N Pty Ltd and N Investment Pty Ltd shares and the units in the Property Trust and that full disclosure about any proposed, anticipated or negotiated sale of the Group or part thereof and the details of dividend distributions were germane to that determination; I accept they renewed their request for full and frank disclosure.
(Footnote omitted)
On 27 April 2015, the remaining shareholders offered to acquire A Pty Ltd’s interests for $2,057,221 (at [233]), which was the value given by Mr L on 31 October 2013 (at [188]) and the offer made by A Pty Ltd on 6 November 2013 (at [192]).
In the year 1 July 2015 to 30 June 2016, N Pty Ltd paid dividends to the remaining shareholders on the special class shares in total of $4,207,500.16 (at [257]).
N Investments
As we have said N Investments was the trustee of the Property Trust. The Property Trust owned 1 F Street, at which N Pty Ltd carried out its business (at [12]). The shares in N Investments were held in the same proportions as the shares in N Pty Ltd, but were held by the individuals and not their related entities (at [16]). The Property Trust is a fixed unit trust with the interests again held in the same proportions by the related entities (at [14]). Relevantly, A Pty Ltd and not Mr Storrer was the unitholder. Mr Storrer was a director until he was removed in 9 October 2013 (at [17]).
On 14 August 2015, N Property was incorporated (at [19]). Mr O, Ms Z, Mr J and Mr C are the directors (at [20]). The shareholders are R Pty Ltd which owns 55 per cent of the shares, while T Pty Ltd, M Pty Ltd and B Pty Ltd each own 15 per cent (at [19]).
On 21 August 2015, the Investment Trust was established with N Property as its trustee (at [21]–[22]). The beneficiaries are the directors of N Property (at [22]).
On 31 August 2015, N Property entered into a contract to purchase 3 F Street for $7.9 million (at [244]).
On 1 October 2015, each of the unitholders of the Property Trust other than A Pty Ltd requested the trustee, N Investments, pay out their loans and beneficiary entitlements as soon as possible (at [245]).
On 1 December 2015, Mr O was advised by the bank that it would simplify security and lending arrangements if both properties were held in the one trust (at [247]).
On 15 December 2015, N Pty Ltd lent $4.9 million and $790,000 to N Property (at [249]–[250]).
The purchase of 3 F Street by N Property as trustee for the Investment Trust was completed shortly thereafter (at [252]).
On 3 February 2016, 1 F Street was valued for first mortgage security purposes, at $7.4 million (at [253]).
In the year 1 July 2015 to 30 June 2016, N Investments as trustee for the Property Trust made a distribution of $146,285.13 to R Pty Ltd, and $33,758.11 to all remaining unitholders including A Pty Ltd, all receiving their appropriate share (at [259]). Each of the unitholders, other than A Pty Ltd, were also paid out on their loans and beneficiary entitlements (at [259]).
On 25 July 2016, the unitholders of the Property Trust were given notice of a meeting to consider replacing N Investments with N Property as the trustee. Mr Storrer was a member of the former but not the latter (at [261]).
On 1 August 2016, the meeting was deferred to 2 August 2016. Mr O advised Mr Storrer that in addition to changing the trustee it was proposed that 1 F Street would be transferred to N Property in exchange for $7.4 million, which he asserted, was on the basis of a valuation on 3 February 2016, and said to be the current market value. He also advised that the Property Trust would repay its loans and be wound up, with all entitlements distributed by the end of August 2016 (at [269]).
The primary judge found that all of the above was part of a “clear plan to act to transfer 1 F Street into a vehicle in respect of which neither A Pty Ltd or Mr Storrer had any interest” (at [278]).
The above resolutions were passed on 2 August 2016 despite Mr Storrer’s objection and the relevant transactions were undertaken (at [282] and [284]–[285]).
APPROACH TO THE APPEAL FROM THE FINDINGS OF OPPRESSION
The parties did not agree on the approach that should be taken in appeals against findings that there had been oppressive conduct. The appellants submitted that the correct approach was identified by the New South Wales Court of Appeal in the following passage from Tomanovic v Global Mortgage Equity Corporation Pty Ltd (2011) 288 ALR 310 (“Tomanovic”):
172.A decision about whether any of the conduct identified in s 232(a)–(c) of the Corporations Act is “oppressive to, unfairly prejudicial to, or unfairly discriminatory against a member or members” involves the making of a judgment by reference to an evaluative standard. The standard for appellate review is therefore that found in Warren v Coombes (1979) 142 CLR 531; 23 ALR 405, and is not confined to the circumstances in which House v R (1936) 55 CLR 499 will permit an appeal court to reverse or alter a trial judge’s decision.
(Citations omitted)
For their part the respondents relied upon the following statements of the Full Court of the Federal Court of Australia (“the Full Court of the Federal Court”) in Wilmar Sugar Australia Ltd v Mackay Sugar Ltd (2017) 345 ALR 174 (“Wilmar”):
45.Deciding whether the conduct of a company is oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member involves an objective evaluation (from the posited perspective of a hypothetical reasonable by-stander) of the effect of the conduct in all of the relevant circumstances. As such, appellate review of the decision is confined by the principles in House v R (1936) 55 CLR 499 at 504-5 (House v R) in respect of discretionary decisions, which withstands repetition:
The manner in which an appeal against an exercise of discretion should be determined is governed by established principles. It is not enough that the judges composing the appellate court consider that, if they had been in the position of the primary judge, they would have taken a different course. It must appear that some error has been made in exercising the discretion. If the judge acts upon a wrong principle, if he allows extraneous or irrelevant matters to guide or affect him, if he mistakes the facts, if he does not take into account some material consideration, then his determination should be reviewed and the appellate court may exercise its own discretion in substitution for his if it has the materials for doing so. It may not appear how the primary judge has reached the result embodied in his order, but, if upon the facts it is unreasonable or plainly unjust, the appellate court may infer that in some way there has been a failure properly to exercise the discretion which the law reposes in the court of first instance. In such a case, although the nature of the error may not be discoverable, the exercise of the discretion is reviewed on the ground that a substantial wrong has in fact occurred.
46.Although, strictly speaking, deciding whether conduct is oppressive does not involve the exercise of discretion, it is the character of the decision, involving as it does the weighing of potentially competing considerations and an overall contextual evaluation of the effect of the conduct, which requires the same approach to appeals as in House v R (see, by analogy, Ghosh v NineMSN Pty Ltd (2015) 90 NSWLR 595; [2015] NSWCA 334 at [37]).
Thus, on appeals from the exercise of a discretion it is not sufficient to persuade the appeal court that it would have come to a different conclusion, but rather, an error of the kind identified in House v The King (1936) 55 CLR 499 must be established. Accordingly, in such cases, a wider range of outcomes is tolerated and “the questions involved lend themselves to differences of opinion which, within a given range, are legitimate and reasonable answers to the questions” (Norbis v Norbis (1986) 161 CLR 513 at 518).
The question on this approach then is whether a finding of oppression is an evaluative decision of such a kind that any appeal from it should be treated as being akin to a discretionary decision so as to attract the same principles of review. See, for example Singer v Berghouse (1994) 181 CLR 201.
It may easily be seen that in such a case the judge must evaluate the facts found by him or her so as to find that the relevant conduct was unfair. That, however, is a common description of judicial method in any ultimate conclusion of fact.
We consider that we should follow the approach set out in Tomanovic because we find that it is consistent with the various judgments in Minister for Immigration and Border Protection v SZVFW (2018) 264 CLR 541. The issue in that case was the nature of an appeal from the trial judge’s finding that a decision of the Refugee Review Tribunal (“the Tribunal”) (as it was then known) was legally unreasonable.
The Full Court of the Federal Court (in Minister for Immigration and Border Protection v SZVFW (2017) 248 FCR 1) considered that such a decision was an “evaluative exercise” which “necessarily involved the primary judge determining what weight she should give to individual relevant circumstances” (at [44]). Thus, as the decision was “largely an evaluative one”, “guidance can be obtained from well-known authorities which emphasise the need for caution by an appellate court which is asked to disturb the outcome of a discretionary judgment, where evaluative issues are also necessarily involved” (at [45]–[46]).
On appeal, the High Court of Australia (“the High Court”) did not agree.
Justices Nettle and Gordon (with whom Kiefel CJ agreed on this point) said that as to the issue of whether the decision of the Tribunal was legally unreasonable that “[t]here is only one answer… ‘yes’ or ‘no’” (at [76]). Their Honours accepted that “legal unreasonableness is invariably fact dependent and requires a careful evaluation of the evidence” and added that it depended “on the application of the relevant principles to the particular factual circumstances of the case” (at [84]) (Emphasis in original). Their Honours continued:
85.On review, a conclusion by a primary judge that a decision‑maker has exercised a power in a manner which is unreasonable does not depend upon the exercise of any discretion by the primary judge. It may involve an evaluative process. But labelling the task of a primary judge as “evaluative” does not entitle an appeal court to determine, for example, that the purported exercise of power by the decision‑maker was valid because it was not legally unreasonable but then, nonetheless, go on to conclude that it was open to the primary judge to reach the opposite view.
After noting the two standards of appellate review, Gageler J said:
49.The line is not drawn by reference to whether the primary judge’s process of reasoning to reach a conclusion can be characterised as evaluative or is on a topic on which judicial minds might reasonably differ. The line is drawn by reference to whether the legal criterion applied or purportedly applied by the primary judge to reach the conclusion demands a unique outcome, in which case the correctness standard applies, or tolerates a range of outcomes, in which case the House v The King standard applies. The resultant line is not bright; but it is tolerably clear and workable.
In assessing whether there has been commercial unfairness amounting to oppression the court must apply well known principles to the facts as found by it. We consider therefore that such a decision is not one which tolerates a range of outcomes and accordingly it is not treated in the same way as a discretionary decision.
This accords with Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd (2003) 214 CLR 51, where in a case of unconscionable conduct and “special disadvantage” for the purpose of s 51AA of the Trade Practices Act 1974 (Cth), the Full Court of the Federal Court simply determined that the decision of the trial judge was not correct. No issue was taken with that approach by the High Court, with Callinan J stating:
167.The appellant’s submission that the primary judge’s decision was wholly or substantially a discretionary one should be rejected. The language of s 51AA does not support it. Nor does the concept of unconscionability under the unwritten law support such a proposition. The manner in which the test of unconscionability in relevant aspects is generally stated or as discussed in Amadio does not presuppose the exercise of a discretion. Practically, indeed perhaps every judgment of a trial judge requires an evaluation of facts, but the evaluation is a different and subsequent process from the finding of the facts. An evaluation of facts found is precisely one of the exercises which an appellate court is obliged, when an unrestricted right of appeal is available, to undertake.
168.In this case, the evaluation of the facts by the Full Court is to be preferred to that of the primary judge…
(Footnote omitted)
In Australian Securities and Investments Commission v Kobelt (2019) 267 CLR 1, Kiefel CJ and Bell J said:
47.The conclusion that a supplier of a financial service has engaged in conduct that contravenes the statutory norm of conscience fixed by s 12CB(1) of the ASIC Act is an evaluative judgment. Nonetheless, it is a judgment that is either right or wrong. It was the duty of the Full Court to conduct a “real review” of the evidence and the primary judge’s reasons for judgment.
(Footnote omitted)
See also Aldi Foods Pty Ltd v Moroccanoil Israel Ltd (2018) 261 FCR 301.
We do not see why the consideration of a finding of oppressive conduct should follow a different course.
Finally, Ghosh v NineMSN Pty Ltd (2015) 90 NSWLR 595, relied on in Wilmar, was a case of abuse of process. It is well established that this involves a discretionary decision (see Batistatos v Roads & Traffic Authority of New South Wales (2006) 226 CLR 256). It therefore does not assist.
We shall therefore follow the approach identified in Tomanovic guided by the principles set out in Warren v Coombes (1979) 142 CLR 531; Robinson Helicopter Company Inc v McDermott (2016) 331 ALR 550 and Lee v Lee (2019) 266 CLR 129.
However, having said so, we do not consider that had we adopted a different approach a different outcome would have been reached. As these reasons will explain we are comfortably satisfied that her Honour’s findings on the issue of oppression were correct.
THE APPEAL FROM THE FINDINGS OF OPPRESSION
The primary judge found that the following conduct was oppressive by N Pty Ltd and N Investments:
(1)Withholding $25,000 from dividends payable to A Pty Ltd as a provision for legal fees that might be incurred by N Pty Ltd in Mr Storrer’s family law proceedings (at [321]);
(2)Determining not to pay Mr Storrer accrued leave of $9,986.86 on the basis he was a contractor and not an employee (at [385] and [387]);
(3)Acting as if A Pty Ltd was obliged to sell its shares in N Pty Ltd (at [408]);
(4)Acting on the basis that A Pty Ltd’s entitlement to receive dividends was conditional on it continuing to provide services to N Pty Ltd (at [408] and [423]);
(5)Ceasing to pay dividends on ordinary class shares but declaring dividends on certain special class shares, that is, paying dividends to all shareholders other than A Pty Ltd (at [418] and [430]);
(6)Paying dividends to the remaining shareholders in proportions determined as if A Pty Ltd was no longer a member (at [433]);
(7)Lending funds to N Property as trustee for the Investment Trust to purchase 3 F Street (at [450] and [455]);
(8)Removing Mr Storrer as a director of N Investments (at [484]);
(9)Failing to disclose to Mr Storrer that the other unitholders of the Property Trust had called for repayment of their loans and beneficiary entitlements on 1 October 2015 (at [486]); and
(10)Resolving on 2 August 2016 to transfer 1 F Street to the Investment Trust in exchange for $7.4 million (at [487]–[489]).
The appellants did not seek to challenge the first two findings.
Was there oppressive conduct by N Pty Ltd?
This aspect of the appeal concerns findings three to seven set out above.
Was there a “Sale Consensus” which justified the actions of N Pty Ltd? (Grounds 3.1, 3.2, 15, 24 and 32)
The appellants submitted that there was “an agreement, arrangement or understanding (or alternatively, on the evidence, a consensus)” amongst the shareholders of N Pty Ltd that when “a member ceased to be committed to the development of the business of N Pty Ltd, that member would sell its shares, the only issue for determination being price” (“the Sale Consensus”) (Ground 3.1) which entirely justified their conduct, and accordingly, was not commercially unfair.
Importantly, the appellants did not suggest that the Sale Consensus had the force of a binding agreement or contract, such as the Shareholders’ Agreement, but did contend that it bound the parties. We see an inherent and irreconcilable tension in that position.
In short, the appellants contend that once Mr Storrer ceased to act as Sales Director, they were entitled to treat A Pty Ltd, which provided his services, as if it was not a shareholder. It is not at all clear that this contention flows easily from the asserted Sale Consensus even if it was found to exist.
The appellants did not suggest that the primary judge’s identification of the principles to be applied was incorrect. Her Honour said:
303. Authority relevantly establishes that:
a)the underlying concern of s 232 of the Act is that conduct of a company (in whatever form it takes and whether it adversely affects all members alike or discriminates against some only) which is unjustly detrimental to any member of the company is a legitimate foundation for a complaint – the concern is directed to instances or courses of conduct amounting to unjust detriment to the interests of a member or members of the company; and
b)the individual alleged particulars need to be considered in totality (and not in isolation) and in the context of the particular relationship to answer whether, in any particular case, there has been, objectively viewed, ‘commercial unfairness’ (being conduct that is so unfair that reasonable directors would have thought it unfair) to the party alleging oppression; and
c)the existence of an objective test necessitates the Court determining whether reasonable directors possessing the skill, knowledge or acumen possessed by the directors and bearing in mind the importance of furthering the corporate object on the one hand and the disadvantage, disability or burden which their decision will impose on a member on the other, would have decided that it was unfair to make that decision; and
d)the loss of confidence by a member of a company about the manner in which the company’s affairs are being conducted or dissatisfaction or disapproval of the conduct of the company’s affairs (on whatever grounds and even if well founded) is insufficient to amount to oppression; and
e)the fact that all members of the company are treated equally does not mandate a conclusion that there has not been unfairness; and
f)context informs what is fair or unfair in any particular case: thus, it is relevant to have regard to matters such as the history of the company, its structure and its members’ reasonable expectations so as to determine whether any detriment occasioned to an Applicant’s interests, arising from the acts or conduct of the company, is justifiable or not; and
g)an Applicant’s conduct may be relevant, in that it might render even prejudicial conduct by a Respondent not unfair and it may affect the assessment of relief; and
h)where matters of business judgment are concerned, Courts have been reluctant to intervene unless an Applicant establishes a lack of good faith or that no reasonable board could have arrived at the decision made; and
i)wrongful exclusion from management may be a form of oppression: so too may be conduct which is unlawful or in breach of contractual obligations; and
j)oppression may occur even where a party thinks he or she is acting rightly.
(Footnotes omitted)
To these principles we would add the following which are particularly relevant to the Sale Consensus.
It is well established that the Court hearing a claim for oppression “is to be undertaken in the context of the particular relationship which is in issue” (Joint v Stephens (2008) 26 ACLC 1467 at [136]). See also O’Neill v Phillips [1999] 1 WLR 1092 (“O’Neill”) (per Lord Hoffman at 1098) and Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (2001) 37 ACSR 672 (“Fexuto”) (per Spigelman CJ at [28]).
In both O’Neill and Fexuto reference was made to Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 (“Ebrahimi”). Although that was a case concerning winding up on the just and equitable ground, it is regularly cited as an example of appropriate relief (winding up or other orders under s 233 of the Act) being granted notwithstanding that the conduct complained of was permitted by the company’s constitution. In Ebrahimi, the company was described as a “quasi-partnership”, which is not a term of art. In MMAL Rentals Pty Ltd v Bruning (2004) 63 NSWLR 167, Spigelman CJ thought this phrase could be misleading and preferred to describe the company in that case as “a majority controlled business requiring mutual co-operation and a level of trust” at [71]. Where we use the phrase “quasi-partnership” we do so with that caveat.
In Ebrahimi at 379, it was held that one or more of the following considerations could be relevant to finding whether it was equitable for the majority to be restrained from relying on the rights given by the constitution:
The superimposition of equitable considerations requires something more, which typically may include one, or probably more, of the following elements: (i) an association formed or continued on the basis of a personal relationship, involving mutual confidence — this element will often be found where a pre-existing partnership has been converted into a limited company; (ii) an agreement, or understanding, that all, or some (for there may be “sleeping” members), of the shareholders shall participate in the conduct of the business; (iii) restriction upon the transfer of the members' interest in the company — so that if confidence is lost, or one member is removed from management, he cannot take out his stake and go elsewhere.
These considerations were also applied in Mopeke Pty Ltd v Airport Fine Foods Pty Ltd (2007) 61 ACSR 395 (“Mopeke”) at [47].
It follows then that circumstances of the kind described by the appellants as the “Sale Consensus” could be relevant to the issue of whether the conduct of N Pty Ltd was commercially unfair in all of the circumstances that applied to N Pty Ltd and N Investments. That is so even if it is accepted, as it was by the appellant, that the Sale Consensus fell short of a legally enforceable agreement (Transcript 17 March 2021, p.50 lines 4–5).
On the issue of the Sale Consensus, described in her Honour’s reasons at times as the “participation agreement”, the primary judge recorded that:
·Mr O said there was “an expectation” that a shareholder who was employed in the operation of the N Pty Ltd business, and then left, would sell their shares (at [393]);
·Ms Z said that “everyone knew they could not just walk out of the business and still remain a shareholder” (at [396]);
·Mr J said “if someone wanted to leave, they would all have to be adults about it and agree what was fair at the time” (at [399]);
·Mr C said that it was his expectation that “if someone wanted to leave the business and wanted to stop working in the business… they would have to stop being a shareholder of the business… and agree on what was fair for their contribution” (at [400]); and
·Mr Storrer said at the time the Shareholders’ Agreement was being discussed the consensus was that if a shareholder left their shares were to be sold, and the only issue was to work out a fair price (at [401]).
Her Honour concluded:
389.I am not persuaded that, in about 2004, the members of N Pty Ltd reached “an agreement, arrangement or understanding” that, in the event a member ceased to be involved on a full-time basis in the development of the business operated through it that that member would sell its shares to the company and/or the remaining shareholders at a price that would be a fair price as at the date the member ceased to be involved (the alleged “participation” agreement). Whilst it was asserted that the participation agreement was partly in writing (namely a letter from N Pty Ltd to Mr Storrer dated 28 January 2004) and partly oral (namely, via asserted discussions between the members of the company at or about the time of the acquisition in February/March 2004), I accept that the correspondence dated 28 January 2004 does not support a conclusion that the shareholders then entered into a participation agreement as alleged. Even if this conclusion is wrong, I consider that the terms of the Shareholders’ Agreement make it clear that it and its terms contain the entire agreement of the parties with respect to its conduct matter and that it supersedes all earlier conduct by the parties to it with respect to its subject matter.
…
404.Given this, I am not persuaded by the arguments advanced on behalf of the relevant [appellants] about the asserted “consensus” and its asserted continuation and its asserted effects in the circumstances of this case; as noted, there is nothing in the Shareholders’ Agreement to reflect the terms of the asserted “consensus.” Additionally, I am not necessarily persuaded that, beyond the idea that everyone would have to be adult and reach agreement if a shareholder wanted to sell their shares in N Pty Ltd, there was any further clear expectation – if I am wrong in this respect, I am not persuaded that whatever consensus beyond this was reached binds any of the shareholders or varies or supersedes the express terms of the Shareholders’ Agreement.
(As per the original) (Emphasis in original)
The appellants submit that the primary judge erred by failing to find that there was a Sale Consensus, in essence, because each of the individuals gave evidence in support of it.
As is evident from her Honour’s reasons and from a plain reading of the Shareholders’ Agreement itself, that agreement is inconsistent with the claimed Sale Consensus.
As already discussed, the Shareholders’ Agreement contains a “general rule” that no disposal of shares will take place during the “No Sale Period” as contained in clause 9.1. However, clause 9.2 allows for a disposal of shares at any time provided the disposal occurs in accordance with clause 11.
To repeat, under clause 11.1 a shareholder wishing to dispose of their shares must first offer their shares to the other shareholders in accordance with the procedures set out in subclauses (b) and (c). If that offer is declined, the shareholder may offer the shares to a third party, under clause 11.2. The transfer of shares to that party must be approved by 75 per cent of the shareholders and the transferee is required to enter into the Shareholders’ Agreement or an agreement in substantially the same form (clauses 11.2 (a) and (c)). No formula is prescribed for the calculation of the sale price. It is up to the transferor to nominate the price.
There is no obligation set out in the Shareholders’ Agreement for any shareholder, existing or incoming, to provide services to the N Pty Ltd business (although, presumably, failure to do so could be a basis for the remaining shareholders to withhold their consent to the transfer of shares to a third party) and no term of the Shareholders’ Agreement requires a shareholder to dispose of their shares if they cease to provide services to N Pty Ltd.
It follows that the Sale Consensus is neither supported by nor reflected in the Shareholders’ Agreement.
The Sale Consensus is in fact no more than an accumulation of circumstances common in a company with a small number of shareholders and where each of the shareholders provides services to the company. These are matters that a court could take into account in determining whether particular conduct is commercially unfair and hence oppressive.
It accords with common sense that in a company such as N Pty Ltd, similar to a
quasi-partnership as described in Ebrahimi, a shareholder who no longer wishes to participate in the company as before should not retain their shares. It is likely to be for the benefit of all parties that there be a complete break. The consequence of that, however, again analogous to a partnership where a departing partner is entitled to withdraw his or her capital, is that the shares of the non-participating shareholder should be appropriately acquired or a reasonable offer to do so be made. In O’Neill, Lord Hoffman, with the concurrence of the other members of the Bench, said at 1107:
Usually, however, the majority shareholder will want to put an end to the association. In such a case, it will almost always be unfair for the minority shareholder to be excluded without an offer to buy his shares or make some other fair arrangement.
…
But the unfairness does not lie in the exclusion alone but in exclusion without a reasonable offer. If the respondent to a petition has plainly made a reasonable offer, then the exclusion as such will not be unfairly prejudicial and he will be entitled to have the petition struck out.
(Emphasis added)
See also Belgiorno-Zegna v Exben Pty Ltd (2000) 35 ACSR 305 at [139].
Sections 232 and 233 of the Act are in broad terms and “are not confined by reference to categories created by existing case law” (Tomanovic at [178] and [234]–[235]). See also Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304 (“Campbell”) at [72]. Nonetheless, in this matter, the making of offers and their nature are clearly relevant circumstances that bear upon the issue of whether there was commercial unfairness.
The consequence of the Sale Consensus, if it is established, or, at least if the relevant surrounding circumstances asserted by the appellants are established, is that the exclusion of a shareholder is unlikely to be commercially unfair if a plainly reasonable offer to acquire the shares has been made.
What then is a reasonable offer?
In O’Neill at 1107, Lord Hoffman considered that there were four aspects to such an offer, which were:
(1)The offer to purchase must be at a fair value which will ordinarily represent an “equivalent proportion of the total issued share capital, that is, without a discount for its being a minority holding”;
(2)The value of the shares should be agreed or determined by a competent expert;
(3)The value should be assessed by the expert as an expert, with the objective of economy and expedition, rather than a more elaborate procedure; and
(4)There should be “equality of arms between the parties”, with both having the same right of access to company information which bears upon the value of the shares, and with the same right to make submissions to the expert.
Such an offer need not be an offer “in the classic contractual sense” and the “emphasis must be on the creation of a fair exit mechanism” (Nassar v Innovative Precasters Group Pty Ltd (2009) 71 ACSR 343 (“Nassar”) at [103], per Barrett J as his Honour then was). Therefore to look at a single offer in isolation in Nassar:
105.… represents an altogether too simple and mechanistic approach. In order to avoid such a charge, the members upon whom lies the expectation of facilitating exit on fair terms are not required to come up immediately with a detailed offer constructed in isolation from discussion and negotiation that conforms in every respect to Lord Hoffman’s criteria of fairness. They are not, as it were, given a single arrow with which they must hit the bullseye.
This is where the Sale Consensus falls short as it did not extend to a reasonable exit mechanism. In this matter both the remaining and departing shareholders recognised the desirability of A Pty Ltd’s shares being acquired, but there, any common ground ended.
As was explained in O’Neill, unreasonable offers to acquire the shares of a departing shareholder may be part of the oppressive conduct, or indeed turn an otherwise unremarkable exclusion from the company, into commercially unfair conduct. We accept that O’Neill concerned the involuntary removal of a shareholder, who was also a director, unlike the present where the departure was voluntary, but that does not affect the principle to be applied.
What then, was the position as to offers for the acquisition of A Pty Ltd’s shares?
On 2 August 2013, Mr O informed Mr Storrer that he was happy to meet with him to discuss an appropriate settlement contract, including a payment to cover A Pty Ltd’s interests fully (at [161]–[163]).
As discussed earlier, the valuations of A Pty Ltd’s shares by Mr L and Mr FF became available on 19 September 2013 and 27 September 2013 respectively (at [174]–[175]).
On 4 October 2013, Mr O wrote to Mr FF providing additional information which he said would “materially change” the valuer’s conclusions and asked for a new report. Mr O advised Mr FF that due to Mr Storrer’s conduct in resigning without notice, deleting electronic files and emails and taking with him or destroying paper files, he should be regarded as a “bad leaving shareholder”, whatever that may be (at [179]). We add here, that ultimately it was not asserted that N Pty Ltd had suffered any loss at all by this alleged conduct.
Mr O went on to advise Mr FF that A Pty Ltd would receive no further income from N Pty Ltd, including dividends or contract fees. The primary judge accepted that:
180.… Mr O advised Mr FF as follows:
…
As a significant portion of the valuation you have determined is based on future revenue stream and there will be no future revenue stream, we would therefore request that as this is a significant material change to the information you previously have at hand, your valuation should be adjusted accordingly.
(Footnote omitted)
It is plain therefore that Mr O’s notion of what was an appropriate amount to pay A Pty Ltd for its shares was very much lower than the figure proposed by Mr FF. The letter is a clear indication that there would be no further payment of dividends to A Pty Ltd regardless of the financial position of N Pty Ltd. It is also plain that the price Mr O envisaged paying for A Pty Ltd’s shares was not based on it receiving an equivalent proportion of the total issued share capital.
Mr O wrote to Mr L on 14 October 2013 in identical terms (at [183]).
Mr L produced a further valuation on 31 October 2013, presumably taking into account, but clearly not adopting Mr O’s comments, in which he valued A Pty Ltd’s interest in N Pty Ltd at $1,585,300 and the Property Trust at $130,000, in addition to the sum of $341,921 owed to the Storrer Family Trust (at [188]). This was significantly higher than his earlier valuation.
Mr L’s valuation was given to the solicitors for N Pty Ltd on 1 November 2013 by the solicitors for A Pty Ltd. An invitation was extended to N Pty Ltd to meet and discuss the purchase of Mr Storrer’s and A Pty Ltd’s interests (at [189]).
On 6 November 2013, the solicitors for the respondents wrote to the solicitors for the appellants to advise of their clients’ intention to commence proceedings. In that letter, A Pty Ltd offered to sell its shareholding for $1,585,300 and Mr Storrer proposed that he receive $471,921 for his interests in the Property Trust, consistent with the most recent valuation of Mr L (at [192] and Exhibit 1, p.1373–1374).
That offer was rejected on 7 November 2013 (at [194]). It is notable that in this letter, which purported to “set out fully” the appellants’ case and is couched in a combative tone, that no mention was made of the Sale Consensus (Exhibit 1, p.1375–1378). It indicated that the remaining shareholders were prepared to meet with Mr Storrer to discuss making a payment to him to exit the business (Exhibit 1, p.1376–1377). However as the letter went on to say, it was due to Mr Storrer’s poor performance that there would be no guarantee that dividends would be paid in the foreseeable future and that no ordinary dividends would be paid to any shareholder in the year ending 30 June 2014 (Exhibit 1, p.1376). As we have seen that was not the case, and it is difficult to see this as a reasonable exit proposal.
The proceedings commenced on 27 November 2013.
On 26 August 2014, the remaining shareholders offered to purchase the interests held by Mr Storrer and A Pty Ltd at “fair value” (at [214] and Exhibit 1, p.1380). The letter did not identify how that fair value would be determined.
The reply from Mr Storrer and A Pty Ltd, sent on 28 August 2014, invited the provision of “sufficient details” of the proposed offer for fair value or otherwise (at [215] and Exhibit 1, p.1381).
Some considerable time later, on 27 April 2015, the remaining shareholders offered to purchase A Pty Ltd’s interest for $1,585,300 and Mr Storrer’s interest for $471,921 (at [233]). These were the valuations given by Mr L some eighteen months earlier, even though in the letter the remaining shareholders expressly disavowed that opinion (Exhibit 1, p.1383).
There was therefore, no offer prior to the commencement of the proceedings to acquire the interests of Mr Storrer and A Pty Ltd at a fair value by an independent expert with all the parties having appropriate access to the necessary information. As to the latter, we refer to our earlier discussion as to the disputes about disclosure.
We note here that the appellants did not adduce any evidence to show that either of the offers made to acquire Mr Storrer’s and A Pty Ltd’s interests at an identified price (in November 2013 and April 2015) was such a reasonable offer that it justified the subsequent treatment of A Pty Ltd. Whilst the first offer may have been a part of an attempt to hit the target in the heat of the departure, that could not be said about the second.
The Response to Initiating Application filed on 3 December 2013 by the appellants simply sought the dismissal of the proceedings. It contained no proposal for the acquisition of Mr Storrer’s and A Pty Ltd’s interests at a fair value or otherwise.
The appellants filed a Defence to Second Further Amended Statement of Claim on 6 February 2017. It again denied that Mr Storrer and A Pty Ltd were entitled to any relief at all, but added that if they were found to have been oppressed, the appropriate relief was for the purchase of their interests with the valuation to be undertaken as at 31 July 2013, or alternatively, as at 26 November 2013 (Appellants’ Defence to Second Further Amended Statement of Claim filed on 6 February 2017, paragraph 47).
The appellants also relied on their written submissions filed on 2 December 2015, which related to the application for summary orders filed on 3 September 2015. In the written submissions, the appellants asserted that:
47.… the most the [respondents] could have reasonably anticipated to be paid by the [appellants] was:
(a) $737,772 for their interest in [N Pty Ltd];
(b) $471,291 for their interest in the [Property Trust];
(c) $25,000 withheld from dividends in 2012;
(d) $84,000 in management fees net of GST to 30 June 2014;
(e) $27,300 in fully franked dividends on the ordinary shareholding; and
(f) $249,050.04 in fully franked dividends on the special class shares,
being a total of $1,594,413,04.
48.In light of payments already made to the [respondents] of $38,091.67 during the 2014 financial year, this leaves the sum of $1,556,321.37 as nominally payable to the [respondents].
(Footnotes omitted)
That application was dismissed on 30 September 2016.
Again, this is an instance of the appellants themselves asserting a value for the shares as opposed to acquiring them at an independently arrived at fair value. Again, they did not seek to support this valuation by calling evidence to show that this was a fair valuation. Thus, whilst there was some evidence that the appellants wished to acquire the interests of A Pty Ltd, the offers were only on their terms.
As can be seen from her Honour’s reasons the essence of the finding of commercial unfairness in relation to N Pty Ltd was the exclusion of A Pty Ltd from the benefits of its shareholding. It is implicit that there was a finding that this was coupled with the refusal to acquire its shares for a fair value. That finding is easily borne out by the above chronology – there was never an offer to acquire the shares at a fair value in the sense that the phrase was used by Lord Hoffman in O’Neill, nor was a reasonable exit mechanism proposed.
We would add, that an offer made after the commencement of the proceedings could be relevant to the issue of oppression and not just the costs of the proceedings because of the allegations and, indeed, findings that the relevant conduct was continuing at the time of the hearing.
The appellants did not take the position at the hearing below that N Pty Ltd was, in effect, a quasi-partnership, and cannot now seek to address the Sale Consensus as if it was a suggestion to that effect. However, had such an approach been taken it would have failed because it is inherent in such an approach that there be a fair offer to acquire the shares and here there was none.
The primary judge did not accord the Sale Consensus any weight because it was not a binding agreement and was inconsistent with the Shareholders’ Agreement. We are unable to see any error in that approach. The essence of the appellants’ submissions was that, having regard to the Sale Consensus, the only issue between the parties was the price of the shares to be acquired. That was not the case, as the above offers and pleadings show. Even if it was the case, however, the failure to make an offer to acquire the shares at a fair independently arrived at valuation can be a key component of commercial unfairness. The appellants really wished to have it both ways, that is, to not make such an offer but to exclude A Pty Ltd from the benefits of its shares.
The Sale Consensus, even if taken into account as a relevant set of circumstances, is no answer to that position.
It follows that the grounds that assert the existence of the Sale Consensus as a binding arrangement which justified the conduct of the appellants have not been made out.
Did the primary judge err by finding that a determination was made that A Pty Ltd and Mr Storrer were not to obtain any benefit from their interest in N Pty Ltd and the Property Trust after 31 July 2013? (Grounds 11, 15, 25 and 32)
The primary judge made a finding that the motivation of the remaining shareholders for the purchase of 3 F Street was as follows:
452.The relevant [appellants] submitted that there was no evidence to establish why N Pty Ltd should have bought 3 F Street itself in late 2015/early 2016 rather than advancing the funds to N Property Pty Ltd as trustee for the Investment Trust to assist with its purchase. However, I think it overwhelmingly clear that, but for the A Pty Ltd/Mr Storrer “problem” and what I consider to be a determination to ensure that A Pty Ltd (and Mr Storrer) did not obtain any benefit from A Pty Ltd’s shareholding in N Pty Ltd and its units in the Property Trust after 31 July 2013, it is highly unlikely that the purchase of 3 F Street would have proceeded other than the manner in which the purchase of 1 F Street had proceeded: with N Pty Ltd loaning the funds to N Investments Pty Ltd as trustee for the Property Trust to acquire additional premises from which the business operated through N Pty Ltd could be run.
The appellants submit that the finding is erroneous because it ignores the offers to meet to discuss the purchase of A Pty Ltd shares in N Pty Ltd and units in the Property Trust, what was said to be the attempts to resolve the issue of price on 27 April 2015 and the filing of the application for summary orders (Appellants’ Summary of Argument filed on 28 August 2020, paragraph 63). Those submissions also rely upon the Sale Consensus and the Trust Consensus (see below at [177]). It is thereby based on premises which have not been established.
As these submissions seek to build upon the offers to purchase the interests and the Sale Consensus to demonstrate that there was no relevant unfairness, they must fail for the same reasons that the submissions addressed directly to them failed. Thus there is no merit in these grounds.
Did the primary judge err in relying on the Shareholders’ Agreement to find that the Sale Consensus did not exist? (Grounds 3.3, 3.4, 4, 5, 6, 7, 15, 24 and 32)
As we have already observed, we are not persuaded that the Sale Consensus has a special status in these proceedings. The appellants accepted that the Sale Consensus did not meet the requirements for a binding agreement (Transcript 17 March 2021, p.50 lines 4–5) but submitted that, in finding the Sale Consensus did not exist, the primary judge erred by relying on:
·The absence of a clause in the Shareholders’ Agreement compelling a shareholder to sell its shares once it no longer provided services to N Pty Ltd (at [405]–[408]);
·The absence of a clause in the Shareholders’ Agreement preventing a non-employee of N Pty Ltd from holding or acquiring shares in N Pty Ltd (at [402]); and
·The presence of clause 18 in the Shareholders’ Agreement, which stated that this agreement contained the entire agreement between the parties (at [403]).
(Appellants’ Summary of Argument filed on 28 August 2020, paragraph 71)
Before turning to the Shareholders’ Agreement itself, we note that the primary judge considered that it was relevant that a draft version included provisions as to the sale and valuation of shares which were then not included in the final version (at [38]). For ourselves, we consider that simply to be highlighting that the parties deliberately chose not to limit the terms of the Shareholders’ Agreement. That alone deprives the Sale Consensus as some kind of controlling arrangement of any force.
We have already referred to a number of the clauses of the Shareholders’ Agreement which authorise a sale of shares to an outsider without any corresponding obligations on the part of the purchaser to work within the business.
Recital D provided:
D. The Shareholders wish also to set out their expectations that they will develop the Business of [N Pty Ltd] to a mutually agreed exit strategy.
(Shareholders’ Agreement dated 22 November 2007, p.6)
Clause 7 is headed “Commitment to [N Pty Ltd] and Business”. The first subclause provides:
7.1 Shareholders’ Commitment
The Shareholders commit to developing the Business and exiting in the manner set out in this Agreement.
(Shareholders’ Agreement dated 22 November 2007, p.14)
This recital and clause reinforce the stated intention of the parties to develop the business with a view to its eventual sale as a whole, however clause 7.1 also confirmed that shareholders will exit “in the manner set out in this Agreement”.
The balance of clause 7 is not relevant to the issue presently before the Court.
Clause 18 provides:
18 ENTIRE AGREEMENT
This Agreement contains the entire agreement of the Parties with respect to its subject matter. It sets out the only conduct relied on by the Parties and supersedes all earlier conduct by the Parties with respect to its subject matter.
(Shareholders’ Agreement dated 22 November 2007, p.23)
Clause 7.1 and 18 combine to render any elevation of the Sale Consensus to anything higher than relevant circumstances which may be taken into account very difficult indeed. In short, the Shareholders’ Agreement does not authorise the stance that was taken by the remaining shareholders.
These grounds have not been established.
In coming to the view that the conduct of N Pty Ltd was oppressive, did the primary judge fail to consider or give appropriate weight to a number of matters? (Grounds 8 and 9)
The first matter relied upon by the appellants was the Sale Consensus. We will not repeat what we have already written.
As to the second matter, it is true that Mr Storrer voluntarily left the business of N Pty Ltd but we do not understand why that is significant in assessing the parties’ conduct thereafter. We have already referred to the lack of evidence that his alleged conduct when he left, afforded N Pty Ltd any harm.
The majority of the submissions under these grounds focused on the IP Deeds. The primary contention was that “the actions taken by N Pty Ltd in entering into the IP Deeds (in the face of the conduct of Mr Storrer having left the business without notice and destroying or keeping company property) and dealing with future payment of dividends to the shareholders other than A Pty Ltd, did not and could not equate to ‘unjust detriment’ to [A Pty Ltd]” (Appellants’ Summary of Argument filed on 28 August 2020, paragraph 98). Therefore, they submitted that there was no oppression merely because A Pty Ltd was treated differently to the other shareholders.
As to the last point, it is not an apt description of the oppressive conduct found by her Honour.
The IP Deeds each had three major elements. First, the obligations of those providing services to N Pty Ltd as to its confidential information were set out much more extensively in the IP Deeds than in the Shareholders’ Agreement. Secondly, the requirements that the parties to the IP Deeds and the principals behind those entities would work exclusively with N Pty Ltd, were set out in detailed fashion. Finally, a fixed monthly management fee and a fixed special class fully franked dividend were agreed upon for remuneration based on an average of a 40 hour week.
Mr O’s evidence was that the effect of the IP Deeds was to increase the money paid to the remaining shareholders which he thought was appropriate because A Pty Ltd had left the business (at [411]).
Such an agreement with the remaining shareholders would be unremarkable if A Pty Ltd’s shares had been acquired or if, pending acquisition or the making of an appropriate offer for the purchase of its shares, A Pty Ltd was paid a dividend on its shares that was not compromised by the obligations under the IP Deeds.
That was not the case, as her Honour found:
416.I do not accept the submission that the decision made by Mr O in his capacity as managing director of N Pty Ltd to have it enter into the IP Deeds with each of R Pty Ltd, T Pty Ltd, M Pty Ltd and B Pty Ltd (in the manner already described) was one that was of no real consequence to the fund left to it to pay on the ordinary shares. I consider that the decision to bind N Pty Ltd to make the payments in increased amounts in the manner set out above diminished the fund available to N Pty Ltd from which to determine its capacity to pay dividends on its ordinary shares: the fact that, as a result of Mr O’s decision that N Pty Ltd would not pay dividends on its ordinary shares (other than in 2014), no dividends other than those paid in 2014 were subsequently paid by N Pty Ltd to A Pty Ltd does not detract from or undermine this conclusion.
The challenge that was made to these findings was that they were inconsistent with the Sale Consensus. Again, that proposition must fail for the reasons already given.
Under these grounds the appellants also submitted that there was no evidence that the failure to pay dividends to A Pty Ltd was oppressive because any price to be paid for the shares would necessarily be based upon a value which allowed for the payment of future dividends.
There are a number of points to be made. Even if it is accepted, as was contended for by the appellants, that there was an agreement to acquire A Pty Ltd’s shares, the issue as to price remained. No process for valuing the shares had been offered or agreed, let alone one which was based on future payment of dividends. As we have seen, Mr O’s view, as expressed to the two valuers was that A Pty Ltd’s shares should be valued on the basis of it not receiving any further dividends, which is to the contrary of the premise of these submissions.
Conduct may be oppressive even if undertaken strictly in accordance with the legal rights of entities (see Tomanovic at [176]). It may also be oppressive if no immediate financial detriment is suffered, as was the case with the circumstances of the transfer of 1 F Street, assuming the value of the property had not changed from the 3 February 2016 valuation which was relied on to fix the consideration.
These grounds do not succeed.
THE APPEAL FROM THE RELIEF ORDERS
Was there procedural unfairness? (Ground 18)
As was envisaged at an early stage, the proceedings were divided so that there was a hearing as to whether there had been oppressive conduct which was to be followed by a second hearing, if necessary, as to the orders which should be made to remedy any such conduct.
We accept, at the outset, that there may well have been evidence that could have been called at the second hearing which was relevant to the framing of the appropriate orders. Where a compulsory purchase of shares is to be ordered, the amount to be paid for the shares is determined by disregarding any adverse effects of the oppressive conduct. However, other matters may be relevant to that issue, including the fortune or misfortune of the company up to the time of the order. For example, the loss of an aspect of the company’s business unrelated to the oppressive conduct was taken into account in Mopeke at [96].
This is consistent with the relevant authorities. In Campbell, the High Court of Australia said:
178.… Although s 233(1)(d) gives the court power to make an order for the purchase of shares by a member, the CorporationsAct is silent about the terms on which such a sale may be ordered. In particular, the CorporationsAct does not identify the basis upon which the price for the shares is to be fixed if an order for compulsory purchase is made. Under earlier forms of the oppression provisions of companies legislation, orders were made for the compulsory sale of shares by one member to another at prices to be fixed according to various criteria. In some cases the price has been fixed at the value the shares would have had at the commencement of the proceedings but for the effect of the oppressive conduct. In other cases a date other than the date of commencement of the proceedings has been fixed. Again, there is no reason to give the present oppression provisions some narrower construction. In particular, the power given to the court by s 233(1)(d) should not be hedged about by implied limitations…
(Footnotes omitted)
See also Dynasty Pty Ltd v Coombs (1995) 59 FCR 122 at 143 and Re London School of Electronics Ltd [1986] Ch 211 at 224 for example.
The appellants submitted that, effectively, they were deprived of the opportunity to adduce evidence relevant to the date and valuation of Mr Storrer’s and A Pty Ltd’s interests, if there was to be an order for compulsory acquisition at the second hearing, and thus a denial of procedural fairness. For their part, the respondents contended there was no such unfairness because the appellants were heard as to the orders to be made and, although no directions were made for the filing of evidence, the appellants could have adduced evidence had they chosen to do so.
Unfortunately, her Honour’s task in this regard was made unnecessarily difficult by the diffuse and opaque manner in which the issue of further evidence was raised. Regrettably, it will be necessary to quote the submissions that were made to us and especially to the primary judge at some length in order to explain the outcome of this ground.
In his submissions in the appeal, Queen’s Counsel for the appellants described the evidence that the appellants wished to adduce at the second hearing in the following terms:
[QUEEN’S COUNSEL FOR THE APPELLANTS]: The appellants were not able to put on evidence about what the change in values might have been and what the contributions by each of the relevant members to that change in value after [Mr Storrer] had left. And in those circumstances we say her Honour couldn’t have been properly informed as to what the appropriate relief should be in determining that it was at a leaving date. There is no question on the authorities that it is a discretionary consideration in relation to the acquisition of shares to satisfy oppression that it can be a range of dates. And there is a number of authorities that we each cite that point to different dates. But we say the clear import of the cases is that it is to be determined against all the material facts.
And in this case there is evidence that is before this court and the court below as to the significant change in the financial circumstances of the entity. I can indicate that there was evidence that the revenue as at 30 June 2013 for – and I think I am right to say, I will have this checked – for [N Pty Ltd] was a little over 42 million and by the time we get to 2018 it’s over 76 million, and the net profit after tax in 2013 was just a bit over 7.8 million and that has risen to now in ’18 – well, at least in ’18 11.6 million.
There is no evidence as to what it was as at 30 June 2019 and the appellants were seeking to put on that evidence and we say against the background of having understood that there was to be a process and directions to be given for the relief hearing that would facilitate the putting on of evidence…
(Transcript 17 March 2021, p.24 lines 26–47) (Emphasis added)
In short, it was being suggested that the N Pty Ltd business had improved so dramatically since the departure of Mr Storrer that it would be unfair for Mr Storrer and A Pty Ltd to share in that benefit, even allowing for the oppressive conduct. Such evidence was potentially relevant to the date at which the interests should be valued for the purpose of a compulsory acquisition.
We return now to 30 September 2016, when the proceedings were split and to the following exchange between the primary judge and then Queen’s Counsel for the respondents:
HER HONOUR: Well, no. The way I look at it is that if there is a finding of oppression, then depending upon the findings as to the nature of the oppression and its consequences, there may be a necessity for – if the relief sought is the purchase for a value to be determined, to give effect to and based upon whatever the factual findings of oppression are because all of the authorities I have read suggest to me that that is the logical and clear way of proceeding because otherwise, the person who may be engaged to value or to provide, rather, expert evidence as to price is, perhaps, a better, more accurate way of saying it, perhaps, will not know the basis of the oppression that they should assume for the purpose of providing expert evidence.
[QUEEN’S COUNSEL FOR THE RESPONDENTS]: So it would – so I’ve got a clear understanding, and I don’t disagree with anything that you’ve said, is it that would all be determined in two separate stages?
HER HONOUR: Yes.
[QUEEN’S COUNSEL FOR THE RESPONDENTS]: So there would be another process of hearing - - -
HER HONOUR: Yes.
[QUEEN’S COUNSEL FOR THE RESPONDENTS]: - - - to determine the appropriate remedy and where, if it’s to be valued, then a valuation question?
HER HONOUR: Yes. And, I suppose, I see them as what I am calling the primary hearing for – the purpose, at this stage, is to establish whether, factually, oppression is made out. If the answer to that is “no” and your client fails, that’s the end of it.
[QUEEN’S COUNSEL FOR THE RESPONDENTS]: Yes.
HER HONOUR: That action is dismissed. If I am persuaded that, for whatever reason, having reached a series of what I will now call preliminary factual findings, that whatever that might be, taken together, I am then persuaded of the necessary statutory considerations that there has been oppression, then I would see myself delivering a judgment that deals with what are, really, factual disputes, obviously, and then, presumably, affording the parties at or about that time, if your action is successful, to make submissions or to hear you as to what the appropriate remedy is. If the appropriate remedy is advocated to be the alternative of purchase, then, it seems to me, the only way – the next step is to have an expert provide expert evidence in relation to purchase price matters so that a decision can be made by the court as to the appropriate purchase price.
If what is advocated for is an order for winding up, then I would hear submissions if I’m asked to make a decision as between the alternatives. Then, obviously, I will have to hear everyone on that, so I don’t think you can get beyond breaking it down - - -
[QUEEN’S COUNSEL FOR THE RESPONDENTS]: I understand.
(Transcript 30 September 2016, p.10 lines 1–47)
Unfortunately, this discussion did not advert to what has now emerged as a major issue, namely, what is the appropriate date the interests should be valued at for the purpose of compulsory acquisition rather than simply the fact of acquisition itself. Rather the debate focused on the fact of valuation only and no one adverted to the possibility of other evidence.
At the delivery of the first reasons for judgment on 31 May 2019 the matter was, by orders made on that day, listed on 24 July 2019 “for the purposes of hearing the parties about the terms of orders to be made”.
On 21 June 2019, the respondents’ lawyer proposed that the parties exchange their draft orders and identified a number of orders which they would, most likely, seek (Annexure “C” to the respondents’ Outline of Submissions filed on 8 October 2019). The reply, dated 26 June 2019, said that it was expected that any orders seeking a “present date valuation” would be opposed (Annexure “D” to the respondents’ Outline of Submissions filed on 8 October 2019).
Consequently, the primary judge made a set of consent directions in chambers on 11 July 2019. The date for the further hearing was adjourned to 10 October 2019. The respondents were directed to deliver a schedule of proposed orders by 19 September 2019 with the appellants to deliver a response by 26 September 2019. The parties were to exchange written submissions by 3 October 2019 and file their written submissions and proposed orders by 8 October 2019.
As is obvious, there were no directions proposed or made about the filing of evidence. Why this was so, perhaps, can be explained by the written submissions subsequently filed. As Queen’s Counsel for the appellants put it, they were “two ships passing in the night”, and by a long way it seems (Transcript 10 October 2019, p.24 lines 14–15; Transcript 18 March 2021, p.117 lines 17–18).
The respondents proposed orders were final orders and were largely along the lines of those that were ultimately made by the primary judge. The submissions in support were extensive and sought to justify the making of each proposed order. Importantly, the respondents sought an order that the appellants acquire their interests valued at the date of the order yet to be made for that acquisition “after all dividends and other moneys” sought had been paid (Respondents’ Outline of Submissions filed on 8 October 2019, paragraph 18.1) (Emphasis in original).
The appellants’ submissions, on the other hand, were directed to seeking “procedural orders by way of directions toward a trial on quantum and final orders taking into account that findings of certain facts and liability for oppression” had already been made (Appellants’ Outline of Submissions filed on 8 October 2019, paragraph 1). Accordingly, the submissions sought that “directions be made to progress the proceeding toward trial on the question of the appropriate purchase price and final orders… which will require the receiving of valuation and other evidence” (Appellants’ Outline of Submissions filed on 8 October 2019, paragraph 4) (Emphasis added).
The appellants sought orders for valuations to be undertaken as at 31 July 2013 (or 27 November 2013), August 2014 and April 2015 and for an expert opinion to be obtained on remuneration, which was said to be relevant to the amounts paid under the IP Deeds and hence as to the dividends paid (Appellants’ Outline of Submissions filed on 8 October 2019, paragraphs 5–14). They did not oppose, however a valuation being conducted “as at present date” but reserved their position as to the appropriate final remedy to be imposed (Appellants’ Outline of Submissions filed on 8 October 2019, paragraph 21). As we have said, these valuations could only relate to the remedies to be imposed and not to whether the findings of oppression should stand.
We pause to observe that the valuations sought by the appellants could not be employed to assert that the offers made at those times were fair and that thereafter there was no commercial unfairness even though the offer had not been accepted. It was too late for such a course as the findings as to oppressive conduct had already been made. It follows that valuations of the shares on those dates would only be of assistance if the Court decided that they were the appropriate dates for that purpose. Given the findings of the extent of oppression, they may not be the most obviously relevant dates.
In contrast, the order made by her Honour was that the shares be purchased at a price to be fixed by the Court and to facilitate that determination, a valuer be engaged to determine that value as at 31 December 2019.
The appellants also sought “directions to be made to facilitate the preparation of evidence intended to be relied upon… so the Court may be appropriately informed of all matters” (Appellants’ Outline of Submissions filed on 8 October 2019, paragraph 5). It was said that “[o]nly one issue in the proceeding has been determined and the proceeding is not at the stage at which final orders can be made” (Appellants’ Outline of Submissions filed on 8 October 2019, paragraph 16).
This is an indirect reference to evidence, other than valuations, that could bear on the issue of remedy.
Finally, it was submitted:
17.To make final orders now with respect to certain components of liability for oppression but leave for subsequent determination relief with respect to other components (such as value) has the potential to lead the Court into error concerning the final relief that ought to be ordered taking into account what is fair and appropriate in the totality of the circumstances.
(Appellants’ Outline of Submissions filed on 8 October 2019, paragraph 17)
Thus, it was envisaged that evidence other than valuation evidence would be adduced, but its nature was never identified.
The primary judge returned to the matter on 10 October 2019. Queen’s Counsel for the respondents expanded at some length on his written submissions seeking final orders. At the close of those submissions he turned to oppose the appellants’ proposed orders which were said to be the “antithesis” of the purpose in separating the hearing into liability and remedy phases. He submitted:
[QUEEN’S COUNSEL FOR THE RESPONDENTS]: … But more importantly, as we will explain later, why value them at the dates they have selected when doing so propounds rather than overcomes the effect of the oppression that you’ve identified.
Indeed, their orders possibly also involve re-opening the oppression findings that you’ve made as I will come to shortly. But most fundamentally, the orders they seek do not do what is necessary to identify the relief which is appropriate in light of and so as to overcome the oppression findings which you’ve made…
(Transcript 10 October 2019, p.8 lines 13–20)
At the outset of his submissions to the primary judge, Queen’s Counsel for the appellants confirmed that, at that stage, his clients were not proposing any final orders for the relief of the oppressive conduct that had been found. He said:
[QUEEN’S COUNSEL FOR THE APPELLANTS]: … What we’ve understood that we were required to do in coming here today, from your Honour’s order and from the discussions that had occurred back in 2016 and from the correspondence that had gone on between the parties, to which you’ve been referred but not taken to the respective passages, was that there would be, appropriately, reflecting your Honour’s findings in relation to oppression, relevant – submissions being made on evidence as to the relief that should be made for the oppression that your Honour – should be given for the oppression that your Honour has found has occurred.
This is not in any way, by the [appellants], an attempt to go behind, second-guess, defer, do anything in relation to your Honour’s findings in respect of oppression…
(Transcript 10 October 2019, p.24 lines 21–31)
A reference was then made to the transcript of September 2016 and her Honour was taken to that portion of the transcript, which we have quoted above at [227].
Queen’s counsel for the appellants agreed that a buyout was the most likely order and continued as follows:
[QUEEN’S COUNSEL FOR THE APPELLANTS]: … Then as to how that buyout works, and what payments are made for dividends, and when the buyout figure is to be determined as at, are all matters that depend upon information that your Honour doesn’t have and shouldn’t properly have before you in the way the case has been conducted. There was no evidence sought to be led by either party in relation to anything other than the question of liability, whether oppression occurred. Everything else was deferred. That is, questions of relief and evidence relevant to the appropriate relief was deferred, and both parties were proceeding along that – as your Honour was aware – from the outset.
It’s not as though we’re standing here now saying we’ve already had an opportunity to lead this relevant evidence and we’re trying to have a second bite at the cherry. We’re not. We’re simply here following your Honour’s decision, saying we’ve now got to the next step. Before we’re heard on relief and what the appropriate relief is, we want your Honour to have the evidence that we will contend is relevant, rather than for your Honour to be determining relief before the evidence is available.
And, frankly, we’re here – and I will acknowledge that we are to some extent embarrassed because the question of this being the determination of the relief, we don’t – we say was certainly not clear on the face of your Honour’s order or consistent with what had passed before. And we were equally – as I apprehend my learned friend’s submissions to be – taken by surprise by the approach of the [respondents] to advocating for final orders today. What we apprehended was the appropriate directions to be made, so that the hearing for relief – whatever that form should be – will then occur.
Merely because the [respondents] took that course, we say, is not a basis for us having to have attempted to put on material in advance of today’s hearing to determine that. So there is clearly evidence that we say would be relevant to a question of buyout. For example, capacity to purchase…
(Transcript 10 October 2019, p.26 line 44 to p.27 line 25) (Emphasis added)
Queen’s Counsel for the appellants pointed out that no directions had been made for evidence to be adduced for the second phase of the hearing. He described the proposed evidence in these terms:
[QUEEN’S COUNSEL FOR THE APPELLANTS]: … We say that the exercise of that discretion requires your Honour to have the opportunity of any relevant evidence that would go to the question of the appropriate discretion, and that would go to the financial circumstances of the companies, and the – I will colloquially use – the relevant entities and of the members who potentially might be the subject of the relevant orders for a buyout that are being sought; what the winding up – if that was to be the appropriate remedy – what the effect of that would be; what the circumstances – have occurred between 2013 and to date have been; what the operations of the company have been; whether the value has increased or decreased subsequent to the applicants no longer being involved in the company.
(Transcript 10 October 2019, p.29 lines 9–18) (Emphasis added)
We have quoted these passages at length to demonstrate that, albeit that it was raised obliquely and in the most opaque of language, it was squarely put to the Court that the appellants wished to call evidence as to the change in the financial position of N Pty Ltd. As we have explained, this evidence could support a relevant consideration.
Finally, the submission was made that, if the primary judge did not accept the proposal for the further conduct of the matter put forward by the appellants, they should be granted an adjournment so as to be able to reopen to address the respondents’ submissions as to the final orders to be made (Transcript 10 October 2019, p.38 lines 13–14).
After some consideration, her Honour announced that she intended to accede to the request made by the appellants “to be heard further by way of provision of written submissions in relation to the specific relief sought” by the respondents (Transcript 10 October 2019, p.39 lines 32–35). A tight timetable was put in place for that to occur. It follows, implicitly, that the primary judge must have refused the application to adduce further evidence although she did not say as much.
The critical effect of the orders made by the primary judge was to determine the valuation date without regard to the further evidence proposed by the appellants. Thus, whilst her Honour found that the selection of the date of 31 December 2019 was the appropriate remedy to ensure that N Pty Ltd did not benefit from its oppressive conduct, that consideration did not take into account the suggested improvement in the company’s fortune, for example.
Thus, the appellants submitted that they were denied procedural fairness in relation to the determination of the issue of remedy.
The response of the respondents is simple and two fold.
First, it is said that the appellants had the opportunity between the delivery of the first set of reasons and the hearing in November 2019 to adduce such evidence that they considered relevant to the selection of the valuation date or the mode of valuation.
Secondly, they point to her Honour’s findings that the oppressive conduct continued after the valuation date proposed by the appellants. In the reasons for judgment of 18 February 2020, her Honour said:
13.I accept that to order that [A Pty Ltd’s] shares in [N Pty Ltd] be valued as at 31 July 2013 or 30 June 2014 would not meet the overarching obligation to fashion a remedy that undoes the damage caused by the oppression found against [N Pty Ltd]. I also accept the thrust of the submissions to the effect that, if the date for the valuations of [A Pty Ltd’s] shares in [N Pty Ltd] was nominated as 31 July 2013 or, alternatively, 30 June 2014, such an approach would result in [N Pty Ltd] benefitting from its oppressive conduct. I also accept that, if the date for valuation was determined to be 31 July 2013, such order would in effect result in treating [A Pty Ltd] as though the value of its shares in [N Pty Ltd] was dependent on [Mr Storrer’s] continued engagement in the business rather than, given the finding that its status as a shareholder was not dependent on this, it being entitled to the benefits of being a shareholder on an ongoing basis.
14.Whilst not the subject of further particular discussion here, I generally accept the submissions made by [Queen’s Counsel for the respondents] in advocating for the exercise of the discretion in favour of nominating a contemporaneous date for the value of [A Pty Ltd’s] shares in [N Pty Ltd]. In particular, I accept that, given the findings made about [N Pty Ltd’s] oppressive conduct toward [A Pty Ltd], the appropriate remedy - and that which accords fairness - is that which recognises that [N Pty Ltd] has remained entitled as a shareholder from 31 July 2013 onwards: I accept that, by ordering the value of its shareholding to occur contemporaneously with the making of orders, such finding will be given effect.
15.Given that the object of the orders to be made now is to implement a remedy that is fair to overcome the oppression as found and that the oppression I found was, in effect, that [N Pty Ltd] treated [A Pty Ltd] as if it ceased to be a shareholder after [Mr Storrer] stopped working in the business operated through it (for example, by failing to pay dividends to it when they were paid to other shareholders), I consider that the appropriate date at which [A Pty Ltd’s] shares in [N Pty Ltd] should be valued is contemporaneous with the date on which the Orders are made; for ease, however, I consider that it is appropriate that [A Pty Ltd’s] shares in [N Pty Ltd] be valued as at 31 December 2019. Given the inter-relationship between [N Pty Ltd] and [the Property Trust], the units in it should be valued at the same date.
The difficulty with the respondents’ submissions is that even if it is accepted, as it must be having regard to her Honour’s findings, that the oppressive conduct continued after the valuation dates proposed by the appellants, it ignores the possibility that there was other evidence other than those valuations which could be relevant to the appropriate remedy.
Whilst her Honour’s findings were that the oppressive conduct (which was essentially refusing to offer to acquire A Pty Ltd’s shares at an independently fixed value and refusing to pay dividends on the shares) continued up until 31 December 2019, that is not the only consideration that bore upon the selection of the date. It is to be recalled that the range of remedies under s 233 of the Act is wide indeed and the further considerations raised by the appellants may have led to a valuation date other than 31 December 2019.
We return then to the troubling question of whether the appellants had the opportunity to adduce this evidence themselves. In doing so we need to take into account whether there had, in fact, been a realistic opportunity to adduce evidence other than valuation evidence. Whilst the matter is not at all free from difficulty, we consider that there was not. A fairly tight timetable was imposed which did not allow for the preparation of evidence. Whilst it was not the only obvious course, the course that was taken by the appellants of not obtaining the evidence before the directions hearing was not unreasonable. That evidence was likely to be extensive and controversial.
It follows that on 10 October 2019, the primary judge erred by not giving the appellants the opportunity to adduce the further evidence identified.
In Stead v State Government Insurance Commission (1986) 161 CLR 141, there had been a denial of natural justice that could not be negated unless the Full Court found “that a properly conducted trial could not possibly have produced a different result” (at 147). We cannot be so satisfied.
It follows that the orders must be set aside and the matter remitted for rehearing on the issue of the appropriate orders to be made in light of the oppression findings after the parties have been given a reasonable opportunity to adduce the evidence they consider relevant. Whether that will include all the valuation dates proposed by the appellants, given that the primary judge’s findings on liability stand and cannot be challenged, will be a matter for the judge hearing the matter.
The appellants submitted that we should make orders for final relief. The order proposed was that N Pty Ltd or its nominee acquire A Pty Ltd’s shares in it for $1,585,300 (that is Mr L’s valuation) together with interest of $640,515, with orders along similar lines for its interest in the Property Trust. However, to accede to that application would be to proceed without all of the evidence that the parties might wish to adduce on the question of remedy. That is a course we cannot follow.
As the question of remedy will be redetermined it is neither desirable nor necessary for us to deal with the remaining grounds of appeal as it is most likely that further evidence will be called and our opinions on the balance of the appeal could carry no weight at the rehearing.
Given the limited nature and scope of the ordered rehearing, we see no good reason to order that the rehearing be undertaken by a judge other than the primary judge. Nevertheless, it will be a matter for the primary judge as to whether her Honour is content to deal with the rehearing.
LEAVE TO APPEAL
The question arose as to whether leave to appeal is required because the orders made required further steps to be taken, including the approval by the Court of the purchase price after a valuation had taken place, with the concern being that the orders are therefore interlocutory and not final.
Technically speaking that is so, as the orders have not finally disposed of the dispute between the parties, although there is no scope for a reconsideration of most of the orders. Erring on the side of caution, there will be a grant of leave.
COSTS
The issue of costs will be dealt with in chambers on the basis of written submissions.
I certify that the preceding two hundred and sixty-six (266) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justices Strickland, Aldridge & Kent. Associate:
Dated: 29 July 2021
SCHEDULE OF PARTIES
NOA 20 of 2020
BRC 7225 of 2009Appellants
Fourth Appellant:
T PTY LTD ATF THE Z FAMILY TRUST
Fifth Appellant:
M PTY LTD ATF THE S FAMILY TRUST
Sixth Appellant:
B PTY LTD ATF THE C FAMILY TRUST
Seventh Appellant:
MR O
Eighth Appellant:
MS Z
Ninth Appellant:
MR J
Tenth Appellant:
MR C
Eleventh Appellant:
MR O AND MS O ATF THE O PROPERTY TRUST
Twelfth Appellant:
MS Z AND MR D ATF THE E PROPERTY TRUST
Thirteenth Appellant:
N PROPERTY PTY LTD ATF THE N INVESTMENTS TRUST
1
25
1