Patrick Corporation Limited v Toll Holdings Limited
[2005] VSC 392
•3 October 2005
| IN THE SUPREME COURT OF VICTORIA | Not Restricted | |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
No. 2100 of 2005
| PATRICK CORPORATION LIMITED | First Plaintiff |
| and | |
| PATRICK RAIL INVESTMENTS PTY LTD (ACN 098 055 522) | Second Plaintiff |
| v | |
| TOLL HOLDINGS LIMITED (ACN 006 592 089) | First Defendant |
| and | |
| TOLL RAIL HOLDINGS PTY LTD (ACN 098 059 137) | Second Defendant |
| and | |
| PACIFIC NATIONAL PTY LTD (ACN 098 060 55) | Third Defendant |
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JUDGE: | DODDS-STREETON J. | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 29 September 2005 | |
DATE OF JUDGMENT: | 3 October 2005 | |
CASE MAY BE CITED AS: | Patrick Corporation Ltd and anor v Toll Holdings Limited and ors | |
MEDIUM NEUTRAL CITATION: | [2005] VSC 392 | Revised 4 October 2005 |
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CONTRACT – Construction of shareholders’ agreement – Preconditions for notice invoking deadlock‑breaking mechanism – Whether implied condition that initial board meeting be adjourned – Whether resolution or its subject – matter to be adjourned – Whether “adjourned” bears its strict meaning.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Ms M. Gordon SC with Mr M. Henry | Arnold Bloch Leibler |
| For the First and Second Defendants | Mr R. Brett QC with Mr I. Waller | Clayton Utz |
| For the Third Defendants | Mr J. Paterson | Minter Ellison |
TABLE OF CONTENTS
Introduction........................................................................................................................................ 2
Relief Sought...................................................................................................................................... 3
Background to the Dispute.............................................................................................................. 4
The Shareholders’ Agreement....................................................................................................... 14
The Constitution.............................................................................................................................. 18
The Parties’ Principal Contentions............................................................................................... 19
The Plaintiffs’ Submissions........................................................................................................ 19
The First and Second Defendants’ Submissions..................................................................... 22
The Third Defendant’s Submission.......................................................................................... 24
Relevant Legal Principles............................................................................................................... 24
Application........................................................................................................................................ 27
Whether meeting to be adjourned............................................................................................ 28
Whether matter or relevant resolution to be adjourned........................................................ 33
Conclusion......................................................................................................................................... 37
HER HONOUR:
Introduction
In this proceeding, two major transport and logistic groups, each entitled to an equal shareholding and representation on the board of a company incorporated as a joint venture vehicle, dispute, inter alia, the construction of a clause of the relevant shareholders’ agreement governing deadlock.
Each adopts a different construction of the conditions which must be satisfied in order validly to invoke a deadlock‑breaking mechanism under which, in the case of unresolved disagreement between the shareholders or their nominated directors, a number of steps within a timeframe are prescribed, ultimately leading to the sale of the business of the joint venture company if resolution is not achieved.
The plaintiffs (members of the Patrick Group) contend that the disputed clause means that, provided that a resolution has been considered but not agreed upon at a board meeting, a director may require that the matter the subject of the resolution be reconsidered at a subsequent board meeting, which must take place no earlier than one month after the first board meeting. They argue that in the present case, as a resolution was put to the vote and not passed at a board meeting concluded on 1 September 2005, and a director by letter dated 14 September 2005 required that a resolution on the same subject matter (but with minor amendments) be reconsidered at a board meeting on 4 October 2005, the conditions of the clause have been satisfied. In consequence, if the board remains unable to agree on the resolution at the meeting scheduled for 4 October 2005, either shareholder may, by notice, invoke the joint venture company’s deadlock‑breaking mechanism.
The first and second defendants (members of the Toll Group) contend that the relevant clause means that at a board meeting at which a resolution is considered but not agreed upon, a director must require that both the resolution and the meeting be adjourned, the adjourned meeting not to take place earlier than one month after the meeting at which the adjournment was required. They argue that as there was no requirement at the board meeting on 1 September 2005 that the resolution and the meeting be adjourned, but rather, the meeting concluded and a director by letter dated 14 September 2005 convened a new meeting for 4 October 2005 to consider the resolution (as amended), the conditions of the clause were not satisfied. There therefore has as yet been no board meeting at which the necessary requirement for adjournment of the resolution and the meeting has been made. In consequence, if the directors remain unable to agree on the amended resolution or its subject‑matter at the board meeting to occur on 4 October 2005, a director must, at that meeting, require that both the resolution and the meeting be adjourned. A further minimum period of a month must then elapse before the adjourned board meeting reconsiders the resolution. If, at that adjourned meeting, the directors remain unable to agree on the resolution, the conditions of the clause would be satisfied. Only at that point would either shareholder be entitled, by notice, to invoke the deadlock‑breaking mechanism.
The practical consequence of the present dispute is that if the plaintiffs’ construction be correct, the deadlock‑breaking mechanism may be invoked by notice immediately after the board meeting to be held on 4 October 2005 if, at that meeting, the directors remain unable to agree. If the first and second defendants’ construction be correct, and the directors are unable to agree on the resolution at the board meeting on 4 October 2005, that meeting must be adjourned for at least a further month and the directors must remain unable to agree at the adjourned meeting, before the deadlock‑breaking mechanism may be invoked.
Relief Sought
By amended summons on originating motion dated 19 September 2005, the first plaintiff, Patrick Corporation Limited (“Patrick”) and the second plaintiff, Patrick Rail Investments Pty Ltd (“Patrick Rail”) seek a declaration that in the events which have happened, by his letter and an accompanying “Agenda and Notice of Meeting of Board of Directors”, both dated 14 September 2005, Mr Christopher Corrigan, as a director of Patrick, has, within the meaning of clause 13.1(a) of the Shareholders’ Agreement, required that the matters be adjourned to a subsequent meeting of the board of directors of the third defendant, Pacific National Pty Ltd (“Pacific National”). The plaintiffs also seek a declaration that the meeting of the board of directors of Pacific National to be held on 4 October 2005 is, within the meaning of clause 13.1(b) of the shareholders’ agreement, “the adjourned meeting” at which the matters are to be reconsidered and voted upon by the board of directors of Pacific National.
Background to the Dispute
The plaintiffs’ application is supported by the affidavit of William Hara sworn 19 September 2005. Mr Hara is the company secretary and corporate counsel of Patrick and the company secretary of Patrick Rail. He is also a company secretary of the third defendant, Pacific National.
Mr Hara’s affidavit sets out the background to the proceeding, which is undisputed.
Patrick (formerly called Lang Corporation Ltd) is a publicly listed company on the Australian Stock Exchange (“ASX”). Its principal activities are transport logistics. It specialises in loading and unloading ships and land based collection, distribution and storage of cargo for domestic and international trade. Its directors are:
Peter Scanlon
Christopher Corrigan
John Cloney
Maurice James
Geoffrey Carmody
Patrick Rail is a wholly owned subsidiary of Patrick.
Toll is also a publicly listed company on the ASX, with principal activities in local freight distribution and interstate freight forwarding. Its directors are:
John Moule
Paul Little
Neil Chatfield
Bill Farrands
Ron Paul
Mark Rowsthorn
Ross Dunning
Alistair Lucas
Toll Rail is a wholly-owned subsidiary of Toll.
Pacific National is a joint venture company established by Patrick and Toll. Patrick Rail and Toll Rail each own 50% of the issued shares in Pacific National. Pacific National’s principal activities include bulk freight, intermodal containers and specialised transport services.
In August 2001, Patrick and Toll formed a consortium to bid jointly to acquire, through the vehicle of Pacific National (which was formerly called “National Rail Consortium Pty Ltd”): (a) the National Rail Corporation Limited, jointly owned by the Commonwealth, New South Wales and Victorian governments; and (b) the Freight Rail Corporation from the New South Wales government.
The relationship between Patrick and Toll as shareholders in Pacific National is governed by a Shareholders’ Agreement executed on about 5 September 2001 by Patrick, Patrick Rail, Toll, Toll Rail and Pacific National (“the Shareholders’ Agreement”).
By clause 2(b) of the Shareholders’ Agreement, the board of Pacific National must comprise four directors, two directors being nominated by Patrick Rail, and the other two being nominated by Toll Rail. The Patrick Rail nominated directors of Pacific National were specified to be at the outset, and remain:
Christopher Corrigan
Allan Davies
The Toll Rail nominated directors of Pacific National were specified to be at the outset, and remain:
Paul Little
Mark Rowsthorn
In early 2002, Pacific National acquired National Rail Corporation Limited and Freight Rail Corporation for $1.172 billion.
During July and August 2003, the Board of Pacific National considered a proposal to commit the company to a project known as Project Blizzard, under which it was proposed that Pacific National and Toll North (another subsidiary of Toll) would establish a rail line haul business in Queensland and Toll North would switch its existing rail line haul customer volumes from Queensland Rail to Pacific National. Project Blizzard required Pacific National to make an “upfront” capital investment of $119 million, in order to increase its capacity in such a way that it would be guaranteed to receive revenue, whether or not its services were required.
Patrick, as an equal shareholder of Pacific National, would obtain a return from Pacific National’s investment by way of its 50% interest. Toll would not only obtain a return by way of its 50% interest in Pacific National, but would also obtain additional services on a more competitive basis than that being offered by Queensland Rail.
At a board meeting of Pacific National on 22 July 2003, the board received a confidential paper in the form of a Capital Expenditure Request, including a Terms Sheet, regarding key aspects of Project Blizzard. The board resolved to give authority to convert the Terms Sheet into a binding Memorandum of Understanding between Pacific National and Toll.
On 25 August 2003, Pacific National executed the Memorandum of Understanding with Toll and Toll North, relating to Project Blizzard. Following the execution of the Memorandum of Understanding, Pacific National invested approximately $140 million in order to establish an intermodal rail line haul business in Queensland. It commenced providing services in Queensland in March 2005, pursuant to the Memorandum of Understanding.
By July 2004, a dispute between Patrick and Toll had arisen in relation to the Memorandum of Understanding. The dispute involved Patrick’s claim that the then actual and forecast returns to Pacific National were less then the returns presented to Pacific National’s board when it had agreed to the Memorandum of Understanding.
Patrick, by letter to the Chief Executive Officer of Toll dated 18 August 2005,, asserted that the actual and forecast returns to Pacific National under the Memorandum of Understanding were less than had been represented to the board when it had approved the agreement in the Memorandum of Understanding.
As a result of the dispute, William Hara, on 26 August 2005, circulated proposed resolutions to be considered and voted by the board of the Pacific National at its board meeting on 1 September 2005.
On 31 August 2005, Paul Little of Toll, by letter to Chris Corrigan, complained that the notice of the proposed resolutions was not adequate.
At the Pacific National board meeting on 1 September 2005, the Patrick nominated directors put forward resolutions (“the Relevant Resolution”) which stated:
“PACIFIC NATIONAL PTY LIMITED
RESOLUTIONS
1In order to deal with its concerns about the Memorandum of Understanding dated 25 August 2003 (“the MOU”) between the company, Toll Holdings Limited and Toll North Pty Ltd (collectively “the Toll Companies”), the board of directors resolves that:-
(a)William Hara be authorised to give all necessary instructions and directions to the company’s solicitors and counsel or such solicitors and counsel as he may nominate to urgently advise the company:-
(i)whether the MOU is legally binding on the company;
(ii)whether the terms of the MOU reflect the bargain made or intended to have been made by the company with the Toll Companies;
(iii)whether the MOU was induced by fraud, misrepresentation, misleading and deceptive conduct by the Toll Companies or any other person; and
(iv)whether there are any other remedies available to the company against the Toll Companies or any other person arising out of, relating to or connected with the MOU,
and provide such legal advice as soon as practicable to the committee of the board to be established as set out below.
(b)William Hara be authorised to give all necessary instructions to such solicitors, counsel and forensic accountants as he may nominate, and to direct the company’s employees in such manner as he deems necessary, to enable the solicitors, counsel and forensic accountants to conduct an independent review of and prepare a report concerning the conduct of the company’s employees, officers and agents who were involved in the negotiation and preparation of the MOU on such terms and conditions as William Hara and those solicitors, counsel and forensic accountants may agree.
(c)A committee of directors be established pursuant to clause 98 of the company’s constitution consisting of the following members (who are not associated with the Toll Companies):
(i)Christopher Corrigan; and
(ii)Allan Davies,
(“the Committee”).
(d)The board of directors of the company delegates to the Committee the power to receive the legal advice and independent investigation report referred to above, and to make and implement decisions on behalf of the company arising out of, relating to or connected with the legal advice and independent investigation report, including, without limiting the generality of these powers, the power, as the Committee thinks fit, to:
(i)cause the company to cease supply of services to the Toll Companies in accordance with the terms of the MOU;
(ii)renegotiate the provision of the services including with retrospective effect; and
(iii)commence, maintain, and/or settle legal proceedings against the Toll Companies or other person or entitles arising out of, relating to or connected with the MOU.
2.The board of directors resolves that William Hara be authorised to give all necessary instructions and directions to Clayton Utz lawyers to provide a list of all matters for which it has acted for the company, including matters that it is currently acting for the company, and a summary of each of these matters.”
At the Pacific National board meeting on 1 September 2005, the Patrick Rail nominated directors voted in favour of the Relevant Resolution. The Toll Rail nominated directors voted against the Relevant Resolution. Clause 3.10 of the Shareholders’ Agreement provides that all matters to be determined by the board must be approved by a unanimous vote of the directors present and entitled to vote at the relevant board meeting. Accordingly, the Relevant Resolution was not passed at the meeting on 1 September 2005. The board meeting proceeded to deal with other matters. The meeting concluded and was closed.
Mr Hara prepared draft minutes of the board meeting on 1 September 2005. A dispute about their accuracy ensued.
The draft minutes prepared by William Hara stated that in relation to the “Resolutions received from CDC/Patrick” the Chairman, Mark Rowsthorn, initially stated that Toll had received advice that the resolutions were not properly notified, but subsequently accepted that prior notification of the resolutions was received with the requisite three business days’ notice and therefore formed part of the business of the meeting. Further discussion about the resolution was recorded.
The draft minutes further stated:
“The Chairman put the Resolutions (copy attached to these minutes) to a vote.
In relation to Resolution 1, CDC and AD voted FOR the Resolution, MR and NC voted AGAINST the Resolution. Accordingly the Resolution was not unanimously agreed and hence NOT PASSED.
In relation to Resolution 2, CDC and AD voted FOR the Resolution, MR and NC voted AGAINST the Resolution. Accordingly the Resolution was not unanimously agreed and hence NOT PASSED.
After the vote on the Resolution was taken, MR asked whether because the directors were unable to agree with the Resolution that it meant that they were in dispute. CDC said yes.
The Chairman requested that the minutes record that the Pacific National dispute has been going on for a long time. Toll had asked for information regarding the business in Queensland and that it was premature for the company to launch into a legal external investigation.
CDC noted that Patrick has been asking questions regarding the Queensland business for a long time and it has expressed a view about the MOU to the company. It is Patrick’s position that the board approved an agreement different to the terms of the executed MOU.
WH reiterated the Chairman’s comments that this dispute has been going on for a long time and is an issue that the company must take action to address immediately hence the Resolution – it has nothing to do with Toll’s proposal to take over Patrick.
The letter of Mark Rowsthorn to William Hara dated 8 September 2005 objected to the draft minutes. The letter stated that the draft minutes included considerably more narrative detail than was usual and that the draft minutes were ‘almost completely inaccurate as to the substance of the Board Meeting’.”
The letter further stated:
“Resolutions received from CDC/Patrick.
The description of the exchange is not accurate. In the first paragraph you should include my comment that, although there may have been 3 business days notice of the resolutions, necessary Board papers had not been provided …
The paragraph on page 3 after those sentences recording the outcome of the voting should also be deleted as it does not properly record the conversation which I followed. As I recall, after the vote, I asked, ‘What does all this mean?’ and asked if it meant we were heading to the dispute resolution provisions of the Shareholders Agreement. You replied that this was now a matter for the shareholders and that we should ‘wait and see’ what it would all mean’.”
Mr Rowsthorn subsequently expressed the view in letters dated 8 September 2005 to Pacific National directors that Mr Hara was in a position of conflict as the company secretary and that the existing company secretaries of Pacific National should stand down and be replaced by an independent company secretary. Patrick did not agree to that proposal.
The dispute in relation to the accuracy of the draft minutes remains unresolved. It is, however, undisputed that during the course of the board meeting on 1 September 2005, no director of Pacific National required or requested that the matters the subject of the Relevant Resolution be adjourned to, or reconsidered at, a future board meeting of Pacific National or that the board meeting of 1 September 2005 be adjourned to a later date.
On 2 September 2005, Arnold Bloch Leibler, solicitors for Patrick, forwarded to Toll a document entitled “Notice Pursuant to Clause 13.1(b) of the Shareholders’ Agreement”. The notice relevantly stated:
“BACKGROUND
1.On 1 September 2005, there was a meeting of the Board of Directors of the company (“the Relevant Board Meeting”).
2.At the Relevant Board Meeting, the Directors of the company considered the resolution annexed to this Notice and marked Annexure A (“the Relevant Resolution”).
3.At the Relevant Board Meeting, the Directors of the Company were unable to agree on the Relevant Resolution.
TAKE NOTICE THAT in accordance with clause 13.1(b) of the Shareholders’ Agreement, Patrick Rail Investments Pty Ltd hereby invokes the procedures set out in Part A of Schedule 1 of the Shareholders’ Agreement.”
By letter to Patrick Rail dated 5 September 2005, Toll Rail referred to the “Purported Notice” under clause 13.1(b) and stated:
“Under Clause 13.1, it is a pre-condition to any party seeking to invoke the process set out in Part A of Schedule 1 to Shareholders’ Agreement that:
1.at a Board Meeting at which there was a failure to agree on a resolution (‘the Resolution’), a Director requested that consideration of the Resolution be adjourned to a subsequent Board Meeting to be held not earlier than one month after the date of the Board Meeting at which the Resolution was initially considered; and
2.at the adjourned Board Meeting, the Directors remain unable to agree on the Resolution.
These conditions have not been satisfied in relation to the Relevant Resolution (as that term is defined in the Purported Notice). Patrick is not, therefore, entitled to issue a notice under clause 13.1(b) and, accordingly, the Purported Notice has no force and effect under the Shareholder’s Agreement.”
Arnold Bloch Leibler, solicitors for Patrick, by letter dated 5 September 2005 to Clayton Utz, solicitors for Toll, maintained that the clause 13.1(b) notice was effective. The letter relevantly stated:
“… if PN directors are unable to agree to a resolution then a director may (emphasis added) require that the matter be adjourned to a subsequent board meeting, such meeting not to take place earlier than one month later. The directors did not avail themselves of that option. In fact the resolution was put to a vote and the directors were unable to agree. Accordingly, as the directors were unable to agree on the resolution, the clause 13.1(b) Notice was validly served on your client.”
The letter also disputed that a procedure requiring an adjournment of the dispute for a further month was necessary as a precondition of serving the notice. It asserted that the Patrick nominees on the board of Pacific National could at any time convene a board meeting on three business day’s notice to reconsider the Relevant Resolution and then start the process again. It declined to withdraw the notice.
Clayton Utz, by letter to Arnold Bloch Leibler dated 6 September 2005, pointed out that “the consequences of a dispute between the Shareholders to Part A of Schedule 1 of the Shareholders Agreement applies are serious” and there was therefore a clear obligation to comply with the requirements of clause 13. The letter relevantly stated:
“It is clear from the language of clauses 13.1(a) and (b) that what is envisaged is a process which provides for a number of opportunities for any disputes to be resolved by discussion between the Shareholders prior to the appointment of a sale facilitator. Contrary to your assertion, this is clearly commercially sensible as an alternative reading of clause 13.1 could result in a precipitous triggering of the break up of PN. Clauses 13.1(a) and 13.1(b) read properly (and together) set out a requirement that the matter must be considered at two separate Board Meetings at least one month apart. The purpose of this is clearly to give the shareholders the opportunity to consider and discuss their respective positions. … The interpretation of clauses 13.1(a) and 13.1(b) advanced in your letter must therefore be wrong, if, for no other reason, because it ignores the words of the first half of clause 13.1(b) … “
The further letter of Clayton Utz to Arnold Bloch Leibler also dated 6 September 2005 expressed that the first resolution proposed by Patrick at the 1 September 2005 board meeting did not guarantee that any lawyers appointed to investigate the concerns of Patrick would be independent and stated, “The Resolution did not, therefore, propose that PN ‘appoint independent lawyers’ as stated in your letter“.
The letter of Arnold Bloch Leibler to Clayton Utz dated 8 September 2005 noted, inter alia, that there appeared to be a misunderstanding about the Relevant Resolution and that the implicit requirement that the lawyers be independent. Patrick would amend the Relevant Resolution to make that explicit.
The letter of Clayton Utz to Arnold Bloch Leibler dated 14 September 2005 stated, inter alia:
“… clause 13.1 entitles any director or shareholder to require the matter, the subject of the resolution, to be adjourned to a subsequent board meeting. At the Board Meeting on 1 September 2005, no director or shareholder required the matter, the subject of the Relevant Resolution (as that term is defined in your letter), to be adjourned to a subsequent Board Meeting. Accordingly, if your client chooses to refer the matter the subject of the Relevant Resolution, to the Board Meeting to take place on 4 October 2005, that Board Meeting will consider the matter for the first time for the purposes of clause 13.1.”
The letter of Christopher Corrigan to Mark Rowsthorn, Paul Little (the Toll nominated directors of Pacific National) and Allan Davies (a Patrick nominated director of Pacific National) dated 14 September 2005 relevantly stated:
“As you know, at that meeting the board of directors of the Company considered the following matters (‘the Matters’).
(a)Whether the Company should obtain legal and accounting advice relating to the memorandum of understanding between the Company, Toll Holdings Limited (Toll) and Toll North Pty Ltd dated 25 August 2005, and
(b)Whether a committee of directors should be established to receive such advice and, if appropriate, act upon it.
The Matters were considered by the directors of the company by reference to a proposed resolution (‘the Relevant Resolution’). The directors were unable to agree on the Relevant Resolution.
On 2 September 2005, Patrick served on Toll a notice pursuant to clause 13.1(b) of the Shareholders’ Agreement (‘the Notice’) invoking the major dispute resolution mechanism set out in Part A of Schedule 1 of the Shareholders’ Agreement. Toll has disputed the validity of the Notice.
Irrespective of the validity of the Notice, I require that the Matters be reconsidered at a subsequent board meeting of the Company. Again, as stated below, this is to occur by reference to a proposed resolution.
Accordingly, pursuant to clause 13.1(a) and/or 3.6(b) of the Shareholders’ Agreement, I am convening a meeting of the board of directors of Pacific National to take place at 10.00am on Tuesday, 4 October 2005 at Level 6, 15 Blue Street, North Sydney, NSW 2000, for the purpose of reconsidering the matters and voting upon the related proposed resolution set out in the enclosed Agenda and Notice of Meeting of Board Directors (‘the Amended Resolution’).
Kindly note that, in order to clarify matters that appear to have caused some confusion to Toll, the Amended Resolution incorporates some minor amendments to the Relevant Resolution.”
The accompanying Agenda and Notice of Meeting of Board of Directors enclosed a resolution containing some amendments to the Relevant Resolution. The amendments principally incorporated a description of the solicitors, counsel and accountants to be instructed as “independent”.
The Shareholders’ Agreement
Sub-clause 1.4 of the Shareholders Agreement provides:
“In the event of an inconsistency between the terms of this Agreement and the terms of the Company Constitution, the terms of this Agreement shall prevail.”
Sub-clause 3.6 of the Shareholders’ Agreement provides:
“(a) The Board will meet a minimum of 5 times per year at times to be notified to the Directors by a Secretary.
(b)A Director may at any time, and a Secretary will on the request of a Director, convene a meeting of the Board.”
Sub-clause 3.7 provides:
“Unless all Directors otherwise determine, notice of each Board Meeting, which must specify the time and the place of the meeting, state the nature of the business to be transacted and be accompanied by appropriate Board papers relating to the matters to be considered at the Board Meeting:
(a)Must be given to each Director and his or her alternate Director (if any) at least 3 Business Days before the meeting (unless all Directors agree to a lesser period of notice); and
(b)may be given by telephone, facsimile transactions or electronic mail message,
but the non-receipt by a Director or his or her alternate Director of any notice of a Board meeting will not affect the validity of the convening of the meeting.
Sub-clause 3.8 provides:
“Quorum
(a)The quorum for a Board meeting is at least one Director appointed by [Patrick] and at least one Director appointed by Toll.
(b)If at least one Director appointed by [Patrick] and at least one Director appointed by Toll are not present … at a Board Meeting, the meeting must be adjourned and reconvened at such time and place as determined by the Directors present (provided that notice of the time, date and place of the reconvened meeting must be given to each Director not less than 3 Business Days before the meeting).
Sub-clause 3.9 provides:
“Voting rights
(a) Each Director is entitled to one vote at a Board Meeting.
(b) …
(c) The Chairperson will not have a casting vote.
Sub-clause 3.10 relevantly provides:
“Decisions of the Board
All matters to be determined by the Board must be approved by a resolution passed by a unanimous vote of Directors present and entitled to vote at the Relevant Board Meeting and must not be acted upon by any Director or officer of the Company or by any of the Parties, unless such resolution has been passed by a unanimous vote of the Directors present and entitled to vote at that meeting, … “
Sub-clause 3.13 relevantly provides:
“Convening Shareholders meeting
A Shareholders meeting may be convened by:
(a) the Chairperson
(b) the Board; or
(c) any Shareholder,
by giving written notice of the proposed meeting no later than 15 Business Days prior to the day such meeting is proposed to be held stating the time, date and place of the meeting and the resolutions to be proposed at that meeting.
Sub-clause 6.2 provides:
“Shareholders to be just and faithful
Each shareholder undertakes with each other Party that:
(a)it will be just and faithful in all its dealings with each other Party in relation to the conduct of the Business and implementation of this Agreement; and
(b)it will in good faith do all things reasonably within its power which are necessary or desirable to give effect to the spirit and intent of this Agreement and the Company Constitution and to promote the objects of the Company for the benefit of the Shareholders as a whole.”
Clause 13 provides:
“13. Dispute resolution
13.1 Deadlock
(a)If the Board or the Shareholders are unable to agree on a resolution (the ‘Relevant Resolution’) considered at the relevant Board Meeting or meeting of Shareholders, then any Director or Shareholder (as the case may be) may require that the matter be adjourned to a subsequent Board Meeting or meeting of Shareholders, such meeting not to take place earlier than 1 month after the meeting at which the Relevant Resolution was initially considered.
(b)If, at the adjourned meeting, the Directors or the Shareholders remain unable to agree on the Relevant Resolution then, subject to the conditions in paragraph (c) being satisfied, either Shareholder may, by notice in writing to the other Shareholder, invoke the procedures set out in Part A of Schedule 1.
(c)The giving of a notice under paragraph (b) is subject to the following conditions:
(i)the Relevant Resolution must be reasonable having regard to the asserts and liabilities, financial condition and prospects of the Company at that time;
(ii)the Relevant Resolution must not relate to a matter involving a departure from the core business of the Company Group at that time;
(iii)the Relevant Resolution must be a matter that is material to the financial condition, assets, liabilities or prospects of the Company Group or the manner in which it conducts the Business and operations including a matter that is material in relation to:
A.the approval of the Business Plan and Budget for the following Financial Year;
B.capital expenditure in respect of a genuine business opportunity for the Company which has not been provided for in the Business Plan and Budget for the then current Financial Year; or
C.the restructuring of the share capital or financial indebtedness of the Company; and
(iv)the Relevant Resolution does not relate to a matter which:
A.has been delegated by the Board to the management of the Company in accordance with clause 5.3;
B.save as provided for in subparagraphs (iii)(B), is inconsistent with the Company’s then current Business Plan and Budget; or
C.is inconsistent with, or would give rise to a breach of, the Company’s contractual and legal commitments.
(d)If the Shareholder who has not given the notice under paragraph (b) forms the view that the conditions referred to in paragraph (c) have not been satisfied in relation to the Relevant Resolution, that Shareholder may, within 48 hours of receiving the notice under paragraph (b), by notice in writing, require the issue of whether those conditions have been satisfied to be determined by an arbitrator agreed to by the parties, or failing agreement, by an arbitrator nominated by the then President of the Law Society of New South Wales, in accordance with the Commercial Arbitration Act 1984 (NSW). Such arbitration must be completed within 30 days of the date of the notice under this paragraph (d).
(e)Upon the issue of a notice under paragraph (d), the procedures in Part A of Schedule 1 of this Agreement will be suspended until the earlier of the date on which arbitration pursuant to paragraph (d) is complete and the arbitrator makes a determination that the conditions of paragraph (c) have been satisfied and the date on which the parties agree that the conditions have been satisfied.
Schedule 1 provides:
Schedule 1
(Dispute Resolution Mechanisms)
PART A – Deadlock-Breaking Mechanism for Major Disputes
1.Immediate consequence of deadlock
A notice under clause 13.1(b) will operate to notify the other Shareholder that unless the matter the subject of the Relevant Resolution has been agreed upon at the expiration of 14 days from the giving of that notice (the “Notice Period”) the provisions of paragraph 2 may be invoked (subject to clause 13.1(c)).
2.Deadlock persists
If the matter the subject of the notice referred to in paragraph 1 is not resolved within the Notice Period, the Shareholders must cause their respective managing directors to meet and to discuss the issue no later than one month or any longer period which the Shareholders agree upon after the giving of the notice. The Shareholders must act reasonably and honestly and make bona fide efforts to agree upon the matter in question within that period for meeting and discussion.
If at the expiration of the period referred to above the matter in question has not been agreed upon between the Shareholders, then either Shareholder may, by notice in writing to the other, require the procedures in paragraph 3 to be invoked.
3.Sale of Business
(a)Within 30 days of the date on which the notice in paragraph 2 is received, the Shareholders must appoint a person to facilitate the sale of the assets and undertaking of the Company Group (the “Sale Facilitator”) in accordance with the following provisions. If the Shareholders cannot agree on the identity of the Sale Facilitator, the Sale Facilitator shall be a corporate advisory practitioner of at least 10 years standing who is also a partner of an accounting firm of at least 50 partners nominated by the president from time to time of the Institute of Chartered Accountants (New South Wales Division).
(b)In respect of the Non-Intermodal Businesses:
(i)each such business conducted by the Company Group will be offered by private auction to each of the Shareholders;
(ii)the business offered will be separated into each category of service (for example, grain and coal), provided that each business offered will comprise all of the assets and liabilities applicable to that business including locomotives, rolling stock, terminals, employees, contracts, property leases, equipment leases and liabilities associated with that business;
(iii)the Shareholders will be entitled to submit binding and irrevocable bids by private auction for the businesses being offered;
(iv)the highest bidder shall be entitled to distribution of the assets of the business and will assume the relevant business liabilities.”
The Constitution
The Constitution of Pacific National relevantly provides:
“Article 1.3 Replaceable Rules
The replaceable rules in the Corporations Act do not apply to the Company.
Article 5 Proceedings of Members
…
Article 5.11 Adjourned, Cancelled and Postponed Meetings
(a) Subject to the Corporations Act, the Chairperson:
(i)may adjourn a meeting of Members to any day, time and place; and
(ii)must adjourn a meeting of Members if the Members present with a majority of votes that may be cast at that meting agree or direct the Chairperson to do so. The Chairperson may adjourn that meeting to any day, time and place.
(b)No person other than the Chairperson of a meeting of Members may adjourn that meeting.
(c)The Company is only required to give notice of a meeting of Members resumed from an adjourned meeting if the period of the adjournment exceeds the Prescribed Period.
(d)Only business left unfinished is to be transacted at a meeting of Members resumed after an adjournment.
…
(h)A notice under Article 5.11(c) of a meeting of Members resumed from an adjourned meeting and a notice postponing a meeting of Members must set out the place, date and time for the revised meeting (and if the revised meeting is to be held in 2 or more places, the technology that will be used to facilitate this).”
Article 9.2(a):
“The Directors may meet, adjourn and otherwise regulate their meetings as they think fit.”
Schedule 1 of the Constitution states:
“’Prescribed Period’ means 21 days.”
The Parties’ Principal Contentions
The Plaintiffs’ Submissions
Although at an early stage of the exchanges between the parties, the plaintiffs apparently contended that a mere failure to pass a resolution at a board meeting would, without more, entitle a shareholder to serve a notice under sub‑clause 13.1(b), at trial, they did not maintain that contention. Rather, Ms Gordon, senior counsel for the plaintiffs, argued that by its plain words, sub‑clause 13.1(a) entitled a director to require the reconsideration, at a board meeting, of a matter that has been considered and not agreed upon at a prior board meeting, subject to the sole proviso that the board meeting at which the matter is reconsidered cannot take place earlier than one month after the initial board meeting.
In that context, the plaintiffs submitted that “the matter … adjourned” was a reference to the matter or matters the subject of the Relevant Resolution, and that the director’s entitlement was to defer or put off such matters. That construction avoided the anomaly of a reference to adjourning a “resolution” which, if it had been put and not passed, was exhausted. It also permitted the later consideration of an amended resolution, provided that in substance it related to the same subject‑matter as the earlier resolution. In the present case, the amendments to the Relevant Resolution, incorporated in the Notice accompanying the letter of Mr Corrigan dated 14 September 2005 which convened the meeting of 4 October 2005, were minor clarifications which did not affect or alter the fundamental subject-matter of the Relevant Resolution.
Ms Gordon argued that sub‑clause 13.1(a) conferred an entitlement to adjourn the matter, not the meeting, and assumed that the meeting at which the resolution was first considered, and not passed, would continue to completion in the ordinary way. The entitlement of a director to make the requirement that the matter be adjourned to a subsequent meeting was conditional only on the non‑passing of the resolution. The stipulated minimum one month interval between the prior and subsequent meetings was not, strictly speaking, a pre‑condition of the director’s entitlement. Rather, it was directed to the content of the entitlement.
Ms Gordon emphasised that sub‑clause 13.1(a) was silent on the notice that must be given of the subsequent meeting. The sub‑clause therefore, she said, assumed, and was consistent with, the operation of the express notice provisions of sub‑clause 3.7 of the Shareholders’ Agreement, which would apply to the subsequent meeting. Sub‑clause 3.7 dealt exhaustively with the notice required to convene a board meeting and provided that, in the absence of unanimous agreement by the directors to the contrary, a notice must specify the time and place of the meeting, state the nature of the business to be transacted and be accompanied by appropriate board papers. It further prescribed (in the absence of unanimous agreement to a lesser period of notice) notice of at least three business days for a board meeting.
Ms Gordon contended that the sub-clauses 13.1(a) and 3.7 were intended to operate co‑extensively, in accordance with their terms, and that there was no inconsistency between the imposition of the three day’s notice requirement and the valid exercise of the director’s entitlement to require reconsideration of a matter at a subsequent meeting to be held no earlier than one month after the board meeting at which the resolution was initially considered.
Ms Gordon argued that sub-clause 13.1(a) employed three distinct concepts: a resolution, a meeting and a matter, and it stated in clear terms that the director may require the matter, not the meeting or the resolution, to be adjourned. It also referred to a subsequent meeting to which the matter was to be adjourned.
She submitted that sub-clause 13.1(b) was subject to sub-clause 13.1(a), which operated as a “gateway”. It followed that the phrase “the adjourned meeting” in sub‑clause 13.1(b) must be read as a reference to the meeting at which the adjourned or deferred matter is to be reconsidered. That construction also accorded with commercial reality which would not necessitate the adjournment of that meeting, as distinct from the matter not agreed upon. Similarly, the reference to the “Relevant Resolution” in sub‑clause 13.1(b) must, she argued, be a reference to the wider “matter”, because the resolution considered and not agreed upon at the initial meeting was necessarily already spent.
Ms Gordon contended that Toll’s construction was highly artificial. It imposed additional provisos and conditions of notice on the director’s entitlement, which were not warranted by the plain words of sub-clause 13.1(a).
Toll’s construction also entailed, she said, potentially absurd consequences. If correct, it would be necessary to convene a new meeting on three days’ notice if the director had announced the requirement one minute after the initial meeting was pronounced closed.
She disputed Toll’s contention that the plaintiffs’ construction would permit the revival of stale resolutions for ulterior purposes. Ms Gordon submitted that the directors would, in any event, be on notice that a resolution had not been passed from the date of the meeting at which that occurred. The deadlock‑breaking mechanism applies only to a material matter, a dispute on which was unlikely to “sleep” unobserved. She submitted that the correspondence between the parties in the present case made clear that the parties were well aware, from the board meeting on 1 September 2005, of the dispute and the possible invocation of the deadlock‑breaking mechanism. Debate and discussion about the disputed matter had also occurred. Further, sub‑clause 6.2 requires that the parties act in good faith, which precluded the use of a provision of the Shareholders’ Agreement for ulterior purposes. Ultimately, Ms Gordon emphasised that the words of sub‑clauses 13.1(a) and (b) did not support the meaning for which Toll contended. The parties’ intentions were discernable from the ordinary meaning of the words used, which would be defeated by the importation of unstated provisos and notice requirements. In contrast, the plaintiffs’ construction accorded with the words used and gave the sub-clauses a sensible commercial operation.
The First and Second Defendants’ Submissions
Mr Brett, senior counsel for the first and second defendants (Toll), argued that under sub‑clauses 13.1(a) and (b), there must first be a board meeting at which there is (a) a failure to agree on a resolution considered at the meeting; (b) a requirement by a director that the resolution and the meeting be adjourned to a date not earlier than one month after the date of the initial board meeting; and (c) an adjournment in fact of both the resolution and the meeting.
He contended that the “subsequent meeting” referred to in sub‑clause 13.1(a) is “the adjourned meeting” referred to in sub‑clause 13.1(b), which provides the basis for a notice pursuant to sub‑clause 13.1(b) if the directors remain unable to agree on the Relevant Resolution.
Mr Brett argued that unless the minimum period of one month commences to run from the date of a meeting at which both: (a) a resolution is considered and not agreed upon, and (b) a director also requires that the consideration of resolution be adjourned to a subsequent meeting; sub‑clause 13.1 would have an unintended, commercially unrealistic operation. The purpose of specifying the minimum period of one month in sub‑clause 13.1(a) was to provide a sufficient period during which the parties are on notice that a second meeting is scheduled, whereby the deadlock‑breaking mechanism may be enlivened. Unless the minimum one month period commences to run from a meeting at which the requirement that the matter be considered at a subsequent meeting is made, that minimum notice is not ensured.
Mr Brett, submitted that because “adjourn” signifies, broadly, “put off, defer, postpone or suspend, to be resumed on another day”,[1] the necessary positive act of adjournment must logically precede the conclusion of that which is adjourned. In the present context, that meant that although sub‑clause 13.1(a) did not state that:
(a)the requirement that the matter be adjourned must be made at the initial meeting; or that
(b)the initial meeting itself must be required to be, and in fact, adjourned, before it concluded:
both those conditions must be implied, because otherwise the word “adjourn” could not operate according to its usual correct meaning.
[1]See definitions of “adjourn” in the Macquarie Dictionary On-line and Oxford Dictionary On-line.
Mr Brett submitted that this construction was supported by the reference to the “adjourned” meeting in sub-clause 13.1(b).
He also argued that the “matter [to] be adjourned” in clause 13.1(a) could mean nothing other than the Relevant Resolution. The phrase did not imply a wider concept. A resolution and its subject‑matter wholly coincided. As such, a director was restricted (in the absence of agreement) to putting the identical Relevant Resolution considered at the initial meeting to the adjourned meeting. Even amendments of a minor nature were, in the absence of consent, precluded.
Mr Brett contended, however, that the Relevant Resolution which was to be adjourned must first be put and lost. Although he conceded that, as such it, would ordinarily be extinguished, he submitted that in the context of clause 13.1(a), a failed resolution retained sufficient life to be adjourned, as “the clause by its very terms requires things to proceed as if there were something left over that [is] capable of being adjourned”.
Mr Brett stated that sub-clause 13.1(a) was silent as to notice provisions for the “subsequent” meeting because it was properly to be understood as the adjourned meeting, rather than a new one. Therefore, no notice was necessary.
He submitted that adjournment of the meeting would be effected by the director first requiring the adjournment at the meeting itself. Although an individual director was not entitled to adjourn a board meeting, on the making of that requirement at the meeting, the remaining directors would be obliged to agree to adjourn and co‑operate in relation to dates and other necessary arrangements. Alternatively, the adjourned date might in some cases be fixed after the initial meeting had concluded.
Mr Brett argued that the plaintiffs’ construction of the sub‑clauses gave no content at all to the concept of “adjourn” and must therefore be wrong, because, clearly, at the heart of the sub‑clauses, there lay something which must be adjourned.
The Third Defendant’s Submission
The third defendant, Pacific National, did not make any submissions.
Relevant Legal Principles
The parties did not dispute the principles which govern the construction of clauses in commercial contracts.
I recently considered the relevant principles in Unique Life-Style Investments Pty Ltd v Robertson[2]and for convenience repeat the discussion here.
[2][2005] VSC 347 at [88] – [94].
“Relevant authority establishes that the modern approach to the construction of commercial agreements of business people is, generally, to endeavour to uphold the bargain by eschewing a narrow or pedantic approach in favour of a commercially sensible construction, unless irremediable obscurity or a like fundamental flaw indicates that there is, in fact, no agreement. It is permissible to have regard to extrinsic evidence of the “factual matrix”[3] or surrounding circumstances in determining the meaning of contractual terms.
[3]Reardon Smith Line Ltd v Ynngar Hansen-Tangen [1976] 1 WLR 989 at 997; Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337.
In Hillas & Co Ltd v Arcos Ltd,[4] Lord Tomlin stated:
“the problem for a court of construction must always be so to balance matters that, without violation of essential principle, the dealings of men may as far as possible be treated as effective, and that the law may not incur the reproach of being the destroyer of bargains.”[5]
[4][1932] All ER 494.
[5]Ibid at 499.
Lord Wright stated:
“Businessmen often record the most important agreements in crude and summary fashion. Modes of expression sufficient and clear to them in the course of their business may appear to those unfamiliar with the business far from complete or precise. It is, accordingly, the duty of the court to construe such documents fairly and broadly, without being too astute or subtle in finding defects.”[6]
[6]Ibid at 503-4.
In Biotechnology Australia Ltd v Pace,[7] Kirby J, in acknowledging the difficulty of reconciling the competing principles, stated as a general observation that:
“The determination of every case depends upon its own facts. The meaning of the agreement between the parties must be discovered objectively. Where there is suggested ambiguity or vagueness or where it is urged that a term is illusory, it may sometimes be both necessary and appropriate to have regard to extrinsic evidence in order to give meaning to that to which the parties have agreed; see, eg Kell v Harris (1915) 15 SR (NSW) 473 at 479; 32 WN (NSW) 133 at 136 and Raffles v Wichelhaus (1864) 2 H&C 906; 159 ER 375.
The court will endeavour to uphold the validity of the agreement between the parties: see Hillas & Co Ltd v Access Ltd. The court will attempt to avoid frustrating the wishes of the contracting parties so far as those wishes may be ascertained from the agreement between them: see Meehan (at 589); see also Barwick CJ in Upper Hunter County District Council v Australian Chilling and Freezing Co Ltd (1968) 118 CLR 429 at 437 where his Honour said that: ‘ … In the search for that intention no narrow or pedantic approach is warranted, particularly in the case of commercial arrangements.’
But the court will not do so, where, in effect, it is asked to spell out, to an unacceptable extent, that to which the parties have themselves failed to agree. Nor will the court clarify that which is irremediably obscure … ”. [8]
[7][1988] 15 NSWLR 130.
[8]Ibid at 136.
In Vroon BV v Fosters Brewing Group Ltd,[9] Ormiston J also stated “that in commercial transactions the court should strive to give effect to the expressed arrangements and expectations of those engaged in business, notwithstanding that there are areas of uncertainty and notwithstanding that particular terms have been omitted and not fully worked out” whilst acknowledging that “[w]here one should draw the line is difficult to state and equally difficult to apply”.[10]
[9][1994] 2 VR 32.
[10]Ibid at 67.
Consistently with the above principles, in MLW Technology Pty Ltd v May,[11] Gillard AJA, (with whom Winneke P and Buchanan JA agreed), stated:
“The court, in construing contracts between businessmen and also their actions, should proceed in a common sense, non-technical way. How would the businessmen construe the agreement in the light of the commercial purpose of the setting … “[12]
[11][2005] VSCA 29.
[12]Ibid at [76].
His Honour referred[13] to Lord Wright’s observations in Hillas, supra, and to Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd[14] in which Lord Steyn, noting that the law had moved on from a strict technical approach, stated:
“Since then there has been a shift from strict construction of commercial instruments to what is sometimes called purposive construction of such documents … It is better to speak of a shift towards commercial interpretation. About the change in approach to construction there is no doubt. … In determining the meaning of the language of commercial contract, and unilateral contractual notices, the law therefore generally favours a commercially sensible construction. The reason for this approach is that a commercial contract is more likely to give effect to the intention of the parties. Words are therefore interpreted in the way in which a reasonable commercial person would construe them. And the standard of the reasonable commercial person is generally hostile to technical interpretations and undue emphasis on niceties of language.”[15]
[13]Ibid at [77] – [81].
[14][1997] AC 749.
[15]Ibid at 770-771.
Application
The construction of sub-clauses 13.1(a) and (b) of the Shareholders Agreement is not free from difficulty. Some key terminology of the sub‑clauses is used without accuracy, precision or consistency. The competing constructions now advanced by the parties arise from those drafting deficiencies. Neither construction is entirely free from anomalies or wholly avoids the inconsistent use of words and concepts within the sub‑clauses.
By its literal terms, sub-clause 13.1(a) does not impose any obligations or requirements. Rather, it confers upon a director (or shareholder) an entitlement, in the circumstances set out, to require that a matter be adjourned to a subsequent meeting. It is clear, however, and the parties did not dispute, that sub‑clause 13.1(a) prescribes the circumstances and preconditions which must be satisfied in order for sub-clause 13.1(b) to come into play.
That view is confirmed by the reference at the commencement of sub‑clause 13.1(b) to “the adjourned meeting” and the “Relevant Resolution” which, although not free from difficulties of interpretation, necessarily relate back to a meeting and resolution referred to in sub-clause 13.1(a).
Sub‑clause 13.1(b) assumes, and cannot be read independently of, sub‑clause 13.1(a). The entitlement to serve a notice under sub‑clause 13.1(b) is not enlivened until the requirements of sub‑clause 13.1(a) are satisfied.
It is necessary to determine the requirements of sub‑clause 13.1(a) which are the subject of dispute in the present proceeding.
By its literal terms, sub‑clause 13.1(a) requires first, that a resolution be considered at a board meeting and that the directors are unable to agree on it. Sub‑clause 13.1(a) does not, in terms, require that the resolution be put to the vote and not passed. The terminology may be sufficiently wide to comprehend both that occurrence and also less formal manifestations of failure to agree on a resolution.
Whether meeting to be adjourned
Sub‑clause 13.1(a) further provides that, in such a case, a director may require that the matter be adjourned to a subsequent board meeting.
It does not, in terms, provide that a director may require that the meeting be adjourned. Rather, the reference to a “subsequent meeting” indicates that “the matter” is to be adjourned to a new meeting, not a continuation of the initial meeting by its adjournment. If sub-clause 13.1(a) contains an implied condition that the initial meeting itself must be adjourned, such adjournment could logically take place only prior to the conclusion of the initial meeting.
Sub-clause 13.1(a) empowers a single director to make the relevant “requirement” (whatever its content). An individual director of Pacific National is not empowered to adjourn a board meeting. The adjournment of a board meeting requires (by the combined effect of sub-clause 3.10 of the Shareholders’ Agreement and Article 9.2(1) of the Constitution) the unanimous agreement of the directors present and entitled to vote at the board meeting, in contrast to the convening of a board meeting, which, by the express terms of sub-clause 3.6(b) of the Shareholders’ Agreement, a single director may effect or require. Similarly, an individual shareholder is not empowered to adjourn a shareholders’ meeting. By the express terms of Articles 5.11(a) and (b), only the chairman may adjourn a shareholders’ meeting, either at his own behest or upon the direction of members present with a majority of the votes that may be cast at the relevant shareholders’ meeting.
If sub-clause 13.1(a) were in conflict with, and intended to exclude, the express provisions of sub-clause 3.10 by empowering a single director or shareholder to demand an adjournment in the circumstances there set out, that exclusion would be either express or at least by very clear implication. Toll did not contend that the express provisions of the Shareholders’ Agreement and the Constitution applicable to the adjournment of meetings were excluded by sub-clause 13.1(a), but contended that upon a single director requiring that the initial meeting be adjourned, the remaining directors were thereby obliged to agree to, and resolve upon, the required adjournment. Further, Toll argued that the remaining directors would then be obliged to co‑operate with, and agree upon, (ordinarily at the initial meeting, but possibly thereafter), the necessary consequential arrangements for the adjournment of the initial meeting, including fixing a date.
In my opinion, if such a process were necessary to the operation of sub‑clause 13.1(a), it would have been expressly set out.
A process of obligatory co‑operation, triggered by a single director’s request, would constitute, in substance, if not in form, an exclusion of the express contrary provisions of the Shareholders’ Agreement and the Constitution. In my opinon, there is no warrant for such an implied exclusion.
While an obligation to agree may be imposed in other commercial contexts, it would be incongruous and potentially obstructive in a process aimed at entitling an individual director or shareholder to set in train steps to break a deadlock. Sub‑clauses 13.1(a) and (b) are predicated upon the existence of disagreement and deadlock. They would be rendered ineffectual and uncertain if their operation were dependent upon an implied requirement of unanimous agreement and co-operation.
If it be accepted that the necessary second meeting is, in accordance with the literal terms of sub-clause 13.1(a), a “subsequent” meeting to which a matter is adjourned, rather than an adjournment of the initial meeting, the uncertainties inherent in Toll’s construction are avoided. No problem or uncertainty arises from the absence of:
(a)any requirement that the date of the adjourned meeting be specified;
(b)an express exclusion of the usual rules requiring unanimity for adjournment in the case of a board meeting, or adjournment by the chairperson unilaterally or by majority direction in the case of shareholders’ meeting; or
(c)any provisions governing notices of an adjourned meeting where required by the Constitution, or, alternatively, a dispensation from such requirements.
If the second meeting is not an adjournment of the initial meeting, no entitlement in a single director (direct or indirect) to adjourn a meeting would be required, or conferred, by sub-clause 13.1(a). The ordinary provisions applicable to convening a meeting by a director or a shareholder, including the requirements for fixing a date and the necessary notice, would apply.
Toll relies on the reference to “the adjourned meeting” in sub-clause 13.1(b). Sub‑clauses 13.1(a) and (b) must be read together in order to establish the preconditions of service of a notice. The reference in sub‑clause 13.1(b) to “the adjourned meeting” can only refer to a second meeting first referred to in sub‑clause 13.1(a). In my view, in contrast to sub‑clause 13.1(a), which effectively defines or gives content to the second meeting, sub-clause 13.1(b) merely assumes, rather than contradicts or adds to, that content. Rather, it “labels” the second meeting. If, on analysis, the second meeting provided for in sub-clause 13.1(a) is not an adjourned meeting, a reference to it as such in sub‑clause 13.1(b) will be ineffective to alter its character.
In my opinion, the second meeting referred to by different terms in sub‑clauses 13.1(a) and 13.1(b) is, in character, not an adjournment of the initial meeting, but a “subsequent” meeting, in accordance with the terms of sub‑clause 13.1(a), which assumes that a new meeting will be convened in accordance with all co‑existing relevant provisions of the Shareholders’ Agreement and the Constitution.
While that conclusion means that the subsequent meeting could be convened with different periods of notice depending on whether it were a board meeting or a shareholders’ meeting, the different convening periods would not operate to abridge the minimum one month interval between the initial and subsequent meetings. Further, even if, as Toll contends, the second meeting were, on a proper construction, an adjournment of the initial meeting (which could logically only be made at the initial meeting) in my opinion, the minimum one month time period would still commence to run, by the express words of sub-clause 13.1(a), from “the meeting at which the Relevant Resolution was initially considered”.
Toll’s construction requires that the plain meaning of the term “meeting at which the Relevant Resolution was initially considered” be disregarded and that for the purposes of sub‑clause 13.1(a), it be interpreted to mean a meeting at which the resolution was both considered and not agreed upon (whether for the first time or not) and at which the requirement for the adjournment was first made. (On Toll’s construction there is, of course, only one board meeting although, by adjournment, it is held on different occasions.)
The reference to the “initial consideration” of the relevant resolution must, on Toll’s interpretation, bear an artificial meaning, because, irrespective of the number of previous meetings at which the resolution has already been considered (and not agreed upon), the resolution must be taken, for the purposes of sub‑clause 13.1(a), not to be initially considered until the consideration and failure to agree first coincide with the making of the requirement that the matter be adjourned.
Toll bases that interpretation on the ground that it is necessary in order to ensure a minimum period of one month’s notice that the resolution is to be reconsidered or put again at a subsequent meeting, thus providing a possible basis for a notice under sub‑clause 13.1(b). That notice enlivens the deadlock‑breaking mechanism, which may ultimately result in the sale of the business. Toll says that such a drastic mechanism necessarily requires at least one month’s notice that it may be invoked.
Toll also argues that it would be absurd if a resolution could be lost and an indefinite time could then elapse, after which the “subsequent meeting” could be convened with only three days’ notice (or fifteen days’ notice in the case of a shareholders’ meeting). Such an outcome is possible on the plaintiffs’ construction, because no maximum length is prescribed for the interval between the two meetings. If Toll’s construction be adopted, although a lengthy time could elapse between the two meetings, the parties would be on notice throughout the intervening period that a subsequent meeting within terms of sub-clause 13.1(b) was scheduled.
On the plaintiffs’ construction, a “subsequent meeting” of the board within terms of sub‑clause 13.1(b) could be convened with only three days’ notice. Although there would be an interval of at least one month between the meeting at which the resolution was put and lost and the subsequent meeting, the parties would not necessarily have a minimum of one month’s notice that a subsequent meeting for the purposes of a sub‑clause 13.1(b) notice was to occur.
Further, the plaintiffs’ construction admits the possibility that a party could rely on a resolution, which failed to pass at a meeting some time ago, in order to convene, on three days’ notice (or fifteen days’ notice in the case of a shareholders’ meeting), a board meeting which could form the basis for a sub‑clause 13.1(b) notice.
Toll contends that, given the very serious possible consequences of the deadlock‑breaking mechanism, the parties to the Shareholders’ Agreement could not have intended that consequence but rather, because sub‑clause 13.1 establishes a process which provides a number of opportunities for such a dispute to be resolved by discussion between the directors or shareholders, they must have intended a regime whereby a sub-clause 13.1(b) notice could not be served unless the other party had at least one month’s notice that it may be served.
The construction of a contractual provision should not be dictated by the aim of excluding its possible abuse for ulterior purposes, for which remedies may be available elsewhere.
I am not persuaded that the parties must have intended, under sub‑clause 13.1(a), to exclude the possibility that a resolution which was dealt with at a meeting some time ago would be reconsidered at a meeting convened in accordance with the usual convening provisions of the Shareholders’ Agreement.
The usual minimum three business days’ notice for Board Meetings under the Shareholders’ Agreement applies to the most serious matters, expressly including the disposal of all or a substantial part of the company’s business. In contrast to the express stipulation for a minimum period of one month between the two meetings contemplated by sub‑clause 13.1(a), no maximum period is specified for the interval.
The notice that a subsequent meeting was required would not be notice of a certainty but of a possibility, as the shareholders might agree upon the resolution at the subsequent meeting, or if they did not, neither party might serve a sub‑clause 13.1(b) notice.
Further, the deadlock-breaking mechanism does not impose an immediate forced sale but rather, prescribes a period of at least six weeks for discussion and bona fide attempts to resolve the deadlock.
In a company with the management and decision‑making structure of Pacific National (where any decision of the board requires the unanimous agreement of two equally empowered parties and there is no casting vote) the potential for paralysis and its attendant deleterious consequences, is significant. In such circumstances, the prolongation of the prerequisite preliminary process for the commencement of the deadlock‑breaking mechanism may be commercially undesirable.
I am therefore not persuaded that (if, contrary to the view expressed above, the second meeting is properly an adjourned meeting) a radical departure is necessary from the ordinary meaning of the words “from the meeting at which the Relevant Resolution was initially considered” in order to avoid a result which the parties could not have intended. The minimum one month period would, in the present case, in my view, commence to run on 1 September 2005.
Whether matter or relevant resolution to be adjourned
Sub-clause 13.1(a) states that a director may require that “the matter”, rather than the meeting, be adjourned. That phraseology entails a degree of ambiguity. It is not preceded by any reference to a “matter”. Rather, at its commencement, clause 13.1(a) refers to a “Relevant Resolution” which is considered at a meeting and on which there is inability to agree. The subsequent reference to the “matter be adjourned” can only relate back to the Relevant Resolution which has been considered and not agreed upon.
Toll contends that the Relevant Resolution, rather “the matter” must be adjourned. Putting the same argument in a slightly different way, it contends that “the matter” does not exist independently of the Relevant Resolution and that the two concepts wholly coincide.
Toll also relies on the reference in sub-clause 13.1(b) to remaining unable to agree on the Relevant Resolution, in order to argue that only if the Relevant Resolution in the identical form considered at the initial meeting is not agreed upon at the second meeting will the conditions for service of a sub-clause 13.1(b) notice be satisfied. Therefore, even minor amendments to the Relevant Resolution, in the absence of agreement, would be impermissible for the purposes of sub-clause 13.1(b). As such, Toll contends that failure to agree on the amended Relevant Resolution attached to Mr Corrigan’s letter dated 14 September 2005 convening the board meeting on 4 October 2005, cannot form the basis of a sub-clause 13.1(b) notice.
The plaintiffs argue that the phrase “the matter be adjourned” refers to the matter the subject of the Relevant Resolution. As such, they contend that it is wider than a form of words and is unaffected by the introduction of minor amendments. In contrast to a meeting, which would determine when closed, or a resolution, which would determine when put and lost, “the matter” would have a continued existence, so that its adjournment is not an incongruous concept.
“Adjourn” usually connotes the putting off, deferral or suspension of a process which has not terminated. Although it does not aptly describe a resolution which has been put to the vote and not passed, Toll contended that in the special context of sub‑clause 13.1(a) there would be sufficient life in a lost resolution for its adjournment, as the sub-clause otherwise did not make sense. I am not persuaded that a resolution once put to the vote and lost could be other than exhausted.
Further, I do not consider that the rational operation of sub-clauses 13.1(a) and (b) necessitates such a strained interpretation.
In my opinion, the different term “matter” in the context of sub-clause 13.1(a) is not a synonym for the Relevant Resolution, but is of wider reach. That conclusion is based not only on the use of a different and potentially wider word, but also on the total context of clause 13.1 in which it appears. Sub-clause 13.1(a) commences by a reference to a resolution considered at a meeting and not agreed upon. It does not state that the resolution must be put to the vote and not passed. The sub-clause is not expressly focussed on the voting process per se. While counsel for both parties took a contrary view, and it is unnecessary to decide the point, I am not persuaded that a failure to agree upon the relevant resolution must in every case necessarily be evidenced by the putting of a resolution which is not passed. Such an approach may be unduly technical, given the relative generality of the language used.
The view that sub-clause 13.1 is essentially concerned with deadlock on a matter underlying, and not necessarily coincident with, the resolution of which it is the subject, is reinforced by the statement in Schedule 1 Part A of the Shareholders’ Agreement that “A notice under clause 13.1(b) will operate to notify the other Shareholder that unless the matter the subject of the Relevant Resolution has been agreed upon at the expiration of 14 days from the giving of that notice (“the Notice Period”) the provisions of paragraph 2 may be invoked”.
Although the adjournment of “the matter” not agreed upon does not pose as many conceptual problems as a resolution voted upon and not passed, if the requirement that “the matter be adjourned” is made after the conclusion of the initial meeting, as Toll contends, it would lack the temporal sequence characteristic of an adjournment, because, by that stage, consideration of it would already have been interrupted. The requirement at that stage would be, more accurately, for reconsideration of the matter.
If the term “adjourned” bears its strict technical meaning, there are problems with its application to either “the matter” or a resolution, although they are magnified in relation to the latter.
The term “adjourned” must, however, be applied to one or the other (whether or not the initial meeting must also be adjourned) and it is not contended that sub‑clause 13.1(a) covers only the case of disagreement over a resolution not put to the vote.
Strict conformity with the technical requirements of adjournment in the context of sub‑clauses 13.1(a) and (b) is not consistently possible on either the plaintiffs’ or Toll’s construction. As relevant authority establishes, “technical interpretations and undue emphasis on niceties of language” should be eschewed. Applying a “common sense non‑technical” approach “in the light of the commercial purpose of the setting”, I consider that “adjourn” is not used accurately or consistently in the relevant sub‑clauses, but rather imprecisely and colloquially, to indicate both the reconsideration of a matter and a later meeting.
In my opinion, “the matter” referred to in sub‑clause 13.1(a) is the substantive underlying subject matter of the Relevant Resolution on which there has been a failure to agree.
Sub-clause 13.1 is aimed at breaking a deadlock and it would seem an unduly technical approach to construe it as obstructing measures which, during the preliminary phase, might avert deadlock, such as minor amendments to the Relevant Resolution, which leave its substantive subject-matter unchanged. As observed above, although a resolution is required, the relatively wide language of sub‑clause 13.1 suggests that it is not narrowly focussed on voting on resolutions per se, but on the failure to agree on underlying subject-matter.
In the present case, the amendments to the Relevant Resolution clarify the independent status of the solicitors, counsel and accountants proposed to be appointed, in apparent concession to objections raised by the other Shareholder, and in my opinion do not otherwise alter its substance.
Sub-clause 13.1(b) refers to remaining unable to agree on the Relevant Resolution, which supports Toll’s submission that a resolution identical to that considered at the initial meeting must be considered at the later meeting. The reference to “the matter” which is to be adjourned is, however, interposed between the reference to the Relevant Resolution in sub‑clause 13.1(a) and the reference to the Relevant Resolution in sub‑clause 13.1(b). As discussed above, the term “Relevant Resolution” is given no content in sub‑clause 13.1(b) and can be understood only by reference to sub-clause 13.1(a) which expressly states that “the matter”, not the Relevant Resolution, is to be adjourned.
Conclusion
It follows that, in my opinion, the letter of Christopher Corrigan dated 14 September 2005 together with the accompanying Agenda and Notice of Meeting constituted a requirement within the meaning of sub-clause 13.1(a) of the Shareholders’ Agreement that the matters the subject of the Relevant Resolution considered at the meeting of the board of Pacific National Pty Ltd on 1 September 2005 be adjourned, and that the board meeting convened for 4 October 2005 is “the adjourned meeting” within the meaning of sub‑clause 13.1(b) of the Shareholders’ Agreement.
Accordingly, in my opinion, the plaintiffs are entitled to the relief sought in the originating motion.
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CERTIFICATE
I certify that this and the 36 preceding pages are a true copy of the reasons for Judgment of Dodds-Streeton J of the Supreme Court of Victoria delivered on 3 October 2005.
DATED this third day of October 2005.
Associate
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