RBC Investor Services Australia Nominees Pty Limited v Brickworks Limited
[2017] FCA 756
•10 July 2017
FEDERAL COURT OF AUSTRALIA
RBC Investor Services Australia Nominees Pty Limited v Brickworks Limited [2017] FCA 756
File number(s): NSD 2387 of 2013 Judge(s): JAGOT J Date of judgment: 10 July 2017 Catchwords: CORPORATIONS – oppression – whether maintenance of cross shareholding in publicly listed companies oppressive – whether an agreement, arrangement or understanding between directors to maintain cross shareholding – whether cross shareholding depresses value of shares in companies – whether cross shareholding entrenches position of incumbent boards – whether cross shareholding disenfranchises shareholders – application dismissed Legislation: Corporations Act 2001 (Cth) ss 232, 233, 250B, 259D, 259E
Evidence Act 1995 (Cth) ss 81, 87
Federal Court of Australia Act 1976 (Cth) ss 37M, 37N
Cases cited: Ashburton Oil NL v Alpha Minerals NL (1971) 123 CLR 614
Bateman v Newhaven Park Stud Ltd [2004] NSWSC 566; (2004) 49 ACSR 597
Briginshaw v Briginshaw (1938) 60 CLR 336
Campbell v Backoffice Investments Pty Ltd [2009] HCA 25; (2009) 238 CLR 304
Carson v Dynasty Metals Australia Ltd [2011] FCA 621
Catalano v Managing Australia Destinations Pty Ltd [2014] FCAFC 55; (2014) 314 ALR 62
Corbett v Corbett Court Pty Ltd [2015] FCA 1176; (2015) 109 ACSR 296
Equiticorp Finance Ltd (In liq) v Bank of New Zealand (1993) 32 NSWLR 50
Falkingham v Peninsula Kingswood Country Golf Club [2014] VSC 437
Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd [2001] NSWCA 97; (2001) 37 ACSR 672
HNA Irish Nominee Ltd v Kinghorn (No 2) [2012] FCA 228; (2012) 290 ALR 372
Insurance Commissioner v Joyce (1948) 77 CLR 39
Joint v Stephens [2008] VSCA 210
Jones v Dunkel (1959) 101 CLR 298
Latimer Holdings Ltd v Sea Holdings New Zealand Ltd [2004] NZCA 226; [2005] 2 NZLR 328
Mackay Sugar Ltd v Wilmar Sugar Australia Ltd [2016] FCAFC 133; (2016) 338 ALR 374
Maine v Chelia [2005] NSWSC 860
Morgan v 45 Flers Ave Pty Ltd (1986) 10 ACLR 692
Nadinic v Drinkwater [2017] NSWCA 114
News Ltd v Australian Rugby Football League Ltd (1996) 64 FCR 410
Ngurli Ltd v McCann (1953) 90 CLR 425
Re Spargos Mining NL (1990) 3 WAR 166
Territory Realty Pty Ltd v Garraway [2009] FCA 292
Thomas v H W Thomas Ltd [1984] 1 NZLR 686
Trade Practices Commission v David Jones (Australia) Pty Ltd (1986) 13 FCR 446
Trade Practices Commission v Nicholas Enterprises Pty Ltd(No 2) (1979) 26 ALR 609
Wayde v New South Wales Rugby League Ltd (1985) 180 CLR 459
Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285
Date of hearing: 22 - 26 May 2017, 1 - 2 June 2017 Registry: New South Wales Division: General Division National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Category: Catchwords Number of paragraphs: 408 Counsel for the Cross-Claimant: Mr A L J Bannon SC with Mr J A C Potts SC and Ms L E Hulmes Solicitor for the Cross-Claimant: Clayton Utz Counsel for the First Cross-Respondent: Mr I M Jackman SC with Mr D F C Thomas Solicitor for the First Cross-Respondent: King and Wood Mallesons Counsel for the Second Cross-Respondent: Mr N Hutley SC with Mr D Sulan and Mr A Hochroth Solicitor for the Second Cross-Respondent: Baker & McKenzie ORDERS
NSD 2387 of 2013 BETWEEN: RBC INVESTOR SERVICES AUSTRALIA NOMINEES PTY LIMITED ACN 097 125 123 AS NOMINEE FOR RBC INVESTOR SERVICES TRUST IN ITS CAPACITY AS CUSTODIAN FOR PERPETUAL INVESTMENT MANAGEMENT LIMITED ACN 000 866 535
Cross-Claimant
AND: BRICKWORKS LIMITED ACN 000 028 526
First Cross-Respondent
WASHINGTON H SOUL PATTINSON AND COMPANY LIMITED ACN 000 002 728
Second Cross-Respondent
JUDGE:
JAGOT J
DATE OF ORDER:
10 JULY 2017
THE COURT ORDERS THAT:
1.The second cross-claim be dismissed.
2.The cross-claimant pay the cross-defendants’ costs of the second cross-claim as agreed or taxed.
3.Publication of the reasons for judgment apart from paragraphs 1 to 5 other than to the parties and their legal representatives be suppressed for 48 hours to give the parties an opportunity to notify the Associate to Jagot J whether there is any confidential matter disclosed in the reasons and an explanation of why the matter continues to be confidential.
4.Any application to vary order 2 may be made within 14 days by way of email to the Associate to Jagot J, copied to the parties, which includes details of the costs order sought and a proposed timetable for resolving the issue of costs.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
JAGOT J:
1. OVERVIEW
In this case a major institutional investor contends that a cross shareholding between two large publicly listed Australian companies is oppressive to shareholders primarily because by allegedly disenfranchising minority shareholders the cross shareholding is said to entrench the incumbent boards and, as a result, the control of the “Millner family”, and depresses the price of shares in each company.
A finding of oppression is an outcome of an evaluative exercise in which potentially competing considerations are brought to account. This is why in an oppression suit a court asks whether reasonable directors would consider the impugned conduct unfair. The impugned conduct in the present case is the maintenance of the cross shareholding in the face of repeated attempts since 2011 by the investor, Perpetual, to have the cross shareholding dismantled.
In the present case it would be apparent to reasonable directors that the cross shareholding has a range of potential effects which should be considered in context. In particular, and as explained in these reasons:
(1)the cross shareholding has been in place for more than 40 years;
(2)the cross shareholding would not now be able to be created (or recreated if unwound) but is lawful because of transitional provisions in the legislation;
(3)Perpetual acquired its shares knowing the cross shareholding existed and, in its capacity as an institutional investor, presumably understood the implications of it;
(4)it is not apparent that the cross shareholding has caused any related party or improvident transaction;
(5)it is possible that the cross shareholding has contributed to shares in the companies trading at below net asset value per share, but whether that is so or not has not been demonstrated to date and the extent of any such contribution, if it exists, is presently unknown;
(6)the cross shareholding may reasonably be seen as having provided each company with material benefits as a result of diversification which has reduced earnings volatility;
(7)there are available ways in which the cross sharing could be unwound which would not cause adverse tax consequences, but it is not possible to be satisfied on the presently available material that any proposal dismantling the cross shareholding will yield material longer term financial benefits to shareholders of either company;
(8)Perpetual’s attempt to prove that there is an agreement, arrangement or understanding between members of the “Millner family” and/or various members of the boards of each company to maintain the cross shareholding in order to entrench control of the companies by the incumbent boards and thus the Millner family has failed;
(9)the cross shareholding has a range of other implications for both companies. In particular, the cross shareholding operates to discourage any takeover of the companies, impacts on liquidity, facilitates retention of board membership, and is a circumstance which, as the present case demonstrates, is capable of giving rise to actual and perceived conflicts of interest which require continued vigilance and prudent management. It does not, however, disenfranchise minority shareholders in either company who must generally be taken to have acquired their shares knowing that the majority shareholder in each company was the other company given that the cross shareholding was created in 1969;
(10)in terms of takeover and liquidity implications, as noted, no demonstrable impact on the share prices of either company has been proved;
(11)in terms of corporate governance implications, if the boards are perceived to be performing well, this could be characterised as a positive attribute of the cross shareholding by facilitating stability and thus decision-making with a view to longer term benefits. By the same token, if either or both of the boards are perceived to be under-performing, this could be characterised as a negative attribute of the cross shareholding by facilitating entrenchment of the boards despite lack of performance. Perceptions are likely to change depending on circumstances but the underlying governance issues remain that the cross shareholding facilitates retention of board membership and may give rise to potential actual or perceived conflicts of interest;
(12)to date, there is no suggestion that either board has under-performed and, to the contrary, the consensus appears to be that both boards have performed well and both companies are well managed, lending weight to the perception that the cross shareholding, to date, has facilitated stability and a capacity for long term decision-making;
(13)the cross shareholding is a complex structure which makes it more difficult than would otherwise be the case for market participants to assess the true value of the companies because it creates a form of valuation circularity;
(14)a number of market analysts have recognised the range of implications of the cross shareholding, both positive (including earnings stability by reason of diversification, takeover defence, board stability and consequential capacity for long term decision-making) and negative (including lack of liquidity, entrenchment of boards, conflicts of interest, complexity, possible depression of share prices);
(15)on any reasonable view of the evidence, the directors of each company have diligently considered the structure of the companies with their obligations to act in the best interests of the company firmly in mind;
(16)there is good reason to infer that the directors of each company are committed to continuing to consider the structuring issues in future with their obligations to act in the best interests of the company firmly in mind;
(17)Perpetual has been selling its shares in both companies and cannot suggest it is unable to continue to do so given the recent increases in share prices for both companies;
(18)there is no evidence that any shareholder in either company other than Perpetual wishes orders to be made to the effect Perpetual seeks; and
(19)the effect of the orders Perpetual seeks on other shareholders, in terms of share price, company performance, and dividend yields cannot be known.
Weighing all of the circumstances, reasonable directors would not consider maintenance of the cross shareholding to date to be unfair or oppressive. Accordingly, Perpetual’s claim must be rejected.
My reasons follow.
2. SOME UNCONTROVERSIAL FACTS
Soul Pattinson (or WHSP or SOL) was incorporated in 1903. Brickworks (or BKW) was incorporated in 1934. The companies are each listed on the Australian Securities Exchange (ASX), Soul Pattinson being listed in 1903 and Brickworks in the early 1960s.
In 1969 Soul Pattinson and Brickworks acquired shares in each other, an arrangement referred to as the cross shareholding. At that time such an arrangement was permissible. Section 259D of the Corporations Act 2001 (Cth), as in force from 1998, would not now permit creation and maintenance of such an arrangement, but the provision does not apply to the cross shareholding given its creation in 1969.
There is no evidence of any similar cross shareholding arrangement in any other publicly listed company in Australia.
Brickworks currently owns approximately 42.7% of the shares in Soul Pattinson and Soul Pattinson currently owns approximately 44.23% of the shares in Brickworks. Each is thereby the single largest holder of shares in the other.
The total value of Brickworks’ shares on issue exceeds $2 billion of which the holding of Soul Pattinson represents about $1.010 billion (as at 16 May 2017). The total value of Soul Pattinson’s shares on issue exceeds $4 billion of which the holding of Brickworks represents about $1.902 billion (as at 16 May 2017).
There are about 7,689 shareholders in Brickworks and 15,617 shareholders in Soul Pattinson.
One such shareholder, which owns shares in both companies, is the cross-claimant. The cross-claimant, referred to as Perpetual (or PIML), through its custodian’s nominee (referred to as RBC), is an institutional investor. Perpetual first acquired shares in each company in the 1980s, after establishment of the cross shareholding.
At the time it filed the cross-claim Perpetual, via RBC, owned about 8.95% of the shares in Brickworks and about 6.49% of the shares in Soul Pattinson. Perpetual subsequently sold a number of its shares in each company and presently owns, via RBC, about 3.06% of the shares in Brickworks and 1.46% of the shares in Soul Pattinson.
Under the Constitution of Brickworks the company must have not less than three and not more than 10 directors (cl 6.1(a)). The directors and the company at a general meeting by ordinary resolution may appoint any person as a director (cl 6.2(a) and (b)). Directors must retire from office after three years (cl 6.3(b)) but may be re-appointed. The company may remove any director by ordinary resolution at a general meeting (cl 6.3(h)). The company’s business is managed by or under the direction of the directors (cl 8.1(b)). The directors may elect a director as the chairperson (cl 9.6(a)). Resolutions of directors are made by vote of the majority with the chairperson having a casting vote in the event of an equal number of votes (cl 9.7).
Under the Constitution of Soul Pattinson cll 34, 35, 36, 37, 45, and 50 provide equivalent provisions for not less than three and not more than 10 directors, retirement of a director after three years subject to a capacity for re-appointment, removal of any director by an ordinary resolution at a meeting, management of the company’s business by or under the direction of the directors, election by the directors of a chairperson, and resolutions of directors made by vote of the majority with the chairperson having a casting vote in the event of an equal number of votes.
When the cross shareholding was established James (or Jim) Millner was the chairman of Soul Pattinson. On establishment of the cross shareholding James Millner was appointed as a director of Brickworks. He remained a director of both companies until November 1998. The current chairman of both companies is Robert Millner, the nephew of James Millner. The current directors of Brickworks include Robert’s cousin, Michael Millner. The current directors of Soul Pattinson include Robert’s son, Thomas Millner and David Wills, Robert’s brother-in-law. David Wills proposes to retire as a director in the near future and Soul Pattinson is engaged in a search for a new director.
Given the various members of the Millner family involved it is necessary to refer to each by his given name in order to avoid confusion. Given that other people are referred to below in a more formal manner, it is appropriate to record that my intention is clarity, not disrespect to those referred to by their given name.
The directors of each company at the hearing dates and their dates of appointment are as follows:
·Brickworks
(a)Mr Robert Millner (chairman) –28 July 1997;
(b)Mr Michael Millner –26 October 1998;
(c)Mr Lindsay Partridge – 26 September 2000;
(d)The Hon Robert (RJ) Webster – 13 August 2001;
(e)Mr David Gilham – 1 August 2003;
(f)Mr Brendan Crotty – 10 June 2008; and
(g)Ms Deborah Page – 1 July 2014.
·Soul Pattinson
(a) Mr Robert Millner (chairman) – 11 January 1984;
(b) Mr David Wills – 1 April 2006;
(c) Mr Robert Westphal – 1 April 2006;
(d) Mr Thomas Millner – 1 January 2011;
(e) Mr Michael Hawker – 10 October 2012;
(f) Mr Warwick Negus – 1 November 2014;
(g) Ms Melinda Roderick – 1 November 2014; and
(h) Mr Todd Barlow – 14 October 2015.
Perpetual’s case involves the concept of the Millner family. The Millner family means the relatives by blood or marriage to Robert Millner. They include Michael Millner, Thomas Millner and David Wills, and also Peter Robinson, a former director of Soul Pattinson. Perpetual’s case also refers to Millner entities, which are companies controlled by a member or members of the Millner family.
The Millner family owns about 0.95% of the shares in Brickworks and about 1.18% of the shares in Soul Pattinson. Millner entities own about 2.88% of the shares in Brickworks and about 7.37% of the shares in Soul Pattinson.
The concepts of the Millner family and Millner entities are relevant to Perpetual’s case because Perpetual pleads that:
(1)the Millner family customarily exercise voting rights as directors of and shareholders in the companies consistently with each other to maintain the cross shareholding;
(2)alternatively, there is an implied agreement, arrangement or understanding between the Millner family that they will exercise voting rights as directors of and shareholders in the companies consistently with each other to maintain the cross shareholding;
(3)at least three directors of Brickworks who are not members of the Millner family, Lindsay Partridge, the Hon RJ Webster and David Gilham, when making decisions as directors of Brickworks customarily act consistently with the Millner family to maintain the cross shareholding or there is an implied agreement, arrangement or understanding between these directors and the Millner family to exercise their voting rights consistently with the Millner family to maintain the cross shareholding;
(4)at least two directors of Soul Pattinson who are not members of the Millner family, David Fairfull (a director between 14 August 1997 and 2014) and Robert Westphal, when making decisions as directors of Soul Pattinson customarily act consistently with the Millner family to maintain the cross shareholding or there is an implied agreement, arrangement or understanding between these directors and the Millner family to exercise their voting rights consistently with the Millner family to maintain the cross shareholding; and
(5)as a result of the above, the Millner family is able to and does exercise control or a disproportionate influence over the companies having regard to their shareholdings in each.
Perpetual also pleaded that the cross shareholding is oppressive because each member of the Millner family who is also a director of either company has an interest in maintaining the cross shareholding as it enables the Millner family to exercise control of or a disproportionate influence over the affairs of both companies, and that interest is in conflict with the interests of other shareholders in each company who wish to have the cross shareholding dismantled. This appears to be another way of making the same contentions as identified above. Perpetual did not develop this aspect of its contentions separately from the case as identified above.
Perpetual believes that the cross shareholding is outdated and inappropriate, in that it entrenches control of both companies in the incumbent boards and thus the Millner family and thereby disenfranchises other shareholders (those who are not members of the Millner family, the Millner entities and the companies which each has shares in the other company), and also depresses the value of shares in each company.
Since 2011 Perpetual has made a number of proposals which it believed would ameliorate the position. None came to fruition. Perpetual contends that this is a result of the control of the companies by the Millner family and that the conduct of the directors of each company in relation to and failure of each of its proposals, and the continued existence of the cross shareholding, demonstrate both the fact of control by the Millner family and consequential oppression.
In 2011 Perpetual proposed to Soul Pattinson that Robert Fraser be appointed as a director. This is referred to as the first proposal. Mr Fraser’s appointment did not find favour at an annual general meeting of Soul Pattinson on 2 December 2011.
In early 2012 Perpetual proposed to Brickworks an in specie distribution of all of Brickworks’ shares in Soul Pattinson to the shareholders of Brickworks, the effect of which would be to remove the cross-shareholding (with Soul Pattinson remaining a shareholder in Brickworks but Brickworks no longer being a shareholder in Soul Pattinson). This is referred to as the second proposal. The second proposal did not proceed on the basis that Perpetual accepted that the taxation consequences appeared adverse.
In July 2012 Perpetual proposed to the companies a nil premium merger under which shareholders in Soul Pattinson would be issued shares in Brickworks in exchange for their Soul Pattinson shares and Brickworks would cancel the shares in it held by Soul Pattinson. This is referred to as the third proposal.
Whilst the third proposal was being considered Perpetual, along with another shareholder Mark Carnegie, proposed that a scheme for the unwinding of the cross shareholding be taken to a vote of shareholders of each company by a number of steps including the cancellation of all shares held by Brickworks in Soul Pattinson in exchange for consideration paid by Soul Pattinson, as well as the appointment of Elizabeth Crouch as a director of Brickworks. This is referred to as the fourth proposal. The restructuring component of the fourth proposal foundered on the failure to obtain a favourable tax ruling, and Ms Crouch was not elected to the board at an annual general meeting on 24 November 2015.
Thereafter Perpetual has continued to press for the unwinding of the cross shareholding, including by reference to variants of the third proposal, the nil premium merger. This is referred to by the companies as the fifth proposal. Both companies have decided not to pursue any variant of the nil premium merger proposal or to take any other step to unwind the cross shareholding at this time.
Perpetual contends that, whether or not the cross shareholding depresses the value of shares in the companies or the unwinding of the cross shareholding would increase the value of those shares, the maintenance of and failure to take steps to dismantle the cross shareholding entrenches the control of the companies by the incumbent boards and thus the Millner family and thereby effectively disenfranchises shareholders other than the companies in each other, the Millner family and Millner entities. Accordingly, maintenance of and failure to take steps to dismantle the cross shareholding is not in the interests of members as a whole, is unfair and involves oppression.
3. OPPRESSION
The relevant provisions are ss 232 and 233 of the Corporations Act. By s 232, an order may be made under s 233 if the conduct of a company’s affairs, an actual or proposed act or omission by or on behalf of a company, or a resolution, or a proposed resolution, of members or a class of members of a company is either contrary to the interests of the members as a whole or oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members whether in that capacity or in any other capacity. Under s 233 a court can make any order that it considers appropriate in relation to the company including, relevantly, an order regulating the conduct of the company’s affairs in the future, restraining a person from engaging in specified conduct or from doing a specified act, or requiring a person to do a specified act.
The most succinct statement of the overarching principles remains that in Wayde v New South Wales Rugby League Ltd [1985] HCA 68; (1985) 180 CLR 459 at 472-473 where Brennan J said:
Section 320 requires proof of oppression or proof of unfairness: proof of mere prejudice to or discrimination against a member is insufficient to attract the court's jurisdiction to intervene. In the case of some discretionary powers, any prejudice to a member or any discrimination against him may be a badge of unfairness in the exercise of the power, but not when the discretionary power contemplates the effecting of prejudice or discrimination. It is not necessary now to decide whether “oppressive” carries in the context of s 320 the meaning which it carried in the context of the statutory precursors of s 320. At a minimum, oppression imports unfairness and that is the critical question in the present case.
It is not necessarily unfair for directors in good faith to advance one of the objects of the company to the prejudice of a member where the advancement of the object necessarily entails prejudice to that member or discrimination against him. Prima facie, it is for the directors and not for the Court to decide whether the furthering of a corporate object which is inimical to a member's interests should prevail over those interests or whether some balance should be struck between them. The directors’ view is not conclusive, but an element in assessing unfairness to a member is the agreement of all members to repose the power to affect their interests in the directors: see s 78 of the Code. Nevertheless, if the directors exercise a power — albeit in good faith and for a purpose within the power — so as to impose a disadvantage, disability or burden on a member that, according to ordinary standards of reasonableness and fair dealing is unfair, the court may intervene under s 320. The question of unfairness is one of fact and degree which s 320 requires the court to determine, but not without regard to the view which the directors themselves have formed and not without allowing for any special skill, knowledge and acumen possessed by the directors. The operation of s 320 may be attracted to a decision made by directors which is made in good faith for a purpose within the directors’ power but which reasonable directors would think to be unfair. The test of unfairness is objective and it is necessary, though difficult, to postulate a standard of reasonable directors possessed of any special skill, knowledge or acumen possessed by the directors. The test assumes (whether it be the fact or not) that reasonable directors weigh the furthering of the corporate object against the disadvantage, disability or burden which their decision will impose, and address their minds to the question whether a proposed decision is unfair. The court must determine whether reasonable directors, possessing any special skill, knowledge or acumen possessed by the directors and having 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.
Referring to Wayde and other decisions in New Zealand and England, Young J in Morgan v 45 Flers Ave Pty Ltd (1986) 10 ACLR 692 at 704 explained that the unifying principle is one of commercial unfairness, saying:
it has been accepted that one no longer looks at the word ‘oppressive’ in isolation but rather asks whether objectively in the eyes of a commercial bystander, there has been unfairness, namely conduct that is so unfair that reasonable directors who consider the matter would not have thought the decision fair…In my view a court now looks at [the phrase “oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member”] as a composite whole and the individual elements mentioned in the section should be considered merely as different aspects of the essential criterion, namely commercial unfairness.
In Campbell v Backoffice Investments Pty Ltd [2009] HCA 25; (2009) 238 CLR 304:
(1)French CJ made the point at [72] that “language and history indicate that ss 232 and 233 are to be read broadly. The imposition of judge-made limitations on their scope is to be approached with caution”; and
(2)Gummow, Hayne, Heydon and Kiefel JJ at [176] observed that the issue is not the motive for, but the effect of, the allegedly oppressive conduct. Accordingly, directors who believe they are acting rightly may nevertheless cause oppression, unfair discrimination or unfair prejudice.
In Catalano v Managing Australia Destinations Pty Ltd [2014] FCAFC 55; (2014) 314 ALR 62 at [9] Siopis, Rares and Davies JJ put the question this way:
The test of unfairness requires an objective assessment of the conduct in question with regard to the particular context in which the conduct occurs. The question is whether objectively in the eyes of the commercial bystander there has been unfairness, namely conduct that is so unfair that reasonable directors who consider the matter would not have thought the conduct or decision fair. As the test is objective, whether or not the conduct is oppressive will not depend upon the motives for what was done. It is the effect of the acts that is material: Wayde 180 CLR at 472–473; Campbell 238 CLR at 360 [176].
In Mackay Sugar Ltd v Wilmar Sugar Australia Ltd [2016] FCAFC 133; (2016) 338 ALR 374 Gilmour and White JJ and I referred to these observations and, at [14], those of the Victorian Court of Appeal (Nettle, Ashley and Neave JJA) in Joint v Stephens [2008] VSCA 210 at [136] that:
…the task of deciding whether there has been commercial unfairness is to be undertaken in the context of the particular relationship which is in issue. As is observed in Ford [Austin and Ramsay, Ford’s Principles of Corporations Law, 13th Ed [11.450].], the assessment of commercial unfairness will not infrequently involve a balancing exercise between competing considerations. In turn that may involve an examination of the conduct of the applicant.
Sections 232 and 233 apply to a “company” which is defined in s 9 of the Corporations Act to mean “a company registered under this Act”. Accordingly, companies listed on the ASX are subject to ss 232 and 233.
As explained by the Court of Appeal of New Zealand in Latimer Holdings Ltd v Sea Holdings New Zealand Ltd [2004] NZCA 226; [2005] 2 NZLR 328 the fact that a company is listed is a relevant aspect of the context within which the relationship between the member(s) alleging oppression and the other members and directors is to be evaluated. Referring to the earlier decision of the Court in Thomas v H W Thomas Ltd [1984] 1 NZLR 686 the Court (Glazebrook, Hammond and O’Reagan JJ) at [66] said:
This Court held that fairness is not to be assessed in a vacuum, or from the point of view of one member of a company, and that all the interests involved must be balanced against each other, including the policies underlying the Act and those underlying s174 [the equivalent provision to s 232]. For unfairness in this broad sense to be grounded, there must be a “visible departure” from the standards of fair dealing, “viewed in the light of the history and structure of the particular company, and the reasonable expectations of [its] members” (at 695).
Their Honours continued:
[101]…there are a number of reported decisions in the United Kingdom, Canada and Australia in which proceedings of this character have been brought with respect to listed companies with publicly traded shares, and we are not aware of a jurisdictional objection having been taken, let alone succeeding. Relief has on occasion been granted against such companies. (See as only some examples: Re Westfair Foods (above; Canada [(1991) 79 DLR (4th) 48,]); Re Spargos Mining NL (1990) 3 ACSR 1 (Australia); Re Blue Arrow plc [1987] BCLC 585 (UK)). It would be incongruous if New Zealand law was to be put on a different footing (particularly as between Australia and New Zealand).
[102] That said, there are considerations which may well make it more difficult for plaintiffs to succeed in the case of listed companies.
[103] The first and most obvious point is that the exit strategy for an investor in a listed company (as an alternative to litigation) is to sell his or her shares. There is a continuous market in the shares of listed companies, save in extraordinary circumstances which create an illiquid market. This exit strategy is more cost effective than litigation. However it must be said - and it is part of what Mr Rennie said in this case - that a shareholder may, in a company which is being run in a manner that is prejudicial to members, face a share price which has fallen before the shareholder decides to, or can, liquidate his or her investment.
…
[109] The short point is that, even in a listed company, a corporate constitution and the related nexus of agreements may not address all pertinent issues. There may be considerations that give rise to reasonable expectations that are not reflected in strict legal documentation. However, clearly the forensic burden on an applicant will be considerably more difficult in the case of a listed company.
[110] This consideration shades into another, and more recent, development in company law. For a number of reasons which it is unnecessary to traverse here, there is increasing recognition of the very real difficulties of this kind of litigation, and a greater recognition of shareholder rights. This has led to greater recognition by companies of Shareholder Committees, the purpose of which is to give shareholders (and particularly minority shareholders) a greater voice in the corporation’s affairs (see for instance McConvill and Bagaric, “Towards Mandatory Shareholder Committees in Australian Companies” [2004] MelbULawRw 4; (2004) 28 Melbourne U L R 125). Alternative dispute resolution is another option which ought to hold real attraction in this subject area.
[111] In our view, s174 can and does apply to listed companies with tradeable shares, but the considerations which will apply to them will not necessarily be the same as obtain with respect to closely held companies. But it would be quite wrong for the New Zealand corporate community to think that the activities of listed companies are beyond the reach of this provision.
In Re Spargos Mining NL (1990) 3 WAR 166 the petitioning shareholder contended that directors of Spargos Mining NL had entered into a number of transactions for the benefit of other companies in the company group and not for the benefit of Spargos Mining NL. The group held 37-38% shares in Spargos Mining NL, sufficient to give it the controlling interest. The board of directors contained a number of the group’s nominees. Murray J at p 191 held that:
Effectively since Spargos was brought into the IRL Group there has, in my view, been an endemic incapacity on the part of its Board, at least until the Board attained its present composition, to deal with Spargos' affairs by giving sole attention to its interests. Some of the factual examples discussed above are clear cases where a conflict of interest arose and remained unresolved to the detriment of Spargos, its shareholders generally and the minority shareholders.
At p 196 his Honour concluded in these terms:
Having regard to all the foregoing, I propose to make an order which will effectively replace the existing elected Board of Spargos with a Board of my own choosing. I propose that Spargos under the management of that Board should not be given any special protection as to its future, but for a period of twelve months from the date of my order I will secure the existence of the Board I propose. That will provide the independent management necessary for the relief of Spargos and its members, but without the appointment of a receiver and in the expectation that within that period progress will be made to again place the company on a sound footing and pursue remedies in respect of past defaults.
The touchstone of oppression, that conduct be so unfair that reasonable directors who consider the matter would not have thought the conduct or decision fair, may appear circular but is designed to reinforce that the role of the court is not to step into the shoes of the directors and unilaterally decide what it thinks to be in the best interests of the company as a whole. The courts recognise that it is the responsibility of the directors to weigh the competing considerations with which they will be routinely confronted and determine what is in the best interests of the company as whole. They recognise also that as the task of the directors is evaluative it is necessarily one about which reasonable minds may differ. In performing its own evaluation, accordingly, the courts do not merely substitute what appears to them to be the preferable commercial decision. As Mansfield J summarised in Territory Realty Pty Ltd v Garraway [2009] FCA 292 at [312]:
The authorities indicate that the Court should not readily find either s 232(d) or (e) is made out: Edwards v Idaville Pty Ltd (1996) 22 ACSR 1. Such a finding requires consideration of all the circumstances, viewed cumulatively, but not with a hypercritical approach, as the measure is the standard of reasonable directors: De Tocqueville Private Equity Pty Ltd v Linden & Conway Ltd (2006) 59 ACSR 587. It is not a finding to be made because the Court may, on the information available, disagree with the decision of the directors, or because the wisdom of hindsight may show that the decision of the directors was unwise and perhaps grossly so, or because the directors or management did not conduct the affairs of the company as well as the Court considers they may have: Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (1998) 28 ACSR 688. As Murray J said in Re Spargos Mining NL (1990) 3 ACSR 1 at 44, the Court should not in substance adopt an approach to those provisions without clear justification, so that it does not simply take “over the management of the company”.
4. THE CROSS SHAREHOLDING
Apart from the treatment of its various proposals with which I deal separately below, Perpetual relies on a number of other circumstances to support its contention that maintenance of the cross shareholding is not in the interests of members as a whole and involves oppression. I consider those circumstances now.
4.1 Creation of the cross shareholding
The reasons for the establishment of the cross shareholding in 1969 are relevant to, but not necessarily determinative of, the reasons for its continuation in 2017.
Perpetual contends that the cross shareholding was established as an anti-takeover mechanism; that is, to prevent persons other than the then existing controllers of each company gaining control by acquisition of a sufficient number of shares. To function as such, each board must be (and according to Perpetual is) of the one mind about maintenance of the cross shareholding. By controlling the votes attached to their shares in each other (over 40% of the shares in each company are subject to the cross shareholding) the boards of each company, over which the Millner family allegedly exercise control or a disproportionate influence, can defeat any attempt by shareholders to change the compositions of the boards or unwind the cross shareholding. In other words, the cross shareholding was established for a particular purpose, to resist takeovers of the companies, and continues to fulfil that purpose.
At the time the cross shareholding was established (by mechanisms which are not in dispute and need not be recorded) Soul Pattinson acquired about 25.75% of the shares in Brickworks and Brickworks acquired about 18.73% of the shares in Soul Pattinson. At the same time, the chairman of Soul Pattinson, James Millner, was invited to join the board of Brickworks.
Brickworks’ annual report for 1969 recorded that:
The brick industry is one closely geared to the building industry which is notorious for violent fluctuations of trade. Your directors considered it would be a wise precaution to have assets outside the brick industry to cushion it against building trade fluctuations…
Washington H Soul Pattinson & Co Limited shares provide a substantial source of future income from diversified activities not associated with the Building Industry…
Because of the extremely liquid position of Brickworks Limited the Directors also felt it was very vulnerable to takeover bids which might not be in the interests of shareholders generally. The association with Washington H Soul Pattinson & Co Limited, does not prevent a takeover bid but it does ensure that the bid would have to be a substantial one before shareholders would feel it was in their interests to accept any such offer.
…
… The investment in Washington H Soul Pattinson & Co Limited was not made with a view to Brickworks Limited acquiring any short term benefit therefrom. It has been considered by the Directors as essentially a long term form of insurance for the future, because of their confidence that substantial capital benefits and substantially increased revenue will accrue to that Company from its widespread share portfolio and its own trading activities and those of its subsidiaries.
Each company is the subject of a corporate history the contents of which, I infer, were made under and with the authority of each company. As such, representations in the books about the cross shareholding, being made both with and within the authority of each company, are admissible as admissions by the relevant company under ss 81 and 87 of the Evidence Act 1995 (Cth).
The first book, published in 1993 under and within the authority of Soul Pattinson, is “A singular success Washington H. Soul Pattinson 1872-1993”, with an introduction written by James Millner. This introduction included the following:
Washington H. Soul Pattinson and Co Ltd is one of the very few successful public companies which has always been, and still is, controlled and managed by the same family.
All have had the ability to appoint and train the right people to senior and middle management positions and, above all, have been able to adapt to changing industry and general economic conditions.
Management has always been supported by able, loyal and long-serving staff. It is not practical in this history to mention the hundreds of shop managers and the many others who have contributed so much to the success of Washington H. Soul Pattinson and Co Ltd over the last 120 years. Nevertheless, their contribution is acknowledged.
Washington H. Soul Pattinson and Co Ltd has over forty staff who have served the company for over fifty years. Five families – Pattinson, Dixson, Spence, Rowe and Letters – have had three generations with the company, and a large number of sons and daughters have followed on from their fathers or mothers.
There has also been a large number of brothers and sisters who have served the company making it a ‘family business’ in the broadest sense of the term.
The text of this book included these statements:
The Brickworks Cross Shareholding. In the late 1960s Soul Pattinson made another impressive share purchase - this time buying 25 per cent of Brickworks Ltd. The purchase was in fact a share swap and gave each company a minority interest in each other. The theory behind these cross acquisitions was that each company would be impervious to the possibility of a successful takeover.
At a time when takeovers were becoming more frequent among Australian financial and industrial companies this move was seen by many as a sound, albeit protective move. Analysis in the Bulletin on 23 August 1969 reported the move this way: The share swap was a masterly stroke on the part of Jim Millner, the shrewd tactician who in the managing directors chair of Washington H. Soul Pattinson and Co made a wonderful kill and gained a real bargain in the deal.. . To all intents and purposes, Mr James Millner may find himself inheriting the Golden Egg.
…
For Jim Millner the cross shareholding was a means to protect his company from the hostile takeovers that were becoming more and more frequent He had been concerned for some years that Washington H. Soul Pattinson was a potential takeover target and had, on occasion, approached a number of companies with a view to exchanging shares thus minimising the threat of takeover.
Coincidentally William Dawes, the chairman of Brickworks, then in his seventies, had come to the same conclusion about the company he headed. There were rumours in the market that Brickworks was under threat of takeover by London Brick and possibly the Slater Walker group who had just launched a hostile takeover for Drug Houses of Australia. To prevent this Dawes and Millner struck a deal which left the market open-mouthed, a share swap.
Millner explained the swap this way: It wasn't primarily defensive. We both thought it was a good investment. The thing you have to remember about companies like ours, where the directors and chief executives are major shareholders, is that these people are mainly interested in the companies on a long-term basis, and what they can get out of them in dividends as well as salary. A lot of professional management only want to be as big as possible so they can get the largest possible salary.
It’s also very much in the shareholder's interest to have an increasing return without having to put in more money. To do this, you have to be self-financing, as Brickworks and Soul Pattinson have been, by retaining profits for expansion and being conservative.
The danger in doing this is that you become a prime takeover target, and a group of outsiders can buy the company for less than its really worth and reap the benefits which rightly belong to shareholders.
The companies agreed to swap 1,000,000 shares at $10.00 each. The result was that Washington H. Soul Pattinson owned 25 per cent of Brickworks Ltd and Brickworks Ltd owned 22 per cent of Washington H. Soul Pattinson. Jim Millner joined the board of Brickworks Ltd as deputy chairman, sitting alongside W K Panes, Lawrence Taylor, George Travis, Arthur M Dawes and William F Dawes. In 1981, upon the death of William Dawes, Jim Milner became chairman of Brickworks.
Washington H. Soul Pattinson's holding edged up to 28.6 per cent in 1977, to 33.2 per cent by 1978 and to 38 per cent in 1979. By 1992 it held 49.9 per cent of the company. Brickwork's interest in Washington H. Soul Pattinson is currently 43 per cent.
The arrangement has proved a good one in the long term despite the building recession in the early 1970s which caused Brickworks profits to slump. Net profit fell from $3,248,000 in 1974 with an earning per share of 80 cents to $2,396,000 in 1977 and 59.2 cents earning per share.
Chanticleer writing in 1979 in the Australian Financial Review referred to this arrangement as 'one of the most comfortable of its type in Australia'. As Jim Millner said at the time: '…we no longer have to look over our shoulders anymore. It is an arrangement based on a handshake.' But James Millner is quick to add, 'if somebody came along with a bloody good offer either block would be for sale.'
The book also included quotes from newspaper articles in these terms:
James Millner heads three companies, which are reasonably healthy operations in their own right, although he often prefers to think of them as one entity.
Indeed, the tripartite link between Sydney pharmaceutical group Washington H. Soul Pattinson, Brickworks Ltd and the Keith Harris and Co fruit juice group, forms a crucial part of Millner's corporate strategy — to be ready to repel raiders.
…
“Quite frankly,” James Millner told Business Review “all three companies at one time or another have been vulnerable. That's one of the very important reasons why we are so involved with each other — to make sure that something like that does not happen again”.
The second book, published in 2008 under and within the authority of Brickworks, is “The Brickmasters 1788-2008” authored by Ron Ringer. It said this:
WATCH YOUR BACK
People get married for all sorts of reasons: love, family tradition, fear of being left on the shelf, or as a matter of convenience. When Brickworks Limited met Washington H. Soul Pattinson for the first time in early 1969 it wasted no time popping the question. And surprisingly, the answer was ‘yes’. But why now, and for what reason, did these two eligible parties unite in what turned out to be a most successful and mutually beneficial union? In early 1969, with brick sales from its various plants continuing to flourish, all was going well, yet Dawes [William K. Dawes, the then chairman of Brickworks] was a worried man. Unwelcome news was beginning to filter down the grapevine from his friends at The London Brick Company. Those pin-striped City gents in bowler hats mentioned previously were none other than corporate raiders from the UK firm of Slater Walker. For the first – and last – time in his life Dawes and his creation, Brickworks Limited, were being stalked.
Several years later he confided in Peter Mahony, a brickmaker with nearly 50 years’ experience, that he would have done anything to repel the unwanted advances of Slater Walker. What Dawes had in mind was a most unusual plan which he announced at a crisis meeting of directors. A selection of companies listed on the Australian Stock Exchange was being drawn up, he informed his worried colleagues. The idea was to find a business with similar market capitalisation that might consider a share swap of about 20 per cent for each party. This would make it difficult, if not impossible, for anyone to take over either company. In the weeks that followed Dawes and another director, George Travis, the former auditor for Brickworks, sifted through the pages of The Australian Financial Review and held confidential discussions with the company’s share broker. The hunt was not an easy task for it required background research on likely partners, their company structures, shareholders and leadership. At the top of the list was the firm of Howard Smith Limited with its interests in shipping, transport and hardware, but when approached it dismissed the idea of out hand …
WASHINGTON H. SOUL PATTINSON
We cannot be sure of the precise date, but in the early months of 1969 George Travis put forward the name of Washington H. Soul Pattinson, or ‘Soul Patts’, a pharmacy chain controlled by the late James ‘Jim’ Millner. The company is now an investment house with substantial shareholdings in coal, pharmacies, telecommunications, investment banking, fund management and media (a TV station). Millner was from a Beecroft family and had earned a formidable reputation as an astute investor and businessman. He later recalled: ‘initially, we were approached by a broker who said that Brickworks Limited was looking for someone like ourselves – a like-minded partner that was conservative and afraid of takeover.’ The broker he was referring to may have been Patrick Brothers.
George Travis then met with Millner at Eastwood Rugby Club. During the tete a tete Travis laid Dawes’ carefully prepared cards on the table, explaining how a share swap would offer protection for both firms. Millner had a nose for a good investment and was struck by the hugely profitable business of Brickworks. He agreed in principle and the two men exchanged handshakes before going their separate ways. Several days later, Dawes went to meet Millner at his office at the 1886 Soul Pattinson’s shop in Pitt Street …
Having weighted each other up the two men got down to business, with Millner voicing similar concerns that his company might one day find itself having to fend off unwelcome advances. …
RAISED EYEBROWS
The exchange of shares took place on 23 August 1969 and was widely reported in the financial columns of the daily papers. Both companies were roundly criticised and the arrangement attacked by stockbrokers who claimed that ‘bricks and pills didn’t mix’. In reality, the swap was a remarkable coup and provided a two-way flow of investment income, as well as security. In November 1969 the annual report of Brickworks Limited endeavoured to put an end to press speculation.
…
We might also mention that despite newspaper hints of rumours of takeover offers, they are completely without foundation. The investment in Washington H. Soul Pattinson & Co. Limited was not made with a view to Brickworks Limited acquiring any short term benefit therefrom. It has been considered by the Directors as essentially a long term form of insurance for the future …
This was certainly true, but it was most definitely the case that a hostile take-over was on the cards, according to those who witnessed these events. Clearly, it made no sense for the board to alarm shareholders, which may account for the lengthy statement in the annual report for 1969.
GETTING TO KNOW YOU
Following the swap Jim Millner took a seat on the board of Brickworks, although his first appearance as a director did not take place until 7 October 1970 …
Strangely, Dawes spurned a reciprocal offer to sit on the board of Soul Patts, claiming to know little about pharmaceuticals, and that in any case he was flat out running brickyards. The reality was that William King Dawes was a controlling personality, and what lay beyond his control held little interest. And was it really a partnership of equals, in view of the fact that Brickworks Limited had initiated the share swap? As we shall see his refusal to engage set in motion a chain of events which stymied any succession plan Dawes may have been contemplating for a family member to take over the helm.
A footnote to this text included the following:
James ‘Jim’ Millner (1919-2007) was the eldest of three boys and grew up in Cheltenham, Sydney. His mother was the daughter of the founder of Soul Pattinson. His father was a decorated war hero who returned to Australia from active service in 1919 with the Military Cross. He went on to establish Commonwealth Imperial Gases (CIG) in Australia.
Perpetual made this submission:
Although Brickworks has denied it, and Soul Pattinson has refused to admit it, it is clear given the history recounted in these books, and from the words attributed in those histories to Mr Jim Millner himself, that the cross-shareholding was implemented in 1969 to make it more difficult for a proposed takeover of Brickworks and Soul Pattinson to succeed. The cross-shareholding was, from its outset, an anti-takeover mechanism, designed to entrench control in the incumbent management. Neither Brickworks nor Soul Pattinson has led any evidence from any witness giving any other explanation for the reason for the creation of the cross-shareholding.
I accept that the cross shareholding was created to make it more difficult for a proposed takeover of Brickworks and Soul Pattinson to succeed. That is not the whole of the story, however. Perpetual cannot pick and choose those parts of the histories of the company which suit it and disregard those parts which do not suit it. It is also apparent that:
(1)each company considered that acquiring shares in the other was a good investment for a number of reasons including diversification of their holdings and confidence that the other company held a similar conservative long term view about the company’s activities; and
(2)neither company suggested that the anti-takeover object was to be maintained irrespective of circumstances (for example, if it was no longer seen to be in the best interests of the company as a whole to retain the shares in the other) and, indeed, James Millner expressly referred to the prospect that the shares of each company could be sold if the offer was good enough.
4.2 The family business
Perpetual contends that it is clear that former and current members of the Millner family regard Brickworks and Soul Pattinson as their own “family business”. According to Perpetual they have made numerous public statements to this effect, and their actions are entirely consistent with this view. Further, said Perpetual, the actions of other board members suggest that they are equally content for the companies to be viewed and treated by the Millner family as in substance their “family business”.
Perpetual notes (and it is not in dispute that) that:
(1)James Millner was a director on the board of Brickworks from on or about 28 August 1969 until on or about 6 November 1998 and was a director on the board of Soul Pattinson from on or about 20 June 1962 until about 20 November 1998; and
(2)Robert Millner, the current chairman of Brickworks and Soul Pattinson is:
(a)the great grandson of Lewy Miall Pattinson, founder of Soul Pattinson;
(b)the nephew of James Millner;
(c)the father of Thomas Millner, a current director of Soul Pattinson;
(d)a cousin of Michael Millner, a current director of Brickworks, and a former director of Soul Pattinson;
(e)a brother-in-law of David Wills, a current director of Soul Pattinson; and
(f)a cousin-in-law of Peter Robinson, a former director of Soul Pattinson.
In the 2002 annual report on the centenary of Soul Pattinson as a public company Robert Millner said:
Washington H. Soul Pattinson is one of the few successful public companies that has been managed by the same family from the outset – and therein lies the key to its strength. Its leadership has been grounded in successive family members who value the history of the company, yet are able to adapt to changing times and economic conditions. All have had the ability to spot talented people to fill senior and middle management positions. In turn, management has always been supported by able, loyal and long-serving staff.
More than 40 employees have worked for the company for over 50 years. Four generations of the Pattinson family have served the company, as have three generations of the Dixson, Spence, Rowe and Letters families.
Soul Pattinson company minutes record that in 2011 at the annual general meeting the answer to a question about the appointment of Thomas Millner as a director was:
He had been appointed for succession planning and possesses relevant skills.
Perpetual also relies on a series of newspaper articles containing statements attributed to Robert Millner and others to support its contention that the Millner family considers the companies to be “family companies” and other directors are content for the companies to be viewed as such. These include the following statements:
(1)29 May 2004 in the Australian Financial Review:
(a)Robert Millner - “Family culture, stability, loyalty and trust are important values, says Millner”;
(b)Peter Robinson - “There’s nothing worse than these big organisations where you’ve got to run everything through. And with five of us round the table, if there’s one person who doesn’t agree with something, it is normally one in, all in or one out, all out.”
(2)2009 in the Sydney Morning Herald:
(a)Robert Millner - “Like most of the best companies in Australia, this is a family company”.
(b)Robert Millner - “I always said I would like to work for the family business. My uncle and the board had to be convinced I was up to standard and I joined the board in 1984…Will there be a fifth generation succeeding you? My son is the only fifth generation involved in the company. He is 32 and is running Brickworks Investment company. It would be nice, but I don’t know what is in store. It is up to him to make that decision.”
(3)2015 in afrsmartinvestor.com.au: “Robert Millner - It’s clear [Robert] Millner is a believer in the sharemarket as a place to invest savings and earn returns. And that’s where he expects his legacy to continue – his 37-year-old son Thomas Millner, CEO of funds management firm BKI Investments (Robert is chairman), ‘should be interested in taking over the business at some stage’.”
The companies object to admission of the newspaper articles on the basis that they cannot constitute admissions against interest, being mere representations by journalists of what Robert Millner and Peter Robinson said and thus not representations by a person with authority to make statements on behalf of either company in relation to the matter with respect to which the representation was made. The question to which s 87 of the Evidence Act gives rise is thus the character of the representations – are the representations by journalists as to what the makers of the statement said or are they representations by the makers of the statement as to the substance of the statements? I consider that they are of the former character, the result of which is that the statements are inadmissible. Nevertheless, in case I am incorrect in this regard, I propose to express my conclusions in these reasons for judgment assuming the statements are admissible as admissions by a person with authority from the companies. I take the same approach below to other newspaper articles on which Perpetual relies.
Perpetual also submitted that:
The mere fact of the appointment of Mr Thomas Millner to the board of Soul Pattinson evidences the intention of the family that there should be a fifth generation of Millner family control. The evidence as to the circumstances of Mr Thomas Millner’s appointment…demonstrates the complicity of other directors of both Brickworks and Soul Pattinson in this “family” arrangement.
In evidence are the minutes of a meeting of the so-called nomination committee of Soul Pattinson on 8 December 2010 (only 5 days after the 2010 AGM), comprised of Messrs Robert Millner, Robert Westphal and David Wills (Robert Millner’s brother-in-law), recommending to the board the appointment of Mr Robert Millner's son as a director of Soul Pattinson. No doubt the decision to appoint him by resolution of the board, as distinct from election at the AGM, a mere 5 days after it had occurred was to enable him to have the maximum possible time in office as a director before having to offer himself for re-election at the 2011 AGM, and to present himself as an already established director.
I do not doubt that Robert Millner sees the companies as “family companies” if by that it is meant that:
(1)members of the Millner family have had a long history of shareholding, board and management roles in each company and, for Soul Pattinson at least, multiple members and generations of other families have had a long history of working for the company; and
(2)those histories are perceived to have contributed to the success of the companies over a lengthy period of time.
Whether other board members shares this view is unknown, but they would be aware of the history of both companies and the role the Millner family has played in that history.
Beyond this, the broadly held view appears to be that the companies have been successful over a lengthy period and it would be surprising if the views of Robert Millner, given his lengthy involvement with the companies, did not carry weight in the meetings of directors as a result (a matter I return to below). But influence by reason of a history of success (even if proved) is not “undue” provided each member of the board brings his or her own judgment to bear. Nor does it prove the existence of an agreement, arrangement or understanding of the kind Perpetual alleged.
In any event, Perpetual cannot have the benefit of newspaper articles insofar as they suit its case and ignore the balance. Relevantly:
(1)there is no suggestion in the material that the Millner family’s long history of board and management roles in each company should continue irrespective of their capacity and performance;
(2)there is no suggestion in the material that Thomas Millner does not possess the relevant skills to function as a director of Soul Pattinson;
(3)there is no suggestion in the material that the directors of Soul Pattinson did not believe that Thomas Millner had the relevant skills to function as a director of Soul Pattinson and, to the contrary, it would be inferred that they believed he did have those skills;
(4)there is no suggestion in the material that any of the directors of Soul Pattinson, including Robert Millner, considered that Thomas Millner would become the chairman of Soul Pattinson irrespective of his capacity and performance; and
(5)there is no basis for drawing an inference that “the decision to appoint [Thomas Millner] by resolution of the board, as distinct from election at the AGM, a mere 5 days after it had occurred was to enable him to have the maximum possible time in office as a director before having to offer himself for re-election at the 2011 AGM, and to present himself as an already established director”.
The fact that Robert Millner considers family culture, stability, loyalty and trust to be important values is hardly of moment. Perpetual appears to be reading into this and other statements such as “family company” a meaning I do not accept that they can bear. Perpetual is asserting that such statements should be taken to mean that members of the Millner family have agreed between themselves that they each must exercise voting rights as shareholders and as directors (if they are a director) of both companies to ensure that the cross shareholding is to be maintained as a means of entrenching control of the companies by the Millner family. Perpetual is also asserting (beyond its pleaded case, which is confined to some directors only) that from their silence in the face of such statements other directors of each company must be taken to agree with or accept this as appropriate. None of these allegations have come up to proof.
Insofar as the other directors of each company are concerned, the notion that they must be taken to agree with Perpetual’s interpretation of statements in the press because they did not correct the record, assumes Perpetual’s interpretation is the only one open or the most likely interpretation, when neither proposition is sound. Moreover, even if a statement was made which could bear Perpetual’s interpretation, it is not apparent why I should infer that every other director must be taken to agree with the statement by reason only of having not openly corrected the statement. It does not take much to suppose that directors of a publicly listed company would strive to avoid airing internal board disputes in the press. Nor, for reasons also explored below, does the fact that no directors have given evidence in this proceeding assist Perpetual. On the evidence, I can draw no inference that other directors of the boards of each company agreed with any of the statements attributed to Robert Millner or others in various articles. Further, and as noted, the reasons for which the cross shareholding was created are not necessarily the reasons it has remained to date.
Insofar as the position of Thomas Millner is concerned, Perpetual’s approach is also untenable. For example, it is apparent from one of Robert Millner’s statements that Thomas Millner is the only fifth generation Millner involved in the companies. The natural inference one would draw from this statement is that there are other fifth generation Millners who are not involved. This does not support the notion of “Millner family control”. The statement that it is “up to him to make that decision” cannot be read as meaning that it is for Thomas Millner alone to decide if he wishes to be chairperson of the boards of the companies. It can only mean that it is his decision if he wishes to continue his involvement with the companies, subject to the boards as a whole and shareholders considering that appropriate. The reference to “succession planning” in the minutes is innocuous. Presumably, Thomas Millner is younger than many members of the Soul Pattinson board. Perpetual’s high point seems to be the statement that Thomas Millner “should be interested in taking over the business at some stage” but a case such as this cannot be sustained by an expression of paternal hope.
Mr Robinson’s statement that “with five of us round the table, if there’s one person who doesn’t agree with something, it is normally one in, all in or one out, all out” does not advance Perpetual’s case. Mr Robinson was a director of Soul Pattinson between 1984 and 2015. His statement discloses that board members had disagreed with each other but worked through the disagreements to achieve consensus. It is not apparent how this supports the notion that the Millner family, let alone other directors, agreed between themselves that they each must exercise voting rights as shareholders and as directors (if they are a director) of both companies to ensure that the cross shareholding is to be maintained. Moreover, as Brickworks rightly said:
In the quotation from the Australian Financial Review of 29 May 2004 relied upon by Perpetual, reference is made not only to the concept of “one in all in” but also to the equally important proposition “one out all out”. Accordingly, the practice referenced in the article is inconsistent with Perpetual’s contention that Mr Robert Millner was accustomed to getting his own way.
Accordingly, the thread of Perpetual’s argument which depends on the notions of “family companies” or “family business” does not provide material support to its case. To the extent Perpetual’s submissions assume the Millner family is greater than the sum of its parts, I adopt the submissions of each company that, as Barrett J observed in Bateman v Newhaven Park Stud Ltd [2004] NSWSC 566; (2004) 49 ACSR 597 at [34]:
A point to be made at once in relation to these questions is that the mere fact of family relationship should be left to one side. King George V and Kaiser Wilhelm II were first cousins. They did not act in concert between August 1914 and November 1918 and probably at other times as well. In the absence of evidence of agreement or dependency or actual influence implying commonality of action, family relationships, like the personal friendships considered in the Elders IXL case, above, of themselves prove nothing relevant to an inquiry such as the present.
For the same reasons directorships of other companies along with one or other member of the Millner family or long association do not materially advance Perpetual’s case.
One other point should be made. I have said above that it would be surprising if the views of Robert Millner, given his lengthy involvement with the companies, did not carry weight in the meetings of directors. This is because, in the ordinary course, I would expect that perceived success engenders influence and it was not in dispute that the companies are perceived to have been successful. Perpetual’s case, however, does not rest on the notion of influence. Influence on boards must be ubiquitous. Directors are not required or expected to make decisions in a vacuum free from knowledge of the strengths and weaknesses of their colleagues as directors. They do not fail to act in the best interests of the company merely because they might take into account or even be persuaded by the views of their colleagues.
Accordingly, Perpetual’s case is necessarily framed as one of control or what it terms “disproportionate” or “undue” influence by the Millner family over the boards of each company. In context, this must mean that Perpetual alleges that the obligations of each director of each company have been and are being subordinated to the maintenance of the cross shareholding as a mechanism of entrenching control of the companies by them and thus the Millner family. These matters should be kept in mind when assessing the evidence which is said to support this aspect of Perpetual’s case because to assert that a director of a publicly listed company is acting other than in accordance with their obligations is no small thing and the likelihood of that being so is to be assessed with regard to the seriousness of the allegations (s 140(2)(c) of the Evidence Act and Briginshaw v Briginshaw (1938) 60 CLR 336 at 361-362).
4.3 The cross shareholding could not now be created
Perpetual places weight on the fact that creation and maintenance of the cross shareholding would not now be permitted by operation of ss 259D and 259E of the Corporations Act. As Perpetual submitted:
Section 259D provides:
(a)if a company obtains, or increases, control of an entity which holds shares in the company, then, within 12 months of either obtaining or increasing control, the entity must cease to hold the shares, or the company must cease to control the entity (s. 259D(1));
(b)any voting rights attached to the shares cannot be exercised while the company continues to control the entity (s. 259D(3));
(c)if, at the end of the 12 months (or any extension to that period granted by ASIC pursuant to section 259D(1)), the company still controls the entity and the entity still holds the shares, the company commits an offence for each day while that situation continues (s. 259D(4)); and
(d)the offence is an offence of strict liability (s. 259D(4A)).
Section 259E(1) provides that a company controls an entity if the company has the capacity to determine the outcome of decisions about the entity's financial and operating policies. Pursuant to section 259E(2), in determining whether a company has this capacity:
(a)the practical influence the company can exert (rather than the rights it can enforce) is the issue to be addressed; and
(b)any practice or pattern of behaviour affecting the entity's financial or operating policies is to be taken into account (even if it involves a breach of an agreement or a breach of trust).
…
Sections 259D and 259E were introduced into the then Corporations Law by the Company Law Review Act 1998 (Cth), which commenced 1 July 1998. Section 259C was introduced at the same time, and it provided that the issue or transfer of shares of a company to an entity controlled by the company would generally be void (unless certain exceptions applied). The provisions remain substantially the same today (although s. 259D(4A), referred to above, was inserted in 2001).
…
ASIC has issued Regulatory Guide 233 “Indirect self-acquisition: Relief for investment funds”, which explains the conditional relief ASIC may grant under s 259C(2) of the Corporations Act from the indirect self-acquisition provisions in s 259C…
Regulatory Guide 233 is for investment funds and similar entities, and controlled entities of listed companies engaged in arbitrage and client driven activities, however, the guide outlines the general regulatory risks that ASIC considers may arise from allowing indirect self-acquisition, as follows:
(a)improper attempts to consolidate or exercise control - there is a risk that the company's shares acquired by controlled entities may be inappropriately used to control the company;
(b)increased possibility of corporate failure - there is an increased risk of corporate failure where a company is investing its own funds in itself;
(c)possible discrimination between shareholders - there is a risk that self-investment may lead to a controlled entity being preferred over other shareholders in the company;
(d)insider trading - there is a heightened risk of insider trading where a controlled entity is trading in its holding company's shares;
(e)market manipulation - there is a risk that acquisitions by a controlled entity could be used to manipulate the market for the benefit of the corporate group; and
(f)price opacity - allowing indirect self-acquisition by a controlled entity, which uses its own funds rather than investors' funds, can create difficulties in valuing the consolidated group of companies. This is because part of the assets of the group includes shares in the controlling company. In addition and all things being equal, the greater the amount of indirect self-investment, the great the volatility in the controlling company's share price. This is because indirect self-investment tends to exaggerate the effect of good and bad news on the share price of the company.
The presence of these legislative prohibitions evinces a legislative policy choice that arrangements such as the cross-shareholding are, as a matter of general corporate policy, considered undesirable. That is for good reason, as they permit individuals without the majority of capital invested in a company from exercising effective control.
Brickworks pointed out that Parliament chose to allow cross shareholdings that were in existence prior to the enactment of s 259D to continue in operation without temporal restriction. Accordingly, as Brickworks put it:
The Explanatory Memorandum to the Company Law Review Bill 1997 provided:
“[12.73] The rules in section 259D of the Bill apply only to obtaining control, increasing control and other transactions occurring after commencement. For example, if A obtained control of B prior to commencement, A would not be required to end its control of B, nor B to dispose of its shares in A. However, if A were to increase its control in B after commencement, then within 12 months either A must end its control of B, or B must cease to hold the shares (Bill s 259D(1)).”
It follows that there is no policy against the Cross-Shareholding that is capable of being divined from the Corporations Act. On the contrary, Parliament was content for companies in the position of BKW and SOL to retain their cross-shareholdings for as long as they saw fit.
For the same reasons, Perpetual’s reliance on ASIC Regulatory Guide 233 is misplaced. That regulatory guide has no application to the Cross-Shareholding. Further, the guide is directed at entities other than BKW and SOL – namely, investment funds and similar entities engaged in arbitrage and client driven activities. Even if these matters are ignored, the Regulatory Guide rises no higher than recognising certain “risks” that may arise from an indirect self-acquisition and expressly contemplates that ASIC may grant relief permitting such acquisitions to take place.
Both the fact that the cross shareholding would not be permitted if sought to be created now and that the statutory regime excluded pre-existing arrangements from the prohibition are relevant. The former proposition demonstrates that arrangements such as the cross shareholding are undesirable as a matter of general corporate policy. The latter demonstrates that this general undesirability was not seen as sufficient by Parliament to force pre-existing arrangements to be undone by subjecting them to ss 259D and 259E. General undesirability as a matter of policy, of course, does not prove that any of the risks inherent in a structure have eventuated or, for that matter, that any unfairness has been caused. Ultimately, all that can be said is that the policy considerations mean that it would be prudent for the boards of both companies to be vigilant about the kind of issues that such a structure might involve. As discussed below, the evidence establishes that neither board could be accused of a lack of vigilance or prudence about the potential effects of the cross shareholding.
4.4 The cross shareholding depresses share prices?
Perpetual submitted that:
The cross-shareholding serves to depress and supress the market value of both Brickworks and Soul Pattinson. That has been repeatedly acknowledged in the companies’ own advice from Gresham, Lion Capital, and Pitt Capital…
The financial press coverage and perception of the cross-shareholding in the market is highly negative.
While Perpetual said it relied upon the evidence of Mr Duncan and Professor Frino to support these submissions, their evidence about value did not demonstrate that the cross shareholding in fact depressed share prices. The evidence, taken as a whole, permits only the following findings:
(1)Perpetual and experts advising Perpetual have consistently considered that the cross shareholding materially depresses the value of shares in the company compared to the market value of those shares but for the cross shareholding and all things otherwise being equal;
(2)some other market analysts share Perpetual’s views;
(3)at various times and to various extents experts giving advice to the companies have reached similar conclusions to those of Perpetual;
(4)one difficulty that besets all of the evidence about the effect of the cross shareholding on share price is that the comparison is between the companies as they exist and the companies but for the cross shareholding or in a merged form and “all other things being equal” (which seems to mean that the assets of the companies and efficacy of the boards and management will be the same). However, if the cross shareholding is unwound the companies will be fundamentally different, as would be a merged entity, so the assumption of “all other things being equal” is elusive, and perhaps meaningless; and
(5)the substantial increases in share prices for both companies in more recent times tends to work against the conclusion that the cross shareholding materially depresses the value of shares in either company, a fact which advisors to the companies have recognised in their more recent reports to the companies.
It is for these reasons that, as I have said, the cross shareholding may contribute to the share prices of each company having traded below net asset value in the past but, as the directors would also know, the relationship between the cross shareholding and share price is by no means certain given that share prices substantially increased over recent years.
Further, reasonable directors would also be aware that:
(1)the cross shareholding has been in place for more than 40 years;
(2)there are approximately 7,689 shareholders in Brickworks and 15,617 shareholders in Soul Pattinson, but it is not apparent that any apart from Perpetual favour the relief sought in this proceeding. The position of other shareholders about the relief sought is unknown;
(3)given that the cross shareholding has been in place since 1969 Perpetual acquired its shares knowing of the existence of the cross shareholding and it would be reasonable to assume that most current shareholders acquired shares aware of the existence of the cross shareholding;
(4)Perpetual has been selling down its holdings in both companies. RBC on Perpetual’s behalf owns 3.06% of Brickworks’ shares and 1.46% of Soul Pattinson’s shares. Perpetual has adduced evidence, to which objection is taken, that in total it holds 6.3% of Brickworks’ shares and 3.6% of Soul Pattinson’s shares but the relevant point is that it has materially decreased its shareholding since this proceeding commenced (via RBC Perpetual previously held 8.95% of Brickworks’ shares and 6.49% of Soul Pattinson’s shares). The fact that Perpetual has done so exposes the obvious fact that any shareholder who has become dissatisfied with the cross shareholding is not locked in and can sell their shares as the companies are publicly listed on the ASX;
(5)on the evidence, as Soul Pattinson put it, there is not a single example of “any transfer of value to the so-called Millner Family or any other improvident transaction” by either company in the entirety of that period;
(6)the cross shareholding facilitates stability over the longer term in board membership of both companies which has contributed to the capacity of the boards to make decisions with a view to longer term outcomes;
(7)there is abundant evidence that both companies are generally considered to have been well managed at all times;
(8)for Brickworks’ directors the shares in Soul Pattinson have provided it with a useful buffer during low periods during the building and construction cycle and could reasonably be anticipated to continue to do so in the future;
(9)for Soul Pattinson’s directors, the shares in Brickworks have been seen in the past to be a good investment and no circumstance has apparently arisen that would presently suggest to the contrary;
(10)by the same token, the cross shareholding has the potential to facilitate retention of boards of the companies even if they were under-performing;
(11)advice on restructuring proposals has been received by the companies over a number of years, the most recent advice being that there is insufficient justification for such a restructure at this time, and for the directors of Brickworks at least other value adding options have been recommended for further consideration;
(12)the merger proposal, if implemented, could not be readily undone and the cross shareholding could not be recreated under the Corporations Act; and
(13)no-one can know whether the merged entity would perform as well as the companies in terms of either dividend payments or share price.
All of these factors would be taken into consideration and weighed by reasonable directors. On the evidence, I would infer that all of these factors have been taken into consideration and weighed by the directors of each board having regard to the interests of their company as they appear at the time. In this regard, it is apparent that as circumstances have changed (eg the possible sale of Soul Pattinson’s shares in New Hope and the changes in share price of each of the companies), the advice which the directors have received has also changed. The evidence overwhelmingly favours the inference that the directors of each board have carefully considered restructuring options on the basis of professional advice which has taken into account the circumstances at the time. They have reached the view that no restructuring option has presented itself which presents demonstrable benefits compared to the existing structure which has existed for 40 years. In so doing, moreover, I infer that they have taken into consideration other factors which would be apparent to people in their position and with their expertise. For example, it is apparent from his emails that Mr Crotty assessed the possible advantages and disadvantages of any restructuring with a detailed understanding of relevant matters which a judge could not appreciate based on a hearing of two weeks and a review, in the context of litigation, of selected aspects of the management of the companies.
The fact that Mr Crotty was able to identify these matters in a short email and on only a brief review of the material presumably reflects his particular experience and expertise. He has extensive property industry experience, was the managing director of Australand for 17 years, and holds other directorships in the property sector. Similar observations could be made about the experience and expertise of the other directors of the companies. Despite Perpetual’s contentions to the contrary, there cannot be any doubt that each director reached their conclusions in good faith and with the best interests of the relevant company in mind, based on a wealth of experience, expertise and knowledge which, in reality, could not be available to a court. Moreover, there is no reason to infer that the directors will not continue to consider restructuring options if any circumstance presented itself suggesting that it might be in the best interests of the company for such options to be pursued. While these matters are not a reason to shy away from a finding of oppression if oppression is proved, they are relevant to the posited consideration of the commercial bystander and are of the utmost importance when assessing remedy.
Perpetual’s submission that the references to the benefits of diversification are misconceived because there is no part of the cross shareholding which is necessary to achieve this aim overlooks the fact that it is diversification from the perspective of each company which is being called in aid. For a shareholder in Brickworks, the shares in Soul Pattinson provide a buffer against the cyclical nature of the building and construction industry. For the shareholder in Soul Pattinson, the shares in Brickworks provide exposure to the building and construction industry. Not every shareholder would, like Perpetual, have shares in both companies. Not every shareholder, moreover, can be assumed to be as willing as Perpetual is to hold shares in a merged entity, a point to which I return below in the context of relief.
Perpetual’s complaint that neither board has considered the oppression caused by the mere maintenance of the cross shareholding is without substance. Whether or not the label of oppression has been invoked in the past (and it has not in Perpetual’s communications with the companies other than in the context of this proceeding), the submission assumes that neither board is aware of the effect of the cross shareholding. This assumption would not be made. Both boards must be taken to be aware of the effect of the cross shareholding on corporate governance, including the risks of conflicts of interest. Given their qualifications, expertise and experience the notion that they do not know and have not taken into account the potential effects of the cross shareholding on the corporate governance of the company of which they are a director is unpersuasive.
The boards did not need to refer expressly to the issue of corporate governance in their resolutions in order to found an inference that those potential effects were taken into account. Further, the submission is directly at odds with Perpetual’s case that board members are party to or have acquiesced in an agreement, arrangement or understanding to maintain the cross shareholding for a particular corporate governance objective – the control of the companies by the incumbent boards and thus Millner family. The fact this case has failed does not make it reasonable to infer that these boards are proceeding in ignorance of the potential impacts of the cross shareholding on corporate governance. Finally, there is direct evidence to the contrary. Corporate governance issues were raised in a number of the reports to each board. The independent committee of the Brickworks’ board expressly noted in its March 2016 meeting that earnings diversity and stability are a by-product of the cross shareholding and not a justification for it. This view was open to the members of that committee, but it does not mean that a reasonable director would not consider possible loss or reduction of earnings diversity and stability as relevant to the assessment of whether a restructuring was warranted. In any event, the point is that insofar as corporate governance issues are part and parcel of any consideration of the best interest of the company I am satisfied that each board member must be well aware of those issues and must be taken to have considered them when evaluating the options for restructuring. Moreover, there is no reason to assume board members will not continue to do so in the future.
What then is left? There are two companies which own shares in each other and have done so for many years. The cross shareholding could be unwound by a number of methods without adverse tax consequences but the timing and details of any such restructuring would require substantial time, effort and cost to resolve. The restructuring would have some advantages as identified above but, on the material available in this case, those advantages would not necessarily include any mid to longer term increase in share price. In particular, there is no proper foundation for concluding that there is any material financial advantage to shareholders for such a restructuring to be pursued at this time. The restructuring also would have some disadvantages as identified above. In addition, in contrast to decades of apparently successful corporate performance by each company in pursuing their different corporate objectives, the future of a restructured entity is unknown. Given this, a commercial bystander would consider that not only is there no compelling financial reason to pursue a restructure at this time, but also that there is no demonstrable financial benefit to doing so.
Despite Perpetual’s primary focus for years being the consequences of the cross shareholding being the allegedly adverse impact on share price, its case is that there is a more fundamental issue at stake – that directors are servants, not masters, but the effect of the cross shareholding is to enable the board of each company, rather than “external” shareholders (that is, shareholders other than the companies and the Millner family) to determine the constitution of each board. This raises two issues. Does the cross shareholding have this effect? Would a commercial bystander consider this effect to be objectively unfair in all of the circumstances identified above including the length of time for which the cross shareholding has been in place, that it may reasonably be inferred that most shareholders, and certainly Perpetual, purchased their shares knowing about the cross shareholding, and that, as Perpetual has been doing, shares in the companies are able to be sold?
First, the effect issue. I have accepted above that the cross shareholding facilitates stability of board membership and thus also facilitates the boards making decisions which they consider would benefit the companies over the longer term. Perpetual would submit that this is simply another way of saying that the cross shareholding entrenches Millner family control of the companies. I disagree. Control or any form of improper influence by the Millner family, as I have said, has not been proved. That said, I have accepted that the cross shareholding could facilitate entrenchment of under-performing boards because it does facilitate stability in board membership.
One then must ask, what does “entrenchment” mean in this context? Soul Pattinson is a major shareholder in Brickworks and Brickworks is a major shareholder in Soul Pattinson. As substantial shareholders, their votes carry corresponding substantial weight in any meeting of shareholders. Accordingly, if the issue is membership of the board, the votes of each company in the other carry weight commensurate with their shareholdings. On one level, any consequential potential entrenchment of board membership is no different from the position of any company with a substantial shareholder. On another level, the “cross” part of the cross shareholding has a compounding effect. The board of company A has an interest in the board of company B discharging its obligations in a manner considered appropriate by the board of company A and the board of company B has an interest in the board of company A discharging its obligations in a manner considered appropriate by the board of company B. It is not difficult to hypothesise that a resulting tendency would be a shared view that it is best if the boards of each company are like or at least similar minded about their consideration of the best interests of the company. But a hypothesis is one thing and an inference from evidence another. In the present case, if it could be inferred that this has occurred, what is also apparent is that apart from Perpetual in the present case, there is no suggestion, let alone evidence, that this had any impact detrimental on any shareholder. To the contrary, it would not be unreasonable to again hypothesise that any tendency towards like or similar mindedness about management, to date at least, has facilitated positive financial outcomes for shareholders over many years.
Perpetual makes the point that if members of each board continue to be effective then, acting rationally, shareholders will retain the directors. The cross shareholding, however, deprives shareholders of that capacity. This, Perpetual says, is why Brickworks’ submission that Perpetual may simply call a meeting of shareholders and put its nil premium merger proposal to a vote is meaningless; with the cross shareholding in place, the votes of shareholders who wish to unwind the cross shareholding can never be sufficient. It is here, however, where Perpetual’s theory of unfairness and thus oppression breaks down. The theory breaks down because it assumes that the determining factor for each company in exercising voting rights as a shareholder in the other company is the continuation of control of each company by the incumbent boards and thus the Millner family, an aspect of the case which has failed. Once that is put aside, there is no reason to assume anything other than that the board of company A wants company B to perform well and the board of company B wants company A to perform well. If the cross shareholding, at any time, is inimical to that objective, there is no reason to infer that both companies would do anything other than vote in accordance with their perceived corporate self-interest. There is no reason to infer that the voting rights of either company in the other will be exercised for any purpose ulterior to the best interests of the company as a shareholder. Such an exercise of voting rights may or may not align with the interests of minority shareholders, but that fact alone does not involve any unfairness. It is nothing more than the consequence of a substantial shareholding. As Brickworks submitted, the fact that the exercise of majority voting power may defeat the wishes of the minority, of itself, does not indicate oppression of the minority. As such, I do not accept that the cross shareholding deprives “external” shareholders of their vote. All shareholders have a vote commensurate with their shareholding. Insofar as voting rights are concerned, the effect of the cross shareholding on any shareholder in one or other of the companies is the same as any substantial shareholding.
This again brings me back to the point made earlier that performance matters. Because the cross shareholding facilitates stability in board membership it could be used to facilitate the continuation of poorly performing boards. If there were any evidence of that in the present case (which there is not) then Perpetual might have been able to identify conduct related to maintenance of the cross shareholding which would be considered unfair. But that is not the present case. I can see no reason why a commercial bystander would see any unfairness in the fact that, on the material available to them at the time they made the decisions and to date, the boards of each company decided against a restructure that would unwind the cross shareholding on the basis that each company would continue to monitor opportunities for increased shareholder value including by restructuring if seen as appropriate in the future. While increased shareholder value is not the only relevant issue, I do not accept Perpetual’s contention that the boards made decisions without regard to the full suite of considerations, particularly those concerning corporate governance. It was for the boards to evaluate the complex and, in a number of respects, competing financial, structural, and governance considerations to which the cross shareholding gives rise, and it remains a matter for them to continue to do so. Given this complexity, a conclusion of objective unfairness would not be reached lightly. The directors of each company were and would be entitled to substantial latitude in weighing up the best interests of the company in the circumstances as they appear to them at the time. The principal matters to which Perpetual has pointed, the possible depression of share value, the difficulty in ascertaining value, the anti-takeover effect, the liquidity issues, the facilitation of retention of board membership (or, as Perpetual would have, it, the entrenchment of the boards), and the potential for actual and perceived conflicts of interest, do not lead to a conclusion of objective unfairness in all of the circumstances. These matters cannot be considered in isolation from the numerous other issues of relevance discussed in these reasons for judgment, all of which I am satisfied the directors have taken into account.
The conclusions of each board, I note, are also supported by the evidence that since departing from Perpetual Mr Williams, in his capacity as industrial portfolio manager for Airlie Funds Management, has caused that fund to almost double its shares in Brickworks since June 2016. Brickworks submitted the following which I accept:
… [The] fund [managed by Mr Williams for Airlie Funds Management] contains approximately 25 stocks and a “highly selective process” is used to determine which stocks to include in the fund.
Mr Williams accepted that three key criteria were used when determining which stocks to invest in. Those criteria included: (a) outperformance of the ASX; (b) a strong balance sheet; (c) a durable business; and (d) management with a high degree of competence and integrity.
Mr Williams confirmed that all of the investments that Airlie Funds Management has made in the industrial share fund satisfy these criteria. Mr Williams also accepted that BKW was one of the stocks included in the Airlie Funds Management industrial share fund and that Airlie had almost doubled its investment in BKW in the period October 2016 – March 2017. Mr Williams confirmed that it was his decision to double the investment in BKW and that he applied the criteria set out above in making that decision.
It follows that the main proponent of the current litigation considers that BKW is likely to outperform the ASX, has a strong balance sheet, runs a durable business and has a management with a high degree of competence and integrity. These views are inapt to describe a company that is being run oppressively.
Mr Williams, the architect of Perpetual’s campaign to unwind the cross shareholding and the only person to give evidence of Perpetual’s issues of concern (albeit that he no longer works for Perpetual and has not done so since 2015), doubled the investment of the fund he now manages in Brickworks. Now this is telling evidence. Mr Williams doubled the industrial share fund of Airlie Management in Brickworks based on its existing structure. It is difficult to accept that he would have done so if he believed that the existing structure was so unfair that reasonable directors could not have thought it fair in all of the circumstances. It should also be inferred that Mr Williams believed the investments in Brickworks satisfied the applicable investment criteria which included “management with a high degree of competence and integrity”. This is inconsistent with the allegations of an agreement, arrangement and understanding to maintain the cross shareholding and the hypothesis that the companies have and will exercise voting rights to maintain the cross shareholding in order to entrench control by the incumbent boards and thus the Millner family.
For these reasons I do not accept Perpetual’s case of oppression by reason of the maintenance of the cross shareholding. A commercial by-stander would not see maintenance of the cross shareholding to date unfair in all of the circumstances identified.
12.4 Other relevant matters
As the companies submitted, there are other problems with Perpetual’s case. I have no idea about the position of other shareholders, employees of the companies, or third party interests that might be affected by the relief sought. Leaving it to the companies to deal with everything under mandate that the cross shareholding must be unwound within 12 months or shares in each other sold to reduce the cross shareholding to no more than 10% within a further 6 months is not a substitute for consideration of these interests.
Nor is a court an appropriate forum to weigh these interests. The companies relied on observations in Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd [2001] NSWCA 97; (2001) 37 ACSR 672 at [201] to [214] where Spigelman CJ explained why a “feasible” split of company assets was nevertheless inappropriate because, amongst other things, a number of the steps would involve commercial judgment which, absent agreement, a court would not usually make (at [207]). His Honour continued:
[208] No doubt, the parties could, acting in a co-operative manner, resolve many commercial issues leaving a limited number of appropriate issues for judicial determination on the basis of, inter alia, expert evidence. Nothing in the course of these proceedings suggests that such co-operation is likely.
[209] No authority in the long history of oppression suits or, the relevantly analogous history of partnership dissolution suits, in which a court has undertaken the task of dividing the assets of an ongoing business, was cited to the Court. My research has not discovered any such precedent.
…
[212] In my opinion, this Court should not embark on the course of attempting to divide the assets in this case. Indeed, save in a situation of a limited range of assets with little interconnection between them, I doubt if it would ever be appropriate for a court to attempt such a task. The Court should not be placed in a position where:
(i) it may have to make commercial judgments;
(ii) it runs the risk of being dependent on commercial or political negotiations;
(iii) it may have to make contingent or alternative orders, subject to the outcome of commercial or political negotiations.
I accept that the present case raises similar issues. I have not been taken to any authority in which orders requiring the restructuring of two publicly listed companies have been made in an oppression suit. The orders are dependent on commercial negotiations and, no doubt, the position of shareholders and regulatory authorities (which are presently unknown but for the parties). I am being requested to make contingent or alternative orders (the sale of shares if the restructure cannot be agreed).
In respect of the lack of authority, Young J in Maine v Chelia [2005] NSWSC 860 at [46] said:
It is true that, so far as everyone's researches are concerned, no case where a demerger order has been made in an oppression suit has been found. The fact that this is so does not necessarily mean that such an order cannot be made, it is just that it makes one pause when one can see that the present case may very well not [sic] be unique.
In Falkingham v Peninsula Kingswood Country Golf Club [2014] VSC 437 Robson J found oppression (at [97]-[100]) in conduct by which a merger was effected but refused relief on the grounds of delay (at [111]). His Honour continued:
[113] If I am wrong as to the application of laches and acquiescence or delay to the statutory oppression claim, then in any event, in my discretion under s 233 of the Act, I would not make orders undoing the merger as sought by the plaintiff. I have to balance the harm done to the members of the company as it now stands with the plaintiff’s entitlement to relief. There is no doubt that laches applies as a defence to the equitable claim to invalidate the decision of the company to admit new members from the Peninsula Golf Club.
[114] In the circumstances where the clubs have been merged for almost a year, I consider the relief sought by the plaintiff to be unwarranted, bearing in mind the inconvenience and prejudice that would be caused to the members of the Peninsula Kingswood Club today.
[115] Another factor that I take into account is that the group supporting Mr Falkingham appears to be only a handful of members out of some now two thousand plus members of Peninsula Kingswood. I expect that if the admission of the new members was set aside, that the board would probably be able to affect the merger again.
On the available evidence it is not possible to ascertain the inconvenience and prejudice to other shareholders if the orders Perpetual seeks are made. It is possible, however, to infer that there will be a real potential for such inconvenience and prejudice. The companies are quite different. Shareholders in one but not the other might not be of the same mind as Perpetual, which owns shares in both companies, about owning shares in a merged entity. The likelihood of all shareholders being persuaded of the fairness of a merger ratio is dubious. The impact of the ongoing negotiations and uncertainty inherent in the orders (a dismantling of the cross shareholding or a sell down of the cross shareholding shares to no more than 10%) on the share price and dividend policies of the companies is unknown.
Otherwise it is sufficient for me to adopt parts of the submissions of each company which expose the difficulty of making orders such as Perpetual seeks. Soul Pattinson thus submitted:
a.the interests of shareholders were found to be relevant to the Court's decision to decline to order the transfer of ordinary shares and removal of directors in HNA Irish Nominee Ltd and Another v Kinghorn and Others (No 2) (2012) 88 ACSR 427. Emmet J held that he would "require that the other shareholders be notified, and given an opportunity to be heard, prior to the making of any such orders" (at [736]);
b.the possibility that a company and "its other shareholders' position" could be "detrimentally affected" by a Court order requiring reinstatement of a director was relevant to the Court's decision to ultimately decline to grant such an order - Re Courtesy Real Estate (NSW) Pty Ltd (2013) 96 ACSR 593; [2013] NSWSC 1666 at [22] per Black J;
c.in striking out an Amended Statement of Claim seeking, inter alia, orders that various directors be restrained from holding office, the Court gave weight to the interests of other shareholders, noting that it would be reluctant to "interfere with the election preferences of members" of a widely held public company "which has over two million members" - Shelton v National Roads and Motorists' Association Ltd and Others (2004) 51 ACSR 278 at [17] per Tamberlin J;
d.the likely voting intentions of other shareholders were relevant to the Court's determination as to whether declarations could be made deeming a distribution in specie by way of dividend to be contrary to ASX listing rules. In that decision, Anderson J declined to grant the declaratory relief on the basis it was "quite clear" that if the entity "had held a meeting of its members to approve the distribution in specie by way of dividend of the CRL shares, the members would have approved it by an overwhelming majority" - Quancorp Pty Ltd And Another V Macdonald And Others (1998) 28 ACSR 520 at 525 per Anderson J;
e.the "disruption" to various third party interests weighed in favour of the Court declining to grant an injunction restraining a company from proceeding with a rights issue until a general meeting had been convened to vote - Chimaera Capital Ltd v Pharmaust Ltd And Others (2007) 64 ACSR 332; [2007] FCA 1539. French J noted at [102] that "if the allotment of shares pursuant to the rights issue is effectively blocked pending the EGM, there will be effects on third parties and a delay in raising the necessary funding for the company"; and
f.the fact a company was able to operate effectively on a day to day basis, including the fact it had a number of employees, militated against the Court granting an order that the company be wound up - Australian Institute of Fitness Pty Ltd v Australian Institute of Fitness (Vic/Tas) Pty Ltd No 3 (2015) 109 ACSR 369; [2015] NSWSC 1639 at [709]-[711] per Sackar J.
Brickworks submitted:
… the orders ignore a whole range of practical issues that would face the boards of BKW and SOL in attempting to unwind the Cross-Shareholding.
…
…Perpetual fails to have regard to:
…
(a)the effect of ASX Listing Rules. Those rules are binding on BKW and SOL and enforceable by the Court (Corporations Act, ss 793C and 1101B). A number of Listing Rules are potentially relevant in the present context, including Listing Rule 10.1 (which requires the approval of members, by ordinary resolution, to the disposal of a substantial asset to a substantial holder of the entity), and Listing Rule 11.2 (which requires the approval of members, by ordinary resolution, to certain significant changes in the nature and scale of activities of a listed entity). It is not for this Court to make decisions, in advance and in the absence of a specified transaction, that cut across the operation and/or scope of the Listing Rules;
(b)the need for schemes of arrangement. While the revised orders refer in passing to the possibility of a scheme, it is likely that two schemes would be required. The terms of the schemes would need to be drafted, orders for the convening of meetings would need to be obtained, shareholder votes would need to be passed by the requisite majorities and a court would need to approve the schemes. These matters are not merely mechanical but instead raise a wide range of substantive considerations that would need to be considered at the appropriate time. The orders sought by Perpetual make no allowance for these matters. In particular, there is no conceivable basis on which BKW and SOL should be required to sell down their shareholdings in each other even if schemes of arrangement are voted down by shareholders or not approved by the Court. Yet, Perpetual’s orders require just this outcome;
(c)the need for ATO rulings. While the tax advice received by BKW suggests that a nil premium merger is unlikely to trigger a material CGT liability, the advice has consistently recommended that private rulings be obtained in order to confirm the position. Again, Perpetual’s orders make no allowance for the possibility that such rulings may ultimately be unfavourable;
(d)the need for consideration to be given, at the appropriate time and by the appropriate decision-maker, to the ability of BKW and SOL to vote their shares in each other in relation to any shareholder resolutions. For example, it is not appropriate for the Court now to make orders prohibiting BKW and SOL from voting in any schemes of arrangement given that matter is quintessentially one for the judge responsible for convening the scheme meetings. For the same reasons, this Court would not trample on the authority of the ASX to reach concluded views about such matters under the Listing Rules.
For these reasons, if Perpetual had proved oppression, then I would have refused relief in the exercise of discretion, particularly given the evidence that both companies accept that their structure, which is unique in Australia insofar as I am aware and has corporate governance implications as discussed above, should be subject to ongoing periodic review.
12.5 Mr Fraser and Ms Crouch’s appointment as directors
Having failed in its case of oppression, the relief Perpetual seeks by way of the appointment of Mr Fraser to the board of Soul Pattinson and Ms Crouch to the board of Brickworks need not be considered. Nevertheless it is worthwhile to note that, again, if Perpetual had succeeded in proving oppression, I would have declined this relief in the exercise of discretion.
As to Mr Fraser, Perpetual’s case does not take into account the appointments of Mr Hawker and Mr Negus, independent directors of unimpeachable qualifications and experience. These facts alone would be sufficient reason not to exercise any discretion in favour of the order Perpetual seeks. Apart from this, there is a concern on the evidence that Mr Fraser has been involved in advising Perpetual which would call into question not his actual independence, but at least the perception of his independence. No such concerns attach to Mr Hawker or Mr Negus.
As to Ms Crouch, Perpetual’s case does not take into account the appointment of Ms Page and, as Brickworks said, “Perpetual has not sought to explain why a still further independent director must be appointed to the board of the company, let alone why that person should be appointed by the Court instead of submitting themselves to the normal election processes provided for under the company’s constitution”.
Otherwise I do not accept Perpetual’s submission that it should be inferred that the decisions to appoint these new directors were made as a result only of Perpetual’s case and not because the boards considered the appointments to be in the best interests of each relevant company. Even if Mr Partridge considered that the appointment of another independent director to the board of Brickworks would “undermine” that part of Perpetual’s proposal, it cannot be inferred that other directors shared this view or that they did not consider it in the best interests of the company for Ms Page to be appointed or, indeed, that Mr Partridge did not consider it to be best interests of the company for Ms Page to be appointed.
13. CONCLUSIONS
Perpetual has not proved oppression. Accordingly, the second cross-claim must be dismissed, with costs.
I certify that the preceding four hundred and eight (408) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jagot. Associate:
Dated: 10 July 2017
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