Re Skytraders Pty Ltd (No 2)
[2022] VSC 523
•7 September 2022
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
CORPORATIONS LIST
S ECI 2019 04462
IN THE MATTER OF SKYTRADERS PTY LTD (ACN 001 851 921)
BETWEEN:
| PREMIER AVIATION HOLDINGS PTY LTD (ACN 104 968 354) | Plaintiff |
| v | |
| NORMAN FARQUHAR MACKAY & ORS (according to the Schedule of Parties) | Defendants |
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JUDGE: | Button J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 31 August 2022 |
DATE OF JUDGMENT: | 7 September 2022 |
CASE MAY BE CITED AS: | Re Skytraders Pty Ltd (No 2) |
MEDIUM NEUTRAL CITATION: | [2022] VSC 523 |
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COSTS – Offers of compromise – Where plaintiff wholly unsuccessful in making out its shareholder oppression case at trial – Where earlier offers to purchase the plaintiff’s shares in the company applied a minority discount without sufficient justification – Where later offer to purchase the plaintiff’s shares in the company made shortly before trial offered a price within the range of competing expert valuations without the application of a minority discount – Where weakness of aspects of the plaintiff’s case should have been apparent to it at the time of the later offer – Whether rejection of offers of compromise unreasonable – Rejection of earlier offers reasonable – Rejection of later offer unreasonable – Supreme Court (General Civil Procedure) Rules 2015 (Vic) O 26 - Hazeldene’s Chicken Farm Pty Ltd v Victorian WorkCover Authority (No 2) (2005) 13 VR 435.
COSTS – Indemnity or standard basis – Where principal judgment found that it was not necessary to determine allegations made against a specific defendant – Where defendant joined to allow plaintiff to respond to a defence not ultimately taken by the primary defendants – Where defendant made a ‘walk away’ offer that the plaintiff discontinue the proceeding against him shortly after the proceeding commenced – Whether joinder of the defendant for ulterior purposes such as to warrant the award of indemnity costs in the defendant’s favour – Whether ‘walk away’ offer sufficient to ground an indemnity costs order – Neither joinder nor ‘walk away’ offer sufficient to ground an indemnity costs order.
COSTS – Indemnity or standard basis – Where plaintiff made allegations that impugned certain defendants’ honesty and conduct – Where evidence at trial tended to support the allegations, but it was not necessary to make findings – Where those defendants prepared witness statements, but were not called to give evidence – Whether those defendants should be denied their costs, or alternatively the costs of preparing their witness statements – No basis to deny the defendants’ costs.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | G Bigmore QC S Rubenstein | Colin Biggers & Paisley |
| For the First, Second and Eighth Defendants | P Collinson QC | William James |
| For the Third and Seventh Defendants | C van Proctor | McCullough Robertson Lawyers |
TABLE OF CONTENTS
Introduction........................................................................................................................................ 1
The parties’ positions........................................................................................................................ 1
Mackay parties’ position.............................................................................................................. 1
Sallab and Mr Sharp’s position................................................................................................... 2
Premier’s position......................................................................................................................... 2
Other defendants........................................................................................................................... 3
The offers............................................................................................................................................. 3
The August Offer.......................................................................................................................... 3
The January Offer.......................................................................................................................... 4
The February Offer....................................................................................................................... 5
The Sharp Offer............................................................................................................................. 5
Rules and principles.......................................................................................................................... 5
Consideration...................................................................................................................................... 7
The August Offer.......................................................................................................................... 7
The January Offer........................................................................................................................ 16
The February Offer..................................................................................................................... 18
Mr Sharp and Sallab................................................................................................................... 20
Premier’s contention regarding denying Sallab and Mr Sharp any costs order...... 20
Mr Sharp’s contention regarding indemnity costs....................................................... 21
Orders................................................................................................................................................. 24
HER HONOUR:
Introduction
On 28 July 2022, I delivered judgment in Re Skytraders Pty Ltd [2022] VSC 416 (Reasons) following a trial occupying 14 hearing days.[1] I dismissed the oppression claims made by the plaintiff (Premier), and declined to order that the eighth defendant (Skytraders) be wound up on the just and equitable ground. I gave the parties an opportunity to make submissions on costs. They took up that opportunity and made written and oral submissions.
[1]The matter was heard on 15–17, 21–24 and 28 February, 3 and 7 March, and 6–7 April 2022.
To avoid unnecessary repetition, these reasons assume familiarity with the Reasons delivered following the trial.
The parties’ positions
In brief, the parties’ positions on costs were as follows.
Mackay parties’ position
The first, second and eighth defendants have been referred to as the Mackay parties in this proceeding. While submissions on costs were filed for all of the Mackay parties, in oral submissions, counsel for the Mackay parties confirmed no costs order was sought by Skytraders (ie, the eighth defendant).
In reliance on an offer of compromise made under r 26.02 of the Supreme Court (General Civil Procedure) Rules 2015 (Vic) (the Rules) on 5 August 2021 on behalf of all defendants (the August Offer), the first and second defendants (the Mackay defendants) sought an order that Premier pay their costs on a standard basis to 11:00am on 9 August 2021 and on an indemnity basis thereafter.
If not awarded indemnity costs from 9 August 2021 in accordance with their primary position, the Mackay defendants sought costs on an indemnity basis from:
(a) 11:00am on 25 January 2022, in reliance on a 21 January 2022 Calderbank offer (the January Offer); or
(b) from the first day of trial (which was 15 February 2022) in reliance on a further Calderbank offer made on 11 February 2022 (the February Offer).
In support of their application for costs, the Mackay parties relied on an affidavit of their solicitor, Toby William King, sworn 4 August 2022 (King Affidavit), which principally exhibited correspondence between, and offers made by, the parties.
Sallab and Mr Sharp’s position
The third defendant (Sallab) and seventh defendant (Mr Sharp) sought orders that:
(a) Premier pay Mr Sharp’s costs of the whole proceeding on an indemnity basis on the grounds that he should never have been joined as a party, or alternatively:
(i) pay Mr Sharp’s costs on a standard basis until 8 November 2019, when an offer inviting Premier to discontinue the proceeding against Mr Sharp with no order as to costs lapsed (the Sharp Offer), and on an indemnity basis thereafter; or alternatively
(ii) pay Mr Sharp’s costs on a standard basis until 9 August 2021, and on an indemnity basis thereafter, relying on the August Offer; and
(b) Premier pay Sallab’s costs on a standard basis until 9 August 2021, and on an indemnity basis thereafter, relying on the August Offer.
In the alternative, Sallab and Mr Sharp also both relied on the February Offer to seek costs on an indemnity basis from the first day of the trial.
Premier’s position
Premier contended that only a standard costs order should be made in favour of the defendants[2] (other than Sallab and Mr Sharp). It contended that there should be no costs order in favour of Sallab or Mr Sharp, or alternatively, that they should only have their costs of filing defences and attending the trial, but not the costs of preparation of witness statements.
[2]Including the fourth to sixth defendants, who held performance shares and did not participate in the trial.
Other defendants
The fourth to sixth defendants held performance shares in Skytraders. They filed defences but did not participate in the trial. They have not made submissions seeking an order other than a standard costs order, which is not opposed by Premier.
The offers
The following offers were made.
The August Offer
The August Offer was made under r 26.02 of the Rules. Under the August Offer, the first, second, third and seventh defendants offered to purchase Premier’s shares in Skytraders for the sum of $10,198,001. The August Offer also provided for the first, second, third and seventh defendants to pay Premier’s costs of the proceeding as agreed or taxed.
The accompanying correspondence explained that the sum of $10,198,001 reflected the ‘midpoint of the midpoints’ of the 2019 and 2020 valuations conducted by Mr Dawson and Ms Chester (being the experts engaged by the plaintiff and the Mackay parties, respectively).[3] The valuations used to calculate the offer sum were those that were subject to a minority discount. I will use the term ‘minority discount’ to refer to the discounts for lack of control and lack of marketability which both expert valuers imposed.[4] The global minority discounts which Mr Dawson and Ms Chester applied were substantial: 45%-50% in the case of Ms Chester,[5] and 53%-63% in the case of Mr Dawson.[6]
[3]King Affidavit, exhibit TWK-1, 1-2.
[4]At trial, the defendants contended that, if an order was made that the defendants purchase the plaintiff’s shares in Skytraders, the purchase price should be discounted to reflect a ‘minority discount’. The plaintiff contended that a ‘minority discount’ should not be applied. Ultimately, as explained at paragraph 484 of the Reasons, it was unnecessary to decide this issue.
[5]Expert Report of Meredith Chester dated 9 April 2021, [158], [162].
[6]Expert Report of John Dawson dated 5 March 2021, [184], [190]-[191].
The accompanying correspondence also stated that the offer was ‘in addition to the dividend the existing shareholders will shortly receive from the profits earned in the financial year ended 30 June 2021.’[7]
[7]King Affidavit, exhibit TWK-1, 2.
The August Offer was open for acceptance until 5:00pm on 20 August 2021. On 1 September 2021, Premier’s solicitors wrote to the defendants informing them that Premier did not accept this offer.[8]
[8]King Affidavit, exhibit TWK-1, 6-7.
The January Offer
The January Offer was a Calderbank offer. Under the January Offer, if accepted:
(a) an independent expert valuer would undertake a valuation of Premier’s shares in Skytraders, which valuation would be subject to a minority discount;
(b) the independent valuer would have access to the reports of Ms Chester and Mr Dawson, and the parties could make submissions to the valuer;
(c) the Mackay defendants would have the option to purchase Premier’s shares in Skytraders at the value determined;
(d) if the Mackay defendants did not purchase the shares, then the business of Skytraders would be sold by a court-appointed receiver; and
(e) the Mackay defendants would pay Premier’s costs of the proceeding up to the date of acceptance of the offer as agreed or taxed.[9]
[9]King Affidavit, exhibit TWK-1, 8-10.
The January Offer was open for acceptance until 5:00pm on 2 February 2022. Premier did not accept this offer.
The February Offer
The February Offer was also a Calderbank offer. By the February Offer, the first, second, third and seventh defendants (ie, the Mackay defendants, Mr Sharp and Sallab) offered to purchase Premier’s shares in Skytraders for $15,000,001 and to pay Premier’s costs of the proceeding as agreed or taxed.[10] The February Offer was open for acceptance until 4:00pm on 14 February 2022, being the day before the commencement of the trial. This offer was not accepted by Premier.
[10]King Affidavit, exhibit TWK-1, 15-16.
The Sharp Offer
On 1 November 2019, Mr Sharp made an offer to Premier that it discontinue the proceeding against Mr Sharp with no orders as to costs.[11] The offer was open for acceptance until 5:00pm on 8 November 2019. The offer was not accepted by Premier.
[11]Letter from McCullough Robertson Lawyers to Logie-Smith Lanyon Lawyers dated 1 November 2019, emailed to the Court on 5 August 2022 (without objection).
Rules and principles
The August Offer was made under r 26.02 of the Rules.
Rules 26.02(3)-(4) set out various formal requirements for an effective offer of compromise. There was no suggestion that the August Offer did not meet the formal requirements.
The costs consequences of failure to accept an offer of compromise are addressed by r 26.08. Relevantly, r 26.08(4) provides that:
Where an offer of compromise is made by a defendant and the plaintiff unreasonably fails to accept the offer and the claim to which the offer relates is dismissed or judgment on the claim is entered in favour of the defendant, then unless the court otherwise orders—
(a)the defendant shall be entitled to an order against the plaintiff for the defendant’s costs in respect of the claim until 11.00 a.m. on the second business day after the offer was made, taxed on the ordinarily applicable basis; and
(b)the defendant shall be entitled to an order against the plaintiff in respect of the defendant’s costs after the time referred to in paragraph (a) taxed on an indemnity basis.
In assessing whether a plaintiff has ‘unreasonably’ failed to accept an offer of compromise made under the Rules, the Court will consider similar factors to those considered in assessing reasonableness in relation to Calderbank offers.[12]
[12]Di Falco v Emirates (Ruling No 3 — Costs Ruling) [2019] VSC 732, [7] (Forbes J), citing Smith v Jovanoska (No 2) [2013] VSC 714, [13] (Zammit AsJ, as Incerti J then was).
Accordingly, the factors identified by the Court of Appeal in Hazeldene’s Chicken Farm Pty Ltd v Victorian WorkCover Authority (No 2)[13] (Hazeldene’s) are relevant to the August, January and February Offers. In Hazeldene’s, the Court of Appeal made general observations regarding the concept of ‘unreasonableness’ and set out a (non-exhaustive) list of matters to which regard should ordinarily be had, as follows:
[13](2005) 13 VR 435.
The test of unreasonable rejection
In our view, these competing considerations can be sufficiently accommodated by applying a test of (un)reasonableness. The critical question is whether the rejection of the offer was unreasonable in the circumstances. We see no justification for a more stringent test such as “manifestly” or “plainly” unreasonable.
Of course, deciding whether conduct is “reasonable” or “unreasonable” will always involve matters of judgment and impression. These are questions about which different judges might properly arrive at different conclusions. As Gleeson CJ said recently, “unreasonableness is a protean concept”. But a test of reasonableness is, we think, entirely appropriate to the exercise of a discretion such as this.
Factors relevant to assessing reasonableness
The discretion with respect to costs must, like every other discretion, be exercised taking into account all relevant considerations and ignoring all irrelevant considerations. It is neither possible nor desirable to give an exhaustive list of relevant circumstances. At the same time, a court considering a submission that the rejection of a Calderbank offer was unreasonable should ordinarily have regard at least to the following matters:
(a) the stage of the proceeding at which the offer was received;
(b) the time allowed to the offeree to consider the offer;
(c) the extent of the compromise offered;
(d) the offeree’s prospects of success, assessed as at the date of the offer;
(e) the clarity with which the terms of the offer were expressed;
(f) whether the offer foreshadowed an application for … indemnity costs in the event of the offeree’s rejecting it.[14]
[14]Hazeldene’s, 441-2 [23]-[25] (Warren CJ, Maxwell P, Harper AJA) (footnotes omitted).
The Sharp Offer was not expressed as a Calderbank offer, and did not foreshadow any application for indemnity costs if it was not accepted. Mr Sharp submitted as follows on the authorities in support of his contention that there ought to be an indemnity costs order in his favour: [15]
[15]Mr Sharp and Sallab’s costs submissions, [7]-[8] (footnotes in original).
Costs usually follow the event, and in this regard the usual order is to award costs to the successful party on a standard basis. There may, however, be circumstances where a special costs order is warranted, and in this regard there are a number of categories of circumstances accepted as possible bases for the making of a special costs order. Those categories include:
… the fact that the proceedings were commenced or continued for some ulterior motive … or in wilful disregard of known facts or clearly established law …; the making of allegations which ought never to have been made or the undue prolongation of a case by groundless contentions …; an imprudent refusal of an offer to compromise …[16]
In Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd,[17] Woodward J said that a special costs order may be warranted when:
… it appears that an action has been commenced or continued in circumstances where the applicant, properly advised, should have known that he had no chance of success. In such cases the action must be presumed to have been commenced or continued for some ulterior motive, or because of some wilful disregard of the known facts or the clearly established laws.
[16]Colgate Palmolive Co v Cussons Pty Ltd (1993) 46 FCR 225 at 233–234.
[17](1988) 81 ALR 397 at 401.
Consideration
The August Offer
As stated above, by the August Offer the defendants offered that the first, second, third and seventh defendants (referred to as the Purchaser Defendants) would purchase Premier’s shares for $10,198,000.
If accepted, the August Offer would still have allowed Premier to receive dividends from profits earned in the 2021 financial year, notwithstanding that the allegations of oppressive conduct advanced by Premier last occurred in October 2019 and the parties had put on competing expert valuations as at September 2019 and September 2020. To that point, and omitting the first dividend (which had a record date of 1 July 2016,[18] and which was unusually large due to the existence of an accumulated cash balance) Skytraders had historically declared substantial dividends in Premier’s favour.[19]
[18]CB10257.
[19]The dividends declared in Premier’s favour, and their record date, were: $5,538,462 on 27 July 2017 (CB10261); $769,231 on 17 April 2018 (CB10297); $769,231 on 23 August 2018 (CB10301); $1,846,154 on 16 August 2019; $2,769,231 on 4 August 2020 (CB10320).
The August Offer also offered that the Purchaser Defendants pay Premier’s costs of the proceeding as agreed or taxed.
In support of their contention that Premier’s failure to accept the August Offer was unreasonable for the purpose of r 26.08(4), the Mackay defendants relied on the following features and circumstances:[20]
[20]Mr Sharp and Sallab adopted the Mackay defendants’ submissions in relation to the August and February Offers and made some limited additional submissions regarding the August Offer.
(a) at the time the August Offer was made, the pleadings were closed,[21] the vast bulk of the parties’ lay witness statements had been filed and the experts had filed their principal reports;
[21]The Mackay defendants submitted that, although amendments were made in Premier’s Amended Statement of Claim and Further Amended Statement of Claim filed 10 December 2021 and 16 February 2022 respectively, those amendments were ‘immaterial’.
(b) while the August Offer remained open for acceptance, the Court fixed the proceeding for trial on 15 February 2022;
(c) the August Offer was open for one day more than the 14 day minimum prescribed by r 26.03(3);
(d) the August Offer represented a significant compromise as it was significantly greater than the value Ms Chester (being the expert retained by the Mackay parties) attributed to Premier’s shares after applying a minority discount at both of the proposed valuation dates, and the figure was within the range of the valuations of Mr Dawson (being the expert retained by Premier), subject to a minority discount, at 30 September 2019,[22] and afforded Premier a realistic opportunity to exit Skytraders (as all parties considered desirable) without the need to find a third party purchaser; and
(e) the August Offer included an offer to pay Premier’s costs of the proceeding.
[22]Although, the amount of the August Offer was significantly below the valuation of Mr Dawson as at September 2020, with a minority discount, which was $16,971,000.
In their submissions, Mr Sharp and Sallab highlighted that the August Offer was clear and certain in its terms, and that Premier had not beaten the offer at trial.
In its written submissions, Premier raised a number of points in contending that there should be no indemnity costs order consequent upon the failure to accept the August Offer. I will deal with each of the matters raised by Premier in turn.
First, Premier noted that, at no stage did the Mackay parties make an offer to settle the proceeding that was not contingent on Premier selling its shares. Premier pointed out that the Mackay parties did not make any ‘walk away’ offer. In oral submissions, counsel for Premier explained that the relevance of the lack of a ‘walk away’ offer meant that there was no ‘like for like’ offer against which the outcome of the trial could be compared (ie, one that contemplated oppression not being found, and no buyout order being made), whereas a ‘walk away’ offer would have presented such a point of comparison.
I do not regard this as being of any real importance. The task before me is to assess whether it was unreasonable for Premier not to accept the offers that were made, not those that were not made. It is also not apparent that a ‘walk away’ offer would have been of any utility given that Premier’s apparent objective in commencing the proceeding was to succeed in its oppression claims and obtain a buyout order that would require some or all of the defendants to buy its shares without the imposition of a minority discount. If Premier had been content with the status quo (to which the acceptance of a ‘walk away’ offer would have restored it), it could have simply not commenced the proceeding, or could have discontinued it very shortly after its commencement, once it became clear that Mr Vickers was to be ejected from Skytraders’ board.
Secondly, Premier pointed to the following matters (which observations were made in respect of all the offers of settlement made by the defendants):
(a) while Premier saw merit in the parties going their separate ways if agreement could be reached on a price or a framework for reaching an agreed figure, ‘there was no desire on the part of Premier to separate its interests from those of the Mackay parties at any price’,[23] and that each of the offers of settlement was for a price that was never agreed by the parties;
(b) the positions of the parties with respect to price were based on the opinions of experts and there were significant differences in the opinions of those experts, with the following table setting out the midpoints of the ranges identified by each expert at each valuation date with and without applying a minority discount):[24]
[23]Plaintiff’s reply costs submissions, [5(c)].
[24]The below table is taken from paragraph 4(b) of Premier’s reply costs submissions.
Valuer
Value as at 30 September 2019
Value as at 30 September 2020
Dawson
$19,650,000
(not discounted)
$33,908,000
(not discounted)
$9,835,000
(with minority discounts)
$16,971,000
(with minority discounts)
Chester
$13,238,000
(not discounted)
$11,962,000
(not discounted)
$7,347,000
(with minority discounts)
$6,639,000
(with minority discounts)
(c) the offers to purchase the shares held by Premier were subject to a minority discount ‘which was not acceptable to Premier’;[25]
[25]Premier’s reply costs submissions, [4(c)].
(d) when considering the offers, Premier was faced with the prospect of selling its shares at a significant minority discount or retaining the shares and participating in the substantial dividends being paid by Skytraders;
(e) therefore, faced with the choice of accepting an offer including a significant minority discount or retaining the shares, it was not unreasonable for Premier to reject such offers;
(f) if Premier had succeeded in establishing oppressive conduct, the Court would have been required to determine whether a buyout order was appropriate and, if so, the appropriate value of the shares and whether a minority discount ought to be applied, those being complex issues in respect of which the experts expressed forceful differing views;
(g) that the Mackay parties had argued that, even if Premier did not establish oppressive conduct, it was open to the Court to order a buyout under s 467(1)(c) of the Corporations Act 2001 (Cth), which submission I rejected in the Reasons;
(h) consequently, I was not required to and did not express an opinion about the value of the shares and whether it was appropriate to apply a minority discount;
(i) in circumstances where the value of the Premier’s shares (including whether or not a minority discount ought to apply) has not been ascertained by the Court ‘it is difficult if not impossible’[26] for the Court properly to consider whether or not it was reasonable for Premier to refuse an offer to buy its shares for a price that was substantially below the value arrived at by Mr Dawson, and included a minority discount; and
(j) insofar as the offers were based on the valuation of Ms Chester, Premier was concerned that the valuation did not properly take into account the likelihood of the renewal of valuable government contracts, which was one of the significant points of distinction and difference between the valuations of the two experts (as set out in correspondence sent by Premier’s solicitors dated 1 September 2021[27]).
[26]Premier’s reply costs submissions, [4(k)].
[27]King Affidavit, exhibit TWK-1, 6-7.
In the letter of 1 September 2021, Premier’s solicitors observed, inter alia, that (emphasis added):
It was clear from the explanation provided that the amount of $10,198,000 identified at paragraph 2(a) of the [August Offer] was based on among other things: …
(b)… the figure incorporated the respective reductions or discounts that have been identified by both Mr Dawson and Ms Chester for a minority shareholder’s ‘lack of control’ and ‘lack of marketability’. Our client of course disputes that these discounts would apply following a finding of ‘oppressive conduct’ under section 232 of the Corporations Act 2001. The authorities are clear on this point: see for instance Dynasty Pty Ltd v Coombs (1995) 59 FCR 122 at 145 and restated recently in Joint v Program IT Pty Ltd [2020] VSC 867 at [4]. This matter alone renders the amount offered in the offer of compromise significantly less than the likely outcome upon the court finding that oppressive conduct has occurred and determining ‘fair value’ for the purposes of a buy out order; and
(c)information relied upon by both Mr Dawson but particularly by Ms Chester with regard to assumptions about likely future earnings that are now out of date and that need to be updated or recalculated. In particular, Ms Chester makes a number of assumptions about uncertainty as to the renewal or continuation of contracts including with the AAD (which was to expire in June 2021), Department of Defence (which was to expire in June 2021) and with Australian Border Force (which is to expire in December 2021). Your letter did not provide any information about the renewal or continuation of those contracts or any income that might be derived under the broad arrangements with those Government agencies. Further, it did not provide any information about other tenders or business opportunities that might have been applied for or won. Your letter did not identify whether Ms Chester had refreshed her valuation to take into account any new information. The figure calculated in the offer of compromise was based on historical data that had not been updated to take into account more recent developments. This information of course is known to your clients. It has not been disclosed to our client. Without this information, our client was unable to reliably assess the amount identified in the offer of compromise. Failure to provide this information also renders the explanation in your letter incomplete and unreliable.
I will deal briefly with the point raised about the Mackay parties’ submission regarding ordering a buyout under s 467(1)(c) of the Corporations Act 2001 (Cth). That submission was first made by the Mackay parties in their written closing submissions dated 31 March 2022. It was not a submission that had been made at the time when Premier was called on to decide whether or not to accept the August Offer (or any other offer). In oral submissions, counsel for Premier clarified that the relevance of the s 467(1)(c) point was not that the Mackay parties had also failed to obtain a buyout order (on a different statutory footing), but that, at the time of the offers, there was no relief sought by the defendants to the effect that Premier could lose the case, but nonetheless have its shares acquired pursuant to a buyout order applying a minority discount. Premier submitted that this matter was relevant to the reasonableness of Premier’s rejection of the offers. Put in this way, the submission is just another way of saying that Premier had not yet been notified of any basis upon which the defendants making the offer would put a case which might result in Premier’s shares being subject to a buyout order, but on a minority basis.
The points raised by Premier broadly raise the following considerations:
(a) that Premier might have preferred to retain its shares rather than accept what it regarded as an unacceptable price;
(b) that the August Offer involved a minority discount; and
(c) that the August Offer embedded recourse to Ms Chester’s valuation, which was based on pessimistic and outdated assumptions.
As to the first of these points, it might be expected that, in a commercial environment, a willing seller of a parcel of shares would assess the price offered in light of its own valuation of the shares, and the relative merits of selling at the offered price, as against retaining the shares and continuing to enjoy dividends. However, Premier’s contention that these considerations made it reasonable for it to refuse the August Offer are not persuasive in the context of a contested oppression proceeding where the principal relief sought by Premier was (in addition to declaratory relief) an order that the first to sixth defendants purchase its shares for ‘fair value in the circumstances’.[28] In other words, Premier commenced a proceeding which, if it succeeded, would have resulted in an order that the other shareholders acquire Premier’s shares for a sum determined by the Court. Success would not have resulted in an ‘option’ allowing Premier to choose whether to sell at the price determined by the Court, or hold the shares and continue to enjoy dividends, if it did not consider the price determined by the Court to be acceptable.
[28]Further Amended Statement of Claim filed 16 February 2022, prayer for relief paragraph B.
In relation to the second consideration relating to the minority discount, Premier’s position was that success at trial would have meant no minority discount would be applied. As such, and viewed through the lens of matters as they stood at August 2021, the August Offer was premised on Premier failing to establish its claims in oppression. In colloquial terms, the August Offer offered to settle a proceeding aimed at securing a buyout order with no minority discount for an amount that included a very substantial minority discount, but the letter accompanying the August Offer did not explain on what basis Premier might find itself in the position of succeeding in making good at least part of its oppression claim, yet not obtaining a buyout order without a minority discount.
As at August 2021, the options would reasonably have appeared to Premier to be either success, with a buyout order involving no minority discount, or failure to establish oppression, with no buyout order being made (with Premier retaining the shares and their associated dividend stream). There was, at that stage, no basis on which Premier should have been expected to anticipate being required to sell its shares at a price determined to include a minority discount even if it succeeded at trial. It was not until the Mackay parties put on their written opening submissions on 21 January 2022 that the basis upon which that position might arise was explained. There, the Mackay parties set out their position that, even if Premier succeeded in making out oppression, the buyout order should still be subject to a minority discount on the basis that Premier was a ‘willing seller.[29] But that position was only articulated months after the August Offer was made, and rejected. The argument based on s 467(1)(c) (which, had it succeeded could have seen Premier’s shares subject to a buyout order, applying a minority discount, even if it lost the oppression case) was not articulated until closing submissions.
[29]Mackay parties’ opening submissions, [11], [128]-[133].
In relation to the third matter raised, in my view it was reasonable for Premier to harbour concerns about the instructions given to Ms Chester and whether they were unduly pessimistic, particularly in relation to Skytraders’ prospects of obtaining renewal of its contracts and the assumption that all expiring contracts would have to be put out to tender, and could not be extended for any period. In my view, it was not unreasonable for Premier to decline an offer that ‘baked in’ Ms Chester’s valuation, which was based, as it was, on instructions and an earnings forecast prepared by the management of Skytraders after the litigation commenced and which was, at face value, very pessimistic.
In my view, as at August 2021, Premier, properly advised, ought to have appreciated its prospects of establishing oppression on matters other than those relating to the cessation of Mr Vickers’ executive roles and his ejectment from the board, were poor. Premier, properly advised, would have recognised that its prospects of establishing oppression arising from the cessation of Mr Vickers’ executive roles and his ejectment from the board was less certain, and would be substantially influenced by the course of trial and the course of cross‑examination. Nevertheless, as at August 2021, it was not unreasonable for Premier not to accept an offer to acquire its shares on a basis that:
(a) presumed it would fail to establish oppression (and so not be likely to obtain a buyout order with no minority discount), but would also be subject to a buyout order at a price involving a minority discount, or would succeed in making out oppression, and would still be subject to a buyout order involving a minority discount; and
(b) embedded Ms Chester’s principal valuation in circumstances where a party in Premier’s position might have reasonably held reservations about that valuation.
It follows that I do not consider that the failure to accept the August Offer attracts the imposition of an indemnity costs order in favour of the Mackay defendants, Mr Sharp or Sallab under r 26.08(4).
The January Offer
The January Offer was a Calderbank offer made by the Mackay defendants. It offered adoption of a mechanism to obtain a third expert valuation, but on a minority discount basis, with the Mackay defendants having the option to purchase at the price thereby established, failing which the business of Skytraders would be sold by a court-appointed receiver.
I do not consider it unreasonable for Premier to have rejected the January Offer, although I accept that:
(a) in view of the proximity of the trial, the offer was open for a reasonable period of time (seven business days, taking account of 26 January 2022 being a public holiday); and
(b) although the offer itself did not detail the merits of the case (but made only conclusory assertions), the January Offer was annexed to the Mackay parties’ opening submissions, in which they detailed the weaknesses in Premier’s case and explained the basis upon which the Mackay parties contended that Premier would only obtain a buyout order with a minority discount, even if it succeeded at trial.
Nevertheless, I have concluded that it was not unreasonable for Premier not to accept the January Offer for the following reasons.
The January Offer was based on a valuation involving a minority discount. The January Offer was made on the same day (21 January 2022) as the Mackay parties’ written opening submissions were delivered. Those submissions raised (for the first time) the prospect that, even if Premier succeeded in its oppression case in some respects, it would still not be entitled to a buyout order without a minority discount because Premier was a ‘willing seller’.
The ‘willing seller’ point raised by the Mackay parties in those submissions rested on the contention that ‘Mr Vickers and Premier chose to depart Skytraders for their own personal reasons’.[30] As such, the contention rested on the premise that Premier would fail to satisfy the Court that Mr Vickers did not abandon his executive roles, but rather those roles were effectively terminated. As I have set out above, the strength of its case on that point was a matter that would have been difficult for Premier to assess prior to trial, even if:
(a) its case on the conduct that occurred prior to the cessation of Mr Vickers’ executive roles and directorship — which I described in the Reasons as the ‘family-related events’ — ought to have been recognised as weak; and
(b) it ought to have recognised that conduct complained of, of which Premier only became aware after commencing proceedings — viz, the financial irregularities — could not support a buyout order without a minority discount for the reasons raised by the Mackay parties.
[30]Mackay parties’ opening submissions, [133].
The January Offer also did not offer Premier any specific price, but invited it to commit to a one-way (call) option, which would have permitted (but not obliged) the Mackay defendants to purchase Premier’s shares at the price set by the third valuation. As such, the January Offer did not, as the Mackay parties submitted, give Premier ‘an opportunity to sell its shares in [Skytraders] at a price to be determined by an independent valuer’.[31] Had the January Offer included a put option, allowing Premier to require the Mackay defendants to purchase Premier’s shares at the price arrived at by the third valuer, it would have been a more powerful offer (at least in terms of its utility as a Calderbank offer). In my view, it was also not unreasonable, in circumstances where Premier’s proceeding was directed at obtaining a buyout order at a price to be determined by the Court on expert evidence, not to accept the ‘backstop’ position of a sale of the business of Skytraders by a court-appointed receiver.
[31]Mackay parties’ costs submissions, [36].
The February Offer
The February Offer was made on behalf of the Purchaser Defendants (ie, the Mackay defendants, Mr Sharp and Sallab). In oral submissions, counsel for Mr Sharp and Sallab confirmed that they relied on this offer (although that matter had not been noted in their written submissions on costs).
The February Offer was also a Calderbank offer. Unlike the January Offer, the February Offer conveyed an offer on the part of the Mackay defendants, Mr Sharp and Sallab to purchase Premier’s shares for a fixed sum, namely $15,000,001 (inclusive of any GST and duty). That offer was made on 11 February 2022, ahead of the scheduled start of the trial on 15 February 2022. While the February Offer did not rehearse the merits of the parties’ positions, it referred to the delivery of the Mackay parties’ written outline of opening submissions, which detailed the merits of the parties’ respective positions.
In support of their contention that it was unreasonable for Premier not to accept the February Offer, the Mackay parties noted that the sum offered was:
(a) higher than Ms Chester’s valuations of Premier’s shares at either 30 September 2019 or 30 September 2020, even without the application of a minority discount;
(b) higher than Mr Dawson’s valuation of Premier’s shares at 30 September 2019 (applying a minority discount) and within the range of Mr Dawson’s valuation at 30 September 2020 (again applying a minority discount); and
(c) not far from the midpoint of the valuations of Ms Chester and Mr Dawson without a minority discount at the 2019 valuation date, which was $16,444,000.
The Mackay parties also noted that the offer included an offer to pay Premier’s costs which, given the scale of the proceeding and the volume of the evidence, would have been substantial by that time.
Mr Dawson’s valuation of Premier’s shares at 30 September 2019 was between $18,309,000 and $20,991,000 without a minority discount, and between $8,459,000 and $11,314,000 with a minority discount.
In evaluating the February Offer, in my view, Premier should have been alive to the absence of any identifiable justification for a valuation being conducted at 30 September 2020.[32] That date was neither proximate to when the last of the events complained of occurred, or when the trial was to occur. While conducting valuations at that date might have been understandable as a matter of pragmatism (given the experts’ principal reports were prepared in March and April 2021), in my view, Premier should have evaluated the February Offer giving little, if any, weight to the 30 September 2020 valuations, and should have evaluated the offer relative to the 30 September 2019 valuations.
[32]This was the subject of discussions at trial: T1550.29-30; T1678.2-9. As it happens, in closing submissions, Premier did not seek to support the 30 September 2020 valuation date, but contended for a fresh valuation to be undertaken close to the date of judgment: T1676.4-T1678.20.
Therefore, having regard to the 30 September 2019 valuations, Premier’s realistic best case, if it won on liability and obtained a buyout order with no minority discount, was $19,650,000 (ie, Mr Dawson’s preferred, midpoint valuation at 30 September 2019 with no minority discount), but its realistic worst case on quantum (assuming success on liability) was $13,238,000 (ie, the midpoint of Ms Chester’s valuation range at 30 September 2019 with no minority discount). The midpoint between those valuations (at 30 September 2019 with no minority discount) was $16,444,000.
In my view, it was unreasonable for Premier not to accept the February Offer. While the quantum offered was below Premier’s best case, the offer was for a certain sum (cf, the call option format of the January Offer). The sum was also substantially above its worst case on quantum, even assuming success on establishing oppression and in resisting the Mackay parties’ contention that there should be a minority discount even if Premier established oppression. The sum offered constituted a reasonable compromise having regard to the midpoint between the experts, particularly once the value of the costs component of the offer was taken into account.
As noted, the offer included an offer to pay Premier’s costs which, on any view, would have been substantial. It also relieved Premier of any potential obligation to pay the costs of the Mackay defendants and Mr Sharp and Sallab. While, as addressed above, the prospects on the allegations concerning the cessation of Mr Vickers’ executive roles and his ejectment from the board would have been harder to assess before trial than the strength of the other allegations, the weakness of the balance of the allegations should have been apparent. Yet a substantial amount of hearing time (and no doubt associated costs incurred outside of hearing hours) was devoted to the balance of the allegations, which were persisted in and taken to trial, despite their manifest weakness.
Accordingly, I consider it appropriate that Premier pay the costs of the defendants who made and relied on the February Offer[33] from 15 February 2022, being the day after the February Offer closed for acceptance.
[33]Namely, the Mackay defendants as well as (subject to what follows concerning their position) Mr Sharp and Sallab.
Mr Sharp and Sallab
I will first address Premier’s contention that Mr Sharp and Sallab should not have the benefit of any costs order, or that their costs should be limited to the costs of filing defences and attending the trial of the proceeding, but not the costs of preparation of witness statements. I will then address whether Mr Sharp should have the benefit of a costs order on an indemnity basis for the entirety of the proceeding, or alternatively from 9 November 2019, following the Sharp Offer.[34]
[34]The cost consequences of the other offers in which Mr Sharp and Sallab participated, being the August Offer and the February Offer, have already been addressed above.
Premier’s contention regarding denying Sallab and Mr Sharp any costs order
I am not satisfied that the matters stated in the Reasons[35] concerning the existence of a substantial body of evidence suggesting that Premier’s theory concerning Mr Sharp and Sallab was correct warrants denying Mr Sharp and Sallab the costs to which they would ordinarily be entitled following the failure of Premier to make out its case. As stated in the Reasons,[36] I did not make findings on those matters as it was not necessary to do so. As such, I do not consider that I could properly deny Sallab and Mr Sharp the costs of the proceeding generally, or their witness statements on the basis that their defences were false and the contents of their witness statements were false and misleading. For the same reasons, I also do not consider that Mr Sharp and Sallab ought to be precluded from relying on the Sharp Offer (in Mr Sharp’s case) and the August and February Offers.
[35]Reasons, [475]-[476].
[36]Reasons, [480].
Nor do I consider they should be denied their costs of preparation of their witness statements on the basis that Mr Sharp and Sam Ballas (Mr Ballas) (the director, shareholder and secretary of Sallab) were not actually called to give evidence. As submitted by counsel for Mr Sharp and Sallab, a litigant faced with allegations (whether or not it was necessary for the disposition of the proceeding for those allegations to be made out) can be expected to respond to them. It was open to Mr Sharp and Sallab to make a forensic judgment whether or not to call Mr Sharp or Mr Ballas when that point was reached in the trial. That is just an ordinary incident of litigation, and does not, in this case at least, constitute a basis upon which to deny them their costs. It would be speculation to conclude (as counsel for Premier submitted) that they were not called after Premier obtained the banking records through which Premier said it traced the payment of dividends paid to Sallab into Mr Sharp’s hands.
Mr Sharp’s contention regarding indemnity costs
In my view, there should not be an indemnity costs order in favour of Mr Sharp either for the entirety of the proceeding, or following the Sharp Offer. Counsel for Mr Sharp referred to the passage in the Reasons where I said that it was never satisfactorily explained why Mr Sharp was joined to the proceeding.[37] I there referred to no oppression stemming from his conduct being alleged, and Sallab being bound by the outcome of the proceeding, irrespective of whether or not it held its shares for Mr Sharp (or anyone else) beneficially.
[37]Reasons, [482].
However, in argument at the costs stage, additional matters were raised as to why it was appropriate that Mr Sharp had been joined (in addition to repeating the beneficial ownership contention, which I had already addressed in the Reasons). In particular, Premier submitted it was appropriate that Mr Sharp be joined as a party in circumstances where Premier sought findings that Skytraders operated as a quasi-partnership[38] involving Mr Vickers, Mr Mackay and Mr Sharp, which involved claims relating to Mr Sharp’s involvement in Skytraders.
[38]Premier’s costs submissions stated (at [6]) that Premier made the quasi-partnership contention ‘in the alternative to the pleaded Shareholding and Directorship Agreement’.
While the Expectation case[39] was not explicitly pleaded on a quasi-partnership basis,[40] Mr Vickers’ voluminous witness statements referred to the operational and managerial roles he occupied, as well as Mr Mackay and Mr Sharp’s ongoing activities once he ceased formally to hold the position of director. While the relevance of these parts of the witness statements may not have been immediately obvious, by the time the case was taken to trial, the quasi-partnership contention was advanced.[41] In the Reasons, I observed that Premier’s alternative Expectation case was anchored in the expectations Mr Vickers formed through his interactions with Mr Mackay leading up to mid-2003, well before Mr Sharp became involved.[42] I also noted that the only relevance Mr Sharp could have had was if the Mackay parties had contended that Sallab’s ostensibly passive role undermined Premier’s Expectation case, requiring Premier to meet that point by contending that Sallab was just a front for Mr Sharp, who was not a passive investor. However, as noted in the Reasons,[43] the Mackay parties never took this point.
[39]As defined in the Reasons, [19].
[40]In the Reasons, I referred to the regrettable paucity of the pleading of the Expectation case: Reasons, [111].
[41]Premier’s opening submissions, [107].
[42]Reasons, [123], [127]-[128].
[43]Reasons, [124].
While there is some force in the suggestion that Mr Sharp ought not to have been joined and required to defend a proceeding based on the mere possibility that Premier’s primary adversary (the Mackay parties) would take a particular point, it is also important not to allow the kind of clarity that emerges post-trial (or even during a trial) to condemn decisions as to joinder made at a time when the issues may be less clearly delineated.
Stepping back from the matter, Premier wished to, and did, advance a case that Mr Sharp’s role and (alleged) beneficial interest in the Sallab shares supported its case that there were no passive investors in Skytraders. That contention was to be advanced based on allegations that directly impugned Mr Sharp’s honesty and conduct. The fact that it was ultimately unnecessary for Premier to take those points,[44] does not, in my view, mean that I should infer (as I was invited to) that Mr Sharp was clearly joined for ulterior purposes, so that Premier should be subject to an indemnity costs order in favour of Mr Sharp for the entirety of the proceeding.
[44]In the absence of the Mackay parties contending that Sallab’s passive role undermined the Expectation case, and having regard to the evidence at trial, which crystallised that the Expectation case was anchored to events in mid-2003 and not thereafter affected: Reasons, [123], [128]-[129].
Nor, in my view, does the bare ‘walk away’ offer conveyed by the Sharp Offer in early November 2019, shortly after the proceeding was commenced, warrant an indemnity costs order from the date that offer expired. The Sharp Offer was made at a time when only the Originating Process and Mr Vickers’ initial, short affidavit had been filed. The fuller picture of Premier’s case, and how Mr Sharp fitted into it, had yet to emerge. The Sharp Offer was also not styled as a Calderbank offer, and made no reference to Mr Sharp relying on the letter in support of a claim to indemnity costs in the future. I also consider that the time allowed for Premier to consider the offer, which was a period of only one week, was too short given that the proceeding was at a very early stage and there was no urgency justifying a relatively short period of time to consider the offer (cf, the position closer to trial). Further, and particularly at that early stage, making a ‘walk away’ offer did not constitute an offer to compromise to any significant extent, particularly as the potential costs liability from which Premier might be relieved would not have been significant only one month after the proceeding had been commenced.[45]
[45]The first directions hearing was held on 22 November 2019, and orders were then made for pleadings.
Orders
Costs orders will be made as follows:
1.The plaintiff pay the costs of the first, second, third and seventh defendants on a standard basis until (and including) 14 February 2022, and on an indemnity basis thereafter, to be taxed if not agreed.
2.The plaintiff pay the costs of the fourth to sixth defendants on a standard basis, to be taxed if not agreed.
SCHEDULE OF PARTIES
S ECI 2019 04462
| BETWEEN: | |
| PREMIER AVIATION HOLDINGS PTY LTD (ACN 104 968 354) | Plaintiff |
| - and - | |
| NORMAN FARQUHAR MACKAY | First Defendant |
| SCARP NOMINEES PTY LIMITED (ACN 608 980 650) | Second Defendant |
| SALLAB PTY LTD (ACN 164 150 332) | Third Defendant |
| DEEP SECTION INVESTMENTS PTY LTD (ACN 628 475 383) | Fourth Defendant |
| EDISTO PTY LTD (ACN 620 149 831) | Fifth Defendant |
| 6PLATFORMS PTY LIMITED (ACN 613 457 373) | Sixth Defendant |
| JOHN SHARP | Seventh Defendant |
| SKYTRADERS PTY LTD (ACN 001 851 921) | Eighth Defendant |
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