Rilgar Nominees Pty Ltd v BHA Holdings Pty Ltd
[2014] VSC 632
•17 December 2014
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
CORPORATIONS LIST
S ECI 2014 000456
BETWEEN
| RILGAR NOMINEES PTY LTD (ACN 006 469 629) | Plaintiff |
| and | |
| BHA HOLDINGS PTY LTD (ACN 128 764 803) & ORS (in accordance with the attached schedule) | Defendants |
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JUDGE: | SIFRIS J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 2 December 2014 |
DATE OF JUDGMENT: | 17 December 2014 |
CASE MAY BE CITED AS: | Rilgar Nominees Pty Ltd v BHA Holdings Pty Ltd |
MEDIUM NEUTRAL CITATION: | [2014] VSC 632 |
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CONTRACT — Settlement at mediation — Mediation Agreement required any settlement to be in writing and signed by the parties – No signed agreement – Whether Mediation Agreement varied or requirement waived – Whether conduct sufficient to establish any variation or waiver.
CORPORATIONS — Company not a party to Settlement at mediation and did not attend mediation — Whether company a necessary party — Whether the unanimous assent of all voting shareholders is sufficient — Application of In re Duomatic Ltd [1969] 2 Ch 365; Bodikian v Sproule (2009) 72 ACSR 598.
PRACTICE AND PROCEDURE — Summary judgment for defendants — Whether plaintiff’s claim has real prospects of success — Supreme Court (General Civil Procedure) Rules 2005 (Vic) r 23.02, Civil Procedure Act 2010 (Vic) s 62, s 63.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr M W Wise | K&L Gates |
For the First Defendant | Mr B Gibson | SBA Law |
| For the Second, Third and Fourth Defendants | Mr C E Shaw | Norton Gledhill |
HIS HONOUR:
A Introduction
On 9 September 2014, the plaintiff (“Rilgar”) filed an Originating Process[1] seeking relief against the second, third and fourth defendants, for allegedly oppressive conduct pursuant to sections 232, 233(1) and 1324 of the Corporations Act 2001 (Cth), in relation to the first defendant (“BHA”) (“the Oppression Proceeding”).
[1]The Originating Process was filed in proceeding number S ECI 2014 000084.
The Oppression Proceeding was the subject of a mediation conducted on 25 September 2014, attended by representatives of the plaintiff and the second, third and fourth defendants (“the Mediation”). The Mediation was not attended by or on behalf of BHA.
The plaintiff contends that the Oppression Proceeding and the matters in issue between the parties was resolved at the Mediation (“the Settlement Agreement”).
On 7 November 2014, the plaintiff commenced this proceeding seeking amongst other things specific performance of the Settlement Agreement.
On 11 November 2014 the second, third and fourth defendants (“HPE Defendants”) filed an application seeking summary judgment pursuant to rule 23.03 of the Supreme Court (General Civil Procedure) Rules 2005 (“the Rules”) and/or section 62 of the Civil Procedure Act 2010 (Vic) (“the Act”) and costs.
On 12 November 2014 BHA filed an application seeking summary judgment and costs against Rilgar on the same terms.
The defendants contend that Rilgar’s claim for specific performance has no real prospects of success and should be dismissed. Four grounds are relied on –
·BHA, a relevant and necessary party, did not attend the Mediation and is not a party to the Settlement Agreement.
·The Settlement Agreement was required to be in writing and signed by the parties.
·Uncertainty – the defendants contend that important matters were not agreed and the Settlement Agreement is uncertain and incomplete.
·The alleged Settlement Agreement affects the pre-emptive rights agreed by the parties.
B Background
BHA Board (‘the Board’)
There are five directors of BHA: Howard Riley, Ian Shaw, Ross Boyce, Brendan Sulway, and David Plumridge.
BHA shareholders
There are three classes of BHA shares which have been issued, A Class, B Class and Ordinary shares. Rilgar holds A Class and Ordinary shares. Ian Shaw and Ross Boyce hold B Class shares and the HPE Defendants hold Ordinary shares. There was a dispute over whether the B Class shareholders have voting rights. For the purposes of this application for summary judgment I have assumed that the B Class shareholders do not have voting rights. As set out in the Constitution of BHA, the Ordinary Shareholders have voting rights, and Rilgar submitted that Rilgar and the HPE Defendants therefore owned 100% of the voting shares in BHA.
Rights and powers of shareholders and the Board
A Shareholders’ Deed signed by Rilgar and the first to third defendants (“Shareholders’ Deed”) provides, in summary, at clause 7.1(a), that ‘the Board must decide all matters relating to the affairs of the Company that it does not specifically delegate to senior management of the Company’.
Some of the powers and responsibilities of the Board of BHA are set out in clause 6 of the Shareholders’ Deed, which states that the Board must adopt an Approved Budget and Business Plan each Financial Year and neither BHA nor its officers or employees may commit any resources of BHA other than in accordance with an Approved Budget and Business Plan or the policies and procedures of BHA as determined by the Board.
In addition, Howard Riley deposed that the practice of BHA has been to have the Board consider and pass relevant resolutions where dealings between BHA and its shareholders have been in prospect.[2]
[2]Affidavit of Howard Riley sworn on 21 November 2014 (“the Second Riley Affidavit”).
However, clause 10 of Schedule 1 of the Shareholders’ Deed provides, in summary, that in relation to the making, variation or termination of a contract or arrangement by the Company, any Director who is interested in the matter may not vote on the matter unless all Directors would not, but for this provision, be entitled to vote. Therefore, there is a possibility that directors representing the HPE defendants would not have been able to vote at a meeting where decisions about the Settlement Agreement were made because of their interest in the Oppression Proceeding.
Clause 7.2(a) of the Shareholders’ Deed provides that before certain action in respect of any matters in Schedule 3 of the Shareholders’ Deed (which include matters such as budgets, business plans, acquisitions and disposals of assets, loans, share rights and share capital, entering into arrangements and expenditure) can be taken by the parties or a director of the company who is not a party, the prior written approval of the Investors (which are defined as the second and third defendants) must be sought.
Moreover, pursuant to clause 7.2(b) of the Shareholders’ Deed, where a matter requires prior written approval of the Investors, approval is deemed to be given if the Investor Directors (i.e. the persons nominated by the Investors to be appointed as a director) have voted in favour of the matter at a Board meeting.
Clause 4 of Schedule 2 of the Shareholders’ Deed provides that at least 14 days’ notice in writing must be given to all Shareholders of any general meeting of Shareholders (which is defined as a holder of at least 1 issued share in the capital of the Company and Share is defined to include Ordinary Shares and A Class Shares).
The Oppression Proceeding
As pointed out, Rilgar commenced the Oppression Proceeding alleging oppressive conduct by reason of a proposed issue of Ordinary Shares in BHA to existing shareholders at an issue price which Rilgar argued was unrealistically low and designed to substantially dilute Rilgar’s shareholding from 36% to 9% and increase the HPE Defendants’ shareholding from 64% to 91%. BHA was joined to the Oppression Proceeding but took no active part in that proceeding.
The Mediation
A Mediation Agreement was entered into by Rilgar and the HPE Defendants on 25 September 2014 (“Mediation Agreement”). Clause 2.10 of the Mediation Agreement provided that ’[a]ny settlement agreement will be prepared and signed by the Parties at the earliest possible time. No settlement of the dispute will take place unless and until a settlement agreement has been signed.’
The Mediation was held on 25 September 2014. Howard Riley for Rilgar, David Plumridge and Brendan Sulway were in attendance. BHA submitted that it did not attend the Mediation nor did any of the BHA shareholders attend the Mediation as representatives of BHA.
During the Mediation, a compromise was suggested by the mediator, that BHA cancel and reissue the shares to the HPE Defendants at a higher price with Rilgar making a contribution partly as share capital and partly as a loan with an option to convert the loan to shares.
The parties agreed on certain terms and transactions which were written on a whiteboard and included that Rilgar would loan $722,000 to BHA at a rate of 10% (with the interest to be paid as director’s fees) with the loan able to be converted at any time into BHA shares at $55.73 per share; and Rilgar would subscribe to $722,000 of additional shares in BHA at a price of $55.73 per share. The parties also agreed that the HPE Defendants would surrender/cancel $1.44 million of its shares and that Shane Rose would be appointed as a director of BHA with a salary of $50,000. It was agreed that these payments and transactions would occur on 6 December 2014. Rilgar alleges that these terms constituted the Settlement Agreement.
Handwritten notes of this Settlement Agreement made by Anthony Watson and Shalini Jawaweera, of the solicitors acting for Rilgar, replicated the terms written on the whiteboard and included the same level of detail.
The parties stated that they agreed to the terms on the whiteboard and shook hands. The parties then took photos of the whiteboard and agreed that formal documentation would be necessary and that K&L Gates would prepare a written document.
Events that occurred after the Mediation
K&L Gates prepared a draft agreement which it submitted to Norton Gledhill on 3 October 2014 (“Draft Proposed Agreement”). The Draft Proposed Agreement was 24 pages long and contained clauses including in relation to the appointment of Shane Rose, subscription for new shares, terms of the loan, terms of the buy back, details of the offer, conditions precedent, details for completion, conditions of completion and warranties. The Draft Proposed Agreement also required a waiver of pre-emptive rights and a unanimous resolution of the BHA board.
A week after the Draft Proposed Agreement was submitted, David Plumridge advised Howard Riley that the finance committee had rejected the Draft Proposed Agreement on the basis of taxation issues.
On 7 November 2014, Rilgar commenced this proceeding alleging that by an agreement made at the Mediation the parties agreed to settle the matters in dispute in the Oppression Proceeding. Rilgar seeks an order for specific performance of the Settlement Agreement.
On 11 and 12 November 2014, the defendants made an application for summary judgment against Rilgar alleging that the claim has no real prospect of success.
C Applicable Law
Rule 23.03 of the Rules provides that:
On application by a defendant who has filed an appearance, the Court at any time may give judgment for that defendant against the plaintiff if the defendant has a good defence on the merits.
Section 62 of the Act provides that:
A defendant in a civil proceeding may apply to the court for summary judgment in the proceeding on the ground that a plaintiff's claim or part of that claim has no real prospect of success.
The corresponding power of the Court to grant such an application is contained in s 63 of the Act:
Subject to section 64, a court may give summary judgment in any civil proceeding if satisfied that a claim, a defence or a counterclaim or part of the claim, defence or counterclaim, as the case requires, has no real prospect of success.
The test applicable to an application for summary judgment was specifically altered by s 62 of the Act, such that the test is now one of 'no real prospect of success.' As is clear from the Explanatory Memorandum to the Act, the change was recommended by the Victorian Law Reform Commission which considered the summary judgment procedure too restrictive. It advised that the procedure be liberalised so as to more frequently and flexibly dispose of claims or defences that are unmeritorious.[3]
[3]Explanatory Memorandum, Civil Procedure Bill 2010 (Vic) 24.
The ‘no real prospect of success’ test refers to a ‘real’ as opposed to a ‘fanciful’ chance of success, and is to be applied without paraphrase or comparison to the ‘hopeless’ or ‘bound to fail’ tests set out in previous authorities.[4]
[4]Lysaght Building Solutions Pty Ltd (t/as Highline Commercial Construction) v Blanalko Pty Ltd [2013] VSCA 158 (24 June 2013); Gray v Morris [2004] 2 Qd R 118,133 [46]. Previous authorities include General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125.
The test has been interpreted as a more liberal test which may in some circumstances extend to cases not regarded as sufficiently hopeless to warrant striking out under the Rules alone.[5]
[5]Lysaght Building Solutions Pty Ltd (t/as Highline Commercial Construction) v Blanalko Pty Ltd [2013] VSCA 158 (24 June 2013) [27], [32].
Lord Woolfe MR, speaking of the adoption in the United Kingdom of the 'no real prospect of success' test, said:
It saves expense; it achieves expedition; it avoids the court’s resources being used up on cases where this serves no purpose, and I would add, generally, that it is in the interests of justice.[6]
[6]Swain v Hillman [2001] 1 All ER 91, 92 [14].
According to the High Court, the power to order summary judgment should be exercised where it is clear that there is no real question to be tried.[7]
[7]Fancourt v Mercantile Credits Ltd (1983) 154 CLR 87, 99. This statement remains ‘forceful and authoritative guidance’: Gray v Morris [2004] 2 Qd R 118, 133 [46]. The Court in Karam v Palmone Shoes Pty Ltd [2012] VSCA 97 (15 May 2012) [28] also held that this statement remains in effect.
D BHA not a party to the Settlement Agreement
Defendants’ submissions
BHA was not a party to the Settlement Agreement. BHA did not file a defence in the Oppression Proceeding and did not attend the Mediation. The Statement of Claim does not allege any breach of the Settlement Agreement by BHA[8] and no order is sought against BHA.[9]
[8]Statement of Claim dated 7 November 2014 (“Statement of Claim”), [10].
[9]Ibid [12], [A] of the Prayer for Relief.
On this basis alone, the defendants submit that Rilgar’s case has no chance of success. It seeks to allege an agreement, but does not allege that a critical party to the agreement was a party to that agreement. Even if Rilgar were to succeed on its claim it cannot, it was submitted, get any relief. The agreement Rilgar alleges must it was submitted, have BHA as a party for reasons set out below, yet Rilgar does not allege that that was the position. It cannot establish the existence of any agreement or get any relief on that agreement.
This is not, it was submitted, a mere pleading point. Rilgar has quite properly not alleged that BHA is a party to the agreement because there is no proper basis to do so. BHA was not represented in the Oppression Proceeding. Norton Gledhill filed an appearance for the HPE defendants but not for BHA.[10] BHA was not represented at the injunction application before Ferguson J (as her Honour then was).[11] On Rilgar’s own evidence, no one attended the Mediation representing BHA.[12] On its evidence, no one confirmed that they had authority to settle on behalf of BHA.[13]
[10]Exhibit “ABW2” to the Affidavit of Anthony Watson sworn on 7 November 2014 (the “Watson Affidavit”).
[11]Exhibit “ABW3” to the Watson Affidavit.
[12]Watson Affidavit, [11]; Affidavit of Shalini Manuja Jayaweera affirmed on 21 November 2014 (the “Jayaweera Affidavit”), [3].
[13]Watson Affidavit, [12]; Jayaweera Affidavit [4].
Further, the Managing Director of BHA, Ian Shaw has sworn an affidavit in support of BHA’s application for summary judgment.[14] He has deposed that BHA played no active part in the Oppression Proceeding.[15] He says that BHA did not participate in the Mediation.[16] He deposes further that none of Riley, Plumridge or Sulway were authorised by Shaw or the Board of BHA to represent BHA at the Mediation or negotiate terms on behalf of BHA.[17] Shaw was not consulted during the Mediation.[18] BHA did not execute the Mediation Agreement.[19] He says further had he been asked he would not have consented to BHA entering into the Settlement Agreement as it would not be in its interests to do so.[20]
[14]Affidavit of Ian Andrew Shaw affirmed 14 November 2014 (the “Shaw Affidavit”).
[15]Ibid [4].
[16]Ibid [7].
[17]Ibid [8].
[18]Ibid [9].
[19]Ibid [10].
[20]Ibid [15] and [16].
Finally it was submitted that BHA would have to have been a party to the Settlement Agreement because the agreement contains numerous obligations on its part, namely that:
(a) it was to borrow $720,000 from Rilgar;[21]
[21]Statement of Claim, [7(a)].
(b) it was to pay 10% interest on that loan;[22]
[22]Ibid.
(c) the interest was to be paid by way of increased director’s fees to Riley;[23]
(d) it was to issue shares to Rilgar;[24] and
(e) it was to grant Rilgar the option of converting a loan into shares in BHA.[25]
[23]Ibid [7(b)].
[24]Ibid [7(c)].
[25]Ibid [7(d)].
These matters it was submitted could not be agreed in the absence of BHA. Plainly BHA was absent when these matters were allegedly agreed. There can have been no agreement to the effect alleged or anything resembling it and the case is therefore, it was submitted, hopeless.
Plaintiff’s submissions
As at the date of the Mediation, between them, Rilgar and the HPE defendants owned 100% of the voting shares in BHA.
Consequently, it was submitted that it was within the power of the parties who reached the Settlement Agreement, as shareholders in general meeting, to have approved BHA entering into the agreement in fact reached, such that the principle in Inre Duomatic[26] is to be invoked.[27] That is, that the company is bound in a matter which is intra vires of the company by the unanimous agreement of its members, even where that agreement is given informally.
[26][1969] 2 Ch 365 (“Duomatic”).
[27]See also Brick & Pipe Industries Ltd v Occidental Life Nominees Pty Ltd [1992] 2 VR 279.
By reason of the operation of clause 7.2 of the Shareholders’ Deed, power is reposed in the Investors – the HPE defendants – to exercise veto control over a raft of matters relating to the operation of BHA normally reserved for determination by the directors. Those matters include the matters the subject of the Settlement Agreement. Those matters are as follows:
(a) Appointment of directors – cl.7.2.(a) and Schedule 3, Item 1(a).
(b) Director’s Remuneration – cl.7.2(a) and Schedule 3, Item 1(b).
(c) Making of loans – cl.7.2(a) and Schedule 3, Item 4.
(d) Issuing shares and/or convertible notes to Rilgar, and the HPE defendants surrendering or having their shares cancelled – cl.7.2(a) and Schedule 3, Item 5.
It was submitted that the suggested limitations on the scope of the doctrine in Ford’s Principles of Corporations Law[28] does not affect its operation in this case. The power to provide ultimate approval of the matters referred to above was reposed in the shareholders – specifically the HPE defendants. If it is correct on Rilgar’s case that those present at the Mediation did reach an agreement, 100% of the shareholders, including the HPE defendants, agreed to those matters and BHA is thereby bound.
[28]HAJ Ford, RP Austin and IM Ramsay, Ford’s Principles of Corporations Law, vol 1 (at service 107) [7.590].
The HPE defendants relied on an affidavit which exhibits a document purporting to describe the rights attaching to the 96 B Class shares owned by Messrs Shaw and Boyce.[29] That document purports to provide that B Class shares have the same rights in BHA as Ordinary Shares. Ordinary Shares carry the right to vote.[30] The provenance of that document is unknown and was not accepted by Rilgar. Riley deposed to the allotment of shares to Shaw and Boyce.[31] The shares were intended to be non-voting shares. Page 27 of BHA’s Financial Accounts, signed off by Mr Shaw on 14 November 2014 states the following in relation to B Class shares:
Fully paid B Class Shares do not carry any voting rights or rights to dividends, and are only held by management and personnel.[32]
[29]See Exhibit “MEB1” to the Affidavit of Miranda Bordignon affirmed 25 November 2014.
[30]See Schedule 14 to the Constitution of BHA at Exhibit “ABW-1” to the Watson Affidavit.
[31]Second Riley Affidavit, [11]-[13].
[32]Exhibit “HFR-3” to the Second Riley Affidavit.
Rilgar submitted that the issue of whether 100% of the voting shares were present at the Mediation is a matter that is properly to be resolved at trial.
Finally, Rilgar submitted that insofar as it was within the power of Rilgar and the HPE defendants to cause the organs of BHA to do any relevant matters to effect the agreement, then they would be bound to cause it to do so. So much is to be implied in any agreement.[33] If that required the directors to call a directors’ meeting to pass certain resolutions, or a shareholders’ meeting to do so, they would be obliged to have their respective directors and shareholders vote to effect the agreement. In this way the absence of BHA to the agreement reached was immaterial.
Defendants’ submissions in reply
[33]It is a general rule applicable to every contract that each party agrees, by implication, to do all such things as are necessary on its part to enable the other party to have the benefit of the contract: Butt v M’Donald (1896) 7 QLJ 68, 70-1 (Griffith CJ) (approved Secured Income Real Estate (Aust) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596, 607).
In reply the defendants submitted that the Duomatic principle or the doctrine of unanimous assent did not apply for a number of reasons. First it was submitted that the doctrine did not apply to decisions specifically reserved for the directors and this included the management of BHA. Secondly it was submitted that even though they had non-voting shares, Shaw and Boyce were entitled to receive notices of meetings and participate in discussions.
Decision
I accept the submission of the defendants. In my opinion BHA was a necessary party to the Settlement Agreement.
It is common ground that the Settlement Agreement and the Draft Proposed Agreement contains obligations on the part of BHA and in respect of which it, in its own right, was required to assent to and sign off on. It did not and was not involved in the process in its own right.
In my opinion the principle of unanimous assent, articulated by Buckley J in the seminal case of Duomatic[34] does not assist the plaintiff.
[34][1969] 2 Ch 365, 373.
In Duomatic, Buckley J said:
In other words, I proceed upon the basis that where it can be shown that all shareholders who have a right to attend and vote at a general meeting of the company assent to some matter which a general meeting of the company could carry into effect, that assent is as binding as a resolution in general meeting would be. The preference shareholder, having shares which conferred upon him no right to receive notice of or to attend and vote at a general meeting of the company, could be in no worse position if the matter were dealt with informally by agreement between all the shareholders having voting rights than he would be if the shareholders met together in a duly constituted general meeting.
Subsequent cases illustrate the ambit and constraints that apply in what is very often a misconceived application of the principle.
In Compaction Systems Pty Ltd and the Companies Act[35] it was held that Duomatic did not apply in circumstances where only one non-voting shareholder did not receive notice of a general meeting but was entitled to receive such notice. Although the non-voting shareholder could not affect the outcome of the meeting, the shareholder was entitled to receive notice and attend the meeting and participate in the debate. In this regard Bowen CJ in Eq said:
The right to receive notice of a meeting, and to attend, and to be heard, is not an insubstantial right. The right to advance arguments and to influence the course of discussion may in some circumstances have an effect, even a decisive effect, on the decision reached. It may be that the principle laid down in Re Express Engineering Works Ltd [1920] 1 Ch 466, should apply, notwithstanding there has been an omission to notify the auditor, but I am not prepared to extend the principle to cover the case where only the shareholders entitled to vote have assented to a transaction while another shareholder entitled to receive notice of meetings and to attend has not been made aware of the transaction and has not assented to it: cf. Re Stanley W Johnson Pty Ltd [1936] VLR 59.
[35][1976] 2 NSWLR 477, 485 [E]-[F] (“Compaction Systems”).
In Poliwka v Heven Holdings Pty Ltd,[36] a decision of the Western Australian Full Court, Ipp J identified another limitation on the operation of the principle. Where directors are specifically charged with the management and operation of a company, the unanimous assent of members may be of limited or no application. At page 787, Ipp J said:
The power of the members, however, to bind a company is dependent upon its constitution. In my view, nothing that was said in Re Express Engineering Works Ltd and the subsequent authorities to which I have referred detracts from this proposition. In none of those cases were the members precluded by the articles from binding the company to the contracts in question.
[36](1992) 8 ACSR 747 (“Poliwka”).
In Bodikian v Sproule,[37] Austin J, referring to Duomatic, Compaction Systems, Poliwka and High Court authority said:
[37](2009) 72 ACSR 598, 605 [28]-[32] (“Bodikian”).
28As can be seen from Ford's Principles of Corporations Law, LexisNexis looseleaf, [7.590], there is now a substantial body of English and Australian case law on the Duomatic principle. While some English cases might exemplify a wider approach, on the whole the Australian case law treats the principle as an example of the doctrine of waiver. For present purposes it is sufficient to cite three Australian cases.
29In Re Compaction Systems Pty Ltd and the Companies Act[1976] 2 NSWLR 477, at 484 Bowen CJ in Eq gave the following succinct account of Re Duomatic Ltd[1969] 2 Ch 365:
"In that case, various payments were made to directors in different sets of circumstances. These payments were challenged by the liquidator of the company, which had afterwards been ordered to be wound up. Certain of these payments could have been authorised by a resolution of the company in general meeting. In fact no general meeting had met to approve them, and they had not been authorised by any resolution of a formally constituted board meeting. The evidence was that they had been made, however, with the full knowledge and consent of all the registered holders of voting shares in the company. It should be mentioned that, in addition to voting shares in the company, there had been issued 80,000 redeemable preference shares of £1 each. These redeemable preference shares did not carry the right to receive notice of meetings, or to attend meetings, or to vote. The question, therefore, was whether the principle applied where all shareholders entitled to receive notice and attend and vote at general meetings had assented. Buckley J expressed his view as follows [at 373]:
'... I proceed upon the basis that where it can be shown that all shareholders who have a right to attend and vote at a general meeting of the company assent to some matter which a general meeting of the company could carry into effect, that assent is as binding as a resolution in general meeting would be. The preference shareholder, having shares which conferred upon him no right to receive notice of or to attend and vote at a general meeting of the company, could be in no worse position if the matter were dealt with informally by agreement between all the shareholders having voting rights than he would be if the shareholders met together in a duly constituted meeting.'"
30In Herrman v Simon (1990) 4 ACSR 81, at 83, Meagher JA (with whom Samuels and Priestley JJA agreed) referred to the Duomatic principle and continued:
"What is that principle? The principle is I think this: where it can be shown that all shareholders having a right to attend and vote at a general meeting of the company assent with full knowledge and consent to some matter which a general meeting of the company could carry into effect, that assent is as binding as a resolution in general meeting would be. In other words, it is a doctrine dispensing with the consumptive effect of formalities. It is a doctrine that formalities may be disregarded if they have been waived by all shareholders acting in concert who want the same substantial result."
31In Angas Law Services(in liq) v Carabelas[2005] HCA 23; (2005) 226 CLR 507 Gleeson CJ and Heydon J described the Duomatic line of cases as "cases in which, by reason of some feature of a company's internal structure, or some failure to comply with its articles of association, there is a potential defect in a purported exercise of corporate power". They continued (at 24):
[24]"In such a case, the unanimous consent of the shareholders, even if there has been no formal resolution of a general meeting, may be as binding as a resolution in general meeting would have been. This line of authority is often invoked to meet the contention that the company is not bound by some decision or conduct by reason of administrative irregularity, failure to comply with articles of association, or want of authority on the part of some internal organ."
32It can be seen from these observations that the Duomatic principle allows the court to accept as valid, notwithstanding failure to adhere to formal requirements, a decision made by the unanimous assent of the members entitled to participate in the decision, whether or not they have actually met together. The doctrine does not give the members acting unanimously a power that they do not constitutionally possess (because, for example, the power is vested in the board of directors.
It is not necessary to go any further. From this short reference to the relevant cases it is tolerably clear that the principle has no application in this case. The unanimous agreement of all of the shareholders entitled to vote does not overcome the notice to all shareholders’ requirement or the management by directors’ point.
The fact that the HPE Defendants, as the holders of the voting shares are entitled and indeed required under the Shareholders’ Deed to approve the very matters agreed, did not and does not have the effect of dispensing with the need for the board of directors to consider the matter. The directors are charged with the management and operation of BHA. The fact that particular decisions require the prior written approval of the Investors does not mean that the Investors can directly compel the directors to make those decisions. Rather it is the other way around. If such a decision is to be made by the directors, after due and proper consideration, the Investors must, prior to any resolution to such effect, provide their written approval. This consideration by the directors must obviously include all of the directors and whether or not they hold (directly or indirectly) voting shares. They are entitled to receive notice of any such directors meeting and participate in discussions.[38] This is an important right that cannot simply be ignored by the voting shareholders acting unanimously, unilaterally and without regard to the very board that they have charged with the management and operation of the company. The reach of Duomatic is much more restricted.
[38]Of course and perhaps more relevantly in this context, the same applies in relation to notice to non-voting shareholders.
Accordingly, in my opinion, this part of the claim has no real prospect of success. Reliance on the principle of unanimous assent is misconceived.
E No settlement agreement unless signed
Defendants’ submissions
Clause 2.10 of the Mediation Agreement signed prior to the mediation at which the alleged Settlement Agreement was reached provided as follows:
Any settlement agreement will be prepared and signed by the Parties at the earliest possible time. No settlement of the dispute will take place unless and until a settlement agreement has been signed.
It was submitted that the meaning of the second sentence of that clause could not be any clearer. There is no settlement agreement until an agreement has been signed. The reason for such a clause is clear. It is, it was submitted, to prevent the dispute the subject of the Mediation becoming a dispute about what went on at the Mediation. It is to prevent proceedings such as this.
BHA has put on evidence that the Mediation Agreement was signed by Rilgar and the HPE Defendants.[39] BHA does not allege[40] or lead evidence[41] that any Settlement Agreement was signed.
[39]Watson Affidavit, [10].
[40]Statement of Claim, [6] and particulars under that paragraph.
[41]Watson Affidavit, [16] - [24].
The HPE Defendants do not contend that the effect of clause 2.10 is that it would not have been possible for the parties to enter into an agreement other than one that was in writing and signed by the parties. However, it was submitted that the presence of clause 2.10 and the conduct of the parties means that in the events that happened in this case, any allegation that a binding agreement was reached is hopeless.
First, it was submitted none of Rilgar’s evidence suggests that agreement was reached by the parties notwithstanding the presence of clause 2.10. That is, to reach an agreement, they would have had to agree, it was submitted, to vary clause 2.10 and enter into the Settlement Agreement. There is no evidence that there was any discussion of clause 2.10 or any agreement to vary or abrogate it and thus enter a binding agreement notwithstanding its terms. It is submitted that this would have been necessary for the parties to enter into a binding agreement in the face of the clause.
Secondly, it was submitted that clause 2.10 has a very significant evidentiary effect,[42] such that the Court cannot conclude that a binding agreement was entered into. The Court must conclude from the objective facts (and not the inadmissible subjective evidence in the Watson Affidavit) whether or not an agreement was entered into. The Mediation was a process, governed by the Mediation Agreement, including clause 2.10. That clause reflected the parties’ objectively determined intention that there would be no settlement without a signed agreement. In circumstances where there is no signed agreement, the Court must conclude, it was submitted, that the objectively ascertained intention of the parties was not to enter into a binding agreement, particularly where there was no express disavowal by anyone of clause 2.10.
Plaintiff’s submissions
[42]GEC Marconi Systems v BHP Information Technology (2003) 128 FCR 1, 62 [221].
It was submitted that notwithstanding clause 2.10, the solemn and formalised manner in which the parties recorded the terms of the agreement, agreed to settle upon that basis, shook hands and photographed the white board manifests their clear intention to waive the requirement of clause 2.10.
Further, Rilgar contends that the parties did orally agree to vary or waive clause 2.10 of the Mediation Agreement by their oral agreement for K&L Gates to produce a more formal document later in recognition that input might be required from commercial lawyers to document the transaction and that Mr Sulway had to fly back to Sydney.
Putting the matter at its lowest, it was submitted that having regard to the nature of this application, it cannot be said that Rilgar’s case on this point enjoys no real prospect of success.
Decision
I accept the submission of the defendants. In my opinion and despite the suggested formality of hand shaking, there was and is no binding agreement between the parties. The plain irrefutable and perhaps unfortunate fact is that the Settlement Agreement was not reduced to writing or signed by the parties as they themselves required.
The starting point is of course clause 2.10. It is a standard but very important provision particularly in relation to mediations. The onus is clearly on the plaintiff to establish that notwithstanding such a provision, there has been a waiver of such a requirement or a variation of the Mediation Agreement (by conduct) so as to dispense with the specific requirements of clause 2.10. The Plaintiff has not discharged this onus and full effect must be given to the clause.
There is nothing in the conduct of the parties to suggest or conclude that clause 2.10 was being dispensed with. Shaking hands and taking a photograph of the whiteboard is also entirely consistent with having reached agreement in principle without dispensing with clause 2.10. The Settlement Agreement, such as it was, did not specifically include a term varying clause 2.10. It cannot simply be inferred or implied from the conduct of the parties which is at best equivocal. Clear and unequivocal conduct is required to vary or waive a specific term such as clause 2.10. The reasons are obvious and do not require elaboration.
Accordingly, in my opinion, this part of the claim has no real prospect of success. The alleged Settlement Agreement was part of the Mediation,[43] indeed the culmination thereof and the parties remained bound by what they had specifically agreed would apply to this process.
[43]The facts therefore differ from the case of Cook v Taing [2014] VSC 428 (11 September 2014) relied on by the plaintiffs.
F Settlement Agreement incomplete or too uncertain to be enforced
Defendants’ submissions
The HPE Defendants submitted that the fact that the Draft Proposed Agreement proffered after the Mediation (a) contained gaps on important issues; and (b) included terms that on Rilgar’s case and evidence were not agreed at the Mediation; meant that any agreement reached at the Mediation was incomplete or insufficiently certain to be enforceable.
The Draft Proposed Agreement included a proposed definition of “Maturity Date”,[44] which is the date by which the loan to BHA must be repaid if it is not converted into equity. This, it was submitted, was a critical term that was plainly not agreed between the parties and which remained open for negotiation when the draft agreement was circulated. There is no warrant to imply any “Maturity Date”, or a term providing for repayment on demand, given the character of the loan, which was to be convertible into equity. This affects clauses 4.1(b)(iv). In addition, clauses 3.1, 4.2(c) and 5.1(a) remain open. These are, it was submitted, important terms and thus contribute to the incompleteness or uncertainty of any agreement.
[44]Exhibit “ABW 9” to the Watson Affidavit, clause 1.1.
In addition it was submitted that the Draft Proposed Agreement proposes matters that were plainly not the subject of agreement at Mediation on any view. This includes the definition of Share Equivalent, which is an important term that was not agreed, as well as clauses 2.1(b) and (c), 3.2(b)(i)(A) and (B), 5.1, 5.2, 8.10 and 8.17. These are terms that are important, which were not on any view agreed but which Rilgar seeks to have included in the agreement.
For example, the whiteboard note of the alleged Settlement Agreement[45] states:
H.B [i.e. Hawkesbridge, i.e. the HPE Defendants] surrender/cancels $1.44M upon receipt [presumably by the HPE Defendants] of $1.44M.
but there is nothing to suggest how it was proposed HPE Defendants would be paid $1.44 million as a condition of the surrender/cancellation of $1.44 million worth of the shares they had recently subscribed for in BHA. This was in a context where Rilgar was to lend BHA $720,000 and subscribe for $720,000 shares in BHA, so that while BHA would receive cash from Rilgar of $1.44 million, one half of that was debt, not equity, at least for the time being. Accordingly if BHA was to pay $1.44 million in cash to the HPE Defendants, it would be left with a liability of $720,000 to Rilgar, so that the transaction would cost BHA $720,000.
[45]Exhibit “SMR 1” to the affidavit of Shane Martin Rose made 13 November 2014 (the “Rose Affidavit”).
The solution proffered by clause 5 of the draft agreement[46] was to have BHA either buy back shares from the HPE Defendants pursuant to section 257A of the Corporations Act 2001 (Cth) or selectively reduce its capital pursuant to section 256A of the Corporations Act 2001 (Cth).[47] There is no evidence that the parties turned their minds to these issues during the course of the mediation; Mr Riley gives evidence that it was agreed the HPE Defendants “would surrender shares to the value of the Rilgar contribution”[48]; Mr Rose gives evidence to the same effect.[49]
[46]Exhibit “ABW 9” to the Watson Affidavit.
[47]The Draft Proposed Agreement in effect seeking confirmation from the parties as to which method was appropriate: see clause 5.1(a).
[48]Affidavit of Howard Frederick Riley made 13 November 2014 (the “First Riley Affidavit”), [8(g)(iv)].
[49]Rose Affidavit, [13(v)].
Further, and perhaps more fundamentally, there is, it was submitted, no evidence that the parties turned their minds to the fact that the proposed transaction would cost BHA $720,000, perhaps because, as Riley and Rose would have it, they spoke in terms of the HPE Defendants “surrendering” their shares.
Plainly, therefore, any agreement reached at the mediation was, it was submitted, either incomplete or is void for uncertainty.
Plaintiff’s submissions
The plaintiff submitted that attention should be directed to the agreement reached at the Mediation. That agreement, subject to the proper implication of terms and considerations of reasonableness,[50] is, it was submitted, complete and not uncertain.
[50]Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540, 548 [F].
For example, the agreement provided that Rilgar would provide financial injection to BHA by way of a purchase of $720,000 of shares at $55.73 per share and a loan of $720,000 at 10% interest which loan would be convertible at any time to ordinary shares at $55.73 per share.
The fact that the proffered documents included a “Maturity Date”[51] which affects clause 4.1(b)(iv), the date for repayment of the loan, is irrelevant. At law, a loan which expresses no deferred date for repayment is repayable on demand.[52] That the documents proffered an alternative is, it was submitted, irrelevant and does not make the agreement reached at mediation uncertain.
[51]Exhibit “ABW-9” of Watson Affidavit (see CB 330-356).
[52]Ogilvie v Adams [1981] VR 1041, 1043; VL Finance Pty Ltd v Legudi (2003) 54 ATR 221; Haller v Ayre [2005] 2 Qd R 410.
Similarly, the fact that clauses 3.1 and 5.1(a) leave open the question of the form in which the surrender or cancellation of the HPE defendants’ shares was to be effected does not matter. The agreement provided that the HPE defendants were to surrender or have cancelled $1.44 million of shares upon receipt of that amount of money. Rilgar was to provide that sum by way of subscription for shares for half of that sum and a loan to BHA of half of that sum.
Properly and reasonably construed, the Settlement Agreement, it was submitted, would require the parties to cause BHA to pay that sum to the HPE defendants in return for their surrender or cancellation of the relevant number of sharers. The documents proffered suggested a way or alternative to achieve this. Practically, it was a matter for the HPE defendants, as the Investors under the Shareholder Deed, to determine how best to achieve this, and then the parties would cause relevant action to be taken by BHA.
Similarly, the objection that BHA would incur a debt of $720,000 in respect of the transaction is, it was submitted, no proper objection. 100% of the shareholding agreed that $1.44 million of funding would be provided to BHA by Rilgar instead of the HPE defendants. They agreed that half would be provided by way of a loan from Rilgar. It is, it was submitted, within their power to do this.
Decision
Given my decision in relation to the first two issues, it is not strictly necessary to deal with this aspect of the case. However, I agree with the submission made by the defendants. It is clear that the Draft Proposed Agreement goes beyond matters which are the subject of the Settlement Agreement. These are not simply matters of form but of sufficient substance so as to require consideration and assent. In my opinion, too much remained to be done and the plaintiff has no real prospects of overcoming this issue.
G Waiver of pre-emptive rights
Defendants’ submission
Clause 3.2(b)(i)(A) of the Draft Proposed Agreement requires BHA to give Rilgar a waiver of all pre-emptive rights in connection with the issue of the new shares to Rilgar. Clause 9 of the Shareholders’ Deed[53] identifies the relevant pre-emptive right. Clause 3.2(b)(i)(B) of the Draft Proposed Agreement requires BHA to give Rilgar a resolution of the directors of BHA unanimously approving the issue of the new shares to Rilgar.
[53]Exhibit “ABW3” to the Affidavit of Anthony Brooke Watson sworn 9 September 2014 (see CB 86).
Having regard to the Shaw Affidavit, it is evident, it was submitted, that neither the waiver nor the unanimous resolution will be forthcoming.
Plaintiff’s submission
The plaintiff submitted that the defendants’ submission misdirects attention from the agreement reached to the agreement proffered.
The resolution of disputes between the HPE defendants and Rilgar relates to a capital raising of $4 million. Prior to the Settlement Agreement, the only party who took up any of the shares on offer were the HPE defendants.
Neither Shaw, nor Boyce did so. Indeed on a proper consideration of the correspondence in evidence it was never contemplated that they would. It is to be inferred, it was submitted, that their B Class shares did not carry the right to participate in any new share issues.
Upon a proper construction, the surrender/buyback/cancellation of the HPE defendants’ shares and re-issue to Rilgar of half of that allocation, does not, it was submitted, constitute the “issue of any new securities (including shares)” that would enliven the provision of clause 9 of the Shareholders’ Deed.
That the Draft Proposed Agreement included such a provision does not, it was submitted, indicate that the agreement at the Mediation was incomplete or incapable of completion.
Decision
It is not strictly necessary to deal with this aspect of the case and I do not propose to do so.
H Disposition
In the result, I am not satisfied that the case pleaded by the plaintiff has any real prospect of success. It should not be permitted to proceed. The plaintiffs should pursue the claim made in the Oppression Proceeding.
I will hear from the parties as to the precise form of orders and costs.
SCHEDULE OF PARTIES
RILGAR NOMINEES PTY LTD (ACN 006 469 629)
Plaintiff
BHA HOLDINGS PTY LTD (ACN 128 764 803)
First Defendant
HPE3TA PTY LTD (ACN 127 196 553)
Second Defendant
HPE3TB PTY LTD (ACN 127 197 013)
Third Defendant
HPE3TC PTY LTD (ACN 132 514 508)
Fourth Defendant
4
8
0