Stillwell Trucks P/L v Nectar Book Investments P/L
[1993] FCA 970
•22 DECEMBER 1993
STILLWELL TRUCKS PTY LTD Appellant/Cross Respondent v. NECTAR BOOK INVESTMENTS
PTY LTD Respondent/Cross Appellant
No. SG62 of 1993
FED No. 970/93
Number of pages - 7
Corporations
(1993) 12 ACLC 126, (1993) 12 ACSR 334
COURT
IN THE FEDERAL COURT OF AUSTRALIA
SOUTH AUSTRALIAN DISTRICT REGISTRY
GENERAL DIVISION
SPENDER, FRENCH AND VON DOUSSA JJ
CATCHWORDS
Corporations - Articles of Association - employees' shares - rights of transfer - restrictions on those rights - whether under particular article an employer/shareholder must transfer his shares to the directors' nominee immediately on cessation of employment or whether the requirement to transfer does not occur until directors' request - whether directors have discretion not to request the transfer - date upon which the outgoing employees' shares are to be valued.
O'Donnell v. Thor Industries Pty Ltd (1977) 136 CLR 297.
HEARING
ADELAIDE, 11 November 1993
#DATE 22:12:1993
Counsel for the appellant/
cross respondent : Mr V. Bruce QC with
Mr G. Griffen
Instructed by : Phillips Fox
Counsel for the respondent/
cross appellant : Mr D. Officer QC with
Mr R. Darke
Instructed by : Ledlin Partners
ORDER
The Court orders that:
1. The appeal be dismissed with costs.
2. The cross-appeal dismissed with costs.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
JUDGE1
SPENDER, FRENCH AND VON DOUSSA JJ This is an appeal and a cross-appeal from a judgment of a single judge of this Court (O'Loughlin J) who on 28 May 1993 made declarations concerning the interpretation and operation of article 4B of the articles of association of Stillwell Trucks Pty Ltd ('Stillwell').
On 17 September 1991 Stillwell dismissed Ray Alexander Russell from its employ. Mr Russell had earlier in 1984 during the course of his employment applied for and had allotted to him 2000 ordinary "E" class shares in the capital of Stillwell ('the shares'). At the time when he acquired the shares (for which he paid $2000.00) and at all times since that time, the provisions of article 4B of the company's articles of association were as follows:
" Notwithstanding any other provisions contained in these articles the transfer and transmission of the Ordinary 'E' Class, 'F' Class, 'G' Class and 'H' Class shares shall only be as provided by this article and for the purpose of this article the expression 'Shares' means and refers only to the Ordinary 'E' class, 'F' class, 'G' class and 'H' class shares in the capital of the Company.
(i) the Shares shall only be issued or allotted to persons who are employed by the Company and such persons shall only be entitled to retain and hold the same so long as they remain employed by the Company and if by death resignation retirement dismissal or otherwise any such person ceases to be employed by the Company he or his executors administrators or legal representatives (as the case may be) shall be bound by request in writing of the Directors of the Company to transfer all such Shares to such person or persons as may be nominated by the Directors of the Company and if any such person is not an employee of the Company then such person shall at all times upon request of the Directors of the Company transfer all such Shares to any other person nominated by the Directors of the Company who is an employee of the Company.
(ii) If any person who in conformity with the provisions of this Article is required to transfer any Shares makes default in transferring same, the Directors of the Company may by writing under the common seal appoint any person to make the transfer on behalf of the person in default and a transfer by such Appointee shall be as effective as if it were duly executed by the person so in default and a certificate under the Common Seal that such power of appointment has arisen shall be conclusive for all purposes.
(iii) In the event of any transfer or transmission of Shares in conformity with the provisions of this Article the fair value of such Shares to be transferred or transmitted shall be determined by two independent duly qualified Chartered Accountants appointed by the Directors of the Company who shall issue a Certificate in writing of the amount to be paid by any Transferee in respect of such Shares and in so certifying such Accountants shall be construed to be acting as experts and not as arbitrators and accordingly the Arbitration Act shall not apply. All moneys payable in respect of such Shares shall be paid by the Transferee to the Transferor or his executors administrators or legal representatives (as the case may be) within a period not exceeding nine (9) calendar months from the date of transfer of the Shares.
(iv) In this articles 'employee of the Company' means and includes any Manager, Departmental Manager, foreman, clerk or workman. The term does not include Directors or Auditor. "
Although not named as such, it is obvious that article 4B is dealing with special classes of shares that are commonly called "employees' shares".
The Federal Court proceedings arose as a result of the company's attempts to force Mr Russell to transfer his shares to the company's nominee. Nectar Brook Investments Pty Ltd ('Nectar Brook'), Mr Russell's family company, was named as a respondent because notwithstanding the provisions of article 4B, the company had permitted a transfer of the shares from Mr Russell to Nectar Brook in June 1985. In separate proceedings that were instituted by Nectar Brook in the Supreme Court of New South Wales and cross-vested to this court and consolidated with these proceedings, Nectar Brook had sought relief claiming that the company's attempts compulsorily to divest it of the shares were void and of no effect. Robert Neil Brigden had been named as a co-defendant with the company in the Supreme Court proceedings as he was the company's nominee to take a transfer of the disputed shares. Neither counsel sought to rely on the involvement of Nectar Brook and the Court, both at first instance and on the appeal, was invited to determine the substantive issues as if Mr Russell had continued at all times to be registered as the holder of the shares.
After Mr Russell's dismissal, the Board of Directors of Stillwell resolved in February 1992 to obtain a valuation of the disputed shares from two independent chartered accountants. In so doing, the company claimed it was acting in conformity with the provisions on paragraph (iii) of article 4B. The valuation, which was dated 6 August 1992, valued the shares at par as at the date of Mr Russell's dismissal on 17 September 1991.
On 16 September 1992, the solicitors for the company wrote to Nectar Brook enclosing a notice allegedly issued by the company on 11 September pursuant to paragraph (i) of article 4B. A share transfer form was also enclosed with the letter. Nectar Brook was requested to execute the transfer and to return it together with the relevant share certificate within 14 days under threat that legal proceedings would otherwise be instituted.
The notice read as follows:
"TAKE NOTICE that pursuant to article 4B(i) of the Articles of Association of Stillwell Trucks Pty Ltd you are requested to transfer all ordinary 'E' class shares held by you (that is 2000 ordinary "E" class shares numbered 1,200,001 to 1,202,000 inclusive) to ROBERT NEIL BRIGDEN of 6 BOGAN PLACE, RUSE, NSW 2560 (an employee of Stillwell Trucks Pty Ltd).
In accordance with the provisions of article 4B the transfer price of the aforesaid shares is $2,000.00. The Certificate of two independent duly qualified chartered accountants appointed by the Directors of Stillwell Trucks Pty Ltd pursuant to article 4B(iii) of the said Articles of Association is annexed hereto. "
Nectar Brook did not comply with the request that issued in September 1992; accordingly, the company appointed its secretary, Brian Fitzgerald, to execute a transfer of the shares in the name of Nectar Brook and in favour of Mr Brigden. In so acting the company and Mr Fitzgerald were purportedly acting under the powers contained in paragraph (ii) of article 4B. Mr Fitzgerald duly executed a form of transfer of 2,000 'E' class shares in the capital of the company showing Nectar Brook as the transferor. However, no further action has been taken having regard to these proceedings in the Federal Court.
The primary question before the learned trial judge and on the appeal was the date upon which the shares should be valued. The orders the subject of the appeal and the cross-appeal are as follows:
" The Court:-
1. Declares that upon the true construction of article 4B of the Articles of Association of Stillwell Trucks Pty Limited, the date upon which shares transferred in accordance with the Article are to be valued pursuant to article 4B(iii) is the date of the making of the request in writing of the Directors of the Company given pursuant to article 4B(i).
2. Declares that the notice dated 11 September 1992 from the directors of Stillwell Trucks Pty Limited to Nectar Brook Investments Pty Limited ("the request") is a valid request in writing of the Directors of the Company within article 4B(i) of the Articles of Association of Stillwell Trucks Pty Limited.
3. Declares that in the events which have happened, the shares the subject of the request ("the shares") must be valued pursuant to article 4B(iii) as at 16 September 1992 and the fair value so determined paid to the Respondent.
4. Declares that the transfer of the shares from Nectar Brook Investments Pty Limited to Robert Neil Brigden dated 12 November 1992 is a valid transfer of the shares (subject to the consideration being the fair value as determined in accordance with Order 3 above). "
Stillwell submitted on the appeal that the learned primary judge was in error in holding that article 4B of the articles of association does not contain terms that are illusory, and in holding that the directors are entitled - but not bound - at any time after the cessation of an employee's employment to request that employee to transfer his shares to the directors' nominee, and in holding that the appropriate date of valuation of the shares was at the issuing of the notice pursuant to article 4B(i) by the company, that date being 16 September 1992.
Stillwell submitted that the learned primary judge should have found that the only proper construction that could be placed on article 4B was one which compelled the directors to give the "request in writing" immediately upon the employee ceasing to be an employee of the company and that the appropriate date for the valuation of the shares was immediately upon the cessation of the employment of the outgoing employee, that date being 17 September 1991.
Nectar Brook, in its cross-appeal, submitted that the learned primary judge erred in his conclusion that the notice dated 11 September 1992 from the directors of Stillwell was a valid request in writing within article 4B(i) of the articles of association of Stillwell. It was submitted by Nectar Brook that the primary judge, having held that the date upon which the shares to be transferred should be valued was 16 September 1992, should have held that the notice of that day, which stated that the transfer price was to be calculated on the basis of a valuation of the shares as at 17 September 1991, was void.
Mr Bruce QC, senior counsel for the appellant, submitted that the construction of article 4B by O'Loughlin J, that there was no compulsion on the directors to make any request to a former employee to transfer the ordinary 'E' class shares held by him, was in error. He submitted the effect of so construing the contract between the former employee and the company was that the company, through its directors, was a party to a breach of the agreement between itself and the former employee in maintaining him as a shareholder by not taking steps to remove from the register a person who has ceased to have an entitlement to be a holder of the shares in the company. It was submitted that in order to give business efficacy to the agreement, namely that an employee was only entitled to remain as a shareholder so long as he remained an employee, it is necessary to interpret the article as imposing an obligation on the directors to take steps to ensure that the contract with the former employee is carried into effect and he is removed from the register.
Article 4B in the articles of association of Stillwell may be contrasted with the provisions of clause XIV of the memorandum of association of Thor Industries Pty Ltd considered by the High Court in O'Donnell v. Thor Industries Pty Ltd (1977) 136 CLR at 297. Clause XIV read as follows:
"Shares of the Class 'E' shall bear equal voting rights with shares of the class 'G' share for share, and shall bear no less dividend rights than shares of the class 'G' provided always that such shares may only be issued to and held by employees of the Company so long as such holder remains in the employment of the Company and upon the termination of such employment for any reason whatsoever such shares shall be transferred to such other employee or employees in part or in whole as the Governing Director shall direct, and in the event of no such employee or employees being nominated or directed by the Governing Director, then such shares shall be transferred to the Governing Director."
Unlike clause XIV in O'Donnell's Case, article 4B contains no express obligation to transfer shares on cessation of employment. The appellant submits, however, that that is a necessary implication. In O'Donnell's Case there was no provision for a request from the directors of the company; the clause stipulated that upon the termination of employment "such shares shall be transferred". The majority of the High Court (Barwick CJ, Stephen, Mason and Aicken JJ) concluded that on the termination of employment of a holder of class 'E' shares, the holder was obliged to transfer the shares as directed in accordance with the provision in the memorandum and was not entitled to receive any consideration for the transfer.
Stephen J, with whom Mason and Aicken JJ agreed, said (at 300-301) of clause XIV that it was:
"...designed to ensure that only those who are for the time being employees of the company shall hold shares of this class. It does this by two measures, first the requirement that such shares may only be issued to and held by employees; secondly the requirement that upon termination of employment those shares shall be transferred to such other employees as the governing director may direct or, failing any such direction, to the governing director himself."
The absence in the present case of the second measure, namely a requirement that upon termination the shares "shall be transferred", distinguishes the facts in O'Donnell's Case from the present.
On its proper construction, article 4B provides that after termination of employment, a person is not entitled to retain and hold shares in Stillwell; however, unless and until there is a request in writing by the directors of the company to transfer those shares, the former employee is permitted to remain the holder of those shares. Consistent with that interpretation, an outgoing employee has no right to transfer his shares unless and until requested to do so by the directors, and the directors are under no compulsion to make any such request.
The use of the word "request" strongly suggests that the exercise by the directors of the power in connection with the transfer of shares of an outgoing employee is discretionary and that the directors are under no obligation to make the request referred to in 4B(i).
While it is conceded on all sides that the terms of the articles of association are not the most happily drafted, there are suggestions in the choice of words employed pointing to the conclusion that the obligation on an outgoing employee to transfer only arises upon request. Article 4B(iii) commences with the words:
"In the event of any transfer or transmission of Shares in conformity with the provisions of this Article...";
this may be contrasted with expressions such as:
"On the transfer or transmission..."
Further, article 4B(iii) provides that payments of the consideration for the transfer of shares transferred pursuant to article 4B are to be paid within a period not exceeding nine calendar months from the date of transfer of the shares, rather than the date of cessation of employment.
Moreover, one can imagine circumstances which would incline directors not to make a request referred to in article 4B(i). Personal circumstances of a retiring employee or the widow of a former employee might be such as to indicate the desirability of maintaining the shareholding so as to maintain a dividend flow. Or there may be the circumstance that the directors are unable to find a potential transferee of the shares who has both the financial capacity and desire to pay the consideration required by the provisions of the articles.
O'Loughlin J concluded that the language of article 4B establishes that an employee who acquires 'E' class shares in the capital of a company is to be regarded as having done so in the knowledge that he has no right to transfer or dispose of those shares other than as a consequence of a request from the directors subsequent to the termination of his employment and that there is no compulsion on the directors to make any such request. His Honour commented:
"That in my opinion is the natural and ordinary meaning of the language of the article and it is an interpretation which affords to the company time within which to find a replacement employee and perhaps, also time within which to reflect upon the desirability of permitting the outgoing employee to remain as a shareholder for a time." We agree. The appeal should be dismissed with costs.
The cross-appeal concerns the validity of the notice sent on 16 September 1992, purporting to be pursuant to article 4B(i).
On 16 September 1992, solicitors for Stillwell, in the letter accompanying the notice said, inter alia:
"Attached to this letter is a notice pursuant to article 4B(i) of the Articles of Association of our client. Also enclosed is a share transfer form which has been completed in relation to this transaction, to which your company seal will need to be affixed. ..."
The certificate referred to in the notice is one dated 6 August 1992 which relevantly certified:
"that at 17 September 1991 the fair value of the 2000 "E" class shares in the Company held by Nectarbrook...was two thousand dollars ($2,000)."
The standard transfer form referred to in the letter of 16 September 1992 gave the name and address of the transferee and stated the consideration as $2,000.00.
It was submitted by counsel on behalf of Nectar Brook that if, as we agree, the date upon which the shares should be valued is the date of giving of notice under article 4B, the notice dated 11 September 1992 was not a valid notice. It was submitted that the notice read as a whole constituted a demand by the company that the shares the subject of the notice be transferred to the named transferee for the specified consideration and that that transfer was clearly contrary to the terms of article 4B. It was said that the portion of the notice dealing with the consideration was an integral and inseparable part of the transaction which the notice demands to occur.
The structure of article 4B suggests, as the learned primary judge noted, two distinct acts: namely, a request for transfer and a determination of the fair value to be paid for the transferred shares.
It is not necessary for a notice given pursuant to article 4B to include any material concerning the consideration to be paid for the shares. In our view, while the notice purports to deal with both the request for transfer and the determination of the consideration for that transfer, it does constitute a valid request for the purposes of article 4B. The determination of the fair value to be paid for the shares the subject of the request to transfer has to be determined in accordance with the provisions of article 4B: that is to say, the value of the shares as at 11 September 1992 has to be determined in the manner called for by article 4B(iii).
O'Loughlin J was right to conclude that the fact that the notice included extraneous and erroneous material did not affect its validity. The cross-appeal should be dismissed with costs.
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