Westchester Financial Services Pty Ltd v Acclaim Exploration NL
[1999] WASC 87
•29 JUNE 1999
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS
CITATION: WESTCHESTER FINANCIAL SERVICES PTY LTD -v- ACCLAIM EXPLORATION NL [1999] WASC 87
CORAM: OWEN J
HEARD: 28 JUNE 1999
DELIVERED : 29 JUNE 1999
FILE NO/S: CIV 1688 of 1999
BETWEEN: WESTCHESTER FINANCIAL SERVICES PTY LTD (ACN 074 841 900)
Plaintiff
AND
ACCLAIM EXPLORATION NL (ACN 009 076 233)
Defendant
Catchwords:
Corporations - Corporate finance - No liability company - Notice of meeting - Reduction of capital - Whether reduction authorised by law - Whether ordinary or special resolution required for capital reduction - Whether equal or selective reduction
Corporations - Management and administration - Notice of meeting to approve allotment of shares and options - Purpose of allotment to satisfy consideration for acquisition of interest in another company - Whether notice of meeting and explanatory memorandum deficient - Whether sufficient information given to shareholders relating to the nature and purpose of resolutions - Test for adequacy of notice and memoranda
Procedure - Supreme Court procedure - Injunctions - Need for applicant to give the usual undertaking
Legislation:
Corporations Law, s 246A(b), s 249HA(1), s 249L(c), s 254C, s 256C(l), s 731(c), s 999, s 1324, s 1444, s 1445
Trade Practices Act 1974, s 52
Result:
Applicant entitled to injunction subject to undertaking
Representation:
Counsel:
Plaintiff: Mr S Blanks (by leave)
Defendant: Mr P D Evans & Ms R Maslin-Stannage
Solicitors:
Plaintiff: Jamieson Johnston
Defendant: Freehill Hollingdale & Page
Case(s) referred to in judgment(s):
Air Express Ltd v Ansett Transport Industries (Operations) Pty Ltd (1981) 146 CLR 249
Chequepoint Securities Ltd v Claremont Petroleum NL (1986) 4 ACLC 711
Devereaux Holdings Pty Ltd v Pelsart Resources NL (1986) 4 ACLC 12
Re Etrade Australia Ltd (1999) 30 ACSR 516
Re Hunter Resources Ltd (1992) 34 FCR 418
Re RGC Ltd (1998) Butterworths Unreported Judgments, BC9805957, 2 November 1998
Residues Treatment and Trading Co Ltd v Southern Resources Ltd (1988) 14 ACLR 375
Case(s) also cited:
AAPT v Cable & Wireless Optus, unreported; SCt of NSW (Austin J)
Active Leisure (Sports) Pty Ltd v Sportsman's Australia Ltd [1991] 1 Qd R 301
Archibald Howie Pty Ltd v Commissioner of Stamp Duties (NSW) (1948) 77 CLR 143
Bell Wholesale Co Ltd v Gates Export Corporation (1984) 2 FCR 1
Bulfin v Bebarfald's Limited & Ors (1938) 38 SR (NSW) 423
Clark v Ryan (1960) 103 CLR 486
Davis Investments pty Ltd v Commissioner of Stamp Duties (NSW) (1958) 100 CLR 392
Fraser v NRMA Holdings Ltd (1995) 55 FCR 452
Gambotto v WCP Ltd (1995) 182 CLR 432
Grey v Australian Motorists & General Insurance Co Pty Ltd [1976] 1 NSWLR 669
Harman Pictures NV v Osborne [1967] 1 WLR 723
In Re Alabama, New Orleans, Texas and Pacific Junction Railway Company [1891] 1 Ch D 213
In re Empire Mining Company (1890) 44 Ch D 402
In re North Western Railway Company v McMichael Birkenhead, Lancashire and Cheshire Junction Railway Company and Pilcher (18510 5 Exch 114; 155 ER 49
Jones v Palaya Rubber & Produce Co [1911] 1 KB 455
Killen v Marra Developments Ltd (1979) ACLD 608
Re Advance Bank Limited (1997) 15 ACLC 248
Re Advance Bank Australia Ltd (No 2) (1997) 22 ACSR 513
Re Campaign Holdings (1990) 8 ACLC 64
Re Preston Motors Pty Ltd [1957] VR 111
Re Prime Group Holdings Ltd (1994) ACSR 357
Re Stockbridge Limited (1993) 9 ACSR 637
Ryan v Edna May Junction Gold-Mining Co NL (1916) 21 CLR 487
Slate v Darlaston Steel and Iron Company [1877] WN 165
OWEN J: This is an application for an interlocutory injunction to restrain the defendant from putting to a meeting of its shareholders due to be held on 2 July 1999 two of three resolutions contained in a notice of meeting dated 2 June 1999.
Background
The defendant is a public company the securities in which are listed on the Australian Stock Exchange Ltd. The plaintiff is a shareholder in the defendant.
The defendant has sent to its shareholders a notice of a meeting which it proposes to hold on 2 July 1999 to consider three resolutions. The first concerns the election of a director and is not contentious. The second proposes an ordinary resolution to approve a reduction of capital by way of a distribution in specie of shares which the defendant holds in a company called Acclaim Uranium NL ("AUNL"). The third proposes an ordinary resolution to approve the allotment of shares and options to satisfy the obligations of the defendant under an option agreement for the acquisition by the defendant of 50 per cent of the issued capital of a company called Kilbinya Pty Ltd ("Kilbinya") which owns some mining tenements. The defendant already owns 50 per cent of the issued capital of Kilbinya by virtue of an earlier transaction. The second and third resolutions are contentious.
The plaintiff commenced this action in the Supreme Court of New South Wales on 18 June 1999. By order of that Court made on 23 June 1999 the action was transferred to this Court. The application came on for an urgent hearing on 28 June 1999. There was some confusion as to whether what had been listed was the substantive hearing or simply an application for interlocutory relief. I indicated to the parties that in view of the state of the process and the way in which it had come before the Court I was only prepared to deal with the matter on the basis that it was an application for an interlocutory injunction to restrain the defendant from putting Resolutions 2 and 3 to the meeting on 2 July 1999.
Resolution 2: The Reduction of Capital
In my opinion there are serious questions to be tried whether Resolution 2 should be put to the meeting on 2 July 1999 in its present form. The serious questions to be tried arise in three areas.
The first is whether, in the circumstances of this case, a reduction of capital of this nature can be effected under Part 2J.1 or whether it requires a scheme of arrangement under Part 5.1. The proposal is for the reduction to take place by way of a distribution in specie to the members of the defendant of shares which the defendant holds in a company called AUNL. The argument is that the members will be compelled to acquire shares without "agreeing" to do so: see s 246A(b) and Re Hunter Resources Ltd (1992) 34 FCR 418 and Re Etrade Australia Ltd (1999) 30 ACSR 516. If so, a scheme of arrangement may be necessary.
There are strong arguments to the contrary. One of them arises as a particular feature of this proposal. Because of the escrow arrangements in which the shares are to be held until November 1999 only the beneficial ownership is being dealt with and the members will not be "compelled " to take the shares in the relevant sense. Another argument is that the statutory direction that a shareholder must "agree" to acquire shares requires only an assent to do so rather than something that speaks more like a contract. In this sense the members may signify assent in other ways, for example, in relation to dividends.
I acknowledge those arguments but I am nonetheless persuaded that there is a serious question to be tried.
The second area is whether the resolution to reduce capital could be passed by an ordinary resolution of members. The constitution of the company, which has always been regarded as a contract between the members and the corporation and between a member and each other member (see s 140), requires a special resolution: Article 41. That article is said to apply "[s]ubject to the Corporations Law".
The reduction of capital scheme within the Law was substantially amended in 1998. The amendments, among other things, removed the need for the constitution of a company to sanction reductions and for the Court to approve them. The question is whether these changes affect the operation of articles such as Article 41. Assuming for the moment that this is an "equal reduction", s 256C(1) provides that the reduction must be approved by a "resolution" which, according to the marginal note, seems to be an "ordinary" resolution. Nonetheless, could the contract between the members and the corporation still specify the more stringent requirement of a special resolution (as Article 41 does)? Alternatively, was s 256C(1) intended to supplant and override articles such as Article 41, as one reading of par 12.10 and par 12.11 in the Explanatory Memorandum to the amending Bill may suggest? In Re RGC Ltd (1998) Butterworths Unreported Judgments, BC9805957, 2 November 1998, Young J seemed to adopt the former position.
If the capital reduction requires a special resolution it seems to me that the definition of "special resolution" in s 9, when read with s 249HA(1) and s 249L(c) would mean that Resolution 2 could not validly be put to the meeting on 2 July 1999.
Once again, I acknowledge the contrary arguments but I am nonetheless persuaded that there is a serious question to be tried.
The third issue is whether the reduction is, in fact, a selective reduction rather than an equal one. If it is, then under s 256C(2) it could only be approved by a special resolution at which those who are to receive consideration under it cannot vote or an ordinary resolution of all ordinary shareholders. The former requirement could not be fulfilled in this case because all shareholders are to receive consideration under the resolution. The latter requirement has been interpreted as requiring a unanimous vote of all ordinary shareholders: Re Etrade Australia Ltd at 517.
This is a No Liability company with all that it entails. All shares in the company have, or more accurately had, a par value of $0.25. There are 3,750,000 shares on issue that have been partly paid. Some were issued at $0.5 and some at $0.7. They are paid up to $0.01. The plaintiff says that if this is to be an equal reduction the partly paid shares can participate in the distribution only to the extent of amounts actually paid up on the partly paid shares. The defendant says that because it is a no liability company the difference between the issue price and the par value of the shares is credited as having been paid up. Accordingly, the participation rate will be the proportion which the amounts actually paid up and credited as having been paid up bear to the par value. The difference between the two approaches is significant in a numerical sense.
The difficulty for the defendant in sustaining this argument is twofold. First, the combination of s 254C, s 1444 and s 1445 of the Law (all of which were introduced in the 1998 amendments) makes resort to par value for an exercise of this nature questionable. Secondly, the statements in the explanatory memorandum to the notice of meeting that the partly paid shares are paid to $0.181 or $0.201 respectively may be misleading and thus offend s 95. The question here is not so much whether the proposal is "fair and reasonable to the company's shareholders as a whole" [s 256B(1)(a)]. The real issue is whether the information given to members is complete and apposite in the relevant sense. I think there is a serious question to be tried on this issue.
In view of this conclusion I do not need to go into the further arguments that the explanatory memorandum is deficient because it fails to explain whether the reduction will effect the solvency of the defendant and because it fails to provide information about the AUNL, being the company shares in which are to be distributed to the shareholders.
Resolution 3: The Allotment of Shares and Options
That brings me to Resolution 3. The plaintiff contends that the notice of meeting and explanatory memorandum are deficient and contravene s 995 and s 731(c) of the Corporations Law and possibly s 52 of the Trade Practices Act 1974 and constitute a breach of the fiduciary duty which directors have not to mislead persons who are called on to exercise their powers in a general meeting.
I take the legal principles to be well settled in cases such as Devereaux Holdings Pty Ltd v Pelsart Resources NL (1986) 4 ACLC 12, Chequepoint Securities Ltd v Claremont Petroleum NL (1986) 4 ACLC 711 and Residues Treatment and Trading Co Ltd v Southern Resources Ltd (1988) 14 ACLR 375. I will summarise them in this way. Directors are under a duty to make full disclosure of facts within their knowledge which are material to enable the members to determine upon their actions, including whether or not to attend the meeting and whether to seek further or additional information, either before or at the meeting. Directors seeking the passage of a resolution at a meeting of shareholders should provide shareholders with sufficient information concerning the business to be brought forward at the meeting. The shareholders must be put in a position to understand and form a judgment upon such business. Where directors take it upon themselves to urge or recommend that members exercise their powers in general meeting in a particular way (as they have implicitly done in this case) it is an incident of the fiduciary obligation of directors that adequate information be provided. Sufficiency of information is a matter of fact and degree. But this does not mean that shareholders must be given every piece of information that might conceivably affect their voting. A surfeit of information may obscure the purpose of the resolution. A lack of information may constitute misrepresentation by omission. It is a matter of sensible judgment by the directors in each case and ultimately by the court whether the material is sufficient reasonably and properly to inform the shareholder about the matter on which it will have to vote and to avoid placing the shareholder in a position where it may be under a serious misapprehension of the matter.
As a general comment, I think the approach implicit in the dicta of White J in Residues Treatment at 378 –79 (in the paragraphs commencing "With respect---" down to "This is a case…"), 386 (in the paragraph commencing "Mr Lander QC…" ) and 389 - 390 ( in the paragraph commencing "There is no basis…") are apposite. The comments that I am about to make concerning the submissions and evidence in this case should be seen in that light.
I have read the affidavits of Christopher Ryan sworn 18 June 1999, Ronald Butler and Evan Jones, both sworn 28 June 1999, Edmond Edwards sworn 21 June 1999 and 28 June 1999 and Rebecca Maslen‑Stannage sworn 28 June 1999. Counsel for the defendant objected to the admissibility of the Butler affidavit on the grounds that the deponent was not qualified to give expert testimony on the matters contained in the affidavit and, in any event, they were directed to the wrong question. In the end, I think it is a matter of weight rather that admissibility. At very least it provides a useful check list for the type of information that the plaintiff submits should have been provided to the shareholders.
I will deal first with what counsel for the defendant called "the grand conspiracy theory". It is that Brett Matich, a director of the defendant, is associated with the shadowy figure of Diversfied Technology Corporation ("DTC") or Lexus Distribution Company Ltd ("Lexus") or whoever it is that is behind Kilbinya. Alternatively, the vendors in the first of the Kilbinya transactions (which I will describe shortly) are associated with those involved in the transaction to which Resolution 3 relates. Accordingly, the allotment of 18,000,000 shares and 18,000,000 options to DTC may offend Chapter 6 of the Law and it may even transform the entire transaction into one between related parties, with all the consequences that this would entail.
The evidentiary base for this contention is set out in par 14 of the plaintiff's written outline of submissions. I will not repeat them. It is sufficient for me to say that I do not accept that the directors of the defendant simply "remain silent or blind as to the possibility of association between the respective vendors". I refer to pars 26 to 29 and exhibits "EE10", "EE11" and "EE11A" of the Edward's affidavit sworn 28 June 1999. I refer also to the history of the transaction contained in pars 8 to 25 of the affidavit. Even giving full rein to the evidentiary matters summarised in par 14 of the submissions I am not prepared, at this stage of the proceedings, to draw the inferences that would be necessary for me to conclude that there is a serious question to be tried as to the "grand conspiracy theory". If there is a breach of the Law it will not be cured by the resolution that sanctions the allotment of the shares and options and I make no findings that would prevent the matter being raised at a latter date or being investigated by the regulatory authority. Indeed, I could not do so. I rest on not being satisfied that there is, at present, a sufficient evidentiary base from which to draw the necessary inferences.
The plaintiff submits that there is a number of areas in which the notice of meeting and explanatory memorandum is deficient. I will deal with each in turn.
On 13 May 1999 the defendant acquired 50 per cent of the issued capital of Kilbinya from Lexus and Eveete Pty Ltd in consideration of the allotment of 16,000,000 shares in the defendant. The complaint is the shareholders are not given any financial information about Kilbinya, nor are they advised as to the value of the transaction and nor is the difference in value being given for the second tranche from that given for the first tranche explained. The retort of the defendant is that the transaction itself, that is, the effective acquisition of mining tenements owned by Kilbinya, is not a transaction that would need shareholder approval but for the fact that the payment of the consideration involves an allotment of shares. Had the consideration been paid in cash (as the vendors originally demanded) there would be no need for a shareholder meeting. The entire transaction needs to be seen in that light. Kilbinya is a purpose company that exists solely to hold these tenements and does not have a "financial life" of its own over and above this purpose. The explanation for the difference in considerations is that the arrangements were separately negotiated and the vendors stipulated separate treatment. So far as the value of the transaction is concerned the defendant says that the shareholders are aware, indeed painfully so, of the market value at which shares have been trading. Leaving to one side the additional consideration represented by the value of the shares in AUNL, the value of the transaction can easily be ascertained. In my view, all of this is information in the public domain or which could readily be obtained from the company or ascertained from the floor of the meeting. I am not persuaded that its absence from the explanatory memorandum is material. I also accept what is said in par 38, par 39 and 40 of the Edward's affidavit.
Other complaints are that there is no information on which shareholders could assess the worth of warranties contained in the contractual arrangements and as to the governing law of the contract. In my view, in the circumstances of this case, these items fall into the category of a "mass of legal … financial and factual information of great complexity" which, if of concern to a shareholder, can be ascertained by other means but its absence from the material that has been circulated does not affect its essential validity. I also accept what is said in par 38 and par 39 of the Edward's affidavit.
The plaintiff also submits that the defendant should have disclosed whether DTC demanded board representation as part of the arrangements. There may well be circumstances where a demand of this nature might be material. But I have not seen any evidentiary base for an assertion that DTC did, or might have done so, in this case. I do not think that in a corporate transaction of this type the company is required to state the negative if that be the case. This is especially so in view of the fact that the constitution of the board of directors is always a matter for the shareholders and it is reviewed at regular intervals in general meetings. In the absence of an evidentiary base for the assertion that board representation was a part of the arrangement, I am not persuaded that the explanatory memorandum is deficient in a relevant sense.
Another issue is that while the proposed resolution sanctions an allotment of shares and options to DTC the option agreement is between Antonio and Berrima and makes no reference to DTC. I do not think this is sufficiently material to warrant intervention. What the shareholders need to know is the identity of the beneficial owner of a shareholding or proposed shareholding, that is likely to be substantial. In the circumstances of this case, anything else remains between Antonio and Berrima on the one hand and DTC on the other.
The Butler affidavit points to some information not included in the explanatory memorandum and which concerns exploration activities of the defendant generally and in relation to the Kilbinya tenements. The defendant has had a historical association with the Kilbinya tenements and at least some of the information is in the public domain: see, for example, ex 13. Information concerning Mason's future role with the defendant could be readily ascertained from the company or from the floor of the meeting. I accept also what is said in par 38 to par 40 of the Edward's affidavit.
Finally, the plaintiff says that the explanatory memorandum does not comply with r 7.3 of the Listing Rules. The material was submitted to and approved by the Australian Stock Exchange: see Edward's affidavit par 41 and par 42. While this is by no means determinative, and it is, and remains, an issue to be decided by the Court, I think it is at least an indication that the relevant specialist body does not regard the level of disclosure as being materially deficient. But in the end it is a value judgment that I have to make. I do not think the particular deficiencies specified in par 12 of the plaintiff's written outline reveal additional issues that have not already been dealt with. I am not satisfied that there is a material non-compliance with the Listing Rules.
Conclusions and Form of Relief
Accordingly, for the purposes of this application, I find that there is a serious question to be tried concerning Resolution 2 but I am not so satisfied concerning Resolution 3. Save for two issues that I will mention in a moment I do not think there is any substantial difference between the parties as to the principles that govern the grant of injunctive relief.
The first of those issues goes to whether injunctive relief should be granted at all. It is whether damages would be an adequate remedy. It is true, as counsel for the defendant has submitted, that there is no evidence that the plaintiff will suffer any pecuniary loss if the reduction were to proceed. But if the plaintiff is right the reduction will constitute a clear breach, not only of inter‑partes rights, but of the statute law of the country. In those circumstances I would be disinclined to withhold relief in the exercise of discretion solely on the ground that damages would be an adequate remedy.
The other matter is of more substance. I accept that the defendant may be at risk of substantial governance and financial detriment unless the transactions proceed. It is not possible to divorce the effect of Resolution 2 from the transaction to which Resolution 3 relates. One reason for saying this is that part of the consideration sounds in AUNL shares. Whether injunctive relief should be conditioned by the giving of an undertaking as to damages is always a matter of discretion. The common law has always shown a pre-disposition to require an undertaking. It is an important, if not essential, means of preventing injustice before the rights of the parties have been finally determined: Air Express Ltd v Ansett Transport Industries (Operations) Pty Ltd (1981) 146 CLR 249 at 311. This is reflected in the Rules of the Supreme Court O 52 r 9. There is nothing in s 1324 to indicate that different principles apply in Corporations matters, save to the extent expressly provided for in the section.
I accept the submission of counsel for the plaintiff that minority shareholders should not be dissuaded, by the threat of financial imposition, from coming to the courts to put a view on corporate governance matters. However, I do not accept that the analogy of courts refraining from making costs orders against dissenting shareholders in schemes of arrangement indicates that there is a pre-disposition not to require an undertaking. And I would condition that broad proposition by adding that shareholders must not be unreasonably deterred from approaching the courts. In the end it is a matter of balance. Where do the interests of justice lie? There are arguments against the contentions advanced by the plaintiff and I would not be prepared to say that the plaintiff must, on any view, make good its case. The defendant is, as I have already said, at some risk. The financial statements indicate that the defendant is not awash with funds. Any depletion of the corporation's funds will be to the detriment of the defendant and, indirectly, to the interests of the general body of shareholders. Apart from the fact that the plaintiff is a minority shareholder exercising a right in relation to the administration of the affairs of the company nothing has been shown that takes the case out of the ordinary. Accordingly, I think justice requires that an undertaking be given.
I will hear the parties as to the form that the relief should take and as to any consequential orders, including those that might be necessary to have the substantive issues resolved quickly. If an injunction is to issue it must be supported by an undertaking as to damages in the usual form. I am not in a position to say whether the undertaking of the plaintiff could stand alone or whether it would need to be supported.
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