Bendall v Marshall HC Wellington CIV 2004 454 993
[2005] NZHC 1263
•15 February 2005
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
CIV 2004 454 993
BETWEEN A S BENDALL
Plaintiff
AND
D A J MARSHALL
First Defendant
AND
A R MARSHALL
Second Defendant
AND
TUTU TOTARA LIMITED
Third Defendant
AND
KELSO LIMITED
Fourth Defendant
AND
KELSO RANGER (2004) LIMITED
Fifth Defendant
Hearing:
4 February 2005
Appearances: L J Taylor and J Maslin for the Applicant (Plaintiff)
P S J Withnall for the Respondents (all five Defendants) Judgment: 15 February 2005
JUDGMENT OF WILD J
Introduction
[1] This is an application for leave to bring a derivative proceeding in the name of the fourth defendant, Kelso Limited (“Kelso”) against its two directors. They are Messrs D A J and A R Marshall, the first and second defendants respectively (I will refer to them, as appropriate, as the directors or as “the Messrs Marshall”). The
A S Bendall V D A J Marshall And Ors HC WN CIV 2004 454 993 [15 February 2005]
proposed proceeding will allege breach by the directors of their fiduciary duties to Kelso and breach by the directors of their duties to Kelso under ss 131 and 133 of the Companies Act 1993 (“the Act”).
[2] The application is pursuant to s165 of the Act. The considerations relevant in considering such an application are set out non-exclusively in s165(2) of the Act. They have been developed and applied in cases such as Vrij v Boyle [1995] 3 NZLR 763 and McFarlane v Barlow (1997) 8 NZCLC 261,470.
[3] This proceeding was commenced on 8 December 2004 by way of a statement of claim and interlocutory application for an interim injunction. That injunction sought to prevent Kelso selling its franchise business and 500 ewes from its stud sheep flock to the fifth defendant, Kelso Ranger (2004) Limited (“Ranger”). The directors of Kelso had resolved on 2 November 2004 to complete that sale at a price of $310,000. The minutes of the directors’ meeting of 2 November record that the $310,000 “will be subject to review by an independent valuation if required”. The directors’ resolutions themselves did not so condition the sale price.
[4] Ronald Young J granted an interim injunction ex parte on 9 December. The proposed sale has thus not proceeded, and cannot while that injunction remains in force.
[5] There is no new draft proposed statement of claim for the derivative proceeding, but Mr Taylor for the plaintiff indicates that it will contain essentially the fourth, sixth and seventh causes of action in the plaintiff’s existing statement of claim. As I have mentioned, those causes of action allege breach by Kelso’s directors of their fiduciary duties, and their duties to Kelso under s131 and 133 of the Act.
[6] The plaintiff proposes to pursue personal rights of action against Kelso’s directors in tandem with those three causes of action which belong to Kelso itself. Authorities such as Vrij v Boyle indicate that that is acceptable practice.
[7] Kelso’s business is stud sheep breeding. To date Kelso’s business has been restricted to breeding maternal rams i.e. rams used for on-going breeding, as opposed to terminal sires used to produce livestock for slaughter.
Factual background
[8] I see no need to descend much into the background detail. The plaintiff became involved with the Messrs Marshall in the mid-1990s. In March 1996 he began working for the Marshalls: for their company Tutu Totara Limited (“TTL”) which was the entity they used for their sheep farming operations.
[9] The plaintiff deposes that in March 1998 he and Mr David Marshall began discussing setting up a new sheep breeding company. The outcome of these discussions was the incorporation, on 18 December 1998, of Kelso. The plaintiff held 15% of the shares in Kelso, TTL the majority balance of 85%. The plaintiff became the managing director.
[10] Although it is not of immediate relevance to this application, I note that the plaintiff claims to have a contractual entitlement to a 33% shareholding in Kelso. That is one of the personal claims he intends pursuing against the Messrs Marshall and/or TTL.
[11] Kelso’s business expanded rapidly. The plaintiff claims credit for that, but the extent of his contribution seems to be disputed by the Messrs Marshall.
[12] Kelso developed a franchise operation in order more rapidly to expand its operation. Franchises were granted in various parts of New Zealand during the years 1998 (there may be an error here for 1999), to 2000.
[13] Starting, it seems, in the latter part of 2000, relations between the plaintiff and the Messrs Marshall began to deteriorate. On 13 December 2002 TTL wrote to the plaintiff complaining about his performance and threatening termination. The plaintiff’s employment as General Manager of Kelso was summarily terminated at a Kelso directors’ board meeting on the morning of 23 December 2002. The plaintiff
was required to return immediately his keys and all company property, and to collect his personal belongings and leave.
[14] The plaintiff resigned – he says reluctantly – as a director of Kelso on 4 April 2003.
[15] Excluded from Kelso’s business, the plaintiff, in the interim, has worked on developing his own stud sheep breeding business, which competes with Kelso’s business.
[16] Since the plaintiff’s dismissal as General Manager of Kelso, Kelso’s business has been directed and managed by the Messrs Marshall, or by staff under their direction.
[17] The sale transaction of 2 November 2004 enjoined by this Court was designed and approved by the Messrs Marshall. The plaintiff had no input into it, nor any knowledge of it until it was publicly announced by Wrightson Ltd at a Kelso field day on 3 November 2004.
[18] That public announcement was of “… an exciting joint venture, to be known as Kelso-Wrightson”. The announcement also stated:
John McDonald, Director of Mac-Corp Ltd (a joint owner of Kelso Ranger 2004) said the Kelso-Wrightson partnership would be hugely beneficial for sheep farmers nationwide.
[19] Rightly or wrongly, the plaintiff thought the joint venture was between Kelso and Wrightson Limited. It was not until he saw the minutes of the 2 November 2004 meeting of Kelso’s board, that he became aware that the proposed sale was to Ranger, which “will be an incorporated joint venture between TTL and Mac-Corp Ltd”. In other words, only then did the plaintiff become aware that Kelso had no proprietary interest in the proposed joint venture, but that the Messrs Marshall did: a 50% proprietary interest through their ownership of TTL.
[20] In the affidavit he swore on 2 February, and which was filed on 3 February, Mr David Marshall deposes that Kelso-Wrightson (2004) Ltd is a company formed
by Wrightson Ltd, Mac-Corp Ltd and the Messrs Marshall together with Sarah Jane Alexandra Marshall, as trustees of the David & Sarah Marshall Family Trust. The plaintiff was previously unaware of this shareholding. It does not, of course, alter the facts that Kelso has no proprietary interest in Kelso-Wrightson (2004) Ltd, whilst the Messrs Marshall, or at least one of them, do/does, albeit in a trustee capacity. The evidence does not disclose who are the beneficiaries of the David & Sarah Marshall Family Trust.
[21] The salient feature of all this background is that there has been, and remains, a complete and seemingly irreconcilable breakdown of trust and any sort of cooperation or working relationship between the plaintiff on the one hand and the Messrs Marshall on the other. They clearly cannot do business together in Kelso in future and they should go their separate business ways. I note that another of the plaintiff’s personal causes of action against Kelso and the Messrs Marshall is one under ss 174 and 175 of the Act alleging oppressive conduct against him as a (minority) shareholder. Somewhat - in my view - inappropriately, the relief sought in respect of that cause of action is simply an injunction restraining Kelso from disposing of any assets.
[22] That brings me back to the present application. It is an application to enable Kelso to sue its directors for breaches of fiduciary and statutory duties owed by them to Kelso. Its genesis and basis is or was the sale transaction to Ranger approved by Kelso’s directors on 2 November 2004 and prevented by the injunction granted by this Court on 9 December.
[23] Kelso’s directors do not now intend proceeding with this transaction, but they do intend proceeding with a different transaction involving the sale of 170 stud ewes by Kelso to Ranger for inclusion in a stud flock. It is proposed that Kelso’s franchisees will also contribute stud ewes to this flock. My understanding is that Ranger will also manage the Kelso Ranger terminal sire breeding stud, which has to date been the business of Mac Corp Ltd, which is owned by a Mr John McDonald. Mac Corp is one of Kelso’s franchisees.
[24] In his affidavit sworn on 2 February, Mr David Marshall explained in some detail the business of Kelso Wrightson (2004) Ltd. He said that it had two key elements. The first was the sale and marketing to farmers of Ranger Terminal sire rams which will be supplied to Kelso Wrightson by Mac Corp Ltd.
[25]Mr Marshall deposed:
33. Kelso Wrightson (2004) Ltd is accordingly separate and distinct from Kelso Ranger (2004) Ltd. As an illustration of this Kelso Wrightson (2004) Ltd can and is currently proceeding even though the proposed sale of 500 ewes and the franchise business by the Fourth Defendant to Kelso Ranger (2004) Ltd is no longer able to. Kelso Wrightson (2004) Ltd does not need that proposal to proceed to in turn set up and begin operating Kelso Wrightson (2004) Ltd’s business.
[26] Mr Marshall then explained the second key element of Kelso Wrightson as the setting up of an agency business:
37.… Kelso Wrightson 2004 Ltd hopes to secure the business from farmers of selling the resulting progeny from Kelso maternal and Ranger Rams in the same way as stock and station agents typically act as sales agents.
[27] Mr Marshall, in his affidavit, then explained the way in which he considers the sale by Kelso Wrightson of Ranger Terminal sire rams will benefit Kelso, and the purpose of Ranger’s business.
[28] Although I have read Mr Marshall’s affidavit, and although Mr Withnall spent some time outlining to me the nature of the new businesses of Ranger and Kelso Wrightson, I was left not fully understanding them, in particular the exact purpose of the stud flock into which Kelso proposes to sell 170 of its stud ewes. It is not clear to me whether this flock is to be used in the maternal or terminal sire breeding programme, or both.
[29] Whatever the correct position is, one thing is clear. Kelso will not have a proprietary interest in either of the new businesses Ranger and Kelso Wrightson but, in one form or another, the Messrs Marshall will have.
[30] Kelso’s directors see commencement of these businesses as urgent, because of a need to plan and implement a breeding programme for the current year. Kelso intends to apply to the Court for a variation of the injunction to allow it to sell 170 ewes to Ranger.
[31] The primary opposition to this application is that the transaction which gave rise to the proceeding in the first place, and subsequently to this application, is not now going ahead. Mr Withnall also opposed the application on the basis that the new businesses are not a business opportunity of Kelso, and therefore it cannot be said that Kelso’s directors – the Messrs Marshall – are diverting those opportunities from Kelso to themselves. That submission rests on a dual basis. First, Mr Withnall submits that the proposed businesses are new businesses, because they involve breeding terminal sire rams, as opposed to maternal sire rams. As I have previously mentioned, Kelso’s business to date has been restricted to breeding maternal sire rams. Secondly, Mr Withnall submitted that the evidence established that none of the other joint venturers were prepared to enter into a venture with Kelso, while the plaintiff remained involved with Kelso. This is asserted in a letter the defendant’s solicitors, Russell McVeagh, sent the plaintiff’s solicitors, Minter Ellison Rudd Watts, on 19 January. The assertion is supported by an attached letter dated 16 December, sent by Mr John McDonald, Managing Director of Mac-Corp Ltd, to Kelso. In that letter Mr McDonald states:
… Our family would have no financial association with Kelso Ltd while the Bendalls were still financially involved with Kelso because of Michelle’s (Mrs Bendall’s) interference in Kelso affairs. …
[32] Mr Withnall submitted a prudent business person conducting his own affairs would not, in that circumstance, pursue this proceeding. That applies the test as it is spelt out in the cases, in particular Vrij v Boyle. That test, in turn, is to be applied taking into account the factors set out in s165(2): merits; quantum; cost and the prospects of executing any judgment.
[33] Mr Taylor was scornful of these submissions, contending that the proposed new businesses clearly sought to use, and capitalise upon, either the genetics, or the expertise, or the name, of Kelso, or all of them. He submitted that those businesses
thus came squarely within the definition of business opportunities of Kelso. He referred to and relied upon the test as it was stated by McGechan J in Holden v Architectural Finishes Ltd & Ors (1996) 7 NZCLC 260,976 at 261,026:
… a director cannot take for himself a specific “business opportunity”, e.g. a chance to obtain an agency, which the company is pursuing, or would or might pursue. A director, or indeed a senior company officer, who comes to know of such an opportunity in the course of office, and particularly a director who is involved in preparation or negotiation on behalf of the company, cannot resign with a view to taking up the opportunity himself, and subsequently proceed to do so.
[34] Having stated that test, McGechan J referred to the decision of the Supreme Court of Canada in the leading case of Canadian Aero Service Ltd v O’Malley (1974) 40 DRL (3rd) 371, where the Court said this at 381-382:
It follows that O’Malley and Zarzycki stood in a fiduciary relationship to Canaero, which in its generality betokens loyalty, good faith and avoidance of a conflict of duty and self-interest. Descending from the generality, the fiduciary relationship goes at least this far: a director or a senior officer like O’Malley or Zarzycki is precluded from obtaining for himself, either secretly or without the approval of the company (which would have to be properly manifested upon full disclosure of the facts), any property or business advantage either belonging to the company or for which it has been negotiating; and especially is this so where the director or officer is a participant in the negotiations on behalf of the company.
An examination of the case law in this Court and in the Courts of other like jurisdictions on the fiduciary duties of directors and senior officers shows the pervasiveness of a strict ethic in this area of the law. In my opinion, this ethic disqualifies a director or senior officer from usurping for himself or diverting to another person or company with whom or with which he is associated a maturing business opportunity which his company is actively pursuing; he is also precluded from so acting even after his resignation where the resignation may fairly be said to have been prompted or influenced by a wish to acquire for himself the opportunity sought by the company, or where it was his position with the company rather than a fresh initiative that led him to the opportunity which he later acquired.
[35] Having read Mr Marshall’s affidavit, and listened to Mr Withnall’s submissions, I was left with the impression that the Messrs Marshall have not grasped “the pervasiveness of (the) strict ethic in this area of the law” referred to by
the Canadian Supreme Court. In my view, there is considerable force in Mr Taylor’s submission for the plaintiff that the proposed new businesses are essentially “business opportunities” of Kelso. It is Kelso’s genetics, Kelso’s experience and expertise and, perhaps above all, the “Kelso” name and reputation which are needed for those businesses. Without those, it seems to me that the Messrs Marshall would have nothing to contribute to the proposed new businesses, and would therefore not be involved in them. Their contribution and involvement is essentially a Kelso one, not one which they are making in their individual capacities.
[36] Mr Withnall had a further argument, in support of his submission that a prudent business person conducting his own affairs would not bring the proposed (derivative) proceeding. He submitted that the quantum of the proposed claim – the damages potentially recoverable – was far from certain. In evidence before me was a tentative valuation in an affidavit sworn on 7 December 2004 by Mr D S Vance of McCallum Petterson, valuing Kelso’s franchise business at an estimated $1 million and the 500 ewes at $250,000, a total of $1.25 million. That figure is to be compared with the sale price of $310,000, causing Mr Vance to depose:
In those circumstances I find it difficult to understand how the directors have arrived at a valuation of only $310,000 for the whole transaction.”
[37] On the other hand, exhibited to Mr Marshall’s 2 February affidavit is a valuation dated 9 December 2004 by Mr D H Russell of Bussing Russell & Co. Ltd expressing the opinion that “the sale price of $310,000 for 500 ewes and the franchise rights (Kelso brand) is fair value”.
[38] Mr Withnall rightly made the point that the divergence of opinion as to the value of the franchise rights (Kelso brand) and 500 ewes was huge, and the damages potentially recoverable thus ranged from nil upwards to approximately $1 million. In any event, as Mr Withnall again emphasised, the transaction involving Kelso selling those assets was not now proceeding, so the issue of damages was irrelevant in any event.
[39] Mr Taylor largely accepted this. He focused on the injunctive relief sought in the statement of claim. When I put it to him that, if Kelso’s directors conceded to permanent injunctive relief preventing them from diverting away from Kelso business opportunities that were Kelso’s business opportunities, then there would be no present basis for the plaintiff to pursue a derivative proceeding any further, Mr Taylor accepted that.
[40] I then inquired of Mr Withnall whether Kelso’s directors were prepared to concede that such permanent injunctive relief should be granted against them. I pointed out to Mr Withnall that such relief did no more than enjoin Kelso’s directors from breaking the law, and that the grant of such permanent relief was probably justified in view of the directors’ past actions, resulting in the Court granting an interim injunction on 9 December. Mr Withnall undertook to obtain instructions, and revert to me by Wednesday last, 9 February. I heard nothing from Mr Withnall and was about to ask my Registrar to follow the matter up when I received, yesterday, a memorandum from Mr Taylor for the plaintiff. In this memorandum Mr Taylor advises that the plaintiff’s solicitors sent a reminder to Mr Withnall on Thursday 10 February and received a response on Friday 11 February advising that Mr Withnall would confirm the defendants’ position that day. Mr Taylor’s memorandum then continues:
4.No confirmation has been received and I consider that more than ample time has been given to the defendants to respond to your Honour’s proposal. I therefore respectfully request that your Honour make a decision on the application.
Subsequent activities
5.Since the hearing of the application for the derivative action, it has come to my client’s attention that advertisements advertising “Kelso Wrightson” rams have appeared in several major newspapers. The advertisement that appeared in Hawke’s Bay Today (5 February 2005) and NZ Farmers Weekly (8 February 2005) is attached for your Honour’s information. There was a similar advertisement in the Dominion Post.
6.The advertisements breach the spirit, if not the letter, of the injunction imposed by Justice Ronald Young on 9 December 2004, and are examples of the type of behaviour that the plaintiff is concerned will continue, despite the injunctionj.
[41] The advertisement said to have appeared in ‘Hawkes Bay Today’ and the ‘NZ Farmers Weekly’ was not in fact attached to the faxed copy of the memorandum provided to me.
[42] This morning, I had my Registrar, Ms Jane Penney, contact Mr Withnall to ascertain what the defendants’ position was. She has advised me that Mr Withnall advised her that the defendants do not intend filing anything further, do not wish to be heard further, and invite the Court to give its judgment upon the plaintiff’s application.
[43]Accordingly, and for the reasons I have given, I make the following orders:
a)I make a permanent injunction restraining the first, second and fourth defendants, without the prior leave of this Court, from selling, transferring or otherwise alienating any of the fourth defendant’s assets to the first, second, third or fifth defendants or to any other entity in which the first and second defendants have an interest, whether direct or indirect.
b)I make a permanent injunction restraining the first and second defendants from taking for themselves or for either of them, or from diverting to any other person or persons or entity, a business opportunity of the fourth defendant.
c)I reserve to all parties leave to apply in this proceeding, for a ruling as to whether a proposed transaction would, or has, breached the injunction made in b).
d)The plaintiff’s application for leave to bring a proceeding in the name and on behalf of Kelso Ltd stands adjourned sine die. If the plaintiff wishes to bring that application on again, he should in the first instance seek a directions conference before the Associate Judge.
e)The first and second defendants are to pay the plaintiff’s costs to date of his application for leave to bring a derivative proceeding on a 2B basis, together with disbursements as fixed by the Registrar failing agreement. Those costs are not to be billed directly or indirectly by the first and second defendants to the fourth defendant.
[44] Implicit in what I have said in this judgment, and in the orders I have made, is my view that the lending by the fourth defendant (Kelso Ltd) of the name ‘Kelso’ to the fifth defendant (Kelso Ranger (2004) Ltd) and/or to Kelso Wrightson (2004) Ltd) involves the diversion by Kelso of a Kelso business opportunity to those other entities. When I raised this with Mr Withnall he responded that the defendants do not accept that. He advised me that the defendants had considered meeting that objection by simply discontinuing the use of the name ‘Kelso’ in or for the Ranger and Kelso Wrightson businesses. It appears, in particular from paragraphs 5 and 6 of Mr Taylor’s memorandum of yesterday, that the defendants have not done that and that Kelso Wrightson is actively advertising “Kelso Wrightson” rams.
[45] In paragraph [21] above I referred to the seemingly irretrievable breakdown in trust and cooperation between the plaintiff and Kelso’s directors, and suggested that the parties needed to go their own separate ways. Mr Taylor informed me that the plaintiff considers that his best interests are currently served by retaining his 15% shareholding in Kelso. On the basis of what I have read and heard I doubt that that is correct. I indicated as much to Mr Taylor in no uncertain terms, asking him to convey my views to the plaintiff. However, whether the plaintiff chooses to retain his shareholding in Kelso or to exit from it is a business decision for the plaintiff and not for me. Were the plaintiff to change his mind, then surely it must be possible to address the two issues (which seem to me to subsume all others):
a)What is the plaintiff’s shareholding entitlement in Kelso? Is it the 15% he holds or the 33% he claims?
b)What is the shareholding to which the plaintiff is entitled worth upon the well established valuation principles which apply in a situation such as this?
Where, in b) above, I refer to “well established valuation principles”, I am referring to the principles set out, for example, by the Court of Appeal in its judgment of 7 April 1997 in Architectural Finishes Ltd & Thwaite v Holden CA272/95 (starting on p13 under the heading “Valuation”) and by Doogue J in Oppenheimer NZ Ltd v Struthers and Struthers v Oppenheimer NZ Ltd 27/9/93 HC Wellington CP620/91 and M454/91 (at paragraph 74 and following).
Solicitors:
Minter Ellis Rudd Watts, Wellington for the Plaintiff
Russell McVeagh, Wellington for the Defendants
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