Birchfield v Birchfield
[2020] NZHC 1516
•30 June 2020
IN THE HIGH COURT OF NEW ZEALAND GREYMOUTH REGISTRY
I TE KŌTI MATUA O AOTEAROA MĀWHERA ROHE
CIV-2019-418-29
[2020] NZHC 1516
UNDER the Companies Act 1993 IN THE MATTER
of an application for orders under s 174
BETWEEN
ALLAN JOHN BIRCHFIELD, LEIGH ELLEN BIRCHFIELD, CHRISTOPHER PAUL BIRCHFIELD, PAULETTE MICHELLE BIRCHFIELD and NGAIRE
ELIZABETH BIRCHFIELD, as trustees of the PLC Trust
First Plaintiff
AND
ALLAN JOHN BIRCHFIELD
Second Plaintiff
AND
BIRCHFIELD HOLDINGS LIMITED
First Defendant
continued…
Hearing: 12 June 2020 Appearances:
K G Davenport QC and A M Cameron for Plaintiff
S O Munro and A L Davidson for First to Fourth Defendants
R J Hollyman QC and G K Riach for Fifth to Ninth DefendantsJudgment:
30 June 2020
JUDGMENT OF ASSOCIATE JUDGE LESTER
This judgment was delivered by me on 30 June 2020 at 4.45pm pursuant to Rule 11.5 of the High Court Rules
Registrar/Deputy Registrar 30 June 2020
BIRCHFIELD v BIRCHFIELD HOLDINGS LIMITED [2020] NZHC 1516 [30 June 2020]
AND
AND
AND
BIRCHFIELD COAL MINES LIMITED
Second Defendant
BIRCHFIELD ENERGY AND RESOURCES LIMITED
Third Defendant
NORTH WEST COAL COMPANY LIMITED
Fourth Defendant
AND
GARY PAUL BIRCHFIELD
Fifth Defendant
AND
KAREN ANNE BIRCHFIELD
Sixth Defendant
AND
EVAN RAYMOND BIRCHFIELD
Seventh Defendant
AND
JOELENE ANNE JAMIESON, KAREN ANNE BIRCHFIELD and STEFFAN
NIGEL JAMIESON, as trustees of the SJC Trust
Eighth Defendants
AND
DONNA JOYCE BIRCHFIELD, EILISH PAULINA BIRCHFIELD and GARY PAUL
BIRCHFIELD, as trustees of the EMB Trust Ninth Defendants
[1] This proceeding arises from a falling out between siblings who between them own Birchfield Holdings Ltd, the first defendant. In turn, Birchfield Holdings Ltd owns the second, third and fourth defendants.
[2] The plaintiff, Allan Birchfield (Allan), says his removal as a director of the defendant companies by his siblings is conduct that was oppressive, or unfairly discriminatory, or unfairly prejudicial to him in terms of s 174 of the Companies Act 1993 (the Act). Allan also complains of other actions of the company and/or his siblings, which I will refer to below.
[3] Allan seeks to rely on the full flexibility of s 174(2) of the Act and seeks the following orders (assuming he can establish that the conduct he complains about qualifies for relief):
(a)declaring invalid the directors’ and shareholders’ resolutions [removing him as director];
(b)reinstating the second plaintiff as a director of the first to fourth defendants so as to give the first plaintiffs proper representation on the first to fourth defendants;
(c)directing the directors to obtain:
(i)a business plan;
(ii)a full review by a suitably qualified person/company of the companies’ health and safety procedures;
(iii)a review of the companies’ business plan, practices and procedures and a remuneration review of all senior staff; and
(d)to implement such changes as identified in the report(s);
(e)requiring the directors and shareholders or any one of them to pay compensation to the first and/or second plaintiffs (including an account of profits in relation to any inappropriate remuneration/benefits from their positions);
(f)regulating the future conduct of the first defendant’s affairs by appointing a majority of independent directors (and nominating one of them to be the chairman of the board of directors) for a period of five years;
(g)setting aside any action taken by the directors or shareholders in breach of the Act or the constitution of the companies; and
(h)as to costs of and incidental to these proceedings.
[4] It will be seen that Allan seeks to be reinstated as a director of the four companies, directions in relation to a business plan and that the directors implement that plan. In relation to the relief sought in (f), that there be sufficient independent directors appointed to constitute a majority of directors resulting in the Birchfield siblings no longer having control of their own companies; control will be in the hands of the majority independent directors.
[5] The defendants have applied for summary judgment. They say it is common ground that the relationship between the Birchfield siblings has irreconcilably broken down. The defendants say the court will not require the siblings to work together as directors, just as the court will not in other contexts require people whose relationship has broken down to continue to work together. Further, the defendants say the court will not, through the orders sought at para (c) essentially put the direction of the defendant companies in the hands of the author of the business plan (to be prepared) which the directors will be required to follow, nor will the court deprive the Birchfield siblings (assuming Allan is reinstated to the Board for five years) of the right to control the company they own. What is to occur at the end of the five year term is not specified by the plaintiffs.
[6] The defendants say it is inevitable that any relief the plaintiffs might obtain will be a share buy-out. The defendants submit that because they offered to buy the first plaintiffs’ shares at fair value, they are entitled to summary judgment. In short, the defendants say as they are offering now what the plaintiffs would receive if they could establish an entitlement to relief, the plaintiffs’ claim should not be allowed to proceed.
Principles applicable to a defendant’s summary judgment application
[7] A defendant is entitled to summary judgment where it demonstrates on the balance of probabilities the claim cannot succeed.1
1 High Court Rules 2016, r 12.2(2). Westpac Bank Corporation v M M Kembla New Zealand Ltd
[2001] 2 NZLR 298 (CA) at [61].
[8] The court may take a robust and realistic approach to the evidence, but it must also be fair. As with a plaintiff’s application for summary judgment, this procedure is not appropriate to determine genuine factual disputes.
[9] Here, only one cause of action is relied on by the plaintiffs and that is under s 174 of the Act.
[10] The application for summary judgment relies squarely on what Mr Hollyman QC, counsel for the fifth to ninth defendants, described by way of shorthand as the “O’Neill” principle.2
Scope of application
[11] At the commencement of the hearing, Ms Davenport QC, counsel for the plaintiffs, noted the submissions filed by the first to fourth defendants, in support of their application for summary judgment, proceeded on the basis the plaintiffs had not provided a basic evidentiary foundation for the allegations in their statement of claim.
[12] Mr Munro’s submissions, counsel for the first to fourth defendants, reviewed the allegations in the statement of claim against the evidence filed to conclude that in each case the plaintiffs had not put forward any evidence in support of the claims – the deficiency being such as to warrant summary judgment.
[13] Ms Davenport correctly pointed out that such was not the pleaded basis for the application for summary judgment, which proceeded on the basis that the O’Neill principle provided a defence, assuming the plaintiffs could establish they were entitled to relief.
[14] After some debate, it was confirmed by Mr Munro that he would not argue summary judgment was warranted on the basis of an absence of evidence in support of the conduct said to found relief under s 174 of the Act.
2 O’Neill v Phillips [1999] UKHL J0520-1, [1999] 1 WLR 1092.
Offer to purchase the Trust’s shares cures prejudice
[15] Mr Hollyman submitted that relief under s 174 of the Act was not available where the majority has made a reasonable offer to purchase the minority’s shares. He submitted in that event, any prejudice will have been cured and the majority is entitled to have the claim summarily dismissed. The application is based on the assumption the plaintiffs can establish an entitlement to relief. The defendants say that as they are prepared to offer the plaintiffs what they could achieve if they were entitled to relief, the proceeding should be halted.
[16]This principle is based on O’Neill v Phillips, where Lord Hoffmann held:3
… unfairness does not lie in the exclusion [of a minority shareholder] alone but in exclusion without a reasonable offer. If the respondent to a petition has plainly made a reasonable offer, then the exclusion as such will not be unfairly prejudicial and he will be entitled to have the petition struck out.
[17] Lord Hoffmann went on to give detail as to what he saw would need to be included in a reasonable offer.4
[18] The approach in Lord Hoffmann’s dicta has been described as “… widely accepted as proving a basis on which many shareholder’s disputes could be resolved without the notoriously high cost of litigation by way of unfair prejudice petition.”5
[19] Predating Lord Hoffmann’s approach by more than 10 years is the New Zealand case, Re Waitikiki Links Ltd, where Hardie Boys J saw an offer to purchase, provided the price was fair, as an obvious and sensible solution to the issue of which the minority complained.6
[20] Mr Hollyman referred to authorities where the O’Neill principle has been applied in New Zealand by the Court of Appeal and the Supreme Court. In M Yovich & Sons Ltd v Yovich, the Court of Appeal said a reasonable offer can cure “all forms
3 At [57].
4 At [58]-[68].
5 Presscott v Potamianos [2019] EWCA 932, [2019] 2 BCLC 617 at [129] [Re Sprintroom Ltd].
6 Re Waitikiki Links Ltd (1989) 4 NZCLC 64,922.
of conduct that are unfairly prejudicial”, not just those relating to the exclusion of the minority from the company.7
[21]In Fong v Wong, the Supreme Court said:8
[w]here relationships between shareholders have broken down, one cannot usually exclude the other from the management of the company without making an offer to acquire that other shareholder’s shares for a value which is determined on a pro rata basis, that is, without a discount for minority interest.
[22] The principle continues to apply in England where recently in Re Sprintroom Ltd it was held the existence of a reasonable offer allowing a defendant to seek summary judgment was fact dependent.9
[23] Mr Hollyman submitted that when assessing whether an offer was reasonable in all the circumstances, less was required where the relationship between the parties has broken down and the offer made by the defendants is inconsistent with the relevant provisions of the company’s constitution. Mr Hollyman submitted in those circumstances, relying on Isaacs v Belfield Furnishings Ltd, the minority alleging prejudice would generally be barred from proceeding where an offer to buy-out was made.10
[24] Ms Davenport QC did not dispute that in a particular case an offer to buy-out by the defendants may found an application for summary judgment by the defendants, but she very much disputed the rule was absolute. To the extent Mr Hollyman’s submissions presented the rule as an absolute, I agree with Ms Davenport’s submissions. To be fair to Mr Hollyman, he recognised through the reference to Re Sprintroom Ltd that whether an offer was sufficient to found an application for summary judgment was fact specific, but his point was, given the court was predisposed towards a buy-out order, in the event prejudice was established, it would be an unusual case where a buy-out would not found a defendant’s summary judgment. Mr Hollyman said given the court’s reluctance to become involved in management issues and that it will not require parties who have fallen out to work together, it was
7 M Yovich & Sons Ltd v Yovich (2001) 9 NZCLC 262,440 at [48].
8 Fong v Wong [2010] NZSC 152 at [5].
9 Re Sprintroom Ltd, above n 5, at [127]-[137].
10 Isaacs v Belfield Furnishings Ltd [2006] EWHC 183 (Ch) at [38].
inevitable in this case if prejudice was found here, the court would not require the siblings to continue to work together.
[25] If I am satisfied on the balance of probabilities that a buy-out order is the relief that will be ordered, and if the defendants have made an offer that meets the requirements in O’Neill, then an order granting the defendants summary judgment will be appropriate.11
[26] Ms Davenport highlighted the breadth of the remedial provisions in s 174(2) of the Act. She recognised the pleaded relief, in particular paras (c) and (f), involved the court making significant inroads into the management of the company. She highlighted that s 174(2)(d) of the Act expressly creates the ability of the court to alter or add to the company’s constitution and as such, the structure of s 174(2) contemplated the court may be prepared to make orders of the type sought in the statement of claim. Parliament must have intended the type of relief sought would be available given the breadth of s 174(2). Given the availability of the jurisdiction, Ms Davenport submitted the court could not be confident to the standard required for a defendant’s summary judgment that the relief set out could not be granted.
[27] In the alternative, Ms Davenport submitted that if the court considered the relief as sought would not be available and a buy-out was, the relief would be ordered, the offer as put by the defendants was not a reasonable offer. This was because the offer did not address the fact that some of the conduct complained of by the plaintiffs would have had an adverse impact on the value of the shares of the company which the offer did not address.
[28] The matters said to impact on the value of the company were, firstly, that excessive salaries were being paid to the plaintiffs’ siblings and/or their families. Secondly, that one of the plaintiffs’ siblings was running a private firewood business from a yard owned by the first defendant company and using company machinery for that business.
11 O’Neill v Phillips, above n 2.
[29] During the hearing, Mr Hollyman submitted the instructions given to the share valuer would be broad enough to allow those matters, if established, to be taken into account. The valuer would have access to the books and records of the defendant companies and would be able to identify the salaries that were being paid and be able to assess whether they were excessive.
[30] The defendants say the claim there is a private business operated from company premises is incorrect. They acknowledge a firewood business is operating from the yard, but say it is a company business operated for the benefit of the company. On that basis, the records of the company should confirm this. The company’s records would include invoices recording the acquisition of timber to be processed for firewood (the defendants saying that some of the wood sold was sourced from land owned by the defendants and some externally). There would be invoices recording the sale of firewood in the ordinary course, together with receipts into the company’s account from the sale of the firewood.
[31] In effect, Mr Hollyman submitted that because these disputes could be resolved on the company’s records and did not depend on oral evidence, resolution of the claims and their impact on value, if correct, was within the ambit of what a valuer could address.
[32] I agree. A valuer of a business will examine whether salaries or director’s fees are at a commercially reasonable level. If they are in excess (or below for that matter), a reasonable commercial level then such will impact on the company’s ongoing ability to generate profits and therefore impacts on value.
[33] A share valuation can take into account the impact on value of the conduct complained of by completing the valuation at a date that pre-dates the oppressive conduct.12 Accordingly, it is not novel to have the valuation take into account the impact of the conduct complained of on value. While in Duncan v Allan Reay Consultants Ltd, the valuation of shares by the valuer was resolved by a consent order,
12 Re Cumana Ltd [1986] BCLC 430 (CA) at 445; M Yovich & Sons Ltd, above n 7, at [35].
French J in reviewing the matters taken into account by the valuer recorded that salary levels were taken into account without any adverse comment.13
[34] As to whether the firewood business is owned by one of the defendants, that is a matter that can be determined on the records of the businesses concerned. Given the scale of assets owned by the defendant companies, the valuer may well want to carry out site visits and probably should do in respect of the claim of misuse of company assets at a particular site.
[35] Ms Davenport referred to Harborne Road Nominees Ltd v Karvaski.14 There, the court accepted that an offer to buy at valuation will not always give a petitioner all that they might achieve at trial. If there are disputes a valuer cannot resolve then an offer to buy-out will not be an answer to a s 174 proceeding.
[36]Accordingly, the two issues are:
(i)am I satisfied on the balance of probabilities that if the plaintiffs have established they are entitled to relief under s 174 of the Act that the remedy they will receive is a buy-out order; and
(ii)if I am so satisfied, will a valuation reasonably address their concerns that the prejudicial conduct has adversely impacted on value.
[37] As to the first issue, in my view the relief sought by the plaintiffs will not be granted. I say that as it will require the Birchfield siblings to work together again, when it is common ground that their relationship has broken down with no prospect of reconciliation. The relief sought will deprive the owners of the business the ability to run the company in the way they see fit for the next five years, and will put control of the company essentially in the hands of whoever is carrying out the review of the company’s business plan practices and procedures. The scope of that review and the instructions that are to be given to the reviewer are themselves far from straightforward.
13 See also Duncan v Allan Reay Consultants Ltd HC Christchurch CIV-2006-409-251, 1 December 2008 at [52], [53] and [181].
14 Harborne Road Nominees Ltd v Karvaski [2011] EWHC 2214 (Ch), [2012] 2 BCLC 420.
[38] The outcome of such a review will, to a large extent, depend on the instructions given to the reviewer, such factors to include:
(a)Is the review to be predicated on a conservative approach to expansion?
(b)Should the review be focused at retiring debt or is it to be predicated on the goal of the company maximising returns to shareholders?
(c)What debt levels should the author of the report deem acceptable?
[39] These key management decisions are not matters for the court. They are matters for the majority to determine.
[40] As highlighted by Mr Hollyman, the s 174 jurisdiction is not available simply because a minority disagrees with management decisions made by the majority. However, the structure of the relief as sought requires the Court to impose management limitations on the Board based on the outcome of the review referred to at para (c) of the relief, but with no way for the terms of reference for that review to be framed. The relief sought would only see the dispute about the strategic direction of the company deferred until the time it came for instructions to be given to the reviewer.
[41] As to order (f) of the relief sought, this order deprives the Birchfield siblings of the ability to manage their own company and puts the control, subject to the order in para (c), in the hands of the five additional independent directors to be appointed. I say five are required, if they are to outvote the four Birchfield siblings. Such a change represents a complete re-writing of the management of the company.
[42] Ms Davenport did not refer to any authority in the minority oppression context where anywhere near this level of intervention and management had occurred. Will the Court go as far as Allan seeks?
Section 174 and management
[43] Morison’s Company Law (NZ) in relation to s 110 of the Act (dissenting shareholder’s right to be bought out) says:15
One of the principle themes of the 1993 company law reforms was that the majority should be able to decide on how best to employ its investment, and should not normally be prevented from doing so by a dissenting minority. The remedy for the dissenting minority is not to prevent the majority from acting, but rather to exit from the company at a fair price.
[44] In discussing s 110 of the Act, Morison’s recognises the effect of a decision entitling a shareholder to invoke s 110 may also amount to unfairly prejudicial conduct. The authors state:16
… whether the effect of the decision is unfairly prejudicial will be assessed taking into account the right to exit at a fair price, and the policy considerations … in relation to the freedom of the majority to deal with its investment as it thinks best. The minority will need to establish clear prejudice that cannot be resolved by buy-out before the proposed action is likely to be restrained by a Court.
[45] The predecessor of s 174 of the Act was s 209 of the Companies Act 1955. Section 209 was expanded in 1980 and the first Court of Appeal decision on the amended s 209 was Thomas v H W Thomas Ltd.17 Sir McCarthy, in referring to the s 209, said that the powers given by s 209 were ones which would not be lightly exercised, especially when a lack of probity or want of good faith was not established (although he did not see such as a pre-requisite for relief).18 His Honour said:19
These powers can invade the traditional rights of the shareholders to determine the management of their company according to their shareholder, and while few would deny the necessity for such provisions as those in s 209 in the interests of minorities, the danger of allowing minority interests to inflict serious damage to a company’s structure can be quite real.
[46] Thomas is a case with some similarities to the present one. There the applicant complained against a conservative divided policy of the family company arguing the return on his investment was inadequate and that he was a locked in minority. Other
15 Morison’s Company Law (NZ) (online ed, LexisNexis) at [16.15].
16 At [16.25].
17 Thomas v H W Thomas Ltd [1984] 1 NZLR 686.
18 At 697.
19 At 697.
shareholders held salary positions in the company deriving extra revenue. There, the applicant asked to be brought out.
[47] In Thomas, while the Court recognised the dividend policy of the company was conservative, relief was denied. The Court was also unconvinced the applicant had done everything possible to sell his shares in accordance with those rights under the Articles of Association.
[48] Here, one of the complaints made by Allan in the statement of claim is that while the family companies tendered for and acquired a number of assets formerly owned by Solid Energy New Zealand Ltd and while those mines have had significant turnover, no distribution has been paid to any shareholders. At the same time, Allan’s siblings and their family members received wages or management fees from the company.
[49] A difficulty for Allan in respect of this claim is that he signed a shareholders memorandum resolving that no dividend be payable in respect of the year ended 31 May 2018. I accept this does not address the short period since but the defendants say that shareholder distributions were halted as a result of the significant investment that took place in the Solid Energy assets.
[50] While mismanagement can constitute unfairly prejudicial conduct, the court will normally be very reluctant to accept that managerial decisions can amount to unfairly prejudicial conduct.20 The plaintiffs claim puts management in issue; Ms Davenport’s submission saying the issue is “… a systemic lack of proper direction, financial management and governance of the companies”.
[51] In M Yovich & Sons Ltd v Yovich, non-payment of a dividend to a locked in shareholder of a family company who had no other income from his shareholding and no influence in the affairs of the company was recognised as unfair prejudice.21 The remedy in that case was for the minority shareholder’s shares to be purchased by the majority.
20 Morison’s Company Law, above n 15, at [37.5].
21 M Yovich & Sons Ltd v Yovich, above n 7.
[52] Each case is of course determined on its own facts and in Yovich no dividends had been paid for an extended period. As I have said, in May 2018 Allan signed a memorandum agreeing to no distributions. There were distributions in the past. This proceeding was issued on 10 September 2019. While I appreciate the claim is not based solely on the failure of the company to make shareholder distributions, the circumstances surrounding this issue do not point to the need for significant intervention in the management of the company. The general rule is a court is unlikely to intervene in the director’s dividend policy. Whether or not dividends are to be declared and when and what amount, are matters traditionally left to the directors’ discretion.22 The court’s hesitancy to become involved in management reflects the approach taken in Australia and the United Kingdom.
[53] The court’s reluctance to become involved in management reflects the reality that for the court to do so will generally mean leaving parties who cannot work together in a continuing relationship. An irreconcilable breakdown in the relationships between shareholders/directors is, as I have said, a significant factor in a number of cases where buy-out has been ordered.23 Allan wants to bring in directors from outside the family “… to make sure [their] investment [is] maximised and the company run and managed properly”. However, it is up to the shareholders how they want to run their company and who will run it. This issue represents a disagreement on how the companies should be managed.
[54] Here, the reality is the factors that influence the type of relief the court would, if minority oppression is established, stand squarely against the type of relief sought by Allan.
[55] The relief sought by Allan represents such a departure from the court’s hesitancy to interfere in management, it requires parties who have fallen out to work together, and such a significant re-writing of the company’s management, that I see no realistic prospect of it being granted. This is not to say the jurisdiction to make the orders does not exist or to elevate the O’Neill24 principle to an absolute, so that it is as
22 Morison’s Company Law, above n 15, at [37.8.2].
23 See the cases referred to under Company Law (online looseleaf ed, Thomson Reuters) at [CA 174.08].
24 O’Neill v Phillips, above n 2.
an automatic answer to any minority oppression case, but where factors just referred to are coupled with the difficulties inherent in giving instructions to the writer of the business plan, the relief sought is not workable.
[56] Whether the O’Neill principle will result in a defendant’s summary judgment is fact dependent. I accept that a relevant fact in this case is that on 21 August 2018 Allan issued a notice under the constitution stating he wished to sell his shares in the first defendant company. This pre-dates Allan’s removal as director. The sale process under the first defendant’s constitution was brought to an end by mutual agreement and later in 2018 so that informal negotiations could continue, but they petered out. That Allan commenced the sale process was recognition by him, even before he was removed as a director, that exiting the company was appropriate.
[57] Ms Davenport submits these are established factual disputes that can only be determined at trial. That may well be so, but the point of the defendants’ application is that it jumps to the relief the plaintiffs can achieve if the factual issues are resolved in the plaintiffs’ favour.
[58] After the hearing, Ms Davenport helpfully drew my attention to a decision of the Court of Appeal concerning s 174 released the day the application in this case was argued.25 That decision has not caused me to change this decision.
Final form of offer
[59] As aspects of the defendants’ offer developed during submissions, Mr Hollyman is to file and serve a memorandum containing the full details of the offer, having regard to the O’Neil factors, and in particular, the form of instructions to be given to the valuer to address the salary and firewood business issues, so there is no doubt as to its terms. A valuer should be nominated or the means by which the valuer can be determined should be set out. Mr Hollyman confirmed the defendant companies would meet the cost of the valuation.
25 Vey Group Ltd v Vance [2020] NZCA 232 [12 June 2020].
[60] It was not until after the issuing of proceedings that an offer was made that expressly stated there would be no minority discovery. The offer needs to address the issue of costs of this proceeding. The issue of wasted costs on the earlier aborted offer to sell by Allan is a separate issue.
[61] The offer is to be expressed to remain open for 20 working days. I say that, as inherent in the defendants’ summary judgment application is that the remedy the plaintiffs would receive if it went through a hearing is available to the plaintiffs now. Of course, Allan is not obliged to accept the offer, but if he does not do so then these proceedings will be at an end.
Costs
[62]The costs of the summary judgment application are reserved.
[63] I record that a prior application for consolidation of this proceeding with the proceeding in CIV-2019-418-33 was resolved by agreement with costs to the plaintiffs fixed at $1,000.
[64] Given the present application has been granted, the agreed order that this proceeding and proceeding CIV-2019-418-33 be managed together, is overtaken.
Associate Judge Lester
Solicitors:
Anderson Lloyd, Christchurch (for First to Fourth Defendants) Harmans, Christchurch (for Fifth to Ninth Defendants)
Copy to counsel:
Kate Davenport QC
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