Green v Gillette
[2022] NZCA 408
•29 August 2022 at 11.00 am
| IN THE COURT OF APPEAL OF NEW ZEALAND I TE KŌTI PĪRA O AOTEAROA |
| CA278/2019 [2022] NZCA 408 |
| BETWEEN | THOMAS PATTON GREEN |
| AND | NATHAN DANIEL GILLETTE |
| Hearing: | 14 July 2022 |
Court: | Dobson, Peters and Downs JJ |
Counsel: | Appellant in person |
Judgment: | 29 August 2022 at 11.00 am |
JUDGMENT OF THE COURT
AThe appeal is dismissed.
BThe appellant is to pay the respondent the amount of disbursements incurred by the respondent in the categories usually allowed. If necessary, the amount is to be fixed by the Registrar.
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Table of contents
Para no
Introduction
The factual background
The High Court judgment
Issues on the appeal
Mr Gillette’s misrepresentations inducing shareholder agreement
Ownership of the intellectual property
Mr Gillette’s standing as a director of SunPower
Valuation of the 49 per cent shareholding
Costs
REASONS OF THE COURT
(Given by Dobson J)
Introduction
This appeal involves the shareholders in a closely held company where their business relationship ended in litigation. The appellant (Mr Green) was the founding shareholder of a business based in Nelson called SunPower Ltd (SunPower) which was in the business of selling and installing domestic solar power systems. SunPower’s business was established by Mr Green in 2014.
In January 2016 Mr Green agreed with the respondent (Mr Gillette) that Mr Gillette would acquire a 49 per cent shareholding in SunPower for $98,000 and become an employee of it. Their business venture together did not go well. Mr Green retained effective control of the company and in June 2016 terminated Mr Gillette’s employment with the company. In August 2016 Mr Green incorporated a new company SunPower Solar Ltd (SunPower Solar), and in September 2016 he unilaterally transferred the assets of SunPower to SunPower Solar for $7,900. The only record of the sale was itemised credits in SunPower’s bank account for seven items totalling that amount.[1]
[1]The highlighted items on the relevant bank statement also included a payment into the account of $2,000 with a narration of “Patrick loan”. Given substantial and fluctuating amounts in Mr Green’s shareholder current account, there appeared to be no evidence as to why, on transfer of the assets, Mr Green repaid that amount.
In or about April 2017 Mr Green sold the business assets then held by SunPower Solar to a third party (BSC Shipping) for $120,000. He also negotiated an employment agreement with BSC Shipping pursuant to which he was to be paid a salary of $80,000 per annum.
Mr Gillette pursued a claim in the Employment Relations Authority for unjustified dismissal and obtained a determination from the Authority in January 2017 requiring SunPower to pay approximately $50,000 for arrears of salary, other entitlements and compensation, plus a penalty of $10,000 and other costs.[2] Given that SunPower had been reduced to a shell by Mr Green’s sale of its assets before that time, Mr Gillette subsequently obtained a further order from the Authority making Mr Green personally liable for approximately $20,000 of the earlier award.[3]
[2]Gillette v Sunpower Ltd [2017] NZERA Christchurch 1.
[3]Gillette v Roofpower Installations Ltd [2017] NZERA Christchurch 198.
Mr Gillette also commenced a claim, initially in the District Court, alleging misrepresentations and breaches of the Fair Trading Act 1986 inducing his entry into the contract to purchase the 49 per cent shareholding in SunPower and his entry into the employment agreement. He also claimed that the steps taken by Mr Green in, among other things, selling the assets of the company constituted oppression of him as a minority shareholder under s 174 of the Companies Act 1993.
The proceedings were commenced in April 2017 and were subsequently transferred to the High Court. The claims were heard over three days in April 2019 with the parties being the only witnesses. On 17 May 2019 Cooke J delivered a reserved decision.[4] In it he dismissed Mr Gillette’s claims for misrepresentation and for misleading or deceptive conduct inducing Mr Gillette’s purchase of the shares and entry into the employment agreement.[5] The High Court judgment did uphold the claim for minority oppression.[6] The Judge treated the sum of $120,000 for which the assets of SunPower Solar had been sold in 2017 as the appropriate reflection of fair value of SunPower at the point at which Mr Green had stripped it of its assets.[7] The judgment accordingly ordered that Mr Green was to pay Mr Gillette $60,000, together with interest from the date of judgment. In return for that payment Mr Gillette was directed to execute share transfers for his 49 per cent shareholding in SunPower back to Mr Green.[8]
[4]Gillette v Green [2019] NZHC 946 [High Court judgment].
[5]At [23]–[29] and [33]–[37].
[6]At [49] and [63].
[7]At [68]–[69].
[8]At [70].
On appeal Mr Green challenges the High Court findings of oppression and also challenges the fair value adopted as the measure of his liability to pay out Mr Gillette. In the High Court Mr Gillette appeared on his own behalf. Mr Green was represented by counsel on a legally aided basis. Both parties have represented themselves throughout the appeal in this Court.
Notwithstanding that the High Court judgment was more than three years old, there was a flurry of activity by both parties in the period shortly before the hearing of the appeal. On 27 June 2022 Mr Gillette applied for leave to bring a cross-appeal and also made an interlocutory application for discovery in relation to documents claimed to be relevant to it. For his part, on 28 June 2022 Mr Green filed an application for further discovery of documents, for the striking out of Mr Green’s synopsis of argument and a motion for summary judgment in favour of the appellant. Especially in light of the lapse of time since the High Court judgment and given irregularities in what both parties were pursuing, all those recent applications and motions were dismissed.[9]
[9]Green v Gillette CA278/2019, 30 June 2022 [Minute of Dobson J] at [4].
Accordingly, this judgment is confined to the grounds advanced by Mr Green for challenging the High Court finding of his liability for oppression of Mr Gillette as a minority shareholder in SunPower, and from the Judge’s analysis of the fair value of the company which dictated the extent of the award ordered against Mr Green, in Mr Gillette’s favour.
Shortly before the hearing it became apparent that the case on appeal had been inadequately prepared. It did not include the briefs of evidence of the parties or the transcripts of their relatively lengthy cross-examinations. The parties had prepared an agreed bundle of documents for use at the High Court hearing and that was also omitted from the case on appeal. Mr Green had not complied with the obligations in r 39 of the Court of Appeal (Civil) Rules 2005. There was scope for concern at the selectivity in including only documents that were relevant to his own arguments on appeal. He had not conferred with Mr Gillette as respondent on the content of the case on appeal.
Mr Green had also filed a supplementary bundle of documents, some of which were clearly not before the High Court as they were created after the High Court judgment issued. After discussion with the parties during the hearing and subsequent confirmation from them of the extent to which documents in the supplementary bundle submitted to this Court were indeed before the High Court, we were satisfied that we could deal with the issues raised by the appeal without more.[10]
The factual background
[10]The Court of Appeal registry was able to procure the briefs and transcript of evidence given in the High Court, together with the exhibits produced to that Court by the parties.
Both Messrs Green and Gillette are originally from the United States of America. Mr Green has been a citizen of New Zealand for some time. Mr Gillette became interested in becoming a shareholder and employee of SunPower whilst travelling in New Zealand in December 2015. Negotiations moved relatively quickly and the parties agreed on terms for him to be an employee, and to acquire shares up to a 49 per cent holding. A shareholder agreement was prepared and promptly signed on 18 January 2016. It provided for acquisition of tranches of shares over a period of time, and for Mr Gillette to be appointed a director of the company once he had secured a certain shareholding.
Mr Gillette relied on confirmation from SunPower of his employment by it to obtain appropriate visa status for himself, his wife and children to reside in New Zealand. Mr Green subsequently complained that Mr Gillette materially misrepresented his work skills and qualifications, relevantly meaning that he was not qualified to take on the role that they agreed he would undertake as a SunPower employee.
Mr Green was concerned that Mr Gillette’s sales efforts had not produced any new business and on 22 June 2016 terminated Mr Gillette’s employment by SunPower.
Mr Green complains that Mr Gillette failed repeatedly to sign the Companies Office form accepting appointment as a director within relevant time limits, so that the Companies Office records do not show his status as a director during the period of his involvement with SunPower.
For his part, Mr Gillette complains that the prospects for the SunPower business were materially overstated by Mr Green and that he was induced to become a shareholder with inadequate and misleading disclosure as to the company’s financial performance and prospects. He disputes that his non-appointment as a director resulted from any omission on his part.
On Mr Green’s version of events Mr Gillette absented himself from all aspects of management of the company and from his responsibilities as an in-substance director and as a shareholder from the time of his dismissal. Claiming to act in the absence of engagement by Mr Gillette and on advice as to how to protect the assets of the company, Mr Green unilaterally incorporated SunPower Solar in August 2016 and effected a transfer of SunPower’s assets to the new company in September 2016. SunPower Solar paid what appears to have been depreciated book value for the tangible assets of the business. On Mr Green’s version of events, by way of his further financial contributions and his hard work, he restored value to the business assets then being conducted by SunPower Solar, from a business with no positive or negligible net asset value, to a point where he was able to sell the assets for $120,000 in April 2017.
The High Court judgment
The misrepresentations which Mr Gillette claimed had induced him to enter into the purchase of shares included the extent of profit in the company’s previous year on top of the salary Mr Green had paid himself, as well as more general assertions in the nature of puffery as to the company’s prospects. The shareholder agreement pursuant to which the purchase occurred had been drafted by a Nelson lawyer retained by Mr Gillette with the assistance of his wife who was a lawyer practising in Singapore. The agreement contained an entire agreement clause stipulating that its terms superseded all prior negotiations. In the absence of any written representations by Mr Green, the Judge found that the claims of misrepresentation were too vague to be made out and that the entire agreement clause in the shareholder agreement precluded the claims of misrepresentation.[11]
[11]High Court judgment, above n 4, at [23]–[29].
Although not the subject of an express finding, the tenor of the Judge’s analysis suggests that Mr Gillette could have been more exacting in requiring information including items such as financial statements in writing, before making the commitments he did.[12] Mr Gillette’s evidence was to the effect that he was not shown any financial statements, but was able to view financial data displayed on a computer screen for “maybe a few minutes”. The causes of action for misrepresentation and breach of the Fair Trading Act were accordingly dismissed.
[12]At [23]–[24].
Mr Gillette separately alleged that there had been misleading or deceptive conduct on Mr Green’s part in relation to inducing him to become an employee of SunPower. His employment claims had been resolved in terms of salary and other breaches of his employer’s obligations by the award in the Employment Relations Authority. In terms of other inducements, the Judge was not persuaded that Mr Green had a plan from the outset to deceive Mr Gillette into entering into the employment agreement and that cause of action was also dismissed.[13] The issues on those causes of action are not relevant to the appeal.
[13]At [33]–[37].
Mr Gillette’s claim for oppression as a shareholder under s 174 of the Companies Act was the final cause of action and was the one that the High Court upheld. The terms of s 174 are as follows:
174 Prejudiced shareholders
(1)A shareholder or former shareholder of a company, or any other entitled person, who considers that the affairs of a company have been, or are being, or are likely to be, conducted in a manner that is, or any act or acts of the company have been, or are, or are likely to be, oppressive, unfairly discriminatory, or unfairly prejudicial to him or her in that capacity or in any other capacity, may apply to the court for an order under this section.
(2)If, on an application under this section, the court considers that it is just and equitable to do so, it may make such order as it thinks fit including, without limiting the generality of this subsection, an order—
(a)requiring the company or any other person to acquire the shareholder’s shares; or
(b)requiring the company or any other person to pay compensation to a person; or
(c)regulating the future conduct of the company’s affairs; or
(d)altering or adding to the company’s constitution; or
(e)appointing a receiver of the company; or
(f)directing the rectification of the records of the company; or
(g)putting the company into liquidation; or
(h)setting aside action taken by the company or the board in breach of this Act or the constitution of the company.
(3)No order may be made against the company or any other person under subsection (2) unless the company or that person is a party to the proceedings in which the application is made.
The Judge considered five out of a larger number of criticisms raised by Mr Gillette as evidencing Mr Green’s conduct in oppressing him as a minority shareholder of the company. These matters were:[14]
(a)that Mr Gillette had not been appointed a director as provided for in the shareholders agreement between them;
(b)that Mr Gillette was excluded from financial and operational involvement in the company;
(c)that Mr Green controlled all financial matters, in particular distribution of funds to the extent that he would withdraw funds for his own purposes as he wished;
(d)that Mr Green threatened to close the business down with the adverse consequences for Mr Gillette that he would lose the money he had recently invested and also his employment that was critical to his immigration status, to pressure him into signing further documents varying the original agreement; and
(e)that Mr Green unilaterally formed a new company and transferred the assets of the business to it without seeking shareholder approval or advising Mr Gillette of the steps being taken.
[14]At [40].
The Judge found that Mr Green continued to exert effective control over management and governance of SunPower during the period in which Mr Gillette was the minority shareholder. He had sole control over banking matters and also over supply arrangements. Mr Green had provided personal guarantees for the supply of materials and in that regard the Judge recognised that he was somewhat more at risk than Mr Gillette was. Notwithstanding that, the Judge accepted that Mr Gillette was effectively excluded from any meaningful input into the financial performance of the company and was excluded from access to accounting and management records.[15]
[15]At [41].
In reviewing the exchanges between the parties when their differences arose during June 2016, the Judge accepted Mr Gillette’s evidence that he was forced to sign documents that purported to defer his right to become a director under the shareholders agreement. The Judge found that whether or not Mr Gillette was a director in substance (he was not registered as such with the Companies Office), recognition of a director’s position would not have made an effective difference because Mr Green asserted complete control.[16]
[16]At [42]–[47].
The Judge found the evidence on these matters sufficient to make out the requirements of s 174 in that Mr Green had engaged in oppressive, unfairly prejudicial conduct in dealing with Mr Gillette as the minority shareholder.[17] The Judge then considered the circumstances in which Mr Green procured the sale of the business assets of SunPower to SunPower Solar in September 2016 and treated that conduct as a more obvious reason for applying s 174 to afford Mr Gillette a remedy for oppression. The Judge found that Mr Green unilaterally effected the transfer of all the business assets from SunPower to SunPower Solar paying only $6,600 for identified tangible assets.[18] The Judge observed that there was no payment for goodwill notwithstanding that that was the principal asset of SunPower.[19] Those steps were all taken without advising Mr Gillette that they were occurring.[20]
[17]At [48]–[49].
[18]At [51]. It is understandable that the Judge would not include some of the items Mr Green persuaded us SunPower Solar had paid for (that is, $7,900, see [2] above) but the difference is not material.
[19]At [51].
[20]At [63].
As to remedy, the Judge considered the appropriate form would be to require Mr Green to acquire Mr Gillette’s 49 per cent holding, for what the Judge determined to be fair value.[21] In fixing fair value the Judge reflected on Mr Gillette having paid $98,000 for the 49 per cent share, and that SunPower Solar’s business was sold in April 2017 for $120,000.[22] The Judge rejected Mr Green’s claims that there was no net value in the SunPower business because of Mr Gillette’s failure to generate business, when contrasted with Mr Green’s successful efforts in generating a positive level of business for SunPower Solar in the last quarter of 2016 and the first half of 2017.[23] The Judge also rejected claims by Mr Green that the improved value of the business assets was attributable to his having injected funds to clear indebtedness of SunPower.[24]
[21]At [64].
[22]At [68].
[23]At [56]–[58].
[24]At [60]–[61].
The Judge accordingly concluded that the price at which Mr Green had sold the business assets of SunPower Solar reflected fair value for the shares of SunPower at the time he oppressed Mr Gillette as the minority shareholder of that company.[25] The Judge ordered that Mr Green was to pay Mr Gillette $60,000 together with any interest from the date of judgment, and that on payment of that amount Mr Gillette was to execute share transfers for the 49 per cent of the shares in SunPower back to Mr Green.[26]
Issues on the appeal
[25]At [69].
[26]At [70].
Mr Green’s principal criticisms of the judgment under appeal may be listed as follows:
(a)First, Mr Gillette fraudulently falsified details of his experience and qualifications, thereby inducing Mr Green to enter into the shareholder agreement with him.
(b)Second, the Judge wrongly treated the intellectual property being applied by SunPower as if owned by the company when Mr Green claims that he personally owned the intellectual property.
(c)Third, the Judge erred in analysing the circumstances of Mr Gillette’s putative appointment as a director.
(d)Fourth, the Judge erred in fixing the value of Mr Gillette’s 49 per cent shareholding. Arguably at the time of Mr Gillette’s exclusion, his shareholding had no positive value.
Mr Gillette’s misrepresentations inducing shareholder agreement
On appeal, Mr Green has argued that he was induced to enter into the shareholder agreement with Mr Gillette by Mr Gillette falsely representing that he had the requisite skills to undertake the sales role for the specialised solar panel business operated by SunPower. Specifically, the curriculum vitae Mr Gillette presented to Mr Green included as work experience a period as an electronics specialist in the United States Air Force, and in terms of his education that he had obtained United States Air Force avionics and electronics certifications. Mr Green claimed that Mr Gillette had subsequently confirmed to him that those representations were false. He had challenged Mr Gillette to produce certificates as proof of those qualifications and claimed that Mr Gillette could not do so. For his part, Mr Gillette denied that he had made any such acknowledgement and maintained that the details in his curriculum vitae were accurate.
Mr Green argued that the difficulties that developed during the period Mr Gillette was working with the company were caused by his lack of competence in the tasks allocated to him as an employee. Had the issue been confronted in a timely way, Mr Green argued that he would have had grounds for cancelling the agreement.
This issue was not squarely put to the Judge and the Judge made no finding as to whether Mr Gillette had either innocently or fraudulently misrepresented his qualifications or work skills in the curriculum vitae that he provided for Mr Green in their initial negotiations.
There is no scope to entertain a new ground for resisting liability on appeal in these circumstances. In any event, we are not persuaded that a misrepresentation as to Mr Gillette’s skills as an employee could constitute any sufficient justification for Mr Green as majority shareholder to ignore Mr Gillette’s interests as a minority shareholder sufficiently to absolve him of his liability for oppression under s 174. The shareholders agreement made no reference to the relevant work skills that shareholders might contribute to the business of the company as employees. Further, as Mr Green invoked on his own behalf in argument in the High Court, it contained a whole agreement clause (cl 19.3) recording that it constituted the parties’ full agreement and superseded any previous negotiations, proposals or agreements.
In his oral submissions Mr Green also addressed an additional criticism of Mr Gillette’s performance under the shareholder agreement that appeared not to have been raised in any of his written documents filed with this Court. The terms for Mr Gillette’s purchase of a 49 per cent shareholding provided that he was initially to acquire 26 per cent of the shares with two payments, first of $32,000 on settlement of the agreement and thereafter the remaining $20,000 on the 60th day after establishment of the employee position intended for Mr Gillette. The agreement then provided for Mr Gillette to have an option to acquire a further 23 per cent of the shares at the same price per share, to be exercised at any time up to a certain point after his commencement as an employee.
Mr Green’s new argument was that the staged timing for acquisition of the shareholding was “a rigid timeline to allow us to get to know each other”. He argued that he was induced by Mr Gillette to collapse that timetable so that, on Mr Green’s perception, he owed greater obligations to Mr Gillette as a 49 per cent shareholder from an earlier point in time than was contemplated.
There is nothing in this point. The timing for later acquisitions provided in the shareholder agreement was permissive at Mr Gillette’s option. Mr Green did not have any right under the terms of the agreement to delay Mr Gillette’s acquisition of the shareholding. Nor is there any suggestion in the evidence that he would at the time have sought to defer taking some of Mr Gillette’s money. In any event, the obligations owed by the majority shareholder to a minority shareholder would not have been materially different had the holding only been, say, the first 26 per cent.
Mr Green made much of the lack of communication from Mr Gillette once he had been dismissed in or around the third week of June 2016. Mr Green did not raise this as a separate ground of appeal and it was unclear whether he emphasised the lack of responses from Mr Gillette as either a complete excuse for Mr Green’s own conduct in transferring the assets of the company without consultation, or that Mr Gillette’s lack of participation in some way lessened the seriousness of Mr Green’s breach of his obligations under s 174.
Mr Gillette denied that there was any point in engaging with Mr Green on the latter’s terms. From his perspective, Mr Green was never going to share control of the company or recognise Mr Gillette’s entitlement to participate in governance decisions. He instanced his 1 August 2016 letter to Mr Green as his attempt to seek engagement on matters of concern to him. It appears many of those issues had been outstanding for some time, and there is no evidence of positive engagement in response to the letter from Mr Green or on his behalf.
In response to Mr Green’s claim that he was responsible for “deadlock[ing]” SunPower, Mr Gillette made the point that to impose any sort of deadlock on the company’s decision-making, he would first have to have been given a role in that decision-making which had never occurred.
It is sufficiently clear on the evidence that Mr Green retained sole control over all aspects of the governance of SunPower throughout the period during which Mr Gillette was a shareholder. It is untenable to suggest that the absence of engagement by Mr Gillette in the period after he had been dismissed by Mr Green either justified the steps Mr Green then took unilaterally, or in some way lessened the relative seriousness of the oppressive conduct.
Section 175 of the Companies Act includes a list of conduct in relation to governance of a company that is to be treated as unfairly prejudicial for the purposes of s 174. That list includes in s 175(1)(l) the undertaking of a major transaction in respect of the company’s assets which is the essential complaint involved in this case.
We are satisfied that the finding of breach of Mr Green’s obligations under s 174 could not be altered by some different consideration of the circumstances in which there was a lack of positive communication between the parties during the relevant period. Had Mr Green given, say, 21 days’ notice of his proposal to undertake a major transaction including sale of the company’s assets, then it is clear that Mr Gillette would indeed have responded.
Ownership of the intellectual property
Mr Green submitted that the Judge had erred in treating the intangible assets of SunPower, and in particular its goodwill and intellectual property, as being owned by the company. Instead, Mr Green contended that he retained all such items as his personal property. It followed that, on Mr Green’s reconstruction, SunPower had only its tangible assets to sell to the new company he formed, whereas it was open to him to include the goodwill and other aspects of intangible assets when he sold the second business on to a third party in April 2017. Arguably, this error had resulted in the Judge substantially overvaluing the assets when fixing fair value of Mr Gillette’s 49 per cent holding. It was also implicit in Mr Green’s argument that if he only dealt with the modest tangible assets ignoring Mr Gillette’s entitlement to participate, then that was far less serious oppressive conduct.
The shareholder agreement addressed ownership of intellectual property in the following terms:
16. Intellectual Property
16.1Each Shareholder acknowledges and agrees that the Company owns and will continue to own any Intellectual Property created, made or developed by or on behalf of the Company in the course of the Business including (without limitation) any Intellectual Property developed by any Shareholder contracted to the Company when such Intellectual Property was created, made or developed as part of or incidental to the performance of such contract. For the avoidance of doubt, this will not include:
(a)Any Intellectual Property created by the relevant Shareholder outside the terms of any such contract;
(b)Any Intellectual Property that was in existence prior to embarking on the performance of any such contract which is merely applied by the relevant Shareholder in performance of any contract with the Company; and/or
(c)Any Intellectual Property not for the direct or indirect benefit of the Business.
16.2 Each Shareholder acknowledges and agrees that:
(a)The Company or its licensors are the sole owners of the Intellectual Property;
(b)It has no right over, interest in, or ownership of any Intellectual Property;
(c)It will not assert any right over, interest in, or ownership of any Intellectual Property;
(d)It will not consent or challenge in any legal proceedings or otherwise undermine the Company’s or its licensors’ proprietorship, ownership or use of the Intellectual Property; and
(e)All the goodwill and rights resulting from the use of the Intellectual Property by that party or otherwise will enure for the benefit of the Company.
Mr Green addressed ownership of intangible property somewhat tangentially in answering a question from the Judge during his evidence:
Well the company [SunPower Ltd] consisted of plant, some stock and some tools and my know how and website and things. So yes I transferred myself and I transferred the furniture and the tools and the stock.
The Judge dealt with the issue as follows:[27]
[59] Next it was argued that the goodwill of the business was personal to Mr Green. I accept that a purchaser would have regarded Mr Green’s continued involvement as important in preserving the goodwill of the business. That is why the buyer was prepared to offer employment with the additional $80,000 per annum in salary to have Mr Green continue. But that was over and above the amount paid for the company’s goodwill. It is also clear that the goodwill was an asset owned by SunPower, and effectively transferred to Sunpower Solar when the business was transferred. Under cl 16.2(a) of the Shareholders Agreement Mr Green warranted that the company was the sole owner of the intellectual property, and intellectual property was broadly defined, and included all intellectual property rights and confidential information used in the business. It clearly encompasses the goodwill of the business operated by SunPower.
[27]High Court judgment, above n 4.
Mr Green’s argument on appeal was that all of the intellectual property that he took with him from SunPower came within the exclusions described in cl 16.1(a) and (b) of the shareholder agreement, namely having been created by him outside the terms of any contract between him and the company or constituted intellectual property that was in existence prior to his own contract with the company.
Mr Green also submitted at one point that cl 16 only gave the company ownership of intellectual property created after the shareholder agreement was completed. That is an untenable interpretation. The exclusion in cl 16.1 applies to items of intellectual property that were created or acquired outside the scope of any shareholder’s employment by the company.
It is tolerably clear that Mr Green had used SunPower as the vehicle for developing the relevant business. He claimed to have built the business up whilst controlling SunPower. When he agreed to sell a minority stake to Mr Gillette, he provided the acknowledgement in cl 16.2 that the company was the sole owner of the intellectual property and that he had no right over it, subject only to the exceptions in cl 16.1 that meant he could retain ownership of anything created, effectively, outside his work for the company.
The Judge did not consider the scope of the exclusions in cl 16.1 of the shareholder agreement. However, it is understandable that the origins of individual components of the intellectual property were not focussed upon in any detail at the High Court hearing. When the terms of cl 16 of the shareholder agreement are assessed in light of the history of the business and reflecting on the types of intellectual property that were referred to in general terms, we are not persuaded that the Judge erred in reaching the conclusion he did about the company’s ownership of the intellectual property.
The balance sheet in evidence for SunPower recorded its total current and fixed assets at $65,270.61 at 31 March 2015 and $72,005.13 at 31 March 2016. After taking into account liabilities owing at those dates, the net asset position reduced to zero at the end of March 2015 and a deficit of $2,175.90 at the end of March 2016.
In contrast, in Mr Green’s negotiations with Mr Gillette in January 2016, he attributed a value to the company of $200,000, to arrive at the price of $98,000 for 49 per cent of it. The clear inference is that the value resided in the company’s intangible assets, essentially comprising its intellectual property. In his oral submissions Mr Gillette acknowledged that Mr Green is highly skilled at what he does, that he was effectively buying into those skills, and pointed to the absence of any evidence that Mr Green had identified any parts of the intellectual property being used by the company that were retained as his separate property.
The evidence does not include a breakdown of intangible assets or values attributed to it at various times. However in general terms, it would clearly include items such as licences to operate, logos, the know how in relation to solar panels, the communication details which would have enabled SunPower Solar to give an appearance of continuity, as well as the network of connections which would have been built up during the period in which Mr Green conducted the business of SunPower. Expert valuers could readily value such items at substantially different amounts. In general terms, it is clear that they were of significant value, and on any view, exceeded the value of tangible assets by many multiples. It was the whole of the company’s undertaking that Mr Green dealt with, in breach of obligations to Mr Gillette.
Mr Gillette’s standing as a director of SunPower
Clause 3.4 of the shareholder agreement committed Mr Green to appointing Mr Gillette as a director immediately upon payment of what was then contemplated as the second tranche of money paid to lift his shareholding to 26 per cent. Each of the parties blames the other for Mr Gillette not having confirmed status as a director of the company from the date of acquisition of the relevant tranche of shares.
On Mr Green’s version, he provided a form for Mr Gillette to indicate his acceptance of the appointment on 24 February 2016. In late March Mr Green contends that the Companies Office removed Mr Gillette’s appointment as a director because of the non-filing of a signed acceptance of his appointment. A second acceptance form was supposedly provided to Mr Gillette on 1 April 2016, but was again not signed.
Mr Gillette’s version was that he was keen to accept appointment but was blocked by Mr Green’s failure to co-operate in formalising the appointment. In oral submissions, Mr Gillette complained that Mr Green controlled log-in to the Companies Office register for the company, so that it was unrealistic to expect him to complete filing of the signed acceptance form. On his version of this matter, he prepared and signed an acceptance form in August 2016. Mr Green criticised this document as “fraudulent”.
We did not take Mr Green to go so far as to argue that if Mr Gillette had positively engaged by accepting formal appointment as a director, then Mr Green’s dialogue with him about the future of the company may have been more inclusive.
The Judge dealt with this point as follows:[28]
[47] There is a dispute between the parties as to the responsibility for the failure for Mr Gillette being registered as a director of the company at the Companies Office — both say the other is responsible for failing to take the administrative steps required. Mr Gillette was never formally registered. But even if he had been formally registered it would have made no effective difference as Mr Green had complete control regardless. I reject Mr Green’s argument that Mr Gillette was a director in substance.
[28]High Court judgment, above n 4.
The Judge’s final observation in that paragraph suggests that in the High Court, Mr Green was arguing that Mr Gillette’s position throughout the relevant period was as if he had been formally appointed a director.
In any event, we agree with the Judge that it is not relevant to the issues now pursued on appeal as to which of the parties was responsible for Mr Gillette not formally becoming a director. Certainly given the realities of the relationship between Messrs Green and Gillette, when assessing whether Mr Green abused his position of practical control over the company to oppress Mr Gillette, whether the latter was a director or not is a matter of indifference.
Valuation of the 49 per cent shareholding
Mr Green raised a number of criticisms of the Judge’s approach in adopting as fair value of the shares in SunPower, the price paid by BSC Shipping for the business assets of SunPower Solar some eight months after they were transferred. The first of these was the discrete challenge to inclusion in the valuation of intellectual property which Mr Green asserted was in his own personal ownership. We have considered and rejected that argument above.
The second criticism of the Judge’s valuation was that it disregarded the benefit of Mr Green’s good work once he had transferred the assets from SunPower in September 2016 and re-established a supposedly profitable level of business for SunPower Solar in the period up to finding a buyer, and selling it in April 2017.
A component of this argument was Mr Green’s contention that poor performance by Mr Gillette in the first half of 2016 had harmed SunPower to the extent that there was no goodwill in the business as at June 2016.
The Judge dismissed these arguments, having undertaken a comparison of the profitability of SunPower in the year to 31 March 2015 (net operating profit of $30,294) with the profitability of that company to 31 March 2016 (small operating loss of $2,176) and an operating loss for the year to 31 March 2017 of $28,907. There were explanations for the operating losses in the latter two years and the Judge discerned no meaningful change in the financial performance of the business arising from the trading activities that would explain a dramatic change in value of its assets between August 2016 and April 2017. He found that the company’s value existed in the form of its potential given its established reputation and supply lines.[29]
[29]High Court Judgment, above n 4, at [57].
There was no valuation or other expert evidence on the longer term impact of a dip in the level of trading activity such as appears to have occurred in the first half of 2016. There is no basis in the evidence, or in Mr Green’s arguments on appeal, to warrant our rejecting the Judge’s conclusion that the company’s business was of a type that is appropriately valued by looking at its established reputation and supply lines, and its potential position in the market. We accordingly reject Mr Green’s argument that his initiatives in the period between transferring the company’s business to SunPower Solar and agreeing to sell that business deprive the sale price to the third party of relevance in establishing fair value for the required re-purchase of Mr Gillette’s 49 per cent shareholding.
There appears to have been no close analysis in the High Court as to the date at which fair value of Mr Gillette’s shares should be reconstructed. Nor did we receive any analysis on the point from the parties in their submissions on appeal. Re-transfer of the shares to Mr Green is only to occur as a consequence of the orders made by the Court and Mr Gillette’s contention was that he ought to have been entitled to unwind the whole transaction, by getting back all of his original investment of $98,000 in return for transferring the shares to Mr Green.
The remedies provided for in s 174 contemplate flexibility so that the court can make orders of a variety of types, as best suits the circumstances of each actionable breach of the section. There can be no hard and fast rule for fixing fair value in a case where re-transfer of a minority shareholding is ordered.[30] In this case, the appropriate approach is to fix a value at the point in time at which the oppressive conduct by Mr Green occurred.
[30]See Stephen Revill and Linda Howes Company Law (online ed, Thomson Reuters) at [CA174.07].
On 2 August 2016 Mr Green obtained a short informal assessment of the value of the shares in SunPower from his accountants, Crowe Horwath. In one relatively short paragraph each, the accountants addressed two modes of valuing the shares. The first assessed the shares on an earnings basis. Given that the draft profit and loss accounts to 31 March 2016 showed a loss, it followed that there were no earnings to capitalise, and on that method the accountants opined that the company had no value. Secondly, a valuation was projected on an assets basis. Using a balance sheet from Xero the accountants noted total assets of $76,122 and liabilities of $65,190. On that basis the company had net assets and accordingly equity of only $10,932.
The valuation on earnings was on a very narrow basis, and is inconsistent with the amounts Mr Gillette was prepared to pay in January 2016 and which BSC Shipping was prepared to pay eight months later. As to the asset valuation, no account was taken of the intangible assets. On the basis of our analysis above, that was the major component of the value in the company. The accountant’s email ended with a caveat that it reflected an assessment of the financial position “on what we have in front of us” and “that this is a high level indication only”. We are satisfied that, particularly without evidence of greater analysis and the opportunity for cross-examination, that cannot represent a reliable indication of fair value for Mr Gillette’s shares.
The third criticism raised by Mr Green in challenging the fair price set by the Judge is that it failed to have regard to the amount Mr Green paid from his own resources to discharge debts owed by SunPower to suppliers.
Mr Green submitted that he had applied personal resources to clear $80,000 in debts owed to suppliers of SunPower and had also cleared a $30,000 overdraft. He submitted that the Judge ought to have had regard to that as affecting the value he was able to obtain on a sale of SunPower Solar’s business to BSC Shipping.
Mr Green had raised this argument in the High Court. The Judge dealt with it as follows:[31]
[61] There are two answers to that suggestion. First it was not the company that was being sold, but its business assets. Any amounts invested into the company by Mr Green might have been to the benefit of the company, but they did not change the value of its business. Secondly, and in any event, the evidence does not support Mr Green’s contention as a matter of fact. The accounts to 31 March 2016 record that Mr Green owed SunPower Ltd $60,742 as a result of shareholder advances. To identify what Mr Green invested in the following financial year, it is necessary to consider the annual accounts of both SunPower and Sunpower Solar, as the business was transferred from one to the other during that financial year. The accounts of SunPower record that Mr Green reinvested $83,606 into the company eliminating Mr Green’s debt of $60,741 and leaving the shareholders account in credit to the amount of $22,865. That supports Mr Green’s contention. But the accounts for Sunpower Solar for the same period shows Mr Green’s shareholders current account in deficit by $71,974. The net effect across both sets of accounts is that Mr Green repaid or reinvested only approximately $10,000 of the $60,000 he had extracted. Presumably he was able to use some of the $98,000 paid to him by Mr Gillette for 49 per cent ownership to do so.
[31]High Court judgment, above n 4.
When pressed by us, Mr Green accepted that the Judge had correctly taken these figures from the relevant financial statements. He criticised the presumption made in the last sentence.
As to the first of the Judge’s reasons, its relevance may be subject to some qualification. Mr Green could argue that the extent of SunPower’s debt was crippling so that, without a cash injection, it would not have been possible to resurrect it as a viable business to enable its assets to be portrayed as such to a potential buyer. In that sense, Mr Green’s commitments subsequent to the unauthorised transfer of assets from SunPower to SunPower Solar were necessary to demonstrate the viability of the business to an extent that would attract a buyer.
Such a commercially prudent intervention may have occurred, but the assets attracting the third party buyer are the same as those transferred from SunPower to SunPower Solar. In the context of a sale of assets, we agree with the Judge that the extent of working capital required to demonstrate the viability of the business cannot of itself affect the ascertainment of the fair price for 49 per cent of the shares in the original business.
As to the net extent of Mr Green’s commitment of personal resources, he agreed with the Judge’s arithmetic. The upshot is that the net extent of additional working capital required from Mr Green in the period between transferring the assets and selling them on to a third party is not exceptional and nor can it affect the appropriateness of what a third party has paid for the assets as an indication of the fair value of 49 per cent of the shares in the original company.
The last of Mr Green’s criticisms of the Judge’s determination of fair price was that, if the price achieved on his resale of the business was to be applied, then it ought at least to have been a net recovery after deduction of direct expenses of sale. Mr Green submitted that he had paid a real estate agent’s commission of $17,250 (including GST) to procure the sale. He also referred to other “direct costs such as accounting fees and legal fees associated with the sale”, details of which he volunteered to provide to the Court. This impact on the fair price is not addressed by the Judge and it is unclear as to whether the point was taken by Mr Green at the High Court hearing.
The ascertainment of a fair price for 49 per cent of the shares was validly fixed by ascertaining what a willing third party buyer would pay for the assets. We do not accept that that proxy for value has to take into account the costs to the vendor of procuring the sale. In any event, a commission of 12.5 per cent for a transaction of this nature appears unusually high. Mr Green advised us that the $15,000 fee was a minimum, irrespective of the value of the business assets. Even if costs of sale were conceptually available as a deduction, we would not accept 12.5 per cent as appropriate.
We do not accept that the Judge’s approach to establishing a fair price for Mr Gillette’s shareholding erred by virtue of not taking into account the costs of sale incurred by Mr Green as vendor.
We are accordingly not persuaded that Mr Green has made out any error in the Judge’s approach to setting the fair price for Mr Gillette’s shares. Standing back, Mr Gillette was persuaded to pay $98,000 for those shares on a very casual and vague description of the present and likely future value of the business. He may well have been motivated not to question whether that was more than fair value by the opportunity the shareholding would provide for him to also gain employment and thereby have grounds to apply for the desired category of visa for him and his family which appears to have been important to him. Thereafter, a disastrous employment situation evolved. The appeal does not relate in any way to the resolution to his dispute as an employee in the Employment Relations Authority.
After approximately six months Mr Green, exerting complete control and without notice to Mr Gillette, had transferred the business undertaking to a separate company owned entirely by him. Eight months thereafter, he was prepared to sell that same business undertaking for $120,000. In the absence of reconstructed valuations by experts several years after the events, we agree with the Judge that the price paid for the business by a third party was the appropriate reference point for fixing the fair value for Mr Gillette’s shareholding. Had independent valuers opined on the fair value, it seems highly likely that the price for which the same business was on-sold would have had an important influence on their valuation in any event.
For all the foregoing reasons, the appeal is dismissed.
Costs
Both parties were self-represented. Mr Gillette is entitled to an order requiring Mr Green to pay him all reasonable disbursements incurred in the categories usually allowed, if necessary to be fixed by the Registrar.