Greymouth Holdings Limited v Jet Trustees Limited
[2014] NZHC 2679
•30 October 2014
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
COMMERCIAL LIST
CIV 2011-404-005309 [2014] NZHC 2679
BETWEEN GREYMOUTH HOLDINGS LIMITED
First Plaintiff
R M P DUNPHY Second Plaintiff
P H AND J A MASFEN Third Plaintiffs
AND
JET TRUSTEES LIMITED First Defendant
J G STURGESS Second Defendant
cont../2
Hearing: 15 October 2014 Appearances:
J A Farmer QC, M D O'Brien and B J Ward for Greymouth
Petroleum Holdings Limited
P G Skelton QC and A Borchardt for Jet Trustees Limited
J G Sturgess in personJudgment:
30 October 2014
JUDGMENT OF GILBERT J [Second judgment relating to sale notices]
This judgment is delivered by me on 30 October 2014 at 3pm pursuant to r 11.5 of the High Court Rules.
..................................................... Registrar / Deputy Registrar
GREYMOUTH HOLDINGS LTD & ORS v JET TRUSTEES LTD & ORS [2014] NZHC 2679 [30 October
2014]
CIV 2011-404-005309
JOHN STURGESS & ASSOCIATES LIMITED
Third Defendant
GREYMOUTH PETROLEUM HOLDINGS LMITED
Fourth Defendant and Cross-Claimant
CIV 2011-404-005442
BETWEEN J G STURGESS First Plaintiff
JET TRUSTEES LIMITED Second Plaintiff
JOHN STURGESS & ASSOCIATES LIMITED
Third Plaintiff
ANDR M P DUNPHY First Defendant
GREYMOUTH HOLDINGS LIMITED Second Defendant
RICHARD SHANE DUNPHY AND WENDY DUNPHY
Third Defendants
JUGEN KADEL Fourth Defendant
TOWER HILL INVESTORS LLP Fifth Defendant
GERMANDA HOLDINGS LIMITED Sixth Defendant
PETER HANBURY MASFEN AND JOANNA ALISON MASFEN Seventh Defendants
GREYMOUTH PETROLEUM HOLDINGS LIMITED
Eighth Defendant
Introduction
[1] In a judgment given on 12 September 2014, I determined that sale notices issued by Jet Trustees Ltd and Mr Sturgess did not conform to the terms of the sealed orders because the fair market value of the shares (FMV) has not been finally determined by the arbitrator.1 These orders relevantly provide:
1. The first defendant (Jet Trustees Limited) and the second defendant (Mr John Gilbert Sturgess) (together and separately “the Sturgess interests”) shall sell their shares (“the shares”) in Greymouth Petroleum Holdings Limited (“GPHL”) and in or in respect of all other companies and related entities owned legally or beneficially by the shareholders in GPHL (together and separately “the Greymouth Group”), being in aggregate 13.856 per cent of the total shares issued by those companies, at the fair market value (“the FMV”) determined by the arbitration (“the arbitration”) currently being undertaken by the parties to the 5309 proceeding and on such other terms or at such other price as might otherwise be agreed in accordance with clause 8 of the parties’ Shareholder Agreement.
3. If no sale of the shares has been effected prior to the commencement of the FMV arbitration hearing, the Sturgess interests must, within
10 working days following the determination of FMV, give a sale notice
offering to transfer the shares to GPHL (for itself and as agent for all
Greymouth Group companies and related entities) at FMV and clauses 8.5 to
8.10 and 8.12 of the Shareholder Agreement shall apply as appropriate with the necessary modifications.
[2] Since that judgment was issued, Jet Trustees and Mr Sturgess have proposed replacement sale notices which raise further issues:
(a) Should there be one sale notice covering the shares held by Jet Trustees Limited and Mr Sturgess as the Group 2 shareholders or two separate notices?
(b) Should the time for acceptance of the sale notice be extended from
10 working days, as provided in cl 8.6 of the Shareholder Agreement, to 20 working days?
(c) Is the sale subject to bank consent?
1 Greymouth Holdings Limited & Ors v Jet Trustees Limited & Ors [2014] NZHC 2283.
(d)Are the Group 2 shareholders entitled to include terms in the sale notice stipulating that:
(i)FMV must be paid without deduction for resident withholding tax?
(ii) FMV must be paid without set-off for damages? (iii) FMV must be paid without set-off for costs?
(iv)No company in the Greymouth Group that issued shares to Jet Trustees may acquire those shares if this would result in the shares being cancelled?
(v) Greymouth Petroleum Holdings Ltd (GPHL) must acquire all
of Mr Sturgess’ shares on its own behalf as treasury stock?
Should there be one sale notice or two?
[3] Mr Skelton QC submits that two sale notices are required because there must be two share transfer forms and two payments, one for Jet Trustees and the other for Mr Sturgess. Mr Farmer QC argues that there should only be one notice because this is what order 3 requires.
[4] I accept Mr Skelton’s submission. The order directs Mr Sturgess and Jet Trustees to issue a sale notice. Neither can compel the other to do so but each must comply. If the offers contained in the sale notices are accepted, this will result in separate transfers requiring separate payments. If the offers are not accepted, Mr Sturgess and Jet Trustees will each be free to exercise their rights under the Shareholder Agreement.
[5] I note that this conclusion is consistent with the approach previously taken by
GPHL and the Groups 1 and 3 shareholders. They drafted separate sale notices for
Jet Trustees and Mr Sturgess and submitted these to the Court of Appeal for approval.2
Should the time for acceptance of the sale notice be extended from 10 working days to 20?
[6] GPHL initially sought an order extending the date for acceptance of the sale notice from 10 working days to 20 working days. I am unable to see any basis for an extension of time. The order explicitly provides that cl 8.6 of the Shareholder Agreement applies. The time limit specified in this clause is 10 working days from the date the notice is given. Mr Farmer confirmed at the hearing that GPHL no longer seeks this order.
Is the sale subject to bank consent?
[7] Clause 8.7 of the Shareholder Agreement provides that settlement shall occur
10 working days after acceptance or 10 working days after the last of the consents referred to in cl 8.8 is obtained. Clause 8.8 requires the parties to obtain “all necessary consents to the sale and purchase of the Sale Interest, including any consent required from any governmental or regulatory agency or authority”.
[8] Bank of New Zealand provides funding to the Greymouth Group under two facility agreements. It is a term of each of these agreements that the bank’s written consent must be obtained prior to any member of the Group repurchasing its shares, other than redeemable preference shares. Bank consent is therefore a “necessary consent” within cl 8.8. However, bank approval of funding for the purchase would not be a necessary consent in terms of cl 8.8.
Are the Group 2 shareholders entitled to stipulate that FMV must be paid without deduction for resident withholding tax?
[9] Section 59 of the Companies Act 1993 allows a company to purchase shares
it has issued provided that this is expressly permitted by its constitution. GPHL’s
constitution does permit this. Such shares are deemed to be cancelled immediately
2 See attachments 3 and 4 to memorandum dated 21 August 2014.
on acquisition, subject to the treasury stock exception. Section 66(1) of the Act provides:
66 Cancellation of shares repurchased
(1) Subject to sections 67A to 67C, shares that are acquired by a
company pursuant to section 59 or sections 112 to 112C are deemed to be cancelled immediately on acquisition.
[10] The exception to the automatic cancellation rule for treasury stock is set out in ss 67A to 67C. Section 67A(1) relevantly provides:
Treasury stock
67A Company may hold its own shares
(1) Shares acquired by a company pursuant to s 59 … shall not be
deemed to be cancelled under s 66(1) if –
(a) the constitution of the company expressly permits the company to hold its own shares; and
(b) the board of the company resolves that the shares
concerned shall not be cancelled on acquisition; and
(c) the number of shares acquired, when aggregated with shares of the same class held by the company pursuant to this section at the time of the acquisition, does not exceed
5% of the shares of that class previously issued by the company, excluding shares previously deemed to be
cancelled under section 66(1).
[11] Where shares acquired by a company are cancelled, the market value of the transfer of those shares is deemed to be nil for tax purposes. The amount paid by the company for the shares is therefore treated as a dividend to the shareholder. Section CD 5 of the Income Tax Act 2007 relevantly provides:
CD What is a transfer of value?
General Test
(1) A transfer of value from a company to a person occurs when - (a) the company provides money or money’s worth to the
person; and
(b) if the person provides any money or money’s worth to the
company under the same arrangement, the market value of what the company provides is more than the market value of what the person provides.
…
When shares are cancelled
(2B) The market value of any transfer from the shareholder to the company on the cancellation of a share of the shareholder’s rights as a shareholder is zero.
[12] It follows that, subject to the exception for treasury stock, if GPHL or any other member of the Greymouth Group, elects to purchase any shares issued by that company, this will give rise to a deemed dividend to the Group 2 shareholders that will attract resident withholding tax.
[13] The Group 2 shareholders would prefer to avoid the incidence of resident withholding tax which they say is an unexpected consequence of the order that requires the shares to be offered to GPHL and other companies in the Greymouth Group. The Group 2 shareholders say that they hold their shares on capital account and that any gain on a sale of the shares to any party outside the group would not be subject to tax.
[14] The Group 2 shareholders seek to transfer the tax burden to GPHL by including a term in the sale notice stipulating that the full amount of FMV must be paid to them without any deduction for resident withholding tax. This is not permissible. The sealed order requires the Group 2 shareholders to offer their shares to GPHL at FMV, not FMV plus resident withholding tax. The Group 2 shareholders are not entitled to require GPHL to pay FMV plus resident withholding tax by stipulating that no deduction can be made for this tax. That would be contrary to the order.
Are the Group 2 shareholders entitled to stipulate that FMV must be paid without set-off for damages?
[15] The draft sale notices require payment of FMV without any other set-off or deduction. GPHL objects to this term on the basis that it would defeat its equitable right to set-off the damages it claims from Mr Sturgess in relation to his negligent conduct of operations at Midhurst and Radnor. The hearing to quantify these damages is presently adjourned part-heard. However, it is now clear that GPHL is
fully secured for its claims by the money held in Court.3
[16] It follows that GPHL has already fully exhausted any right of set-off it may have and there is no basis for any further set-off. Mr Farmer accepted this at the
3 These monies are held in terms of the judgment given on 26 June 2014: Greymouth Holdings
Limited & Ors v Jet Trustees Limited & Ors [2014] NZHC 1418.
hearing and confirmed that GPHL will not pursue any further set-off for these damages.
Are the Group 2 shareholders entitled to stipulate that FMV must be paid without set-off for costs?
[17] The draft sale notices include a term that would preclude GPHL from exercising any right of lien under the constitution of the company. GPHL claims that it will be entitled to costs against Mr Sturgess and Jet Trustees for the proceedings in this Court, the Court of Appeal and the Supreme Court and for the arbitration hearing. GPHL claims that it will be entitled to exercise its right of lien over the shares in respect of these costs. That may turn out to be the case, but there is not yet any order for costs. There is therefore no present liability or obligation to pay costs in respect of which a lien could attach. I do not consider that GPHL has any right to make any deduction on account of its prospective entitlement to costs.
Are the Group 2 shareholders entitled to stipulate that no company in the Greymouth Group may acquire Jet Trustees’ shares if this would result in those shares being cancelld?
[18] Recognising the difficulty with a term requiring that no deduction be made from FMV for resident withholding tax, the Group 2 shareholders have formulated other ways of structuring the transaction so that no tax is payable. They have advanced two proposals, one for Jet Trustees and another for Mr Sturgess. For this reason, separate sale notices have been drafted, each with different terms. Both notices purport to stipulate the party or parties that may purchase, the basis of the purchase and what may be done with the shares following purchase.
[19] Jet Trustees’ draft sale notice reads:
1.In accordance with order 3 of the Sealed Orders, the Seller hereby gives a sale notice to GPHL (for itself and [as] agent for all Greymouth Group companies) offering to transfer:
(a) its legal ownership of 118,560 ordinary shares held by it in
GPHL; and
(b) all its beneficial ownership and interest in shares in all other companies and related entities owned legally or
beneficially by the shareholders of GPHL and forming part of the Greymouth Group;
(collectively the Sale Interest), for [a] total consideration of [NZ$ ] subject to the terms and conditions in paragraphs 2 to 6 below.
2.This sale notice may, subject to paragraphs 3 and 4 below, be exercised by GPHL for itself, and for all or any of the Potential Transferees as may be selected by GPHL to take transfers of all or any part of the Sale Interests, and clauses 8.5 to 8.10 and 8.12 of the Shareholders’ Agreement shall apply as appropriate with the necessary modifications.
3.The Sale Interest is not divisible and GPHL may accept all but not part only of the Sale Interest.
4.Notwithstanding paragraph 3 above, GPHL may not allow any Potential Transferee to itself acquire any part of the Sale Interest that constitutes any shares issued by it on any basis that would result in the cancellation of any such Sale Interest, provided that this condition shall not prevent any Potential Transferee lawfully acquiring any shares as treasury stock (within the meaning of sections 67A to 67C of the Companies Act 1993).
5.[Mr Skelton advised that paragraph 5 of the draft sale notice is to be deleted].
6.For the purpose of clause 8.7 of the Shareholders’ Agreement the total consideration for the Sale Interest must be paid without set off, deduction or lien including, without limitation, any deduction by way of resident withholding tax and payment of each accepting Potential Transferees’ purchase price shall be in cleared funds...
[20] Mr Skelton contends that Jet Trustees is both entitled and obliged to set the terms upon which it offers to sell its shares, provided that the proposed terms are not inconsistent with the sealed orders or the intent of the judgment. He submits that the proposed terms avoid the unintended and unnecessary consequence for the Group 2 shareholders of the purchase price of their shares being treated as a deemed dividend for income tax purposes. The proposed terms are designed to put the Group 2 shareholders in the same position they would have been in had any sale been made to the Groups 1 and 3 shareholders as the beneficiaries of the pre-emptive rights in the Shareholder Agreement. Mr Skelton argues that the Group 2 shareholders should not be exposed to significant tax liability by the decision to allow the Groups 1 and 3 shareholders to increase their percentage shareholding in GPHL by acquiring the Group 2 shares indirectly through GPHL.
[21] Mr Skelton submits that the sealed orders provide for the sale of the Group 2 shares, not the cancellation of those shares. He notes that cancellation of the shares would result in quite different financial and tax consequences for the parties. He argues that if the Groups 1 and 3 shareholders wish to structure the purchase of the Group 2 shareholding through GPHL and use the company’s funds for that purpose, they should bear the tax consequences.
[22] Mr Skelton says that the Group 2 shareholders have not agreed to the cancellation of their shares. The sale notice drafted for Jet Trustees makes this a condition of sale. Mr Skelton submits that implementing the sealed orders in the manner proposed by Jet Trustees will ensure that the intent of the judgment is given effect and that Jet Trustees will receive FMV for its shares, not FMV minus resident withholding tax.
[23] Mr Skelton’s argument is premised on the contention that the Group 2 shareholders are entitled to set the terms and conditions of any sale in their sale notices. This contention is based on cl 8.2 of the Shareholder Agreement which provides that any shareholder wishing to sell must serve a sale notice specifying the sale interest, including the number of shares to be sold, the price the shareholder is seeking and any other terms and conditions of sale.
[24] The flaw in Mr Skelton’s argument is that cl 8.2 of the Shareholder Agreement was not incorporated in the sealed orders and does not apply. Order 3 requires that all of the shares must be offered at FMV. The only other terms of sale are those specified in cls 8.5 to 8.10 and 8.12.
[25] Clause 8.5 deals with the requirement to give notice. Clause 8.6 specifies that acceptance must be within 10 working days. Clause 8.8 deals with any necessary consents for the sale. Clause 8.9 details the seller’s right to offer the shares to third parties if the offer contained in the sale notice is not accepted within the specified period. Clause 8.10 provides that the same procedure must be followed if the seller subsequently wishes to sell the shares on terms more favourable than those originally offered. Clause 8.12 sets out the requirement for any purchaser to enter into an accession deed in relation to the Shareholder Agreement.
[26] The terms of sale are set out in cl 8.7 which relevantly provides:
8.7Terms of Sale: … The purchase of the Sale Interest shall be effected at the price, and on the terms and conditions, specified in the Sale Notice, and subject to anything to the contrary in the Sale Notice, on the following terms:
(a) the purchase of the Sale Interest shall be settled on the date
10 Working Days after the [Acceptance Date], or if clause
8.8 applies, 10 Working Days after the last of the consents referred to in clause 8.8 is obtained;
(b) if there is more than one Buyer, the purchase of the Sale
Interest by all Buyers shall be settled simultaneously;
(c) the Seller shall transfer to each Buyer good title to the Sale
Interest free of any charge or encumbrance; and
(d) on settlement of the purchase of the Sale Interest each Buyer shall pay the purchase price to the Seller in cleared funds, the Seller shall deliver to each Buyer a transfer of the Sale Interest in a form reasonably acceptable to that Buyer, and the Seller, and the Buyers, and all other Shareholders shall enter into and deliver to each other an Accession Deed in accordance with [clause 8.12].4 If any Shareholder fails to enter into that Accession Deed, it shall nevertheless be conclusively deemed to have done so. If the Sale Interest consists of legal title to Shares, all Shareholders shall take all necessary steps to cause the Buyer to be registered as holders of those Shares.
[27] The terms of the order are quite explicit and do not leave room for other terms to be added. The shares are simply to be offered to GPHL at FMV. The other terms stipulate the times for acceptance and settlement and the mechanics of implementing settlement. The Group 2 shareholders are not entitled to add further terms stipulating who may purchase, the terms upon which they may do so, or what they may do with the shares following purchase.
[28] Mr Farmer raises a more general concern that the structures proposed by the Group 2 shareholders could be viewed as tax avoidance. Historically, there was an absolute prohibition on a company acquiring its own shares. This was to preserve
capital for the protection of creditors. This rule was relaxed in New Zealand with
4 Clause 8.7(d) of the Shareholder Agreement refers to cl 8.13 but this is clearly a reference to cl 8.12; there is no cl 8.13.
the enactment of the Companies Act 1993 which allowed companies to repurchase their own shares on the basis that these shares would then be cancelled.
[29] Initially, there was no provision for treasury stock. However, within a year of the enactment of the new Companies Act, an exception was created to allow companies to acquire its own shares and hold them temporarily pending resale. The treasury stock exception is subject to tight restrictions, including a five per cent aggregate limit for each class of shares, and was not intended as a way of avoiding tax on company dividends. Mr Farmer drew attention to statements made by the Minister of Revenue to this effect when he introduced the Taxation Reform (Companies and Other Matters) Bill in June 1994 outlining the purpose of the reforms and emphasising that they could not be exploited to avoid tax being paid on
dividends:5
The new Companies Act makes important changes to the way in which companies operate. Four changes in particular have significance for taxation law. First, in future, companies will be permitted to repurchase their own shares ...
…
The Government has made it clear, however, that it will not allow this increased flexibility to be used to avoid tax. The dividend tax base will be maintained.
…
A further significant change is the introduction of a Treasury stock option in both tax law and company law. Generally, under company law, shares are cancelled upon repurchase. This Bill contains an amendment to the new Companies Act to permit a company to hold temporarily a small number of repurchased shares rather than cancel them immediately on repurchase. The Income Tax Act will mirror these amendments.
These provisions are intended to enhance the flexibility of the whole regime, rather than to achieve any specific tax policy objective. Companies may use this, for example, to buy back unmarketable parcels of shares, bundle them together, and re-sell them. Provided they on-sell them within 12 months, companies will be able to buy back and hold up to 5 percent of their shares without the re-purchase being treated as a distribution of company reserves.
[30] Section CD 25 of the Income Tax Act deals with acquisitions of treasury stock and provides that unless, within 12 months, the company transfers the shares to
5 (2 June 1994) 540 NZPD 1373-1374.
a person not associated with the company or in a transaction through a recognised exchange, a broker or some other independent agent, the shares are deemed to be cancelled from the date they were acquired.
[31] Mr Farmer submits that the arrangements proposed by the Group 2 shareholders are contrived and have no commercial purpose other than to avoid tax. He relies, in part, on the evidence of Mr John Hagen, a highly experienced chartered accountant and a company director. Mr Hagen considers that implementation of the proposal would result in a structure that was “extraordinarily complex and uncommercial”. He referred to the complications, from an accounting perspective, that arise in situations where companies have cross shareholdings, including difficulties calculating equity income, earnings per share and the carrying value of investments in associated companies.
[32] Mr Farmer also contends that the letter sent by the solicitors acting for the Group 2 shareholders attaching the draft sale notices is itself evidence that the sole motivation for the proposed sale structure is to avoid tax and that there is no other genuine commercial rationale for it:
The tax advice that the Sturgess interests have received is that if the sale of the Sturgess interests is structured in the way offered in these draft sale notices, then GPHL will not be under a legal obligation to deduct RWT from the purchase price, as the payment of the purchase price will not constitute a deemed dividend.
…
We remain prepared and willing to structure the sale of the Sturgess interests in a way that addresses your clients’ concerns and lawfully avoids adverse tax consequences for our respective clients.
[33] The leading authority in New Zealand on tax avoidance is the decision of the Supreme Court in Ben Nevis Forestry Ventures v CIR.6 In the judgment given on behalf of Tipping, McGrath and Gault JJ, “the classic indicator” of the use of a specific provision in a manner that is outside parliamentary contemplation was said
to be “the structuring of an arrangement so that the taxpayer gains the benefit of the
6 Ben Nevis Forestry Ventures v Commissioner of Inland Revenue [2008] NZSC 115, [2009]
2 NZLR 289.
specific provision in an artificial or contrived way”.7 The essential test for tax avoidance was formulated as follows:8
The ultimate question is whether the impugned arrangement, viewed in a commercially and economically realistic way, makes use of the specific provision in a manner that is consistent with Parliament’s purpose. If that is so, the arrangement will not, by reason of that use, be a tax avoidance arrangement. If the use of the specific provision is beyond parliamentary contemplation, its use in that way will result in the arrangement being a tax avoidance arrangement.
[34] I accept Mr Farmer’s submission that the terms of sale proposed by Jet Trustees may be regarded as artificial and contrived, with no legitimate commercial purpose other than to avoid tax. For this additional reason, it would not be appropriate for the Court to sanction such an arrangement.
[35] For these reasons, the answer to this question is “no”.
Are the Group 2 shareholders entitled to stipulate that GPHL must acquire all of Mr Sturgess’ shares on its own behalf as treasury stock?
[36] The draft sale notice prepared on behalf of Mr Sturgess stipulates that GPHL must acquire all of the shares for itself as treasury stock. It seeks to limit, contrary to the order, the parties that may accept the offer:
2It is a condition of this offer that GPHL itself acquire the whole Sale Interest and, for itself must acquire the Seller’s shareholding as treasury stock (within the meaning of sections 67A to 67C of the Companies Act 1993).
[37] This draft notice does not comply with the order for the same reasons discussed above relating to the terms of sale proposed by Jet Trustees. The answer to this question is also “no”.
[38] Mr Sturgess filed a brief of evidence for the hearing in which he proposed an alternative solution if his primary argument was rejected. He sought an ancillary order requiring that the deemed dividend be fully imputed with imputation credits
from GPHL’s imputation credit account. This would partially offset the tax payable
7 At [108].
8 At [109].
on the dividend. Mr Sturgess proposes that GPHL should meet the shortfall. Whether or not a dividend is paid with imputation credits attached is a matter for the board to decide. One would not ordinarily expect the board to use such credits to benefit a particular shareholder to the exclusion of others. In any event, Mr Sturgess is not able to make this a condition of any sale of his shares.
Result
[39] I make directions accordingly in terms of this judgment.
[40] Costs are reserved.
M A Gilbert J
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