JMB Trust Limited v China Animal Husbandry Group
[2025] NZHC 1758
•1 July 2025
IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY
I TE KŌTI MATUA O AOTEAROA KIRIKIRIROA ROHE
CIV-2023-419-123
[2025] NZHC 1758
BETWEEN JMB TRUST LIMITED
Plaintiff
AND
CHINA ANIMAL HUSBANDRY GROUP
First Defendant
BODCO LIMITED
Second Defendant
Hearing: 24 March–4 April 2025 Appearances:
J A MacGillivray, C Frost and J L Graham for Plaintiff
B A Keown, E K Martin, K E Crichton and T N Hutchinson for First Defendant
No appearance for Second DefendantJudgment:
1 July 2025
JUDGMENT OF O’GORMAN J
This judgment was delivered by me on 1 July 2025 at 12 pm pursuant to r 11.5 of the High Court Rules 2016.
Registrar/Deputy Registrar
…………………………………
Solicitors/Counsel:
Tompkins Wake, Hamilton
J A MacGillivray, Auckland Bell Gully, Auckland
JMB TRUST LTD v CHINA ANIMAL HUSBANDRY GROUP [2025] NZHC 1758 [1 July 2025]
Table of Contents [Para]
Overview[1]
Factual Summary [11]
BODCO shareholdings, directors and officers[12]
BODCO and CAHG contracts[17]
Nouriz and other distribution channels[19]
BODCO financials[22]
Legal Principles — Section 174 [25]
Pleaded allegations[32]
Plant upgrade[35]
JMB allegations[35]
Analysis[37]
Debt obligations [50]
JMB allegations[50]
Analysis[51]
Transfer pricing [67]
JMB allegations[67]
Analysis[73]
Secondment and employee issues [89]
JMB allegations[89]
Analysis[98]
Acting on BODCO’s behalf [108]
JMB allegations[108]
Analysis[110]
2023 Shareholder Loan [119]
JMB allegations[119]
Analysis[121]
Abandoned allegations [140]
Discovery[141]
Conclusion as to prejudicial conduct [146]
Counterfactual analysis[148]
Plaintiff ’s evidence[149]
Defendant’s evidence[155]
Analysis[157]
Statutory buyout rights [160]
Liquidation relief[165]
Result[167]
Overview
[1] The plaintiff, JMB Trust Ltd (JMB), is a founding shareholder of BODCO Ltd (BODCO). JMB currently holds 10.26 per cent of BODCO’s shares. The joint directors and shareholders of JMB are Mr Brian Wagstaff and Mrs Jan Wagstaff. Mr Wagstaff was BODCO’s first CEO and was a director of the company from inception until he resigned on 5 April 2023.
[2] The first defendant, China Animal Husbandry Group (CAHG), became a BODCO shareholder on 26 July 2016. CAHG currently holds 68.16 per cent of BODCO’s shares. CAHG is a fully state-owned Chinese enterprise directly controlled by China National Agricultural Development Corporation (CNADC). CNADC is owned by the Chinese government and supervised by the State-owned Assets Supervision and Administration Commission.
[3] BODCO is named as second defendant but has not actively participated in this proceeding. Since incorporation, BODCO has formulated, packaged, and distributed dairy-based nutritional products and infant formula to China and the global market. It has a manufacturing plant in Te Rapa, Hamilton, that converts base powder into final products for distribution. BODCO’s main distributor has been Nouriz (Shanghai) Fine Food Company Ltd (Nouriz), based in China.
[4] The plaintiff’s claim against CAHG is brought under s 174 of the Companies Act 1993 for unfairly prejudicial conduct. JMB believes its shareholding in BODCO has been adversely affected by CAHG’s oppressive and discriminatory conduct, forcing the company into irrational trading decisions, thereby extinguishing equity value.
[5] The founding shareholders of BODCO brought CAHG into the business as a cornerstone investor in the hope and expectation that this would assist in capitalising on a potentially lucrative opportunity to export infant formula into China at a time when there was a narrow opportunity to secure registration under tight Chinese regulatory restrictions. It was hoped that a Chinese-registered investor would assist, both in providing financial backing and navigating the regulatory complexities.
Exporting milk products to China requires both registered Ministry for Primary Industries (MPI) approval in New Zealand, and registration in China:
(a)From 1 May 2014, all foreign manufacturers and exporters of infant formula products were required to obtain official registration to export infant milk formula and similar products into China. For each brand, BODCO had to get a licence from the China National Certification Authority (CNCA) to supply infant formula into China and register each brand with the China Food and Drug Authority (CFDA).
(b)In 2018, the State Administration for Market Regulation (SAMR) was established. The SAMR was responsible for product quality, food safety and regulation. It took over the roles of a number of agencies, including the CFDA. The establishment of SAMR triggered a change in the regulation of BODCO’s products in China. BODCO needed its factory to be registered with SAMR and was required to register its products with SAMR. BODCO was permitted a total of up to three product registrations or “brand slots” by SAMR.
(c)In addition, in order to sell infant formula to China, BODCO needed to meet a new Chinese product standard, being the Guobiao Standards (GB Standards). The GB Standards were effective from February 2021 and were mandatory from February 2023. The new GB Standards imposed stricter nutritional requirements. They also imposed strict requirements around the manufacturer’s research and development, processing and traceability. To comply with the new GB Standards, BODCO needed to redesign its formulas and workshop layouts, install traceability equipment and software systems, and redo all processing manuals and documentation.
[6] One of the Chinese requirements under both regimes has been a close association between the manufacturer and the distributor (an integrated supply model known as the “grass to glass” policy).
[7] BODCO owns the SAMR registration for three infant formula products: Healtra, Pinrise and Spring Sheep. Nouriz owns the branding and trademark rights in Healtra and Pinrise. Spring Sheep Dairy NZ Ltd Partnership (Spring Sheep Dairy) owns the branding and trademark rights in Spring Sheep. BODCO previously had an agreement with Shandong Lijian Biotechnology Ltd Co (Shandong) to offer another brand in mainland China under the SAMR regime, but that agreement was terminated with no brand registered.
[8] Despite the hopes of the parties, to date BODCO has not been financially successful. It has traded at substantial losses, and faced numerous setbacks and difficulties:
(a)There was a delay in obtaining MPI approval of BODCO’s risk management plan. This was not received until 27 September 2016. The second step of securing registration in China was also delayed until 2018. These delays alone negatively impacted on the 2018 year end results by over $7.5 million.
(b)From 2020, COVID-19 drastically impacted global supply and customer demand. Meanwhile, retail consumption and the Chinese economy were adversely affected by decreasing birth rates and increased competition by Chinese domestic brands. Around this time, BODCO was operating at less than three quarters of planned capacity.
(c)As mentioned above, the GB Standards were introduced in February 2021, which imposed stricter requirements on the infant formula that could be sold in China from February 2023. The process for achieving SAMR registration was delayed by COVID-19 travel restrictions impacting audit team travel. Compliance with the GB Standards was expensive and time-consuming. It also impacted on demand, because consumers in China held out for new products that would comply with the higher standards.
(d)BODCO explored diversifying into other markets, including the United States. However, around March 2023, BODCO was advised that it had failed to obtain Food and Drug Administration (FDA) approval for its infant formula products in the United States. Its separate pregnancy range of milk products launched in the United States failed to meet financial expectations.
[9] Throughout this time, BODCO only survived because CAHG made ongoing equity and debt contributions to ensure the company could continue to pay its debts as they fell due. CAHG invested more than $30 million in equity, provided a $26 million working capital facility, advanced over $4 million via research and development agreements, purchased product from BODCO and converted loans to equity to improve BODCO’s balance sheet. Given that BODCO has suffered losses in every year since its inception, it is common ground that the company would be insolvent absent CAHG’s ongoing financial support, and that its balance sheet equity is negative.
[10]There are two potential explanations for this position:
(a)The plaintiff contends that such investment and ongoing financial support by CAHG was (and remains) irrational, so this gives rise to a circumstantial inference that CAHG must have been securing benefits in some other way. In particular, the plaintiff alleges that CAHG must be benefiting through its investment in Nouriz, by requiring BODCO:
(i)to continue to trade with Nouriz at a loss; and
(ii)not to take enforcement steps in respect of debts owed and other alleged breaches by Nouriz.
(b)The first defendant says there is no factual basis for those allegations. Nouriz has consistently complained that BODCO’s prices have been too high, such that Nouriz cannot compete effectively in China. That issue, combined with general market conditions, has placed Nouriz in a difficult financial position, so it too depends on CAHG for
financial support. CAHG has continued to invest in both companies hoping they will both trade through this adversity and become profitable. Given the negative equity position, the plaintiff has been “out of the money” at all material times (JMB shares have been worth nothing).1 Despite that reality, CAHG has kept alive the possibility of shareholder value being restored, which only benefits JMB compared with the alternative of liquidation. Therefore, CAHG has not caused any loss or harm to JMB, so there is no proper basis for any claim to compensation or for liquidation.
Factual Summary
[11] Before analysing the legal principles and factual allegations for the unfair prejudice claim, this section contains a high-level summary of key events and broader factual context, focusing on:
(a)changes in BODCO’s shareholdings, directors and officers;
(b)the main agreements between BODCO, CAHG and Nouriz; and
(c)BODCO’s financial position and performance over the relevant years.
BODCO shareholdings, directors and officers
[12] BODCO was incorporated on 10 September 2014 to take over a business previously operated by Danpac (NZ) Ltd. The founders of both companies were Mr Wagstaff, Richard Young and Ole Andersen. Their shares in BODCO have been held by JMB, R C Young Holdings Ltd (RYHL) and NKN ApS (NKN) respectively.
[13] Below is a summary of the shareholdings in BODCO over time, from the shares beneficially held by the founders on incorporation, through CAHG’s initial and subsequent share investments, and the allocation of relatively minor shareholdings to
1 The term “out of the money” is discussed in Gibson v Solid Energy New Zealand Ltd [2016] NZHC 2939 at [15]–[18] in the sense of whether the entity realistically had any remaining economic interest in the company, thereby impacting on the duties owed and whether loss has been suffered by restructuring decisions. See also [101](b) below.
BODCO’s counterpart distributors in China. Shares in the last category were issued to comply with Chinese regulatory expectations of integration:
Transaction date
% shareholding in BODCO (# shares held in brackets)
Total # shares
JMB RYHL NKN CAHG Nouriz Shandong Spring Sheep Dairy 10/09/2014 38.0 (+38) 31.0 (+31) 31.0 (+31) 0.0 0.0 0.0 0.0 100 26/07/2016 22.8 18.6 18.6 40.1 (+67) 0.0 0.0 0.0 167 13/04/2017 16.2 13.2 13.2 57.3 (+67) 0.0 0.0 0.0 234 31/12/2019 15.8 12.9 12.9 55.8 2.5 (+6) 0.0 0.0 240 31/12/2019 15.0 (+2) 13.9 (+6) 12.7 (+3) 56.2 (+16) 2.2 0.0 0.0 267 11/11/2020 10.6 9.8 9.0 68.9 (+109) 1.6 0.0 0.0 376 13/12/2021 10.4 (-1) 9.6 (-1) 8.8 (-1) 68.9 1.6 0.8 (+3) 0.0 376 29/12/2022 10.3 9.5 8.7 68.2 1.6 0.8 1.1 (+4) 380 Current: 10.3 (39) 9.5 (36) 8.7 (33) 68.2 (259) 1.6 (6) 0.8 (3) 1.1 (4) 380
[14]A table of the BODCO directors is set out below:
Name Role Date Appointed Date Resigned Brian Wagstaff Director 10-Sep-14 5-Apr-23 Richard Young Director 10-Sep-14 23-Aug-242 Ole Andersen Director 26-Jul-16 8-Oct-20 Tingwu Xue Director 26-Jul-16 17-Jul-22 Changqin Ding Director 26-Jul-16 17-Jul-22 Deyong Zhang Director 26-Jul-16 1-Nov-23 Ning Liu Director 19-May-17 9-Oct-20 Weiguo Du Director 28-Jul-22 7-Jan-25 Jing Bai Director 28-Jul-22 - Deqiang Wang Director 1-Nov-23 - Fuyuan Lu Director 7-Jan-25 -
[15]The relevant Chief Executive Officers (CEOs) during the material times were:
Name Role Date Appointed Brian Wagstaff CEO 10-Sep-14 Tony McKenna CEO 1-Apr-17 Ravinesh Kumaran CEO Acting from Apr-18, appointed by Jan-19 Nicola Wetere CEO Sep-20
2 Mr Young died on 23 August 2024. This was not recorded on the Companies Office register until 21 January 2025 after the plaintiff raised that issue.
[16] Both Mr Kumaran and Ms Wetere served as BODCO Chief Financial Officers (CFOs) before being appointed as CEOs:
Name Role Date Appointed Ravinesh Kumaran CFO 24-Apr-17 Nicola Wetere CFO Mar/Apr-20
BODCO and CAHG contracts
[17] During early 2015, BODCO began looking for external investors from China. Mr Wagstaff met with CAHG representatives to discuss their potential investment in BODCO and explained that BODCO wanted an $8 million investment as soon as possible. However, Chinese regulations and foreign currency controls meant that certain investments (including equity investments in companies) could not be made without government approval, which takes time. Those requirements do not apply to trade contracts. For those reasons, many contracts between BODCO and CAHG were initially trade contracts (for BODCO product), with those pre-payments later converted to share purchases.
[18]The main contracts between BODCO and CAHG were the following:
(a)On 1 July 2015, under the terms of a purchase order contract CAHG agreed to make an advance payment of $6,132,752 for dairy product, but this included a right for CAHG to cancel the purchase order and be refunded the advance payment plus applicable interest or convert the payment into shares by 1 December 2015. That sum was paid on 13 July 2015. On 28 September 2015, CAHG made a further payment of $1,867,240 to BODCO under the same contractual terms. The time for delivery of product was extended because of delays in BODCO obtaining a verified risk management programme (RMP) from MPI, that being one of the prerequisites for the export of dairy products to China.
(b)On 8 November 2015, the shareholders of BODCO and CAHG signed an agreement for CAHG to buy 40 per cent of the shares in BODCO in exchange for $8 million. The agreement was conditional on various matters including BODCO achieving a registered RMP.
(c)By 26 July 2016, that RMP condition had still not been satisfied but certification was expected imminently. Accordingly, on that day, a variation agreement was signed and the RMP condition waived.
(d)On 26 July 2016, the shareholders also signed a shareholders agreement and adopted a new constitution for BODCO.
(e)On 30 August 2016, CAHG entered into a new purchase order contract, under which it agreed to make an advance payment of $1,290,312 in exchange for dairy products. This was because BODCO urgently needed funding, but CAHG was still unable to pay the subscription payment because RMP certification had not been achieved. Payment was made on 2 September 2016.
(f)On 20 October 2016, CAHG, BODCO and all shareholders entered into a variation of subscription agreement and shareholders agreement. This had the effect of varying the July 2016 variation agreement, allowing BODCO to keep the $8 million paid under that agreement and treat it as payment for the shares CAHG had already received on 26 July 2016.
(g)On 3 April 2017, CAHG entered into a further subscription agreement to purchase 67 shares in BODCO for a payment of $8 million. By this time, RMP approval had been obtained from MPI on 27 September 2016, but BODCO was still unable to export product to China because it had not obtained CNCA approval, which was another requirement for exporting goods into China. The payments were made under the April 2017 subscription agreement on 6 and 12 April 2017.
(h)On 5 April 2017, BODCO and CAHG entered into a memorandum of understanding summarising changes in shareholding, directorships and management structures to be implemented as a result of the subscription agreement and changes to CAHG’s investments.
(i)On 9 June 2017, BODCO and its shareholders signed a variation of the shareholders agreement, providing that BODCO’s board of directors would comprise seven members with CAHG entitled to appoint or remove four of them (consistent with the 5 April 2017 memorandum of understanding). CAHG was also given the following power to nominate the appointment or removal of the CEO, CFO or General Manager (GM) of BODCO:
7.2 CAHG shall have the right to nominate and remove candidates who have the requisite experience and qualifications for the roles of Chief Executive Officer, Chief Financial Officer and General Manager of the Company, who shall each be appointed and removed subject to the approval of the Board of Directors.
(j)At the end of 2019, the BODCO board resolved to convert some loans, interest and director fees to equity to strengthen the balance sheet. These transactions took effect on 31 December 2019 at a share value of
$180,000 per share.
(k)On 8 September 2020, CAHG entered into another subscription agreement for the payment of $11,990,000 as consideration for 109 ordinary shares. These shares were issued on 11 November 2020 and the payment was made on 17 November 2020.
(l)On 13 June 2022, BODCO and CAHG entered into a research and development agreement to fund SAMR costs. A second research and development agreement was entered into on 18 July 2022. CAHG paid
$2.2 million under these agreements.
(m)Around 9 September 2022, CAHG signed a contract to purchase Nouriz product from BODCO for a total purchase price of $1,595,600. A first instalment of $797,800 was paid on 1 September 2022 and a further payment of $766,000 was paid on 2 February 2023.
(n)In January 2023, BODCO and CAHG entered into an infant formula registration agreement providing for CAHG to reimburse BODCO for third party costs incurred in relation to the SAMR registrations for the three different brands of product: Pinrise, Spring Sheep and Healtra. CAHG paid $1 million to BODCO on 16 January 2023 and a further
$1 million on 24 February 2023. A further sum of $230,000 was paid under the terms of the agreement directly to a third party, to cover BODCO’s product testing expenses.
Nouriz and other distribution channels
[19] Against a background of a 2008 dairy product safety incident known as the melamine scandal in China,3 new registration requirements came into force on 1 May 2014 as mentioned above at [5](a). In anticipation of the introduction of that registration regime, the BODCO founders had started a process to identify suitable distributors in China for BODCO’s products. The founders had already identified Nouriz as a potential distributor. It was Mr Wagstaff who introduced CAHG to Nouriz. Prior to Mr Wagstaff’s introduction, CAHG did not know Nouriz and had no dealings with them. Mr Wagstaff had known the CEO of Nouriz for a number of years as a New Zealand resident who understood the market of exporting dairy product to China.
[20] The main contractual events between BODCO and Nouriz are summarised below:
(a)A supply and governance agreement dated 13 December 2016 (2016 distribution agreement) signed by Mr Wagstaff. This contained pricing principles in sch 4 but the specified prices were still “TBC”.
3 For further details of the melamine scandal, see Pure Elite Holdings Ltd v BODCO Ltd [2019] NZHC 2191 at [9]–[14].
The methodology in sch 4 provided for prices to be reviewed quarterly, which included a process for examining evidence about variable input costs and the supplier’s pricing model (a cost plus approach).
(b)On 24 March 2017, BODCO and Nouriz signed a commitment letter as an addendum to the 2016 distribution agreement. Mr Wagstaff signed this letter confirming that the application to CFDA for infant formula registration in China would include two brands to be nominated by Nouriz, with a volume commitment of one million, 99-gram cans per annum for each brand.
(c)On 20 June 2017, Nouriz and BODCO signed a product supply and governance agreement. Mr McKenna signed on behalf of BODCO. Under the agreement, Nouriz agreed to purchase Pinrise and Healtra milk powder products across various package sizes. The agreement was subject to BODCO obtaining a CNCA licence and registration of the Pinrise and Healtra brands with CFDA. CNCA registration was obtained at the end of October 2017. CFDA registration for the Pinrise brand was not granted until February 2018 and registration for the Healtra brand was not granted until June 2018.
(d)Meanwhile, in mid-2017, CAHG bought a 38.5 per cent shareholding in Nouriz, consistent with the Chinese regulatory requirements for supply chain integration. That acquisition of Nouriz shares was recorded in the BODCO interests register.
(e)On 20 December 2019, BODCO and Nouriz entered into a subscription agreement for Nouriz to purchase six shares in BODCO for $1,080,000.
(f)By September 2020, BODCO management reported that BODCO and Nouriz had agreed to a revised pricing formula.
(g)On 1 December 2021, BODCO’s Sales and Marketing Manager (Mr Stapel) emailed a letter of termination to Nouriz in relation to the 2016 distribution agreement, for non-payment of debts. Nouriz responded that the price of Pinrise and Healtra was much higher than the price on the market, so it contended BODCO could not terminate the agreement.
(h)On 23 December 2021, BODCO and Nouriz entered into a brand slot allocation, registration and manufacturing agreement (SAMR Agreement). This provided for various minimum order quantities, and a process for providing annual and rolling forecasts. Clause 26.5 provided that it replaced all previous understandings and agreements concerning its subject matter, except for signed sales orders. During February 2022, Nouriz paid an initial deposit of
$250,000 under this agreement.
(i)During 2022, BODCO sent letters to Nouriz dated 4 June, 27 June, 1 July and 15 July about breaches of the SAMR Agreement and non-payment of debts. This culminated in a letter of termination to Nouriz dated 17 August 2022.
(j)Although CAHG had explored increasing their shareholding in Nouriz to 70 per cent during 2022 (this possibility was disclosed in BODCO’s conflict register at the time), all evidence was that this step was never completed. Accordingly, CAHG’s shareholding in Nouriz remained at
38.5 per cent.
[21] In June 2022, Mr Zhang (then New Zealand representative for CAHG and director of BODCO) proactively suggested pursuing the United States market. This strategy was intended to reduce dependency on Nouriz and the Chinese market. Despite initial optimism, FDA approval for BODCO’s infant formula was declined around March 2023, leaving BODCO with its other strategy of launching a pregnancy range of powders in the United States via the Amazon platform. The 2023 budget provided for more than a million dollars for promotion, but only 10 cans had been sold
after one month of going live. By the time of the board meeting of 6 March 2023, management said it was working on a sales programme in the United States that would “take time” to build. Management was also encouraged to explore any other markets and find new customers. None of these efforts solved BODCO’s financial problems.
BODCO financials
[22] From the outset, a recurring theme during negotiations with CAHG was BODCO’s urgent need for funding. Since incorporation on 10 September 2014 through until 31 December 2023, BODCO never achieved positive earnings. Its full year EBITs4 have been losses ranging between $2.3 million and $10.3 million.
$000’s Mar-15 Mar-16 Dec-16 Dec-17 Dec-18 Dec-19 Dec-20 Dec-21 Dec-22 Dec-23 [REDACTED]
[REDACTED] [REDACTED]
[REDACTED]
[REDACTED]
[REDACTED]
EBIT 0 (3,207) (2,319) (8,047) (8,398) (8,528) (8,524) (2,882) (10,324) (9,006) Interest income 0 16 6 1 36 2 56 Lease interest (687) (661) (649) (674) (724) Interest expenses (9) (770) (1,194) (1,871) (1,515) (1,133) (1,472) (292) NPBT 0 (3,207) (2,328) (8,817) (9,575) (11,079) (10,700) (4,628) (12,467) (9,966) Tax 2,167 (2,167) NPAT 0 (3,207) (2,328) (6,650) (11,743) (11,079) (10,700) (4,628) (12,467) (9,966)
4 Earnings before interest and tax.
[23]This represented an underperformance against budgets:
$000's 2019
Budget
2019
Actual
2020
Budget
2020
Actual
2021
Budget
2021
Actual
2022
Budget
2022
Actual
2023
Budget
2023
Actual
[REDACTED] [REDACTED] [REDACTED] EBITDA 4,934 (3,505) 4,286 (6,085) 2,949 (549) (1,475) (7,592) (1,841) (6,753)
[24] Correspondingly, BODCO’s financial position was steadily deteriorating, remaining in a negative net equity position since 2019:5
$000's Dec-16 Dec-17 Dec-18 Dec-19 Dec-20 Devc-21 Dec-22 Dec-23 Net operating assets 15,803 18,874 17,137 17,862 10,904 15,241 10,602 8,284 Investments 5,824 5,824 10,123 7,667 5,559 Net bank liabilities
(7,437)
(7,110)
(18,069)
(17,561)
(10,994)
(14,631)
(19,423)
(630)
Net position before related party loans 14,190 17,588 9,191 7,968 5,469 610 (8,821) 7,654 Loans from CAHG - (1,290) (1,290) (8,372) (6,876) (6,678) (9,234) (36,234) Loans from St Croix Holdings Unlimited (662) (686) (36) (36) (2) (2) (2) (2) Loans from other related parties (1,023) (1,756) (1,456) (744) (593) (559) (559) - Net position 12,505 13,856 6,409 (1,184) (2,002) (6,629) (18,617) (28,583)
Legal Principles — Section 174
[25] Section 174 of the Companies Act concerns oppressive, unfairly discriminatory, or unfairly prejudicial conduct towards a shareholder. It provides 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
5 These figures are taken from the affidavit of the valuation expert for CAHG. The figures are broadly consistent (but not identical to) those contained in the report of the valuation expert for BODCO. Both experts agree that BODCO has been balance sheet insolvent from the end of 2019.
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.
[26] The three expressions oppressive, unfairly discriminatory, or unfairly prejudicial, overlap and inform each other’s meaning.6 The underlying concern is conduct that is unjustly detrimental to any member of the company.7 It is directed to abuse of power or “a visible departure from the standards of fair dealing”.8 Although the cause of action has a statutory foundation, it necessarily evokes equitable concepts.9 Each s 174 assessment will be intensely fact-specific, so the precedent value of other cases is limited.10
[27] The Court is required to make an objective assessment of the circumstances giving rise to the issues before it in light of the overall scheme and purpose of the relevant provisions of the Companies Act.11
6 Thomas v H W Thomas Ltd [1984] 1 NZLR 686 (CA) at 693. The latter two terms were added by amendments in 1980: see Vey Group Ltd v Vance [2020] NZCA 232, [2021] 2 NZLR 541 at [12].
7 Thomas v H W Thomas Ltd, above n 6, at 693.
8 Bi v Zhang [2024] NZCA 655 at [22], endorsing Thomas v H W Thomas Ltd, above n 6, at 695.
9 Cooper v Cooper & Co Real Estate Albany Ltd [2025] NZHC 478 at [188].
10 At [189]–[190]; Miedema v Petrou [2024] NZHC 3169 at [89].
11 Bi v Zhang, above n 8, at [22].
[28] The remedy originated in s 210 of the Companies Act 1948 (UK), as an alternative to winding up on the just and equitable ground.12 Although the principles have evolved over the years, three principles are well established:13
(a)Errors of judgment by management, inefficiencies, and poor business management without distinct elements of bad faith or self-interest cannot amount to oppression.
(b)Judges should exercise self-restraint in purporting to evaluate business strategies (also known as the “business judgment” rule).
(c)The remedy is not (without more) appropriate for the facilitation of exit from a company where there are straight out disagreements over company strategy.
[29] Once the Court is satisfied that there has been oppressive conduct (deemed under s 175 or actual), it has wide discretion to determine the best type of relief for the particular situation.14 The s 174 jurisdiction is so broad and flexible that exceptions can be made to the usual strictures against derivative or reflective loss.15 While the Court will be wary of assuming a supervisory role that might involve it in matters of business judgement,16 it will not shy away from making intrusive orders where necessary.17 Nor should it hesitate to be creative and flexible.18
[30] Assessing unfairness is usually undertaken by a counterfactual analysis, having regard to all the dynamics at play.19 Wrong and remedy are closely linked; it is the unfairly detrimental effect of the conduct that brings the remedy into play, so any relief is directed at the harm done.20
12 Latimer Holdings Ltd v SEA Holdings NZ Ltd [2005] 2 NZLR 328 (CA) at [57].
13 At [70]–[72].
14 Holden v Architectural Finishes Ltd (1996) 7 NZCLC 260,976 (HC) at 261,007; and Miedema v Petrou, above n 10, at [209].
15 Cooper v Cooper & Co Real Estate Albany Ltd, above n 9, at [207]–[208] and [210], referencing
Miedema v Petrou, above n 10, at [311].
16 Sturgess v Dunphy [2014] NZCA 266, at [172]; and Miedema v Petrou, above n 10, at [211].
17 Vey Group Ltd v Vance, above n 6, at [68]; and Miedema v Petrou, above n 10, at [211].
18 Ross v Smith [2012] NZHC 3034 at [21]; and Miedema v Petrou, above n 10, at [211].
19 Cooper v Cooper & Co Real Estate Albany Ltd, above n 9, at [189].
20 Sturgess v Dunphy, above n 16, at [144]; and Miedema v Petrou, above n 10, at [209].
[31] An order requiring the aggrieved shareholder’s shares to be bought out by another shareholder or the company is the most common remedy for a claim under s 174.21
Pleaded allegations
[32] The key allegations in the amended statement of claim about oppressive, unfairly discriminatory or unfairly prejudicial conduct are at para 79.
[33] Originally, that pleaded eight categories of such conduct. During the hearing, three categories were no longer pursued. The remaining categories are as follows, analysed in the sections that follow:
(a)Plant upgrade: In 2017, BODCO’s CEO at the time proposed to the board that BODCO’s plant should be expanded in preparation for the anticipated increase in demand for 2018 and 2019. JMB alleges that CAHG imposed a decision on BODCO, and acted in its own interests in doing so, despite the fact that this was against the direct advice of BODCO management and its New Zealand-based directors.
(b)Debt obligations: CAHG unfairly and prejudicially controlled Nouriz’s debts to BODCO. For example, JMB alleges that Nouriz failed to pay amounts due to BODCO at the direction of CAHG, and CAHG directed BODCO to accept ongoing purchase orders from Nouriz after management had decided to terminate the distribution agreement with Nouriz and take enforcement action.
(c)Transfer pricing: CAHG has unfairly and prejudicially influenced and/or caused BODCO not to address transfer pricing concerns raised in relation to its dealings with Nouriz, including the price of product supplied, and by CAHG’s purported repayment of Nouriz’s debts. The allegation is that, had these issues been addressed from around the time of a KPMG report dated 4 October 2019, then BODCO would have
21 Sturgess v Dunphy, above n 16, at [148].
been restored to a position of trading profitably rather than supplying a related party at a loss.
(d)Secondment and employee issues: CAHG’s conduct in replacing BODCO’s independent management with CAHG employees was oppressive, unfair and prejudicial because it deprived JMB of its legitimate expectation that the company would be managed by independent employees.
(e)Acting on BODCO’s behalf: JMB alleges that certain meetings and negotiations between CAHG representatives and third parties deprived BODCO’s management and board of the ability to conduct their own decision-making process, thereby causing prejudice.
(f)2023 Shareholder Loan: CAHG acted prejudicially in recommending that BODCO enter into the 2023 proposed shareholder loan, despite being informed of BODCO’s current insolvency and concerns about transfer pricing.
[34] In para 80 of the amended statement of claim, JMB had also pleaded that Mr Zhang had failed to act in the best interests of BODCO in breach of s 131 of the Companies Act in respect of some of the same conduct pleaded for the s 174 cause of action. This separate s 131 claim was abandoned at trial, on the basis that it added nothing to the s 174 cause of action given that the duties under s 131 are owed to the company and not to JMB directly.
Plant upgrade
JMB allegations
[35] Under this category, JMB alleges that CAHG rode roughshod over the views of independent management and demonstrated an intolerant disregard for the views of BODCO’s founding minority shareholders in making decisions about a plant upgrade. It says that CAHG carried out its own separate investigations, discussions and analysis without involving BODCO management and, in effect, dictated the outcome of the
decision-making process. In doing so, this allegedly breached JMB’s reasonable expectations that BODCO’s decision-making process at board level would be conducted in a fair and reasonable manner with due regard for management advice.
[36] The particular alleged departures from the standards of fair dealing are identified as follows:
(a)Departing from management and expert advice without properly engaging with that advice.
(b)Excluding BODCO management from CAHG’s own separate investigations, including discussions with third parties.
(c)Dealing with reasonable and legitimate concerns raised by BODCO management and directors in a dismissive and high-handed manner.
(d)Using CAHG’s financial clout to try to pressure the minority into bypassing proper consideration of management advice and proper consideration by directors of BODCO’s interests.
Analysis
[37] The necessity of a plant upgrade was first raised in the 11 September 2017 board meeting. BODCO’s then CEO, Mr McKenna, reported that BODCO needed new plant capacity by January 2019 to supply into the Chinese market. The response by Mr Zhang, a CAHG director, was that all directors should agree on the equipment replacement.
[38] In a report presented to the board on 27 July 2018, management expressed the view that upgrading the canning line was an urgent issue impacting on productivity, quality, health and safety, and cost. The report identified potential suppliers of a new canning line and found that only Joyea or PLF could meet BODCO’s timing requirements. The Joyea option was much cheaper and had a quicker lead time than PLF, but management were reluctant to accept Joyea due to concerns about reliability, quality and poor references in New Zealand. BODCO management, Mr Wagstaff and
other non-CAHG directors favoured the PLF option. The CAHG directors favoured the Joyea option and indicated that CAHG was prepared to fund that investment. The CAHG directors were open to other options if there was another way to finance them. CAHG considered the issue urgent because of a concern that BODCO might be audited by the CFDA.
[39] On 13 August 2018, Mr Kumaran (then acting CEO) reported that BODCO could not fund the PLF proposal out of cash flows.
[40] On 31 August 2018, Mr Kumaran reported that BODCO would have to go with the Joyea proposal funded by CAHG, unless other new funding could be sourced for the PLF proposal.
[41] At the 19 September 2018 board meeting, the directors remained divided on the issue along the same lines as previously. Although CAHG had a majority on the board, it did not put the matter to a vote at that time. Instead, arrangements were put in place for Mr Kumaran and Mr Silverwood (BODCO’s engineering team lead) to travel to China to visit Joyea to better understand the quality and reliability of that offering. Meanwhile, management was asked to keep in touch with PLF and continue to explore any other possible funding sources. It was agreed that management would submit a final report and recommendation, then the board would decide.
[42] Following the China visit, Mr Kumaran and Mr Silverwood both changed their minds. The report to the board dated 16 October 2018 concludes as follows:
Although my heart was set on PLF previously I have had a change of mind with the new information presented, there is no doubt that PLF is a world class company with a reputation that matches. However, the technology they are offering is fairly new and has not been installed in many plants around the world, there is also no way to control the vacuum in sealed cans.
Joyea is able to provide a full line which offers the best of both worlds, cost and reliability. After seeing the Joyea equipment in person and being able to spend the day with their engineers and sales director I was happy with the equipment and their knowledge. Weighing up all the pros and cons of PLF and Joyea it is my opinion that Joyea will be the most suitable equipment for our upgrade.
[43] In the same report, Mr Kumaran expressed his view that Realgoal was not the right project manager or supplier of equipment. Although CAHG representatives did not agree with that view and responded to the criticisms made, they did not seek to proceed with the appointment of Realgoal.
[44] Despite these management views changing, Mr Wagstaff still did not agree with the Joyea option. Rather than proceeding with a board vote to make a decision in which the CAHG directors held the majority, in March 2019 Mr Wagstaff and Mr Young were given the opportunity to visit Joyea in China.
[45] Following that visit, on 20 March 2019 the BODCO board met and discussed the canning line replacement. All directors voted to proceed with the Joyea option funded by CAHG. BODCO’s factory closed at the end of October 2019 and the Joyea canning line was installed by November 2019.
[46] By 1 November 2019, Mr Kumaran reported that the new canning line installation and commissioning had gone well. The upgrade increased plant capacity from an average of 8,000 cans per day to between 20,000–24,000 cans per day.
[47] Against that background, I do not accept that CAHG’s conduct in respect of the plant upgrade and expansion departed from any standards of fair dealing:
(a)CAHG did seek to engage with the initial advice from management by carrying out further analysis, providing the opportunity for BODCO management to seek funding for the PLF option, and by facilitating two separate trips to China for those adverse to the Joyea option to satisfy themselves about quality and reliability concerns. Far from seeking to impose an outcome contrary to that initial advice without the opportunity for further discussion or input, the CAHG directors pursued their preferred objective of director consensus, even though this delayed the decision.
(b)While CAHG did establish its own working group to consider the issues and it had some direct discussions with Joyea, Realgoal and Melchers (mistakenly thought to be an agent of Realgoal), this does not conflict with standards of fair dealing.
(i)It is understandable that BODCO management was not invited to all such meetings and discussions given that they occurred in China. The plaintiff has not identified any prejudice that arose from these meetings and discussions. Furthermore, a shareholder (represented by its director appointees) is entitled to obtain its own information and make its own assessment of the merits proposed for a significant financial decision, particularly one that it is being asked to fund entirely.
(ii)In any event, the comparative merits of the two choices were dealt with in an open and transparent way, including subsequent disclosure about the above discussions.
(iii)BODCO management and two of the founder directors were subsequently given the opportunity for direct discussions with Joyea during their own visits in China. This is what led to the revised recommendations by BODCO management, and unanimous director approval.
(iv)Realgoal was not ultimately contracted to provide any services for the plant upgrade.
(c)JMB says the approach of the CAHG directors was dismissive and high-handed. While I acknowledge Mr Wagstaff and JMB’s perspective on that issue, I also accept the evidence of the CAHG witnesses that they had genuine reasons to prefer the Joyea option. I do not find the remarks recorded in the documentary evidence and referred to by the witnesses was “unfairly dismissive”. Rather, they demonstrate firm convictions consistent with their good faith
evaluation of the comparative merits of the two options, in circumstances where CAHG was being asked to fund the entire upgrade. A shareholder is perfectly entitled to make a good faith decision not to introduce new funds for a proposal that is not its preferred option. Based on the evidence, I am satisfied that CAHG’s appointed BODCO directors were sufficiently open-minded during the decision-making process and provided the opportunity for BODCO management and the founding shareholders to find alternative funding for the PLF option. When the final decision was made, I am satisfied that CAHG and its appointed directors maintained a genuine view that the Joyea option was in BODCO’s best interests. The underlying commercial decision is something within the business judgement rule.
(d)For the same reasons, I reject the contention that CAHG improperly used its financial clout to bypass consideration of the issues in conflict with director duties. A detailed process of several months, including two visits to China, was followed so that management and other founding directors could understand CAHG’s preference for the Joyea line option. Ultimately, it was a decision taken with all directors voting to approve, following a final report that had the support of BODCO’s acting CEO and its engineer.
[48] In closing submissions, counsel for JMB said it was not possible or useful to attempt to isolate whether the Joyea decision had a negative impact on BODCO’s enterprise value. Accordingly, no specific allegation is made of any detrimental impact from the Joyea plant upgrade. The upgrade was carried out successfully, thereby increasing plant capacity as intended. No issue is taken about the canning line in terms of subsequent quality and reliability problems. Counsel for JMB referred to the Joyea option as involving a $4 million plant write-off in the 2018/2019 financial year. On the other hand, one of the reasons why the Joyea option was preferred was that the cost was significantly lower than the PLF option. In any event, a book value write-off is not the same as a financial detriment in real terms (in fact, tax advantages often arise).
[49] Overall, I reject the plaintiff’s claim that CAHG’s conduct in relation to the plant upgrade and expansion was oppressive or unfair in any way.
Debt obligations
JMB allegations
[50] Separate from the issue of pricing the product sold to Nouriz (addressed under the transfer pricing section below), JMB alleges that CAHG interfered in BODCO’s dealings with Nouriz by controlling payments due to BODCO and by restraining BODCO’s management from making its own decisions in this regard.
Analysis
[51] It is common ground that Nouriz ran out of money in late 2021 and all purchases from BODCO of Nouriz product since then were paid for by CAHG. From that point in late 2021, Nouriz was reliant on financial support from CAHG (its minority shareholder).
[52] In June 2022, Nouriz breached the SAMR agreement with BODCO dated 23 December 2021. When BODCO chased payment, the response from Mr Lu at Nouriz was that it was up to the senior directors of CAHG as to whether and when payment would be made. I accept the first defendant’s evidence that this in fact referred to Nouriz’s inability to make the payment from its own funds because of insolvency problems. In other words, it needed to seek new financial support from CAHG to meet such an obligation.
[53] In a letter dated 17 August 2022, BODCO terminated the SAMR agreement with Nouriz due to non-payment. BODCO’s position was that Nouriz owed over
$2.6 million, made up as follows:
(a)$575,000 (including GST) due under cl 2.5 of the SAMR agreement on 30 June 2022.
(b)$379,117 for 50 per cent of actual costs incurred by BODCO in performance of the SAMR agreement to the end of July 2022, claimed under cl 2.4 of the SAMR agreement.
(c)A sum of $2,233,200 claimed as a liquidated debt for failure to pay the balance of the May/August sales order (including failure to pay 30 per cent due under cl 9.1).
[54] At BODCO board level, CAHG’s directors had expressed caution about terminating the Nouriz arrangements without any alternative customer in place. Termination of the SAMR agreement was nevertheless a decision made by BODCO management without CAHG interference.
[55] CAHG’s directors questioned the merits of trying to enforce payment by Nouriz, given its financial difficulties and the costs of enforcement. A similar approach was adopted for Shandong, which had also failed to make payments under its own SAMR agreement. By this stage, Chinese market conditions were challenging, affected by COVID-19 and a downturn in the demand for infant formula. At the same time, competition was increasing from domestic Chinese brands. Ms Wetere accepted in cross-examination that legal action against Nouriz for these claims would have taken time and money, and there was no guarantee that any legal action would have been successful.
[56] On 30 August 2022, an urgent board meeting was held to decide the future of BODCO. At the meeting, all directors agreed that BODCO had to survive until SAMR registration and FDA approval of infant formula products. With no other funding options available, it was apparent that CAHG would have to provide more financial support to enable BODCO to continue paying its debts as they fell due.
[57] Meanwhile the BODCO plant needed income to contribute to its committed overheads, let alone operating costs and profitability. In that context, a purchase order contract was submitted in early September 2022 under which CAHG agreed to purchase Nouriz products. The terms of the agreement were negotiated between Nouriz and BODCO management. On 6 September 2022, Ms Wetere informed
Mr Wagstaff that BODCO had negotiated the draft contract on improved terms. In accordance with the terms of that contract, CAHG made the initial payment of
$797,800 in September 2022. A further payment of $766,000 was made in February 2023. This provided BODCO with money for the sale of product that otherwise would not have been achieved.
[58] I accept the first defendant’s evidence and submissions that this was not prejudicial. Such sales may be necessary mitigation and can be financially advantageous, so long as they cover marginal production costs, compared with the alternative of not making those sales at all (so long as higher value sales are not thereby sacrificed). The evidence did not seek to address these details, so I take it that the plaintiff does not allege the sales themselves caused loss, but rather that the sales were not as profitable as they should have been compared with market benchmarks.
[59] Meanwhile, on 13 June 2022 and 18 July 2022, CAHG addressed the shortfall in funding the costs of the SAMR registration process by entering into research and development agreements with BODCO. These provided for CAHG to reimburse BODCO for the costs incurred during that SAMR process. CAHG paid BODCO more than $2.2 million under these agreements. JMB complains that these were on terms that the payments should be applied to reduce Nouriz’s debt to BODCO by $750,000. I see no prejudice arising from these arrangements. BODCO received a payment of
$750,000 that it would otherwise not have received given Nouriz’s financial position. In simple terms, CAHG paid Nouriz’s debt.
[60] However, by 17 March 2023, BODCO contended that Nouriz owed $4,269,400 comprised of the following alleged debts:
(a)Invoice relating to the SAMR agreement totalling $755,000 (addressed above).
(b)Invoice for certain expired ingredients (PKG and Nucleotide) totalling
$14,400.
(c)Invoice for certain expired ingredients (Healtra Stg 1 and 3 and packaging) totalling $3.5 million.
[61] The last amount was a claim pursued for expired stock or ingredients under the 2016 distribution agreement with Nouriz, which had been terminated on 1 December 2021 and then superseded by the SAMR agreement on 23 December 2021. When Nouriz received that invoice during October 2022, Nouriz was surprised to receive the demand and it disputed the claim.
[62] Mr Cao emailed Ms Wetere querying the claim for expired stock, saying that it appeared to be too much for Nouriz committed orders (of 480,000 cans). The plaintiff criticises this as disregarding BODCO management’s reconciliation of the expired stock and becoming involved unnecessarily in the negotiations. Criticism was also made of Mr Cao involving himself in pricing discussions. The plaintiff characterises this as trying to run interference. In contrast, the first defendant characterises discussions of this nature as attempts to “mediate” between BODCO and Nouriz.
[63] In terms of the financial impact of the debts owed by Nouriz, the plaintiff concedes that any alleged “control” of the non-payment or delayed payments of amounts due to BODCO is subsumed by the level of shareholder debt now owed by BODCO to CAHG. Accordingly, JMB as shareholder has not attributed any separate financial loss for these alleged departures from fair dealing.
[64] Overall, I do not accept that there is any evidence that CAHG has directed Nouriz not to make payments. To the contrary, all of the evidence indicates that Nouriz was not in a financial position to pay from its own means, and that CAHG has taken steps to address some of the amounts by itself making payments for BODCO’s benefit.
[65] For the balance, I accept that there are disputes about whether the amounts are owed at all in the contractual context, and that significant costs, delays and uncertainties would be involved in pursuing enforcement action against a company in China, measured against only questionable benefit if the company is insolvent anyway.
Given the financial position of BODCO, it is understandable that such action has not been pursued.
[66] In any case, I find no evidence that CAHG has departed from standards of fair dealing in seeking to mediate and arrive at solutions for both companies.
Transfer pricing
JMB allegations
[67] The issue of transfer pricing assumed far more significance at trial than is evident from the amended statement of claim.
[68] The allegation in para 79 of the amended statement of claim was that CAHG breached s 174 by conducting the affairs of BODCO in a manner that was oppressive, unfairly discriminatory, or unfairly prejudicial to JMB’s interests. One pleaded category was:
The transfer pricing issue, as well as the employment and immigration issues, particularised…above.
[69] The claim defines the particulars provided in respect of a PWC draft report dated 18 April 2023 as the “transfer pricing issue”.
[70]There are three relevant reports on transfer pricing:
(a)On 4 October 2019, KPMG sent a report to Mr Kumaran advising that New Zealand’s transfer pricing rules apply to BODCO and Nouriz, due to CAHG’s common shareholding. As a result, it was necessary for BODCO to demonstrate that arm’s length pricing had been used when selling goods on a “cost plus” basis to Nouriz. KPMG recommended using a secondary “transactional net margin method” as a cross-check, and expressed concern that BODCO’s cost base and risk assumptions might be deficient.
(b)On 18 April 2023, PWC circulated a draft report with recommended steps for compliance with the Inland Revenue Department’s (IRD) new requirements for transfer pricing.22 In its draft form, this report suggested that BODCO had derived a lower return than what the IRD would consider an arm’s length return, and the agreement with CAHG and/or Nouriz included terms that could be considered non-arm’s length.
(c)Although not pleaded, on 30 August 2023, PWC issued its final report after being provided with further information. That report concluded that the prices charged by BODCO to Nouriz “can be considered to be at arm’s length for New Zealand transfer pricing purposes”.
[71] The pleading alleges that CAHG’s purported repayment of Nouriz’s debts is an example of transfer pricing. It also refers to discussions at board level and with PWC in the second half of 2022, leading to the commissioning of the PWC report on transfer pricing.
[72] By the time of the expert evidence and closing submissions, JMB’s allegation was that, under CAHG’s control, BODCO failed to deal with the BODCO/Nouriz transfer pricing issues from the time it obtained KPMG’s letter on transfer pricing in 2019. Upon receipt of that advice, JMB says the minority shareholders were entitled to expect CAHG would ensure the issue was properly addressed, and that did not happen then, or subsequently.
Analysis
[73] As I understand it, the real issue as it has emerged at trial is not whether there was non-compliance with the IRD’s requirements. Rather, the key question (though not pleaded in that way) is whether CAHG and its appointees acted prejudicially in making BODCO sell to Nouriz at negative margins, contrary to BODCO’s interests. In other words, JMB says the opportunity was lost to confront such damaging pricing decisions and to take remedial action (such as selling product elsewhere).
22 Income Tax Act 2007, ss GC 6–14.
[74] I acknowledge the plaintiff’s evidence that concerns about pricing to Nouriz were raised several times from June 2017 through to various board meetings in 2019:
(a)For example, at the 20 March 2019 board meeting, Mr Kumaran tabled a report on fair pricing, raising a concern that the current price between BODCO and Nouriz meant it was losing money due to the high cost of materials and low selling price.
(b)In May 2019, Mr Kumaran noted that the China pricing strategy for Nouriz placed a ceiling on what the price could be, and this did not allow the BODCO factory to generate any margin. Mr Wagstaff queried why BODCO would sell product to Nouriz for $13 if it cost
$14.29 to make.
(c)Similar concerns were raised in the September 2019 AGM.
[75] As a result, in September 2019, the board agreed that BODCO would reform its pricing policy and directed that Madam Ding of CAHG would chair a meeting between Mr Kumaran and Lui Ning (Nouriz CEO) to agree on a future pricing formula. The meeting was held as directed, resulting in Mr Kumaran circulating a new set of draft pricing principles on 23 September 2019. The BODCO board agreed that Mr Kumaran should keep on revising the pricing mechanism with Nouriz. Those negotiations continued into 2020.
[76] By September 2020, BODCO and Nouriz had agreed to a revised pricing formula. Mr Zhang’s position under cross-examination was that CAHG had left those negotiations to take place directly between BODCO and Nouriz management, and Mr Zhang took the view that the revised pricing formula meant that the pricing concerns in the 2019 KPMG report had been addressed.
[77] In the 30 March 2021 board meeting, Mr Young raised a concern about continuing to produce Pinrise-branded products for Nouriz knowing this would be at a loss. He proposed that the formulation be assigned to another company. In response, Mr Zhang commented that he was not satisfied with Pinrise’s performance either, but
they should first seek improvement and only if this was not achieved should BODCO look for new distributors.
[78] The issue of transfer pricing was again raised in July 2022, around the time that CAHG was proposing to acquire a 70 per cent controlling interest in Nouriz. Ms Wetere suggested that BODCO should undertake a transfer pricing review. Mr Zhang was open to that in principle, but questioned the timing given BODCO’s cash flow difficulties and the fact that CAHG had not in fact proceeded with acquiring 70 per cent of Nouriz.
[79] Those discussions continued until November 2022, by which time Ms Wetere was reporting to directors that BODCO was insolvent. In those circumstances, Mr Zhang was concerned about carefully managing cash outlays, and said there was no immediate requirement for commissioning a transfer pricing review without the IRD requesting this.
[80] The issue of transfer pricing was then raised in KPMG’s audit report for the year ended 31 December 2022.
[81] In February 2023, Ms Wetere instructed PWC to undertake a transfer pricing review. This led to the draft report, feedback provided by Mr Cao, and PWC requesting and being provided with a range of further information. This included copies of contracts that Nouriz had in place with other New Zealand suppliers.
[82] The plaintiff criticises the usefulness and accuracy of the limited information Mr Cao provided to PWC. In particular, JMB says that Mr Cao failed to disclose the full extent of the CAHG relationships by withholding information that Mr Lu was a seconded CAHG employee at the time of performing the role of Nouriz general manager. Mr Cao described the three companies as independent legal entities, without disclosing the common shareholding and issues of financial dependence on CAHG. At this point, the plaintiff says that the pricing decisions were effectively being made by CAHG employees on each side of the negotiations. Furthermore, the plaintiff says the true nature of the research and development agreements was not properly
disclosed, and the random selection of 18 contracts provided to PWC were inadequate for a proper pricing comparison.
[83]On these issues, CAHG’s position is that:
(a)BODCO has not breached transfer pricing rules based on the final PWC report;
(b)there is inadequate material before the Court to safely overturn or second-guess that assessment;
(c)there is no basis for concluding that pricing between Nouriz and BODCO (whether arms-length or otherwise) is CAHG’s responsibility;
(d)there is no basis for concluding that any such pricing constitutes oppression by CAHG (noting as above that pricing was negotiated between BODCO and Nouriz management);
(e)there is no material to suggest what, if any, alternative pricing could have been obtained and at what volume; and
(f)even if there were such material available, it would be of negligible financial impact.
[84] I acknowledge that aspects of the information provided to PWC appear to be incomplete and that questions legitimately arise as to whether the final PWC report was a reliable assessment of transfer pricing issues. Largely, this amounts to a criticism of the depth of the questions raised by PWC, the quality of the information PWC received, and whether the review was sufficiently robust.
[85] The fact remains that there is inadequate evidence before the Court to take those issues further. The plaintiff has not sought to call evidence from PWC or any other expert as to what a more comprehensive transfer pricing analysis at the time should have produced. Even if there might have been a higher notionally achievable market price, the critical issue is whether the pricing as between CAHG and Nouriz
reflected commercial realities at a time when CAHG was also supporting BODCO management’s efforts to find more profitable alternative distributors or markets.
[86] I find no evidence whatsoever to substantiate that CAHG induced sales to Nouriz at an undervalue against BODCO’s interests so that CAHG could instead derive value as a Nouriz shareholder:
(a)With its majority shareholding in BODCO and only a minority shareholding in Nouriz, and taking into account the volume of product sold to Nouriz, all of the evidence indicates that these problems detrimentally impacted CAHG far more than JMB in financial terms, and that CAHG suffered ongoing wealth erosion from supporting both companies.
(b)Nouriz was initially proposed as a suitable distributor by the founder shareholders, and it was originally their intention to invest in Nouriz to satisfy Chinese regulatory requirements for supply chain integration, so there is nothing improper in CAHG taking those same initial steps.
(c)Evidence of other market conditions credibly explain the solvency problems later faced by Nouriz and its inability to pay and on-sell at higher prices.
(d)BODCO management and the founder directors were encouraged to find alternative distributors and export markets but failed to achieve any such solutions — this is inconsistent with JMB’s necessary assumptions of opportunity cost and relatively inelastic demand.
(e)The fact that Nouriz volumes were much lower than forecast is also inconsistent with JMB’s assertion of wealth transfer (volumes would be higher if external profits were being leveraged).
[87] In any event, even if this issue had been pleaded as causing loss from late 2019 rather than from April 2023, I see no evidence that JMB was prejudicially affected as a shareholder compared with any realistic counterfactual. I do not accept that BODCO management was precluded from finding alternative distributors and export markets. In the absence of a more profitable alternative, the only realistic counterfactual throughout has been to place BODCO into liquidation (addressed further below).
[88] Overall, I reject the plaintiff’s claim that CAHG’s conduct in relation to transfer pricing issues was oppressive or unfair in any material way.
Secondment and employee issues
JMB allegations
[89] The plaintiff claims that CAHG’s conduct in relation to the secondments of [REDACTED] were unfairly prejudicial, in effect because it was part of a strategy that enabled CAHG to take control of BODCO’s management.
[90] JMB’s primary complaint is about the result, being that this enabled CAHG to run BODCO as if it were a wholly owned subsidiary. The plaintiff says this is a serious departure from JMB’s reasonable expectation that BODCO would have independent management. That failure is therefore oppressive and unfairly prejudicial to JMB’s interests in BODCO.
[91] By August 2022, the financial situation of BODCO was such that CAHG wanted increased input into the financial performance and management of the company so Mr Zhang sought legal advice [REDACTED]. Mr Zhang forwarded that advice to Ms Wetere, Mr Young and Mr Wagstaff.
[92] Between January and March 2023, a series of resolutions were tabled and voted on in relation to [REDACTED] appointments.
[93] Mr Wagstaff and Ms Wetere went to extensive efforts to get a copy of [REDACTED]’s visa application (including by instructing external lawyers to formally request documentation from Immigration New Zealand). The application form was not provided following the formal document request because, as Ms Wetere acknowledged, it contains private information that could only be provided with [REDACTED]’s consent.
[94] Ms Wetere and Mr Wagstaff’s apparent concern was that [REDACTED]’s visa (and application) said that he would be performing the role of “resident supervisor”, whereas the resolutions that were tabled with the board referred to him as a “general manager”. The application suggested [REDACTED] was going to monitor and develop CAHG’s investment in BODCO and that there was no-one else suitable for the role. In addition, JMB says the information provided by CAHG to Immigration New Zealand was incorrect because CAHG and BODCO are not within the same corporation, therefore the secondments could not properly be described as “intra-corporate”.
[95] Ms Wetere refused to allow [REDACTED] on site until her concerns were resolved. Successive resolutions were tabled and voted on to arrive at a form of wording that Ms Wetere would accept before she would let [REDACTED] come to work.
[96] JMB’s complaint is that [REDACTED] were effectively appointed to replace Ms Wetere and Ms Lennan:
(a)In December 2022, Mr Zhang sought legal advice in relation to [REDACTED].
(b)On 28 January 2023, the CAHG directors advised BODCO management by email that [REDACTED] would be seconded to work at BODCO.
(c)The board resolutions made on 9 March 2023 appointed [REDACTED] as general manager and aligned Ms Wetere’s key performance indicators (KPIs) with budgetary performance. Failure to deliver on the KPIs would lead to an expectation that Ms Wetere should resign. Ms Wetere considered the budgetary targets to be practically impossible to achieve, so JMB alleges that this was effectively a mechanism for constructive dismissal. JMB says CAHG’s plan was successful as Ms Wetere resigned as CEO shortly afterwards.
(d)Similarly, by a letter dated 6 April 2023, Ms Lennan resigned from her position as financial controller. JMB’s position is that Ms Lennan’s role was effectively taken over by [REDACTED] when he was appointed as financial supervisor of BODCO. Ms Lennan’s letter of resignation says “…the increased controlling involvement from CAHG has resulted in my job being diminished”.
(e)In May 2023, [REDACTED] sent a report to CAHG directors on the work he had undertaken in his first month at BODCO. Mr Du of CAHG responded, congratulating [REDACTED] for coordinating the resignations of Ms Wetere, Mr Wagstaff and “the bunch of people”, noting that CAHG had gained control of BODCO.
(f)In January 2024, Lu Fuyuan was appointed as CEO. Mr Lu was a director of Nouriz for a significant period of time and was BODCO’s main point of contact at Nouriz.
[97] In contrast, CAHG considers that the secondments of [REDACTED] delivered important benefits to the company. BODCO has now successfully obtained SAMR registration for all three of its brands (one of only five factories in New Zealand to achieve this). Changes have been made to the organisational structure to make it more efficient. 2024 saw a loss of approximately $6 million (which was equivalent to the budget that CAHG wanted in 2023 but JMB is now criticising). Further improvements are anticipated for 2025.
Analysis
[98] I reject the plaintiff’s starting proposition that there is an actionable expectation that the company must be managed by people independent of the shareholders. Subject to the company’s constitution, the business and affairs of a company must be managed by, or under the direction or supervision of the board of directors.23
[99] Most director powers can be delegated to a committee of directors, a director or employee of the company, or any other person.24 If so, the board remains responsible, unless the board:25
(a)believed on reasonable grounds at all times before the exercise of the power that the delegate would exercise the power in conformity with the duties imposed on directors of the company by the Companies Act and the company’s constitution; and
(b)has monitored, by means of reasonable methods properly used, the exercise of the power by the delegate.
[100] Sections 139–144 govern how conflicts of interest are managed. A director must disclose to the company any conflict of interest, by recording the issue in an interests register and by disclosing it to the other directors.26 Once this is done, an interested director can be counted as part of a quorum and vote at any meeting of directors that resolves upon a transaction in which he or she has a conflict (unless the constitution provides to the contrary).27 A company can avoid a transaction affected by a conflict of interest only if the company does not receive fair value.28 Any director vote that is potentially affected by a conflict will be subject to the usual director duties,
23 Companies Act 1993, s 128; and Tom Pasley “The Office of Director” in Pavanie Edirisuriya and others Morison’s Company Law (online ed, LexisNexis) at [23.1].
24 Section 130(1); and Edirisuriya and others, above n 23, at [23.5].
25 Section 130(2).
26 Sections 140 and 189(1)(c); and Peter Watts Directors’ Powers and Duties (3rd ed, LexisNexis, Wellington, 2022) at [8.2].
27 Section 144; and Watts, above n 26, at [8.8]. See Berlei Hestia (NZ) Ltd v Fernyhough [1980] 2 NZLR 150 (SC) at 163–167, in which three board appointees of the 40 per cent shareholder (selling in competition with the company) remained entitled to have access to all company documents, subject to potential discretionary court restraint if there was sufficient proof of intent to injure the company.
28 Section 141; and Watts, above n 26, at [8.7].
such as the duty in s 131 to act in good faith and in what the director believes to be the best interests of the company.
[101]Such director duties are primarily owed to the company:29
(a)For a solvent company, this would normally mean acting in the interests of shareholders, because shareholders benefit from increases in company value, meaning the interests are aligned.30 Side benefits are not proscribed. What is proscribed is placing a director’s (or appointing shareholder’s) own interests ahead of the company.31
(b)However, the courts have recognised that in circumstances of doubtful solvency, actual insolvency or inevitable insolvent liquidation, directors may be required to have regard to the interests of creditors.32 This approach rests, in part, on the following rationale:33
[Creditors] become prospectively entitled, through the mechanism of liquidation, to displace the power of the shareholders and directors to deal with the company’s assets. It is in a practical sense their assets and not the shareholders’ assets that, through the medium of the company, are under the management of the directors pending either liquidation, return to solvency, or the imposition of some alternative administration.
(c)A long-term strategy of trading while balance sheet insolvent is generally unacceptable but might be legitimate where there are reliable
29 Section 169(3).
30 Yan v Mainzeal Property and Construction Ltd (in liq) [2023] NZSC 113, [2023] 1 NZLR 296 at [142]. See also John Land “Corporate Purpose and the Impact on Equitable Remedies, Economic Growth and Democracy” (2024) 55 VUWLR 497 at 499.
31 Watts, above n 26, at [6.4], subject to subss 131(2)–(4) and the constitution. See [6.4.2] for a discussion of the issues when there are mixed motivations and no active consideration of the company’s separate interests.
32 Yan v Mainzeal Property and Construction Ltd (in liq), above n 30, at [142] and [217]–[218] distinguishing BTI 2014 LLC v Sequana SA [2022] UKSC 25, [2024] AC 211; and Madsen-Ries (as liquidators of Debut Homes Ltd (in liq)) v Cooper [2020] NZSC 100, [2021] 1 NZLR 43 at [113(b)], [114] and [177]. See Watts, above n 26, at [10.2] for a critique of this as an extension of common law principles.
33 Kinsela v Russell Kinsela Pty Ltd (1986) 4 NSWLR 722 (NSWCA) at 730; and Land, above n 30, at 499.
assurances of support from a related company.34 CAHG has been giving such support in this case.
[102] Consistent with the above principles, it is common for companies to be managed by people who are aligned with the interests of shareholders and/or in whom the directors have confidence. This ranges from closely held companies operated by owner directors through to large, listed companies managed by chief executives with significant shareholdings, or by executive directors who take that responsibility.
[103] Here, the shareholder agreement (as varied) expressly records CAHG’s power to appoint the majority of directors (four out of seven), accompanied by an express entitlement to nominate the appointment or removal of the CEO, CFO or general manager.35 Solvency problems have not caused any misalignment between the interests of BODCO’s creditors and shareholders, because CAHG is also a major creditor.
[104] Given the ongoing deterioration of the financial position of the company, including significant annual losses leaving shortfalls funded by CAHG to enable BODCO to continue trading, I find nothing surprising in its desire to appoint individuals to work within the company with the objective of achieving a financial turnaround. An analogy can be drawn with secured creditors appointing investigative accountants or business consultants in the same circumstances. I do not accept there is any necessary implication that this was merely a façade for replacing Ms Wetere and Ms Lennan. In any case, I consider issues of constructive dismissal are irrelevant, because no such claims are maintained against BODCO.
[105] In terms of the quality of information provided to Immigration New Zealand, I see nothing of substance in those complaints. While the word “intra-corporate” might be inapt, the balance of the information provided a clear explanation of what was meant, including the fact that CAHG was a separate company from BODCO and these appointments were made at that shareholder’s request to monitor and develop its investment in BODCO. I have no concerns with the description of the work that
34 Yan v Mainzeal Property and Construction Ltd (in liq), above n 30, at [272].
35 See [18](i) above.
[REDACTED] were to provide, which I find was entirely consistent with the board materials (regardless of what title might be given to their intended roles).
[106] Other than the generic issue of control, JMB has not identified any respect in which [REDACTED] have materially prejudiced JMB’s interests as a shareholder. Management of the business and affairs of BODCO remains the responsibility of the board (the majority of whom are CAHG appointments under the terms of the shareholders’ agreement). CAHG and its director appointees are satisfied with [REDACTED]’s work and consider that they delivered important benefits to the company. Nothing in the evidence contradicts the legitimacy of those views.
[107] For all of the above reasons, I find no departure from standards of fair dealing in respect of these secondments and the subsequent changes in management.
Acting on BODCO’s behalf
JMB allegations
[108] Under this issue, JMB alleges that CAHG has failed to observe any distinction between itself as majority shareholder in BODCO and BODCO itself, taking actions on behalf of BODCO without instruction from, or the involvement of BODCO’s management and board.
[109] JMB does not allege that each instance is itself oppressive conduct causing prejudice. Rather, viewed together, JMB says that these examples illustrate a pattern of oppressive behaviour by CAHG — they demonstrate CAHG’s ongoing use of its financial control of BODCO to exclude and deprive BODCO’s board and independent management of the ability to make informed business decisions on the basis of BODCO’s independent interests. In doing so, CAHG imposes its desired outcome, sometimes to the benefit of related parties.
Analysis
[110] The first complaint relates to a CAHG meeting with ANZ China without concurrent participation by BODCO management. In cross-examination, Ms Wetere confirmed that ANZ New Zealand contacted her to explain that the bank was
concerned about the risk of BODCO’s borrowing and needed ANZ China and CAHG to speak together.
[111] I find nothing improper about those discussions, given that CAHG had a direct relationship with ANZ China that ANZ China was keen to develop, and CAHG had a direct interest in that $20 million overdraft facility because it provided security for the standby letter of credit. In any event, CAHG reported back to BODCO about those discussions.
[112] The second complaint is about an alleged intervention in negotiations between BODCO and Mataura Valley Milk (MVM), BODCO’s main raw ingredients supplier, about disputed amounts owing between the two:
(a)In late 2022, MVM claimed that BODCO owed around $1.461 million. BODCO management considered that the full amount was not owing because some of the product supplied by MVM was outside specification. On that basis, BODCO refused to pay anything to MVM. This resulted in MVM putting BODCO on a stop credit by September 2022, which meant BODCO could not get raw materials from MVM. BODCO management was concerned that MVM might address that position by issuing a statutory demand and seeking to put BODCO into liquidation.
(b)At the same time, MVM separately owed money to CAHG as a shareholder of MVM. The evidence from CAHG was that it agreed with MVM that it could withhold $1.461 million from the amounts due to CAHG and could keep that money if BODCO went into receivership or did not repay the claimed debts by the end of the financial year.
(c)In her evidence, Ms Wetere confirmed that BODCO did not have money to pay its creditors and, to the best of her knowledge, BODCO never paid any of the $1.461 million invoiced by MVM.
(d)Mr Zhang informed the BODCO board and management of this arrangement at a meeting on 27 October 2022 and Mr Wagstaff said he appreciated what CAHG had done.
[113] I see no departure from fair dealing or prejudice caused by CAHG taking these steps to resolve a dispute that was preventing ongoing supplies to BODCO.
[114] The third complaint is that CAHG sought to negotiate cheaper supplies of base powder from Yili Group, a Chinese dairy products producer, without BODCO management’s prior knowledge, request or inclusion. Ms Wetere acknowledged that BODCO management was informed afterwards, at a board meeting on 2 February 2023, and that these negotiations did not ultimately go anywhere. I accept CAHG’s evidence that this attempt to put in place a cheaper supplier was undertaken for the benefit of BODCO in the belief that CAHG’s direct approach in China may be beneficial. It was not done with any intention ultimately to exclude BODCO management, which is why they were informed of it on 2 February 2023. This did not cause any prejudice and cannot form the basis of any unfair prejudice action.
[115] The final complaint in this category relates to specific instructions by CAHG to BODCO management that the budget for the 2023 financial year needed to be amended by providing for a lower forecast loss, coupled with aligning BODCO management’s KPIs with such a revised budget. BODCO management regarded these budget adjustments as unrealistic:
(a)BODCO management’s initial draft budget had forecast a loss of
$10 million. Given BODCO’s financial position at the time, this was a shortfall that CAHG would have been required to fund to enable the company to continue to trade.
(b)Mr Zhang informed management that a $6 million loss was the most CAHG was willing to bear and asked BODCO management to identify where further cost savings could be made. [REDACTED] and BODCO management worked together to identify a pathway for reducing forecast losses to $6 million. Robust exchanges took place between
CAHG’s appointed directors on the one hand, and Ms Wetere and Mr Wagstaff on the other, in which the budget was challenged.
(c)On 22 February 2023, Ms Wetere emailed the directors with a revised budget for a $5.6 million loss. On 23 February 2023, a special board meeting was held to discuss the 2023 annual budget.
(d)On 6 March 2023, all BODCO directors approved the 2023 budget, except for Mr Wagstaff.
[116] JMB alleges that these directions were to prepare a budget that was unachievable. In contrast, CAHG says that the lower level of forecast losses was not unrealistic, noting that BODCO’s losses in 2024 were $6.3 million and have been forecast at $4 million for 2025.
[117] I do not accept that this conduct fell below the standard of fair dealing giving rise to actionable claims for unfairly prejudicial and unfair conduct. In situations where any losses will need to be funded by one supporting shareholder, it is entirely understandable for that shareholder to want a budget that minimises those losses. The question of whether this amounted to constructive dismissal is not one that requires determination. Ms Wetere resigned and there are no outstanding employment law issues between her and BODCO.
[118] Together and separately, I find that none of these complaints amount to oppressive behaviour by CAHG.
2023 Shareholder Loan
JMB allegations
[119] JMB alleges that the 2023 Shareholder Loan would not have been necessary, had CAHG not caused or allowed BODCO to trade at a loss with the related party. It says that the 2023 Shareholder Loan agreement effectively subsidised BODCO’s losses caused by the Nouriz/CAHG trading relationship which, in that sense, is oppressive and unfairly prejudicial.
[120] JMB alleges that failing to undertake a transfer pricing review immediately before agreeing to that loan was a departure from the standard of fair and reasonable conduct, and the Court should view with scepticism the claim that the loan was needed suddenly, without any documentary evidence that ANZ was intending to call up its facility.
Analysis
[121] Since 2018, BODCO has had a $20 million working capital facility with ANZ in New Zealand. The ANZ facility was secured by a standby letter of credit from ANZ China, which was secured by a $20 million deposit that CAHG held with ANZ in China. To support that structure, the founding shareholders pledged their BODCO shares to CAHG in the event of a default on the facility. The facility was due to mature in May 2023.
[122] On 10 February 2023, Ms Wetere informed directors that she had been contacted by ANZ. ANZ had concerns around BODCO’s financial position and wanted a plan before they would extend or roll over the facility in June 2023. At around the same time, ANZ China informed CAHG that they would not be renewing the standby letter of credit and that ANZ would not renew the loan facility in May 2023. As discussed above, CAHG explored alternative options directly with ANZ China but found no solution.
[123] In April 2023, BODCO’s $20 million ANZ facility was fully drawn down and BODCO was unable to repay it. Had ANZ required repayment of the facility, this would have resulted in JMB’s shares being transferred to CAHG under the counter-guarantee agreement.
[124] On 5 April 2023, Ms Wetere advised the BODCO directors that BODCO was insolvent, and Mr Wagstaff immediately resigned as a director by delivering notice that afternoon.
[125] On 12 April 2023, CAHG circulated a draft loan agreement to the BODCO directors (the 2023 Shareholder Loan). The 2023 Shareholder Loan was for up to
$26 million and was intended to repay and replace the ANZ facility and provide
working capital for the business. The interest rate was [REDACTED]. The agreement also provided for the founding shareholders to continue to pledge their shares to CAHG.
[126] On 13 April 2023, CAHG called an urgent shareholder meeting to discuss the loan and requested that the shareholders waive the 10-day notice requirement for the meeting by reason of urgency. Mr Wagstaff objected. He was the only one to do so. As a result, the meeting was put off until 27 April 2023.
[127] With the exception of Mr Wagstaff, who had recently resigned as a director, all shareholders supported the loan. On 14 April 2023, Mr Young noted that the ANZ facility was “due for repayment and no one else can help” and thanked Mr Zhang for arranging the refinancing. Mr Young noted that the CAHG loan meant a saving of
$600,000 interest per annum for BODCO, was a simple agreement and should be completed urgently. Ole Andersen said that he agreed with Mr Young’s email and said to “[g]et the agreement completed.”
[128] Ms Wetere raised some concerns with the draft agreement and proposed getting PWC to review transfer pricing issues. Mr Zhang directed that the expense of a transfer pricing review should not be incurred because it was “unnecessary work”. Shortly after that, on 19 April 2023, Ms Wetere resigned.
[129] After BODCO sought and received legal advice on the draft agreement, an updated draft agreement was circulated on 27 April 2023. The key changes were:
(a)The term of the loan could be extended on an annual basis with the written consent of CAHG. This amendment was made to address the concerns raised about the length of the loan term.
(b)Specifying the interest rate at [REDACTED].
(c)BODCO would grant a general all asset security interest to CAHG once the ANZ loan was repaid and ANZ’s security was released.
(d)The counter-guarantee agreement between minority shareholders and CAHG would remain valid and in force in respect of the repayment liability CAHG had undertaken by provision of the loan to enable BODCO to repay the ANZ loan, and CAHG did not waive its rights to call for reimbursement liability under the counter-guarantee agreement.
(e)The loan would only be repaid by BODCO on the earlier of the date when BODCO had raised equity, the sale of the re-registration right held by BODCO and/or the appointment of an administrator, liquidator, receiver, statutory manager or similar insolvency official of BODCO.
[130] The shareholders meeting scheduled for 27 April 2023 was adjourned to give the shareholders time to review the updated draft agreement.
[131] On 2 May 2023, the shareholders meeting was held. At this meeting, all BODCO’s shareholders voted in favour of the resolution authorising BODCO’s entry into the loan except for JMB which refused to vote at all.
[132]On 9 May 2023, the loan agreement was executed.
[133] On 31 May 2023, BODCO and CAHG entered a supplementary agreement to extend the term of the loan to 9 May 2025.
[134] The funds from the 2023 Shareholder Loan repaid the ANZ loan of $20 million in full. CAHG’s payments and BODCO’s repayments occurred as follows:
(a)On or around 26 June 2023, CAHG paid $15 million to BODCO.
(b)On 30 June 2023, BODCO repaid ANZ $12.3 million plus $227,000 in interest.
(c)ANZ agreed to extend the remaining $8 million to 30 November 2023.
(d)On or around 28 November 2023, CAHG paid $10 million to BODCO.
(e)On 30 November 2023, BODCO repaid ANZ the remaining $8 million.
[135] At the time of the hearing, BODCO has not paid any interest on the loan to date. Instead, such interest has accrued as further amounts payable to CAHG.
[136] I fail to see any prejudice arising from this refinancing. The reasoning provided by the shareholders who supported the 2023 Shareholder Loan was that the cost of borrowing was lower than the facility provided from ANZ. Given that direct comparison of market lending terms, it is understandable that CAHG would not support the costs and delays of undertaking a transfer pricing review of the document before putting in place the new arrangements.
[137] Even though the shareholder loan is governed by Chinese law, no evidence has been adduced about any prejudice that arises from that, compared with New Zealand law.
[138] Furthermore, I do not find it credible to allege that large New Zealand banks would have been inclined to lend to a company that was balance sheet insolvent and unable to pay its debts as they fell due (absent CAHG support), at least without taking additional external security and/or requiring a substantial premium above usual market rates for significantly increased risk.
[139] In circumstances where the alternative at the time was liquidation with substantial net amounts owed to creditors, I see no prejudicial impact on shareholders arising from the 2023 Shareholder Loan. The remaining allegations about Nouriz pricing have already been addressed under the topic of transfer pricing.
Abandoned allegations
[140] For the sake of completeness, I also address the three allegations initially pursued in the amended statement of claim that were abandoned at trial. That concession was sensible given there was no substance to them:
(a)JMB complained about a delay in BODCO repaying the shareholder loan granted by JMB’s associated entity St Croix Holdings Ltd (St Croix). The terms of repayment were set out in the memorandum of understanding dated 5 April 2017. I heard evidence at trial about the reasons why there was a delay in repayment, including disputed issues about whether the repayment condition was satisfied, and the fact that ANZ did not consent to a loan repayment that would prefer a shareholder over creditors. At the time, Mr Wagstaff was forthright in demanding repayment even if the consequence for BODCO was liquidation. Regardless of the rights and wrongs of that, the St Croix loan was repaid in December 2019 and other shareholder loans were converted to equity. JMB is not St Croix. In any event, St Croix was treated beneficially rather than prejudicially.
(b)For the same reasons, there is no substance to an allegation of prejudice arising from other shareholder loans being converted into equity. Without such conversion, they would have had priority over JMB’s shareholding interest.
(c)The “dilution of shares” caused by BODCO’s distributors acquiring small shareholdings to comply with Chinese regulatory requirements (for which full consideration was paid) was done in BODCO’s interests, to advance the business plan. This conduct was not unfairly prejudicial.
Discovery
[141] During the interlocutory stages of this proceeding, various disputed issues arose with the first defendant’s discovery. After CAHG eventually provided its discovery, the plaintiff contended it was inadequate and applied for particular discovery, seeking seven further categories of documents and access to redacted information.
[142] In a judgment delivered on 13 December 2024, Lang J dismissed that application. This was on the basis that Lang J did not consider that further documents likely to be of real importance to the proceeding would be found, and the requested
further searches would be disproportionate. He held that discovery already provided about the immigration applications and supporting information was sufficient. The Court also accepted that disclosure of the information that was redacted to comply with privacy laws imposed by the Chinese government was not required, since it was not evident why that detail was relevant and such steps would also be disproportionate. Based on my analysis at trial, I agree with Lang J’s assessment.
[143] Against that background, in witness cross-examination and in closing submissions, the plaintiff referred to various other categories of documents and information not provided, implying that adverse inferences might be drawn.
[144] If a party who had or has relevant information fails to disclose it in breach of their obligations, the court may draw such inferences as it considers appropriate, including the adverse inference that the information would not have assisted that party if it had been disclosed.36 However, this is not a licence to engage in pure speculation.37 Rather, in drawing appropriate inferences for the purpose of making findings of fact, the court may rely on all the information that has been disclosed, its experience in cases of this nature and the inherent probabilities from the non-disclosure of information.38
[145] I do not draw any adverse inferences in this case. Tailored discovery was provided in accordance with defined categories. There is no identified instance of non-compliance with those obligations. Rather, the plaintiff is raising new issues not addressed in its application for particular discovery, or other areas were interrogated at trial with much greater focus and particularity than the pleadings indicated. I consider that the evidence before the Court is nevertheless sufficient to determine the disputed issues, and it is mere speculation (inherently improbable) that other non-disclosed information would have proved contrary material facts.
36 Clayton v Clayton [2015] NZCA 30, [2015] 3 NZLR 293 at [186]; rev’d [2016] NZSC 30, [2016]
1 NZLR 590, but without criticising these principles.
37 Prest v Petrodel Resources Ltd [2013] UKSC 34, [2013] 2 AC 415 at [45].
38 Clayton v Clayton, above n 36, at [186].
Conclusion as to prejudicial conduct
[146] As set out in the preceding sections, JMB has failed to substantiate any of its allegations that CAHG acted oppressively or in an unfairly prejudicial or discriminatory way towards JMB as shareholder. To the contrary, CAHG has provided a high level of ongoing investment and support, hoping that BODCO would be able to achieve a financial turnaround. In seeing through this commitment, CAHG has kept alive the possibility that JMB’s shareholder value may be restored. My assessment is that liquidation would otherwise have been inevitable since late 2019, with no likely returns to shareholders. JMB is not worse off because of CAHG’s conduct.
[147] Given that JMB has failed to substantiate any prejudicial conduct triggering the right to relief, it is not strictly necessary to analyse the expert evidence addressing quantification of the alleged losses. I nevertheless do so in the next section, because of disputes about how a proper counterfactual analysis should be conducted.
Counterfactual analysis
[148] If JMB is successful in establishing unfairly prejudicial conduct, then it seeks the primary relief of an order that CAHG acquire JMB’s shares at a price considered fair to remedy that prejudicial conduct. There is no dispute between the parties that, in its present financial state, BODCO is worth nothing or next to nothing to a notional would-be third party purchaser of shares. Accordingly, any valuation to determine “fair value” is based on a hypothetical valuation of what the situation would be if the unfairly prejudicial conduct had not occurred.
Plaintiff ’s evidence
[149] In constructing the counterfactual, Mr Grenfell analysed the revenue and EBIT performance of similar companies that he classified as the “peer group”, being four listed companies and three private companies. He concluded that an EBIT margin of 4–6 per cent would have been consistent with the peer group’s performance over the same periods and would represent a slight discount compared to the IRD rule of thumb of seeking to earn an EBIT margin of seven per cent. Although BODCO had significantly under-performed against its own budgets for the financial years ending
31 March 2018 to 31 March 2021, he adopted those budgeted margins [REDACTED], because they fell around the peer group range. This gave average revenue, EBITDA39 and EBIT figures to which Mr Grenfell applied a market multiples approach to estimate enterprise value. He adopted average multipliers taken from observed sales data to arrive at a midpoint enterprise valuation of $27.5 million.
[150] From this figure, Mr Grenfell needed to deduct a net debt figure to arrive at the equity value of the shares. Rather than using the actual net debt owing as at 31 December 2023, Mr Grenfell adopted a notional net debt figure of $4–6 million in the counterfactual, based on assumed levels of external borrowing that could be supported by the assumed levels of cash flows. This took into account the actual asset position, consisting principally of property, plant and equipment (PPE) with a carrying value of $9.9 million, which he thought a lender would likely discount by 40−60 per cent to recognise the limited pool of potential buyers in a liquidation scenario. He thought a lender would likely also disregard the carrying value of intangible assets and would be unwilling to lend against working capital given its negative financial position. He cross-checked these net debt assumptions against available information from the peer group and found his proposed net debt range fell within the upper end of the observed peer group that had net debt (others were in a net cash position).
[151] Combining the low, middle and high ranges of the estimated enterprise value and assumed net debt, Mr Grenfell arrived at an equity value for BODCO in the counterfactual of between $19–26 million, producing a value per share of
$50,000 (low), $59,200 (middle) and $68,400 (high). On that basis, the calculated value of JMB’s present shareholder interest is $2,309,000 (using the mid-point).
[152] By way of comparison, Mr Grenfell also used an alternative investment approach, assuming a passive equity investment in the NZX50 over the same period. He assumed investment of $4,537,000 in July 2016, realising a compounding annual return of 5.2 per cent. This produced a sum of $6,208,000 as at 31 December 2023.
39 Earnings before interest, tax, depreciation and amortisation.
[153] Finally, he also considered the implied value of JMB’s interest in BODCO based on the last fair value share transaction in July 2016 of $119,400 per share, implying that JMB’s interest at the time was worth $4,537,000.
[154] Taking all of these approaches into account, on balance Mr Grenfell expressed the view that $4,680,000 would be the most appropriate fair value for JMB’s interest, notwithstanding that insolvency of BODCO would likely yield no recovery for shareholders of their equity.
Defendant’s evidence
[155] On behalf of CAHG, Mr Hayward’s view was that, on any straightforward valuation analysis, the value of BODCO’s equity as at 31 December 2023 was nil (or potentially $4,330 per share adopting an option valuation theory). Mr Hayward considered that the break up or liquidation value of nil was appropriate on the facts, given that both experts agreed that the company was balance sheet insolvent from the end of 2019.
[156]He criticised Mr Grenfell’s three valuation approaches in a number of respects:
(a)Mr Grenfell expressed the view that a break up or liquidation value need not be applied because KPMG as auditor was ultimately satisfied that it could adopt the “going concern” basis for preparation of BODCO’s 2022 financial accounts, in reliance on a letter of support from CAHG. I accept that those audit considerations are different from the task of conducting a commercial assessment of share value.
(b)Mr Grenfell took the view that a “net asset” valuation technique was not appropriate either, presumably because he thought his other methods were more effective to counter the alleged prejudicial conduct by constructing a counterfactual that focused on expected performance comparable with the peer group. In contrast, Mr Hayward considered that a net asset valuation technique was highly relevant to determine the value of BODCO’s equity in the circumstances, given its high accumulated losses, material underperformance and significant levels
of financial debt. A net asset valuation approach would again assess equity value as nil.
(c)In terms of Mr Grenfell’s factual valuation, Mr Hayward noted anomalies that the implied “goodwill” value was around $74.2 million, which could not be explained by any benefits or identifiable intangible assets. Another anomaly was that BODCO had a higher valuation in the factual (in which the alleged prejudicial conduct has occurred) compared with Mr Grenfell’s lower valuation in the counterfactual (assuming no prejudicial conduct).
(d)In terms of the counterfactual valuation approach using a deemed assessment of EBIT and EBITDA, this relied on assumptions of peer-equivalent performance that were not tied in any way to the allegations of unfairly prejudicial conduct made against CAHG. Mr Grenfell assumed that the only reason why BODCO failed to achieve its budgeted performance was the alleged prejudicial conduct. This framework hid any analysis of the actual events and causes of underperformance unrelated to CAHG or that were not prejudicial. It failed to account for other operational challenges faced by BODCO referred to in the evidence, including issues with suppliers of base powder, delays in obtaining the necessary registrations for export to China, challenges in accessing the United States market, problems associated with the COVID-19 pandemic, lower than expected demand in China and significant increases in competitor supply.
(e)Other criticisms included Mr Grenfell’s decision to exclude the budget for 2022 and 2023, which was materially lower than preceding years. For calculating a comparable EBIT margin, in Mr Hayward’s view the three private companies were the most comparable to BODCO, because the listed companies were more diverse in product offering, geographic presence and customers. The mean and median EBIT margin across the private companies was negative, therefore Mr Hayward considered Mr Grenfell’s assumption that BODCO would
have been profitable in the counterfactual scenario was arbitrary and unsupported by the available information.
(f)Similarly, Mr Hayward considered Mr Grenfell’s assumptions about the level of debt to be arbitrary and unreasonable given that it was not linked with the actual levels of debt and alleged prejudicial conduct.
(g)In respect of the second valuation approach, there was no evidential basis for an assumption that JMB might have invested in an index fund that tracked the NZX50, had JMB not invested in BODCO. There was also no evidence to suggest that JMB could have sold its shares in MVM and the intellectual property rights for the sum of $4,070,077, being the figure ascribed upon the transfer of those assets into BODCO. In particular, MVM shares were not readily tradeable and MVM was also looking for cash prior to CAHG getting involved. In terms of the intellectual property, ownership remained with St Croix and the licence could be terminated on 12 months’ notice. St Croix had acquired that ownership for two payments of $50.
(h)As for Mr Grenfell’s third approach of using the price of the most recent share transaction, Mr Hayward’s view was that this was unsupportable given the acquisition was to satisfy SAMR regulatory requirements (a collateral purpose), so the transaction did not represent any careful assessment of the value of the company. Mr Wagstaff’s evidence was that there was no negotiation on the price. Furthermore, the amount paid was small compared with the expected value of the distribution relationship.
Analysis
[157] In a different context, the Supreme Court has given detailed guidance about how to construct a counterfactual so as to focus on the particular issue being examined
(in that case competition issues of market power).40 This requires stripping out or neutralising the matters giving rise to the issue being examined, but otherwise replicating or retaining any essential features in the factual.
[158] Consistent with the observations of Mr Hayward, I accept that Mr Grenfell’s analysis did not seek to identify and strip out the alleged prejudicial conduct, otherwise retaining the remaining situation in the factual. His valuation approaches did not seek to engage with the specific loss caused by any contravening conduct.41 Implicitly, Mr Grenfell’s position was that the inference of misconduct involving Nouriz pricing was so all-consuming that it justified such a broad-brush approach. To the contrary, I found no evidential basis for that speculation.
[159] Given that I did not ultimately find any contravening conduct, it is unnecessary to consider the more detailed criticisms of the assumptions made in the three valuation calculations adopted by Mr Grenfell.
Statutory buyout rights
[160] The 2023 Shareholder Loan was a major transaction as defined in s 129 of the Companies Act. The Companies Act requires that major transactions must be approved by special resolution.42 A shareholder who has voted against a special resolution or has not signed a special resolution can require the company to buy its shares under the minority buyout provisions of the Companies Act if the resolution is carried.43
[161] In accordance with those provisions, the documentation approving the 2023 Shareholder Loan was carried out as a special resolution by shareholders. All shareholders voted in favour, except JMB which refused to vote at all. JMB could have voted against the resolution and triggered buyout rights under s 110. It elected not to do so.
40 Commerce Commission v Telecom Corp of New Zealand Ltd [2010] NZSC 14, [2011] 1 NZLR 577 at [12]–[13], [33] and [36]–[40].
41 See [30] above.
42 Companies Act, s 106(1)(b).
43 Section 110.
[162] CAHG argues that this election makes it inappropriate to grant an equivalent remedy now as a matter of discretion, because JMB could have exited its shareholding then and brought all prejudice to an end. It correspondingly argues that JMB cannot complain of any alleged prejudice that arose after May 2023.
[163]I accept submissions on behalf of JMB that:44
(a)A dissenting minority is not obliged to exercise buyout rights. A dissenting minority who stays in the company remains entitled to apply for relief under s 174. The Court will assess whether the effect of the decision was unfairly prejudicial by taking into account the right to exit at a fair price, and policy considerations in relation to the freedom of the majority to deal with its investment as it thinks best.
(b)If a dissenting minority shareholder decides not to leave the company, all normal shareholder remedies remain available for any breach of the Act, constitution, or other actionable wrongs.
(c)On the facts, triggering the buyout right would have had no value given the negative equity position of the company at the time, other than the unfair prejudice claims now pursued in this proceeding.
[164] Accordingly, JMB’s failure to trigger and exercise buyout rights at the time of the 2023 Shareholder Loan is irrelevant.
Liquidation relief
[165] One of the alternative orders for relief sought by JMB was that BODCO be put into liquidation, under s 174(2)(g) of the Companies Act. This was the least favoured remedy. Nevertheless, on this aspect JMB referred to ongoing complaints about the conduct of the business (such as failure to file annual returns and the alleged lack of information provided to JMB as a shareholder on an ongoing basis).
44 See Kim Francis “Minority Buy-Out Rights” in Edirisuriya and others, above n 23, at [16.25].
[166] As the plaintiff has failed in its pleaded causes of action in this proceeding, the alternative remedy of liquidation under s 174(2)(g) is not available. This is not the appropriate context for addressing any other ongoing issues between the parties.
Result
[167]I dismiss the plaintiff’s application.
[168] If costs cannot be agreed, then the first defendant may file a memorandum within 15 working days, and the plaintiff may file a memorandum within a further 15 working days, for costs to be determined on the papers.
O’Gorman J
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