Kiriwai Consultants Limited v Holmes
[2014] NZHC 512
•19 March 2014
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2013-404-000531 [2014] NZHC 512
BETWEEN KIRIWAI CONSULTANTS LIMITED Plaintiff
ANDKENNETH ANGUS HOLMES First Defendant
KENNETH ANGUS HOLMES and DAVID BRIAN RUSSELL AS TRUSTEES OF THE K A HOLMES 2003
FAMILY TRUST Second Defendants
HOLMES VENTURES LIMITED Third Defendant
Hearing: 10-12 February 2014
Appearances: P J Dale and V E Fletcher for Plaintiff
B D Gray QC and S D Williams for Defendants
Judgment: 19 March 2014
JUDGMENT OF COURTNEY J
This judgment was delivered by Justice Courtney on 19 March 2014 at 4.30 pm
pursuant to R 11.5 of the High Court Rules
Registrar / Deputy Registrar
Date……………………….
KIRIWAI CONSULTANTS LTD v HOLMES & ORS [2014] NZHC 512 [19 March 2014]
Introduction
[1] The plaintiff in this case is Kiriwai Consultants Limited. In 2007 it acquired
10% of the shareholding in Holmes Ventures Limited (HVL). Kenneth Angus Holmes and David Brian Russell owned the other 90% of the shares.1 Mr Holmes was HVL’s sole director. In November 2012 Mr Holmes and Mr Russell offered Kiriwai $1m for its shares and put pressure on it to accept the offer quickly, which it did. But it did not know that Mr Holmes was negotiating the sale of an HVL subsidiary, Quality Management Ltd (QML). A month later those negotiations culminated in the sale of QML which significantly increased the value of HVL.
[2] The fact of the negotiations was price sensitive information that triggered s 149 of the Companies Act 1993 and required Mr Holmes and Mr Russell to pay fair value for Kiriwai’s shares. They later acknowledged that $1m was not fair value and paid a further $642,318.2 Kiriwai therefore received $1,605,726 (plus interest) for its shares. However, it says that the sale price of QML should have been taken into account in fixing the fair value of its shares and on that basis the shares were
worth $4.287m. Kiriwai has sued Mr Holmes and Mr Russell for the difference. Mr Holmes and Mr Russell say that the price paid for QML is not relevant in assessing the fair value of Kiriwai’s shareholding. They say, further, that Kiriwai originally acquired its shares at a discount and the fair value of the shares should be discounted to reflect that fact.
[3] In an alternative cause of action Kiriwai has sued Mr Holmes, Mr Russell and HVL alleging a breach of the shareholders’ agreement. This claim arises from HVL’s failure to provide financial information to which Kiriwai was entitled and which it had requested to assist it in valuing its shares. The defendants say that, even if there was a breach, no loss resulted. They also rely on the settlement agreement under which Kiriwai sold its shares, asserting that it was a full and final settlement of
any claims under the shareholders’ agreement.
1 Mr Holmes owned one share personally, with the remainder owned by him and Mr Russell in
their capacity as trustees of Mr Holmes’ family trust.
2 The defendants’ counsel filed a memorandum before trial recording this acknowledgement and
the fact of the additional payment.
[4] As a further alternative, it is alleged that Mr Holmes, in his capacity as director of HVL, was under a fiduciary duty to Kiriwai to disclose the negotiations with PTL. Kiriwai says that if it had known of the prospective sale it would have postponed selling its shareholding and benefited from the sale of QML. The only issue argued on this cause of action was whether Mr Holmes owed Kiriwai any
fiduciary duty.3
[5] A fourth cause of action for relief under s 174 of the Companies Act 1993 was abandoned at the close of the trial.
Events leading up to the sale of Kiriwai’s shares
Kiriwai acquires shares in HVL
[6] In 2006 Mr Holmes acquired the Lambert Group through HVL, which he incorporated for the purpose of the acquisition. Kiriwai’s director, Christopher Emmens, was then Lambert Group’s general manager. He and Mr Holmes already knew one another and had been friends on and off for some years.
[7] Mr Emmens became group general manager of HVL and Kiriwai acquired
10% of HVL’s shares for $200,000. The shareholding was linked to Mr Emmens’ continued employment; under the shareholders’ agreement HVL could require Kiriwai to sell its shareholding if Mr Emmens ceased to be an employee of or consultant to HVL. As an incentive for Mr Emmens to remain with the company, the shareholders’ agreement provided that if Kiriwai sold its shares within five years it would receive no more than $200,000. If, however, it sold after five years it would receive the fair value of those shares as that was defined in the shareholders’ agreement.
The relationship between Mr Emmens and Mr Holmes breaks down
[8] The HVL group was successful, doubling its turnover between 2007 and
2012. However, the relationship between Mr Emmens and Mr Holmes did not fare
3 Mr Russell and HVL were also sued in respect of Mr Holmes’ alleged breach but Mr Dale did
not address the legal basis for such a claim and I do not consider it further.
as well. Mr Emmens described a deteriorating relationship from about 2009. In about June or July 2012 he began to feel that he was being deliberately isolated within the company. In late July 2012 Mr Emmens’ doctor advised him to take a month’s sick leave for stress and anxiety.
[9] Mr Emmens provided a medical certificate. Mr Holmes wrote to him in terms that appeared to accept that Mr Emmens was ill. But Mr Holmes did not believe that to be the case; he said openly in his evidence that he did not believe that Mr Emmens was ill. He requested that Mr Emmens see a doctor nominated by HVL and when Mr Emmens tried to pay the doctor using his company credit card he discovered that it had been cancelled. Mr Holmes also referred to the possible disestablishment of Mr Emmens’ position in a letter 27 August 2012.
[10] Mr Emmens took legal advice regarding both his employment status and the value of Kiriwai’s shareholding. Given the indication that his role within HVL might be disestablished it was clear that he would need to consider what would happen to Kiriwai’s shareholding.
[11] On 30 August 2012 Mr Emmens wrote to HVL in the following terms:
It seems clear to me from your comments about doing my job in my absence that you wish to procure my exit from the business. I therefore suggest the simplest way to resolve all issues between us is that we meet to discuss an agreed termination of my employment and the terms on which this will happen. In order for there to be a clean break, I would also like to discuss the sale of my shareholding with you.
[12] Mr Holmes responded the next day, advising that:
It seems fairly clear to me that the questions of whether or not and when it will be safe for you to return to work will depend on the outcome of any discussions between you and me, to resolve your concerns over your ongoing working relationship with me. That has not occurred as yet and my view continues to be that any such discussion should be held over until a decision has been made on the current proposal to disestablish your role, on the ground of redundancy. Then we will know whether or not your employment will or will not continue.
In that regard I remain committed to working through the process outlined in my 27 August 2012 letter regarding the process to disestablish your role. You have indicated in your response that there is certain inevitability to that outcome given the fact that I am undertaking your role in your absence
(which part of the proposal is that I would continue to do that) and requested to discuss an agreement to terminate your employment. There are of course other reasons for the proposal.
I am not sure if you have any other feedback to provide in the proposal but meantime I am happy to put the process temporarily on hold so that you can explore further your proposal to try and reach an agreement to terminate your employment and sell your shareholding.
[13] A meeting was arranged for 5 September to discuss the issues. In anticipation of that meeting, Mr Russell, who is also HVL’s accountant, prepared a valuation of Kiriwai’s shareholding. This showed the group’s value as at July 2012 at $17,925,343. Mr Russell valued Kiriwai’s shareholding at either $1,498,097 (book value) or $1,254,774 (earnings basis). Both figures had been discounted by
30% to reflect the fact that Kiriwai held a minority interest (Mr Russell had overlooked the fact that under the shareholders’ agreement no minority discount could be applied in establishing the fair value of the shares).
[14] The next day, apparently on his own initiative, Mr Russell produced a fresh valuation. He explained that the first valuation had been undertaken on the basis of the projected earnings for the year ending 31 March 2013. On reflection, he considered it appropriate to take an average over three years and therefore took in the EBIT figures for 2012 and 2011. Although the valuation on book value basis remained the same, the valuation on an earnings basis had reduced markedly to
$657,418 (after the minority interest discount).
[15] Mr Emmens attended the meeting on 5 September 2012 with his wife and his solicitor, Mr Chapman. Mr Holmes attended with his solicitor, Mr Barclay. The meeting was short and inconclusive. There were some inconsistencies between Mr Holmes’ recollection of the meeting on the one hand and that of Mr Emmens and Mr Chapman on the other. However, nothing turns on this. What was not contested was that Mr Chapman said that he would be seeking financial information about HVL for the purposes of establishing the value of Kiriwai’s shares and Mr Barclay indicated that the information would be provided. Later that day Mr Holmes wrote formally advising Mr Emmens that his role was disestablished effective at 5 pm.
[16] On 6 September 2012 Mr Barclay emailed Mr Chapman offering to discuss matters further. Mr Chapman did not reply but instead wrote to Mr Barclay on
7 September 2012 requesting certain financial information. This included updated budgets for the 2012/13 financial year after the July results had been input and the financial statements for HVL as at 31 March 2012. The request was based on advice from Kiriwai’s accountant, John Fisher.
[17] Mr Barclay never responded to Mr Chapman’s letter. Neither he nor HVL
ever provided the information that Mr Chapman requested.
The offer to buy Kiriwai’s shares
[18] There was no contact from either Mr Holmes or Mr Barclay for nearly two months. Then, without preamble, Mr Barclay telephoned Mr Chapman on
5 November 2012 with an offer to buy Kiriwai’s shareholding. Mr Chapman’s unchallenged evidence was that Mr Barclay said that he had been pressing Mr Holmes for further information but that the information was “not prepared yet” and was “not available anyway”. Mr Barclay then said that Mr Holmes was prepared to pay $1m for Kiriwai’s shares and that the gross assets as at 31 July were
$25.49m and the external debt $15.857m. He talked about the difficulty of dealing with Mr Holmes; Mr Chapman made a file that recorded “chapter and verse on problems dealing with Ken”.
[19] Mr Fisher had not proceeded with a valuation of Kiriwai because he needed the information that Mr Chapman had requested and, in particular, information that would establish the future maintainable earnings of Mike Lambert Ltd and QML. He was not prepared to advise that the $1m offer be accepted.
[20] On 14 November 2012 Mr Barclay emailed Mr Chapman to restate the offer. He expressed the offer to be “take it or leave it” and to be withdrawn at 4 pm the following day if not accepted. For the first time Mr Barclay raised Mr Holmes’ concern that Mr Emmens might be working for a competitor, ISO. Although Mr Emmens felt that the offer did not represent the fair value of Kiriwai’s shares he was also worried about what Mr Holmes might do if the offer was not accepted.
Reluctantly, Kiriwai accepted the offer and a deed of settlement was executed on
15 November 2012.
The PTL negotiations
[21] At precisely the time that Mr Barclay was conveying HVL’s offer to Mr Chapman, Mr Holmes was negotiating to sell QML, an inventory management and log handling company that was one of HVL’s bigger subsidiaries. The chief executive officer of Ports of Tauranga (PTL), Mark Cairns, had approached Mr Holmes on 3 or 4 November 2014 to see if HVL would consider selling QML.
[22] Mr Cairns’ approach was prompted by PTL’s loss of its 50% shareholding in the stevedoring and marshalling company C3 Limited. Within the preceding week, PTL’s attempt to obtain control over C3 had resulted in PTL itself being forced to sell its shareholding. That would leave PTL without an interest in a stevedoring and marshalling operation. It wished to maintain a presence in the forestry marshalling sector and was considering either a green field operation or the acquisition of an existing operation such as QML.
[23] PTL’s sale of its interest in C3 was announced on 5 November 2012. The press release indicated that PTL would receive $70m for its shareholding in C3. PTL was moving quickly to advance its negotiations with HVL; on 6 November 2012
Mr Cairns emailed Mr Holmes attaching a draft confidentiality agreement, arranging to meet the following day, reiterating his earlier telephone request for due diligence information (the last three years of audited accounts, current budget, fixed assets register and any significant letters) and assuring him that “we are not tyre kickers” and “will move reasonably quickly with a decision”. On 15 December 2012 HVL and PTL signed a conditional agreement for the sale of QML for $34m, which settled on 31 January 2013.
First cause of action – the fair value of Kiriwai’s shareholding under s 149
Companies Act 1993
The obligation to pay fair value under s 149
[24] Section 149 addresses an aspect of insider trading, namely the sale or purchase of shares by a director with information that would affect the value of the shares but who, at common law, did not owe any fiduciary duty to the shareholders. In Thexton v Thexton the Court of Appeal discussed the background to s 149 and the available legislative solutions to this problem, which it described as clustering
around two approaches: abstain or disclose and abstain or pay fair value.4 Section
149, which adopts the abstain or pay fair value model, relevantly provides:
(1) If a director of a company has information in his or her capacity as a director or employee of the company or a related company, being information that would not otherwise be available to him or her, but which is information material to an assessment of the value of shares or other securities issued by the company or a related company, the director may acquire or dispose of those shares or securities only if;
–
(a) In the case of an acquisition, the consideration given for the acquisition is not less than the fair value of the shares or securities; or
(b) In the case of a disposition, the consideration received for the disposition is not more than the fair value of the shares or securities.
[25] Under s 149 therefore, a director who wishes to either acquire or dispose of shares and has material information in his or her possession can only proceed if fair value is given or received. There is no duty to disclose.5 Conversely, disclosure does not relieve the director of the obligation to pay or receive fair value.
[26] Fair value is not defined in the Companies Act. But there is no dispute over its meaning; it is the value of shares determined by an objective assessment based on
all the information known to the director or known publicly at the relevant time.6 In
4 Thexton v Thexton [2002] 1 NZLR 780 (CA) at [12].
5 Thexton v Thexton at [19]: The plaintiff ’s argument that Mr Holmes was obliged to disclose the negotiations was abandoned during closing submissions.
6 Thexton v Thexton [2001] 1 NZLR 237 (HC) at [65] – [67]. See also Fong v Wong HC Auckland
CIV-2008-404-005547, 13 May 2010.
James Davern v James Davern Ltd & Anor the Court of Appeal endorsed the following comments made by the expert witness in that proceeding:7
Fair value is based on the desire to be equitable to both parties. This recognises that as the transaction is not on the open market, the buyer has not been able to look around for the lowest price, nor has the seller been able to hold out for the highest price. Fair value recognises what the seller gives up in value and what the buyer acquires through the transaction.
[27] Following the hearing Mr Dale drew to my attention Gendall J’s decision in Cooper-Davies Trustees Number 6 Ltd v Cooper Trustees Number 11 Ltd, in which the fair value of shares was assessed on a hindsight basis, though reduced to reflect the uncertainties that existed at the relevant time.8 I do not see the decision as affecting my assessment.
Should the fair value assessment take the PTL negotiations into account?
[28] In their joint statement Mr Lucas and Mr Hagen recorded their agreement that Mr Lucas’ valuation dated 23 December 2013 represented the fair value of the shares, subject only to the value of QML. Mr Lucas calculated the value of HVL at between $19.6 and $23.8m, the mid-point of that range being $21.7m. This would mean the fair value of Kiriwai’s 10% shareholding was $2.170m. Mr Hagen, however, considered that HVL was worth $42.87m, which would mean that Kiriwai’s shareholding was worth $4.287m. The sole difference between Mr Lucas and Mr Hagen was whether, and to what extent, the sale of QML and PTL for $34m should be reflected in the value of Kiriwai’s shareholding.
[29] Mr Hagen gave three reasons for his view that QML’s valuation should reflect the price ultimately paid. First, he considered that s 149 required the negotiations to be disclosed. As I have discussed, this assumption is wrong; the law is clear that s 149 does not require the disclosure of price sensitive information, only that it be reflected in the value paid.
[30] The second factor was that the sale of QML would have been regarded as a major transaction for the purposes of the Companies Act 1993, requiring a special
7 Re James Davern Ltd CA47/96 24 April 1996 at [6]; coincidentally the witness was Mr John
Hagen, who also gave evidence in the present case.
8 Cooper-Davies Trustees Number 6 Ltd v Cooper Trustees Number 11 Ltd [2013] NZHC 3526.
resolution which, under HVL’s constitution, meant the vote of all shareholders. However, the sale would only have been a major transaction if there was a concluded agreement for the sale of QML because “major transaction” is relevantly defined in the Companies Act as:9
The disposition of or an agreement to dispose of, whether contingent or not, assets of the company the value of which is more than half the value of the company’s assets before the disposition.
[31] The evidence was unequivocal that on 15 November 2012 there was no concluded agreement between HVL and PTL, only an agreement to agree. Mr Hagen assumed that HVL and PTL had concluded an agreement for the sale of QML because of an email Mr Russell sent to Mr Holmes on 13 November 2012 saying that:
I thought it best to set out how I think the sale is structured. Ken has sold the company for $34,000,000
The purchaser will pay this amount in total to obtain the shares in the company and pay off external long term debt.
What if [sic] done in the attached spreadsheet is take the position at the end of September and apply the sale proceeds to the adjusted balance sheet.
Based on the above HV would end up with $30,922,619.
I would like Greg to have a look at my calculation so we are all in agreement on how the sale is going to work.
[32] Mr Hagen’s assumption was understandable. But it was wrong because the email did not reflect the correct position. Mr Russell explained that he had couched his email of 13 November 2012 in the terms he did because he had assumed from the information Mr Holmes had given him that an agreement had been reached. However, Mr Cairns gave evidence that it was not until 30 November 2012 that PTL’s board resolved that he should proceed to negotiate the purchase of QML up to a price of $35m, subject to due diligence and final approval from the chairman. With the benefit of Mr Cairns’ evidence, Mr Hagen acknowledged that PTL was not committed to purchasing QML. The third factor was that the prospects of a sale
were sufficiently good that the negotiations ought to have been taken into account.
9 Companies Act 1993, s 129(2)(b).
He was influenced by the facts that PTL no longer had a marshalling operation, needed one and had $70m from the sale of its C3 shares to spend acquiring one. Mr Lucas considered that on 15 November 2012 the probability of a sale of QML for
$34m was negligible and the valuation should not reflect the price paid. In essence, his approach was that the vagaries of these types of transactions make it unsafe to assume that negotiations will culminate in a transaction.
[33] Had the assessment been for the loss of a chance the negotiations may have been accorded greater weight. However, I accept Mr Lucas’ view that, as matters stood on 15 November 2012 the prospects of HVL selling QML were not sufficiently certain to justify being reflected in the valuation, much less at the price ultimately achieved. The flaw in the plaintiff’s approach is illustrated by the counter-factual posed by Mr Gray; what would the value have been had PTL not purchased QML, either at all or for less than $34m? It could not reasonably be said that HVL would still have had to pay on the basis of a sale that did not proceed.
[34] I therefore accept Mr Lucas’ view that the fair value of Kiriwai’s shareholding for the purposes of s 149 lay between $1.964m and $2.376m. The parties seemed to be content to take the mid-point of whatever the correct range was. I therefore find that the fair value that should have been paid under s 149 was
$2.170m, which is $564,274 more than Kiriwai received. Subject only to the question of whether the value of the shareholding should be discounted, this represents Kiriwai’s loss under this head.
Should the value of the shares have been discounted?
[35] Initially HVL asserted that Kiriwai’s shareholding should have been discounted to reflect its minority status. However, that argument was not advanced at trial, following the defendants’ acceptance that the shareholders’ agreement, which excluded such a discount from any fair value calculation, was a factor to consider in the assessment of fair value under s 149.
[36] Instead it was argued that Kiriwai had purchased its share at a discount of
26% and that the same discount should be applied on the sale of the shares. Neither expert witness commented on this issue in his brief because it was first raised by
Mr Holmes in a supplementary brief served after the expert evidence had been exchanged. However, they discussed it before trial and their joint statement recorded that:
We agree that if the shareholder’s agreement were not to apply and the 10 per cent shareholder had knowingly bought his shares in the company at a discount, then fair value may take allowance for some discount.
(emphasis added)
[37] In his supplementary brief Mr Holmes said that HVL had been valued at
$2.690m at the time Kiriwai acquired its 10% shareholding. This should have produced a purchase price of $269,820, but Kiriwai paid only $200,000 i.e. a 26% discount. Mr Holmes annexed to the supplementary brief a valuation that had not previously been discovered.
[38] Mr Dale objected to the production of the valuation. Not only had it never been discovered, it appeared to be dated 31 March 2008, more than six months after the sale of the shares to Kiriwai. After Mr Russell gave evidence about the valuation evidence I allowed the document to be adduced. However, the weight to be given to it is limited because Mr Hagen, who gave evidence before Mr Russell, did not have the benefit of hearing his explanation about the methodology adopted and was not cross-examined on the issue.
[39] Kiriwai did not accept that it had bought the shares at a discount. Mr Emmens said that the price was agreed at a meeting between him, Mr Holmes and Mr Russell. In cross-examination, Mr Emmens agreed that he knew he was paying less than what Mr Russell had said was the value of 10% of the shares and that Mr Russell had mentioned a price higher than $200,000. However, he was not asked what that figure was. Neither Mr Holmes nor Mr Russell gave evidence about the meeting. Nor did Mr Emmens accept that he had been given a copy of the valuation at the time, though Mr Holmes said that he had. Kiriwai did not have a copy of the document to discover in this proceeding.
[40] On this evidence I cannot safely draw an inference as to what figure
Mr Russell mentioned and therefore have no means of knowing what discount was
conveyed to Mr Emmens. Even if the figure mentioned was the figure shown in the valuation, I cannot be satisfied that it accurately reflected the value of HVL as at June 2007 when Kiriwai purchased the shares. In cross-examination, Mr Russell conveyed that the valuation was only indicative:
… The figure was mentioned of $200,000 as Chris’ buy-in and this was negotiated between Chris and Ken. I gave Ken an indicative figure of what I thought the group was worth.
[41] When Mr Russell described the process he followed in preparing the valuation he said that he used projected figures out to 31 March 2008 and, when asked whether the valuation was intended to be a valuation as at May 2007 or March
2008 he told me that it was intended to be a valuation as at March 2008. Mr Russell himself acknowledged the inconsistency in dating the 2007 valuation as at March
2008 compared to the valuations he produced in 2012 which, although also using the same methodology, were dated July 2012. Nor did Mr Russell produce any information to support his valuation. Mr Hagen was not given the opportunity to comment on it. Mr Lucas did not comment on it.
[42] Moreover, one of the reasons Mr Emmens did not consider that Kiriwai had purchased at a discount was that, on his account, Kiriwai had been meant to buy in as a foundation shareholder i.e. when the HVL first acquired the Lambert Group in
2006. In his view, Kiriwai’s shareholding should have been acquired on the basis of the original purchase price of the Lambert Group which had been fixed mainly on book value rather than earnings. He viewed Mr Holmes’ offer to sell the 10% shareholding at less than the value Mr Russell put on it as being partly guilt on Mr Holmes’ part.
[43] Finally, there is no reference in Schedule 2 of the shareholders’ agreement to the effect of a discount to be applied on the sale as a result of a discount having been applied at the time of acquisition. The parties clearly turned their minds to the issue of discounts to be applied on the sale of shares and agreed that no minority discount should be applied. Had the shares been acquired at a discount and the parties had intended that discount to be carried through on sale, I would have expected the fact to have been recorded.
[44] In the circumstances I cannot be satisfied that the valuation did accurately represent the value of HVL in June 2007, nor that the discount was made known to Mr Emmens. The fair value of the Kiriwai shareholding is, therefore, not to be discounted by reference to the original purchase price.
Second cause of action – breach of shareholders’ agreement
[45] The parties to the shareholders’ agreement were HVL, Mr Holmes and Mr Russell as trustees of Mr Holmes’ family trust, Mr Holmes personally and Kiriwai. Clause 7.2 provided:
The company will furnish to each director and to each shareholder as soon as available all financial accounts, projections, budgets and reports that may be prepared on the company’s behalf from time to time as well as any other information as may be required by the board from time to time.
[46] I have already referred to Kiriwai’s request for information and HVL’s failure to provide it. Mr Holmes gave several inconsistent explanations for this failure. In his evidence-in-chief he said that he was surprised to receive the request because Mr Emmens would have been fully aware of HVL’s financial performance and it was therefore unnecessary to provide it. I do not accept that he was surprised at the request because, as he acknowledged in cross-examination, Mr Chapman had said at the meeting that such a request would be made and Mr Barclay had said that the information would be provided. Nor could he have thought that Mr Emmens already had the information; some of the information sought related to accounts that would have been produced after Mr Emmens’ employment was terminated.
[47] In cross-examination Mr Holmes gave three other explanations for HVL not providing the documents. He said, first, that he decided against giving Kiriwai the information following advice from Mr Barclay.
[48] Secondly, he suggested that he could not provide the accounts for QML for the year ended 31 March 2012 because they were not complete. Kiriwai had not specifically requested these accounts but Mr Holmes acknowledged that they were relevant and, further, that he had signed the QML accounts on 21 September 2012 so they were, in fact, available.
[49] Thirdly, Mr Holmes said that he had decided not to give Kiriwai the financial information because he had heard that Mr Emmens was working for a competitor, ISO. This was a reference to an email he had received from a third party (Graham Wylie of C3 Ltd) on 24 August 2012.10 Since Mr Holmes had the email well before the 5 September meeting at which Mr Barclay had agreed to provide the document it is distinctly odd that he did not raise it at the meeting. However, looking at the
totality of the evidence, I think that the most likely reason that Mr Holmes did not provide the financial information Kiriwai requested was that he did suspect Mr Emmens of working for ISO and decided to make things as difficult as possible for him. I note, though, that there was no evidence that Mr Emmens was working for ISO and he denied doing so.
[50] Regardless of the reason, HVL was obliged to make the information available. Its failure to do so was, without question, a breach of cl 7.2 of the shareholders’ agreement.
[51] Mr Gray argued, however, that any breach would not have caused a loss because it would not have included the fact of the PTL negotiations. I accept that the information requested would not have included the fact of the PTL negotiations. It would, however, have included all the information about QML requested by PTL in its email 8 November 2012, being reports prepared on the company’s behalf. That information was provided to PTL by 13 November 2012. It is reasonable to infer that, had Mr Fisher been provided with the information sought he would have reached the same view that Mr Lucas came to about the fair value of the shareholding, namely in the range between $1.96m and $2.38m.
[52] There is, however, a defence to this cause of action. It is based on cl 1 of the settlement agreement which provides that:
In consideration for The Trust and Kiriwai entering into an agreement for sale and purchase of shares in the Company dated even date herewith (the Transaction) the Parties acknowledge and agree that upon settlement of the Transaction no Party shall have any further right or claim as against each
10 Mr Dale objected to its inclusion in the agreed bundle of documents on the ground that Mr Wylie was not being called. I did not make a ruling at the time but because Mr Wylie was not called and no foundation was laid for the admission of the email as hearsay I exclude it from the evidence.
other to the intent that the settlement of the Transaction shall be in full and final settlement of all and any claims between the Parties including, but not necessarily limited to, and without limitation to any and all claims in relation to Holmes Ventures Limited (including all its successor or subsidiary companies), a Shareholders’ Agreement dated 11
June 2007 between the parties (the Shareholders’ Agreement) and the
individual Employer’s Agreement between Chris and Mike Lambert Limited dated 1 December 2008 (the Employment Agreement).
(emphasis added)
[53] Mr Dale did not address this issue in closing but referred back to his submissions on the point made in opening. His submission in opening was simply that, since it was not asserted that Mr Emmens had actual knowledge of the PTL negotiations or offer, it was difficult to see how the defendants could seriously contend that the settlement agreement was effective.
[54] I consider that the settlement deed is a full and final settlement of any claim for breach of cl 7 of the shareholders’ agreement. There is no claim for relief under the Contractual Remedies Act or the Contractual Mistakes Act. As a result, this cause of action fails.
Third cause of action – breach of fiduciary duty
The relevant principles
[55] Kiriwai asserts that, in the circumstances of this case, Mr Holmes owed a fiduciary duty to it in his capacity as director of HVL. Mr Gray accepted that it was possible for a director to owe a fiduciary obligation to a shareholder. However, he submitted that such a duty would only arise in exceptional cases involving closely held family companies where there was some element of vulnerability or dependence.
[56] The relationship of director and shareholder is not one that is recognised as inherently fiduciary, compared, for example, to the trustee/beneficiary or principal/agent relationships. Rather, it is one described by Tipping J in Chirnside v
Fay as depending:11
11 Chirnside v Fay [2006] NZSC 68, [2007] 1 NZLR 433 at [75].
… not on the inherent nature of the relationship but upon an examination of whether its particular aspects justify it being so classified.
[57] Tipping J went on to observe that there was no one test that had received universal acceptance in deciding whether a relationship outside the recognised categories should attract fiduciary obligations but referred to the very general principles stated by the Privy Council in New Zealand Netherlands Society “Oranje” Inc v Kuys in which Lord Wilberforce observed that fiduciary obligations would
apply:12
… whether the case is one of trust, express or implied, of partnership, of directorship of a limited company, of principal and agent, or master and servant, but the precise scope of it must be moulded according to the nature of the relationship. As Lord Upjohn said in Boardman v Phipps:13
Rules of equity have to be applied to such a great diversity of circumstances that they can be stated only in the most general terms and applied with particular attention to the exact circumstances of the case.
[58] In the context of a fiduciary duty by directors to shareholders the parties accepted that the leading case is Coleman v Myers.14 In the circumstances that existed in that case the Court of Appeal considered that the director came under a fiduciary duty to shareholders to make full disclosure of material facts when negotiating the purchase of the latter’s shares. Cooke J (as he then was) considered that the case fell “within the broad class of fiduciary relationships arising from
special facts”. His Honour referred, in support of such a category of cases, to New Zealand Netherlands Society “Oranje” Inc v Kuys. In terms of identifying the precise scope of fiduciary duty arising in this kind of case the Judge went on to say:15
… It must be important to remember that directors are free to profit from their position, in the sense that there is no reason why they should not make a profit from dealings with shareholders. The obligation has to be worked out in terms of representations and disclosures.
Particularised in those respects, in the setting seen here there must be an obligation not to make to shareholders statements on matters material to the proposed dealing which are either deliberately or carelessly misleading. And
12 New Zealand Netherlands Society “Oranje” Inc v Kuys [1973] 2 NZLR 163 at 166.
13 Boardman v Phipps [1967] 2 AC 46.
14 Coleman v Myers [1977] 2 NZLR 225 (CA).
15 At 333.
in my opinion there must at least be an obligation to disclose material matters as to which the director knows or has reason to believe that the shareholder whom he is trying to persuade to sell is or may be inadequately informed.
[59] The particular facts that the Court considered gave rise to a fiduciary duty in Coleman v Myers were the family character of the company, the positions that the respondent directors occupied in the company and the family, their high degree of inside knowledge and the way in which they went about the impugned transaction and persuasion of shareholders.
[60] Similar questions arose in Thexton v Thexton, which concerned a private company whose shareholders were a father and son. Salmon J held that the director, who was Mr Thexton junior, owed a fiduciary duty to his father on the purchase of Mr Thexton senior’s shares.16 The Judge adopted the same approach as the Court of Appeal had done in Coleman v Myers, rejecting as a valid distinction the fact that the director had not tried to persuade his father to sell the shares. Salmon J noted that the presence or absence of such an overture was simply one factor to be weighed alongside others:17
In a case such as the present where the other factors pointing towards a fiduciary relationship are particularly strong, it is sufficient that the director participated in the transaction knowing that he was acquiring the shares at a gross undervalue.
[61] The existence of a fiduciary duty between directors and shareholders was considered again by the Court of Appeal in Saunders v Houghton, this time in the context of an appeal against the refusal to strike out a claim for fiduciary duty.18
Concluding that the pleaded claim could not succeed because there was no real prospect of proving that a duty existed, the Court considered that:19
For a fiduciary duty to exist in a case like this the plaintiff must establish, to speak in metaphor, a stabbing when his or her guard was down by someone whom, by reason of a special relationship, there was reason to trust.
16 The decision was reversed on appeal on the issue of liability under s 149 and the Court of
Appeal found it unnecessary to consider Salmon J’s conclusion on fiduciary duty.
17 Thexton v Thexton, above n 4, at [87].
18 Saunders v Houghton [2010] 3 NZLR 331 at [100].
19 At [100].
[62] Saunders v Houghton was, of course, very different from Coleman v Myers and Thexton v Thexton. It did not involve a family company. It did not even involve a closely held private company. The claim was brought by shareholders who purchased on an initial public offering. Among the reasons that the Court considered that no fiduciary duty arose was that it would mean the promoters would effectively owe a duty to any potential offeree of the shares, which was too wide and, further, the pleaded breach was the same as that pleaded in causes of action brought under the Fair Trading Act 1986 and the Securities Act 1978.
The circumstances of this case
[63] Mr Gray submitted that Kiriwai had failed to either plead or prove any factual basis for the existence of a fiduciary duty. He argued that HVL was not a family- owned company and the evidence did not show any special relationship of trust or confidence between Kiriwai and Mr Holmes, nor any vulnerability on Kiriwai’s part. He submitted that, to the contrary, Kiriwai and Mr Holmes were independent commercial parties, whose rights and obligations were defined in the shareholders’ agreement. He also pointed to the fact that Mr Emmens had openly said in cross- examination that he did not trust Mr Holmes which, Mr Gray submitted, told strongly against any relationship of trust and confidence that would justify finding a fiduciary duty.
[64] I do not accept this characterisation of HVL or of the relationship between Mr Holmes and Kiriwai. Although this was not a family company, there were effectively only two shareholders (Mr Russell was a shareholder only by virtue of being an independent trustee of Mr Holmes’ family turst). A significant imbalance existed in terms of power and knowledge between Kiriwai and Mr Holmes. Kiriwai was a 10% shareholder solely by virtue of Mr Emmens’ employment. It could be forced to sell its shares if Mr Emmens’ employment ended and the acrimonious end to Mr Emmens’ employment made that inevitable.
[65] Mr Holmes had complete control over the operations of HVL and exercised that control to ensure that Kiriwai was kept out of information to which it was entitled under cl 7.2 of the shareholders’ agreement and which would have allowed it
to accurately assess the fair value of its shares. It was difficult for Kiriwai to enforce that right; Mr Holmes was clearly not going to co-operate without a fight and Mr Emmens no longer had a regular income and was facing serious health concerns.
[66] Although Mr Holmes had not initially proposed the acquisition of Kiriwai’s shares, he pressured Kiriwai into a decision, knowing that HVL had wrongfully withheld financial information that would enable Kiriwai to properly assess the value of its shares. He also threatened (through his solicitor) to act irrationally if the offer was not taken up and placed an unfair time frame on acceptance of the offer. These tactics I would regard as serious in themselves, but they are more serious when viewed against the fact that Mr Holmes was then negotiating with PTL for a sale that would, if concluded, result in significant profit for HVL’s shareholders.
[67] The timing of the offer was explored at some length in cross-examination. Mr Holmes said that the offer was made on 5 November 2012 because this was the day he discovered that Mr Emmens was working with ISO and he wanted Mr Emmens out of HVL. That cannot be right; Mr Holmes had already said that he learned of the possibility of Mr Emmens working for ISO from Mr Wylie’s email on
24 August 2012.
[68] Despite Mr Holmes’ protestations that his desire to finalise an agreement with Kiriwai was unrelated to the PTL negotiations, I find that the timing of PTL’s approach to HVL and the offer to Kiriwai was not mere coincidence. There is no doubt in my mind that Mr Holmes wanted Kiriwai out of the picture before PTL’s approach to HVL became public knowledge. In these circumstances, I consider Kiriwai was vulnerable and Mr Holmes did owe a fiduciary duty to disclose what he knew about the negotiations with PTL. His failure to do so was a breach of that duty.
[69] I do not accept the submission that Mr Emmens’ growing suspicion and mistrust of Mr Holmes should count against the existence of a fiduciary duty. That kind of approach would unfairly penalise all but the most naïve and gullible of plaintiffs. A similar proposition was rejected in Coleman v Myers where Cooke J observed that:
A fiduciary does not lose that character merely because the persons to whom his duty is owed, or some of them, begin to have doubts or suspicions. Among the shareholders here the Colemans and Mr Geoffrey Myers evidently came to entertain some misgivings about the intentions of the first respondent. I cannot think that a Court of Equity could allow this to abrogate his duty of care and candour.20
[70] Mr Emmens asserted, without challenge, that had he been aware of the negotiations between HVL and PTL, Kiriwai would not have accepted the offer of
$1m but would have waited to see what the outcome of the negotiations was. I readily accept this evidence because it was clear from the email exchanges between Mr Emmens and Mr Fisher that they both suspected that Kiriwai’s shares were worth more than what was being offered and, further, that Mr Emmens believed that Mr Holmes might well act irrationally. Of course, Kiriwai would only have needed to wait a few weeks and it would have been in the position of being able to take advantage of the $34m sale of QML.
[71] The quantum of loss resulting from Mr Holmes’ breach is the difference between what Kiriwai received for its shares and the amount the shares would have been worth following the PTL purchase of QML. Mr Hagen’s evidence regarding the fair value of the shares in November 2012, which I did not accept in the context of the fair value argument, is relevant in this context. Mr Hagen and Mr Lucas were agreed on the value of HVL in November 2012 save for the value of QML as a component of the group. The challenge to Mr Hagen’s methodology was based only on the uncertainty as to whether the sale of QML would proceed. But that uncertainty is removed in the scenario I am now considering, namely the value of the shares following the sale of QML. It is therefore proper to adopt Mr Hagen’s methodology.
[72] Mr Hagen’s approach was to take Mr Lucas’ valuation of HVL ($21.7m), remove the QML component ($8.33m) and replace it with $29.5m as the equity value. Mr Hagen took this figure from Mr Russell’s 13 November 2012 calculation prepared in anticipation of the sale to PTL. Using that figure, the value of HVL would be $42.87m, of which 10% is $4.287m. Deducting the amount paid to
Kiriwai to date, Kiriwai’s loss therefore stands at $2,681,274.
20 Coleman v Myers above n 14 at 332.
Summary and result
[73] On the s 149 cause of action I have found that the negotiations with PTL were not a factor to be taken into account in assessing the fair value of the shares. Mr Lucas’ assessment of $2.170m as the fair value of Kiriwai’s shareholding on
15 November 2012 is correct. I do not accept that there is any basis for discounting the shareholding. Kiriwai was therefore entitled to be paid $2.170m for its shareholding but only received $1,605,726. There is judgment on this cause of action against Mr Holmes and Mr Russell jointly and severally for $564,274. This amount attracts interest at 5% from 15 November 2012.
[74] In the circumstances of this case Mr Holmes owed Kiriwai a fiduciary duty in his capacity as director. That duty required him to disclose the PTL negotiations. Had he done so, Kiriwai would have retained its shares until the outcome of the negotiations was known. The loss to Kiriwai is $2,681,274m, being the difference between what its shareholding would have been worth after the sale and the amount it actually received. There is judgment against Mr Holmes in his capacity as director for $2,681,274m. This sum attracts interest at 5% from 1 February 2013, being the day after the settlement of the sale of QML.
[75] There are to be costs in Kiriwai’s favour on a 2B basis. Memoranda on behalf of Kiriwai may be filed within 14 days and on behalf of the defendants within
21 days.
P Courtney J
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