Martin v Martinborough Brewing Company Limited HC Wellington CIV 2006-435-32
[2010] NZHC 1443
•19 August 2010
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
CIV-2006-435-032
BETWEEN T J MARTIN Plaintiff
ANDMARTINBOROUGH BREWING COMPANY LIMITED
First Defendant
ANDF A STEWART Second Defendant
ANDA C BARNES Third Defendant
ANDA G STEWART Fourth Defendant
Hearing: 27-29 April 2010
Written submissions filed on 11 and 18 May 2010
Appearances: Mr Martin in person
Mr Carruthers QC with Mr Walker for defendants
Judgment: 19 August 2010 at 1.00 pm
JUDGMENT OF MALLON J
MARTIN V MARTINBOROUGH BREWING COMPANY LIMITED AND ORS HC WN CIV-2006-435-032
19 August 2010
Contents
Introduction............................................................................................................... [1] The evidence ............................................................................................................. [3] Establishing the business ...................................................................................... [3] Discussions concerning Mr Martin reducing his shareholding ............................ [8] Relations deteriorate ........................................................................................... [32] Discussions around sale of all of Mr Martin’s shareholding .............................. [33] Mr Martin takes steps to protect his position...................................................... [42] Events after Mr Martin was repaid ..................................................................... [56] Events subsequent to litigation ........................................................................... [75] Rectification of share register ................................................................................. [85] Oppression or unfair prejudice claim...................................................................... [97] The power of the Court to intervene ................................................................... [99] The relevance of the shareholders agreement ................................................... [103] Invalid changes made to the Companies Office records................................... [105] Mr Barnes’ position as director ........................................................................ [106] Mr Stewart’s appointment ................................................................................ [113] AGM notifications ............................................................................................ [117] Provision of annual accounts ............................................................................ [122] Asset transfer to MBA Limited ........................................................................ [123] Sale of remaining assets.................................................................................... [139] Overall assessment of defendants’ actions ....................................................... [142] Mr Martin’s actions regarding the sale of his shareholding ............................. [145] Other actions prior to Mr Martin’s resignation................................................. [149] Mr Martin’s resignation .................................................................................... [154] Shareholder contributions ................................................................................. [157] Statutory demand/bank facility ......................................................................... [161] Relationship with Southern Cross..................................................................... [166] Relief................................................................................................................. [167] Result .................................................................................................................... [175]
Introduction
[1] Martinborough Brewing Company Limited (MBC Limited) (the first defendant) was a small micro-brewery company. It made award winning beer, which it sold to various outlets, as well as having direct to the public sales from its operations in Martinborough. It was established by Mr Martin (the plaintiff), Ms Stewart (the second defendant) and Mr Barnes (the third defendant). Unfortunately, despite the efforts that went into establishing the business and commencing operations, and the good product it produced, almost from the outset the shareholders did not get on and issues arose between them.
[2] The issues have culminated in Mr Martin’s claim that the affairs of MBC Limited have been conducted in a manner that is oppressive and unfairly prejudicial to him. As a result he seeks various orders from the Court under s 174 of the Companies Act 1993. The defendants deny that there has been any oppression or unfair prejudice to Mr Martin and contend that Mr Martin repudiated the shareholders agreement in place in respect of MBC Limited. The defendants seek various orders from the Court as a result of Mr Martin’s actions.
The evidence
Establishing the business
[3] In about 2001 Ms Stewart began investigating the establishment of a micro- brewery in Martinborough. Ms Stewart asked her partner, Mr Barnes, to become involved in the business. He agreed. Ms Stewart registered MBC Limited, as the company through which the business would be run, on 9 November 2001. MBC Limited had 100 ordinary shares held in equal shares by Ms Stewart and Mr Barnes and they were both directors. Independently of Ms Stewart, Mr Martin had also been investigating starting up such a business. Mr Martin decided to join forces with Ms Stewart and Mr Barnes. To give effect to this, a shareholders agreement dated
22 April 2002 was entered into by Mr Martin, Ms Stewart, Mr Barnes and MBC Limited.
[4] Under the shareholders agreement share transfers were to be made so that Ms Stewart and Mr Barnes’ combined shareholding would be 50% of the shares in MBC Limited and Mr Martin would hold the other 50%. It was also agreed that the board would have a minimum of three directors being Ms Stewart and Mr Martin “together with the third director to be appointed by mutual consent within the first 12 months from the date of signing this agreement”.
[5] The shareholders agreement contained a number of other provisions dealing with such things as the matters which would require a resolution approved by not less than 75% of shareholders, the term of the agreement, exit and pre-emptive provisions and procedures for the transfer of shares. The shareholders agreement also set out the respective functions of each shareholder (with Mr Barnes as the Operations Manager, Ms Stewart the Sales and Marketing Manager, and Mr Martin as the Financial Manager) and provided for MBC to enter management agreements with each shareholder to perform these functions.
[6] In accordance with the shareholders agreement, and on the same date as the shareholders agreement, share transfers were executed pursuant to which Ms Stewart and Mr Barnes each transferred 25 shares to Mr Martin. Mr Martin’s appointment as director was registered on 19 August 2002. However the annual return Ms Stewart filed with the Companies Office on 16 September 2002 erroneously recorded that the shareholders were Ms Stewart and Mr Barnes and that they each held 50 shares.
[7] The parties continued work towards establishing the business. Ms Stewart had prepared a business plan which was adopted in June 2002. Mr Martin carried out other work such as searching for suitable lease sites, negotiating lease terms, managing and liaising with builders and other tradesmen for the improvements to the building, and preparing applications for and obtaining resource and building consents.
Discussions concerning Mr Martin reducing his shareholding
[8] On 17 November 2002 Ms Stewart, Mr Barnes and Mr Martin, as the three directors of MBC Limited, resolved to enter into a facility with ANZ Bank for
$100,000 which would be guaranteed by each of them. On 9 December 2002 ANZ Bank provided the documents for this facility for execution. These documents included a guarantee from each of Ms Stewart, Mr Barnes and Mr Martin for
$37,500.
[9] It was around this time that Mr Martin raised the possibility of reducing his shareholding. His evidence is that he understood Mr Barnes was to resign as director and that a new director would be appointed. He says that he was concerned that this had not happened and that Ms Stewart and Mr Barnes, who were in a personal relationship, were treating the business as their partnership. He says that he was concerned that they were able to make the decisions 2:1 and that his voice in the company’s operations was not reflective of his 50% shareholding. His evidence is also that he viewed Mr Barnes as incompetent and a cost to the business.
[10] Ms Stewart’s evidence is that she did not understand that Mr Barnes needed to resign as director. Her concern was that Mr Martin had not put his share of cash into the business. By the middle of December 2002 Mr Martin’s shareholder advances totalled $75,000, her shareholder advances totalled $70,000 and Mr Barnes’ shareholder advances totalled $61,000. These advances did not match their respective shareholdings and this was contrary to the understanding she says the parties had.
[11] In an email dated 30 December 2002 Mr Martin proposed to Ms Stewart that he become a 25% shareholder. This proposal was said to be subject to the conditions that he resign as director, provide no personal guarantee for the bank debt, that his shareholding be secured behind external debt and that company debt be limited to
40% of the total shareholder contributions. His email offered to prepare the share transfers if the proposal was acceptable to Ms Stewart.
[12] Ms Stewart replied to this proposal by email dated 2 January 2003. With one exception, Ms Stewart was agreeable to what was proposed, and suggested that the shareholders agreement be re-signed to reflect the change. The exception was the condition that Mr Martin not provide a personal guarantee. She viewed a personal guarantee from Mr Martin as “non negotiable”. She pointed out that both she and Mr Barnes were providing a personal guarantee with their respective 25% shareholding and she did not see why Mr Martin should be exempt from this if he moved from a 50% to a 25% shareholding.
[13] Mr Martin replied by email later in the day on 2 January 2003. He reiterated his position that he was not going to take on a personal guarantee if he was to be a passive investor and said it would be very unusual for a non director shareholder to guarantee external debt. He said that he was seeking a passive investment because “we do not have a partnership (or one that works!)”. He said that if his proposal was not what Ms Stewart wanted then he suggested considering other options.
[14] The next morning Ms Stewart forwarded these emails to Mr Barnes, saying
“We need to get rid of him ASAP”.
[15] On 4 January 2003 Mr Martin emailed Ms Stewart saying that another option would be to liquidate the company and offer it up for sale to the highest bidder, thereby giving each party the opportunity to take 100% ownership. He noted that the issue needed to be resolved sooner rather than later as he had “received several calls from trades wanting to be paid and [he was] running out of excuses”. Mr Martin followed this up by email dated 8 January 2003 saying that he would like to know which option worked for her “so I can [get] security etc organised”.
[16] Ms Stewart responded by email dated 9 January 2003 with a proposed amended shareholding agreement under which Mr Martin would be a 25% shareholder and would resign as director. Her email did not mention the guarantee issue. Mr Martin’s response, by email on the same day, was that the existing agreement should be amended rather than a whole new agreement being entered into. He also said that there appeared to be a “complete lack of trust” in his commitment
to finish the work on the building sign off and he proposed that Mr Barnes take over this.
[17] Ms Stewart says that after this she met with Mr Martin at Medici Cafe in Martinborough. She says that at this meeting she signed a share transfer to effect a reduced shareholding of 33% for Mr Martin and an increased shareholding of 42% for herself. She says that they each witnessed the other’s signature on the transfer. She saw this as dealing with his cash contribution shortfall by reducing this shareholding so as to be proportional to his cash contributions. She says that at the meeting Mr Martin stressed to her that he would hold on to the original share transfer as it was his role as financial director to attend to the company secretarial matters. She viewed the meeting as having reached an agreement as to Mr Martin’s reduced shareholding (from 50% to 33%). Mr Martin agrees that there was a meeting at Medici Cafe in February 2003. He disagrees that an agreement was reached regarding his shareholding and that he signed a share transfer allocating 17% of his shares to Ms Stewart (or Mr Barnes).
[18] It is agreed that the bank documents were signed. The loan from the bank was for $100,000. It was secured by a general security agreement over MBC Limited’s assets and by guarantees from the shareholders. Mr Martin’s guarantee was amended by hand to have a limit of $33,000 (from the $37,500 that had been typed on the document). Ms Stewart’s guarantee was amended by hand to have a limit of $42,000 (from the $37,500 that had been typed on the document). Mr Barnes’ guarantee was limited to $25,000. The loan documentation in evidence shows that it was signed by Mr Martin on 12 February 2003, Ms Stewart on
13 February 2003 and Mr Barnes on 19 February 2003.
[19] As to the cash contributions, in January 2003 Ms Stewart had made a further shareholder advance of $15,000. On 18 February 2003 Mr Martin made a further shareholder advance of $14,100 bringing his total advances to $89,000. On the same day Ms Stewart made a further advance of $23,400 bringing her total advances to
$108,400. On 17 March 2003 Mr Barnes made a further advance of $6500 bringing his total advances to $77,500. Together this meant advances in total of $275,000, with Mr Martin’s share of this at close to 33%.
[20] Ms Stewart’s evidence is that the amendments to the guarantee limits reflected the agreement reached as to the new shareholding levels which in turn reflected their cash contributions. Mr Martin’s evidence is that there was no shortfall in contributions because these reflected the operational influence held by each director. He says that it did not reflect the changed shareholding because the terms around a possible transfer had not been agreed.
[21] MBC Limited commenced trading in March 2003. Mr Martin and
Ms Stewart were communicating on various matters relating to the business.
[22] On 20 May 2003 Mr Martin and Ms Stewart were in email communication over an order. As well Mr Martin said:
I have now received the “general security agreement”. With this in place I can finalise the share transfer etc. The security agreement is a form of registering the advances I have made to the company to [sic] compensation for the reduced shareholding agreed to back in mid January.
I have faxed a copy to the brewery for your review. I will send the original to your home address. The agreement will require signatures from all current directors.
[23] In the documents before me are two draft General Security Agreements (GSA) between MBC Limited and Mr Martin granting a security interest in MBC Limited’s personal and other property, in favour of Mr Martin. One of these does not specify the amount of the debt secured. The other draft specifies that it is in respect of a debt for $89,100. This second version appears to have been received by Mr Martin from solicitors by fax on 19 May 2003 (going by the facsimile transmission details). It has annotated on it “Attn Fi. As per email. Tim” and Mr Martin confirms that he received this from his solicitors and forwarded it on to Ms Stewart. There is also a draft resolution of directors to authorise MBC Limited entering into the GSA with Mr Martin.
[24] In an email communication from Mr Martin to Ms Stewart on various matters relating to the business on 22 May 2003, Mr Martin said:
re share transfers: once we have the security agreement etc in place I can execute and register the share transfer docs. Will also distribute copies of bank loan docs at [the] same time.
[25] Ms Stewart responded by email on the same day saying “[t]he agreement looks good”. Her email also commented on two tanks that were available and suggested a meeting. In context, the agreement that she says “looks good” must be to the security agreement which Mr Martin says he had forwarded to Ms Stewart. Ms Stewart’s evidence in cross-examination initially was that she did not recall receiving the GSA at this time. However when shown the email saying “[t]he agreement looks good” her evidence was that she had checked the agreement with her lawyer and, in saying that it looked good, she meant that from a legal perspective it looked fine.
[26] On 27 May 2003 Ms Stewart and Mr Martin were in email communication over tanks. Mr Martin also noted that they were meeting the next day and he listed some items that they needed to go through. Included in this list was “share transfer, security agreement”. There were further email communications on 28 May 2003. Ms Stewart confirmed a meeting set for 5.15pm that evening at Felix Cafe in Wellington. Mr Martin’s email to Ms Stewart that day discussed tax and annual returns and also provided information about a source for tanks (called Bright Beer Tanks or BBT). Ms Stewart replied that she would leave Mr Martin to the tanks and would tell the supplier she had been liaising with to hold off for now.
[27] The meeting between Mr Martin and Ms Stewart took place at Felix cafe on the evening of 28 May 2003. Mr Martin took handwritten notes at the meeting and later typed them up. Those notes show the items discussed as being Sales Forecast, LAQC, Sales Invoices, Fireplace, Security agreement, BBT, Brewer employment, Product for shareholders, Bottles and Dispute with Whiteman refrigeration. Of present relevance are the discussion under “Security agreement” and “BBT”.
[28] As to the Security agreement, Mr Martin’s note records:
Fi not prepared to sign agreement as would give preferential treatment b/w shareholders. TM advised that with no GSA = no transfer of shares. Fi to consider other options listed in the email.
[29] As to BBT, Mr Martin’s note records:
Purchase of additional tanks. Currently v confusing with multiple parties dealing with suppliers. Agreed TM would deal with BBT.
[30] Mr Martin says that at the meeting Ms Stewart said she had changed her mind about the GSA. He says that his response was that unless she agreed to the GSA he would not be giving up his portion of the shareholding (ie going from 50% to 33%). Ms Stewart says that at the meeting she was handed the GSA and Mr Martin asked her to discuss it with Mr Barnes. She says that she had her lawyer look at the document. At another point in her evidence Ms Stewart says that Mr Martin had given her the GSA at the meeting in February 2003 at the Medici Cafe.
[31] After the meeting Mr Martin and Ms Stewart were in email communication over operational matters. For example on 4 June 2003 Ms Stewart was communicating on premises matters, bottles and staff and, in relation to the tanks, she said “Any word on tanks, as we are nearly full re production”. Mr Martin provided Ms Stewart with a summary of shareholders’ funds and advised that a further $5000 was needed, which would need to come from Ms Stewart or Mr Barnes, to pay for the tanks. In the course of these communications, on 12 June
2003 Mr Martin provided Ms Stewart with his minutes from the 28 May 2003 meeting at Felix cafe.
Relations deteriorate
[32] The relationship between Mr Martin and Ms Stewart/Mr Barnes continued to deteriorate. Ms Stewart and Mr Barnes were unhappy with a number of actions taken by Mr Martin. They refer to a function that Mr Barnes had held at MBC Limited’s premises on 13 June 2003 which they believed endangered MBC Limited’s liquor licence; an incident on 16 June 2003 when Mr Martin was abusive to MBC Limited’s label supplier (evidence from the label supplier confirms this); the ordering of five stainless steel tanks on 18 June 2003 when there were no funds to pay for the tanks and when it had not been discussed with Mr Barnes as the brewery operations manager responsible for brewing equipment purchases; behaviour by Mr Martin at Ms Stewart’s work on 24 June 2003 which Ms Stewart says led to a request from Ms Stewart’s employer that she escort him from the premises; and becoming aware on 14 July 2003 that Mr Martin had failed to prepare MBC
Limited’s quarterly report or financial statements since the 31 March 2003 year end and that PAYE and excise returns were due and fines were being incurred on them. Mr Martin disputes some of these matters and that any of them endangered the business.
Discussions around sale of all of Mr Martin’s shareholding
[33] The email correspondence shows Ms Stewart making a request on 24 June
2003 for a full set of the accounts to date and Mr Martin replying that day with the
31 March 2003 year end accounts and asking if Ms Stewart wanted him to also prepare a set of management accounts. There was also a telephone call from Mr Martin on 24 June 2003 leading to an exchange of emails about the shareholding. This is the first correspondence about the shareholding position subsequent to the
28 May 2003 meeting at Felix cafe.
[34] Mr Martin’s evidence is that he had contacted Ms Stewart because of increasing tensions between himself and Mr Barnes. His view was that Mr Barnes was making mistakes at cost to the business. He said that he raised with Ms Stewart the option of Mr Barnes resigning as director and minimising his involvement in the business. He says that Ms Stewart reacted adversely to this suggestion and she suggested that they purchase all of Mr Martin’s shareholding. Mr Martin says that he did not offer to sell his shares but did suggest that both parties consider the possibility of either party owning 100% of the company.
[35] The email exchange after this telephone discussion begins with Ms Stewart emailing her brother on 24 June 2003 saying:
Well, Tim has resigned! Yay. So I spoke to Dad and he said you may be interested in upping your shareholding! There is 33% of the company available. What we might do is increase ‘our’ shareholding from 42% to
50% and sell off 25% to another partner - one we know. Anyway food for thought.”
[36] Ms Stewart’s brother responds noting that this is good news and Ms Stewart must be happier now, and saying he may be interested in increasing his shareholding
and will think about how much he can afford. Ms Stewart forwards this on to her father.
[37] Then on 25 June 2003 Ms Stewart emails Mr Martin saying:
Tim, this is to let you know that we accept your offer of your 33% shareholding of the Martinborough Brewing Company re your phone call on Tuesday 24th June.
I am at present having an independent valuation done on the worth of the shares, and will review this to put an offer to you. I will be in contact re this soon.
[38] Mr Martin’s response by email dated 1 July 2003 was to the effect that their discussion had been an informal one with the intent of seeing if an agreement could be reached outside the formal process in the shareholders agreement. He said that the informal option would expire on 4 July 2003. Ms Stewart said she needed to get a valuation done and would do this as soon as possible. Mr Martin re-iterated his deadline of 4 July 2003. On 2 July 2003 Ms Stewart asked Mr Martin what value he placed on his shareholding. Mr Martin’s response on 3 July 2003 was that this request “may incite a contract on terms that have not been formally agreed to”. He set out what he saw as two possible valuation approaches and proposed a meeting to discuss valuation principles or sale options prior to the 4 July 2003 deadline.
[39] Ms Stewart replied on 4 July 2003 saying that the company/shareholders accept his offer to sell his 33% shareholding. She said that they awaited his value for the shareholding and if that was not received the company would have to get an independent valuation done. She followed this up with emails on 4 and 7 July 2003. Mr Martin replied by email dated 7 July 2003 saying that there must have been a communication problem. He said that he had not given a notice of his intention to sell under the shareholders agreement. He said that their without prejudice discussion was with a view to resolving the deadlock that had arisen between the shareholders and as part of that one possibility discussed was that of one party buying the other party out.
[40] Meanwhile in early July 2003 Ms Stewart removed Mr Martin’s access to
MBC Limited’s online banking, cancelled his MBC Limited’s company email
address and advised suppliers that Mr Martin was no longer part of the company. (Ms Stewart says she put Mr Martin’s online banking access on hold and does not comment on these other matters. I do not understand her to deny that she took these other steps.) Mr Martin’s response was to return to Ms Stewart all unpaid invoices and the cheque book. Ms Stewart’s response to that, on 15 July 2003, was to advise Mr Martin that MBC Limited would be employing an alternative financial advisor. She asked whether the excise return had been completed. Mr Martin said that he was not willing to take responsibility for issues beyond his control and that Ms Stewart and Mr Barnes had been writing out cheques without his knowledge. He also said that he had been unable to complete excise returns because his access to online banking had been removed and that he assumed this had been Ms Stewart’s intention.
[41] Alongside these events a meeting was arranged and took place on
17 July 2003 between Mr Martin and a Mr Gaskell (appointed by Ms Stewart and Mr Barnes to represent them). Mr Martin’s evidence is that Mr Gaskell tried to persuade Mr Martin to walk away from the company with no compensation for his shareholding. Mr Martin says that he told Mr Gaskell that he had no intention of transferring his shareholding without reasonable compensation for his “sweat equity” (ie the work he had put into establishing the business).
Mr Martin takes steps to protect his position
[42] On the same day as the meeting with Mr Gaskell, Mr Martin gave notice that he was resigning as director and made formal demand for repayment of his shareholder advances of $89,100 within 7 days. Mr Martin also emailed ANZ Bank advising that “attempts to resolve the dispute b/w shareholders has not been successful”, that he had resigned as director and his access to the banking records had been cut off. The Bank’s email back to Mr Martin said that the Bank had assisted the company only because of the Martin connection with the Bank, that the Bank had written to the directors advising that the position was unacceptable and a meeting was needed to look at the banking facilities and that refinancing might be required. The Bank also said “[t]he matter is serious and I hope that everybody has
acted with the Company’s interest at heart which is one of the responsibilities of a
Director”.
[43] The Bank’s letter to Ms Stewart and Mr Barnes as directors was dated
18 July 2003. As per the email to Mr Martin, it expressed concern and proposed a meeting. It also said that unless the Bank was satisfied about the position it could be that it would require the loan to be refinanced. The Bank said it would not permit any further draw down under the existing facility. It noted that the directors had responsibilities in the handling of the company.
[44] On 21 July 2003 Mr Martin emailed Ms Stewart raising the possibility that she sell their shareholding. Ms Stewart’s response on 22 July 2003 was “[w]e do not want to sell our shareholding”. She said that they would consider buying Mr Martin’s shareholding at an agreed price and that she assumed his sale price was
$89,100. Mr Martin said that this was not his price but was his demand for repayment of shareholder advances. He threatened legal proceedings to recover that sum. Ms Stewart responded by asking Mr Martin to advise her what he wanted. Mr Martin’s reply, by email dated 24 July 2003, was that he wanted Ms Stewart to make an offer “based on what value the company has to you.” He said that “[f]or the offer to be accepted, I will require compensation for the time and added value I have contributed to the company in the setup process.”
[45] On 6 August 2003 Mr Martin served a statutory demand on MBC Limited for repayment of his shareholder advances of $89,100. By letter dated 27 August 2003
Mr Martin’s solicitors advised that the statutory demand would be withdrawn on the condition that the shareholders agreement was adhered into. The letter referred in particular to clause 3.4(a), saying that this required Mr Barnes to resign as a director, and that in accordance with that clause Mr Martin was prepared to be reinstated and that a third director was to be agreed upon. The letter also referred to clause 3.7(a) requiring management agreements with the shareholders pursuant to which their agreed functions were to be performed.
[46] Around this time Ms Stewart had instructed Horwath (accountants) to provide an “indicative assessment of a fair value for a 33% equity interest in the
Company at the current date”. Horwath’s opinion, set out in a letter dated 27 August
2003, was that MBC Limited’s shares currently had no value. Horwath’s opinion in respect of Mr Martin’s demand for repayment of his advances was that $70,000 would represent a fair and reasonable repayment of his original investment in the company. Based on this opinion, Ms Stewart’s solicitor offered $70,000 in repayment of Mr Martin’s shareholders’ current account in return for a transfer of his shareholding and an assurance that no further action would be taken on the statutory demand. This was rejected by Mr Martin through his solicitors.
[47] At this time Ms Stewart was also investigating the possibility of selling the assets of the company. On 28 August 2003 she received advice from the accountant she had appointed to replace Mr Martin that “[i]f the transaction was at market value then fairness could be demonstrated, although this is obviously open to debate”.
[48] On 29 August 2003 Mr Martin filed a return for MBC Limited showing the addresses for service and communication for the company (a PO Box number in Martinborough) and recording his shareholding at 50 shares and Ms Stewart and Mr Barnes each with 25 shares. Mr Martin’s address was given as 151
Grafton Road.
[49] On 1 September 2003 Ms Stewart emailed her father, Mr Stewart (the fourth defendant) about the response to be made to the letter from Mr Martin’s solicitors of
27 August 2003. Ms Stewart said she was going to speak to their lawyer about an asset transfer to another company. Mr Stewart said “you probably need to keep [the] threats going until [Mr Martin] sees you are not about to roll over”.
[50] On 2 September 2003 the defendants’ solicitors replied to the 27 August
2003 letter. In this letter the defendants said that there was a clear breakdown between the parties, that the defendants wished to purchase Mr Martin’s shares and that independent advice had been obtained as to the value of Mr Martin’s shareholding. The letter also noted that if MBC Limited was liquidated as a result of the statutory demand then Mr Martin would recover significantly less than the
$89,000 he had advanced. The letter proposed payment to Mr Martin of $70,000 in
repayment of his shareholder current account and in return for the transfer of his shares.
[51] On 3 September 2003 Ms Stewart and Mr Barnes as directors signed a memorandum addressed to MBC Limited, copied to the Companies Office, stating “[t]his is to notify parties that a referendum was passed by the Directors of [MBC Limited] to appoint a new Director to the Company”. The memorandum advised that the new director was Mr Stewart. Mr Stewart’s signature appeared on the memorandum.
[52] On 10 September 2003 Mr Martin issued a further statutory demand for his
$89,100 advances. On that same day he wrote to ANZ Bank saying:
I am writing in relation to the loan facility to the Martinborough Brewing Company Ltd of which I am a 50% shareholder and guarantor to the loan facility.
As the bank has been made aware from previous correspondence, the company is currently operating under a dysfunctional shareholders relationship that has lead to the resignation of myself as director and a request for repayment of unsecured advances made to the company. The events leading up to this action include a disregard for the companies shareholders agreement and in particular failure to comply with the process outlined for electing the board to represent the shareholders interests.
More recently I am aware of a potential breach of the loan covenants, under the general security agreement, in relation to a statutory demand notice served on the company. The company has failed to comply with the demand and liquidation proceedings appear eminent. I have also been made aware of the companies financial performance for the trading period to 31 July 2003 which has accumulated tax losses of more than $90,000. My concern is that the company will not be in a position to meet the payment of debts as they fall due and will technically [be] trading whilst insolvent.
As loan guarantor I am well aware of my responsibilities to the bank and more importantly wish to avoid a situation that may compromise the banks position in relation to the loan. In the interests of maintaining a strong banking relationship with the ANZ, I am prepared to purchase the loan facility under the assignment clause, 23.10, of the General Security Agreement. This offer will be for the nominal value of the current loan amount plus any expenses incurred by the Bank. This offer will remain in force until 5.00 p.m. on Wednesday the 17th of September 2003.
[53] The Bank agreed to the offer Mr Martin had made. Vision Consultants Ltd (VCL), a company owned by Mr Martin, purchased the loan and the GSA. VCL advised the MBC Limited directors of this by letter dated 26 September 2003.
Around this time Mr Martin’s solicitors advised the defendants that the offer in the letter of 2 September 2003 was not accepted. The solicitors advised that Mr Martin wanted compensation for his work in establishing the business.
[54] By letter dated 29 September 2003 Mr Martin’s solicitors advised that VCL was exercising its rights under the loan agreement and the GSA for early repayment. On that same day VCL made a written demand of MBC Limited for the sum advanced under the facility (which at that point was $80,000) plus interest. He also appointed Shepherd Dunphy, who advised the defendants’ solicitors that VCL had taken possession of the assets and had changed the locks on the premises. Mr Barnes arrived at the MBC Limited premises on 1 October 2003 to find Mr Martin there with two others. This seems to be when the locks were changed. Mr Barnes told them they were trespassing but left the premises because he did not want to get into a confrontation. Mr Barnes went to the police and reported the incident and the background.
[55] A number of letters went back and forth between the parties’ respective lawyers. The upshot was that Ms Stewart and Mr Barnes paid VCL $83,500 (being repayment of the loan and interest) and $89,100 to Mr Martin in repayment of his shareholder advances. Ms Stewart and Mr Barnes had to borrow money from their parents to come up with this money. These payments did not, however, resolve matters. Mr Martin says that sometime in October 2003 that he became aware that Ms Stewart and Mr Barnes were considering transferring MBC Limited’s assets. On
14 October 2003 Mr Martin’s solicitor advised Ms Stewart and Mr Barnes’ solicitors that unless certain undertakings were given he was reserving his rights to apply to the court for a liquidator to be appointed. Mr Martin’s concern was said to be that Ms Stewart and Mr Barnes would dissipate the assets or business of the company to the detriment of the existing shareholders. Ms Stewart and Mr Barnes’ lawyer responded advising that there was no evidence of asset dissipation and that they were making strenuous efforts to ensure the substance and future of MBC Limited.
Events after Mr Martin was repaid
[56] On 22 October 2003 the police issued a trespass notice to Mr Martin advising that he was to stay off the MBC Limited premises in Martinborough.
[57] On 5 November 2003 Ms Stewart filed an annual return with the Companies Office which recorded the directors as Mr Barnes and Ms Stewart and the shareholders as Mr Martin (33 shares), Ms Stewart (42 shares) and Mr Barnes (25 shares). An identical memorandum to the 3 September 2003 memorandum advising of Mr Stewart’s appointment was prepared and dated on 12 December 2003. The reason for the identical memorandum is not apparent.
[58] Further correspondence between the parties’ solicitors took place in November and December 2003. At one point Mr Martin’s solicitors proposed proceeding under the dispute resolution procedure in the shareholders agreement but this was not taken up. Mr Stewart corresponded with ANZ Bank expressing concern that it had allowed Mr Martin to take over the loan and the security thereby putting MBC Limited in jeopardy.
[59] It appears that there was no correspondence between the disputing parties for the first half of 2004. However the defendants had proceeded to obtain a valuation from Horwaths as to “the fair and reasonable price for the shares” in MBC Limited. This was received at the end of June 2004. Horwath’s advice was:
the shares have no value and would expect the company to have a shareholder deficit on notional realisation of $251,593. The magnitude of this shortfall indicates to the writer that the company has no value.
[60] On 1 July 2004 Ms Stewart and Mr Barnes’ solicitors wrote to Mr Martin’s solicitors advising of the valuation, proposing that Mr Martin transfer his 33% of the shares and offering the sum of $7000 as compensation for Mr Martin’s endeavours in establishing the company. The $7000 offered was said to be the figure mentioned by Mr Martin when he left the company. There is no correspondence in the bundle from Mr Martin in response to this offer. Mr Martin’s evidence is that the offer was rejected. He says that a figure of $7500 had been mentioned by him, as his estimate
of travel and telephone expenses he had incurred in setting up the business, but this figure had no relation to his “sweat equity” in establishing the business.
[61] On 21 July 2004 the directors of MBC Limited passed a resolution “to outsource the storage and production of beers currently being produced and the marketing of these, on a basis yet to be negotiated”. It was said that this would leave MBC Limited as responsible for:
a) the operations of plant and machinery for the new company to be formed and other companies;
b) the provision of amenities for hire and use by other companies;
c) the maintenance of the premises for the production of the beer; and d) rental of plant, machinery and premises to the new company.
[62] The reason for this was said to be “a lack of ability to attract further capital to develop the production and marketing aspects of the company because of an impasse between existing shareholders”. It was resolved to appoint an accountant to assess this.
[63] Ms Stewart explained in her evidence the reason for this resolution. She says that MBC Limited was beginning to experience success. It had won three awards and had gained export orders to Australia and Denmark and orders to outlets throughout New Zealand. It needed an overdraft facility, a vehicle, a bottling machine, a labelling machine and additional chilled storage. The estimated sum needed was between $150,000 and $200,000. It was thought that it would be difficult to obtain new investors while the shareholders’ dispute remained unresolved. It was thought that the production and sales/marketing operations should be split as it was sales/marketing that needed to expand. With this in mind she and Mr Barnes set up Martinborough Beers and Ales Limited (MBA Limited). Mr Stewart and Mr Barnes gave similar evidence.
[64] On 8 September 2004 Mr Stewart, as Chairman of the directors of MBC Limited, provided the annual report and accounts to Mr Martin as a shareholder. He also advised details of the time and place for the Annual General Meeting. These were sent to Mr Martin at 1/30 The Crescent. This communication led to a letter dated 15 September 2004 from Mr Martin raising various points including concerns about Mr Stewart’s appointment.
[65] I do not have evidence about what transpired at the annual general meeting held on 24 September 2004 except that Mr Martin says that no mention was made of the 21 July 2004 resolution.
[66] By letter dated 30 September 2004 Mr Stewart responded to Mr Martin’s letter of 15 September 2004 saying that he had been appointed by resolution of shareholders and that “[s]hould this not have proceeded as required rectification will be undertaken at the next most opportune time unless demanded by shareholders in which case a resolution can be circulated or a shareholders meeting called”.
[67] By letter dated 7 December 2004 Mr Martin advised Mr Stewart that his appointment required a shareholders’ resolution. He said that Mr Stewart was unable to represent the interests of all shareholders and he requested that Mr Stewart resign. He said that a replacement director should be appointed under s 153 of the Companies Act and in accordance with the provisions of the Companies Act.
[68] By letter dated 16 December 2004 Mr Stewart said to Mr Martin that as a shareholder he could give formal notice that he was seeking a shareholders’ meeting to consider a proposed resolution that a director be removed. Mr Martin duly made that request by letter dated 22 December 2004. He repeated that the appointment had not been made in accordance with the Companies Act. He said that the appointment should also be made in accordance of the shareholders agreement. In respect of his position as director he said that an alternate director would be nominated.
[69] On 22 December 2004 the directors of MBC Limited resolved that it would contract with MBA Limited to supply its product to MBA Limited, and with MBA
Limited able to package, market and distribute (etc) the product. They further resolved that MBC Limited would sublease its premises to MBA Limited. The directors recorded this resolution as benefitting MBC Limited because:
a) with the present impasse between shareholders it was not possible to raise further capital for the purchase of essential equipment including a bottling plant and labelling plant;
b)the separation of operations would allow the company to contract out and better utilise its plant and equipment to other producers of both alcoholic and non-alcoholic beverages:
c) the separation of operations would provide MBC Limited the opportunity to more closely monitor its costs of production and lead to greater profitability.
[70] On that same day a supply agreement between MBC Limited and MBA Limited was signed. That agreement provided that MBC Limited would supply MBA the product at cost plus 20%. Payment was to be made on the 20th of the month following supply with interest at 2% if payment was late. The agreement was to commence on 1 January 2005 and would continue unless terminated by either party giving 6 months’ notice. The agreement provided for the parties to meet each year on 1 April to review the terms and conditions of the agreement.
[71] The directors obtained advice from a Mr Shaw, an accountant, about the contract. This is set out in an email from Mr Shaw to the directors dated
23 December 2004. In this email he set out draft prices for the beer produced by MBC Limited which he had calculated on the basis of cost plus 10% and on the assumption of 40,000 litres of production per annum. He said that the agreement should include a mechanism enabling the price to be renegotiated, say every six months and/or if production changed by more than, say 5000 litres. Mr Shaw said that on the basis of annual production of 40,000 litres this arrangement was forecast to provide net profit to MBC of $8248. Ms Stewart says that after further research
about what others were paying for beer produced for them, it was decided that the price would be cost plus 20% (which was equivalent to about $3 a litre).
[72] At the same time as entering into the supply contract, MBC Limited and MBA Limited entered into a sublease. That sublease is not in evidence. Ms Stewart’s evidence was that under the terms of the sublease MBA Limited paid a portion of the rent payable under the head lease, as well as rent for the items provided by MBC Limited.
[73] Also at this time, Ms Stewart and Mr Barnes made demand for partial repayment of their contributions to MBC Limited. The partial demand was met by way of transfer of intellectual property and plant and equipment to MBA Limited which were their contributions to the initial capital of MBA Limited. The demand was for $69,080, made up of $10,000 for intellectual property and $49,080 for plant and equipment. Those figures were supported by a valuation obtained by a company, called DTZ (associated with Ms Stewart) which had valued the good will at $5000 and the plant and equipment at $49,080. Ms Stewart and Mr Barnes had decided to double the amount for intellectual property.
[74] Throughout 2005 the dispute between Mr Martin and Ms Stewart/Mr Barnes continued:
a) By letter dated 24 February 2005 Mr Stewart advised Mr Martin that “[t]he previous Shareholders Agreement has no validity and is not in existence. That has been made clear in exchanges between the various shareholders”. The letter also said “[o]ur advice is that your letter [of 22 December 2004] is not in a form which requires the company to call a Special General Meeting”.
b)By letter dated 25 March 2005 Mr Martin sought to inspect MBC Limited’s records. This request was granted (although Mr Barnes had proposed that it not be), but a subsequent request for copies of documents was declined on the basis that Mr Martin had not returned
2003 financial information and some company software.
c) In June 2005 the directors of MBC Limited made a complaint to the Institute of Chartered Accountants about Mr Martin’s conduct alleging “breaches of professional ethics and unprofessional behaviour bordering on criminal activity” and seeking that the Institute investigate his behaviour “with a view to deregistration”.
d) On 16 August 2005 MBC Limited held its annual general meeting.
MBC Limited’s accounts for the year ending 31 March 2005 referred to the arrangements entered into with MBA Limited. Mr Martin attended this meeting and through this became aware of the arrangement entered into with MBA Limited.
e) In November 2005 Mr Martin was also served with a further trespass notice in relation to MBC Limited’s premises.
f) In December 2005 he informed a customer of MBA Limited (the Southern Cross Tavern) that it may have trouble getting continued supply of the beer.
g) In February 2006 Mr Martin commenced these proceedings (at that stage drafted as a derivative action) in the High Court.
Events subsequent to litigation
[75] Mr Martin’s evidence is that, by letter dated 24 July 2006, he advised the directors that his new address for shareholders’ correspondence was 34 Jellicoe Street Martinborough (a copy of that letter is in the documents produced at the hearing). The defendants deny receiving that letter.
[76] It appears that MBC Limited held its annual general meeting on or about
27 September 2006 (this being the date of the Chairman’s report attached with MBC Limited’s accounts for the year ended 31 March 2006). Mr Martin says that he did not receive notice of this meeting. The defendants evidence is that notice of the 2006 annual general meeting was sent to Mr Martin at his address at 151 Grafton Road,
being the address on the share register and at the companies office. Mr Martin disputes that any notice was sent to any address.
[77] On 4 February 2007 the directors resolved that MBC Limited and MBA Limited would cease business.
[78] By letter dated 19 April 2007, the directors of MBC Limited made a without prejudice offer to buy Mr Martin’s shares. Mr Martin requested the 31 March 2006 accounts in order to consider the offer. He also said that any major transaction would require approval from a majority of shareholders.
[79] On 24 October 2007 MBC Limited held its annual general meeting. Mr Martin’s evidence is that he did not receive any notice of the annual general meeting. The directors say that the notice was sent to Mr Martin at the address recorded for him at the companies office (151 Grafton Road). The Chairman’s report dated 24 October 2007 which accompanied the accounts for MBC Limited dated 31 March 2007 stated:
With the continuing unresolved dispute between a former Director and Shareholder and the lack of ability to attract further capital from the existing shareholders/directors because of that dispute, it was resolved to close the Brewery plant down.
[80] The directors obtained a valuation from DTZ dated 9 August 2007 valuing
MBC Limited’s plant and equipment at $117,800.
[81] On 7 November 2007 the directors of MBC Limited resolved to sell three
Bright Beer Tanks. Sale proceeds from this of $6000 were received.
[82] In the first part of 2008 there was correspondence between the parties’ lawyers about the proposed sale. Mr Martin objected to DTZ being involved on the basis that Mr Stewart had an involvement with that company. With the expiry of the lease, the plant and equipment had been put in storage. In mid-2008 MBC Limited was notified that the storage was no longer available. Ms Stewart’s evidence is that the plant and equipment were losing value over time at a rate she estimated to be
$10,000 per year. Mr Martin says this sum is grossly exaggerated. Ms Stewart says
that the directors resolved to employ Industrial Brokers Limited to sell the remaining plant and equipment before their value eroded further.
[83] On 25 August 2008 MBC Limited entered into an agreement with Three Boys Brewery Limited for the sale of the plant and equipment. The agreed purchase price was $100,000. Ms Stewart’s evidence is that this included $574.90 for brewer’s tools which were not included in DTZ’s asset valuation. The broker’s advice was that the sale price was better than expected, although less than may have been achieved if the plant had still be connected on site and if it had the appropriate number of conditioning and Bright Beer Tanks. Mr Martin takes a different view about the sale price based on his own experience and his discussions with someone from Three Boys Brewery.
[84] The sale proceeds have been held in trust (less deductions for litigation fees and broker’s fees) pending the outcome of these proceedings.
Rectification of share register
[85] Mr Martin’s first cause of action is an application for rectification of the share register, pursuant to s 91 of the Companies Act, to show Mr Martin as the holder of 50 ordinary shares, and Ms Stewart and Mr Barnes each as the holder of 25 ordinary shares.
[86] The defendants contend that a binding agreement was entered into at the meeting on 12 February 2003 at Medici Cafe for Mr Martin to transfer 17% of his shareholding to Ms Stewart with the consequence that the share register correctly reflects the current shareholdings. They say that there was a common understanding that the shareholding reflected an obligation to make financial contributions in that proportion. They rely on Ms Stewart increasing her proportion of financial contributions after the February meeting, the amendment to the bank documents and the subsequent communications from Ms Stewart referring to Mr Martin’s 33% shareholding.
[87] I consider that a binding agreement was not reached. At the time Mr Martin raised the possibility of reducing his shareholder it is the case that his shareholders’ advances were not at 50% of all shareholders’ contributions. But there is no correspondence showing that Ms Stewart or Mr Barnes raised this with Mr Martin as a concern and which needed rectifying. Rather Mr Martin expressed concern about the “partnership” not working and proposing that he become a “passive” 25% shareholder. His proposal was subject to the conditions set out in his 30 December
2002 email. There was then debate between them about one of those conditions, namely that he not provide a personal guarantee, and Mr Martin put forward the alternative proposal that the highest bidder take a 100% shareholding. At this point Ms Stewart wanted to “get rid of” Mr Martin.
[88] There is nothing in the correspondence leading up to the 12 February 2003 meeting indicating that Mr Martin had agreed to transfer his 17% shareholding without obtaining security for his shareholder contributions. Mr Martin’s lack of control or influence over the company, which was of concern to him, would be exacerbated by his resignation as director, and so his desire for security was understandable.
[89] Shares in a company are transferred by entry of the name of the transferee on the share register.[1] To effect a transfer, a form of transfer must be signed by the present shareholder delivered to the company.[2] A form of transfer must also be signed by the transferee if registration as holder of the shares imposes liability to the company on the transferee.[3] “On receipt of” such a transfer “the company must forthwith enter or cause to be entered the name of the transferee on the share register as holder of the shares”.[4]
[1] Section 84(1) of the Companies Act.
[2] Section 84(2) of the Companies Act.
[3] Section 84(3) of the Companies Act.
[4] Section 84(4) of the Companies Act. There is an exception to this, set out in s 84(4) but it does not apply here.
[90] There is disagreement between the parties as to whether a share transfer was signed at the February 2003 meeting. There must have been some discussion about reducing Mr Martin’s shareholding to 33% rather than 25% because the emails in
December 2002 and January 2003 had referred to a reduction to 25%. It may be that in the context of that discussion Ms Stewart did sign a share transfer. She was adamant in her evidence that it was signed and something occurred at the meeting to make her think that Mr Martin had agreed to become a 33% shareholder. That explains why she agreed to Mr Martin’s personal guarantee having a limit of
$33,000. Although she may have signed a share transfer that does not mean, however, that a binding agreement was reached. It suited Ms Stewart for Mr Martin to reduce his shareholding and resign as a director (by this stage she wanted Mr Martin out of the business) and because of this she may have taken an overly optimistic view of what had been achieved at the February 2003 meeting.
[91] I consider, on the evidence before me, that either Mr Martin did not sign the transfer or, that if he did sign it, he did not indicate that everything was agreed and that he would immediately attend to having it entered on the share register. I say this because, at the time of the February 2003 meeting, Mr Martin did not have his security in place. There is nothing to indicate that Mr Martin had changed his mind about the transfer being subject to the security he required. Rather, the evidence indicates that this remained a requirement and that Ms Stewart knew that. Because it was a condition of the transfer that he have the security, it is more likely that he indicated that he would attend to the transfer once arrangements were finalised.
[92] I prefer Mr Martin’s evidence about the sequence of events regarding the GSA which he was seeking as a condition of the transfer of a portion of his shareholding. Ms Stewart’s evidence indicated some confusion about this. It is possible that there was a draft given to her at the February 2003 meeting, but without the amount of the debt recorded on it. However, after this Mr Martin forwarded the draft GSA which he had received by fax from his solicitors. The emails at this time and the facsimile details confirm this (refer [22], [23] and [25] above).
[93] Mr Martin’s email to Ms Stewart of 22 May 2003 said that once the security agreement was in place “I can execute and register the share transfer docs” (my emphasis). Ms Stewart replied to the email commenting that the agreement (here, in context referring to Mr Martin’s proposed GSA) “looks good” (she says, meaning that from a legal perspective it looked fine) and did not query why the share transfer
needed executing nor complain at Mr Martin’s failure to attend to its registration. After that Ms Stewart seems to have changed her mind about Mr Martin having the security. There is no correspondence from her disputing the accuracy of Mr Martin’s minutes of the May meeting at Felix Cafe. At this stage Ms Stewart’s view was that Mr Martin was “holding the signing of the GSA agreement over my [Ms Stewart] head before you [Mr Martin] submitted the share transfer paperwork to the Companies Office”.
[94] Ms Stewart first referred to Mr Martin’s shareholding as “33%” in correspondence in late June 2004 when relations with Mr Martin had seemingly irrevocably broken down. By this stage Ms Stewart understood that Mr Martin was willing to sell all his shareholding and so her focus shifted to the price to be paid to Mr Martin and there was no further need to address the proposed GSA. For his part Mr Martin either wanted to buy 100% of the shares or to sell his shareholding for a price that reflected what he referred to as his “sweat equity”. He did not say in the correspondence at this time that his shareholding was 50%, and that Ms Stewart was incorrect to be referring to 33% but, given that he wanted paid by reference to his “sweat equity”, I accept that he did not see the need to point this out to Ms Stewart. He did however advise ANZ Bank in September 2003 that his shareholding was
50%.
[95] In these circumstances I consider that the company had not received a transfer in accordance with s 84 and so there was no requirement to register the transfer. Moreover, the agreement to transfer the shares was subject to a security being put in place and this did not occur. In my view therefore Mr Martin remained a 50% shareholder. It follows that the annual return filed by Ms Stewart in November 2003 showing Mr Martin as a 33% shareholder was incorrect.
[96] The Court has a discretionary power to order rectification of the share transfer.[5] However a number of other issues are raised which are said to amount to unfair prejudice or oppression. There are a wider range of relief powers in such a claim.[6] It is therefore better to consider whether an order for rectification of the
[5] Section 91 of the Companies Act.
[6] Section 174(2) of the Companies Act.
share register should be made in conjunction with what relief, if any, should be ordered in respect of the oppression/unfair prejudice claim.
Oppression or unfair prejudice claim
[97] Mr Martin’s second cause of action is an application for relief for oppression and unfair prejudice under s 174 of the Companies Act. The specific conduct he relies on are:
a) making invalid entries to MBC Limited’s share register and filing an incorrect annual return;
b)failing to adhere to the shareholders agreement in that, contrary to clause 3.4(a), a third director was not appointed by mutual consent;
c) failing to provide notification to him as shareholder of the 2006, 2007 and 2008 AGMs;
d)failing to provide the annual accounts for the 2006, 2007 and 2008 years;
e) transferring assets from MBC Limited to MBA Limited;
f) entering into a major transaction (the sale of the assets of MBC Limited) without a special resolution approved by the shareholders.
[98] The defendants contend that the share register was correct, that Mr Martin breached the shareholders agreement by resigning as director, that notice of the AGMs were sent, that Mr Martin has now received the accounts and that the transfer of assets and their subsequent sale were necessary because of Mr Martin’s actions and in any event were in the best interests of MBC Limited.
The power of the Court to intervene
[99] Section 174(1) sets out when a shareholder can apply for relief under the section. It provides for this if the shareholder “considers that the affairs of a company have been...conducted in a manner that is...oppressive, unfairly discriminatory, or unfairly prejudicial to him or her”.
[100] Section 174(2) sets out when the Court can order relief and the kinds of orders it can make. It provides “[i]f, 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”. It then sets out a non-exhaustive list of the kinds of orders that might be made.
[101] At first blush it might be thought that an order for relief can be made if it is “just and equitable to do so” providing an application has been made on the grounds set out in s 174(1), and without it being necessary for the applicant to establish that the company has been managed in an oppressive, unfairly discriminatory or unfairly prejudicial way. This interpretation was rejected by Henry J in Vujnovich v
Vujnovich.[7] No contrary view was taken by the Court of Appeal when the decision
was appealed[8] and the Courts have consistently proceeded on the basis that it is necessary to first establish that there has been oppressive, unfairly discriminatory or unfairly prejudicial conduct before relief can be considered.
[7] [1988] 2 NZLR 129 at 135 and 136.
[8] [1988] 2 NZLR 129.
[102] The leading authority on what amounts to such conduct is Thomas v H W Thomas Ltd.[9] It is conduct that is unjustly detrimental to a shareholder irrespective of whether there has been an irregularity, an invasion of legal rights, a lack of probity or a want of good faith. The conduct must depart from the standards of fair dealing, viewed in the light of the history and structure of the particular company and the reasonable expectation of its members.
The relevance of the shareholders agreement
[9] [1984] 1 NZLR 686.
[103] Both parties rely on various provisions of the shareholders agreement. The rights and obligations created under that agreement are determined and enforceable in accordance with contract law. There were submissions from the defendants on whether the agreement was repudiated by Mr Martin and submissions from Mr Martin that the defendants had affirmed the shareholders agreement. However, there was no contract cause of action brought by either party (the defendant’s counterclaim was not pursued). The rights and obligations under the shareholders agreement are relevant, however, to the reasonable expectations of the parties and are therefore relevant in assessing whether there has been unfairly prejudicial conduct.
[104] The provisions of the Companies Act are also relevant in assessing the reasonable expectations of the party and whether there has been unfairly prejudicial conduct. Those provisions may be modified by a constitution. Although the shareholders agreement refers to a constitution for MBC Limited, the parties have not referred to or relied on any such constitution. I proceed on the basis that MBC Limited did not have a constitution or, if it did, that there was nothing of relevance to this dispute in the constitution. Therefore the rights and duties of the directors and
shareholders were as set out in the Companies Act[10] and without modification by any
constitution.
Invalid changes made to the Companies Office records
[10] Sections 27 and 28 of the Companies Act.
[105] Mr Martin refers to Ms Stewart altering the shareholding details at the Companies Office in November 2003 (refer [57] above). I agree that the changes she made incorrectly stated the position, although Ms Stewart seems to have understood (mistakenly) that the changes she made were correct. I note that Ms Stewart’s actions came after Mr Martin had himself made changes to the shareholding details (refer [48] above). Ms Stewart’s actions were indicative of the
dysfunctional relationship between the shareholders, but on their own do not amount to oppression or unfair prejudice.
Mr Barnes’ position as director
[106] Mr Martin contends that the failure of Mr Barnes to resign as a director breached clause 3.4 of the shareholders agreement.
[107] Clause 3.4 of the shareholders agreement provides:
Board Representation
(a)The board shall comprise a minimum of three directors being Fiona Stewart, Tim Martin together with the third director to be appointed by mutual consent within the first 12 months from the date of signing this agreement.
(b)Each Director may appoint an alternate director in accordance with the Company’s constitution.
(c)The quorum necessary for the transaction of business at a meeting of Directors is [3]. No business may be transacted at a meeting of Directors unless a quorum is present. Each director may nominate one substitute director to represent their interests at each board meeting. The substitute directors can be changed yearly at the AGM or with the written consent of the other directors.
(d) The Board may elect a chairperson from time to time. The chairperson will hold office until he or she resigns or the Directors elect another chairperson in his or her place. The chairperson will chair all meetings of the Board at which he or she is present. If the office of chairperson of the Board is vacant, or if at a meeting of the Board the chairperson of the Board is not present within 15 minutes from the time appointed for the meeting, then the Directors present may elect one of their number to chair the meeting. In the case of an equality of votes, the chairperson will have the casting vote.
[108] Mr Martin submits that clause 3.4(a) meant that Mr Barnes (who was a director at the time the shareholders agreement was entered into) was to resign and they were to agree on the appointment of a third director. He says that the failure of this to occur was the catalyst to the dispute between the shareholders. Mr Martin says that he raised this with Ms Stewart and that this was the reason for proposing that he reduce his shareholding in late 2002/early 2003.
[109] Ms Stewart and Mr Barnes did not address this in their evidence in chief but Mr Martin cross-examined them about this. They did not accept that Mr Barnes was to resign and a third director appointed. Ms Stewart seemed to be of the view that clause 3.4 did not require this. Mr Barnes’ view was simply that he was a director at the time of the shareholders agreement and that was the way it stayed. Their evidence was that Mr Martin wanted to reduce his shareholding in the context of the unequal shareholder contributions.
[110] My view is that clause 3.4(a) anticipated that the third director might be someone other than Mr Barnes, and that the shareholders were to agree on this. I consider that at the time Mr Martin entered into the shareholders agreement he had not agreed that the third director would be Mr Barnes. The mere fact that Mr Barnes was the third director at the time the shareholders agreement was signed did not amount to consent, since clause 3.4 anticipated that the appointment would occur within a 12 month time-frame.
[111] I accept that Mr Martin was unhappy about how the arrangement between the parties was working because he did not have the influence in matters that he had anticipated. That is apparent from his email to Ms Stewart on 2 January 2003 that “the reason for me seeking a passive investment is that we do not have a partnership (or one that works!)”. It is also apparent from his email to Ms Stewart on 4 January
2003 that his concern was not having to contribute funding per se, but rather having to contribute funds to a business over which he had insufficient control. In that email he had proposed, as an alternative to reducing his shareholding, that each party have the opportunity to bid for 100% of MBC Limited.
[112] However it is less clear whether Mr Martin directly raised the need for Mr Barnes to resign and for a new third director to be appointed in his place at the time he raised the possibility of becoming a passive investor, or at any earlier time. He says that he did, but there is no correspondence showing this. It seems not to have been raised in any written communication with Ms Stewart and Mr Barnes until his solicitors raised it in a letter dated 27 August 2003 in the context of the dispute between the shareholders. I consider that, in the absence of a formal request from Mr Martin for Mr Barnes to resign and for a third director to be appointed in
accordance with clause 3.4, there was not oppression or unfair prejudice in this respect. By the time a formal request was made, Mr Martin had taken the step of purchasing the bank debt and making demand for early repayment. I discuss this further below at [161] to [165].
Mr Stewart’s appointment
[113] Mr Martin contends that Mr Stewart’s appointment as director breached clause 3.4 of the shareholders agreement because it was done without his consent. I do not agree. By this time Mr Martin had resigned as a director and had not appointed anyone to replace him. Clause 3.4 did not provide this eventuality. It did, however, require that there be three directors because the quorum necessary for the transaction of business at a meeting was three (clause 3.4(c)). In these circumstances the parties to the shareholders agreement were entitled to rely on the provisions of the Companies Act as to how a replacement director was to be appointed.
[114] This meant that Mr Stewart could be appointed as a director by ordinary resolution.[11] An ordinary resolution is a resolution that is approved by a simple majority of the votes of those shareholders entitled to vote and voting on that question.[12] A share in a company entitles the shareholder to one vote at a meeting of the company on any resolution to appoint a director.[13] A power reserved to a shareholder, such as the power to vote on the appointment of a director, can be exercised only at a meeting under ss 120 or 121 of the Companies Act or by
resolution in lieu of a meeting that complies with s 122 of the Companies Act.[14]
[11] Section 153 of the Companies Act.
[12] Section 105 of the Companies Act.
[13] Section 36 of the Companies Act.
[14] Section 104 of the Companies Act.
[115] In this case there was no meeting of shareholders to appoint Mr Stewart. This meant that Mr Stewart could only be appointed by resolution in writing signed by not less than 75% of the shareholders (who would be entitled to vote on that resolution at a meeting and who together hold not less than 75% of the votes entitled to be cast on that resolution).[15] This did not occur. Rather Mr Stewart was
appointed by “referendum” voted on by Mr Barnes and Ms Stewart as “directors”. Even treating Mr Barnes and Ms Stewart as voting on Mr Stewart’s appointment as shareholders (rather than directors), they did not together comprise 75% of the shareholders who would be entitled to vote on that resolution at a meeting. Therefore Mr Stewart’s appointment was not a valid appointment.
[15] Section 122 of the Companies Act.
[116] The invalid appointment of Mr Stewart would not on its own amount to oppression or unfair prejudice. But the response from Mr Stewart when this issue was raised by Mr Martin was in my view deliberately unhelpful. While intending to call a meeting of directors to pass the resolution to transfer the assets to MBA Limited, Mr Stewart required Mr Martin to call a shareholders’ meeting if he wanted to have Mr Stewart resign. Having dealt with the issue raised in this way, the defendants proceeded to pass the resolution for MBA Limited to transfer assets to MBC Limited. Once that was done they informed Mr Martin that his request for a shareholders’ meeting was not in the proper form.
AGM notifications
[117] Mr Martin says that he did not receive notice of the 2006 and 2007 annual general meetings and because of this his shareholder rights were denied.
[118] MBC Limited was required to call annual meetings of shareholders.[16]
Mr Martin was entitled to receive notice of such meetings.[17] Such notice could be sent to him by hand delivery to him, post or delivery to Mr Martin’s address or PO Box or DX “which the person is using at the time” or by fax “to a telephone number used by that person for the transmission of documents” by fax.[18] MBC Limited was required to maintain a share register recording, inter alia, the latest known address of a shareholder.[19]
[16] Section 120 of the Companies Act.
[17] Section 125 of the Companies Act.
[18] Section 391 of the Companies Act.
[19] Sections 87 and 90 of the Companies Act.
[119] The defendants say that the notice of these meetings was sent to Mr Martin at
151 Grafton Road. Mr Barnes’ evidence was that, while they did not want Mr Martin to attend the meetings, they had decided it would be more trouble than it was worth not to notify him of the meetings. His evidence was that they thought they were complying with their obligations by using the address shown at the Companies Office. The evidence was that it was Ms Stewart who attended to the notifications for the 2006 and 2007 annual general meetings.
[120] If the defendants received Mr Martin’s letter of 24 July 2006 then the share register ought to have been updated and notice of the annual general meetings ought to have been sent to the new address. The defendants were adamant that they had not received the letter. It is unclear why that would be so but, in any event, I consider that the defendants ought not to have used the 151 Grafton Road address. That is because they knew or must have known he was no longer at that address and they knew or ought to have known his current contact details.
[121] I say this because:
a) Mr Stewart’s letter to Mr Martin dated 8 September 2004 advising of the 2004 annual general meeting was sent to Mr Martin at 1/30 The Crescent, Wellington;
b)the correspondence in late 2004 concerning Mr Stewart’s appointment was sent to Martin at PO Box 6432 in Martinborough (being the address used in Mr Martin’s correspondence with Mr Stewart);
c) Mr Barnes gave Mr Martin’s address as 1/30 the Crescent in a
Disputes Tribunal application which Mr Barnes filed in December
2004;
d) Ms Stewart’s correspondence with Mr Martin in March and April
2005 concerning access to the company records was sent to the
Martinborough PO Box number;
e) the Martinborough PO Box number was also given to the Institute of Chartered Accountants as the address for Mr Martin in the correspondence which made the complaint about him;
f) the November 2005 trespass notice was served on Mr Martin at
18 McFarlane St, Mount Victoria;
g) by February 2006 Mr Martin had issued proceedings and so the defendants could have checked with his solicitors where the notice might be sent;
h) the offer to purchase Mr Martin’s shares in Ms Stewart’s letter dated
19 April 2007 was sent “C/o Circus Theatre, Jellicoe Street, Martinborough”.
i)The Circus Theatre address is the same address as 34 Jellicoe Street and was sent after the letter dated 24 July 2006 in which Mr Martin advised of the change to that address. Ms Stewart knew that Mr Martin owned and ran a business at the Jellicoe Street address.
j) Mr Barnes acknowledged in his evidence that they knew where to find
Mr Martin.
Provision of annual accounts
[122] The board of MBC Limited were required to send to Mr Martin, not less than
20 working days before the date fixed for holding an annual meeting, a copy of the annual report or a notice complying with s 209(3) of the Companies Act.[20]
[20] Section 209 of the Companies Act.
Mr Martin says that the defendants failed to do this in respect of the 2006, 2007 and
2008 years. I understand the defendants to accept that this did not occur. The defendants note that the 2007 accounts were provided to Mr Martin’s lawyer on 26
November 2007 and the 2006 accounts were provided to Mr Martin’s lawyer on 30
January 2008.
Asset transfer to MBA Limited
[123] Mr Martin contends that the asset transfer to MBA Limited was not entered into in good faith and was not in the best interests of the company. Although this was not pleaded, Mr Martin submitted that this was a major transaction and that therefore this is deemed to be prejudicial conduct[21] for the purposes of s 174 of the Companies Act.
[21] Section 175 of the Companies Act.
[124] Mr Martin relies on the evidence that the defendants had been contemplating an asset transfer during August 2003. He says that this was well before the repayment of his shareholder’s advance and the bank loan which the defendants say gave rise to the need for capital raising. I do not accept that this evidence shows that the transfer was not in good faith or in the best interests of the company. This is because Mr Martin had made a statutory demand on 6 August 2003 for repayment of his shareholder advances. This was before there is any evidence that the defendants were contemplating an asset transfer. On 27 August 2003 Mr Martin made an offer to withdraw that demand on the conditions which required adherence to the shareholders agreement but Ms Stewart and Mr Barnes’ view was that the relationship between them had broken down. It was in that context that the asset transfer appears to have first been discussed. More importantly, the asset transfer did not occur until the end of 2004. By then Mr Martin had been repaid his shareholder advances and MBC Limited had been required to repay the loan from ANZ Bank because of Mr Martin’s actions in September 2003.
[125] Mr Martin makes the point that there is no evidence of any capital being raised after the transfer, nor evidence of any bottling or labelling equipment being acquired (a reason given for the need for capital raising), nor any third party contract brewing services undertaken. Nevertheless, Mr Martin’s actions must have made it
difficult for the defendants to continue to operate the business of MBC Limited. It had lost the funding facility that had been put in place. Ms Stewart and Mr Barnes had needed to borrow from family members to repay the amount owing under that facility and to repay Mr Martin. MBC Limited had considered it necessary and appropriate to have an overdraft facility at the time that Mr Martin was involved in its operations. It can be inferred that access to some funding was still necessary and appropriate once the existing facility had been lost (through Mr Martin’s actions). I accept the defendants’ view that they would have struggled to obtain a replacement banking facility while the dispute between the shareholders remained unresolved. The asset transfer was seen as a way through MBC Limited’s difficulties.
[126] Relevant to whether the transfer of assets was in the best interests of MBC Limited is whether it received appropriate consideration for the transfer. As to this, MBC Limited was paid $10,000 for goodwill, $49,080 for the transfer of assets, and it entered into a sub-lease with MBA Limited and a contract for supply at a price of cost plus 20%. Mr Martin has provided his own analysis as to why these arrangements were not in MBC Limited’s best interests. He has, however, produced no independent expert evidence to support his evidence.
[127] The intellectual property of MBC Limited had been valued by Horwath (accountants) on 28 June 2004 at $5000. Mr Martin says that the Horwath valuation was at fire sale values and prepared on the defendants’ instructions for the purpose of convincing Mr Martin that the company had no value. However, the Horwath valuation records their instructions as being “to assess the fair and reasonable price for the shares”. It records that “there are differences among the three Shareholders and the purpose of the valuation is to facilitate a settlement or failing a settlement, an arbitration to determine the outcome between the parties”. I cannot infer from this that the purpose was to convince Mr Martin that the shares had no value.
[128] Mr Martin says that the valuation should have been done on a “going concern” basis. He says that Horwath ought to have made an assessment of the ability of the company’s management to deliver the business plan and he notes that MBC Limited was on target to achieve the forecast at the end of its first year. However, the Horwath valuation noted the five common methods of valuation but
concluded that none of the “normal income related valuation methodologies” could be utilised. This was because, having reviewed the accounts, Horwath were of the view that the company was “unlikely to produce maintainable profits or cashflow in the foreseeable future”. It therefore concluded that the appropriate valuation methodology was the “notional realisation of assets” methodology. In the absence of any independent expert evidence challenging what Horwath did and explaining why it was in error, there is no sufficient basis on which I could conclude that it was an inappropriate methodology.
[129] As to the valuation being at “fire sale values”, the Horwath valuation says that it has been “based on an orderly realisation of the company’s assets” and that “[w]hile the values determined have not been based on ‘fire sale’ they do depend on the expectation that the company’s assets could be realised in an orderly fashion” (emphasis added). I cannot therefore infer that the valuation was at fire sale values.
[130] Mr Martin’s own analysis is that, excluding goodwill attributable to the value of MBC Limited’s brand, the value of the intellectual property transferred was
$68,900. I understand his figure to be comprised of the cost to MBC Limited of the label design, product development (contract brewing and materials), marketing, wages and advertising. Mr Martin is qualified to give this evidence because he is an accountant. However he has not explained why, from an accounting perspective, his approach is correct and Horwath’s approach is incorrect. Nor has he produced independent expert evidence to support his approach as the correct one. He has therefore not persuaded me that Horwath’s approach was incorrect and that as a consequence the intellectual property was undervalued by Horwaths.
[131] The defendants decided to double the amount for intellectual property (ie to
$10,000) for the purposes of the transfer. I understand that they did this out of caution with the intent of making sure that the asset transfer could not be challenged as having been made at undervalue. This indicates that the defendants intended that MBC Limited would be paid fair consideration.
[132] The other evidence to support the consideration was the DTZ valuation. The date is confusing because it had on its cover a date of 16 February 2004, but at the
foot of every other page it had a date of February 2005. The correct date is 16
February 2004, and the assets were valued as at 1 January 2005, as Mr Stewart explained in his evidence. This valued the assets transferred as $49,080. Mr Martin attacks this valuation as being made after the event so as to support what had already occurred, as being at fire sale values rather than as a going concern and as failing to recognise the “off balance sheet costs of product development, label design, marketing and brand value”.
[133] I do not accept Mr Martin’s submissions on the DTZ valuation for essentially the same reasons as in relation to the Horwath valuation. The DTZ valuation said that it had been carried out “for the purpose of providing you with our opinion of in situ market value”. It said that the approach used was “market value as part of a going concern” with market value being defined as “the estimated amount for which an asset should exchange...between a willing buyer and willing seller in an arm’s length transaction after property marketing wherein the parties had acted knowledgeably, prudently and without compulsion”.
[134] Although the DTZ valuation was received after the date of the MBC Limited accounts consideration for the assets, Mr Stewart’s evidence was that the decision had been made that the assets would be transferred and the price filled in when the valuation was received. I accept this evidence. It is consistent with the defendants being conscious that Mr Martin might challenge the transaction and seeking to ensure that the consideration was appropriate.
[135] Mr Martin prepared a schedule where he has calculated the value of the plant and equipment transferred at $119,000. I understand Mr Martin’s calculation to be based on the cost of the items transferred. Mr Martin has not, however, explained why from an accounting perspective the assets should be transferred at their original cost. Nor has he produced independent expert evidence to show why the valuation approach adopted by DTZ was wrong and his approach correct. He has therefore not persuaded me that a transfer at $49,080 was under value.
[136] I understand Mr Martin to be concerned that MBC Limited incurred start up costs in return for which it projected returns over time once the business was more
established. Mr Martin’s view is that MBC Limited lost the opportunity to achieve these returns by transferring the assets at a price that did not cover all the costs incurred by MBC Limited and entering into a supply contract. Mr Martin seeks to show that the transfer was not in the best interests of MBC Limited with reference to his analysis of the financial performance of MBC Limited before and after the transfer. His calculations show that net earnings (before interest, tax, depreciation and shareholder salaries) declined after the transfer. He also says that the true value of the business was priceless, since the second and third defendants did not want to sell their shareholding at any price.
[137] I do not agree with these points. The defendants had decided that they wanted to buy Mr Martin’s shares and that they did not want to sell their shares to Mr Martin. That is not the same as saying that they would not have sold at any price. Nor does it mean that the transfer of assets to MBA Limited was not in MBC Limited’s best interests. It is a matter of commercial judgment whether MBC Limited would be better off operating with fewer costs and a fixed supply contract in the circumstances that MBC Limited was then facing (which included the dispute with a shareholder and no bank facility). The transfer was intended to reduce MBC Limited’s costs while allowing for growth in the business through MBA Limited’s marketing efforts. That it was ultimately unsuccessful does not mean MBC Limited was worse off than it would have been if the transfer had not occurred. That the defendants intended the transaction to be fair to MBC Limited is indicated by the decision to set the price to be paid by MBA Limited for the beer under the supply contract at a price above that contained in the preliminary advice the directors had received. In the absence of independent expert evidence to support Mr Martin’s view that the transfer of assets to MBA Limited and the supply contract was not in MBC Limited’s best interests, there is no sufficient basis on which I could conclude that it was not a fair transaction to MBC Limited.
[138] That said, I accept that the transfer was undertaken at least in part to estrange Mr Martin from the business. In October 2003 Mr Martin expressed the concern that Ms Stewart and Mr Barnes would dissipate assets. In July 2004 the directors resolved that MBC Limited would rent its plant, machinery and premises to a new company which would be responsible for production and marketing. Mr Martin
attended the September 2004 annual general meeting but no mention was made of this resolution, even though it was a significant change to the company’s operations and the directors would have known that Mr Martin objected to it. The resolution on
22 December 2004, which put in place the proposal in the July 2004 resolution, was passed after Mr Martin had been objecting to Mr Stewart’s appointment, reasserting his right to be represented on the board and requesting a shareholders’ meeting. The sequence of events shows that the defendants intended to deny Mr Martin the opportunity to participate in the decision. They also intended that MBA Limited would be able to make decisions about the business without involving Mr Martin.
Sale of remaining assets
[139] Mr Martin says that the sale of the remaining assets in 2008 was a major transaction. The defendants do not seek to argue otherwise. As such it required approval by “special resolution”.[22] This meant that Mr Martin’s approval was required. It is accepted that it was not obtained. This in turn means that there was conduct which was unfairly prejudicial for the purposes of s 174 of the Companies Act.[23]
[22] Section 129 of the Companies Act.
[23] Section 175(1)(l) of the Companies Act.
[140] Apart from the sale occurring without Mr Martin’s approval as was required, Mr Martin says that the sale was made at under value. The defendants engaged a broker to sell the assets. The sale price achieved was above the book value and in line with a valuation obtained from DTZ. Mr Martin has not produced an independent expert valuation to challenge this. Instead he relies on some limited email and trade me enquiries he has made. Mr Martin has not produced sufficient evidence that the assets were sold at an under value.
[141] Mr Martin says that he was denied the opportunity to purchase the assets. He says the defendants knew that he was interested in buying them, and that he was the person who was likely to pay the most for them. The defendants’ response is that at this stage they no longer trusted him. I consider the issue of the failure to offer
Mr Martin the opportunity to purchase the assets as part of the assessment as to what relief is just and equitable.
Overall assessment of defendants’ actions
[142] Irrespective of whether it was a major transaction, the asset transfer to MBA Limited was unfairly prejudicial to Mr Martin (putting to one side Mr Martin’s actions which I discuss below). Although it has not been established that the directors did not believe it to be in the best interests of MBC Limited, it was undertaken at least in part to remove Mr Martin’s participation in the business (as originally conceived). It was a significant change to MBC Limited’s operation and was undertaken with a deliberate decision not to inform Mr Martin, when it was known he would object to it and at a time that Mr Martin was asserting his shareholder rights. As part of the decision not to inform Mr Martin of what was proposed, the defendants did not act on Mr Martin’s concern that Mr Stewart had not been properly appointed and they did not accede to Mr Martin’s request that the shareholders agreement be adhered to (regarding Mr Barnes’ resignation, that a third director be appointed by mutual consent and that management agreements be put in place).
[143] The sale of the remaining assets is deemed to be unfairly prejudicial. By this time the defendants did not intend to involve Mr Martin in any decisions relating to MBC Limited. As part of this approach Ms Stewart did not use Mr Martin’s last known address when sending notices of the 2006, 2007 and 2008 annual general meetings and she did not provide him with the accounts for those years in the time period stipulated in the Companies Act.
[144] I therefore consider that Mr Martin has established that the affairs of MBC Limited were conducted in a manner that was “oppressive, unfairly discriminatory, or unfairly prejudicial to him”. This means that there is jurisdiction for me to consider whether it is “just and equitable” to order relief. Relevant to this assessment, and as to what relief is appropriate if I am to order relief, are the actions of Mr Martin. The defendants contend that Mr Martin acted to the detriment of MBC Limited in a number of ways and had repudiated the shareholders agreement.
Mr Martin’s actions regarding the sale of his shareholding
[145] In January 2003 both sides were unhappy with how things were working. Mr Martin was debating having to take on a bank guarantee and was proposing to become a passive investor. Ms Stewart was keen to get rid of Mr Martin. The parties became deadlocked over the price at which Mr Martin would sell his shares (because Mr Martin refused to specify a price), and Mr Martin’s attempts to buy Ms Stewart/Mr Barnes’ shares were rebuffed.
[146] At this point the shareholders could have looked to the shareholders agreement. Under that process Mr Martin was to specify a price which he considered to be the fair value of the shares. Ms Stewart and Mr Barnes would then have had the option of acquiring the shares at this price or at the “fair value” as determined by an “independently appropriately qualified person”. Mr Martin wished to avoid these provisions and only wanted to sell his shares outside these provisions. He made it plain that an offer would need to be made for his shares (and that he would not specify the price that was acceptable to him).
[147] It is apparent that Ms Stewart became frustrated with Mr Martin’s approach. It was, however, an approach open to Mr Martin. He was only interested in selling his shares if he was compensated for his work in setting up the business. If Ms Stewart and Mr Barnes did not want to pay him for that, they had the option of selling their shares through the same process. Ms Stewart had decided against Mr Martin having a GSA, which Mr Martin had made a condition of becoming a passive investor with a 33% shareholding. Again, she was entitled to do this even though it was a possible way through the difficulties the parties had in working with each other.
[148] I therefore do not regard Mr Martin’s behaviour at this stage in relation to the sale of his shares as improper, though it did nothing to improve shareholder relations nor to resolve the dispute.
Other actions prior to Mr Martin’s resignation
[149] The defendants contend that Mr Martin ordered Bright Beer Tanks at a price beyond MBC Limited’s ability to pay and then failed to be present to deal with the matter when the tanks arrived. I do not view Mr Martin’s actions in relation to the tanks as detrimental to MBC Limited. The evidence before me is that the tanks were needed ([31]), Ms Stewart had left the tanks for Mr Martin to sort out ([26] and [29]), that the cost of the tanks was in the region of $5,000 to $10,000, and that when money was needed to pay for them Mr Martin pointed out that the shareholder contributions would need to come from Ms Stewart or Mr Barnes ([31]) and there was no objection expressed to Mr Martin about that. Ms Stewart’s concern was that the cost needed to be approved by her and Mr Barnes before the order went ahead, but she did not make that clear in her emails. Moreover, there is no evidence to suggest that the cost of the tanks, as negotiated by Mr Martin, was excessive.
[150] There was evidence, which I accept, that Mr Martin verbally abused MBC Limited’s label supplier and said payment would not be made. This occurred on or about 16 June 2003. It was conduct that could have jeopardised MBC Limited’s supply of labels. As it happened, it did not because Ms Stewart was able to make amends with the supplier.
[151] There was insufficient evidence on which I could safely find that Mr Martin had jeopardised MBC Limited’s liquor licence and breached health and safety regulations. I did not hear evidence from anyone, other than Mr Martin, who was present on the evening the defendants say this incident occurred. The antagonism between Mr Martin and Ms Stewart/Mr Barnes is such that I cannot safely rely on Mr Barnes and Ms Stewart’s account of what occurred (which, in any event, was partly inadmissible hearsay evidence).
[152] Similarly, there was insufficient evidence on which I could safely find that
Mr Martin failed in his duties as a financial controller. There is a letter dated
24 July 2003 advising Ms Stewart that the excise return for June 2003 was overdue but I was not pointed to any evidence of any penalty that was actually incurred and which had to be paid. Even if there had been, this letter was sent after Ms Stewart
had removed Mr Martin’s access to the on-line banking and had advised Mr Martin that she was employing an alternative financial adviser.
[153] The evidence about Mr Martin’s failure to return company records and software was somewhat vague. I was left unclear as to precisely what Mr Martin had and how that had caused detriment to MBC Limited.
Mr Martin’s resignation
[154] Mr Martin resigned as director on 17 July 2003. The defendants say that this was contrary to the requirement that he be a director (referring to clause 3.4(a) of the shareholders agreement).
[155] Under the Companies Act a director can vacate their office by resigning[24] and such resignation is effected by signing a written notice of resignation and delivering it to the address for service of the company.[25] I consider that clause 3.4(a), which does not provide for the situation where a director wishes to resign, was not intended to override that right. By this time, Mr Martin’s on-line banking had been cancelled, his company email had been cancelled and suppliers had been told that Mr Martin was no longer part of the company. In these circumstances it was not improper for Mr Martin to resign. Indeed he may have seen that he had little option but to do so.
[24] Section 157(1) of the Companies Act.
[25] Section 157(2) of the Companies Act.
[156] Moreover, Mr Martin’s resignation was not seen by the defendants as detrimental at the time. Rather, given that the relationship between Mr Martin and Ms Stewart/Mr Barnes had broken down, his resignation was seen as a positive development by Ms Stewart and Mr Barnes. This is shown by Ms Stewart’s “Well, Tim has resigned! Yay” email (Ms Stewart apparently anticipating Mr Martin’s resignation before it had actually occurred).
Shareholder contributions
[157] The defendants contend that the shareholders had an understanding that their
financial contributions would be in proportion to their shareholding. The defendants refer to clause 2 of the shareholders agreement.
[158] The only part of clause 2 of potential relevance to this point is as follows:
Further capital
If further capital is required, the Board may determine that the Shareholders should be requested to subscribe for new shares in the capital of the Company. All new Shares, or new options for Shares or securities convertible into Shares, issued in the Company shall first be offered for subscription for cash on a pro rata basis to all existing Shareholders in accordance with the Company’s constitution. As a pre-condition to an issue of any new Shares to a third party the Board must not issue new Shares unless the third party subscriber has executed a deed of accession in the form set out in Schedule 2.
[159] That was not in practice what happened. Rather, the shareholders were called upon to make contributions as cash was required. It appears that the parties understood this was to be in proportion to their shareholdings, but this did not occur by way of subscriptions for new shares. As a result of the negotiations over Mr Martin’s reduction in shareholding (to 25% or 33%), Mr Martin’s contributions reflected that anticipated reduction. When the negotiations failed (when no GSA was signed and the parties had moved to discussions over a complete sell-out) Mr Martin was not called upon to increase his contributions. The position between the parties had changed, with Ms Stewart and Mr Barnes wanting Mr Martin out of the company.
[160] In these circumstances I do not think Mr Martin acted improperly at this stage in not making further contributions in line with his shareholding. I take a different view of Mr Martin’s actions after this (which are discussed under the next heading).
Statutory demand/bank facility
[161] The defendants contend that Mr Martin’s demand for repayment of his contributions and his actions in purchasing the bank loan and security and then enforcing the security against MBC Limited were detrimental to the company and contrary to the intentions behind the shareholders agreement. It is here that I agree with the defendants.
[162] In July 2003 Mr Martin resigned as director and made demand for repayment of his shareholder advances. He told the ANZ Bank that the parties were in a dispute which could not be resolved, leading to the Bank advising MBC Limited that no further draw downs could be made. He issued a statutory demand. He made withdrawal of his statutory demand conditional on compliance with the shareholders agreement. When the defendants did not accede to the terms on which the statutory demand would be withdrawn, Mr Martin re-issued the statutory demand. He used this in his correspondence with the Bank to take over the funding facility and security. In this regard I reject Mr Martin’s evidence under cross-examination that the statutory demand referred to in the letter dated 10 September 2003 to the Bank was a statutory demand from a law firm for unpaid legal fees. I reject his evidence about this because:
a) a copy of the statutory demand from the law firm has not been produced;
b)Mr Martin could not explain why a statutory demand would have been issued by the law firm for work done much earlier for MBC Limited;
c) it is too co-incidental that Mr Martin should refer to a statutory demand in his letter to the Bank on the same day as he had issued a statutory demand, for the letter not to be referring to his statutory demand;
d)Mr Martin had acknowledged in his evidence-in-chief (given by way of a prepared written brief) that the Bank was aware that the statutory demand was issued by him; and
e) In correspondence from the Bank to Mr Stewart in June 2004 the
Bank said:
In September 2003 ANZ was made aware that Martinborough Brewing Company Limited had failed to meet a demand for payment made by Tim Martin and as a consequence he intended to apply to have the Company placed into liquidation. (my emphasis)
[163] Having taken over the facility and securities Mr Martin proceeded to require repayment of his shareholder advances and the facility. Once he had received repayment of these sums he threatened liquidation proceedings. After this he continued to assert shareholder rights, but did not make any further contributions (cash or otherwise) to the business. It seems that by 2006 and 2007 Mr Martin’s interest became to purchase the assets of MBC Limited should the business fail.
[164] Mr Martin explains his actions by saying that he wished to protect his relationship with the Bank, that as a guarantor he had a vested interest in MBC Limited not breaching the terms of the loan and that he feared being left with an obligation and no assets. These were legitimate concerns in a situation where the shareholders no longer had a workable relationship and Mr Martin was being excluded from the business (eg through being effectively sacked as the Financial Manager). But his actions to address those concerns were not in MBC Limited’s best interests. Mr Martin must have known that in protecting his own position, he was putting considerable pressure on the viability of MBC Limited. It is at this point that I consider “the equities” of the respective sides to the dispute altered.
[165] Mr Martin’s actions may have been understandable if there were no other options open to him to protect his position while not harming MBC Limited. But this was not the position at this point. Mr Martin gave Ms Stewart and Mr Barnes no opportunity to address his concerns before he informed the Bank of the dispute between them. For example, Mr Martin could have said that he was no longer interested in selling his shareholding and that he required all parties to adhere to the shareholders agreement. Mr Martin only did this after he had approached the Bank and after he had issued the statutory demand. Had the defendants refused to comply with the shareholders agreement (ie appointing a director to replace Mr Barnes and putting in place management agreements) the proper way to resolve a dispute between the parties was via the dispute resolution procedure under the shareholders agreement. By the time Mr Martin proposed this he had been repaid his shareholder’s advances and had received repayment of the loan. If need be, Mr Martin was also able to make an application to the Court for relief (including urgent interim relief). The shareholders agreement expressly reserved this right
where a “party believes in its reasonable opinion that such relief is necessary to preserve or protect its interests under this agreement”.
Relationship with Southern Cross
[166] In December 2005 Mr Martin told the manager of the Southern Cross Tavern, which was a key customer of MBA Limited, that Southern Cross might have difficulty with continuing supply from MBA Limited. The manager contacted Ms Stewart who assured him that this was not the case. This is a minor matter in the context of the dispute and did not cause any irrevocable harm to the company.
Relief
[167] Mr Martin was excluded from the business and then it was sold without his consent. Mr Martin’s actions, in particular making a demand for repayment of his contributions alongside purchasing the bank facility and enforcing it, contributed to his exclusion. I consider that there should be relief, but such relief must take into account Mr Martin’s actions.
[168] Mr Martin seeks various declarations. I do not consider it necessary to make any of these declarations as this judgment records my findings about actions taken that did not comply with the Companies Act and which were unfairly prejudicial.
[169] Mr Martin seeks liquidation of the company. He also seeks an order that the liquidator be requested to investigate all transactions relating to the transfer of assets. In my view this relief is not just and equitable. Mr Martin has had his opportunity in this Court to produce evidence to show that the transactions were not at fair value. He has not done so. As the defendants point out, the liquidator’s costs will come out of the company. That will deplete what remains from the sale of the assets to repay Ms Stewart and Mr Barnes’ shareholder advances. Mr Martin has already been repaid his advances.
[170] Mr Martin seeks “the granting of compensation to the Plaintiff for the loss in value denied to the Plaintiff, at the hands of the defendants, as the court believes appropriate”. As to this:
a) I am not satisfied that compensation would be just and equitable given
Mr Martin’s actions;
b)Further, if this is a claim for the loss of opportunity for Mr Martin to receive returns from the business having invested in it, there is no evidence from Mr Martin on which I could value that lost opportunity. There is no evidence that the business would have succeeded with Mr Martin remaining involved in the business, nor if the transfer of assets had not been made to MBA Limited. Ms Stewart and Mr Barnes decided in 2007 to cease operating the business. There is nothing to suggest that they had done anything other than to give the business their best efforts. At this stage they carried the financial risk as Mr Martin had received repayment of all his advances;
c) If this is a claim for compensation for Mr Martin’s “sweat equity”, then again there is no evidence put forward which seeks to value that. Even if there had been, then it would not be just and equitable to award Mr Martin compensation for this when Ms Stewart and Mr Barnes will not receive anything for their respective work in
establishing the business.[26]
[26] The parties take different views about the value of the contribution made by each party to the establishment of the business but it has not been necessary for me to decide this other than to note that it was not just through Mr Martin’s efforts that the business was established.
[171] Mr Martin also refers to “the granting of compensation to the Plaintiff for the loss of opportunity resulting from the transfer and sale of company assets without shareholder approval or participation”. Mr Martin values this opportunity based on what he estimates is the difference between what it would cost to replace all the assets with the amount received by the defendants on the sale of the assets. Even if this were a proper approach to compensation (and I am not persuaded that it is) I am not satisfied that it is just and equitable to order compensation given Mr Martin’s actions.
[172] The only basis on which compensation might have been available is if Mr Martin had proven that the assets were sold at an undervalue. In that case the loss would be a loss to the company. Mr Martin’s loss would come after repayment of Ms Stewart and Mr Barnes’ remaining shareholder advances, and would be determined on the basis of his 50% shareholding. However Mr Martin has not proven that the assets were sold at undervalue.
[173] Mr Martin seeks rectification of the share register. While I agree that the shareholding is inaccurately recorded, I see no point in ordering rectification. Mr Martin has not challenged the evidence from the defendants that the funds from the sale of the assets will not cover their financial contributions. Mr Martin has already been repaid his financial contributions. I consider that Mr Martin’s 50% shareholding should be transferred to Ms Stewart and Mr Barnes for no further consideration. That will enable the defendants to wind up the affairs of MBC Limited at minimal cost.
[174] The defendants requested an order declaring that the shareholders agreement has been repudiated by the plaintiff and is of no effect. I do not think this is necessary. Once the company is wound up, there will be nothing for the shareholders agreement to apply to.
Result
[175] The plaintiff is to transfer his 50% shareholding to the first and third defendants for no further consideration. I make no other orders for relief. I can indicate that I am not minded to award costs to either party. The parties may make submissions about costs by memoranda filed within 14 days if they do not accept my preliminary indication.
“Mallon J”
Solicitors:
Morrison Daly, Wellington,
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