Shell (Petroleum Mining) Co Ltd v Todd Petroleum Mining Co Ltd
[2005] NZCA 194
•3 August 2005
IN THE COURT OF APPEAL OF NEW ZEALAND
CA70/05
BETWEENSHELL (PETROLEUM MINING) CO LTD
First AppellantANDENERGY PETROLEUM INVESTMENTS LIMITED
Second AppellantANDSHELL EXPLORATION NZ LTD
Third AppellantANDTARANAKI OFFSHORE PETROLEUM COMPANY OF NZ
Fourth Appellant
ANDENERGY INFRASTRUCTURE LTD
Fifth AppellantANDSHELL NEW ZEALAND HOLDING COMPANY LTD
Sixth AppellantANDA BANSAL, P T E SANDERSON AND T N WARREN
Seventh Appellant
ANDTODD PETROLEUM MINING CO LTD
First RespondentANDOMV NEW ZEALAND LTD
Second RespondentANDSHELL TODD OIL SERVICES LTD
Third RespondentANDMAUI DEVELOPMENT LTD
Fourth Respondent
Hearing:28 June 2005
Court:Chambers, Baragwanath and Panckhurst JJ
Counsel:J E Hodder and B A Davies for First - Sixth Appellants
JBM Smith and J A Kean for First Respondent
T C Stephens and KLL Sykes for Second Respondent
Judgment:3 August 2005
JUDGMENT OF THE COURT
A THE APPEAL IS DISMISSED.
BThe appellants must pay costs to the first respondent in the sum of $6,000, together with usual disbursements.
____________________________________________________________________
REASONS
(Given by Panckhurst J)
Table of Contents
Para No
INTRODUCTION [1]
BACKGROUND [7]
POST HEARING DEVELOPMENTS [21]
WHAT IS STOS? [26]
HEADS OF AGREEMENT (HOA) [27]
TERMS AS TO STOS [31]
SOME OBSERVATIONS [38]
THE CAUSES OF ACTION [47]
APPOINTMENT OF DIRECTORS [48]
DISPOSITION OF HALF OF STOS’S ASSETS? [57]
BEST INTERESTS OF STOS [63]
DISPUTE RESOLUTION [75]
TERMINATION OF MAUI CONTRACT OF EMPLOYMENT [84]
BALANCE OF CONVENIENCE : INTERESTS OF JUSTICETest to be applied? [90]
The contentions [94]
Conclusion [97]
Decision [100]
Introduction
[1] Late in the evening of 28 April 2005 Goddard J granted an interim injunction in favour of the first respondent, Todd Petroleum Mining Co Limited (Todd), the effect of which was to prevent the directors of the company which provides operator services to several joint venture petroleum fields from voting on proposed resolutions by which such operator would cease to provide those services and another company would assume that role. The operator is Shell Todd Oil Services Limited (STOS), the third respondent. The meeting to consider the relevant resolutions was to occur on 29 April 2005. Hence, Goddard J heard Todd’s interim injunction application in circumstances of urgency.
[2] In 1955 Todd Bros. Limited and Shell Oil Company entered into a joint venture agreement pertaining to the Maui Field. STOS was subsequently established in the context of that joint venture to provide operator services for it. Today Shell’s interest in Maui is held by four petroleum mining companies (PMCs), being the first to fourth appellants. The other part owners are Todd and the second respondent, OMV New Zealand Limited, which companies hold 6.2 and 10 percentage share holdings, respectively.
[3] STOS also provides operator services to other joint venture fields, being Pohokura, Western Platform and Kapuni, in which Shell and Todd have interests, as does OMV in relation to the first two fields. The fifth appellant, Energy Infrastructure Limited, is another Shell company which owns a storage facility known as the Omata Tank Farm which STOS likewise services. Another PMC, Todd Taranaki Limited, owns the McKee and Mangahewa fields which also receive operator services from STOS. In all, therefore, STOS provides its services to three joint venture fields, three individually owned fields and the tank farm.
[4] The resolutions promoted by Shell contemplated that STOS would “cease to be operator or otherwise provide operation services and expertise” in respect of the Maui, Pohokura and Western Platform joint ventures and the Omata Tank Farm. Provision of these services represents about 78% of STOS’s business.
[5] Shell, whose directors on the STOS Board are the seventh appellants, proposed that a 100% Shell-owned operating company would step in to provide operator services and expertise in place of STOS. Todd is adamantly opposed to the proposed change. With Shell it presently has a 50% ownership interest in STOS. The prospect that operator services be provided to the various entities by a wholly‑owned Shell company is singularly unattractive to Todd.
[6] In this appeal Shell challenges the decision of Goddard J to grant an interim injunction pending a substantive hearing upon the grounds that Todd has not demonstrated a serious case for trial. Further, Shell maintains that the balance of convenience, and the interests of justice, are against maintenance of the injunction.
Background
[7] The STOS operating model was established with reference to the Maui field. The company is employed under a contract of employment between itself, the Shell and Todd PMCs which comprise the joint venturers and Maui Development Limited (the fourth respondent), which company is an agent for the joint venturers.
[8] By heads of agreement dated 1 March 2002 Shell and Todd agreed to terminate the 1955 Maui agreement in favour of new arrangements. With reference to STOS the heads of agreement provided that by 31 July 2002 a new agreement would be completed which would govern the role and function of STOS. In the meantime “core terms” contained in a third schedule to the heads of agreement would govern the relationship between Shell and Todd, and define the role and operations to be provided by STOS.
[9] Such terms contemplated that Shell and Todd would continue to provide operational services to the several petroleum fields through an unincorporated joint venture. Governance of the venture would lie with a board of directors to which Shell and Todd would each appoint three members, Shell being entitled to designate one of its appointees to hold a casting vote. Relevant for present purposes was an obligation upon Shell to procure Shell International Exploration and Production (SIEP) to provide technical support and advice to STOS, as required.
[10] The new comprehensive agreement envisaged in the March heads of agreement did not eventuate. Accordingly, the Venture continues to be conducted in terms of the March 2002 heads of agreement. Other aspects of those agreements, and of the core terms, are of direct relevance to the substantive causes of action asserted by Todd in this proceeding. We shall refer to them shortly when considering the causes of action to which they are most relevant.
[11] From soon after conclusion of the heads of agreement Shell and Todd have been in dispute concerning the terms of SIEP’s engagement. Despite Shell’s obligation to procure SIEP’s services (para [9]), any dispute over which between Shell and Todd is a matter for arbitration, SIEP is only prepared to continue providing services to STOS under what are termed its “standard conditions”, it being a company which provides such services on an international basis. Todd is unpersuaded that a change in terms is necessary.
[12] The gist of the dispute is sufficiently conveyed in extracts from letters written by the parties. On 23 March 2005 Shell’s commercial manager, Mr A Bansal wrote to Todd:
Discussions on this matter have now continued for some considerable time, dating back over 12 months. SIEP has made it clear that it will only offer services under its standard conditions. TPM has made its position clear that it will not support the continued use of SIEP Services under the terms offered by SIEP. Shell has stated its position that the use of the services of SIEP is integral to Shell’s continued support of STOS providing operating services.
It is clear we have reached an impasse with no prospect of finding a mutually acceptable position within the framework of the existing STOS operating model.
Shell is now no longer confident that the current STOS operating model is able to deliver services in an effective and timely manner.
[13] Todd’s managing director, Mr R G Tweedie, in a letter dated 18 April 2005 said:
Those problems are not, as you suggest, that the current operating modelling is failing, or problems with governance. Rather, the problem is that proposed increases to SIEP fees and proposed imposition by Shell of EPA, pension and other charges are inappropriate. Unfortunately, Shell has shown a consistent disinclination to address those issues and seek to generate revision of charges to appropriate categories and levels. Instead, Shell seems intent on treating the proposed charges as non-negotiable. We cannot see how that approach could possibly be consistent with the obligation of Shell appointed directors to act in the best interests of STOS, or with the obligation of Shell companies to act in the interests of the various joint ventures of which they are part.
[14] In the period between these letters Shell tabled its proposal for STOS to be replaced by a 100% Shell owned entity. It also invited Todd and OMV as joint Maui venturers to meet on 1 April 2005 to discuss the proposal. A meeting occurred, but Todd did not attend. Correspondence followed and a further Maui meeting on 14 April 2005. Again Todd did not attend.
[15] Then on 21 April 2005 at a further Maui meeting attended by all three parties, Shell and OMV voted in favour of a resolution that:
The PMCs no longer have confidence in STOS’s ability to perform its duties under its Maui Contract of Employment in an efficient and timely manner.
The resolution further provided for various steps to be taken to have Shell (Petroleum Mining) Company Limited assume the operator’s role, in the event STOS resigned in response to the no confidence resolution. However, Mr Tweedie voted against the resolution and also contested its validity on the basis that it was not competent for the joint venturers to replace STOS otherwise than by a unanimous decision.
[16] In the immediate aftermath of the Maui meeting Shell wrote letters inviting STOS to resign from its operatorships in relation to the Omata Tank Farm and the Western Platform and Pohokura Fields. Also on 21 April Shell called for a meeting of the STOS Board on 29 April to consider further proposed resolutions. The principal proposed resolution provided that:
The Company (STOS) is to give the requisite notices (to the extent that notices have not already been received by the Company removing the Company as operator/provider of operator services and expertise), on or as soon as possible after 29 April 2005, that it will cease to be operator or otherwise provide operator services and expertise in respect of Maui, Pohokura, Omata, PEP 38481 and PEP 38482 (Western Platform).
This, the first resolution, also provided that the notices to be given by STOS would be effective on 1 November 2005 with reference to Maui, Pohokura and the Omata Tank Farm and on 1 May 2006 in relation to Western Platform. Further proposed resolutions designed to facilitate this essential outcome followed resolution 1.
[17] Mr Tweedie wrote on 22 April to the other STOS directors suggesting that the proposed resolutions raised contractual and governance issues which were fundamental to STOS’s business and continued viability. He sought a deferment of the 29 April meeting to 12 May and, when this was declined, advised of Todd’s intention to seek interim relief. On 27 April Todd served the proceeding.
[18] The interim injunction hearing occurred the following day culminating in the decision delivered in the late evening. The Judge noted at the commencement of her decision that the hearing had proceeded “on an essentially Pickwick basis”, but added that regardless of the urgency with which the matter had been brought before the Court she did not apprehend that Shell had been prejudiced “as there has been a considerable background to the matter”. Shell was represented by counsel (not Mr Hodder) and filed a detailed notice of opposition and two affidavits from Mr Bansal, one part-way through the hearing.
[19] The injunctive relief which was granted prohibited the Shell directors on the STOS Board from voting in favour of the proposed resolutions and prohibited the various PMCs, STOS itself and Maui Development Limited from taking any steps towards implementation of the phase out of STOS in its operator’s role. The Judge made certain further orders, including that the substantive proceeding was to be heard expeditiously and that the interim orders related to “no other than the Maui joint venture”.
[20] However, this limitation had not been sought by Todd and, after a further hearing on 29 April, Goddard J recalled that aspect of her decision on the basis it arose from a misapprehension on her part, that it would render the relief granted “essentially meaningless”, and did not therefore reflect her intention. Hence, in the end result, the injunction which remains extant prevents STOS ceasing to provide its services to Maui, Pohokura, Western Platform and the Omata Tank Farm.
Post hearing developments
[21] Without objection both Shell and Todd adduced updating evidence as to events which have occurred since the High Court hearing in April. Two matters arise from this evidence.
[22] On 13 May 2005 Shell sent to the other joint venturers in Pohokura and Western Platform notices calling for them to vote upon a proposal that STOS be removed as operator pursuant to an article in the joint venture operating agreement. The notices recorded that an affirmative vote of at least two of the joint venture parties having a participating interest of not less than 70% (Pohokura) and 75% (Western Platform) would enable written notice of removal to be given to STOS.
[23] Unsurprisingly, Todd took immediate exception to this initiative. In essence it contended that calling upon the joint venturers to vote by notice on the issue pursuant to an article in the joint venture operating agreement was misplaced, because it was the technical services agreement between the joint venturers and STOS which governed termination of the latter’s contract. Todd considered that removal under that agreement required a unanimous decision, effective on 12 months written notice. In light of Todd’s opposition Shell indicated its preparedness to defer any action with reference to the notices to vote until 18 May 2005 so that interim relief might be sought. Such was done. The statement of claim in this proceeding was amended by the addition of two further causes of action, one relevant to each of the affected joint ventures. The hearing of a further interim injunction application is pending in the High Court.
[24] The second development concerns the ongoing dispute as to the terms of engagement of SIEP by STOS. (Refer paras [11] to [13]). STOS wrote to Todd as the owner of the McKee and Mangahewa fields giving notice pursuant to technical services agreements under which it operates in relation to those fields that updated terms would apply with reference to SIEP’s services to STOS. By letter dated 9 June 2005 Todd rejected the updated terms. Thereby, by virtue of a clause in the agreements, a termination of STOS’s services as operator for these fields is brought about, effective 12 months after the rejection, that is 9 June 2006.
[25] In terms of the services which STOS provides the loss of the McKee and Mangahewa fields would represent about 13% of its total business. Were STOS to cease to be the operator for the three fields and the tank farm, which are the subject of the injunction, and for McKee and Mangahewa, the total loss of business would be about 84%. A loss of this order would have a dramatic impact upon STOS.
What is STOS?
[26] Mr Hodder commenced his argument in this Court by addressing this issue, since he argued that any consideration of Todd’s causes of actions in the substantive claim required an appreciation of STOS’s character and function. He submitted that in the High Court the arrangements affecting STOS were not considered in the context of the matrix of the contracts as was necessary, rather in what he termed an isolated company law environment. The heads of agreement by which the arrangement between the Shell and Todd Companies was restructured in March 2002 is most relevant.
Heads of Agreement (HOA)
[27] The HOA is a relatively brief document, to which are attached a number of schedules including one of direct relevance to STOS. The introduction to the HOA records that Shell and Todd have agreed to restructure the arrangements between them concerning the prospecting, exploration and mining for petroleum in the Maui field which were originally contained in the 1955 agreement. The HOA contains the new arrangements which are to prevail.
[28] With reference to STOS, clause 5.1 provides:
On or before 31 July 2002, the parties will enter into an agreement governing the relationship of Shell and Todd concerning, and the role and operations of, STOS. The agreement will contain and expand on the core terms set out in, or agreed under, schedule 3. Until such agreement is entered into, those core terms will govern that relationship, that role and those operations.
Because the agreement which was to be concluded by 31 July 2002 has not eventuated the core terms still apply.
[29] Clause 7, under the heading “Dispute resolution” contains detailed provisions for the mediation, and ultimately the arbitration, of disputes between the parties “about the construction or performance of this Agreement”. These provisions are of direct relevance to Todd’s fourth and sixth causes of action and we shall return to them in that context.
[30] A number of miscellaneous matters are governed by clause 9 of the HOA, including:
Relationship of parties
9.8Nothing in this Agreement or in the relationship between the parties will be construed as:
(i) creating a joint venture, partnership, trust or fiduciary relationship;
(ii)giving a party any of the rights, or subjecting a party to any of the liabilities, of a partner, trustee or fiduciary; or
(iii)otherwise constituting a party as the agent, representative or employee of the other party for any purpose whatever.
Terms as to STOS
[31] These, contained in Schedule 3, are headed “STOS Core Terms”. Clause 1.1 provides:
1Services
1.1Shell and Todd will continue to provide prospecting, exploration, development, mining, production and similar services concerning Petroleum (Services).
Clause 1.2 records that Services will be available not only to Shell and Todd and their associated companies, but also to other entities.
[32] Clause 2 provides:
2 Structure
2.1(By 31 July 2002) Shell and Todd will determine to carry on the business of providing Services either (as now) through an unincorporated joint venture between Shell and Todd (with STOS acting as nominee and/or bare trustee for Shell and Todd as joint venturers, or (indirectly only) through STOS as a full operating company acting in its own right (in either case, the Venture).
By clause 2.2 it is agreed that Shell and Todd will have equal shares in the Venture unless and until they agree otherwise (which they have not). Clause 2.3 provides:
The provisions of this schedule will be construed, and/or modified to the extent necessary, to give effect to the ongoing business structure for the Venture determined under clause 2.1.
[33] Clause 3 provides:
3Governance
3.1Each of Shell and Todd will be entitled to appoint up to three persons as members of the principal body (for example, the board of directors of STOS and/or an operating committee) responsible for governance of the Venture (the Governance Body).
Shell is entitled to designate one of its appointees as the chairperson or managing director of the Governance Body, who will have a casting vote: clause 3.2. By clause 3.3 it is provided:
The Governance Body will determine whether and the extent to which the Venture provides Services and/or Scoping Studies and Evaluations (as those terms are defined in the AMIA) for any project or venture.
The balance of the clause requires priority to be accorded to projects or ventures in which Shell or Todd participate to a defined level.
[34] Clause 5, to which we have referred (para [9]), is relevant to the role of SIEP, and relevantly provides:
5SIEP assistance
5.1The Venture will request from Shell International Exploration and Production (or such other Shell Affiliate as Shell may nominate) (SIEP), and Shell will procure SIEP to provide to the extent requested, any and all available technical support, advice and other services reasonably required by the Venture to provide Services.
The balance of the clause and clause 5.2 and 5.3 define the basis upon which SIEP is to be remunerated. That question, of course, became a matter of dispute between Shell and Todd shortly after the HOA was signed, with the result that SIEP has been remunerated on the basis of a number of interim arrangements agreed to from time to time.
[35] Clause 6 provides under the heading “Venture fees” that Services are to be provided for any venture or project on the basis that the Venture will recover fees for its Services from third party entities including a return for the Venture on its intellectual, personnel and physical resources/property. However, where only Shell and Todd are the participants in a venture or project, Services are to be provided by the Venture on a costs recovery basis only. Clause 8 provides that Services provided by the Venture will be subject to a technical services agreement (TSA), the contents of which may vary where Shell and Todd are involved on the one hand, and third parties on the other.
[36] Clause 11 provides:
11 Funding arrangements
11.1Shell and Todd will enter into any and all arrangements reasonably required from time to time by the Governance Body to fund the Venture, and will make contributions in this regard equal to their respective interests in the Venture.
[37] Finally, clause 16, headed “Ownership of assets” provides:
16.1The Venture will not hold material assets (including any and all Petroleum prospecting, exploration and mining permits and licences of any kind whatever) on trust, or otherwise, for Shell and Todd. Instead each of Shell and Todd will hold their respective interests in their own names in accordance with the applicable joint venture operating agreement.
To give effect to this agreement clause 16.2 provides that assets held by the Venture on trust for the parties as at 1 March 2002 were to be transferred to their beneficial owners within 60 days.
Some observations
[38] The HOA envisaged the conclusion of a new agreement within a five month period with reference to STOS. A choice was to be made between continuing to operate it as a nominee or bare trustee for Shell and Todd, or as a full operating company acting in its own right. But that choice was not made, since a new agreement was not concluded by the due date, 31 July 2002.
[39] There appears to be some tension between clause 9.8 of the HOA and the core terms by which Shell and Todd agree to provide petroleum related services through a Venture, the business of which is effected through STOS. The agreement contemplates that the relationship between the parties will involve no partnership, trust or fiduciary element. Yet, at least at this stage and in the absence of full evidence, it is difficult to appreciate how the business of providing Services through a Venture conducted through STOS does not give rise to some degree of special relationship between the parties.
[40] The label an “unincorporated joint venture” is used to describe the Venture in core term 2.1. The Venture involves a number of parties. Shell and Todd are its equal owners. The business of providing Services is conducted through STOS. SIEP provides assistance to the Venture on defined terms. There are also the field owners (including Shell and Todd) to whom the Services are provided by the Venture. Such field owners pay for the services on a defined basis which differentiates between Shell and Todd on the one hand, and third party entities on the other.
[41] Although as noted above core term 2.1 contemplated that STOS may become a full operating company acting in its own right, such has not occurred and it continues to act as a nominee or bare trustee for the principal parties. Nonetheless, STOS is of course an incorporated company. Its total budgeted expenditure for 2005 was $362m. This figure includes about $73m by way of fixed overheads which STOS expected to incur. The balance of $289m represents the cost of Services to be provided during the current year. These costs will be directly met by the field owners. Likewise, STOS’s overheads are allocated to and met by the field owners on a prescribed basis. On the basis of these figures counsel were in agreement that if the proposed resolutions were implemented, STOS would lose about 84% of its business.
[42] The HOA includes in schedule 2 a sample Joint Venture Operating Agreement (JVOA), which provides for the appointment of an operator to carry out joint operations on behalf of the participating interests, with STOS to be the initial operator. A schedule to the JVOA sets out the accounting procedure, including a general purpose in paragraph 1.1.1:
The purpose of this Accounting Procedure is to establish equitable methods for determining charges and credits applicable to operations under the Agreement which reflect the costs of Joint Operations to the intent that each Party shall neither gain nor lose in relation to other Parties and Operator shall neither gain nor lose in relation to other Parties by reason of the fact that it serves as Operator. (emphasis added)
The TSAs by which STOS is engaged as operator for the various fields reflect this essential aim.
[43] Expenditure, including the overheads incurred by STOS, is apportioned among the various fields and the various participants. It holds assets on behalf of the various field owners. It operates a common bank account, through which pass payments made by the field owners, or borrowings, required to meet the costs of field operations. The governing principle remains that of no gain/no loss.
[44] Consistent with such approach the annual reports and audited financial accounts for STOS record that its only capital is share capital of $2000, that “no trading activities were undertaken during the year”, that there are no contingent liabilities or capital commitments, since STOS “was non-trading during the year ended 31 December …”. It is clear, therefore, that STOS is indeed a non-trading company, without assets and which is subject to a no gain/no loss philosophy.
[45] Governance lies with the STOS Board. Its role is to determine whether and the extent to which the Venture provides Services for any field. Mr Hodder argued that the directors had dual roles, being both members of the Governance Body and company directors of STOS itself. He characterised the former role as “fundamental when it is necessary to distinguish between them”.
[46] At least at this stage we find the suggested distinction elusive. Implicit in it is agreement to employ a Governance Body distinct from the directors of STOS and that Shell could lawfully use its casting vote to effect radical change in the fundamental contract between Shell and Todd. But the HOA is the fundamental agreement. By virtue of the HOA, Shell and Todd agreed to restructure their existing arrangements pertaining to the Maui field. The parties also agreed by virtue of the STOS core terms to continue to provide exploration services. This unincorporated services joint venture would be conducted through STOS, whether as a nominee/bare trustee or as an operating company in its own right. Absent a choice between the two models, STOS continues to act in the former capacity. There are no governance provisions other than those in relation to the STOS board of directors. On this analysis we are unable to discern a basis for the contention that there are dual roles resting upon the STOS directors.
The causes of action
[47] Todd asserts six causes of action in its substantive claim. Each is said to provide a sufficient basis to prevent a vote upon, or implementation of, the resolutions for removal of STOS from the four operatorships. It is convenient to consider the causes of action in turn.
Appointment of directors
[48] The constitution of STOS, dated 23 June 1997, relevantly provides in clause 14.2.1 that upon re-registration of STOS under the Companies Act 1993 the directors of STOS would comprise the persons named as such in the re-registration application. Todd’s three nominees to the Board, Messrs Crowe, Selvadurai and Tweedie, are directors by virtue of this clause.
[49] By contrast the Shell appointees to the Board, Messrs Bansal, Sanderson and Warren, were variously appointed in 2003 and 2004. They were not named as directors in the re-registration application.
[50] Clause 14.3.1 of the Constitution provides for the appointment and removal of directors by notice:
Subject to clause 14.2, the Directors are the persons appointed from time to time as Directors by a notice in writing signed by a Shareholder or Shareholders exercising the rights of appointment given to the Shareholders pursuant to the Joint Venture Agreement and who have not resigned or been removed or disqualified from office under this Constitution. (emphasis added)
Because the 1 March 2002 Heads of Agreement terminated the previous Joint Venture Agreement, Todd claims that the subsequent appointments of the three Shell directors were invalid. They may not attend and vote at a meeting of the Board, including in relation to the proposed resolutions. To do so would be in breach of clause 17.4.1 of the Constitution, whereby only duly appointed directors may vote, and s 128 of the Companies Act by which management of a company is vested in its board.
[51] When the HOA was concluded core term 14.1 provided that the constitution of STOS would be amended “to the extent necessary to give effect to this Agreement”. However, the constitution has not been amended. Hence, there is a hiatus to the extent that the mechanism for appointment of new directors refers to appointment by the shareholders pursuant to the Joint Venture Agreement, which of course has been terminated.
[52] Shell resists this cause of action on various grounds. It maintains that the reference to the Joint Venture Agreement in clause 14.3.1 of the STOS Constitution includes any substitute for that Agreement, in particular the present HOA. Implication of a term to that effect is said to be the purposive and correct result. Moreover, Shell’s nominees have in fact participated in Board meetings and decisions since their appointments, until now without objection from Todd. Accordingly it is said Todd is estopped from denying the validity of the appointments.
[53] Section 158 of the Companies Act is invoked:
The acts of a person as a director are valid even though –
(a) The person’s appointment was defective …
Finally, the technical impasse is characterised as one to which s 154(1)(b) of the Companies Act responds, that the High Court may appoint directors if “it is not possible or practicable to appoint directors in accordance with the company’s constitution …”. The exercise of this jurisdiction, we note, is dependent upon an application being made by a shareholder (or creditor) and the High Court being satisfied that it is in the interests of the company for the Court to make appointments.
[54] Mr Smith argued that the wording in clause 14.3.1 of the STOS Constitution was unambiguous and that there was no basis upon which to imply a reference to the HOA in lieu of the Joint Venture Agreement. The Constitution was susceptible to amendment by special resolution and indeed its amendment was contemplated in core term 14.1 of the HOA. This was the cause of the problem. An estoppel should not be raised against Todd, since it had only become aware of the invalidity recently and there was no representation by Todd that it accepted the validity of the Shell appointments, much less an alteration of position on Shell’s part in response to the suggested representation. Finally, counsel submitted that sections 126 (“a person occupying the position of a director” is a director) and 158 of the Companies Act did not avail Shell because the former was not available to remedy a defective appointment of a director and the latter did not apply when no power of appointment existed, as opposed to there being a power which was defectively exercised.
[55] Goddard J regarded this cause of action with scepticism, commenting that she was not convinced that the Shell directors were not validly appointed. However, she concluded that definitive resolution of the issue required further evidence and argument.
[56] We likewise regard this cause of action as unattractive and technical. Plainly the parties contemplated that the STOS Constitution would be amended in light of the new arrangements contained in the HOA. Such was not done. Nonetheless, without objection from Todd, Shell appointed directors to the Board who have, without demur (until now), participated fully in the Board’s affairs, including the appointment of one of them as chairperson and managing director of the Board. It is fundamental to the parties’ agreement that they are joint venturers. Any construction of the contractual documents that would exclude either of them from the operation of the joint venture would be repugnant to their agreement. Although this aspect raises technically arguable issues, we would not regard such arguments, standing alone, as affording a sufficient basis for injunctive relief in the circumstances of this case.
Disposition of half of STOS’s assets?
[57] Todd’s second cause of action is based on the major transactions provision, s 129, of the Companies Act 1993. Thereby, “a company must not enter into a major transaction unless the transaction is … (a) approved by special resolution”: s 129(1)(a). A special resolution requires a 75% majority vote, which is unattainable absent Todd’s support. This will not be forthcoming. Subsection (2) defines assets to include property of any kind, whether tangible or intangible, and a major transaction in relation to a company means:
(b)The disposition of … assets of the company the value of which is more than half the value of the company’s assets before the disposition … .”
Todd contends that if the subject resolutions were passed, STOS would shed about 78% of its assets, being the contract of employment in relation to Maui, and the TSAs for Pohokura, Western Platform and Omata.
[58] Shell contends that this cause of action is misconceived. STOS, by definition, is a bare trustee. It has no assets and therefore nothing which it may shed by disposition. Moreover, whether STOS has assets in terms of s 129(2) is a question of law, not essentially a question of fact as Goddard J considered to be the case. Hence, on the basis of this analysis we were invited to characterise the cause of action as untenable.
[59] Todd, however, contends that assets are very widely defined. The contracts under which STOS provides its services are property in which the company has an interest or a right. Their value is said to be the amount to which each contract contributes to the fixed overheads of STOS. For although it is a bare trustee cost recovery company, the fact remains that each contract has a value to STOS in that sense.
[60] It was inappropriate to rely upon STOS’s audited financial statements, as Shell did, because assets were defined to include property of any kind, and the right to recover overheads was a valuable right in itself. Counsel supported the conclusion reached by Goddard J, that the value of the contracts in the context of s 129 is essentially a question of fact and one the resolution of which will depend upon expert accounting evidence.
[61] We are satisfied that the view reached by the Judge was one which was open to her in the circumstances of this case. The parameters of s 129 have not been considered to any significant extent in decisions of either this or other courts. The arrangements surrounding STOS are complex and we consider that interpretation of the contractual arrangements must await further evidence as to the context in which those contracts arose and have been updated until now. But while we prefer to defer a decision on the construction of s 129 until there is a substantial factual matrix, we consider Mr Smith’s response to Mr Hodder’s argument to be well arguable. The parties have elected to employ the corporate form. The courts are reluctant to find that the legislative consequences of the Companies Act 1993 are to be put aside in favour of an approach that ignores such decision.
[62] That said, there is force in Mr Hodder’s submission that it is surprising there is no accounting evidence before us to substantiate Todd’s contention as to the value of the relevant operatorship contracts. Cudden v Rodley CA67/99 31 March 1999 is authority for the proposition that the concept of value in s 129 is intended to reflect the market value of a company’s assets, in relation to which audited financial statements (in that instance showing fixed assets at their historical cost less depreciation) may be less than persuasive. The case also illustrates the assistance which may be gained from expert evidence, even at an interlocutory stage, at least where there is uncontradicted valuation evidence which undermined the contention
that the relevant transaction would effect a disposition of half the value of the company’s assets. Here, neither side has adduced valuation evidence. Like Goddard J, we must reach conclusions on the basis of the available evidence which is not capable of final interpretation at this stage and in the present context. For these reasons we consider this cause of action does raise serious issues for trial.
Best Interests of STOS
[63] This cause of action is based on s 131 of the Companies Act which relevantly provides:
Duty of directors to act in good faith and in best interests of company – (1) Subject to this section, a director of a company, when exercising powers or performing duties, must act in good faith and in what the director believes to be the best interests of the company.
But these obligations may be compromised:
(4) A director of a company that is carrying out a joint venture between the shareholders may, when exercising powers or performing duties as a director in connection with the carrying out of the joint venture, if expressly permitted to do so by the constitution of the company, act in a manner which he or she believes is in the best interests of a shareholder or shareholders, even though it may not be in the best interests of the company.
[64] Todd asserts against the seventh appellants, the three Shell-appointed directors to the STOS Board, that their voting in favour of the proposed resolutions would contravene s 131, in that although STOS conducts a joint venture and the defendants are nominees of one of the parties, the constitution of the STOS does not expressly permit directors to act in a manner believed to be in the best interests of the particular shareholder : s 131(4).
[65] Goddard J, after noting the respective concerns of Shell and Todd as captured in the letters earlier reproduced in part (paras [12] and [13]), concluded that there was “apparent equality (in) the opposing viewpoints” which militated in favour of preserving the status quo.
[66] Mr Hodder submitted that the contention the STOS directors in voting in favour of the subject resolutions would not be acting in the best interests of the company, was wrong in principle, if not misconceived. Shell and Todd, as joint venturers owed no fiduciary duties to each other. Clause 9.8 of the HOA provided as much. The proposed resolutions represented a decision by the STOS directors in their capacity as the governance body for the joint venture, not a decision in their capacity as STOS directors. Therefore, the best interests of STOS were irrelevant. Section 131 did not apply.
[67] We are unable to accept this argument for reasons already expressed. Despite counsel’s contention that the board members of STOS are both the governance body for the Shell/Todd Joint Venture, and the directors of the company, we are unpersuaded as to the existence of this distinction.
[68] Assuming that s 131 applies, Shell maintains that it is not seriously arguable that a vote for the proposed resolutions would be in breach of the statutory test. Such test is not an objective one. Directors must act in good faith and in what they believe to be the best interests of the company. Shell’s commercial assessment of the position was set out in Mr Bansal’s letter of 23 March 2005 (para [12]). Given that assessment, it would not be competent to find that in supporting the proposed resolutions the Shell directors acted otherwise than in good faith, or contrary to what they subjectively believed to be the best interests of STOS.
[69] By reference to the decision of this Court in Latimer Holdings Limited v SEA Holdings New Zealand Limited (2004) 9 NZCLC 263,694, a s 174 oppression case, we were reminded that Judges are ill-equipped to evaluate matters of business strategy, and should not substitute their views for those of management, nor question the correctness of managerial decisions, unless such decisions were plainly arrived at in bad faith. Further, the decision of Mahon J in Berlei Hestia (NZ) Limited v Fernyhough [1980] 2 NZLR 150 was cited as authority for the proposition that directors who by definition were the nominees of a shareholder had a special responsibility to those who nominated them, not an undivided responsibility to the corporate entity. Here, it was appropriate for the Shell-appointed directors to represent and advocate the interests of their appointor.
[70] Todd submitted that the best interests requirement in s 131 was fully binding upon the STOS directors. Subsection (4) provided the means to expressly permit directors of a joint venture company to act in the interests of the shareholder which nominated them, as opposed to the interests of the company itself, but this exception had not been incorporated in the STOS Constitution in 1997. Nor did the core terms to the HOA contemplate an amendment to the Constitution to allow nominated directors to prefer the interests of their appointor over STOS’s interests. There was in this case, therefore, no blurring of the distinction between the duties owed by the directors to STOS on the one hand and to Shell and Todd as joint venturers on the other. Hence, it was submitted, the STOS directors must first have regard to the interests of that company and only thereafter to the interests of Shell or Todd.
[71] The key interest of STOS which counsel for Todd identified in the present context was its ability to recover its fixed overhead costs and, ultimately, its ability to survive as the provider of operator services to the various oil and gas fields. Counsel accepted that the best interests test is subjective and that there was an initial onus on Todd to demonstrate the existence of a case that the Shell directors in voting for the proposed resolutions would not be acting in STOS’s best interests. Here it was said that support for the resolutions would be so contrary to STOS’s interests as to defeat a claim of good faith. In this context the evidence of Mr Bansal that the overheads of STOS are incurred in direct proportion to the demands upon it and that, therefore, the loss of the major part of its business would not have disastrous consequences, was challenged as mere assertion.
[72] Counsel for Todd maintains that the reality of the situation is that there will be insoluble problems in relation to overheads, with the result that if STOS were to resign as operator of the four fields its demise would be virtually inevitable. Evidence contained in the first affidavit of Mr Selvadurai was said to provide direct support for these contentions. Todd also maintains that the directors of STOS were given very little time, and information upon which, to consider the implications of the proposed resolutions. As was conceded in Mr Bansal’s first affidavit, Shell had taken a commercial decision to secure STOS’s resignation from its operatorship of the Maui field and, shortly thereafter, the proposed resolutions were framed for consideration at a 29 April board meeting. This sequence demonstrated that Shell, and its nominee directors, were in pursuit of the former’s interests, not the best interests of STOS.
[73] We are satisfied that the starting-point in considering the strength of this cause of action is s 131(4) of the Companies Act. The absence from the STOS Constitution of a power for directors to prefer the interests of the joint venture shareholder which nominated them, is obviously significant. Much more problematic is the contention that the Shell directors on the STOS Board would necessarily act against the best interests of the company by voting in favour of the proposed resolutions. Todd’s case appears to be predicated on the assumption that it is necessarily in STOS’s best interests for it to continue to function as a field operator and at its present level. Otherwise its viability may be compromised.
[74] While we have some concerns in relation to this last point, an adequate assessment of the best interests issue is not achievable in the present context and absent evidence in cross-examination. We are satisfied that there is at least a seriously arguable case to be determined at trial.
Dispute resolution
[75] The fourth and sixth causes of action in Todd’s statement of claim are against the first appellant (Shell) and the sixth appellant (Shell New Zealand Holding Company Limited), respectively. The claims are similar. It is alleged that the disputes between the parties, which have become the subject of the proposed resolutions, are fundamental in nature and fall to be resolved in terms of the disputes resolution clauses of the HOA. Otherwise, it is said, both Shell companies will be in breach of clause 9.1 of the HOA, whereby the parties to it are obliged to take all steps reasonably required to allow each side to obtain the full benefits of the agreement. One such benefit is the dispute resolution provisions in clause 7. Shell Holding provided a performance guarantee in relation to the HOA, which is why it is named in the sixth cause of action.
[76] The dispute resolution provisions begin:
Notice
7.1A party may notify the other party if the party considers that a dispute exists between the parties about the construction or performance of this Agreement (including the determination of part or all of any agreement to be entered into under this Agreement). The notice will describe briefly the dispute, and state that it is given under this clause 7.1.
[77] Clauses 7.2 to 7.4 set out an escalating range of dispute resolution methods, from mediation to arbitration. Finally, clause 7.5 provides that the parties are not precluded from obtaining injunctive relief which is necessary for the urgent protection of that party’s rights or property.
[78] Todd’s case is that the present dispute is between Todd and Shell. By reference to the notice of meeting which accompanied the proposed resolutions Todd argues it is clear that the dispute is one governed by the HOA. The notice of meeting recorded that Shell had reviewed the STOS operating model in light of a number of ongoing concerns, in particular the impasse between it and Todd as to payment for SIEP’s services to STOS. The notice continued:
It is clear an impasse has been reached with no prospect of finding a mutually acceptable position within the framework of the existing STOS operating model.
Under the heading “No Confidence” Shell expressed the view that the STOS operating model was no longer able to deliver services in an effective and timely manner and in accordance with contractual requirements. Hence, the notice called the meeting on 29 April 2005 to consider the proposed resolutions.
[79] Mr Smith submitted that the alleged dysfunctionality between Shell and Todd as owners of STOS, the ongoing use of the STOS operating model and the use of SIEP as an advisor to STOS were issues pertaining to the “construction or performance” of the HOA : agreement 7.1. Shell and Shell Holding were bound to adopt the disputes resolution process. The STOS Board was empowered by core term 3.3 to determine “whether and the extent to which the Venture provides Services … for any project or venture” but, as the notice calling the meeting demonstrated, the present issues were beyond the Board’s powers.
[80] Shell contends that the dispute is one as to the provision of Services by the Venture, is therefore for the STOS Board and is susceptible to determination by the casting vote of the chairperson. STOS’s resignation as operator to the Maui, Pohokura, Western Platform and Omata projects was described as a commercial and/or technical decision of the very kind which the STOS Board was required to decide. By contrast, the decision was not one which could sensibly be referred to one or other of the dispute resolution processes.
[81] What is the substance of the dispute? Goddard J found that the existence of clause 7 in the HOA at least appeared to provide a foundation for the two causes of action, but in the exigencies of that hearing she was not in a position to reach an informed judgment about the matter. We consider that Todd has a seriously arguable case in relation to these causes of action. The existence of STOS is a central feature of the arrangements contained in the HOA. Clause 5 contemplated the conclusion of a new agreement governing the ongoing role and operation of STOS. In the meantime the core terms contained in schedule 3 were to apply. In general STOS was to remain the vehicle through which Shell and Todd provided operational services for the Maui field, and for such other projects and ventures as the STOS Board determined was appropriate.
[82] Although in form the first of the proposed resolutions relates to the provision of services for ventures, and therefore relates to whether such services will be provided in terms of core term 3.3, in substance we think the resolution is well capable of producing the result that STOS will cease to exist as a provider of operational services. Whether that is likely to be the case is a question of fact, which must await evidence in a substantive context. At this stage we accept that Todd does have a seriously arguable case both in fact and law in relation to the contentions it advances relevant to these causes of action.
[83] We are conscious also of an additional dimension of these causes of action. Assuming Todd is successful in demonstrating that the issues of dysfunctionality, the viability of the STOS operating model and the retention of SIEP are within clause 7.1, and provided the requisite notice to activate that clause is given, the forum would become arbitration. In this situation, and as Lord Mustill observed in Channel Tunnel Group Limited v Balfour Beatty Construction Limited [1993] AC 334 at 365:
The purpose of interim measures of protection … is not to encroach on the procedural powers of the arbitrators but to reinforce them, and to render more effective the decision at which the arbitrators will ultimately arrive on the substance of a dispute. I prefer the view that when properly used such measures serve to reinforce the agreed method, not to bypass it.
We adopt that observation. It serves to emphasise that these are causes which have the potential to govern forum, which in the present context is in itself a significant consideration.
Termination of Maui contract of employment
[84] By the fifth cause of action Todd alleges that it would not be competent for the STOS Board to resolve to cease to provide operator services to the Maui field. This cause is based on the terms of the Maui contract of employment, which are different to the terms by which STOS provides its services under the TSAs to other venture or projects.
[85] The relevant provisions in the Maui contract are clauses:
14.2Subject only to such rights as may arise out of the breach of this Contract, this Contract shall terminate on the dissolution of the Maui Joint Venture PROVIDED THAT this Contract may be earlier terminated in conformity with the provisions of 4.6 of the Maui Joint Venture,
and
4.4No variation from the forms of contract set forth in the Third, Fifth, Sixth, Seventh and Eighth Schedules hereto shall be made without the unanimous consent of the Petroleum Mining Companies.
The sixth schedule contains the form of contract for STOS.
[86] Clause 4.6 in the Maui Joint Venture Agreement provides:
4.6In the event that SIEP shall cease to be employed as advisor, then either the employment of Shell BP and Todd Oil Services Limited shall be continued or, after consultation with Offshore Mining, such other company as Shell Mining, BP Exploration & Todd Mining (who
will hold all shares in such company) shall mutually agree to form, shall thereafter be employed as an operator on the same terms and conditions mutatis mutandis as those contained the Sixth Schedule hereto.
It follows that STOS may cease to be the operator in relation to the Maui field in three ways: through breach of the contract of employment, through dissolution of the Maui Joint Venture Agreement and, in the event that SIEP ceased to be the advisor to STOS Shell and Todd may appoint a new operator on the same terms. There is, however, no provision for STOS to resign, by virtue of a decision of its board.
[87] Mr Hodder submitted that Todd’s case in relation to this cause was “not beyond argument” on a number of grounds. He argued for the implication of a term entitling STOS to terminate the agreement on reasonable notice, citing Power Co Limited v Gore District Council [1997] 1 NZLR 537 (CA). It was essential that the contract of employment contain a means by which it may be terminated, other than by reference to an external event of the kind recognised in the mechanisms for termination. By way of a fallback position, counsel submitted that at most this claim could only support relief in relation to the Maui operatorship. It is not relevant to the other three operatorships from which the proposed resolutions contemplate STOS’s resignation.
[88] Mr Smith submitted there was no scope for the implication of a term of the kind suggested. As a matter of contract there were only three methods by which the contact of employment could be terminated. There was no breach of the contract of employment which might give rise to a right to any party to terminate. Dissolution of the Maui joint venture required the unanimous agreement of the parties or may follow termination of the Gas Contract : clause 17 of the Joint Venture Agreement. Neither situation pertained. Nor had SIEP ceased to provide its services to STOS. Accordingly, absent the implication of a term which could not be done in the face of the terms agreed to by the parties, it was not competent for the STOS Board to pass the proposed resolutions.
[89] We accept the thrust of Mr Smith’s argument. The contractual arrangements between the parties clearly define when and how the Maui contract of employment may be terminated. There is not room for the implication of a term, in the face of those arrangements. The TSAs by which STOS provides its services for the Western Platform fields do allow for termination on notice by STOS or by a party to the joint venture. A similar provision has not been included in the Maui contract of employment. In the circumstances we are satisfied that Todd has a strongly arguable case in relation to this cause of action, albeit the claim relates only to the Maui field.
Balance of convenience : interests of justice
Test to be applied?
[90] The first three causes of action asserted by Todd allege that a vote upon the proposed resolutions would contravene the STOS constitution or the Companies Act 1993 and, therefore, invoke s 164 of that Act:
Injunctions – (1) The Court may, on an application under this section, make an order restraining a company that, or a director of a company who, proposes to engage in conduct that would contravene the constitution of the company or this Act or the Financial Reporting Act 1993 from engaging in that conduct.
Subsection (4) provides that relief may not be granted in relation to conduct “that has been completed”.
[91] Mr Smith submitted that the normal equitable considerations which govern the discretion to grant injunctive relief were of lesser importance where s164 was invoked. Australian Securities and Investments Commission v Mauer-Swisse Securities Limited [2002] NSWSC 741 was cited as authority for that proposition. Palmer J after a review of a number of Australian cases, summarised the relevant principles, including that the jurisdiction was statutory, not the court’s traditional equity jurisdiction and that the test was whether the injunction would have some utility or serve some purpose within the contemplation of the Corporations Act 2001.
[92] Section 164 has received little attention in New Zealand. In JJ International Limited v Streetsmart Limited HC AK CIV-2005-404-857 11 March 2005, Keane J, after reference to Australian cases, accepted that the s 164 jurisdiction was independent of the normal equitable jurisdiction and was to be exercised for the purposes of that Act, so that the Court was not constrained by the usual equitable considerations. This did not mean, however, that the balance of convenience and the interests of justice tests were to be ignored, although they assumed less importance. We note these conclusions were reached without argument against the contention that s 164 mandated a different approach. The same situation obtains in this case.
[93] In any event, in light of the views which we have formed, the final outcome will not vary depending upon the approach taken to the Companies Act causes of action. There are, of course, two claims which are contractual in any event. In these circumstances we shall not further consider the required approach to s 164, but rather adopt the usual more stringent approach.
The contentions
[94] Shell advanced a range of matters which can be summarised in four main propositions:
[a]That the Venture will be essentially hamstrung as a result of the interim injunction until determination of the substantive proceeding, which is many months away.
[b]That it is of fundamental importance to all affected parties and to the industry that there be the best possible delivery of operational services to the various fields. This can only be achieved independent of the STOS structure. Shell, has reached that conclusion, which should be accorded significant weight because, as the HOA demonstrates, the provision of operational services is dependent upon Shell personnel, experience and expertise. This is also why Shell holds the casting vote in relation to decisions of the STOS Board. Moreover the second respondent, OMV New Zealand Limited, supports Shell’s viewpoint. This was confirmed by its counsel Mr Stevens, in the brief submissions which he made to the Court.
[c]Decision-making in relation to the Venture was necessarily dynamic with reference to the specific contracts between STOS and the various field/tank operators. The contractual environment created by the parties was one where orders for specific performance would plainly be inappropriate, yet the present injunctive relief had that effect at least in the interim.
[d]If it proved that Todd has a valid case, monetary relief, whether damages or a share buy-out, would be an adequate remedy.
[95] Todd contended that if the proposed resolutions were passed it would not be possible to reverse their effect regardless of a successful outcome to the substantive proceeding. If STOS were permitted to resign from the four operatorships, its viability would be at risk, as would its ability to continue to provide services to the remaining operatorships. With reference to third parties, Todd submitted that the jobs of the STOS staff would also be put at risk and that there would be major disruption if STOS was to resign and seek to assign to a new entity numerous contracts it has with a range of providers.
[96] It is not accepted by Todd that damages would be an adequate remedy. At present through STOS it has a direct interest in the Venture by which services are provided to the various fields. The loss of that interest, upon substitution of a Shell entity as Operator, is not susceptible of evaluation for the purposes of damages. In any event, STOS has existed for many years and is the principal operator providing services to the New Zealand petroleum and gas fields. The matters of disagreement asserted by Shell do not suggest a level of dysfunction which requires that the STOS model be summarily dismantled. The submission continued:
There is no immediate imperative to permit Shell to proceed given that its complaints are diffuse, it is denied they could cause loss, they could be addressed by dispute resolution, and have an air of having been contrived in a paper trail leading to the proposed resolutions.
Hence, counsel submitted that the interests of justice favoured maintenance of the status quo until a substantive hearing.
Conclusion
[97] In general we consider that the arguments advanced on behalf of Todd are the more persuasive. STOS has existed for a very long time. We are satisfied that its continued existence will be seriously at risk if the proposed resolutions are passed. At the very least, implementation of the resolutions would involve serious disruption for STOS, its employees and other operators who rely upon its services. These factors indicate that maintenance of the status quo is a consideration of high importance.
[98] By contrast the Shell arguments relied significantly on acceptance of the view that Shell knows best and that its view as to the appropriate vehicle for the provision of services to the industry should not be doubted. In the context of this proceeding, that is an argument to the effect that the causes of action are weak and insufficient to justify the Court’s intervention. For reasons already given that is not a view which we share.
[99] We are satisfied that both in terms of the balance of convenience, and in the interests of justice, it is appropriate that the orders made by Goddard J in the High Court remain in place pending a substantive hearing.
Decision
[100] The appeal is dismissed.
[101] Todd is entitled to costs which we fix at $6,000 together with usual disbursements.
SOLICITORS:
Chapman Tripp Sheffield Young, Wellington, for First – Sixth Appellants
Russell McVeagh, Wellington, for First Respondent
Simpson Grierson, Wellington, for Second Respondent
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