Stacey v Watson
[2017] NZCA 542
•24 November 2017 at 4 pm
| IN THE COURT OF APPEAL OF NEW ZEALAND |
| CA464/2016 [2017] NZCA 542 |
| BETWEEN | NORMAN WILLIAM STACEY NORMAN WILLIAM STACEY, ANNE LOUISE SERRA AND KERRY DALE MCINTOSH AS TRUSTEES OF THE STACEY FAMILY TRUST |
| AND | DOROTHY VICKI WATSON DOROTHY VICKI WATSON AND DVW TRUSTEE LIMITED AS TRUSTEES OF THE DVW FAMILY TRUST |
| Hearing: | 9 October 2017 |
Court: | Gilbert, Venning and Wylie JJ |
Counsel: | P J Dale for Appellants |
Judgment: | 24 November 2017 at 4 pm |
JUDGMENT OF THE COURT
A The appeal is dismissed.
BThe first appellant must pay the respondents costs for a standard appeal on a band A basis together with disbursements.
____________________________________________________________________
REASONS OF THE COURT
(Given by Venning J)
Introduction
Mr Stacey and Ms Watson were financial advisers and directors of Diversified Investments Strategies Limited (DISL) and Diversified Wealth Management Limited (DWML).
The shares in DISL and DWML (together, Diversified) were held equally by the trustees of the Stacey Family Trust and the trustees of the DVW Family Trust.
During 2014 the parties agreed to sell the business of DWML and DISL to Fisher Funds Management Ltd (Fisher Funds) for $318,012.09. Fisher Funds paid $145,216.25 for DWML and $172,795.84 for DISL.
Mr Stacey and the trustees of the Stacey Family Trust allege that in the course of the sale process Ms Watson acted in breach of a fiduciary duty owed to them and that Ms Watson and the trustees of the DVW Family Trust acted in a manner towards Mr Stacey and the Stacey Family Trust which was unfair, prejudicial or oppressive in terms of s 174 of the Companies Act 1993. In the High Court Faire J dismissed both claims.[1]
Background
[1]Stacey v Watson [2016] NZHC 1891, [2017] NZCCLR 5.
DISL provided investment strategies and advice to private clients for individually managed portfolios. Mr Stacey and Ms Watson managed the portfolios online using an electronic investment administration service, AEGIS.
DWML’s business was funds management. It provided investment strategies described as the Law Retirement KiwiSaver Scheme (LRKS) and the Law Retirement Plan (LRP). DWML also offered managed funds to retail investors. A good number of DISL’s private clients were also investors in the DWML funds or in the LRKS.
Mr Stacey and Ms Watson were the directors of DISL and DWML. Each was actively involved in Diversified’s business. Mr Stacey was primarily responsible for research, preparation of monthly economic commentary, and preparation of fund fact sheets. Ms Watson had administration and information technology skills and experience in managing private clients. They worked together in an open plan office and regularly had lunch meetings at which they discussed the affairs of the companies. There was one other staff member, a Ms Johnstone, who was employed as a marketing and communications manager. From 2009 until 2014 Ms Watson and Mr Stacey each drew salaries of $100,000 per annum plus expenses.
The businesses faced challenges during 2013. DWML experienced reductions in its funds under management (FUM) and DISL suffered a reduction in funds under advice.
In the same period, the Financial Markets Authority (FMA) began to require fund managers to disclose the Total Expense Ratio (TER) for KiwiSaver funds. The TER is a method of calculating and presenting the costs that an investor incurs by using a fund manager. The LRKS had a relatively high TER, attributed to its “fund-of-funds” structure involving multiple layers of fees, and its relatively small size. After a meeting with the FMA on 11 December 2013, Mr Stacey and Ms Watson were effectively given an ultimatum by the FMA: either find a solution to the LRKS’s high TER by 31 March 2014, or the FMA would take regulatory action by moving to close down the LRKS.
Mr Stacey and Ms Watson accepted that, realistically, the LRKS would have to be sold. In practical terms, this would mean transferring the clients to another KiwiSaver scheme approved by the FMA. That, however, caused a further issue for Mr Stacey, Ms Watson and the companies. The sale of the LRKS would affect the remaining DWML funds, causing a reduction of the total FUM in the DWML pool. As a result, the percentage of the total FUM held by certain individual investors would increase, which would likely lead to some investors breaching rules around maximum investor interests. A reduction in the total FUM would also exacerbate the high fixed costs per member. Mr Stacey and Ms Watson therefore came to accept that they should look to sell or merge not only the LRKS but the whole of DWML’s fund operations.
Following the meeting with the FMA in December 2013, Ms Watson and Mr Stacey instructed a broker, BBY (NZ) Ltd, to solicit interest in the sale of DWML on a confidential basis. BBY received a number of expressions of interest. For a variety of reasons Mr Stacey and Ms Watson did not pursue the expressions of interest.
Following another meeting on 27 March 2014, the FMA agreed to allow Mr Stacey and Ms Watson a further three months to find a solution. The FMA suggested that they approach Fisher Funds to take over the LRKS, as Fisher Funds had taken over a number of other KiwiSaver schemes.
Mr Stacey and Ms Watson met with Ms Carmel Fisher and Mr Glenn Ashwell of Fisher Funds on 31 March 2014. Mr Ashwell indicated Fisher Funds was interested in acquiring LRKS. At the meeting it was also discussed that Mr Stacey and Ms Watson could be looking at the sale of their interest in DWML’s other funds and might also look to sell the DISL private clients.
There then followed a series of email exchanges and further meetings between Mr Ashwell, Ms Watson and Mr Stacey, which ultimately concluded with formal agreements for the sale of Diversified’s business to Fisher Funds.
Ms Watson first signed non-binding indicative term sheets (NBITS) on behalf of DWML and DISL on 2 May 2014. The final sale and purchase agreements (SPAs) were signed by Ms Watson on 30 May and by Mr Stacey on 4 June. As part of the SPAs, Fisher Funds agreed to employ Ms Watson. The SPA for DISL also included a buy-back provision in her favour.
After the SPAs had been concluded, Mr Stacey learnt that Fisher Funds were to pay Ms Watson a salary of $200,000 per annum plus a bonus of up to 30 per cent and, on reviewing the SPA for DISL again, he realised it contained the buy-back clause in her favour.
The Stacey Interests’ claims
Mr Stacey and the trustees of the Stacey Family Trust (together, the Stacey Interests) brought proceedings against Ms Watson and the trustees of the DVW Trust.
In their first cause of action the Stacey Interests claimed that Ms Watson owed them a fiduciary duty. They claimed that in breach of her fiduciary duty, Ms Watson failed to inform the Stacey Interests of all the benefits she derived from the sale of the business to Fisher Funds.[2]
[2]While the breach of duty pleaded was directed solely against Ms Watson, [41] of the amended statement of claim pleaded both Ms Watson and the trustees of the DVW Family Trust owed a fiduciary duty.
The Stacey Interests claimed that they have suffered loss in the sum of $435,453.95, calculated as a one half share of the difference between the amount received from Fisher Funds and the market value of Diversified’s business, said to be $1,188,920.
In their second cause of action the Stacey Interests claimed that, in breach of s 174 of the Companies Act, Ms Watson and the trustees of the DVW Family Trust acted in a manner that was unfair, prejudicial, or oppressive. They sought relief under that section upon such terms as the Court deems to be just.
The High Court judgment
Addressing first the question whether Ms Watson owed a fiduciary duty to the Stacey Interests, Faire J noted the relationship between directors and shareholders is not inherently fiduciary.[3]
[3]Stacey v Watson, above n 1, at [115].
The Judge referred to the leading decision of Coleman v Myers and the Australian case of Brunninghausen v Glavanics before concluding that there was no basis for finding a fiduciary duty on the basis of any imbalance of power, information or commercial expertise.[4] The Judge considered it important that DISL and DWML were not partnerships or joint ventures; they were incorporated companies.[5]
[4]At [115]–[121]; Coleman v Myers [1977] 2 NZLR 225 (CA) at 324; Brunninghausen v Glavanics [1999] NSWCA 199, (1999) 46 NSWLR 538.
[5]Stacey v Watson, above n 1, at [122].
The Judge accepted that as a director of DISL and DWML, Ms Watson owed a fiduciary duty to the companies but held that she did not owe a fiduciary duty to the shareholders of the companies.[6] Nor did the DVW Family Trust owe a fiduciary duty to the Stacey Family Trust as a fellow shareholder.
[6]At [125].
Faire J then considered the claim by the Stacey Interests under s 174 of the Companies Act. The Stacey Interests alleged that Ms Watson had acted oppressively by refusing to negotiate for a better price for DISL and DWML and that her motivation for selling at a low price to Fisher Funds was the attractive employment deal and the buy-back right she would receive.[7]
[7]At [130].
The Judge considered that the claim under s 174 of the Companies Act was flawed in a number of ways. The first was that while Ms Watson favoured a sale to Fisher Funds, she gave Mr Stacey opportunities to call off the deal to Fisher Funds and to pursue other options.[8]
[8]At [137].
A further flaw, in the Judge’s view, was that Mr Stacey’s decision to accept the offer from Fisher Funds was a business decision.[9] Although there was another offer for Diversified’s business which could possibly have resulted in a higher sale price, it was not for the Court to second-guess commercial decisions which involve the balancing of a number of factors.[10]
[9]At [139].
[10]At [141].
Faire J did not consider it necessary to determine whether Ms Watson’s salary at Fisher Funds was a “super-salary” as he found it did not affect the purchase price paid by Fisher Funds.[11]
[11]At [144].
On the issue of the buy-back option the Judge considered that Mr Stacey had sufficient opportunities to realise that the agreement included the option.[12] It was not concealed from him.
[12]At [145].
Faire J considered that the plaintiffs had not been able to show Ms Watson’s conduct resulted in any corresponding loss to shareholders or otherwise adversely affected them. He found that the conduct complained of was not oppressive, unfairly discriminatory, or unfairly prejudicial.
The Judge concluded by noting that, even if his conclusion regarding the substantive aspects of the claim was wrong, the damages claim by Mr Stacey and the trustees of the Stacey Family Trust was heavily inflated.[13]
The issues on appeal
[13]At [152].
The appeal raises two broad issues:
(a)Did Ms Watson owe a fiduciary duty to the Stacey Interests in relation to the sale process?
(b)Did Ms Watson or the trustees of the DVW Family Trust act oppressively in terms of s 174 of the Companies Act towards the Stacey Interests?
Within these two broad issues, there are a number of subsidiary issues which require determination:
(a)Was the salary Fisher Funds paid Ms Watson and its non-disclosure a breach of fiduciary duty and/or oppressive conduct?
(b)Was the buy-back clause in the DISL SPA and its non-disclosure a breach of fiduciary duty and/or oppressive conduct?
(c)Was Ms Watson’s conduct in the negotiations with Fisher Funds and towards Mr Stacey oppressive?
Did Ms Watson owe a fiduciary duty to the Stacey Interests?
The Stacey Interests allege that Mr Stacey and Ms Watson owed fiduciary duties to each other and their respective family trusts because:
(a)they shared equally in the profits of the two companies, which were treated as related companies;
(b)there was a close inter-personal relationship between Mr Stacey and Ms Watson;
(c)there was a relationship of trust and confidence between Mr Stacey and Ms Watson; and
(d)the companies were operated as a “quasi-partnership”.
The equal sharing of the profits followed the equal shareholding in the companies. Mr Stacey and Ms Watson had a close working relationship but there was nothing obviously special about it, such as to give rise to a fiduciary duty. Further, a number of parties are in relationships which involve trust and confidence but which do not give rise to a fiduciary relationship.
Mr Dale confirmed that the appellants relied particularly upon the “quasi-partnership” nature of the relationship. He submitted that all the elements of a “quasi-partnership” existed between Mr Stacey and Ms Watson. A cornerstone of a partnership, joint venture or orthodox fiduciary relationship is open dealings between the parties.
As Tipping J in the Supreme Court in Chirnside v Fay recognised, there are two situations in which a relationship can give rise to fiduciary duties.[14] The first is where the relationship is of a kind which, by its very nature, is recognised as being inherently fiduciary. The recognised categories of relationships include solicitor and client, trustee and beneficiary, principal and agent, and doctor and patient.
[14]Chirnside v Fay [2006] NZSC 68, [2007] 1 NZLR 433 at [73].
None of those categories apply in this case. We have previously set out the general background to the working relationship between Ms Watson and Mr Stacey. There is nothing in that relationship which of its very nature was inherently fiduciary. As this Court has held, it is well established that the relationship between a director and shareholder is not an inherently fiduciary one.[15] A director owes no fiduciary duty to a shareholder arising out of his or her status as director.
[15]Holmes v Kiriwai Consultants Ltd [2015] NZCA 149, (2015) 11 NZCLC 98-032 at [57].
The second situation in which a relationship will be classed as fiduciary is when an examination of the particular characteristics of the relationship lead to the conclusion that it should be so classified.[16]
[16]Chirnside v Fay, above n 14, at [75].
After reviewing a number of authorities that discussed the requirements for the existence of a fiduciary duty, Tipping J concluded that:
[80] It is clear from the authorities that relationships which are inherently fiduciary all possess the feature which justifies the imposition of fiduciary duties in a case which falls outside the traditional categories; all fiduciary relationships, whether inherent or particular, are marked by the entitlement (rendered in Arklow as a legitimate expectation) of one party to place trust and confidence in the other. That party is entitled to rely on the other party not to act in a way which is contrary to the first party’s interests. …
The issue is whether the Stacey Interests were entitled to place trust and confidence in Ms Watson during the sale process based on, in Mr Dale’s submission, the quasi-partnership nature of that relationship.
It is necessary to address the sale process in more detail to determine whether such a duty existed in this case.
The sale process
After the meeting with Ms Fisher and Mr Ashwell on 31 March 2014, there followed an exchange of emails between Mr Ashwell, Mr Stacey and Ms Watson (and Ms Johnstone) concerning the acquisition of the LRKS and other aspects of the DWML business by Fisher Funds.
The exchanges led to an email from Mr Ashwell to Ms Watson and Mr Stacey on 8 April 2014 with a NBITS directed at the acquisition of the DWML business. The terms proposed were:
·Payment of $200 per LRKS member that transferred to Fisher Funds and remained for one year;
·Payment of $200 per LRP member that transferred to Fisher Funds and remained for one year;
·Payment of an amount equivalent to 1 per cent of the DWML FUM that were transferred to Fisher Funds and remained for one year.
Mr Stacey sent an email reply (copying in Ms Watson) thanking Mr Ashwell for his efforts on LRKS and noting that “we certainly wish to proceed with that”. On the balance of the proposal regarding the remainder of the business of DWML, including the LRP, Mr Stacey said:
I confess I had been hoping for a little more — and I have not yet unequivocally made the decision to divest Diversified.
After discussing Mr Stacey’s response with Ms Fisher, Mr Ashwell replied to Mr Stacey (again copying in Ms Watson):
Completely understand your position …
You should do whatever you think is right for you and your business. …
In the meantime, we’ll continue at full pace with the LRKS and can turn to LRP and DWM if you wish at a later time.
Ms Watson then emailed Mr Ashwell (copying in Mr Stacey) noting Mr Stacey’s response and advising that she would still like to bring Ms Johnstone to meet him and to discuss options. A meeting followed later on 8 April between Ms Watson, Ms Johnstone, Carmel Fisher and Glenn Ashwell.
It is relevant that from an early stage of the process Mr Stacey felt able both to deal with Mr Ashwell and also pursue other options for the sale of the businesses without advising Ms Watson. In particular, on 9 April he emailed Paul Glass of Devon Funds Management Ltd inviting him to express interest in the LRP and the balance of the DWML funds.
On 10 April Mr Stacey emailed Ms Watson setting out his thoughts on the proposed arrangement with Fisher Funds and the future of DWML and DISL generally. He advised:
·The proposed LRKS terms looked fair and acceptable, but it would be preferable if the parties were to bear their respective legal costs.
·He believed the LRP and the DWML funds had FUM of about $6.5 million and net $11.5 million respectively.
·The 1 per cent of FUM metric which had been applied to the DWML funds should be applied to both the LRP and DWML funds.
·Payment of the 1 per cent of FUM should be staggered, with 50 per cent paid on transfer of the FUM to Fisher Funds, 25 per cent after one quarter and the balance after one year.
·From his perspective, agreement on the future or divestment of DISL should be resolved concurrently with or close to the DWML divestment to Fisher Funds or another purchaser. If another purchaser was to be involved, perhaps an independent valuation should be sought.
·He understood Ms Watson would like to continue advising individually managed accounts. A five year non-compete clause in the draft DWML sheet for Mr Stacey should be amended not to exceed one year and further changes may be needed.
So from an early stage, Mr Stacey recognised that Ms Watson wanted to continue working as an adviser, and that he would be subjected to a restraint of trade clause. Ms Watson and Mr Stacey discussed his email later that day. Ms Watson then emailed Mr Ashwell “in confidence” regarding DWML and raised the prospect of selling the DISL clients at the same time, as Mr Stacey had suggested in his email.
Following that email, Ms Watson and Mr Ashwell met to discuss the sale of DWML and the possible divestment of DISL clients. Although to that point Fisher Funds had expected Ms Watson and Mr Stacey would retain the DISL private client business, Mr Ashwell agreed to consider acquiring DISL as well. In that event, the parties discussed Ms Watson’s potential employment by Fisher Funds to maintain her relationship with the DISL clients.
The next day, 11 April, Ms Watson discussed the meeting with Mr Stacey. The parties have different views as to what took place during the discussion.
Ms Watson says the main focus of their discussion was the purchase price of the DISL private clients and that Mr Stacey knew that as part of the arrangement, Ms Watson would be employed by Fisher Funds, who did not have anyone looking after custodial clients. Ms Watson said Mr Stacey was adamant that DISL’s private clients were not worth more than the DWML funds. Mr Stacey said the DWML funds were the valuable part of Diversified’s business and was dismissive of the idea that Fisher Funds would pay more than one per cent of FUM for the DISL clients. Ms Watson said she ultimately accepted Mr Stacey’s view as to price and then prepared a NBITS for the sale of the DISL clients to Fisher Funds. She emailed it to Mr Stacey for his review asking him if he had “anything to add”. The relevant terms she proposed were:
·a purchase price of one per cent of FUM that were transferred to Fisher Funds and remained for 12 months;
·a staggered payment of 50 per cent on execution of the SPA, with 25 per cent to be paid six months later, and the balance to be paid one year from execution;
·Fisher Funds would employ Ms Watson for a minimum of three years;
·no restraint of trade for Mr Stacey.
Mr Stacey did not address the discussion with Ms Watson in his evidence-in-chief, but did acknowledge that he received the email attaching a copy of the NBITS for the transfer of DISL assets to Fisher Funds. Despite Ms Watson’s email query asking him if he had anything to add, he said he assumed the NBITS had originated from Fisher Funds. In his view the proposed terms for DISL were disappointing. He accepted there was an undertaking to employ Ms Watson which he did not regard as unusual. He thought it could even potentially be useful to DISL if agreement could be reached to assist in the successful transfer of DISL’s clients. He noted there was no indication of anything other than a market salary and the NBITS did not include any extra benefit to Ms Watson.
In cross-examination Mr Stacey said he could not recall Ms Watson telling him that she had met with Mr Ashwell. He denied that he and Ms Watson had any detailed discussion about the sale of the DISL clients. Mr Stacey said he disregarded the NBITS, despite Ms Watson’s query whether he had anything to add.
Ms Watson subsequently emailed the same draft term sheet to Fisher Funds, copying it to Mr Stacey. The email made it clear the NBITS was Ms Watson’s document. In the email she said:
I have prepared an indicative term sheet for the purchase of [DISL].
Mr Stacey explained that he did nothing about that email after their meeting as he was “incensed” when he saw the email. He said:
… I was quite disappointed because we didn’t have terms with [DWML] and we were indicating that we’d be prepared to sell them the rest of our business on the same poor terms.
On 14 April Mr Ashwell confirmed the terms of the DISL term sheet were fair and asked Ms Watson if she would like to meet to discuss employment terms. Ms Watson agreed in an email which she copied to Mr Stacey.
We accept Mr Wilson’s submission that Ms Watson’s account of what transpired on 11 April is more credible than Mr Stacey’s. Not only did Mr Stacey fail to take any steps in response to Ms Watson’s email on 11 April but he also failed to respond to or take issue when he received the copy of Mr Ashwell’s reply on Monday 14 April. This was despite Mr Stacey saying he was incensed by the situation.
If Mr Stacey did not agree with the process or the conditions we would expect him to have raised that with either Ms Watson or Mr Ashwell at the time. It would have been a simple matter for him to have done so. But he did not.
On 16 April Ms Watson emailed Mr Ashwell requesting they revert to the original proposal that Fisher Funds would take over the LRP members at $200 per member. She noted that the only other clause Mr Stacey would like altered was to change the non-compete clause to two years and to remove the words “or promote”. Mr Ashwell agreed. Again, Mr Stacey was copied into the email exchanges.
The pressure from the FMA to complete the sale of the LRKS continued during this time. The FMA’s Gavin Quigan demanded a supplementary resolution from them to clarify their intent for the LRKS or the FMA would move to close it down.
In the meantime, Mr Stacey kept Mr Glass of Devon Funds advised of the negotiations with Fisher Funds. On 22 April 2014 Mr Stacey sought out an indicative offer from Paul Glass, in his words “in order to derail that train”, referring to the Fisher Funds agreement.
Mr Glass responded on the same day with an offer of one per cent FUM to acquire the DWML funds subject only to due diligence. Mr Stacey then told Ms Watson about the Devon Funds offer. Ms Watson was not happy as she considered that Mr Stacey was reneging on the arrangement which they had with Fisher Funds.
Subsequently, on the evening of 22 April, Mr Stacey sent an email to Ms Watson recording that he regarded Mr Glass’ offer “considerably superior” as it avoided the time, costs and expenses of closure and wind-up. However, Mr Stacey concluded his email by saying:
That’s it — I do not want to stand in your way.
On 28 April the Fisher Funds board resolved to purchase the DISL and DWML clients.
On 29 April Ms Watson met with Mr Ashwell and explained that Mr Stacey was negotiating with Devon for the sale of the balance of the DWML funds other than the LRKS. She confirmed her commitment to Fisher Funds.
On 30 April 2014 Mr Ashwell wrote to both Mr Stacey and Ms Watson regarding the state of negotiations as at 30 April, noting that he understood that they were now considering a sale of the balance of the DWML funds to another party. He expressed surprise given the numerous discussions about the sale process and associated terms, which had indicated to him that there was an agreement regarding the commercial terms of the transaction and that they were simply finalising the paper work. Mr Ashwell said:
It is disappointing that Diversified no longer wishes to stand by what we thought were agreed terms. There is probably a legal argument for specific performance of implied contract in this instance but that is not Fisher Funds style. Of course the original terms came as a package, not something to pick through the best pieces. We will need to consider new terms, and particularly we will need to consider how the costs incurred by Fisher Funds, which were spread across a much larger transaction will be dealt with under the new terms.
Perhaps the starting point is for you to provide a term sheet of revised terms that is acceptable to you and we can consider whether that works for us. It seems apparent that unless there is something signed by Diversified, it can’t be relied upon so we will not progress any further work, until the details are agreed and signed on a term sheet and probably a legal agreement.
We are still happy to work constructively and positively towards a purchase under the terms provided in the term sheet or on a revised basis in respect of LRKS and DISL clients only but would now prefer to have certainty about what is actually involved.
The same day Mr Glass emailed Mr Stacey an indicative term sheet for the purchase of DWML (including the LRP) with an offer of one per cent of FUM. Mr Stacey forwarded the offer to Ms Watson noting:
It does seem that you are too far down the other track now.
Ms Watson responded by forwarding Mr Stacey an updated term sheet for the sale of DWML to Fisher Funds. The purchase price remained as previously. Later that day Mr Stacey emailed Ms Watson attaching the DWML term sheet with tracked changes stating:
You seem determined that it be Fishers, so if you are happy, we should send that to Anthony Kuran for his guidance / omissions / fish-hooks. Probably a good idea to send the DISL one too.
Mr Kuran was the lawyer who acted for DWML and DISL. Ms Watson responded to Mr Stacey advising that she felt “bound to honour” what she believed was an “inferred” contract with Fisher Funds and said:
If you don’t believe we have made any commitment, verbal, email or otherwise by liaising on various issues of clarification then you should explain your belief to Fishers … It is now up to you to approach the various people involved.
On 1 May Mr Stacey and Mr Ashwell had a telephone conversation regarding the negotiations with Fisher Funds. Later that day Mr Stacey emailed Ms Watson:
I capitulate. I have told Glenn [Ashwell] we will do as you and he have agreed.
On the same day and later that evening Ms Watson forwarded the draft term sheets for DISL and DWML to Mr Kuran at Morgan Coakle for review.
The DISL term sheet included the Fisher Funds agreement to employ Ms Watson for a minimum of three years. Mr Stacey emailed Mr Kuran with suggested changes on 2 May and shortly thereafter emailed Ms Watson and Mr Ashwell in relation to the restraint of trade in the DWML term sheet. He noted he could not “accept to be bound to not participate in the industry for 2 years, nor confidentiality in excess of obligations to clients”.
Later the same day Ms Watson emailed Mr Stacey including an amended restraint of trade clause in the DWML draft term sheet. She also adopted Mr Kuran’s proposed wording with respect to the transfer of DWML’s FUM. Ms Watson subsequently sent Mr Ashwell the signed term sheets for DWML and DISL. As noted, the SPAs were later signed on 30 May by Ms Watson and 4 June by Mr Stacey.
The existence of a fiduciary duty
Against that background, what is it that the Stacey Interests claim led Ms Watson to owe them a fiduciary duty in the circumstances of this case?
While accepting that generally a director does not owe shareholders a fiduciary duty Mr Dale submitted the case of Brunninghausen v Glavanics supported the proposition that in the case of the sale of a small private company where there was only one other shareholder and where, in practical terms, the transaction affected the shareholder, such a duty could be imposed.[17]
[17]Brunninghausen v Glavanics, above n 4.
Mr Brunninghausen was the sole effective director and majority shareholder in a company in which Mr Glavanics was the other director and shareholder. The parties were brothers-in-law. As a result of family pressure the two began negotiations to resolve their differences. While the negotiations were proceeding, Mr Brunninghausen received an offer from a third party to buy the assets of the company. He negotiated for the sale without informing Mr Glavanics. Ultimately Mr Glavanics agreed to sell his shares to Mr Brunninghausen for a price well below the value reflected by the price paid for the assets of the company by the third party.
The Judge held Mr Brunninghausen owed Mr Glavanics a fiduciary duty and his failure to disclose the existence of the other negotiations was a breach of that duty. The Court of Appeal of New South Wales confirmed that, while the general principle that a director’s fiduciary duties are owed to the company and not to the shareholders is correct, the nature of the transaction may give rise to a fiduciary duty. In particular, a fiduciary duty may be owed by a director to a shareholder where there are negotiations for a takeover or for a sale of the company’s undertaking which requires the directors to loyally promote the joint interests of the shareholders and themselves.[18]
[18]Citing as authority, amongst other cases, Coleman v Myers, above n 4, at 276–280.
Mr Brunninghausen was in a position of advantage over his brother-in-law Mr Glavanics. The transaction involved Mr Brunninghausen personally purchasing Mr Glavanics’ shares before the on-sale of the company business to the third party. Mr Brunninghausen as director therefore owed a fiduciary duty to Mr Glavanics as a shareholder which was breached by his non-disclosure of the negotiations for sale of the company’s assets before purchasing Mr Glavanics’ shares from him. As the Court of Appeal of New South Wales observed, the duty arose out of Mr Brunninghausen’s purchase of Mr Glavanics’ shares.[19]
[19]Brunninghausen v Glavanics, above n 4.
The present case is different in a number of respects. Neither Ms Watson nor Mr Stacey were in a position of advantage over the other. They were both directors of DWML and DISL and their family interests were equal shareholders. Both Mr Stacey and Ms Watson were involved in the discussions and negotiations with Fisher Funds. Even though Ms Watson may have taken the lead, she kept Mr Stacey informed of the developments (with the exception of the detail of her salary, a matter to which we return below).
While Ms Watson met separately with representatives of Fisher Funds on occasions, Mr Stacey also dealt separately with Mr Glass of Devon Funds. A further important distinction from Brunninghausen is that Ms Watson did not purchase any shares from the Stacey Interests. Her interests in achieving the best price for the sale of DWML and DISL were aligned with those of the Stacey Interests.
Another relevant case is the New Zealand decision Coleman v Myers.[20] In that case, Mahon J held that the essential basis of breach of fiduciary duty arose from the transaction involving the purchase of shares between the director and shareholder, as the director was the repository of confidence and trust necessarily vested in him by the shareholders.[21] The Court of Appeal agreed, finding that the father and son directors owed fiduciary duties to the minority shareholders who were not directors because of the family character of the company, the high degree of inside knowledge which they did not disclose to the minority shareholders, and the way in which they went about the takeover. There was no such imbalance of power or inside knowledge in the present case. Mr Stacey was not in a vulnerable position relative to Ms Watson.
[20]Coleman v Myers, above n 4.
[21]At 277.
Mr Dale also referred to Holmes v Kiriwai Consultants Ltd.[22] In that case the majority shareholder and director withheld the existence of a substantial offer by a third party from the other shareholders. A particularly relevant factor was that the owner of the minority shareholding was employed by Holmes and the director could compel the sale of the shares by terminating his employment. There was a distinct vulnerability which the director took advantage of.
[22]Holmes v Kiriwai Consultants Ltd, above n 15, at [62].
The present case is again distinguishable. Mr Stacey was well aware of the Fisher Funds offer which he ultimately accepted. Further, Mr Stacey and Ms Watson were equal shareholders. Ms Watson and her interests were not purchasing shares from Mr Stacey and his interests. Ms Watson could not compel Mr Stacey to sell his shares, as we discuss below.
Mr Dale acknowledged the equality of the parties’ positions in the present case but submitted that fact supported the argument the parties were in a quasi-partnership. Mr Dale referred to the following passage from the Supreme Court decision of Maruha Corporation v Amaltal Corporation Ltd:[23]
[21] … It is well-settled that, even in a commercial relationship of a generally non-fiduciary kind, there may be aspects which engage fiduciary obligations of loyalty. That is because in the nature of that particular aspect of the relationship one party is entitled to rely upon the other, not just for adherence to contractual arrangements between them, but also for loyal performance of some function which the latter has either agreed to perform for the other or for both or has, perhaps less formally, even by conduct, assumed.
Mr Dale submitted that because of the quasi-partnership nature of the relationship, Mr Stacey was entitled to rely on Ms Watson.
[23]Maruha Corporation v Amaltal Corporation Ltd [2007] NZSC 40, [2007] 3 NZLR 192 (footnote omitted).
Importantly, in Maruha, the Court rejected a submission, based on the former partnership between the parties, that the relationship between the two shareholders was a fiduciary one. As Blanchard J said:
[19] … These were commercial companies who had elected not to continue as partners and, instead, to frame their relationship by internal and external rules applicable to a company, supplemented by a contract between them in their capacity as shareholders. There is no warrant then for imposing upon them generally obligations not found in the company’s own constitution, in companies legislation or in the terms of the contract. As partners they would have owed fiduciary duties to one another, but their relationship no longer took that unincorporated form. They had deliberately substituted the Companies Act regime for that of the Partnership Act. Mr Miles helpfully provided the Court with a table which compared the provisions of the partnership agreement and the shareholders’ “joint venture agreement”, but it merely demonstrated the great differences between the two structures, which perusal of the documentation itself confirms.
While the Court held that a fiduciary duty would be imposed in relation to the tax and accounting functions, that was because of the particular way in which the parties had allocated those responsibilities between them. In doing so they had created a situation of principal and agent, which was inherently a fiduciary relationship. The Court noted that:[24]
… in the context of the arrangements between Amaltal and Maruha [Mr Holyoake] was also engaged on behalf of both of them. In short, Mr Holyoake was the agent of Amaltal which was in turn, in relation to the accounting functions, the agent of Maruha. The way in which the parties allocated responsibility for these functions created a situation of principal and agent, an inherently fiduciary relationship, in that aspect of their arrangements.
[24]At [22].
The Court was satisfied that in breach of the fiduciary duty he owed as an agent for the purposes of the accounting functions, Mr Holyoake was disloyal to Maruha. He misrepresented the position and positively deflected inquiries about taxation, thereby preserving an advantage which Amaltal was unlawfully enjoying.
Mr Dale confirmed during the course of submissions that it was not suggested that Ms Watson was acting as an agent for the Stacey Interests in dealing with Mr Ashwell and Fisher Funds during the sale process. That was not the way the case was pleaded, nor the way the case had been presented before Faire J in the High Court. Mr Dale did not seek to adopt any such argument before this Court and indeed expressly disavowed any such proposition.
In our judgment, the following factors count against the imposition of a fiduciary duty in this case:
(a)the equality of the parties’ position, reflected in the equal roles they played in the company and the equal shareholding of their family interests;
(b)both were free to deal with Fisher Funds (and in Mr Stacey’s case, with Devon Funds);
(c)they were selling to a third party;
(d)they chose to operate in a corporate structure; and
(e)both had access to the same information (with the exception of the detail of Ms Watson’s salary).
For those reasons we agree with the Judge’s finding that there was no basis to impose a fiduciary duty in the present case.
Did Ms Watson conduct herself in a manner that was oppressive, unfairly discriminatory or unfairly prejudicial to the Stacey Interests?
There are two aspects to the Stacey Interests’ claim under s 174. The first is the allegation that Ms Watson breached s 174 by failing to disclose the collateral benefits to her of the sale to Fisher Funds; the second is that she refused to cooperate in achieving a fair market value for both companies, including by making inappropriate concessions.
Mr Dale accepted that Faire J’s discussion of the leading authorities was correct. In Thomas v H W Thomas Ltd Richardson J discussed the equivalent section under s 209 of the Companies Act 1955 and noted:[25]
Taking the ordinary dictionary definition of the words from the Shorter Oxford English Dictionary: oppressive is “unjustly burdensome”; unfair is “not fair or equitable; unjust”; discriminate is “to make or constitute a difference in or between; to differentiate”; and prejudicial, “causing prejudice, detrimental, damaging (to rights, interests, etc)”. I do not read the subsection as referring to three distinct alternatives which are to be considered separately in watertight compartments. The three expressions overlap, each in a sense helps to explain the other, and read together they reflect the underlying concern of the subsection that conduct of the company which is unjustly detrimental to any member of the company whatever form it takes and whether it adversely affects all members alike or discriminates against some only is a legitimate foundation for a complaint under s 209.
[25]Thomas v HW Thomas Ltd [1984] 1 NZLR 686 (CA) at 693.
In Latimer Holdings Ltd v SEA Holdings New Zealand Ltd this Court confirmed that the judicial approach laid down in Thomas continued to be appropriate under s 174 of the Companies Act 1993.[26] The Court also set out three principles to guide the application of s 174:
[70] First, errors of judgment by management, inefficiencies, and poor business management without distinct elements of bad faith or self-interest cannot amount to oppression. The cases under this head go back at least as far as Re Five Minute Car Wash Service Ltd [1996] 1 WLR 745 (Ch D).
[71] Secondly, in any event, Judges are ill-equipped to evaluate business strategies, and have accordingly exercised self-restraint. See Howard Smith Ltd v Ampol Petroleum Ltd[1974] AC 821 per Lord Wilberforce, “ … it would be wrong for the court to substitute its opinion for that of management, or indeed to question the correctness of management’s decision, on [questions of this character] if bona fide arrived at” (at 832). And see also the case concerning the dismissal of Mr Venables as chief executive of Tottenham Hotspur (Re Tottenham Hotspur plc [1994] 1 BCLC 655) (Lord Nicolls V-C). This is sometimes called the “business judgment” rule. Judges, on the other hand, do have training and expertise in dealing, for instance, with fraud, illegality, or conflicts of interest.
[72] Thirdly, the remedy is not (without more) appropriate for the facilitation of exit from a company where there are straight-out disagreements over company strategy. This point was distinctly reinforced by this Court recently in Yovich & Sons Ltd v Yovich where, in delivering the judgment of this Court, McGrath J said (at [31]):
The statutory protection for prejudiced shareholders is not intended to facilitate exit from the company in all cases where minority shareholders differ from the majority on the policy and direction of a company which they see as being to their disadvantage.
The Court confirmed the test is an objective one.[27]
[26]Latimer Holdings Ltd v SEA Holdings NZ Ltd [2005] 2 NZLR 328 (CA) at [112].
[27]At [113].
In Sturgess v Dunphy this Court more recently clarified the first principle set out in Latimer, as stated above. The Court said:[28]
We acknowledge that in Latimer this Court stated that mere mismanagement and inefficiency will not sustain a remedy, but it was merely emphasising the points that judges are wary of using s 174 to compensate shareholders for risks that are inherent in business. The Court approved of Thomas, in which this Court held after surveying the legislative history that Parliament created a broad and flexible remedy for conduct whose effect is unjustly detrimental upon a shareholder, whatever form that conduct may take, and further that the statutory standard should not be read restrictively, unfairness requires a visible departure from the standards of fair dealing, assessed in light of the history and structure of a company and the expectations of its members.
[28]Sturgess v Dunphy [2014] NZCA 266 at [138] (footnotes omitted).
We consider each aspect of Ms Watson’s conduct in turn.
Collateral benefits — salary
Mr Dale submitted that Ms Watson obtained two collateral benefits from the sale of Diversified’s business to Fisher Funds. The first was her salary of $200,000 plus the opportunity for a bonus; the second was the buy-back provision in her favour. Mr Dale submitted that Ms Watson should have disclosed the existence of the collateral benefits to Mr Stacey.
Mr Dale submitted that the salary Fisher Funds agreed to pay Ms Watson was above market and that Ms Watson should have disclosed the amount of her salary to Mr Stacey.
After Mr Ashwell reviewed the NBITS prepared by Ms Watson for the sale of the DISL clients on 14 April, he met with Ms Watson on 15 April and discussed her proposed employment with Fisher Funds. Later that day, Fisher Funds sent an email to Ms Watson and offered a salary package of $200,000 per annum plus bonuses. Ms Watson accepted and requested that her personal employment terms be kept confidential.
These proceedings arose when Mr Stacey discovered Ms Watson’s agreed salary was $200,000 plus a bonus of up to 30 per cent. Mr Stacey did not have an issue with Ms Watson being employed by Fisher Funds; rather, it was the amount of her salary that was of concern. In particular, the salary paid by Fisher Funds was significantly higher compared with the drawings that Ms Watson and Mr Stacey had taken of $100,000 per annum plus expenses.
The case for the Stacey Interests is that the benefits to Ms Watson from the Fisher Funds salary were reflected in a lesser price for the sale of the business and drove Ms Watson in her determination to deal with Fishers.
The first issue that arises on that argument is whether the salary was significantly above market value as alleged. The Stacey Interests called two expert witnesses to give evidence in respect of this issue.
The first of the witnesses, Mr David Greenslade, is the managing director of Strategi Institute Ltd and has been involved in undertaking valuations of financial advisory businesses since 1999. Mr Greenslade’s evidence was that an experienced adviser joining a large corporate as a financial adviser would probably receive a package of between $120,000 and $140,000 with the ability to earn a bonus. If a $200,000 salary were offered then the business would expect the adviser to generate $600,000 in gross revenue. In his opinion the $200,000 per annum plus the ability to receive up to $60,000 per annum as a bonus was “on the high side”. However, Mr Greenslade acknowledged he was not an employment remuneration expert, nor a human resources expert.
The second of the witnesses, Mr Ralph Stewart, is the managing director of Stewart Capital. He gave evidence regarding the appropriate market salary for an authorised financial adviser servicing a book of approximately $24 million and generating approximately $288,000 in gross revenue. Mr Stewart gave a range of remuneration levels from three comparable organisations. The average remuneration across the organisations ranged between $95,000 and $140,000 per annum, while the maximum remuneration ranged between $105,000 and $280,000 per annum.
As Mr Wilson submitted, it appears that both Mr Greenslade and Mr Stewart were instructed on the assumption Ms Watson would advise the $24 million of former DISL clients. However, it is clear from Mr Ashwell’s evidence that Ms Watson was employed to do more than manage the DISL clients being acquired by Fisher Funds.
Apart from his lack of expertise in human resources, Mr Greenslade acknowledged in cross-examination that his report contained no data series showing comparable adviser salaries. He was prepared to accept that even on the assumption of $24 million of funds under advisement, this could justify a salary of between $160,000 and $180,000. Ultimately he accepted that:
If they [Fisher Funds] had a strong view that it could achieve the levels of revenue that according to Fisher Funds are now being achieved, then that’s a valid commercial decision for them to make, yes.
Mr Stewart accepted that his evidence was premised on the basis that salary was a function of revenue and if that was wrong then the salary assumptions would not apply.
We are satisfied that the Judge was entitled to reject the evidence of Mr Greenslade and Mr Stewart as unhelpful on this aspect and to focus on the evidence of Mr Ashwell in particular.
It is important that the salary was fixed by Fisher Funds, not suggested by Ms Watson. Mr Ashwell explained the background to Fisher Funds’ decision to employ Ms Watson and the salary in his evidence-in-chief:
28.We employed Ms Watson because we considered that her skill set was a good match for Fisher Funds’ business needs. Fisher Funds considered that employing her would help to both retain the former Diversified clients in the IMA service and also to service other clients.
29.We also expected Ms Watson’s employment would allow us to offer deeper financial planning services to many of Fisher Funds existing clients.
…
31.Ms Watson’s salary was proposed by Carmel and I following a private discussion between us on 15 April 2014. We considered a salary of $200,000 per annum plus 30% performance-based bonus to be appropriate. This was put forward in email correspondence on 15 April and accepted by Ms Watson by return on the same day.
32.Ms Watson’s salary was relative to another less experienced financial adviser employed by Fisher Funds and her own expectations of what salary would motivate her performance. We were not aware of her existing package with Diversified. We consider the terms of employment arrived at with Ms Watson to be fair based on her skills, experience, and the nature of her client base. However, we did not seek external market confirmation of packages for similar roles. …
Mr Ashwell went on to say:
33.The employment negotiations did not alter the purchase price of Diversified assets in any way. The terms were negotiated independently and the purchase price for the business assets was agreed before Ms Watson’s salary was discussed or agreed. In fact, the draft employment contract was only sent to Ms Watson by email on 12 May 2014, after the Term Sheets dictating the purchase price for Diversified had already been signed (on 2 May 2014).
Mr Ashwell’s evidence is consistent with the contemporaneous Fisher Funds’ board papers dated 17 April 2014.
The second issue that arises under this head is whether, as a matter of fact, the salary offered by Fisher Funds may have influenced Ms Watson in her dealings with Fisher Funds.
Mr Dale relied in particular on an email Ms Watson sent to Mr Ashwell on 12 May in which she addressed her employment agreement. In her email she said:
I’ve read through the Agreement. I know you mentioned you can’t give assurances of a minimum 3 years employment but I will need some assurances. It is a bit like the non-solicitation you require in the SPA, I need something of the like in reverse.
For example I have no security in selling my clients that 6 months later I may be out of a job for whatever reason – e.g. Redundancy or such like. Now I don’t believe that would happen but I do need assurances. I would not sell an expected gross revenue of around $350k per annum for 1% with no assurance that I have secure employment for a minimum of 3 years. Of course, if gross negligence is involved, that is different and a standard in any contract.
The contract in its present form does not recognise the whole package of selling the clients at a very low price and is purely a contract of employment one would expect when no income stream is part of the package and well covers the salary.
Mr Dale submitted the Judge was wrong to dismiss the suggestion Ms Watson proposed a low price for DISL’s business in order to gain better employment terms. However, that was a reasonable conclusion for the Judge to draw. By the time the email of 12 May was sent, both Ms Watson’s terms of employment and the purchase price for DISL’s business had effectively been agreed.
The evidence of Mr Ashwell, the recipient of the email, is again of interest. He said that he considered Ms Watson’s statement to be a negotiating tactic and that she was trying to extract a better deal for herself. He denied that there was any particular link between Ms Watson’s salary package and the price for the sale of DISL. That supports the Judge’s reasoning on this aspect. By 12 May Ms Watson was not negotiating for the salary but rather for some measure of security by way of the buy-back clause.
There is a further point. In his email of 30 April when he expressed disappointment at the apparent change of heart in relation to the sale of LRP and the balance of the DWML funds, Mr Ashwell confirmed Fisher Funds would still work towards a purchase of the LRKS and DISL clients. Ms Watson had no need to insist on the sale of LRP and the balance of DWML to Fisher Funds. Her employment with them was based on the transfer of the DISL clients.
We are satisfied that the salary Fisher Funds agreed to pay Ms Watson was not above market and that it had no impact on the price Fisher Funds paid for the businesses of DWML and DISL.
Collateral benefits — buy-back
Mr Dale also relied on the buy-back provision in the DISL SPA to support the Stacey Interests’ claim under s 174 of the Companies Act. He submitted the buy-back provision was a collateral benefit for Ms Watson. The clients in question belonged to DISL and it was the company which should have had the benefit of the right of re-purchase. Mr Dale referred to Mr Stacey’s evidence that he would not have signed the SPAs had he known of the buy-back provision.
While Mr Dale accepted that the buy-back provision was included in the SPA, he noted it was only included late in the piece and submitted it ought to have been disclosed at an earlier stage and drawn to Mr Stacey’s attention. Mr Dale criticised the Judge’s finding that Mr Stacey ought to have been aware of the buy-back provision because it was included in the SPA that he finally signed. Mr Stacey gave evidence that he was not aware of the buy-back provision and led evidence that Mr Kavanagh, his solicitor, was only engaged to deal with the restraint of trade provisions. Mr Stacey left for overseas the night that the reference to the buy-back provision finally appeared in the SPA.
As noted, the buy-back provision was only included after the other terms of the SPAs were agreed. Its origin was in the discussion between Mr Ashwell and Ms Watson after he sent her the draft employment agreement on 12 May. She then sought assurances in relation to security of her employment. The discussions regarding the security of employment led to Ms Watson suggesting a buy-back provision in the event that Fisher Funds no longer required her services within a three-year period due to redundancy or restructuring.
On 13 May Ms Watson sent the draft of a proposed buy-back provision to Mr Ashwell and importantly, forwarded a copy of her email with that draft buy-back provision to Diversified’s solicitor, Mr Kuran, of Morgan Coakle. In the email to Mr Ashwell which she copied to Mr Kuran, Ms Watson expressly said:
Should the company (Fishers) no longer require my services within a three year period due to redundancy or restructuring, I have the option to buy back the clients on the same terms as they were sold. Note: This does not mean I have the right to resign my employment and buy back the clients. I would definitely give assurances from that perspective. …
Importantly she noted in her email to Mr Kuran that the buy-back provision “will have some impact of [sic] the SPA agreement for [DISL]”.
On 22 May Mr Kuran forwarded Ms Watson and Mr Stacey the revised draft SPAs, noting the changes he had made and including in the DISL SPA the tracked insert of a buy-back provision in favour of Ms Watson if her employment was terminated due to redundancy or restructuring. Significantly, the buy-back provision in the tracked version of the DISL agreement was in cl 12, titled “Vendor and convenantor restraints [to be read in conjunction with Minter Ellison comments]”. Clause 12.1 provided the restrictive covenant of interest to Mr Stacey. Minter Ellison were the solicitors acting for Mr Stacey.
Later that night at 9.07 pm Mr Stacey sent an email reply to Mr Kuran:
Thank you for your work and amendments … in consideration that there is no employment benefit for me … I would like Section 8 of the DWML agreement to specify a similar $5,000 vendor contribution to the legal costs of Norman Stacey.
Mr Stacey made no mention of the buy-back provision.
The next day, 23 May, Mr Ashwell emailed a revised employment agreement to Ms Watson. On the same day, Mr Kuran forwarded the revised draft SPAs to Ms Sheerin at Chapman Tripp for Fisher Funds. The buy-back provision was again marked as a track change. A copy of the email was forwarded to Mr Stacey and Ms Watson.
Ms Sheerin then sent Mr Kuran both clean and marked-up versions of the SPAs incorporating changes from Minter Ellison on behalf of Mr Stacey noting:
As discussed, the agreements reflect Fisher Funds’ final position on the matters, and Fisher Funds does not wish to negotiate the terms further with Diversified or the covenantors.
Mr Kuran forwarded that email and its attached SPAs to both Mr Stacey and Ms Watson. Mr Stacey responded to Mr Kavanagh, his solicitor at Minter Ellison:
I have read attached documents and a[m] pleased to find they appear to meet my requirements … Your thoughts on the agreement are very welcome, but subject to that, I believe I am ready to proceed.
On 29 May Mr Stacey confirmed the terms of the SPAs were acceptable. That was following an amendment made at Mr Stacey’s request.
Ms Watson made no attempt to hide the buy-back provision from Mr Stacey. Her intention to have a buy-back provision included in the agreement was disclosed to Diversified’s solicitors at an early stage in negotiations and was clearly marked in the final draft SPA as a change to the text. Under cross-examination Mr Stacey accepted that he had been advised to read the SPAs carefully, but had failed to do so.
We find that Mr Stacey should have been aware of the buy-back agreement in Ms Watson’s favour.
Further, as Mr Dale conceded, the buy-back clause was included after the material terms of the SPAs and the employment contract were concluded. That being the case, we are satisfied that the negotiation of the buy-back provision had no impact on the remaining terms of the DISL SPA, including the purchase price.
To the extent that the Stacey Interests’ claim under s 174 relies on the failure of Ms Watson to disclose collateral benefits the immediate answer is that Mr Stacey was aware that Ms Watson was to be employed by Fisher Funds. While he was not aware of the details of the salary, he could reasonably have expected that Fisher Funds would be offering a market rate which, on the evidence, was what Fisher Funds agreed to pay. Mr Stacey also should have been aware of the buy-back provision, which Ms Watson made no attempt to conceal. In any case, however, neither of those factors affected the purchase price offered by Fisher Funds.
In those circumstances, we consider that the failure of Ms Watson to disclose the value of her salary and the inclusion of the buy-back provision to Mr Stacey directly was not oppressive, unfairly discriminatory or unfairly prejudicial to the Stacey Interests. There was no “visible departure from the standards of fair dealing”.[29]
Refusal to cooperate in achieving fair market value
[29]Sturgess v Dunphy, above n 28, at [138].
Mr Dale also submitted in support of the action under s 174 of the Companies Act that Ms Watson refused to cooperate with Mr Stacey in achieving a fair market value for Diversified’s business. He argued that Ms Watson was committed to a sale to Fisher Funds while Mr Stacey was trying to do better. He submitted that Ms Watson used her position of influence to effectively prevent Mr Stacey selling DWML to another buyer.
The evidence does not support this submission. The high point for the Stacey Interests on this point is the exchange of emails on 30 April, starting with Mr Stacey’s at 3.20 pm that day. In that email he stated:
You seem determined that it be Fishers, so if you are happy, we should send that to Anthony Kuran for his guidance / omissions / fish-hooks. Probably a good idea to send the DISL one too.
Ms Watson replied at 5.59 pm stating:
I am not determined in any direction. What I am determined about is honouring a process of emails of negotiation. I feel bound to honour what I believe is an inferred contract.
If you don’t believe that we have made any commitment, verbal, email or otherwise by liaising on various issues of clarification then you should explain your belief to Fishers. As I said I cannot go to them as I believe we have a commitment, but if you are confident that this is an above board business negotiation and ‘you can hold your head high’ then by all means explain to Fishers.
I will not take the next step and then be held accountable.
It is now up to you to approach the various people involved.
Ms Watson was clearly wrong when she suggested there was some sort of “inferred” contract with Fisher Funds in her email of 30 April. However, the parties had been negotiating with Fisher Funds towards a sale for some time. She considered they were honour bound. Ms Watson effectively left it to Mr Stacey to extract them from the Fisher Funds’ negotiations if he considered he was able to do so.
The context is important. The parties were under pressure from the FMA to dispose of the LRKS. The original deadline of 31 March had been extended to 30 June by the FMA. There was a general decline in Diversified’s performance and by early 2014 Diversified’s clients were nervous and losing patience. The FMA deadline was looming. The Fisher Funds’ deal provided certainty. Once the LRKS was sold, other aspects of DWML’s business would become uneconomic which in turn would impact on the business of DISL. It made sense to sell the businesses of DWML and DISL together.
Ms Watson left it to Mr Stacey to extract them from the Fisher deal. He could have done so if he believed they were not committed to the sale. While Mr Stacey no doubt felt under pressure given the letter from Fisher Funds and Ms Watson’s email, nevertheless it was still open for him to pursue the better deal with Devon Funds if he wished to. He chose not to do so.
Importantly, it was following the discussion with Mr Ashwell rather than any further communication from Ms Watson that Mr Stacey sent the email in which he said “I capitulate”. This fact tends to undermine the suggestion for the Stacey Interests that Mr Stacey was effectively forced into accepting the Fisher Funds offer by Ms Watson.
Mr Dale also referred to Mr Stacey’s evidence that Ms Watson had effectively threatened to use her influence to recommend investors withdraw from DWML when presented with the deal with Devon Funds. We agree with the Judge’s assessment that the allegation of such a threat was not supported by any evidence other than Mr Stacey’s assertion.[30] There is no contemporaneous record of that threat and it is inconsistent with Ms Watson’s later statement to Mr Stacey that “if you are confident that this is an above board business negotiation and ‘you can hold your head high’ then by all means explain to Fishers”. The alleged threat is not a matter that Mr Stacey referred to at all in any of the email communications, nor did Mr Stacey disclose any such threat to Diversified’s lawyer, Mr Kuran, or his own legal adviser at the time.
[30]Stacey v Watson, above n 1, at [75].
Finally under this head, Mr Dale submitted that Ms Watson made a number of inappropriate concessions during the negotiation process that undermined Mr Stacey’s attempts to obtain a fair market value for the company, including:
(a)Ms Watson’s statement in an email to Mr Ashwell on 10 April that “we are not too far away in agreement.”
(b)The preparation of a NBITS based on 1 per cent of FUM for DISL without Mr Stacey’s knowledge or approval. For the reasons given above, we prefer Ms Watson’s evidence that the content of the NBITS was discussed between the directors prior to sending the NBITS to Mr Ashwell.
(c)Ms Watson’s acceptance of the employment offer from Fisher Funds on 15 April, which in Mr Dale’s submission signalled that the sale was likely to proceed.
(d)Ms Watson’s statement in a private email to Fisher Funds on 29 April that “I want to reiterate that I am totally committed to our agreement. I told Norman of your shock, as you believed as did I, that we had a verbal agreement.”
(e)Ms Watson’s statement in an email to Mr Stacey on 30 April that she felt bound to honour what she believed was an “inferred contract”.
We do not consider that the evidence demonstrates Ms Watson’s conduct led to the sale of Diversified’s business at anything other than a fair market value. It is relevant that until he became aware of the quantum of Ms Watson’s salary Mr Stacey believed they had striven for the best result in the company achievable under the circumstances. He said in his evidence:
Fisher Funds is a big and very experienced acquirer; it seemed that ‘the Market’ had spoken.
This is not a case where a dominant director or shareholder caused the company to pursue a course of conduct to advance their own interests by overriding the wishes of the minority. Like the Judge we consider that ultimately Mr Stacey’s decision to accept the offer from Fisher Funds was ultimately a business decision. While Ms Watson demonstrated a clear preference for the Fisher Funds offer, her email to Mr Stacey on 30 April placed the ball firmly in his court. He chose to accept the offer from Fisher Funds. Further, although Mr Ashwell set out Fisher Funds’ position forcefully in his email of 30 April, it was on the basis that Fisher Funds was prepared to release Mr Stacey and Ms Watson from any commitment to the sale of the balance of DWML but was still prepared to discuss the purchase of LRKS and DISL.
We are satisfied that there was nothing in Ms Watson’s conduct during the sale process to support the allegation that she or the DVW Trust acted in an oppressive, unfair or prejudicial manner towards Mr Stacey or the Stacey Interests.
Result
The appeal is dismissed.
The first appellant must pay the respondents costs for a standard appeal on a band A basis together with disbursements.
Solicitors:
Friedlander & Co, Auckland for Appellants
Bell Gully, Auckland for Respondents
3
0