Stacey v Watson
[2016] NZHC 1891
•16 August 2016
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2015-404-525 [2016] NZHC 1891
BETWEEN NORMAN WILLIAM STACEY
First Plaintiff
NORMAN WILLIAM STACEY, ANNE LOUISE SERRA and KERRY DALE MCINTOSH as trustees of the Stacey Family Trust
Second Plaintiffs
AND
DOROTHY VICKI WATSON First Defendant
DOROTHY VICKI WATSON and DVW TRUSTEE LIMITED as trustees of the DVW Family Trust
Second Defendants
Hearing: 11 to 18 July 2016 Counsel:
PJ Dale for plaintiffs
JQ Wilson and CM Cattin for defendantsJudgment:
16 August 2016
JUDGMENT OF FAIRE J
This judgment was delivered by me on 16 August 2016 at 12 noon, pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date……………
Solicitors: Friedlander & Co, Auckland (P Friedlander) Bell Gully, Auckland
Stacey v Watson [2016] NZHC 1891 [16 August 2016]
Contents
Introduction ............................................................................................................[1] The plaintiffs’ causes of action...............................................................................[6] The relief sought ..................................................................................................[10] Background ..........................................................................................................[15] DISL and DWML.................................................................................................[24] Regulatory issues with the FMA ..........................................................................[28] The sale process ...................................................................................................[33] The discussions with Fisher Funds ......................................................................[42] The buy-back right ...............................................................................................[82] Issues requiring determination ...........................................................................[101] Expert evidence ..................................................................................................[102] Fiduciary duty .................................................................................................... [111] Section 174 .........................................................................................................[126] Result..................................................................................................................[154]
Introduction
[1] Diversified Investments Strategies Ltd (“DISL”) is a company incorporated under the Companies Act 1993 which was formed for the purpose of providing investment strategies and advice to private clients for individually managed portfolios. All private clients were on the AEGIS administration platform. AEGIS is an electronic investment administration service. It is essentially a website that allows the directors to manage all of the DISL portfolios online and generate management reports.
[2] Diversified Wealth Management Ltd (“DWML”) is a company incorporated under the Companies Act 1993 and which was formed for the purpose of managing funds. DWML provided investment strategies described as the Law Retirement KiwiSaver Scheme (“LRKS”) and the Law Retirement Plan (“LRP”) which was a
superannuation scheme. As a result of the introduction of Portfolio Investment Entities (“PIEs”) in 2007 DWML offered managed funds to retail investors. For the purposes of this proceeding and because of the licensing requirements, the New Zealand Guardian Trust Company Ltd (“NZGT”) became the trustee with responsibility for supervision. DWML established a balanced fund in March 2008 and a dynamic fund in November 2009. Each fund was subject to various regulations and PIE taxes. A good number of DISL private clients were also investors in the DWML funds, or KiwiSaver. There were other connections between the two businesses.
[3] The first plaintiff, Mr Stacey, and the first defendant, Ms Watson, are the directors of DISL and DWML.
[4] The shares in DISL and DWML are held in equal proportions by the second plaintiffs, as trustees of the Stacey Family Trust, and the second defendants, as trustees of the DVW Family Trust.
[5] This proceeding relates to the actions of Ms Watson and Mr Stacey leading up to and including the entry into two agreements for sale and purchase, dated 4 June
2014. In the first, DISL sold the customer relationships and contracts of its private client business to Fisher Funds Management Ltd (“Fisher Funds”). In the second, DMWL sold the members and unit holders of DWML’s wealth products to Fisher Funds
The plaintiffs’ causes of action
[6] The plaintiffs allege that Ms Watson, in breach of her fiduciary obligations to Mr Stacey and the Stacey Family Trust, entered into negotiations with Fisher Funds for the sale of DMWL’s and DISL’s assets in return for an offer of employment with Fisher Funds. In particular, the plaintiffs allege that the employment contract contained a salary and bonus package and a buy-back right, in the event of the first defendant being made redundant or being unjustifiably dismissed by Fisher Funds. Under this arrangement the customers that were sold from DISL to Fisher Funds would be sold to Ms Watson at the price that Fisher Funds had brought those customers from DISL under the sale and purchase contract.
[7] The plaintiffs allege that the employment contract:
(a) Provided a significant additional level of security for Ms Watson in respect of her future employment;
(b)Gave her an advantage by giving her the opportunity to re-purchase the customers in the event of a redundancy or unjustified dismissal; and
(c) Incentivised her to sell the customers at a below market price.
[8] The plaintiffs allege that the purchase price received under the sale and purchase contract was less than their true value, resulting in the plaintiffs suffering a loss, being the difference in the current market value of the assets sold and what was received under the contract.
[9] The plaintiffs’ second cause of action relies on s 174 of the Companies Act
1993 and pleads that the defendants acted in a manner to the plaintiffs that was unfair, prejudicial or oppressive to them. The plaintiffs allege that the defendants’ actions breached the Companies Act because:
(a) There was a failure to disclose the favourable terms of the employment contract;
(b)There was a failure to disclose or discuss with the plaintiffs the buy- back provision; and
(c) There was a refusal to cooperate with the plaintiffs in achieving a fair
market value of DISL’s and DWML’s assets.
The relief sought
[10] The plaintiffs allege that the market value of the assets of DISL was
$700,000. They claim that as the figure received for the sale of DISL’s assets was
$172,795.84, there has been an overall loss on the sale of $527,204.15.
[11] In respect of the sale of DWML, the plaintiffs say that the market value of the business sold was $400,000. The amount received in respect of this business was
$145,216.25. They say, therefore, there has been a net loss on sale of $325,783.75
[12] The plaintiffs say they are entitled to half of the loss which has arisen in respect of the two sales of $426,493.96.
[13] The plaintiffs make similar claims in relation to the second cause of action and say that compensation should be awarded to them pursuant to s 174(2)(b) of the Companies Act 1993 of $426,493.96. There is what appears to be an alternative prayer for relief sought, namely relief pursuant to s 174 of the Companies Act 1993 as the Court deems just.
[14] These figures have been taken from the schedule prepared by counsel for the plaintiffs.
Background
[15] Before setting out the facts which gave rise to this claim, it is necessary to briefly set out the history of the companies involved and the roles that Ms Watson and Mr Stacey had in the companies.
[16] In 2002, Ms Watson formed a company called Aspen Financial Management Ltd. Ms Watson formed Aspen as an investment advisory business for private clients. She was the sole shareholder and director.
[17] From approximately 2005, Ms Watson was looking to expand her business. She spoke to Mr Stacey at an industry conference and he suggested that she join DISL Ltd, which was a company that Mr Stacey and a Mr Clinton Macy were shareholders in. This led to a reorganisation of the companies.
[18] In 2006, Mr Stacey and Mr Macy were appointed as additional directors of Aspen. DISL Ltd acquired Ms Watson’s 1000 shares in Aspen at which time Ms Watson acquired a 10 per cent shareholding in DISL Ltd. Shareholdings in DISL Ltd were allocated according to the proportion of funds under management which
each shareholder had generated. Ms Watson or her interests were a 10 per cent
owner, Mr Stacey’s interests owned 45 per cent and Mr Macy, owned the remaining
45 per cent.
[19] Diversified Wealth Management Ltd (“DWML”) was incorporated on
3 January 2008, at which time its directors were Mr Macy, Mr Stacey and
Ms Watson. Its shares were held by the directors’ interests.
[20] The parties traded through DISL Ltd for a time. In 2010, Mr Stacey entered into negotiations on behalf of DISL Ltd with a third party for the sale of the private clients and the employment of DISL Ltd’s advisers. Ms Watson did not believe that the third party was an acceptable transferee and would not recommend to her clients that they transfer. As a result, most of DISL Ltd’s private clients were transferred to the third party leaving mostly Ms Watson’s clients (former clients of Aspen) in DISL Ltd. At that time, Mr Macy and two of DISL Ltd’s advisers left to work for the third party.
[21] In late 2010, Mr Macy ceased to be a director of both DISL Ltd and DWML
[22] On 9 November 2010, Aspen was renamed “Diversified Investment Strategies Ltd”. In this judgment this company will be referred to as DISL. Ms Watson’s and Mr Stacey’s interests became shareholders in that company directly rather than through DISL Ltd.
[23] In summary, from late 2010 and during the period to which this claim relates, Mr Stacey and Ms Watson (“the directors”) were the sole directors of two companies, DISL and DWML. At all relevant times, the shares in both companies were held in equal parts by the trustees of the Stacey Family Trust and the trustees of the DVW Family Trust, the trustees of which are the second plaintiffs and second defendants respectively.
DISL and DWML
[24] DISL and DWML were run from the same open plan office in Central
Auckland and were sometimes referred to collectively as ‘Diversified’ and it is
convenient, for the purposes of this judgment, to adopt the same description. From approximately 2009, the directors, Mr Stacey and Ms Watson received salaries of
$100,000 per annum plus expenses
[25] The two directors worked closely together and each brought different strengths to the 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.
[26] It is clear on the evidence that Mr Stacey and Ms Watson had a close and collaborative relationship. They worked in an open plan office and would regularly have lunch meetings to discuss the affairs of Diversified. At that time that the events giving rise to this claim arose, there had been a chilling of the relationship.
[27] DISL and DWM also employed other staff. During the period to which this claim relates, the other staff member was Ms Emily Johnstone who was employed as marketing and communications manager.
Regulatory issues with the FMA
[28] From 2013, the Financial Markets Authority (“the FMA”) required fund managers to supply details of KiwiSaver funds’ Total Expense Ratio (“TER”). The LRKS had a relatively high TER because of its ‘fund-of-funds’ structure which involved multiple layers of fees, and its small size. After calculating the TER of the LRKS, and discussing the issue with the trustee NZGT, Ms Watson and Mr Stacey decided to ‘front-foot’ the issue with the FMA.
[29] On 11 December 2013, Mr Stacey, Ms Watson and Ms Johnstone met with the FMA. At the meeting, Diversified was effectively given an ultimatum by the FMA; find a solution to LRKS’s high TER by 31 March 2014 or the FMA would take regulatory action by moving to close down the LRKS. This meant that DWML either needed a large influx of new investors, or to divest or merge the LRKS. It seems that the directors accepted that, realistically, the LRKS would need to be sold to another company.
[30] The broader issue that this caused for Diversified was that divesting the LRKS would affect the other DWML funds. The LRKS funds fed into the same pool as the DWML PIE funds (its balanced fund and its dynamic fund). The divestment of the LRKS would result in a reduction of the total funds under management (“FUM”) in the DWML pool. As a result, the percentage of the total FUM held by certain individual investors would increase and 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. This would require a modification in offering documents and would likely shake investors’ confidence in DWML.
[31] Therefore, as a result of the FMA’s ultimatum and the likely flow on effects, Mr Stacey and Ms Watson concluded that they should look to sell or merge not only the LRKS, but the whole of DWML’s fund operations.
[32] ‘Selling’ the LRKS meant transferring the clients to another KiwiSaver scheme. This could be done either through voluntary transfer, where members are recommended to transfer to another scheme, or compulsory transfer, where members are notified of the transfer but are not required to take any steps to transfer. The benefit of a compulsory transfer is that it is more likely that members will transfer and therefore, the sale price increases. However, a compulsory transfer requires FMA approval.
The sale process
[33] In December 2013, Ms Watson and Mr Stacey, as directors of DWML signed a non-disclosure agreement with BBY (NZ) Ltd. BBY undertook to solicit interest in the sale of DWML. On 17 December 2013, Mr Stacey and Ms Watson meet with Mr Rob Hughes of BBY to discuss DWML’s options. Later that day, after the meeting, Mr Hughes sent a follow up email including data on previous sale prices based on percentage of FUM. This data showed sales of between $300 million and
$1.5 billion of FUM which had been sold for prices ranging between 3.8 and 10.9 per cent of FUM. DWML was significantly smaller than any of the funds listed in
Mr Hughes data. In response to the marketing by BBY, a number of expressions of interest were received.
[34] On 4 February 2014, Elevation Capital made an indicative offer for DWML excluding the LRKS for two per cent of FUM which would be payable in instalments based on the FUM retention. The last instalment of 50 per cent was to be based on FUM retained after one year. This offer did not address the pressing issue of divesting the LRKS and the offer was not followed up past March 2014.
[35] Craigs Investment Partners also made an indicative offer in early February. The offer was one per cent of FUM dependent on retention rate after two years. The offer was not progressed as the two year retention rate condition was unappealing to the directors.
[36] Information on DWML was also sent to Mr Glass of Devon Funds
Management around this time.
[37] In February 2014, Diversified negotiated with Halifax for the sale of DWML and the LRKS. On 14 February, Diversified received a non binding term sheet from Halifax for the acquisition of the shares in DWML for $475,000 subject to due diligence. The directors were pleased with the offer, Mr Stacey stated in an email to Mr Hughes “I believe the basic terms are agreed, we have a ‘handshake’ deal, and from Diversified’s perspective are bound by exclusivity.” Mr Stacey also indicated that they would need to stop talking to the other parties who had made offers, which he communicated to those parties. The terms in the term sheet were incorporated into a deed which gave Halifax an exclusivity period until 28 February to conduct due diligence. The exclusivity period expired and talks continued but NZGT, expressed concerns about Halifax as a solution for the LRKS and the directors were less than impressed with the conduct of the Halifax agents carrying out due diligence.
[38] On 15 January 2014, Ms Watson emailed Mr Stacey to discuss the future of Diversified. She stated that one option would be for DWML to be sold and she would continue with the private clients, or an alternative would be to just sell the
LRKS and continue with the DWML funds. She said that she did not believe that her stress levels would be able to maintain the second option. She then wrote:
Taking this into account and my capacity to continue I would like to put to you that the companies be split in ownership leaving you free to negotiate on your own without any undue pressure from me for a hasty sale. My Trust shares in DWML transferred to your Trust and your shares in DISL transferred to me. I would continue to help, if required, until the sale of DWML or for 6 months whichever comes first. And, I would hope that I could count on the same from you to transition DISL without due disruption. Obviously, finer details would need to be worked out.
The revenue last year for each company was: DWML $562,000
DISL $513,000
Withdrawals have occurred since in both companies.
You have often mentioned that funds management companies are more valuable as they are more transferrable, and scalable. I would hope so and if you do accept this proposal I hope you make a good sum out of the sale.
[39] Mr Stacey replied to the email the same day. He wrote:
I agree that we will need to reassess roles, particularly mine, going forward -
& also that your suggested outcome (ie that you continue on with the IMA
private clients dispensed of me), is logical. I shall endeavour to be accommodative, fair & reasonable in all regards. However right now we
are in a sale process that we must complete, and that critically depends on both our co-operation. I cannot do it alone. It needs you. I firmly & absolutely believe that should be our focus.
The timing is not of our choosing, but precipitated by the FMA edict we get out LRKS.
It is far from clear that there is any value in DWML. (I do not see just divesting LRKS as a viable option). The note to Brian reiterated what I thought you had voiced earlier too – that LRKS is a problem & of no commercial value, but that we see some value in the Funds. (LRKS is somewhat of a moral issue as while there may be some modest membership value, it is almost certainly less than the legacy liability - & I think we are agreed to minimize to the best of our ability).
I share the stress & pressure, which comes from FMA’s March 31st deadline (which we cannot alter), from poor returns (yes, for which I must accept blame, from staff problems and from divestment triggered at a time not of our choosing or influence. I think we are both doing our best to deal with it,
& ask your continuing and active help in achieving the best solution we are able.
I do not perceive changing the ownership at this juncture would be helpful. Let’s focus on meeting the FMA imposed deadline (for which I believe divesting DWML is the best course), and proceeding to an equitable
resolution of those proceeds. Ongoing company structures & my future will be more appropriately addressed thereafter.
[40] On 27 March 2014, Mr Stacey and Ms Watson again met with the FMA. DWML had not met the FMA’s target to reduce the LRK’s TER by the end of March or divest the LRKS. The FMA allowed Diversified another three months to find a solution. At this meeting, the FMA suggested that Ms Watson and Mr Stacey approach Fisher Funds to take over the LRKS as Fisher Funds had done so for other KiwiSaver schemes.
[41] Immediately following the meeting Mr Stacey emailed Halifax informing them that the LRKS was no longer available. The reason for this was that it was accepted by Diversified that Halifax was not a suitable candidate to purchase the LRKS.
The discussions with Fisher Funds
[42] Also on 27 March 2014, after the meeting with the FMA, Mr Stacey emailed a contact of his at Fisher Funds advising that DWML had decided to “wind up the Law Retirement Kiwi Saver Scheme with near immediate effect” and asking whether Fisher Funds would be interested in acquiring the LRKS. This email was also forwarded to Ms Watson. On 28 March 2014, Fisher Funds’ Chief Operating Officer and Chief Financial Officer Mr Glenn Ashwell responded by email stating that Fisher Funds was interested and had been through the process before.
[43] The following Monday, 31 March 2014, the directors met with Ms Carmel Fisher and Mr Ashwell of Fisher Funds. At that meeting, Mr Ashwell indicated that Fisher Funds was interested in acquiring the LRKS at a rate of $100 per member. Mr Stacey countered that with what he viewed as a more commercial price of $200 per member. At this meeting it was also discussed that Mr Stacey and Ms Watson might also be interested in disposing of their interest in DWML’s other funds to Fisher Funds.
[44] Between 1 April and 8 April there was a flurry of emails between Mr Ashwell of Fisher Funds and Mr Stacey, Ms Watson and Ms Johnstone for DWML concerning the acquisition of the LRKS by Fisher Funds.
[45] On 1 April, Mr Stacey stated to Mr Ashwell and Ms Fisher in an email, copying in Ms Watson and Ms Johnstone, that “Diversified is also seeking the most optimal solution – ideally divestment of all our funds (DWM Dynamic PIE fund will be very sub-economic in size, post-LRKS, will have associated party problems – and will likely still leave us with the joys of discovering the Fund-closing process).”
[46] On 2 April 2014, Mr Stacey sent an email to Mr Hughes of BBY in which he stated:
As mentioned, we have been in discussions with Fisher Funds regarding possible ‘Compulsory Transfer’ of the LRKS. They are well connected with FMA, and also interested in taking the LRP by the same technique. It may be difficult for us to counter if they get similar FMA ‘suasion’. We have a meeting at their offices at 9:30, where I expect Fisher may offer to take all our funds – at a distressed price, as condition of taking on the LRKS and with FMA in their corner. If Forrbarr have serious interest in any part, we should resolve it sooner rather than later.
In this email ‘Forrbarr’ refers to Forsyth Barr who had expressed an interest in the
sale.
[47] On 8 April 2014, Glenn Ashwell emailed Ms Watson and Mr Stacey with a draft term sheet for the acquisition of the DWML business by Fisher Funds. In the email Mr Ashwell states “We haven’t sought to address the IMA / advisory side of the business in this term sheet. There is no urgency for that and if you wish to retain that side of the business then that’s OK by us.” In this email ‘IMA/advisory side of the business’ refers to the DISL business.
[48] Attached to the email was what was referred to as an ‘NBITS’, a non-binding indicative term sheet, dated 7 April 2014. The key terms of relevance offered by Fisher Funds were:
LRKS and LRP
(a) $200 for every LRKS member and every LRP member that remains with Fisher Funds for 12 months;
(b)$100 per member would be paid within 10 business days of transfer as a deposit; and
(c) A further $100 would be paid shortly after the 12 month period expired.
DWM Funds
(d) 1 per cent of the FUM transferred to Fisher Funds that remains with
Fisher Funds for 12 months;
(e) A deposit of $50,000 would be made shortly after the transfer; and
(f) The balance would be paid shortly after the expiration of the
12 month period.
Costs
(g)Legal costs involved in reviewing the initial communications to members/investors and the application to the FMA for transfer (or notice of meeting in respect of the unit trusts) would be shared equally between the parties.
(h)Diversified would be responsible for costs involved with communicating with members, transferring members out of Diversified, and any legal advice taken for Diversified’s benefit in respect of the agreement.
(i)Fisher Funds would be responsible for any costs to transfer members into Fisher Funds products, communicating with members who have
transferred in, and any legal advice taken for Fisher Funds’ benefit in
respect of the agreement.
Approval
(j)Any agreement would be subject to approval by the respective boards, negotiation of acceptable terms, and FMA approval in relation to the LRKS transfer.
(k)The approval (except FMA approval) would be satisfied or waived by close of business on 25 April 2014.
Warranties
(l)Diversified and its associates would agree to a non-compete clause for five years.
Exclusivity and Confidentiality
(m)Diversified would not discuss with, entice or provide any information to any third party with regard to the possible sale of the business until the earlier of either party terminating this non-binding indicative term sheet or the failure of a party to satisfy a condition precedent by the required date.
(n)The parties would keep the prospect of this transaction completely confidential, including if it did not proceed.
[49] The email containing the NBITS was sent by Mr Ashwell at 9.58 am. At
10.41 am, Mr Stacey replied to Mr Ashwell by email, copying in Ms Watson. Mr Stacey thanked Mr Ashwell for his efforts in regards to the LRKS and noted that they certainly wished to proceed with that. He then stated:
Regarding the remainder of the business including the Law Retirement Plan, I confess I had been hoping for a little more – and I have not yet unequivocally made the decision to divest Diversified. (A broker downstairs
had assembled the attached sheet from published sources – admittedly at a different time, scale & circumstances – but from those heights to 1%, less costs, seems a big drop).
At this point, I am more inclined toward alternative destiny for Diversified Wealth Management Ltd, but have postponed other discussions until the KiwiSaver is dealt with.
[50] The ‘attached sheet’ which Mr Stacey referred to was the sheet prepared by BBY discussed above. Mr Stacey also excused himself from a meeting that afternoon but stated that he thought that Ms Watson and Ms Johnstone might still wish to attend. His evidence was that he understood that the meeting would be confined to LRKS transfer mechanics rather than corporate matters.
[51] After consulting with Ms Fisher, Mr Ashwell replied to Mr Stacey, again copied to Ms Watson stating:
Completely understand your position Norman. All of the transactions you have noted are, as you say, quite different in both size and circumstance.
You should do whatever you think is right for you and your business. We will not be at all offended.
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.
[52] In the afternoon of 8 April 2014, Ms Watson replied to Mr Ashwell stating:
I have just returned to the office after being out on client visits this morning. I note Norman’s response to your term sheet and as we are 50/50 owners my input is now probably irrelevant. However, I would still like to bring Emily over this afternoon to meet with you so you can put a face to the name and discuss options.
[53] Mr Stacey, stated that Ms Watson, by phone, told him that she was determined to do a deal with Fisher Funds regardless of his wishes. Ms Watson does not recall the conversation but denies that she would have used that language. Her evidence was that she would have said something along the lines of “We have tried the market and everything else, I think we’re at our last resort and we should [go] to Fisher Funds” or a general warning that they should not be too hasty in dismissing Fisher Funds.
[54] On 9 April 2014, Mr Stacey emailed Mr Glass from Devon Funds Management Ltd telling him that they were ‘well down the course’ of the LRKS being transferred to Fisher Funds and that the “next task will be ‘resolution of the LRP & Diversified”. He asked Mr Glass “Is there any interest?” Mr Glass replied the same day and told Mr Stacey that Devon was interested in the remaining assets subject to Devon “being able to pull together a larger transaction” which it appears that Devon was in the process of negotiating. Ms Watson was not copied into this exchange and was unaware of it.
[55] On 10 April 2014, Mr Stacey sent Ms Watson an email in which he stated:
My thinking on what might constitute an equitable and successful arrangement with Fisher Funds includes:
1) The proposed terms for LRKS look fair and acceptable – essentially
$200/mbr payable half shortly after members have transferred and ½ in one year – but it is preferable that parties were to bear their respective legal costs. (Alternatively, Diversified has finite revenue and potentially infinite liability).
2) The Law Retirement Plan could not successfully be successfully transferred to a KiwiSaver (or they would have gone into LRKS) [as you suggest, that may be a typo].
3) I believe the Law Retirement Plan and Diversified Funds are similar in being primarily investment funds (with few savers), and having higher average balances, and FUM being around $6.5 million and net $11.5 million respectively.
4) The 1% of FUM metric applied to DWM Funds – and reluctantly conceded as acceptable in the current circumstances n- should be applied to both LRP & DWM Funds.
5) Economic interest is completed at transfer. (i.e. Diversified as vendor will have no communication with members or influence on investment outcomes following transfer, both of which will be completely with Fisher). In recognition of the change, payment of the 1% of FUM transferred should be 50% on transfer, 25% after 1 quarter and balance 25% after 1 year – perhaps subject to +/- 15% variance to allow for growth or market movement without quibble.
6) From NWS perspective, it is preferable agreement on the future or divesting DISL be resolved concurrently with or close to DWML divestment, with Fisher or other. (If ‘other’, perhaps we should seek an independent valuation from Mike Moore, or other suitably qualified valuer).
7) It is understood DVW wishes to persist with advising on individually managed accounts. NWS future employment is undetermined, but he will need some vocation. Future engagement in management,
independent governance or investment committee roles within the NZ Investment industry should not be excluded for any period. While NWS has absolutely no intention of being principal of a KiwiSaver or retail funds (God forbid!), nor seeking to move clients from Fisher funds products – the broad, 5-yr non-compete clause needs to accommodate ability to earn a living elsewhere. The maximum period of any constraint should not exceed
1-yr, and recognized that it may need to be included in disclosure documents.
Agreed terms would be subordinate to the Code of Professional Conduct for
AFA’s.
A bit of a list, but not that divergent on commercial terms. Welcome your thoughts.
[56] Mr Stacey’s evidence is that Ms Watson never replied to this email. Ms Watson’s evidence is that she was in the office when he sent the email. She did not think it unusual that he sent an email when they were in close proximity as she interpreted it as him wanting to set out his position formally. She says that his preference for dealing with DISL at the same time as DWML was new and significant. She says she thought he must have been concerned that if the DISL clients were not sold at the same time, they may have followed Ms Watson if she later left the business. She assumed that, to him, including the DISL clients in the sale was a way to secure their value. While Ms Watson had originally wanted to purchase the DISL business herself, she was content to sell the DISL clients at the same time as the DWML funds if Mr Stacey wanted, although this raised issues of her future employment.
[57] On 10 April, Ms Watson emailed Mr Ashwell. She wrote:
In Confidence
I have had further discussions with Norman and he has reviewed your Term
Sheet from his perspective.
I too have some points I would also like to raise but we are not too far away in agreement.
How we manage the private client business probably needs to be handled almost simultaneously for us (Norman and I) to agree on how we manage the equitable split. Therefore I would like to discuss with you options for that side of the business.
[58] On 11 April 2014, a Friday, Ms Watson met with Mr Ashwell at the Fisher Funds office. She updated him on the progress of DWML and indicated to him that DISL’s clients were also available for sale. At this point, Ms Fisher also came into the conversation. Fisher Funds indicated that they were interested in purchasing the DISL clients but that if they did, they would need someone to look after those private clients as they had never bought a private client business before and it was not an area in which they had expertise. Ms Watson also indicated that if the DISL clients were sold, she would need employment. At this meeting no terms of employment were discussed. Ms Fisher suggested that Diversified should prepare a term sheet for the sale of the DISL clients as Diversified had seemed offended by the term sheet that Fisher Funds had prepared for the sale of DWML.
[59] At 3.09 pm that day, after the meeting at Fisher Funds, Ms Watson emailed
Mr Stacey. The text of the email itself simply said:
Anything to add? Vicki
[60] Attached to the email was a NBITS which set out proposed terms for the sale
and transfer of DISL’s clients to Fisher Funds. The key relevant terms were:
Price
(a) 1 per cent of FUM transferred to Fisher Funds that remain with Fisher
Funds for 12 months;
(b)A 50 per cent deposit would be paid on execution of the sale and purchase agreement;
(c) 25 per cent would be paid six months following the sale and purchase agreement;
(d)The remaining 25 per cent would be paid on the one year anniversary subject to the transfer being within plus or minus 15 per cent.
Costs
(e) Each party would bear their own respective costs on any legal costs involved to effect the transfer of the individually managed accounts;
(f) DISL would bear the costs involved in communicating with investors prior to transfer, the wind up of DISL, and any legal advice taken for DISL’s benefit in relation to the agreemen;
(g)Fisher Funds would bear the costs of communicating with investors who had been transferred and any legal advice taken for Fisher Funds’ benefit in relation to the agreement.
Conditions
(h)The transaction would be subject to approval by the respective boards and negotiations of mutually acceptable terms for sale and purchase;
(i) These conditions were to be satisfied or waived by close of business
25 April 2014.
Indemnities and Warranties
(j)The directors of DISL would not at some later stage seek to remove the individually managed accounts out of Fisher Funds;
(k)“Fisher Funds would provide all the normal warranties”; and would employ Ms Watson for a minimum period of three years “the employment contract to provide more details”.
Exclusivity and Confidentiality
(l)Diversified would not discuss with, entice or provide any information to any third party with regard to the possible sale of the business until the earlier of either party terminating the non-binding indicative term
sheet or the failure of a party to satisfy a condition precedent by a required date;
(m)The parties shall keep the prospect of this transaction completely confidential, including if it did not proceed.
[61] This NBITS was prepared by Ms Watson using the earlier NBITS prepared by Fisher Funds, which she had received as a word document, as a template. Mr Stacey’s evidence is that he assumed that the NBITS had originated from Fisher Funds and that he dismissed it as another low offer from Fisher Funds. He did not discuss the NBITS with Ms Watson either verbally or by email.
[62] Ms Watson’s account is very different. She says that on the afternoon of
11 April, following her meeting with Fisher Funds, she discussed the meeting with Mr Stacey. She says that the main focus of the discussion was the purchase price of the DISL clients. She says that Mr Stacey was adamant that the private clients were not worth more than the DWML funds. She says that she remembers mentioning to him that even Buyer of Last Resort agreements were around 1.5 per cent, but he dismissed the idea that Fisher Funds would pay more than one per cent. She says that the argument became heated and that it was at that point that she acquiesced and drafted the NBITS including the purchase price of one per cent.
[63] At 3.37 pm that day, just under half an hour after sending the NBITS to Mr Stacey, Ms Watson sent an email to Ms Fisher and Mr Ashwell, copying in Mr Stacey. She stated “I have prepared an Indicative Term Sheet for the purchase of Diversified’s Individually Managed Accounts” to which she attached the NBITS she had prepared and stated that she anticipated that the FUM available for transfer was likely to be approximately $24 million.
[64] Mr Stacey admits that he saw this email that day, although perhaps not at the time it was sent. At this point he must have realised that the term sheet had been prepared by Ms Watson, rather than by Fisher Funds. His evidence was that he became incensed but that he did not send an email correcting the position; rather he got up and left for the weekend.
[65] Mr Ashwell replied to Ms Watson on Monday, 14 April, at 5.50 am, copying in Ms Fisher and Mr Stacey. He stated:
… thanks for putting together the term sheet. In principle, we think we can work together to move forward and the broad terms of the term sheet seem fair enough to us.
We wanted to come back to you quickly so we could give you a guide on the way forward. Of course, there will be some due diligence required (especially on the client contracts, Aegis contracts etc) and we would need to agree employment terms with yourself. We have a Board meeting on 28
April (papers being sent on Thursday) and hope we could get Board approval then with formal sale and purchase agreements to then be finalised. Shall we catch up tomorrow or Wednesday to work through some of that detail and discuss employment terms moving forward?
[66] Ms Watson replied to Mr Ashwell at 7.12 am suggesting a meeting the following day. She wrote “In the meantime, I will work on putting together information on templates, contracts and processes in readiness for the next steps.”
[67] Mr Stacey in cross examination was asked what steps he took following the emails on 11 and 14 April where it was clear that Fisher Funds were taking steps to move forward with the deal and get board approval. He admits that he had no correspondence with Fisher Funds and made no attempt to clarify with them that he did not agree to the price being discussed. When asked whether he verbally dissented to Ms Watson, he stated that he didn’t specifically remember what was said “… but there was no agreement to it”. At this stage, Mr Stacey knew that the price being discussed was one per cent of FUM remaining one year after transfer for both DISL and DWML and he was aware that Ms Watson was likely to be employed by Fisher Funds following the sale.
[68] The following day, 15 April, Ms Watson met with Mr Ashwell and Ms Fisher to discuss her employment with Fisher Funds. After the meeting, Mr Ashwell sent an email to Ms Watson, copying in Ms Fisher. The email read:
Thanks for coming over today. We remain delighted about the prospect of you joining Fisher Funds and we look forward to working with you and your clients.
Carmel and I have discussed a potential remuneration package and we think that a salary of $200,000 plus up to 30% bonus would be acceptable to us. The bonus would be dependent on retaining the clients and profitably
growing the client base as well as other KPI’s (e.g. coaching internal advisers and establishing processes). While we are happy to commit to a three year term it would be dependent on (reasonable) performance standards being met and retention of sufficient clients to at least cover the costs of your employment.
We will pay your reasonable business expenses and you would work from our offices, to the extent that you are not visiting clients.
We hope that sounds attractive to you. You are the sort of person we want representing Fisher Funds and we’ve been impressed with your skill, professionalism and the client base you have built.
p.s I didn’t copy this to Norman as it contains personal employment terms for you but will leave it to you to pass on the information you think is appropriate.
[69] Later that day, by email, Ms Watson indicated that the terms of employment were acceptable and further stated:
As you say, these are personal employment terms and I would rather keep them confidential, suffice to say, in the S&P contract that Fisher Funds will employ Vicki Watson at mutually acceptable terms.
The next step, I suppose, is to have a S&P drawn up reflecting our agreed terms for both Diversified Wealth Management Limited (DWML) and Diversified Investment Strategies Limited (DISL). I will discuss with Norman tomorrow the other draft you have supplied for DWML, just to ensure all is okay from his perspective.
[70] The next day, 16 April 2014, Ms Watson emailed Mr Ashwell copying in Mr Stacey and Ms Fisher. She discussed the possibility of a compulsory transfer for LRP members to Fisher Funds LifeSaver at a rate of $200 per member who remained in Fisher Funds LifeSaver Plan for 12 months. She then states “The only other item that Norman would like altered is to change the non-compete clause to ‘two years’ and remove the words “or promote””. In response, Mr Ashwell indicated he would start producing documents for the LRP similar to what had been produced for the LRKS. Following which there was an estimate from Chapman Tripp to Fisher Funds on legal fees to draft the sale and purchase agreement and a discussion between the parties as to the correct apportionment of those fees.
[71] On 17 April, Mr Ashwell presented his proposal for the purchase of DISL and DWML’s clients to the Fisher Funds Board. The proposal noted Ms Watson’s proposed employment, remuneration, and bonus and stated:
As we develop our “mass affluent” advice offering, we believe there will also be demand for more comprehensive advice and financial plans. We currently offer are relatively limited advice proposition [sic]. Vicki strikes us as a competent adviser who has some good Financial Plan templates and knows how to deal with high net worth clients. She has built her client base from scratch. Diversified have also been audited by FMA who were complementary of their processes, at least for a small organisation. Our team can learn a lot from Vicki and her employment will help our overall advice proposition.
[72] On 22 April, Mr Stacey emailed Mr Glass of Devon in which he set out the amount of FUM in DWML and stated:
We have had discussions & are currently well down the track in divesting both the LRP & DWM, (as well as the Private Clients), to the home we have found for the KiwiSaver. Terms are almost precisely as you have suggested.
2) In order to derail that train, I need a compelling issue comparison, or some other form of sweetener to put before the other 50% partner in this venture. Are you in town, or available for a coffee or private chat in the next
24hrs?
[73] Mr Stacey then received an offer, initially by phone and then by follow up email, from Mr Glass who stated that he would be willing to pay one per cent of FUM to acquire the Diversified PIE funds subject only to quick due diligence. The price would be based on the FUM transferred rather than being conditional on FUM being retained. He stated that he would need only three days to go unconditional.
[74] Mr Stacey shared the news with Ms Watson in their office on 22 April expecting that she would be pleased about what he viewed as a superior offer. He says that Ms Watson shouted at him that she had an indicative offer, that she would not support discussion of an offer from any other party, and accused him of reneging on Fisher Funds. Ms Watson’s evidence is that when Mr Stacey told her of Devon’s offer she told him that if he was going to stop the process with Fisher Funds and pursue another purchaser he would need to go and tell Fisher Funds. She agrees that she told Mr Stacey that he was reneging on Fisher Funds.
[75] Following this discussion, Mr Stacey emailed Ms Watson setting out the reasons why the offer from Devon was superior to the offer from Fisher Funds. In the email he stated that while they had discussed a bottom line of one per cent of FUM, this offer would save time and expenses associated with winding up the
scheme as Devon was interested in taking DWML as a going concern. Mr Stacey says that in response, Ms Watson said that if DWML pursued the sale to Devon, she would thwart the sale by using her influence to recommend that investors and advisers withdraw their investment from DWML. Ms Watson denies that she made this threat saying she would never recommend to advisers that they withdraw. I am not convinced that Ms Watson did make this threat. Not only is it not supported by any other evidence but there is also no logical reason why Ms Watson would harm her own interests by recommending that advisers withdraw their investments.
[76] The same day, Ms Johnstone confirmed to Mr Ashwell, Mr Stacey, Ms Watson and others involved that the LRKS transfer communications had been sent to members, advisers and preferred providers. This included comparison data between Diversified and Fisher Funds which reflected poorly on Diversified’s performance.
[77] On 29 April, Ms Watson met with Mr Ashwell to explain to him that Mr Stacey was looking to sell DWML funds to Devon rather than to Fisher Funds. She was concerned that that could make Fisher Funds reconsider its purchase of the LRKS and DISL. Following the meeting Ms Watson emailed Mr Ashwell and stated “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.”
[78] On 30 April, Mr Ashwell sent an email to Ms Watson and Mr Stacey copying in Ms Fisher in which he said that he understood that Diversified was considering a sale of DWML excluding the LRKS to another party. He stated:
We are surprised by this as we have had numerous discussions about the sale process and associated terms, all of which indicated that we had agreed the commercial terms of a transaction and we were simply finalising the paperwork for this to occur. Instead of finalising the legal agreements before starting work, in good faith, we had focused on what you expressed as your immediate problem – a solution for the Law Retirement KiwiSaver Scheme. This has required significant input from Fisher Funds, utilisation of our intellectual property and expertise as well as incurring external costs.
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 reconsider 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.
[79] Also on 30 April, Mr Glass emailed Mr Stacey a term sheet for the purchase of all shares in DWML with a purchase price of 1 per cent of the FUM with a due diligence period of three says.
[80] Following the email from Mr Ashwell, set out above, Mr Stacey and Ms Watson had an email conversation. Mr Stacey wrote that Ms Watson seemed determined that the sale be to Fisher Funds, and that if she is happy she should send the term sheets to Mr Kuran (Diversified’s solicitor). Ms Watson replied 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.” She then goes on to say that if Mr Stacey disagrees, he can explain this to Fishers and “…approach the various people involved”.
[81] On 1 May, Mr Stacey had a telephone conversation with Mr Ashwell in which he says that he was ‘pretty polite’ but ‘capitulated’ to Mr Ashwell. He then emailed Ms Watson and notes ‘for the record’ that there was no binding agreement with Fisher Funds but says “I capitulate, I have told Glenn we will do as you and he have agreed. It is back in your court”. He further says he has dismissed the offer from Devon.
The buy-back right
[82] During May, Diversified and Fisher Funds set about negotiating the details of the sale and purchase agreements for DISL and DWML including the restraint of trade that Mr Stacey was to be subject to.
[83] On 12 May, Ms Watson emailed Mr Ashwell and stated that she was concerned about what would happen if she was, for example, made redundant by Fisher Funds. She stated “… 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… The contract in its present form does not recognise the whole package of selling the clients at a very low price.”
[84] The next day, 13 May, Mr Ashwell replied stating that he could see Ms Watson’s point but that Fisher Funds would never agree to employ anyone continuously even with a power to dismiss for gross negligence and asked what it was exactly that she wanted covered off. Ms Watson replied with an idea of what the buy-back term could say and forwarded the email to Mr Kuran (Diversified’s solicitor) noting that “… it will have some impact of the SPA agreement for Diversified Investment Strategies.” The buy-back related to DISL’s clients only.
[85] Mr Ashwell replied stating that he was happy to provide her the ability to buy back the clients if she was made redundant or unfairly dismissed. He says that she should be cautious of the distinction between DISL and her as a person. He said “It might look a little odd to have us purchase the clients from DISL but give just you the right of buy back in the SPA?”
[86] In mid May, Mr Stacey sent the sale and purchase agreements to Mr Friedlander, who was a friend of his and also a solicitor. He is also the instructing solicitor for the plaintiffs in this proceeding. At that point, the sale and purchase agreements did not contain reference to the buy-back but did note that Ms Watson was to be employed by Fisher Funds. Mr Friedlander sent Mr Stacey an email on
14 May in which he says that he has had a cursory look at the documentation and then offers some thoughts, which he warns are not intended to be any form of advice. The first point he mentions is that there should be disclosure between Ms Watson and Diversified in terms of her employment contract with Fisher Funds. The remainder of the email notes other miscellaneous issues and then considers the restraint of trade which was Mr Stacey’s main concern at that time.
[87] On 19 May, Mr Stacey met with Mr Kavanagh of Minter Ellison Rudd Watts and instructed that he wanted advice on the terms of the restraint of trade which was to be imposed on him, and that he wanted Mr Kavanagh to express to Mr Kuran that Mr Stacey wanted Mr Kuran to represent the interests of the companies and, in particular, ensure that assets were not transferred prior to sale.
[88] Mr Stacey was due to leave New Zealand for an overseas holiday early in the morning of 23 May. On 22 May, just before 6 pm, Mr Kuran emailed Ms Watson and Mr Stacey copies of both the DISL and DWML draft sale and purchase agreements. Mr Stacey says that he did not read the attached contracts in their entirety as he was preparing for departure on his holiday. Contained in the DISL draft was, as a
‘tracked change’:
Despite clauses 12.1 to 12.3 (inclusive) above, should Dorothy Vicki Watson’s employment with the Purchaser cease at any time within three (3) years from the Completion Date due to redundancy or any restructuring (but not due to her resignation) then:
(d) She and her Associated Persons will be entitled to provide services as an Authorised Financial Adviser; and
(e) Dorothy Vicki Watson will be entitled to require the Purchaser to use its reasonable endeavours to transfer the Customers to her or her nominated entity at the same price, and on the same terms as the Purchaser acquired them pursuant to this agreement.
[89] Until this point, the buy-back clause had been in Ms Watson’s draft employment contract but had not been contained in the sale and purchase agreement. Mr Stacey responded to Mr Kuran’s email later that evening thanking him for his work and amendments and requesting a provision stating that the vendor would contribute to his legal costs.
[90] Fisher Funds was not satisfied with the buy-back provision as worded in the sale and purchase agreement and so the wording of the buy-back provision in Ms Watson’s draft employment agreement was removed from that document and inserted into the sale and purchase agreement.
[91] The final version of the sale and purchase agreement for DISL included, at clause 12.3, the restraint of trade relating to Mr Stacey. The next clause, 12.4 was
headed “Further obligations for Dorothy Vicki Watson”. Included in this clause was
the following provision:
Despite clauses 12.1 and 12.2 and this clause 12.4 (inclusive) above, in the event that Dorothy Vicki Watson is made redundant or is unjustifiably dismissed by Fisher Funds during the period from 1 September 2014 and 31
August 2017, Dorothy Vicki Watson shall, for six months from the termination date, be entitled to buy back from Fisher Funds the Customers
that were sold from Diversified Investment Strategies Limited to Fisher
Funds, at the same price that Fisher Funds had bought those Customers from
Diversified Investment Strategies Limited under this agreement.
[92] On 3 June 2014, Mr Stacey prepared directors’ resolutions acknowledging the sale of DISL and DWML’s assets. He stated that at that point, although he was disappointed in the financial outcome, he believed that the directors had striven for the best result for Diversified achievable under the circumstances. “Fisher Funds is a big and very experienced acquirer; it seemed that ‘the Market’ had spoken.” The sale and purchase agreements were signed by Ms Watson on 30 May and Mr Stacey on
4 June. Mr Stacey’s evidence was that he signed the agreements in Mr Kuran’s
offices and that at that time he did not read the agreements.
[93] On 4 June 2014, Mr Ashwell sent a final draft employment agreement to
Ms Watson and she signed it that day.
[94] The trustees of the DVW Family Trust and Stacey Family Trust signed unanimous resolutions, one relating to DISL and one relating to DWML. The DISL resolution states “notwithstanding the disclosures of interest made by Dorothy Vicki Watson…” The copy of the resolutions that were provided in evidence were only signed by Ms Watson and Mr Stacey, but all parties seem to agree that the resolutions were, in fact, signed by all of the trustees. Mr Stacey says that the difference between the wording of the two resolutions raised his suspicions but at that point he expected that the wording referred only to the employment of Ms Watson. He did not ask Mr Kuran for any clarification.
[95] I record that Minter Ellison Rudd Watts were not instructed to provide advice in relation to the sale and purchase agreements in their entirety and did not consider or comment on the buy-back provision. However, it is not clear whether the other parties were aware of the limited nature of the retainer.
[96] On 19 July, Mr Stacey was working in Diversified’s office and Ms Watson was overseas on holiday. Ms Watson’s computer had been left unlocked by contract adviser Mr Armstrong. Mr Stacey looked through the emails on Ms Watson’s account and discovered the salary that Fisher Funds was to pay to Ms Watson.
[97] Mr Stacey says that in July 2014 he went through the sale and purchase agreements more closely and read, for the first time, the buy-back right.
[98] In August 2014, Mr Friedlander wrote to Ms Watson advising that they acted for Mr Stacey and that they had been instructed to pursue a claim for breach of fiduciary duty on the basis that Ms Watson had failed to disclose that she was to receive an above market salary and that she had refused to pursue an offer from Devon. The buy-back was not raised as an issue at this time, or in the original statement of claim.
[99] Ms Watson began working at Fisher Funds on 1 September 2014 as a senior wealth management adviser. In her role, approximately 20 per cent of her time is spent servicing clients who transferred from DISL.
[100] The prices paid by Fisher Funds are set out below.
Transferred
FUM/ MembersRetained FUM/ Members
Price Paid
DWML unit trusts
$8,520,930.99
$6,121,624.71
$61,216.25
LRKS
317 Members
289 Members
$57,800.00
LRP
147 Members
131 Members
$26,200.00
Subtotal DWML
$145,216.25 DISL
$18,553,382
$17,279,583.00
$172,795.84
Total (DWML + DISL)
$318,012.09
Issues requiring determination
[101] I consider that the issues to be decided are:
(a) Do the circumstances of the sale to Fisher Funds give rise to fiduciary duties owed to the defendants by the plaintiffs? And, if so:
(i)Were the terms of employment offered to the first defendant something that should have been disclosed in their entirety to the plaintiffs in circumstances where failure to do so breached her fiduciary obligations?
(ii)Did the first defendant fail to disclose the buy-back right contained in the agreement for sale and purchase of DISL in breach her fiduciary duty?
(iii)Did the first defendant breach her fiduciary duty by refusing to cooperate with negotiations which would have resulted in a higher sale price of DISL, DWML or both?
(b)Did the first defendant or second defendants act in a manner that was “oppressive, unfairly discriminatory, or unfairly prejudicial” in terms of s 174 of the Companies Act 1993? In particular, by:
(i) Failing to disclose the favourable terms of the first defendant’s
employment with Fisher Funds;
(ii) Failing to disclose the buy-back right; or
(iii)Refusing to cooperate with negotiations which would have resulted in a higher sale price of DISL, DWML or both.
(c) If the plaintiffs are successful, what is the appropriate remedy?
Expert evidence
[102] The plaintiffs brought evidence from two expert witnesses, Mr Ralph Stewart and Mr David Greenslade.
[103] Mr Stewart gave evidence on the appropriate market salary for an authorised financial adviser servicing a book of approximately $24 million and generating approximately $288,000 in gross revenue and the market valuation for the sale of Diversified as at 31 March 2014. I have taken the reference in his brief to
‘unauthorised’ as a typographical error because subsequent evidence given makes it
clear that he was discussing authorised financial advisers.
[104] Mr Greenslade gave evidence on the market valuation of Diversified, the sharing of information between Mr Stacey and Ms Watson, and Ms Watson’s employment terms.
[105] Counsel for the defendants submitted that certain paragraphs of Mr Greenslade’s evidence were inadmissible because they opined generally on the facts at issue in the proceeding, rather than providing valuation evidence. Counsel for the defendants also submitted that the aspects of the briefs of both witnesses relating to remuneration were inadmissible because neither witness was an expert in relation to salaries.The plaintiffs submitted that while neither expert was a remuneration expert as such, it is doubtful whether any HR adviser would be in a position to assist the Court given the specialised nature of the market.
[107] Admissibility of evidence is governed by s 25 of the Evidence Act 2006 which provides:
25 Admissibility of expert opinion evidence
(1) An opinion by an expert that is part of expert evidence offered in a proceeding is admissible if the fact-finder is likely to obtain substantial help from the opinion in understanding other evidence in the proceeding or in ascertaining any fact that is of consequence to the determination of the proceeding.
(2) An opinion by an expert is not inadmissible simply because it is about—
(a) an ultimate issue to be determined in a proceeding; or
(b) a matter of common knowledge.
(3) If an opinion by an expert is based on a fact that is outside the general body of knowledge that makes up the expertise of the expert, the opinion may be relied on by the fact-finder only if that fact is or will be proved or judicially noticed in the proceeding.
…
[108] I consider that the evidence of the experts in relation to Ms Watson’s remuneration did not assist the plaintiffs’ case. It was clear from the evidence (which would not have been available at the time that the expert briefs were prepared) that Ms Watson’s role at Fisher Funds was not equivalent to her role at Diversified. Accordingly, the premise on which the remuneration evidence was given was factually incorrect. Additionally, both experts conceded that an employer could well take into account duties other than advising clients when setting remuneration levels.
[109] The only determinative evidence able to be given by the experts at trial in regards to Ms Watson’s salary at Fisher Funds is that it is higher than what she had previously received at Diversified. This was not in dispute.
[110] I consider that Mr Greenslade’s evidence on the sharing of information between Mr Stacey and Ms Watson is not substantially helpful in understanding the other evidence in the proceeding nor is it within the field of his expertise. Accordingly, it is inadmissible.
Fiduciary duty
[111] Counsel for the plaintiffs, in the course of the trial, advanced the case on the basis that the principal cause of action is the second cause of action relating to s 174 of the Act. However, the first cause of action was not abandoned and so I must address it.
[112] The plaintiffs have pleaded that both the first and second defendants, Ms Watson and her family trust, owed fiduciary duties to the first and second plaintiffs, Mr Stacey and his family trust, 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) the companies were operated as a quasi-partnership; and
(d) there was a relationship of trust and confidence.
[113] The defendants, unsurprisingly, deny that any fiduciary duties were owed between the parties. They submit that it is well settled that the relationship between a director and a shareholder is not an inherently fiduciary one and that there is nothing unique about the companies and relationships in the present case to justify a departure from the normal position.
[114] There are two categories of circumstances in which the courts will find that a relationship gives rise to a fiduciary duty. The first is a ‘status-based’ relationship, where the nature of the relationship is inherently fiduciary such as doctor and patient, solicitor and client, or trustee and beneficiary. The second situation is where the relationship itself is not inherently fiduciary in nature, but some specific factual circumstances give rise to a fiduciary duty.1
[115] A director has a fiduciary role in a company and owes a fiduciary duty to that company. However, this case is not being brought by the company alleging a breach of a fiduciary duty being owed to that company. The alleged fiduciary duty is one owed to a shareholder by a director or to one shareholder by another shareholder. The relationship between directors and shareholders is not inherently fiduciary. As stated by Woodhouse J in Coleman v Myers:2
… the mere status of a company director should not produce that sort of responsibility to a shareholder and in my opinion it does not do so. The existence of such a relationship must depend, in my opinion, upon all the facts of the case.
1 Chirnside v Fay [2006] NZSC 68 at [73]–[75].
2 Coleman v Myers [1977] 2 NZLR 225 (CA) at 324.
[116] That is to say, the relationship between a director and a shareholder does not give rise to a status-based fiduciary duty. A fiduciary duty in such a relationship may only arise because of the particular circumstances and facts of the case. Similarly there is no inherent fiduciary duty between shareholders.
[117] It is not possible to exhaustively list the factors that should be considered when determining whether a relationship gives rise to a fiduciary duty.3 Some assistance can be gleaned from existing case law in which a fiduciary duty has been found to exist. In Coleman v Myers Woodhouse J stated:4
… while it may not be possible to lay down any general test as to when the fiduciary duty will arise for a company director or to prescribe the exact conduct which will always discharge it when it does, there are nevertheless some factors that will usually have an influence upon a decision one way or the other. They include, I think, dependence upon information and advice, the existence of a relationship of confidence, the significance of some particular transaction for the parties and, of course, the extent of any positive action taken by or on behalf of the director or directors to promote it.
[118] Woodhouse J then stated that each of those factors had taken on more than an ordinary significance in that case. Cooke J also found that the relationship was fiduciary on the basis of “… the family character of the company and the family; their high degree of inside knowledge; and the way in which they went about the
take-over and the persuasion of shareholders.”5
[119] In the Australian case of Brunninghausen v Glavanics the New South Wales Court of Appeal held that the appellant, a director and shareholder, did owe the respondent, the other director and shareholder, a fiduciary duty.6 In that case, the company was formed by the defendant to operate a business for importing ski equipment. He was assisted by his brother in law, the plaintiff. The plaintiff and the defendant were the only shareholders and directors of the company. The plaintiff held one fifth of the shares. The plaintiff then set up a company undertaking similar business in which the defendant was a minority shareholder. The relationship between the brothers in law deteriorated and for several years there was limited or no
contact until their mother in law made it known that she thought the brothers in law
3 Chirnside v Fay, above n 1, at [75].
4 At 325.
5 At 330.
6 Brunninghausen v Glavanics [1999] NSWCA 199, (1999) 46 NSWLR 538.
should settle their differences in order to restore harmony in the family. The brothers in law then had several conversations about the plaintiff selling his shares in the defendant’s company to the defendant but before a decision was reached, the defendant received an unsolicited offer to buy the company. The brothers in law then agreed on a sale of the shares, but the plaintiff was unaware of the interests of the third party which would have increased the value of his shares. The Court held that in the circumstances of the case the defendant as a director did owe a fiduciary duty to the plaintiff as a shareholder which had been breached by his non-disclosure of the negotiations for the sale of the company’s assets. The Court described the inequality
of power in the relationship and stated:7
[The plaintiff] had no legal right as a shareholder to inspect the company’s books of account or financial records. He was entitled to copies of the annual accounts but realistically chose not to exercise it. Those alone would not provide any real guide to the value of his shares. He had no effective right to be informed of the negotiations for the sale of the company’s business. The defendant, as the sole effective director occupied a position of advantage in relation to the plaintiff. He could, if he saw fit, disclose information about the pending negotiations for the sale of the business but could not be compelled to do so.
[120] It is clear from the authorities already discussed that there was no inherently fiduciary relationship between any of the parties to this case. Therefore, as a fiduciary duty may only arise because of the particular circumstances, I must consider the nature of the relationship between the parties involved with Diversified. Mr Stacey and Ms Watson were each directors of both DISL and DWML. They had different skills and expertise and this manifested in each having different roles within Diversified. They relied on and trusted each other in matters which the other was more skilled in. For example, Mr Stacey relied on Ms Watson’s knowledge of IT and allowed her to make decisions in that field. They also communicated extensively. They worked from the same space and had regular discussions over lunch about how the business was progressing. Both directors drew the same salary and the family trusts as shareholders received the same dividends. By the time the sales of DISL and DWML were in progress, there had been a breakdown in the relationship to some degree. However, despite this, both continued to work in the open plan office and
spoke to each other, both in person, and via email for much of the period to which the claim relates.
[121] The restructuring of the businesses after the departure of Mr Macy and the way that the businesses were conducted subsequently shows that the directors viewed themselves as equal in the businesses. They clearly had different skills and roles, but they were equals nonetheless. Mr Stacey and Ms Watson each had the right to fully participate in the negotiation for the sale of the Diversified businesses, influence the outcome, and make informed decisions. There is no basis for finding that there was a fiduciary duty on the basis of any imbalance of power, information or commercial expertise.
[122] Additionally, although Ms Watson and Mr Stacey were equals in the businesses it must be remembered that DISL and DWML were not partnerships or joint ventures; they were incorporated companies in which Mr Stacey and Ms Watson were directors. The fact that the business of a company was carried out by two persons in a manner similar to a partnership is an insufficient basis for imposing blanket fiduciary duties to that relationship. As Blanchard J stated in the Supreme Court in Maruha Corp v Amaltal Corp Ltd “In our view, when commercial parties elect to use an incorporated vehicle for a venture that can only loosely be called a joint venture, it is unlikely that their relationship as a whole will be fiduciary
in nature.”8 The same can be said in this case, although Ms Watson and Mr Stacey
worked closely together and trusted one another the general nature of that relationship alone is insufficient to establish that the relationship should be considered a fiduciary relationship.
[123] I note that in Maruha Corp v Amaltal Corp Ltd, the Supreme Court found that although the relationship as a whole was not fiduciary, Amaltal owed Maruha a fiduciary obligation in connection with arrangements made for Amaltal to undertake the company’s accounting and taxation functions. That was found to be the case on the basis that there may be aspects of an otherwise non-fiduciary relationship which
give rise to a fiduciary duty. The Supreme Court stated that this may arise:9
8 Maruha Corp v Amaltal Corp Ltd [2007] NZSC 40, [2007] 3 NZLR 192 at [20].
… 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 other or for both or has, perhaps less formally, even by conduct, assumed.
[124] Such a fiduciary duty was not pleaded in this case, nor am I of the opinion that it existed. Ms Watson did not, either expressly or by conduct agree to carry out negotiations for the sale of the businesses. Indeed, it is clear that both parties perceived that they were both able to negotiate and were both involved in the decisions. If anything, Mr Stacey is of the view that he was involved to a lesser degree than was required.
[125] The essence, in my view, is that while Ms Watson, as director of DISL and DWML, owed a fiduciary duty to the companies she did not owe a fiduciary duty to the shareholders of the companies. Nor did the DVW Family Trust owe a fiduciary duty to the Stacey Family Trust as a fellow shareholder.
Section 174
[126] The second cause of action in the plaintiffs’ claim is that the affairs of the companies were conducted in a manner that was oppressive, unfairly discriminatory, or unfairly prejudicial in terms of s 174 of the Companies Act 1993. That section provides:
174 Prejudiced shareholders
(1) A shareholder or former shareholder of a company, or any other entitled person, who considers that the affairs of a company have been, or are being, or are likely to be, conducted in a manner that is, or any act or acts of the company have been, or are, or are likely to be, oppressive, unfairly discriminatory, or unfairly prejudicial to him or her in that capacity or in any other capacity, may apply to the Court for an order under this section.
(2) If, on an application under this section, the Court considers that it is just and equitable to do so, it may make such order as it thinks fit including, without limiting the generality of this subsection, an order—
…
(b) Requiring the company or any other person to pay compensation to a person; or
(3) No order may be made against the company or any other person under subsection (2) of this section unless the company or that person is a party to the proceedings in which the application is made.
[127] Section 175 sets out certain conduct which is deemed to be prejudicial for the purposes of s 174. The plaintiffs do not allege that any of these forms of prejudice set out in s 175 have occurred.
[128] The elements which must be made out for a claim to be successful under that section are:
(a) The applicant must have standing to sue and must sue the appropriate persons;
(b)The applicant must show that the conduct relates to the affairs of the company;
(c) The applicant must show that the conduct in question was oppressive, unfairly discriminatory, or unfairly prejudicial;
(d)The applicant must show that he or she has suffered prejudice in some relevant capacity.
[129] For the sake of clarity it is necessary to note that applications may be brought under s 174 either by a shareholder or an entitled person. ‘Entitled person’ is defined in s 2 as meaning a shareholder or a person upon whom the constitution confers any of the rights and powers of a shareholder. Only the second plaintiffs, who are parties in their capacity as trustees of the Stacey Family Trust are able to bring an application. That is to say, that Mr Stacey himself has no standing to bring an application under s 174 in his personal capacity. In this case, this makes no practical difference given that both directors were trustees of the family trusts which were shareholders in the companies.
[130] The argument advanced by the plaintiffs in this case was that the first defendant acted oppressively by refusing to negotiate for a better price for the customers of 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. If it is found that Ms Watson refused to negotiate for a better price, there can be no doubt that this relates to the affairs of the companies.
[131] I consider that the crucial issues to be determined are whether the plaintiffs suffered any prejudice and whether the defendants’ conduct was “…oppressive, unfairly discriminatory, or unfairly prejudicial”.
[132] The leading case on the interpretation of “oppressive, unfairly discriminatory, or unfairly prejudicial” in New Zealand is Thomas v H W Thomas Ltd.10 Although that case actually concerned s 209 of the Companies Act 1955, it is still relevant to s 174 of the current Act. That case concerned a family company which operated a specialised transport business. The company took a conservative approach to its financial management and the return to shareholders was modest. The shares in the
company were under the control of the Managing Director who could reject a share transfer without giving reasons. Shares in the company could not be transferred to a non-member if any member or non-member selected by the Managing Director was willing to purchase the shares at their fair value. The applicant’s position was that the company took a commercially unreasonable approach to its affairs and generated a totally inadequate return on shareholders’ funds. The applicant, at the 1980 AGM, moved that the assets held by the company be sold and the proceeds reinvested in higher income earning investments. His resolution did not pass. The next year, the applicant gave notice that he wished to sell his shares in the company. The company informed him that it was expected that the provisions of the Articles would be followed. Nothing further happened until the applicant brought a claim seeking an order that the company be required to buy the applicant’s shares. Richardson J in the
Court of Appeal stated:11
Taking the ordinary dictionary definition of the words from the Shorter 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 3 distinct alternatives which are to be considered separately in watertight compartments. The three expressions overlap, each in a sense helps to
10 Thomas v HW Thomas Ltd [1984] 1 NZLR 686 (CA).
11 At 16.
explain the other, and read together they reflect the underlying concern of the subsection that the conduct 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.
[133] In that case the Court of Appeal agreed with the lower court that the decision of the company to carry out its business conservatively was not unreasonable and it could not be said that the plaintiff was unfairly prejudiced. The Court also held that it was premature to conclude that the plaintiff was locked into the company.
[134] In Latimer Holdings Ltd v SEA Holdings New Zealand Ltd the Court of Appeal confirmed that the judicial approach laid down in Thomas, continued to be appropriate.12 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) (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 (2001) 9 NZCLC 262, 490where, in delivering the judgment of this Court McGrath J said:
“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”(at [31]).
12 Latimer Holdings Ltd v SEA Holdings New Zealand Ltd [2005] 2 NZLR 328 (CA) at [112].
[135] The Court of Appeal also stated that the test is an objective one.13
[136] In Sturgess v Dunphy the Court of Appeal clarified the first principle set out in Latimer, as stated above. The Court stated:14
We acknowledge that in Latimer this Court stated that mere mismanagement and inefficiency will not sustain a remedy, but it was merely emphasising the 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.
[137] The theory advanced by the plaintiffs has several key flaws in regard to s 174. The first problem for the plaintiffs, in my view, is that while Ms Watson clearly favoured a sale to Fisher Funds, she gave Mr Stacey opportunities to call off the deal to Fisher Funds and pursue other options. In particular, it should have been apparent to Mr Stacey that the deal with Fisher Funds was progressing rapidly. The suggestion by Fisher Funds that there may have been an implied contract clearly had no basis and there is no doubt that Diversified was not yet bound to the deal. However, should Mr Stacey have wanted to negotiate further with other potential purchasers he had plenty of opportunity to raise this with Ms Watson prior to informing her of the offer from Devon.
[138] When Mr Stacey informed Ms Watson of the Devon offer she was displeased and made it clear that she believed that they had had a joint intention of progressing the Fisher Funds deal. Nonetheless, Ms Watson provided Mr Stacey with the opportunity to extricate Diversified from the Fisher Funds negotiations if he felt it could be done. Mr Stacey did not do so. He took no steps to clarify the position or halt the unfolding process with Fisher Funds. On 29 April, Ms Watson met with Mr Ashwell and informed him that Mr Stacey was speaking with another party about the sale of DWML. Following this meeting, Mr Ashwell sought clarity from
Diversified and Mr Stacey rang him and ‘capitulated’. If Mr Stacey was not
13 At [113].
14 Sturgess v Dunphy [2014] NZCA 266 at [138] (footnotes omitted).
comfortable with the terms being discussed with Fisher Funds, this would have been the time to say so.
[139] Mr Stacey’s decision not to negotiate harder and instead go along with Ms Watson’s position was a business decision. This is reinforced by Mr Stacey’s position as expressed in his evidence that at the time that the directors’ resolutions were signed “Although I was disappointed in the financial outcome for the companies, I believed the first defendant and I had striven for the best result for the company achievable under the circumstance. Fisher Funds is a big and experienced acquirer; it seemed that ‘the Market’ had spoken.” This does not suggest that Mr Stacey, at the time that the sale was concluded, was of the impression that Diversified was selling too cheaply. It was only after Mr Stacey realised that Ms Watson was to receive a higher salary and the buy-back right that he became of the opinion that Diversified could have got a better deal for DISL and DWML’s assets. This belief was premised on the assumption that Ms Watson’s salary and the buy-back form part of Fisher Funds’ payment for Diversified’s assets.
[140] The directors recognised that it would be preferable to divest DWML at the same time as the LRKS. However, once DWML was divested, DISL would not have sufficient business to maintain the current Diversified infrastructure including two directors, the lease, and other business expenses. Therefore, while only the LRKS needed to be divested urgently, there was commercial sense in finding a prompt solution to the divestment of all of Diversified’s business.
[141] Devon brought to the table another offer in relation to DWML. That offer, if concluded on the terms suggested, could have resulted in a higher sale price. However, it is not the place of the Court to second guess commercial decisions such as these which involve the balancing of numerous factors including not only price, but also certainty, professional responsibility, and the need for a quick resolution.
[142] The plaintiffs allege, however, that this was not an unfettered commercial decision as Ms Watson was forcing a sale to Fisher Funds for personal gain. As Fisher Funds and Ms Watson did not discuss or agree on her salary or the buy-back until after the essential terms for the sales of both DISL and DWML had been
floated, it is difficult to find that she agreed to sell for a low price in order to obtain these benefits. At first glance, Ms Watson’s comment in and email to Mr Ashwell that she wanted better employment terms as the current terms did not reflect the cheap sale price seems damning. However, the suggestion that Ms Watson first suggested a low price in order to later gain better employment terms defies common sense. This would have been a foolish gamble requiring Ms Watson to harm her own interests in the hope that she might be able to achieve another advantage later down the track.
[143] Mr Stacey’s case was that Ms Watson accepted or offered a low price for DISL and DWML in exchange for an inflated ‘super-salary’. It is accepted by the defendants that Ms Watson’s salary at Fisher Funds was higher than at Diversified. However, Ms Watson denies that it is a ‘super-salary’. She says that it reflects the work that she does at Fisher Funds and that she now looks after more clients, more FUM and also takes on other work. Although Ms Watson did not send her résumé to Fisher Funds until after the salary offer was made, that is not to say that they were unaware of her experience or expertise. The parties to the salary offer were previously acquainted, and it is reasonable to assume that Fisher Funds would have been aware of Ms Watson’s background.
[144] I am not convinced that it is necessary for me to determine whether Ms Watson’s salary at Fisher Funds is a ‘super-salary’ given that it did not affect the purchase price paid. However, that finding in itself goes someway to answering the question. Given that Ms Watson’s remuneration was agreed on after the purchase price was agreed, that she has greater and different responsibility at Fisher Funds than she had previously at Diversified, and that she was seen to be a valuable acquisition to Fisher Funds’ business, the plaintiffs are unable to show that Ms Watson received a salary disproportionate to what she was worth to Fisher Funds.
[145] Mr Stacey’s theory that the buy-back was inserted at a late stage, the night before he was going overseas, was a scheme between Fisher Funds and Ms Watson to hide the clause from him is unlikely to be correct. The draft was sent to him. He opened it. The buy-back was clearly marked as a change, although not in the
wording that appeared in the final version. It was on the following page to the restraint of trade clause that Mr Stacey was very concerned about. Had the intention been to hide it from Mr Stacey it would not have appeared in the sale and purchase agreement at all. Neither Ms Watson nor Fisher Funds would have had any reason to assume that Mr Stacey would fail to read the agreement.
[146] Ms Watson’s communication with Mr Ashwell indicates that while Mr Ashwell thought that the inclusion of the buy-back could be awkward, Ms Watson actually gave it little thought and did not intentionally seek to conceal it from Mr Stacey. The inclusion of the buy-back, in effect provided security for Ms Watson against being made redundant or being unjustifiably dismissed. It did not result in any corresponding detriment to the shareholders or, in particular, the Stacey Family Trust.
[147] It is also important to note that the offer by Devon was for DWML and did not include DISL. Once Fisher Funds was aware of Devon’s offer they stated that if Diversified wanted to sell DWML elsewhere, they would need to renegotiate for DISL. Ms Watson’s employment was not linked to DWML. Fisher Funds was interested in hiring her as the move to individually managed funds was new ground for them. There is no reason why, had DWML been sold to Devon, Ms Watson would not have been employed by Fisher Funds.
[148] In my view, Mr Stacey allowed himself to be swayed by Ms Watson’s preference for a sale to Fisher Funds as he perceived that it would be difficult to back out of the negotiations and pursue another angle. He then did not pay close attention to the terms of the sale and realised at a late stage that Ms Watson was obtaining more benefits from the sale than he expected. At this stage, Mr Stacey experienced seller’s regret.
[149] As stated by the Court of Appeal in Latimer Holdings, referencing Thomas “… as a general proposition courts cannot appropriately be involved in second- guessing decisions by boards and shareholders as to the more appropriate direction and management of a company. This Court cannot correct poor strategic decisions, if
such they be.”15 In that case, the Court of Appeal noted that the applicants had entered “with their eyes wide open”. I accept that this is not necessarily true in this case. While Mr Stacey did not know about Ms Watson’s salary or the buy-back right at the time of sale, this was a blindfold of his own making. He had the information regarding the buy-back, he just did not read it. He was told that he should ask about Ms Watson’s salary, but he was not interested.
[150] Section 174 requires that the conduct complained of was “…oppressive, unfairly discriminatory, or unfairly prejudicial”. While Mr Stacey feels that Ms Watson was secretive in not telling him her salary, there is no indication that this resulted in any detriment to the shareholders when viewed objectively. I am not of the view that the plaintiffs have been able to show that Ms Watson’s conduct resulted in any corresponding loss to shareholders or otherwise adversely affected them. Accordingly, the s 174 application must fail.
[151] This judgment should not be taken as an endorsement of the conduct of either director in the negotiations. It may be that Ms Watson should have, as a director, disclosed the exact nature of her interests in the transactions in a clearer manner. However, that was not the issue that I was required to determine. The issue in this case was not whether Ms Watson’s conduct was irreproachable but rather, whether there was conduct that was oppressive, unfairly discriminatory, or unfairly prejudicial to the plaintiffs.
[152] I also record that if I am wrong in respect of the substantive aspect of this claim, the plaintiffs claim for relief is nonetheless heavily inflated. If I had found that the plaintiffs claim under s 174 was successful, the amount of damages awarded in relation to DWML could only be, at most, half of the difference between the amount that resulted from the sale to Fisher Funds (less the LRKS) and one per cent of the FUM at the time that the Devon offer was made.
[153] The damages claim is premised on the basis that had it not been for
Ms Watson’s conduct, Diversified would have sold the clients/funds of both DWML
and DISL at a rate of two per cent of FUM. The evidence does not suggest that, at
15 At [120].
the relevant point in time, the directors saw this as a realistic outcome or were pushing for that result. Mr Stacey, for example, was very pleased with Devon’s offer of one per cent of DWML’s FUM. I would also consider that a reasonable loss in regard to DISL would have been no more than half of the difference between the actual price and one per cent of DISL’s FUM at the time of the offer. I would also likely have reduced the award on the basis that a just and equitable remedy would need to reflect the conduct of Mr Stacey in the relevant matters.
Result
[154] The plaintiffs fail. Judgment is entered for the defendants on the claim.
[155] I reserve costs. If the parties cannot agree, memoranda in support, opposition, and reply shall be filed and served at seven day intervals. Counsel may be assisted by my preliminary view that quantum of costs would appropriately be fixed on a 2B
basis.
JA Faire J
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