Sturgess v Dunphy
[2014] NZCA 266
•24 June 2014 at 11.00 am
| IN THE COURT OF APPEAL OF NEW ZEALAND |
| CA366/2013 CA717/2013 [2014] NZCA 266 |
| BETWEEN | JOHN GILBERT STURGESS |
| AND | ROBERT MARK PATRICK DUNPHY GREYMOUTH HOLDINGS LIMITED RICHARD SHANE DUNPHY AND WENDY DUNPHY JUGEN KADEL TOWER HILL INVESTORS LLP GERMANDA HOLDINGS LIMITED PETER HANBURY MASFEN AND JOANNA ALISON MASFEN GREYMOUTH PETROLEUM HOLDINGS LIMITED JET TRUSTEES LIMITED JOHN STURGESS AND ASSOCIATES LIMITED |
| CA367/2013 | |
| AND BETWEEN | JET TRUSTEES LIMITED JOHN STURGESS AND ASSOCIATES LIMITED |
| AND | ROBERT MARK PATRICK DUNPHY GREYMOUTH HOLDINGS LIMITED RICHARD SHANE DUNPHY AND WENDY DUNPHY JUGEN KADEL TOWER HILL INVESTORS LLP GERMANDA HOLDINGS LIMITED PETER HANBURY MASFEN AND JOANNA ALISON MASFEN GREYMOUTH PETROLEUM HOLDINGS LIMITED |
| Hearing: | 24, 25, 26 and 27 March 2014 |
Court: | Randerson, White and Miller JJ |
Counsel: | F E Geiringer for Appellant in CA366/2013 and CA717/2013 and Second Appellant in CA367/2013 P G Skelton QC and A Borchardt for First Appellant in CA367/2013 J A Farmer QC, M D O’Brien and S M Consedine for First, Second, Seventh and Eighth Respondents J F Anderson for Third, Fourth, Fifth and Sixth Respondents |
Judgment: | 24 June 2014 at 11.00 am |
INTERIM JUDGMENT OF THE COURT
AThe form of relief in relation to orders 1 and 3 is reserved for further argument. A short timetable will be fixed by minute accompanying this judgment. Leave is reserved to apply. The appeals in CA366/2013, CA367/2013 and CA717/2013 are otherwise dismissed.
BThe cross-appeals in CA366/2013, having been abandoned, are formally dismissed.
CCosts are reserved.
____________________________________________________________________
REASONS OF THE COURT
(Given by Miller J)
Table of Contents
INTRODUCTION 1]
THE ISSUES25]
CLAIMS UNDER THE SHAREHOLDER AGREEMENT
Event of Default: the Methanex disclosure
The facts
The shareholder agreement
The High Court’s conclusionsAssessment
Deadlock: the unresolved Board resolution
The facts
The deadlock provision
The High Court’s conclusionsAssessment
QUESTIONS OF BEHAVIOUR
Was Mr Sturgess responsible for managing all of Greymouth’s
operations?
The High Court conclusions
Assessment
Midhurst
The High Court findings
Assessment
Radnor
The High Court findings
Assessment
Other allegations of misconduct
Clarencia
Waimanu
Brotula
Turangi
Findings of misconduct not appealed
Was the conduct of Mr Sturgess oppressive, unfairly discriminatory or unfairly prejudicial?
RELIEF
Winding up
Relief under s 174(2)
Relief in this case
Was it appropriate to grant relief that extended to Jet?
Was the sale of Group 2 shares appropriate?
Process for addressing the orders for sale
Decision
Costs
INTRODUCTION
Mark Dunphy, Peter Masfen and John Sturgess founded Greymouth Petroleum Holdings Ltd (Greymouth) in 2002 as the vehicle for a joint venture. They come to law because they have fallen out, with Mr Sturgess on one side and Messrs Dunphy and Masfen on the other, and the co-operation that the venture requires is now beyond them.
The three men are associated with Greymouth’s three shareholding groups; the Dunphy or Group 1 interests (the first to sixth respondents in CA366/2013) hold 52.144 per cent, the Masfen or Group 3 interests (the seventh respondents) 34 per cent, and the Sturgess or Group 2 interests (the appellant and ninth respondent) the remaining 13.856 per cent. The Group 2 shares are held by Mr Sturgess (two per cent) and Jet Trustees Ltd (“Jet”), a corporate trustee for his two family trusts (11.856 per cent). They were separately represented before us, but not at trial before Gilbert J.[1]
[1]The third to sixth respondents were also separately represented before us, as they were at trial, but we need not dwell on them. For our purposes, as will be seen, they need not be distinguished from Mr Dunphy.
The three were also until recently Greymouth’s directors and two of them were its principal executives. Mr Dunphy was and remains the Executive Chairman, and Mr Sturgess was the Chief Operating Officer (COO). Their executive positions were held under management services contracts between Greymouth and companies that they or their interests owned, being respectively Greymouth Holdings Ltd and John Sturgess and Associates Ltd (JSAL).
Greymouth explores for and produces petroleum. Although established as recently as 2002, it owns substantial exploration and/or production interests in New Zealand and Chile. By any measure it has been successful. Just how successful is controversial. That controversy motivates this appeal, in which the central question is not whether but on what terms the Sturgess interests will sell their shares; to whom, subject to which conditions, and at what price. (This is not to dismiss other, logically prior, questions that must be answered before we reach relief.)
We have described Greymouth as a joint venture. That is an apt but informal characterisation. Arrangements among the three men and their interests are or were governed by a shareholder agreement, the company’s constitution, the management services contracts, and the general law. We must discuss those documents in some detail. For present purposes, it is enough to highlight certain features.
First, although directors may act in the interests of the shareholder who nominated them, the shareholder agreement obliges shareholders to use reasonable endeavours to see that their directors take all reasonable steps to honour certain provisions of the agreement, including those dealing with decisions vested in the Board. Shareholders must also protect the confidentiality of Greymouth’s information, and they may not compete with the company or be interested in any business that does. This last obligation prevents a shareholder selling its shares to a competitor without the Board’s consent, but naturally does not inhibit sale of the company as a whole.
Second, the shareholder agreement generally vests governance in the Board, whose decisions must be unanimous. It reserves certain specified matters for the shareholders, and any shareholder resolution requires the votes of an ordinary or special majority of shares in each of the three groups. So any one director or shareholding group may veto any decision of the Board or, as the case may be, the shareholders.
Third, the resulting risk of corporate paralysis has been addressed via several mechanisms which collectively create powerful incentives to cooperate. Should a resolution submitted to the Board by a director not be resolved within 90 working days, any shareholder may by notice require that all the shares in the company be sold to a third party. This is known as the deadlock provision. Should a shareholder commit an event of default under the shareholder agreement, then fail to remedy the default on notice, the others may require that the defaulter transfer its shares to them at fair market value. This is known as the event of default provision. Fair market value is calculated by determining (by arbitration if necessary) the fair market value of the company as a whole, so that no regard is had either to any premium or discount for control or the lack of it, or to the prohibition on sale to a competitor. Finally, although the agreements make no reference to it, the shareholders retain access to the general law, notably the shareholder oppression remedy in s 174 of the Companies Act 1993.
Fourth, the agreement contains pre-emptive rights, under which any shareholder wishing to sell must first offer the shares to the others. Should the remaining shareholders not exercise their rights the selling shareholder may offer the shares to third parties at a price, and on terms, no more favourable than were offered to the remaining shareholders. If the terms of sale alter so as to become any less favourable, the shares must again be offered to the remaining shareholders before they may be sold to a third party.
The directors worked harmoniously for some years, but by 2011 there was serious trouble. Quite why is unclear. Mr Sturgess says that in 2009 Mr Dunphy abandoned the company for a time to live in Rome, and also that the other directors broke a promise to give him an enhanced shareholding in a Chilean venture. Messrs Dunphy and Masfen say rather that the directors fell out because Mr Sturgess began to act unilaterally and irresponsibly. Their account was substantially accepted by the trial Judge. After a trial of seven weeks duration Gilbert J found, in a judgment both inevitably lengthy and admirably concise, that Mr Sturgess had failed to report to Mr Dunphy and the Board, had conducted operations without approval and sometimes negligently, and had committed the company to unauthorised capital expenditure.[2] These difficulties caused or contributed to significant problems with the company’s drilling operations.
[2]Greymouth Holdings Ltd v Jet Trustees Ltd [2013] NZHC 1013 [First High Court judgment].
The Board having been unable to work things out, Mr Dunphy unilaterally suspended the management services contract with JSAL in February 2011, purporting to do so on behalf of the Board as executive chairman. He later purported to terminate it.
One action (known as the 5309 proceeding[3] began in late August 2011 with the Dunphy and Masfen interests seeking relief under s 174 requiring the Group 2 shareholders to sell their shares. The claim included a derivative action, brought by leave, alleging negligence and breach of the JSAL management services contract. The relief sought was an order that the Group 2 shares be sold on the open market, but subject to the shareholder agreement (whose provisions we refer to in detail below). The plaintiffs also sought transitional orders which would allow the Board to make decisions by majority, and shareholders to make decisions by a simple 75 per cent majority. Importantly for our purposes, they did not seek an order removing Mr Sturgess as a director.
[3]That being the file number assigned to it in the Auckland registry of the High Court.
Mr Sturgess and Jet responded with a second action (known as the 5442 proceeding). They invoked the deadlock provision, saying that the Board failed to deal with a resolution put by Mr Sturgess relating to the suspension of the JSAL management services contract.[4] They also invoked the event of default provision, saying that in January 2011 Messrs Dunphy and Masfen supplied confidential information to a competitor, Methanex, in breach of the shareholder agreement. They eventually abandoned an application for relief under s 174. The relief which they sought at trial was specific performance of the event of default provision, requiring that the Group 1 and 3 shareholders transfer their shares to the Group 2 shareholders; alternatively, specific performance of the deadlock provision, requiring that all of the shares be sold; alternatively, liquidation under s 241 of the Companies Act.
[4]Other claims were made, but we confine ourselves to those that were eventually pursued at trial and on appeal.
An arbitration is taking place in the shadow of the court proceedings. It was commenced following a stay application and resulting orders made by Rodney Hansen J, by consent, on 18 May 2012. The arbitrator, Mr Casey QC, is to establish the fair market value of Greymouth (including 35 other companies in the Greymouth group) under the shareholder agreement, without prejudice to the parties’ positions on liability and remedy in the court proceedings. The sum paid for the Group 2 shares will of course be their proportionate share of Greymouth’s fair market value. At the time of the hearing before us, the arbitrator was soon to begin the oral hearing. We have since been advised that an award is expected on 24 June 2014. For reasons explained subsequently, we have chosen to deliver this interim judgment.
Returning to the narrative, the High Court trial began on 29 October 2012. Mr Skelton QC was trial counsel for all the Sturgess interests (Mr Sturgess, JSAL, and Jet Trustees). Messrs Dunphy and Masfen were among the many witnesses, but Mr Sturgess was not. His proposed evidence had been exchanged and Mr Skelton cross-examined extensively upon it, but he eventually chose not to go into the witness box. Mr Skelton explained before us that the decision was taken because most of the negligence claims against Mr Sturgess had been challenged to good effect during the 5309 plaintiffs’ case. Be that as it may, the record does not include evidence that Mr Sturgess might have given about the issues that now concern us.
Under the 5309 proceeding the Judge was confronted with 12 specific allegations of failure to report or misreporting by Mr Sturgess, eight of mismanagement or negligence, and nine of unauthorised capital expenditure. Most of these overlapped, in that any given well or permit often produced allegations under each head. The Judge dismissed a number of the claims, or found that they did not warrant relief under s 174, but generally speaking he did so without exonerating Mr Sturgess of misconduct. In some cases the Judge found that Mr Sturgess was not negligent, but had failed to report. Some claims falling into that category, and others where Mr Sturgess was held to be negligent, failed because the Judge was not persuaded that the company had suffered any loss. An inquiry into damages was ordered for two specific matters, known as Midhurst and Radnor. Both involved exploration permits under which Greymouth was drilling wells.
Gilbert J rejected the 5442 claims, reasoning that substantive and procedural requirements associated with the deadlock provision had not been complied with, the Dunphy/Masfen interests had committed no breach of the shareholder agreement upon which the event of default provision might operate, and it would not be just and equitable to order liquidation, which would destroy value to no one’s advantage. He found inappropriate, as do we, Mr Sturgess’s request for a liquidation order that would lie in court for a time so the parties might negotiate “a better outcome”.
The Judge found the suspension and later termination of the JSAL management services contract unlawful and ordered that arrears of management fees be paid,[5] but he also held that Mr Sturgess had behaved oppressively and that the Group 1 and 3 shareholders should have relief under s 174. He accordingly cancelled that contract. He considered leaving the shareholding as it stood, but assumed that Mr Sturgess would remain a director unless the Group 2 shares were sold. He was satisfied that the Board was dysfunctional, a result of Mr Sturgess’s behaviour, and would likely remain so; further, the Group 2 shareholders had said they were willing to sell provided they got fair market value. He accordingly decided that it was appropriate to order sale of the Group 2 shares.
[5]These findings and orders were made in the 5442 proceeding.
As to what form the sale might take, the Judge recorded that the Groups 1 and 3 shareholders sought a sale on the open market, alternatively at the fair market value to be established by the arbitrator. Guided by expert evidence and the philosophy of the shareholder agreement, he concluded that the alternative remedy was more appropriate.[6] He accordingly ordered that the Group 2 shareholders sell at the fair market value to be determined by the arbitrator. It will be necessary to review that decision in some detail in this judgment.
[6]At [468].
The parties were invited to file submissions as to the precise form of the orders to be made. That led to a second judgment, issued on 24 September 2013.[7] By that time Mr Sturgess was unrepresented and Mr Skelton represented Jet. Contrary to the Judge’s evident expectation at trial, the parties had agreed that Mr Sturgess would resign as a director and Group 2 would appoint a director suitable to the other directors, failing which the President of the Institute of Directors would make the appointment.
[7]Greymouth Holdings Ltd v Jet Trustees Ltd [2013] NZHC 2497 [Second High Court judgment].
The decision to order sale of the shares was not revisited, however. Indeed, the parties were largely in agreement as to the orders needed to implement the first judgment. The Judge accordingly ordered that the Group 2 shareholders must sell at fair market value, offering their shares to Greymouth in accordance with the pre-emptive rights in the shareholder agreement. He declined to order that the company buy at fair market value; it would have the option to do so, and if it did not the shares might be offered to third parties. He granted leave to apply as to implementation of the orders or for further or ancillary orders.
Since then the President of the Institute of Directors has appointed a director to represent the Group 2 shareholders. It is not suggested that there have been any problems at Board level, or any failure to pursue business opportunities. The company has paid some dividends, although not as many or as much as Mr Sturgess would like.
Many of the Judge’s findings and conclusions are not now challenged, although the precise extent to which that is so was the subject of some controversy before us. As we have observed, there was and is no evidence from Mr Sturgess, apart from what can be found in the agreed bundle of documents and parts of some interlocutory affidavits which were used in evidence by consent, to challenge the Judge’s findings. Confronted with this formidable obstacle, Mr Geiringer did his best. He challenged the Judge’s Midhurst and Radnor findings, and the conclusion that Mr Sturgess’s conduct justified relief under s 174. He also pursued the attempt to invoke the deadlock provision and the event of default provision, and to have the company wound up, with the order to lie in court for a time so that Mr Sturgess might force the Dunphy/Masfen interests to compromise.
On appeal the Group 2 shareholders no longer presented as willing sellers. Mr Skelton asserted that Jet wishes to remain a shareholder. He resisted a winding up order, and focused Jet’s case on the proposition that sale of the Group 2 shares is unnecessary and disproportionate. Mr Geiringer advised that Mr Sturgess does not wish to sell his shares either. In support of the proposition that Mr Sturgess’s conduct does not justify forced sale of the Group 2 shares, Mr Skelton agued that his misconduct happened as manager and emphasised that he accepts the termination of the management services contract; further, he is no longer a director. Counsel further advised that Mr Sturgess will allow the President of the Institute of Directors to make any future appointment that is necessary. The reader will observe that the issues have evolved somewhat since trial.
THE ISSUES
As noted, the appellants did not contest a number of the High Court Judge’s conclusions. Cross-appeals were abandoned before us (and will be dismissed accordingly).[8]
[8]Some issues were not pursued before us. These include: Mr Dunphy’s lawyers’ conflict of interest as they also worked for Greymouth; consolidation of the proceedings; the status of Mr Dunphy as executive chairman; the ability of a director to act in the best interests of particular shareholders in joint venture companies pursuant to s 131(4) of the Companies Act 1993; the validity of the arbitration and the relevant valuation date for that arbitration; the attempt to reinstate the management services contract; and an attempt to receive compensation for its termination.
There remain a substantial number of issues, however. We will begin with Mr Sturgess’s claims under the shareholder agreement:
(a) the alleged event of default through disclosure to Methanex; and
(b)the alleged Board deadlock over the resolution relating to cancellation of the JSAL management services contract.
We will then examine the grounds of appeal relating to the conduct of Mr Sturgess:
(a)A preliminary issue is whether Mr Sturgess was COO of certain Greymouth group companies whose operations were the subject of complaint; he alleges that he was never appointed to those positions, but the Judge found that he was COO in fact.
(b) Midhurst: negligence and failure to report.
(c) Radnor: negligence and failure to report.
(d) Other allegations of misconduct.
(e)Other adverse findings of the Judge which influenced his decision on oppression and relief.
(f)Whether the conduct of Mr Sturgess was oppressive, unfairly discriminatory or unfairly prejudicial under s 174.
We will then turn to relief:
(a) Whether liquidation is an appropriate remedy.
(b)Whether Group 2 (Jet and Mr Sturgess) should be ordered to sell their shares in all the circumstances.
The appropriate terms and conditions of any sale of the Group 2 shares. As will be seen, we have reserved this issue for later decision.
CLAIMS UNDER THE SHAREHOLDER AGREEMENT
Event of Default: the Methanex disclosure
We begin with the facts, then turn to the shareholder agreement provisions on which this ground of appeal rests.
The facts
Clause 15.2 of the shareholder agreement relevantly provides that each shareholder will always keep confidential, subject to certain exceptions, any information developed or held for the purposes of Greymouth and will require its representatives to comply with this obligation.
It is not in dispute that Mr Dunphy supplied such information to Methanex, a major customer, in connection with a proposal to sell all of the shares in Greymouth. The information included the most recent audited financial statements, a set of management accounts, 2010 forecasts and annual reserves, 2009–2012 production data for various New Zealand fields and a 38 page portfolio overview containing a broad range of information about hydrocarbon reserves, prospects of further exploration, recent and planned activities in New Zealand and Chile and a list of the company’s main gas customers. This manifestly confidential information was supplied in January 2011. The disclosure was subject to a deed which obliged Methanex to keep it confidential, to destroy it should the proposal not proceed, and to not disclose to any person, including any Greymouth shareholder, the existence or content of any negotiations or discussions about it.
All Board members were made aware of the Methanex proposal, which took shape following a meeting between Mr Dunphy and Mr Aitken, the Chief Executive Officer of Methanex, in Vancouver in November 2010. Mr Sturgess knew of the proposed meeting and the Methanex interest. He suggested that two Greymouth directors should attend. Mr Dunphy went alone, having explained that it was not a formal meeting but rather a personal invitation to dine with Mr and Mrs Aitken at their home. During the evening, however, Mr Aitken expressed interest in buying Greymouth, and the expression of interest was discussed at Greymouth board meetings on 14 and 16 December 2010.
It was an issue at trial whether Mr Sturgess consented to the subsequent disclosure of company information to Methanex, or whether Messrs Dunphy and Masfen believed that he had. Relying on a covert recording which Mr Sturgess made of part of the 14 December board meeting,[9] the Judge found that Mr Sturgess did not agree to the disclosure; rather, he was prepared to consider sale, but not to take the proposal any further unless Methanex first demonstrated the ability to pay a price that all directors agreed upon.
[9]It appears that he may have taped further discussions but the entire record was not produced.
The Board having not consented to the disclosure of confidential information, the Judge found that the disclosure, when it happened, was contrary to the shareholder agreement.[10]
[10]First High Court judgment, above n 2, at [54].
The Judge found that Mr Masfen understood that a consensus had been reached at the December 2010 board meetings that Mr Dunphy should progress discussions with Methanex, and understood that this would involve disclosure of confidential information. Mr Masfen’s evidence was not challenged in cross-examination. The Judge’s finding was material because, for reasons discussed below, it was necessary that Mr Sturgess show that the Dunphy and Masfen interests had both committed events of default.
Not until 9 July 2012 did the Sturgess interests seek to rely on the alleged event of default.
The shareholder agreement
We have mentioned the duty of confidentiality provision (cl 15.2) above. The relevant event of default for a shareholder is found in a schedule to the agreement; it provides that an event of default occurs in respect of a shareholder if:
(a)that Shareholder or any Related Party of that Shareholder commits any breach of or fails to observe any of the obligations under this agreement and (if that breach or failure is capable of remedy) does not remedy that breach or failure within 10 Working Days of notice from any other Shareholder specifying the breach or failure and requiring remedy or (if that breach or failure is not capable of remedy) that breach or failure is material in the context of the obligations of that Shareholder or Related Party under this agreement or that Related Agreement.
It will be seen that an event of default happens only if a shareholder breaches the agreement and, where the breach is capable of remedy, does not remedy the breach within 10 working days of notice from any other shareholder specifying the breach and requiring remedy. If the breach is incapable of remedy then an event of default happens only if the breach is material in the context of the shareholder’s obligations under the agreement.
Clause 13.1 provides that should an event of default occur in respect of a shareholder then non-defaulting shareholders may, while that event of default continues, by notice in writing to the defaulting shareholder require that the defaulter transfer all of its shares to the non-defaulters. We will return to this provision later; it is set out at [149] below. For present purposes it is enough to note that when the non-defaulters make such demand the defaulter is deemed to have given a sale notice offering to transfer all of its shares to them at Fair Value. With necessary modifications, certain clauses associated with the agreement’s pre-emptive rights then apply. Those clauses are cl 8.3 to cl 8.5, which relevantly provide that the recipient of a sale notice who wishes to accept the offer must give notice of its desire to buy. Such acceptance notice must be given within 10 working days after receiving the sale notice. It followed that if the Sturgess interests were to buy the defaulters’ shares, they would have to give an acceptance notice timeously.
As mentioned earlier, it was necessary for Mr Sturgess’s purposes that not only the Dunphy but also the Masfen shareholders should be categorised as defaulters. That is so because cl 13.2 provides that any notice which may be given by the non-defaulting shareholders may only be given by shareholders which hold more than half the shares held by all non-defaulters. Unless the Masfen shareholders were also defaulters, the Sturgess shareholders, who hold only 13.856 per cent, would not be able to give notice under cl 13.1.
The High Court’s conclusions
As noted, Gilbert J found that Mr Dunphy had breached the shareholder agreement, or caused it to be breached, by disclosing the company’s confidential information to Methanex without unanimous board approval. However, he did not accept that an event of default had been proved, for several reasons.
First, the Judge did not accept that the Masfen interests were defaulting shareholders, for they did not provide confidential information to Methanex.[11] It followed that the Sturgess interests did not qualify under cl 13.2 to give notice on behalf of non-defaulting shareholders. The Judge was not prepared to allow the Sturgess interests to plead in the alternative that Mr Masfen had breached the shareholder agreement by authorising Mr Dunphy to make the disclosure as his agent. Such allegation was not pleaded, and the Judge refused an amendment which the Sturgess interest sought to make after closing submissions. (This decision was not challenged on appeal.) He noted that the default notice which the Sturgess interests had served on 9 July 2012 did not assert any breach by the Masfen interests. He also found on the facts that the agency allegation could not be sustained.
[11]At [61].
Second, the Judge reasoned that a valid notice under cl 13.1 can be served only while the event of default continues and the provision of information to Methanex was not a continuing default. It happened in January 2011, and notice was not given until 9 July 2012. Long before that date Methanex had destroyed the confidential information in accordance with the confidentiality agreement.
Third, the Judge noted that even if the notice of 9 July 2012 was valid, it would have had the effect under cl 13.1 of deeming the Dunphy and Masfen interests to have given a sale notice offering to transfer all of their shares to the Sturgess interests at fair value. Clause 8.3 states in those circumstances that the recipients of the sale notice (that is, the Sturgess interests) might acquire the defaulters’ shares by giving an acceptance notice. No such notice was given, and the 10 working day period for giving it had long expired.
Finally, the Judge noted that the remedy sought was specific performance of the event of default provisions, and in the exercise of his discretion he would not be prepared to grant that remedy.[12] Delay by Mr Sturgess and Jet Trustees Ltd in seeking relief was such as to disentitle them to the remedy.
Assessment
[12]At [69].
The claim that Mr Dunphy acted as agent for the Masfen interests in making the disclosure was abandoned in argument before us. In any event our attention was drawn to nothing that justifies interfering with the Judge’s findings on this issue. Nor did counsel challenge the Judge’s finding that Mr Masfen did not himself supply confidential information.
However, Mr Geiringer maintained that the Masfen interests were in default, arguing that Mr Masfen allowed or authorised the disclosure because he knew it was to happen and did nothing to stop it. It was implicit in his argument that such inaction is an event of default.
This argument confronts two difficulties. First, the claim at trial was that Messrs Dunphy and Masfen were in default because they provided Methanex with confidential information. There was no pleading that Mr Masfen was in default because he authorised or allowed Mr Dunphy to do so. The evidence established, however, that Mr Masfen played no part in the disclosure. The Judge refused an amendment which would have allowed a pleading of agency, and that decision has not been appealed. The argument now advanced is not relevantly different from the agency allegation; it too alleges a different and indirect breach of the shareholder agreement.
Second, the evidence does not say that Mr Masfen allowed or authorised the disclosure. Mr Geiringer pointed only to evidence that Mr Dunphy briefed Mr Masfen in January 2011 on what had occurred in Vancouver. He invited us to infer that Mr Masfen must have authorised the disclosure at that time, and suggested that Mr Masfen “did not even contest the suggestion that he allowed the information to be disclosed”. It is true that Mr Masfen stated that he understood negotiations would be pursued and that this would involve some disclosure, but that falls short of an authorisation to Mr Dunphy to make the disclosure. It must be borne in mind that Mr Masfen’s evidence was that he thought the entire Board had agreed to progress discussions with Methanex, including any necessary disclosure.
This second point illustrates the significance of the first. Had it been alleged that Mr Masfen was in default because he allowed Mr Dunphy’s disclosure to happen the evidence would likely have responded squarely to the allegation. It would be unfair in the circumstances to draw the inference which counsel urged upon us.
These conclusions dispose of this ground of appeal. We deal briefly with the remaining arguments, in respect of which we also agree with the Judge.
First, the right to acquire a defaulter’s shares continues only while the breach continues, and this breach was not a continuing one, for the information disclosed was subject to strict confidentiality obligations and had since been destroyed in accordance with those obligations. Mr Geiringer did not argue that a breach of this kind is incapable of remedy.
Second, the Sturgess interests did not comply with the procedural requirements of the shareholders agreement, which required that they give an acceptance notice within 10 working days of a deemed sale notice. It is no answer to this to say, as Mr Geiringer did, that Mr Sturgess acted sensibly by seeking first to determine the disputed claim whether an event of default had happened. On that approach the non-defaulting shareholder might keep a deemed sale notice alive indefinitely. The shareholders agreement understandably grants no such right. Its processes are strict and swift.
Finally, we are not persuaded that the Judge was wrong to conclude that specific performance should be denied in the exercise of discretion. It may be true that not for some time did Mr Sturgess learn of the breach, but he undeniably knew by 29 April 2011 and the notice of default was not issued until 9 July 2012. In the meantime the company had carried on business, committing to major operational expenditure. For reasons which will become apparent, we are also satisfied that Mr Sturgess does not come to equity clean-handed.
Deadlock: the unresolved Board resolution
Again, we begin with the facts, then turn to the relevant provisions of the shareholder agreement.
The facts
The deadlock issue concerns the suspension of the JSAL management services contract. As noted earlier, Gilbert J found the suspension unlawful. The deadlock at board level is said to have arisen because Mr Sturgess challenged the suspension immediately by proposing a resolution to the effect that the company supported suspension of the contract but Messrs Dunphy and Masfen, knowing of course that the board would not unanimously support the resolution, declined to put it or to allow it to be resolved, then or at subsequent meetings.
The Judge found the facts as follows:
[74] In late January or early February 2011, Mr Dunphy and Mr Masfen decided to suspend Mr Sturgess as COO. Having taken legal advice, Mr Dunphy prepared a letter to JSAL and Mr Sturgess that he signed as chairman. The letter purported to give formal notice by the company directing that JSAL suspend the provision of services to allow Mr Sturgess to take a holiday from Greymouth’s business for three months from the date of the letter until 9 May 2011. Mr Dunphy handed this letter to Mr Sturgess at the board meeting on Friday 4 February 2011. For the reasons given earlier in this judgment, I have found that the purported suspension was invalid.
[75] After handing the letter to Mr Sturgess, Mr Dunphy asked him to advise whether he was going to take the holiday as directed in the notice. There was then the following exchange:
MD — John, I need to know whether you are going to take a holiday?
…
JS — I’ll do what I like to do. Right, we have to agree on stuff Mark. If this is then the resolution that you are passing, like to say that I have to go from the company for three months, then put the resolution to the board right and we will then decide on that.
…
JS — Put the resolution forward Mr Chairman please?
MD — Sorry, what resolution are you…
JS — The resolution that this be passed to me, the resolution that this be passed to me. That you have full ability to pass this resolution to your partner, right, in business and let’s see whether Peter votes on it or not, and whether I vote on it.
[76] Later in the meeting Mr Sturgess said:
JS — … We can’t agree on a resolution, right, I have proposed a resolution, right?
PM — You proposed a resolution?
JS — Yeah, I propose a resolution around this one.
MD — Right, what are you proposing?
JS — That this is something that the company supports to be delivered to John Sturgess.
PM — Well my own attitude is that Mark has taken legal advice on this which I have seen and that that notice is in correct format.
JS — So you support it?
PM — Yeah, I told you that.
JS — Mark, you support it?
MD — Yes, I do John.
JS — I don’t support it, okay so we are now, we are now in this period of I believe 90 days.
MD — No, no that’s not…
JS — According to the Shareholders Agreement gentlemen, right where we either sort this one out or not or the company winds up.
[77] The meeting ended shortly after this because Mr Masfen had to leave. Mr Masfen encouraged Mr Sturgess to consider taking the leave. Mr Sturgess said that he would do so and take legal advice. Mr Dunphy then re-stated that he needed to know whether Mr Sturgess would take the leave which provoked the following exchange:
JS — We have a resolution Mark.
MD — No, we don’t have a resolution.
JS — We have yet to decide whether you have the ability to issue something like this to someone who is covered under the Shareholders Agreement.
MD — Listen, I am quite convinced that I’ve got the ability to do that John, I’ve done it.
JS — Okay.
MD — And you know how it is when you are giving instructions to someone who reports to you, you need to know whether they’re going to do what you say or not and that’s fundamental in our type of company so I need to know now whether you are going to follow that instruction and take 90 days leave.
JS — As I’ve told you Mark I will take legal advice and as far as you gentlemen are concerned, I’ve tabled a resolution to there, we are now also in the 90 day period.
MD — Well John I’m going to take that as a no.
JS — Okay, you take it anyway you like, yeah.
MD — And on that basis I’m going to declare the meeting closed.
[78] Mr Sturgess immediately consulted Simpson Grierson who wrote to Messrs Dunphy and Masfen on Sunday 6 February 2011 challenging the validity of the notice and demanding that the letter be withdrawn. They took the view, based on Mr Sturgess’ instructions, that the resolution he had proposed remained outstanding and still needed to be formally voted on. They stated:
Mr Sturgess understands that the board meeting of last Friday will continue on Monday morning and will meet at 9.30 am at Mr Masfen’s office for this purpose. We understand that there are a large number of agenda items outstanding. It is important that these agenda items are dealt with. One such item is the board resolution proposed by Mr Sturgess that the board consider, and if thought appropriate, vote on whether the 4 February letter from Mr Dunphy be approved (ratified) by the board.
[79] The resolution was not put at the next meeting that was held on 16 February 2011. The minutes of that meeting make no reference to the issue.
[80] The usual practice was for formal board submission documents to be prepared in support of proposed resolutions. Mr Sturgess did not at any stage follow this procedure in relation to the suspension notice. There is no evidence that he proposed a resolution that the company ratify or approve the notice following the 4 February 2011 meeting.
The deadlock provision
Clause 6.1 of the shareholder agreement provides:
If a resolution submitted to the Board by a Director is not passed, then if the resolution is not resolved within 90 Working Days of the date the resolution was submitted to the Board, any Shareholder may by notice to the other Shareholders, require that all the Shares in the Company be sold to a third party. In the event that the parties are unable to find a purchaser for the shares, then unless one (or more) of the Shareholders agrees to purchase the Shares held by the other Shareholders, the Company (and any Subsidiary) should be liquidated unless the parties agree otherwise.
It will be seen that a shareholder may compel a sale of all of the shares in the company if a resolution is not “resolved” within 90 working days of the date it was submitted to the Board. That period expired, so far as the resolution said to have been put on 4 February 2011 is concerned, on 14 June 2011. Not until 9 July 2012 did Mr Sturgess interests seek to invoke cl 6.
The High Court’s conclusions
The Judge did not accept that the proposed resolution of 4 February 2011 triggered rights under cl 6.1 of the shareholder agreement.[13] He found, as noted above, that Mr Sturgess did not at any stage follow the usual practice of submitting formal documents in support of the proposed resolution, nor did he pursue the resolution following the 4 February meeting.[14] Rather, the matter was left on the basis that he would take legal advice and consider his position, so it was not necessary for the board to consider the resolution further. Mr Sturgess never pursued the matter. In short, there was no deadlock.
Assessment
[13]First High Court judgment, above n 2, at [82].
[14]At [80].
Mr Geiringer criticised the Judge for shrinking from strict commercial consequences that the parties had prescribed for themselves in the event of deadlock. The Judge should not have used s 174 to “manufacture” a different end to the parties’ relationship. So far as the deadlock provisions themselves are concerned, the Judge read in unnecessary procedural requirements, some of which the Board did adopt but only after the event of default. Delay in invoking the deadlock provisions should be attributed not to Mr Sturgess but to the “belligerence” of his co-directors.
We reject the essential premise of this ground of appeal, which is that the deadlock provisions must prevail over s 174 in this case. It is settled law that s 174 “characteristically operates so as to limit the exercise of legal powers; in other words to stop, or grant a remedy in respect of, what would otherwise be lawful”.[15] Relevantly, the Court might order under s 174(2)(a) that the Group 2 shareholders sell their shares to the Groups 1 and 3 shareholders even if the opposite result would have followed, but for the Court’s intervention, under the shareholder agreement. We do accept, for reasons given later,[16] that the Court may choose to hold parties to their agreements, finding that complying conduct is not oppressive or does not warrant relief. But in this case relief was found warranted for reasons making it unjust for Mr Sturgess to rely on the deadlock provision. As will be seen, we agree with the Judge’s findings about his misconduct, which predated the alleged deadlock and, by leading Mr Dunphy to suspend the management services contract, may be said to have caused it.
[15]Jacobsen Venue Management New Zealand Ltd v Worldwide NZ LLC [2008] NZCA 105 at [50].
[16]See [157]–[175] below.
Mr Sturgess sought specific performance. Gilbert J did not consider relief, but having regard to his findings about the event of default, which was also invoked for the first time on 9 July 2012, it is inevitable that he would have exercised his remedial discretion against Mr Sturgess. We would not be prepared to grant specific performance either. The deadlock issue arose because Mr Sturgess breached his obligations to Greymouth and the other shareholders. Further, the subsequent delay was long – exceptionally so in a live commercial context – and unjustified. We observe that in the interim Greymouth continued to invest, committing to more than $65 million in operational expenditure.
These conclusions dispose of this ground of appeal. We add finally that we are not persuaded that the Judge erred by finding that Mr Sturgess did not call on the Board to make a decision on his resolution. Mr Sturgess himself deposed in an affidavit sworn on 11 November 2011 that there had been no situation of deadlock. It was open to the Judge to conclude, as he did, that Mr Sturgess agreed, having put the resolution informally, to reflect on his position and never subsequently put it on the agenda.
QUESTIONS OF BEHAVIOUR
We turn to the grounds of appeal relating to Mr Sturgess’ behaviour. We will deal first with the Midhurst and Radnor issues, which concern findings of negligence or breach of contract made against Mr Sturgess and JSAL in the derivative action brought by the Dunphy and Masfen interests in the 5309 proceeding. As part of that exercise, we will consider findings about Midhurst and Radnor which are relevant to whether Mr Sturgess also behaved oppressively for purposes of s 174. We will then deal with other allegations which also concern oppression, before deciding whether relief was warranted under s 174.
Before dealing with Midhurst and Radnor, however, we must first address an issue about the extent of Mr Sturgess’s authority as COO within the Greymouth Group.
Was Mr Sturgess responsible for managing all of Greymouth’s operations?
The 5309 plaintiffs took the view that Mr Sturgess was COO of all relevant companies within the group, including some which were not strictly subsidiaries but were ultimately in common ownership. Mr Sturgess denied it, saying that his responsibilities and those of JSAL were confined to Greymouth and seven subsidiaries, and did not extend to 20 special purpose companies established following a restructuring of the group’s operations in 2005. This issue affected the s 174 claims, and it was also relevant to the Radnor and Midhurst allegations, since permits were held, or operations conducted, by companies for which Mr Sturgess denied responsibility.
The High Court conclusions
Mr Sturgess and JSAL relied on cl 1.1 of the management services contract, which provided that JSAL was appointed to provide management services to the company and/or any of its subsidiary companies. Shares in the special purpose companies were held by Greymouth in a bare trust for Greymouth’s shareholders in the same proportions as their shareholdings in Greymouth, so they were not strictly subsidiaries. This structure was adopted to permit the sale of particular operations or interests held by the special purpose companies, without it being necessary to channel the sale proceeds through Greymouth and pay them out as dividends.
The Judge found, however, that new management structures were not established for the special purpose companies and in practice their operations were managed in the same way as all other companies in the group, with no distinction being drawn between subsidiaries and the special purpose companies.[17] In practice, he found, Mr Sturgess was COO for all group companies, including the special purpose companies. He acknowledged that the shareholder agreement and management services contract do not reflect this, but he found that all parties proceeded on the understanding that the management arrangements for the special purpose companies were exactly the same as those for other companies in the group.[18] On the facts, he found, Mr Sturgess did indeed take responsibility for special purpose companies. The Judge found that an estoppel by convention arose on the basis of the parties shared understanding that the management services contract extended to the special purpose companies as if they were subsidiaries.[19]
Assessment
[17]First High Court judgment, above n 2, at [127].
[18]At [130].
[19]At [139].
On appeal, Mr Geiringer argued that because the JSAL management services contract covers only a few companies and it was never varied to include the others, many of the claims must fail. Further, the Judge’s conclusions were not open on the pleadings, for they were available only in a claim for rectification. Nor were the requirements of estoppel by convention made out.
For s 174 purposes, as will be seen, it is immaterial whether Mr Sturgess was appointed as COO of all group companies; it is enough that he conducted the affairs of those companies and did so in an oppressive manner. However, his obligations as COO under Greymouth’s governing documents may inform that question, and he further maintains that he was not COO of the special purpose companies involved in the two permits, Midhurst and Radnor, in respect of which inquiries into damages were ordered.
We need not dwell on the Judge’s factual findings, because Mr Geiringer did not challenge them directly (although he did contest findings about what Mr Sturgess did in the Radnor and Midhurst instances). His submissions on the present issue did not challenge the Judge’s general finding that Mr Sturgess acted as COO of all group companies. That finding is unimpeachable. The special purpose companies had no other management, and there are instances of Mr Sturgess discussing them at Board level in terms indicating that he was responsible for them. The Judge noted Mr Sturgess’s own statement, in his proposed brief of evidence, that the Board had increased his remuneration to reflect additional workloads which were associated, as a matter of fact, with the special purpose companies. There was some controversy about this in argument before us, as a result of which memoranda were filed after the hearing to demonstrate that Mr Sturgess had claimed expenses in respect of some of the special purpose companies.
The argument that the Judge’s conclusions could be reached only in an action for rectification is misconceived. The other parties claimed that the parties not only reached but then performed an agreement that Mr Sturgess would act as COO of all group companies. The special purpose companies were subsidiaries in substance, the contract did not preclude extension to other companies, and the omission from the JSAL management services contract was explained. The omission was relevant, but only as evidence. The contract contains a whole agreement clause, but such provisions are not conclusive.[20] The Judge found for compelling reasons that the parties did agree that Mr Sturgess would act as COO. The evidence shows that they did not distinguish in any relevant way among the group companies. The Judge drew the irresistible inference that Mr Sturgess assumed for the special purpose companies all of the responsibilities contained in the management services contract.[21]
[20]PAE (New Zealand) Ltd v Brosnahan [2009] NZCA 611, (2010) 9 NZBLC 102,862 at [15].
[21]At [138].
Given these findings the 5309 plaintiffs did not need to invoke estoppel, which plea presumes that Mr Sturgess would be entitled, but for detrimental reliance by the others, to rely upon contractual arrangements under which he was not COO of the special purpose companies. Accordingly, we say no more about it.
Midhurst
Greymouth holds two exploration permits in Taranaki which are known as the Midhurst permits. As the Judge recorded, the terms of these permits required the company to pursue two targets, known as the York and Midhurst leads, by acquiring, processing and interpreting 2D or 3D seismic data before 23 May 2010. The allegation was that Mr Sturgess conducted a 2D, rather than a 3D seismic survey contrary to professional advice and without board approval, and then tried to have the 2D data synthesised into 3D images despite professional advice that it would not produce results.
The High Court findings
The Judge explained that 3D data takes longer and costs more to acquire than 2D, but because it permits a three dimensional image it provides a more sophisticated and accurate understanding of the subsurface geology. The choice between 2D and 3D is always important. It involves balancing the cost, the potential quality of the results, the target area characteristics, and the survey objectives.
The Judge found that Geoff Bulte, a senior geophysicist with Greymouth, recommended a 3D programme for Midhurst because Greymouth was examining multiple prospects at a range of depths; further, a 3D survey would complement two existing 3D surveys adjoining the intended survey area. He found that Mr Sturgess initially accepted this recommendation, but then changed his mind. The Judge appears to have accepted that Mr Sturgess was concerned about the cost of drilling additional shotholes required for a 3D survey, particularly given difficult drilling conditions in the area. He found that Mr Sturgess did not discuss this decision with Mr Dunphy, nor tell him that it was contrary to Mr Bulte’s advice. He accepted, though, that by 5 January 2010 Mr Dunphy was aware that a 2D survey was required for at least part of the area. At a board meeting on 23 February 2010 Mr Bulte gave an exploration update which noted the 2D seismic programme at Midhurst and did not express any misgivings about the survey, which was by then well advanced.
In early March 2010, after about half of the shotholes had been drilled, Mr Sturgess asked Mr Bulte to turn the programme into a 3D one. Mr Bulte pointed out that because differing requirements of a 3D survey most of the shotholes already drilled would be wasted. Mr Sturgess responded that he had seen an Internet report by a Russian company describing the use of pseudo-3D data processing techniques using 2D seismic data.
Mr Bulte did not consider this methodology relevant to Midhurst, but Mr Sturgess insisted on it, contrary to Mr Bulte’s advice. The Judge appears to have accepted that Mr Sturgess was interested in trialling methods of shooting in 2D mode but analysing the data in pseudo 3D manner, in an attempt to find ways to meet significant commitments that Greymouth had made to acquire 3D seismic data in Chile.
It seems clear that the Midhurst data could not produce a 3D-quality output. Indeed, the experts involved considered that the 2D data was unsuitable for processing into a 3D volume. Mr Sturgess was told that his expectations of the data were unrealistic. That assessment proved correct.
Although the Judge found that the 2D data did not produce anything of value, he was not persuaded that a full 3D survey was the only reasonable option and that Mr Sturgess was negligent in proceeding with a 2D survey. However, he did find that Mr Sturgess was negligent in proceeding with the pseudo 3D endeavour with no supporting expert advice that the unconventional technique would be worthwhile.[22] The additional costs incurred in that exercise were recoverable. They were not quantified in the judgment, the Judge indicating that he would order an inquiry into damages if necessary.
[22]At [164].
The Judge also found that Mr Sturgess ought to have discussed the survey with Mr Dunphy before abandoning the planned 3D survey in favour of 2D, and ought to have allowed Mr Dunphy to consider the matter in the light of Mr Bulte’s adverse advice. He found that Mr Sturgess’s failure to do so breached his reporting obligations as chief executive officer and director, and also breached the shareholder agreement.[23]
Assessment
[23]At [161].
Under this ground of appeal Mr Geiringer argued that the Judge’s factual findings cannot be sustained on the evidence. He emphasised that the choice between 2D and 3D lay on a cost-benefit continuum and (as the Judge found) it was not necessarily wrong to choose 2D. He emphasised that at the 23 February 2010 Board meeting Mr Bulte said nothing critical about the 2D survey, and that in March 2010 the Board received a report on Midhurst which recorded that the 2D survey would generate “a lot more data than originally planned” when used in combination with a methodology designed for 3D data. He submitted that the Board knew of the proposed methodology before each phase of it was implemented. Not until it was apparent that the 2D survey had failed to produce useful data did Mr Sturgess proceed (in September 2010) with pseudo-3D, and that decision was reasonable; for just $100,000 it might allow the company to secure something from the $2.6 million sunk on 2D. He contended too that the Judge’s finding that Mr Sturgess continued in the face of expert advice was mistaken; all the experts had said was that the methodology would not produce the results of a full 3D survey, and contemporaneous emails show that Mr Sturgess was receptive to advice. An inference that the Board would have proceeded even if fully informed ought also to have been drawn.
However, the primary complaint was that Mr Sturgess did not consult the Board about Mr Bulte’s recommendation that a full 3D survey be done given that Greymouth was looking at multiple prospects and depths, or his decision to abandon 3D in favour of 2D, or the costs and benefits of each. It is no answer to say that Mr Bulte did not criticise 2D at the February Board meeting; the important points are that Mr Bulte had recommended 3D but by then Mr Sturgess had already made the 2D decision and the work was under way. That committed the company to the costs of a survey which later proved to be wasted, which in turn appears to have led him to throw good money after bad by pursuing conversion of the data into pseudo 3D form.
Nor did Mr Sturgess pass on expert reservations about the pseudo 3D methodology; rather, he decided to proceed in that manner without apprising the Board of the adverse advice he had received. With respect to the submission that Mr Sturgess was receptive to advice, we accept that he told one advisor in an email of 30 April that the attempt to “make 3D out of Midhurst” should not be made if there was no value in it. Although the experts’ advice was negative the attempt subsequently proceeded. The evidence of Mr Brady, Greymouth’s General Manager (Exploration and Subsurface), was that Mr Sturgess insisted in the face of all advice that pseudo 3D could be done and became quite combative when told that it would not work. For these reasons we do not accept that the Judge’s findings were not open to him. It was also open to the Judge to conclude that had the Board been adequately informed the company would not have proceeded with the pseudo-3D analysis, and further that the work achieved nothing of value.
This ground of appeal fails.
Radnor
The allegation regarding the Radnor permit is that Mr Sturgess negligently, and without board approval, decided to fracture stimulate the Radnor-1B well contrary to expert advice. It was said that the operation failed, resulting in substantial wasted costs to Greymouth, and Mr Sturgess is said to have responded to subsequent questions by trying to distance himself from the operation.
The High Court findings
The Judge explained that the Radnor permit, which is in Taranaki, is held by five wholly owned Greymouth companies and another company, Bridge Petroleum Ltd, which is 92 per cent owned by Greymouth. In October 2009 Greymouth began to drill a sidetrack well from the existing Radnor-1A wellbore at a depth of 4,033 metres, with the intention of testing multiple reservoirs in the Mangahewa formation for hydrocarbons. Drilling was completed on 22 October 2009 to a total depth of 5,021 metres.
Fracture stimulation or “fracking” stimulates the flow of oil or gas to a well by increasing permeability of the producing formation. Fracturing is achieved by pumping fluid down the well and through the perforations in the casing under extremely high pressure. A petroleum engineer, Ricardo Guerra Urquijo, recommended to Mr Sturgess that a “mini frac” be undertaken in a particular zone at Radnor-1B because initial results were unpromising and a mini frac would be an inexpensive way of assessing potential productivity. A mini frac is an operation of short duration in which a small amount of water is pumped until fracture has been initiated, at which point pressure in the well is allowed to fall off naturally. The information acquired can then be used to assess whether a full fracture operation is justified and, if so, to assist in its design.
Decision
The form of relief in relation to orders 1 and 3 is reserved for further argument. A short timetable will be fixed by minute accompanying this judgment. Subject to that, the appeals are dismissed. The cross-appeals are dismissed.
Leave is reserved to apply.
Costs
Costs are reserved.
Solicitors:
Bell Gully, Wellington for Respondent
Anderson Creagh Lai, Auckland for Respondent
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