Totara Properties Whangarei Ltd v Cochrane
[2013] NZCA 283
•5 July 2013 at 10 am
| IN THE COURT OF APPEAL OF NEW ZEALAND |
| CA844/2012 [2013] NZCA 283 |
| BETWEEN | TOTARA PROPERTIES WHANGAREI LIMITED |
| AND | ALEXANDER REGINALD COCHRANE |
| AND | GRANT ALEXANDER COCHRANE, NOEL BRENT COCHRANE AND LARRY PETER COCHRANE |
| AND | ALEXANDER REGINALD COCHRANE, MAQ TRUSTEES 2011 LIMITED AND MAC TRUSTEE SERVICES LIMITED AS TRUSTEES OF THE SNOW COCHRANE NO 1 TRUST AND MAREE JOYCE COCHRANE, MAQ TRUSTEES 2011 LIMITED AND SHAREE MILDRED COCHRANE AS TRUSTEES OF THE MAREE COCHRANE NO 1 TRUST |
| Hearing: | 22 May 2013 |
Court: | Ellen France, Wild and Ronald Young JJ |
Counsel: | A P Holgate for Appellants |
Judgment: | 5 July 2013 at 10 am |
JUDGMENT OF THE COURT
A The appeal is dismissed.
BThe second appellant must pay the respondents costs for a standard appeal on a band A basis and usual disbursements.
____________________________________________________________________
REASONS OF THE COURT
(Given by Ronald Young J)
Introduction
“Snow” (the second appellant) and Maree Cochrane have four children, Sharee, Larry, Noel and Grant. Totara Properties Whangarei Ltd (Totara) was incorporated in 1973. It owns a working forest at Poroti. Prior to June 2011 Totara had one class A share owned by Snow and 100 class B shares divided equally (20 each) between Maree and the four children.
The class A share by Totara’s constitution had 300 votes; the class B shares, one vote per share. The three boys, Grant, Noel and Larry issued proceedings in the High Court against Totara, their father Snow and trustees of the various family trusts arising from the way in which Totara has been managed.
Part of these proceedings allege that Snow caused Totara to pay a dividend to himself (as the class A shareholder) but none to the holders of the class B shares. Grant, Noel and Larry allege that this was contrary to the company’s constitution and the Companies Act 1993. The High Court ordered the lawfulness of this payment be decided before the other issues in the proceedings.[1] The facts were agreed, the issue between the parties was one of interpretation of the constitution. In the High Court Lang J concluded that the constitution of Totara prevented it from paying a dividend to the class A shareholders without the class B shareholders sharing equally in the dividend.[2]
[1]Cochrane v Totara Properties Whangarei Ltd HC Whangarei CIV-2012-488-177, 31 July 2012.
[2]Cochrane v Totara Properties Whangarei Ltd [2012] NZHC 3265 at [29].
The appellants challenge this conclusion. They submit a correct interpretation of the constitution would allow unequal dividends between share classes, or if it did not, such a provision should be implied into the constitution.
The High Court judgment
The Judge concluded that the proper interpretation of Totara’s constitution meant that all shareholders had a right to share equally in any share distribution. His Honour considered the wording of cl 2.2 of the constitution was determinative.[3] That clause preserved equal rights attaching to all shares except voting rights. His Honour said cl 4.1(1)(b) confirmed the right of all shares to share equally in any authorised distribution.[4]
[3]At [24].
[4]At [25].
Finally, his Honour concluded that cl 18.1 did not authorise such unequal sharing of dividends because it was subject to cls 2.2 and 4.1(1)(b) which specifically required equal sharing.[5]
[5]At [27].
However, the appellants say that if Totara’s right to declare a dividend in favour of class A shares alone is not readily apparent, then it is a term capable of ready implication through the constitution itself.
The parties agree that the issue for this Court is:
Under the terms of the constitution and the Companies Act 1993 is the company lawfully entitled to pay a dividend in respect of the class A share only and not pay any dividend in respect of the class B shares?
The appellants’ case
The appellants’ case begins with s 52(1) of the Companies Act which they submit authorises any form of distribution by the company including to any shareholders it thinks fit. Section 52(1) provides as follows:
Board may authorise distributions
(1)The board of a company that is satisfied on reasonable grounds that the company will, immediately after the distribution, satisfy the solvency test may, subject to section 53 of this Act and the constitution of the company, authorise a distribution by the company at a time, and of an amount, and to any shareholders it thinks fit.
As to the constitution, (to which s 52(1) is subject) the appellants say that while cl 2.2 expresses the principle of equal rights between classes of shares, this in turn is subject to other limitations within the constitution.
Clause 2.2 provides:
2.2
Class of Shares
The shares of the Company shall be divided into the following classes: Class A consisting of 1 share and Class B consisting of 100 shares. Both classes of shares shall enjoy the rights and be subject to the limitations conferred or imposed by the Constitution of the Company save and except as to voting powers thereof in which respect; Class A share shall entitle the holder to 300 votes at all meetings of the Company or on any resolution requiring shareholder vote. Class B shares shall entitle the holder or holders thereof to one vote per share at all meetings of the Company or on any resolution requiring shareholder vote.The second appellant, Snow, also pointed to cl 2.4 as supporting the proposition that he had wide powers as director to govern and control the company.
Clause 2.4 provides:
2.4 While the said Alexander Reginald Cochrane or his appointee shall hold office as a permanent director the full government and control of the Company shall be vested in him or his appointee and he or his appointee (as the case may be) may exercise all the powers and authorities and discretions vested in the directors generally and notwithstanding that he or his appointee may be the sole director holding office he or his appointee may exercise all the powers of the Company which are not by statute required to be exercised by the Company in a general meeting and any minute entered in the minute book of the Company’s proceedings signed by the said Alexander Reginald Cochrane or his appointee (as the case may be) shall in any matter not expressly required by statute to be done by the Company in a generally meeting have the effect of a resolution of the Company and all other directors for the time being of the Company shall be under the control of the said Alexander Reginald Cochrane or his appointee (as the case may be) whose opinion shall prevail in the event of any difference of opinion and they shall be bound to conform to his directions in regard to the Company’s business and accordingly all clauses of these articles shall be read subject to this clause.
The appellants accept the equal sharing principle is confirmed in cls 4.1(1)(b) and 4.1(2). However, the appellants say the important aspect of these clauses is that equal dividend rights may be “negated” or “altered” by the constitution. These clauses provide as follows:
4.1. (1) Subject to subclause (2), a share confers on the holder—
...
(b) Subject to part 8 and clauses 18.4 and 18.5, the right to an equal share in dividends authorised by the board.
...
(2) Subject to clause 18.2 [Dividends payable pari passu], the rights specified in subclause (1) may be negated, altered, or added to by this constitution, whether in part 2 or elsewhere, or in accordance with the terms on which the share is issued under clauses 14.3 [Issue of other shares] or 14.4 [Shareholder approval for issue of new shares].
The appellants say cl 4.2(2)(b) specifically allows unequal dividends for different classes of shares and, therefore, the “right” to equal dividends is thereby negated by the constitution.
Clause 4.2 of the constitution provides as follows:
4.2. (1) Different classes of shares may be issued by the company.
(2) Without limiting subclause (1), shares may:
(a)Be redeemable within the meaning of clause 4.3 [Redeemable shares]; or
(b)Confer preferential rights to distributions of capital or income; or
(c) Confer special, limited, or conditional voting rights; or
(d) Not confer voting rights.
Finally, the appellants refer to cl 18.1(1):
18.1. (1) The board may (if it is satisfied on reasonable grounds that the company will, immediately after the distribution, satisfy the solvency test) subject to clause 18.2 [Dividends payable pari passu] and subject to any restrictions in this constitution, authorise a distribution by the company at a time, and of an amount, and to any shareholders it thinks fit.
They say that this clause authorises distribution of dividends to any shareholders the board (here Snow) thinks fit also, therefore, authorising unequal dividends between shares in different classes. The only prohibition on unequal distribution of dividends in the constitution is at cl 18.2(2)(a) which provides as follows:
18.2. ...
(2) The board must not authorise a dividend—
(a) In respect of some but not all the shares in a class; or
...
In this case, there was equal distribution within shareholders of class A and B but unequal distribution between class A shareholders and class B shareholders. These provisions, therefore, authorised different payment of dividends between classes of shares.
Discussion
We are satisfied the constitution does not authorise the unequal distribution of dividends between classes of shares. We agree both with the result and the reasoning of Lang J in the High Court.
Clause 2.2 of the constitution divides the shareholding of the company into A and B shares. These shares enjoy equal rights “save and except as to voting powers”. The A share is allocated 300 votes and the B shares one vote each. Clause 2.2 therefore does not authorise unequal dividends. On the contrary, it requires equal rights for each share except voting rights. Clause 2.2 is, however, “subject to the limitations conferred or imposed by the Constitution of the Company”.
Except for cl 2, the other relevant clauses in the constitution all mirror provisions in the Companies Act. For example, cls 4.1 and 4.2 are reflected in s 36 (reflecting the principle of equal sharing), cls 18.1 and 18.2 in s 52 and cl 4.4 in s 117(1).
As for cl 2.4, this is concerned with directorial powers. It does not authorise Snow, as the controlling director, to approve unequal dividend sharing in the absence of authority in Totara’s constitution.
Clause 4.1(1)(b) specifically deals with dividend rights for each share confirming equal rights. But cl 4.1(2) provides such rights can be altered by the constitution. We are satisfied the constitution does not in fact alter such equal rights. We reject the appellants’ argument that cl 4.2 alters the equal share in dividends principle. Clause 4.2 permits the issue of shares with “preferential rights to distributions of capital or income”. In Totara’s case different classes of shares were issued at the outset, class A and class B. Clause 2.2 confers special voting rights on class A shares (see cl 4.2(2)(c)) but the shares in Totara were not issued with preferential dividend rights. Clause 4.2, therefore, does not authorise the appellants’ unequal distribution of dividends.
Further, cl 4.4 provides:
4.4. (1) The company must not take action that affects the rights attached to shares unless that action has been approved by a special resolution of each interest group.
This reinforces the proposition that Snow cannot unilaterally affect the rights (of equal sharing of dividends) attaching to the class B shares without the agreement of the holders of those shares.
Finally, the appellants submitted that cl 18.1(1) of the constitution allowed Snow as the “board” to authorise the payment of a dividend to any shareholder he chose. The appellants said this provision therefore authorised Snow’s payment to himself (as the only class A shareholder) without an equivalent payment to the other shareholders.
Clause 18.1(1) is subject to “any restrictions in this constitution”. Clauses 4.1 and 4.2 make it clear that there is to be equal sharing of dividends between shareholders. These provisions are restrictions on the board’s authority to pay a dividend to any shareholder it thinks fit and therefore a restriction on the apparent breadth of cl 18.1(1). We are therefore satisfied that unequal payment of dividends is not authorised by cl 18.1(1) of the constitution.
In summary, the constitution expresses the general principle that shareholders are to share equally in any distributions by Totara. That proposition is subject to the terms of the constitution. There is nothing in the constitution which provides for unequal sharing of dividends. The only unequal arrangements identified in Totara’s constitution are the voting arrangements as between the class A and class B shares.
Implied terms
The appellants submitted that because company memoranda and articles should not be treated as cast in stone, it is permissible for terms to be implied into a company constitution in appropriate circumstances. Typically the appellants said that terms will be implied into a memorandum of association of a company where there is no provision in the constitution for what is to happen when an event occurs. This is where the “true construction” of the constitution requires the implication of such a term. They submit this Court should imply a provision in the constitution that authorises unequal distribution of dividends.
Without expressing a view as to whether or not it is permissible to imply terms into a company constitution, we consider there could be no basis to do so here. The drafters of Totara’s constitution turned their minds to unequal rights between shareholders. It provided for unequal rights between class A and class B shares in voting power. If they had wished also to include a capacity for unequal sharing of dividends it would have been a simple matter to do so. In fact the constitution says the opposite. It declares the principle of equal sharing of dividends applies to the shares of Totara. In those circumstances the prerequisites for consideration of an implied term in a company constitution do not exist in this case.
In any event, we consider this submission is essentially an alternative way of putting the appellants’ argument for a different interpretation of the constitution. We have already rejected such an interpretation. We reject this ground of appeal.
The appeal is dismissed.
Costs
In the event the appellants were unsuccessful, the first respondents sought costs against Snow (the second appellant) rather than Totara (the first appellant). The first respondents submitted that given the appeal potentially advantaged only Snow, he should meet the costs personally. The first respondents pointed out that any costs order against Totara would be borne 60/101ths by them, as they own 60 of the 101 shares in Totara.
The appellants opposed any order making Snow solely liable for the first respondents’ costs. They submitted that when Snow authorised the dividend he had been acting as the board on Totara’s behalf. He had interpreted the constitution in a particular way and was entitled on Totara’s behalf to get clarity about the proper interpretation of the constitution. They submitted, therefore, that Totara should meet any costs award.
By analogy with costs award decisions in derivative actions,[6] a general principle can be identified; a company should not bear the costs of litigation pursued for the benefit of one of the company’s directors and/or shareholders as opposed to the company’s interests. The costs enquiry should, therefore, focus on the motive of the litigant who caused the proceeding to be brought in the name of the company.[7]
[6]Companies Act 1993, s 166.
[7]See Frykberg v Heaven (2002) 9 NZCLC 262,966 (HC); Presley v CallPlus Ltd [2008] NZCCLR 37 (HC).
Also relevant is the approach to costs in shareholder prejudice cases.[8] A similar principle regarding costs has been developed there. Where the true interest in the benefit of the litigation is an individual shareholder(s) rather than the company, then the shareholders should meet the costs.[9]
[8]Companies Act, s 174.
[9]See Corbett v Corbett [1998] BCC 93 (Ch); Re D G Brims & Sons Pty Ltd (1995) 16 ACSR 559 (QSC) at 591–592.
This Court’s costs rules give a broad discretion.[10] We accept that a costs award could be made against an individual litigant rather than a company litigant where it is clear the beneficiary of the litigation is the individual shareholder or director rather than the company. But caution needs to be exercised.
[10]Court of Appeal (Civil) Rules 2005, r 53.
We return to the facts of this case. If they are calculated on the basis of entitlement to dividends declared by Totara, then the first respondents are correct in submitting that they will effectively bear 60/101ths of any costs order made against Totara. That would be unfair to them, as it would have the effect that they would have to meet 59.4 per cent of a costs order that was intended to be in their favour. Such a costs order would impact in the same way on the second respondents who are the holders of the remaining class B shares. But in this case the proceeding was commenced by the first respondents challenging Snow’s dividend distribution. The judgment in the High Court, therefore, arose from the first respondents’ challenge. More importantly, all parties benefited from the High Court judgment, including the company and all of the shareholders and the director. An important question as to the interpretation of Totara’s constitution was resolved by the High Court judgment. Understandably and appropriately, therefore, costs were awarded jointly and severally against Snow and Totara.
We are satisfied that costs on this appeal should follow the first respondents’ success. As to who should pay the costs, Snow alone or Snow and Totara jointly and severally, we are satisfied Snow alone should be liable. We consider the judgment in the High Court was clearly correct. We are satisfied that this appeal was intended to benefit solely Snow rather than clear up any remaining ambiguity or uncertainty in Totara’s constitution.
The appeal, therefore, can be properly characterised as Snow, as the controlling shareholder of Totara, acting for his own benefit. Given that conclusion, we are satisfied that it would be unfair for Totara’s funds to be expended in meeting the costs of the appeal. That is especially so given we have held that any dividend declared must be in respect of all shares in Totara.
There will, therefore, be an award of costs for a standard appeal on a band A basis and usual disbursements against the second appellant alone.
Solicitors:
Swan Law, Whangarei for Appellants
Henderson Reeves Connell Rishworth, Whangarei for Respondents
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