Williamson v Smalley
[2022] NZHC 1789
•26 July 2022
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
I TE KŌTI MATUA O AOTEAROA ŌTAUTAHI ROHE
CIV-2022-409-000033
[2022] NZHC 1789
UNDER Part 18 of the High Court Rules IN THE MATTER
of an application for specific performance
BETWEEN
GRANT ROBERT WILLIAMSON, IAN PERRY, DAVID MICHAEL HAYES, GRANT TREVOR DAVIS and JEREMY DANIEL SULLIVAN
Plaintiffs
AND
JAMES HOWARD NIGEL SMALLEY
Defendant
Hearing: 15 July 2022 with further submissions received on 18 and 22 July
2022
Counsel:
R W Raymond QC and J M McGuigan for Plaintiffs W J Palmer for Defendant
Judgment:
26 July 2022
JUDGMENT OF ASSOCIATE JUDGE PAULSEN
This judgment was delivered by me on 26 July 2022 at 2.30 pm pursuant to Rule 11.5 of the High Court Rules
Registrar/Deputy Registrar Date:
WILLIAMSON v SMALLEY [2022] NZHC 1789 [26 July 2022]
[1] This is an application by the defendant (Mr Smalley) under r 12 of the Court of Appeal (Civil) Rules 2005 for a stay of a summary judgment requiring Mr Smalley to transfer his shares in Hamilton Hindin Greene Ltd (HHG) and Overview Portfolio Ltd (OPL) to the plaintiffs.1
Background
[2] Mr Smalley is a shareholder and former director of HHG and OPL. In September 2018, Mr Smalley ceased to be engaged by the companies, triggering an obligation to offer his shares for sale to the plaintiffs. The parties agreed to have the shares valued by an independent valuer, to be bound by the independent valuation, and to not challenge the valuation either directly or indirectly. After a lengthy and disputatious process, the independent valuer, Ernst & Young Strategy and Transactions Ltd (EY), released its valuation report. The plaintiffs called upon Mr Smalley to transfer his shares at the value assessed by EY. Mr Smalley considered EY had undervalued the shares and refused to transfer them to the plaintiffs.
[3] The plaintiffs filed this proceeding seeking summary judgment that Mr Smalley transfer the shares to them. Mr Smalley opposed summary judgment. Mr Smalley has never disputed that he is contractually bound to sell his shares to the plaintiffs. His defence to the summary judgment application was that EY’s valuation was not binding upon him because:
(a)it had not been prepared in accordance with agreed compliance standards in breach of EY’s mandate;2
(b)it was not a final report as EY had reserved to itself the right to correct the report for inaccuracies; and
(c)the plaintiffs and EY breached the terms of the parties’ joint instruction to EY by communicating with each other to the exclusion of Mr Smalley.
1 Williamson v Smalley [2022] NZHC 1452.
2 Institute of Chartered Accountants of New Zealand Advisory Engagement Standard 2 for Independent Business Valuation Engagements, issued 11/01 as amended 6/03, 07/13 and 08/19.
[4] I granted the plaintiffs summary judgment on 21 June 2022.3 I ordered Mr Smalley to transfer his shares to the plaintiffs contemporaneously with payment to him of $2,150,200, being the value of his shares as assessed by EY.4 In addition, I ordered that in the event Mr Smalley did not transfer his shares, the Registrar of the High Court was appointed to sign any documents required to do so.5
[5] Mr Smalley has filed an appeal to the Court of Appeal. His appeal relates to the issue of whether EY’s valuation was completed in accordance with the agreed compliance standards.
[6] Mr Smalley does not wish to transfer his shares to the plaintiffs until, at least, his appeal is determined. He applies for a stay of execution of the judgment.6 Counsel expressed a preference for an in-person hearing. At the conclusion of the hearing, I indicated I would accept further submissions as to how the Court might respond if it was subsequently held the EY valuation was not binding. Further written submissions were received on that issue from Mr Smalley’s counsel, with attached comments from the plaintiffs’ counsel.
[7] In addition, in the course of preparing my judgment, I sought further submissions from counsel as to whether the plaintiffs could provide an undertaking to avoid prejudice Mr Smalley considered he would suffer if a stay was refused. I received written submissions for both parties on that issue.
Principles governing applications for stay
[8] The application is made under r 12 of the Court of Appeal (Civil) Rules 2005. Rule 12 provides:
12 Stay of proceedings and execution
(1)None of the matters referred to in subclause (2) operate as—
3 Williamson v Smalley, above n 1, at [110].
4 At [111].
5 At [112].
6 At the hearing I raised with Mr Palmer whether Mr Smalley was seeking a stay or interim relief that the Registrar not exercise her power to sign documents to transfer the shares to the plaintiffs. On reflection, I accept the application is for a stay.
(a) a stay of a proceeding in which a decision was given; or
(b) a stay of execution of that decision.
(2)The matters are—
(a) an application for leave to appeal; or
(b) the giving of that leave; or
(c) an appeal.
(3)Pending the determination of an application for leave to appeal or an appeal, the court appealed from or the Court may, on an interlocutory application,—
(a) order a stay of the proceeding in which the decision was given or a stay of the execution of the decision; or
(b) grant any interim relief.
(4)An order or a grant under subclause (3) may—
(a) relate to execution of the whole or part of the decision or to a particular form of execution:
(b) be subject to any conditions that the court appealed from or the Court thinks fit, including conditions relating to security for costs.
(5)If the court appealed from refuses to make an order under subclause (3), the Court may, on an interlocutory application, make an order under that subclause.
(6)If the court appealed from makes an order under subclause (3), the Court may, on an interlocutory application, vary or rescind that order.
(7)The Court may, at any time, vary or rescind an order made by it under this rule.
[9] On an application for a stay the Court balances the competing right of a successful party to the fruits of their judgment against the need to preserve the appellant’s position in the event that the appeal succeeds.7
[10] In making this assessment the Court takes into account several well-recognised factors including:8
7 Greymouth Petroleum Holdings Ltd v Empresa Nacional Del Petroleo [2017] NZCA 397 at [10].
8 Yan v Mainzeal Property and Construction Ltd (in rec and in liq) [2014] NZCA 86, (2014) 22 PRNZ 296 at [25].
(a)whether the appeal may be rendered nugatory by the lack of a stay;
(b)the bona fides of the applicant as to the prosecution of the appeal;
(c)whether the successful party will be injuriously affected by the stay;
(d)the effect on third parties;
(e)the novelty and importance of the questions involved;
(f)the public interest in the proceeding;
(g)the overall balance of convenience; and
(h)the apparent strength of the appeal.
[11]I will deal with the factors relied upon by either party under the headings below.
Will the appeal be rendered nugatory without a stay?
[12] Mr Smalley says that if a stay is not granted the outcome of his appeal, if successful, will be undermined. He considers that once the shares are transferred to the plaintiffs, either his right to challenge the EY valuation or the Court’s ability to grant him suitable relief, will be lost. He says:
Fundamentally, my entitlement to payment for the transfer of the shares to the plaintiffs is based on my holding shares in HHG and OPL. If I no longer hold the shares in HHG and OPL then this may limit the relief that the Court of Appeal can grant me if my appeal is successful.
[13] Mr Smalley says that if the Court of Appeal was to order a new valuation to be completed, then the valuation date may be a more recent date than that used in EY’s report, and he needs to remain a shareholder so that his shares can be valued at the new valuation date.
[14] Mr Smalley is also concerned that before any new valuation is completed, HHG and/or OPL may be restructured in some manner that will be detrimental to him.
Because he presently holds 30 percent of the shares in the companies, he says his approval is required for certain transactions, including transactions to introduce new shareholders, alter rights attaching to shares or the constitution, liquidate the companies, make material alterations to the nature of the business of the companies, or enter into major transactions.9 Mr Smalley says that if such transactions were entered into, it may not be possible for a new valuation to be undertaken.
[15] I consider Mr Smalley is wrong in his belief that he needs to retain his shares in order to achieve an effective remedy on appeal or following any further hearing in the High Court.
[16] If Mr Smalley is successful on appeal, the Court of Appeal will not order a further valuation of the shares be completed. The issue on appeal is whether Mr Smalley has an arguable defence to the plaintiffs’ claim. If I was wrong in my conclusion that he does not, the Court of Appeal will set aside the plaintiffs’ summary judgment and refer the case back to the High Court for trial in the ordinary way. The plaintiffs’ summary judgment may be set aside by the Court of Appeal irrespective of whether the shares have been transferred to the plaintiffs or not.
[17] An issue that did concern me, and upon which I sought further submissions, was that if Mr Smalley is required to transfer his shares but is successful on appeal, the plaintiffs, having already obtained the shares, might have no reason to pursue the proceeding further and could simply discontinue. If that was to occur, there would be no extant proceeding to determine the issues Mr Smalley wishes to raise challenging the EY valuation. Mr Smalley went further and submits that even if this proceeding remains on foot, it could only be as a vehicle for him to bring a counterclaim against the plaintiffs and, potentially, a claim against EY for any difference in the fair value of the shares as assessed currently and the “corrected value” as assessed after a further valuation process. He submits those claims would be fundamentally different in scope and context to the proceeding the plaintiffs have brought against him.
9 Clause 11 of shareholders agreement dated 13 September 2006 and agreement to amend shareholders agreement dated 18 March 2015, annexed as GRW001 to affidavit of Grant Robert Williamson dated 9 February 2022.
[18] I accept the plaintiffs’ submission that there is already adequate protection for Mr Smalley under High Court Rules 2016 for the potential prejudice he might suffer if the plaintiffs discontinued their claim. In the circumstances of this case, the discontinuance could be set aside under r 15.22 as an abuse of the process of the Court. If there was any genuine concern that the Court might not set aside the discontinuance on that basis, it has been removed because the plaintiffs have provided an undertaking they will not discontinue without the leave of the Court. That engages r 15.20(1)(b) of the High Court Rules, and ensures the plaintiffs must seek leave to discontinue.
[19] I do not accept Mr Smalley’s submission that if the case is referred back to the High Court it will be fundamentally different in scope and context. It is the case that the proceeding would effectively become a vehicle for Mr Smalley to bring a counterclaim against the plaintiffs, but that is a matter of form not of substance. As between the plaintiffs and Mr Smalley, the primary issue for determination would remain whether the EY valuation was binding. While Mr Smalley might seek to join EY as a party, and thereby increase the issues to be determined, that is an option he has always had and does not cause him prejudice.
[20] I also consider that if, after a trial in the High Court, it was held the EY valuation was not binding, Mr Smalley’s right to have the shares revalued is not compromised. Mr Smalley’s right in this regard is not derived from his status as a shareholder but as a matter of contract between the parties. Those contractual arrangements do not come to an end when Mr Smalley is no longer a shareholder.
[21] There is no evidence to support Mr Smalley’s contention that it may not be possible for a valuation of his shares to be undertaken following a trial in the High Court. Further, the authorities to which Mr Smalley’s counsel referred me show that upon setting aside an expert determination the Court has a range of options available to it to do justice between the parties. Depending on the circumstances of the case, these include referring the matter back to the expert who made the original determination to arrive at a fresh conclusion in accordance with the Court’s directions, prescribing alternative machinery for determination of the issue, referring the matter
to a Court-appointed expert, or making its own determination in substitution for that of the expert.10
[22] Mr Smalley’s wish to retain his shares would be understandable if there was any prospect the plaintiffs may be unable to pay for the shares at a price ultimately determined following a trial in the High Court. That is not the case here. There is no suggestion the plaintiffs will not be able to pay for the shares at whatever value they might ultimately be assessed to have. Mr Palmer confirmed that it is not suggested otherwise. It must also be borne in mind that Mr Smalley will, contemporaneously upon the transfer of his shares, receive $2,150,200. What is in issue is the difference between that figure and whatever value the shares are found to have following a further valuation (assuming, of course, they are not valued at less than $2,150,200).
[23]Mr Smalley’s appeal will not be rendered nugatory if a stay is not ordered.
Is there prejudice to Mr Smalley?
[24] Mr Smalley submits he will be prejudiced if a stay is not granted because upon the transfer of the shares to the plaintiffs, his rights as a shareholder will be lost.
[25] The first right he asserts concerns the payment of dividends. There is an ongoing dispute between Mr Smalley and the companies as to whether HHG and OPL are in breach of an obligation to pay dividends.11 Mr Smalley says that if the shares are transferred, his ability to claim dividends will be compromised. He also says legal arguments will arise as to whether he remained entitled to dividends until the Court of Appeal resolves the appeal, and as to the effect of the accrual of dividends on the value of his shares at that time.
[26] Next, Mr Smalley submits that, as a shareholder, he has the right to withhold consent to several kinds of transactions and rights under the Companies Act 1993.12
10 C Freedman and J Farrell Kendall on Expert Determination (5th ed, Sweet & Maxwell, London, 2015) at 371-372 and the authorities cited there.
11 Clause 6 of the variation to shareholders agreement dated 23 March 2018, annexed as GRW003 to affidavit of Grant Robert Williamson dated 9 February 2022.
12 See for instance s 149 of the Companies Act 1993.
[27] He also says that if he does not remain a shareholder, then imputation credits that HHG and OPL would have generated would be lost, resulting in a reduction in the value of both HHG and OPL.
[28] Concerning the issue of dividends, Mr Smalley has received gross dividends of $898,432 since September 2018. The non-payment of dividends has become an issue because the directors of HHG and OPL have resolved the companies should not pay further dividends after 16 July 2021. The reasons for that include that EY needed certainty to complete its valuation without late adjustments due to further dividends being paid,13 and the EY valuation has already taken into account, for the benefit of Mr Smalley, retained earnings and the future income potential of the shares.
[29] In a letter of 12 April 2022, from the plaintiffs’ solicitor, David Stock, to Mr Smalley’s solicitors, Buddle Findlay, Mr Stock explained:
The share valuation of [EY] includes all retained earnings of the two companies and takes into account that dividends were not paid. In particular the valuation takes into account, and includes in the share price, surplus cash. Your client cannot expect to receive both a dividend that would be paid from the cash included in the share value plus the price payable for the shares which also includes that cash.
In addition the share price is based on the future maintainable earnings for the shares so all future profits have been included in the share valuation. Again your client has no right to seek payment of dividends as this right is included in the share valuation.
[30] On this basis, the plaintiffs submit that Mr Smalley has already received the benefit of the retained earnings and future income via the value of his shares, and that in asserting an ongoing entitlement to dividends, he is double-counting.
[31] The plaintiffs’ position is compelling but, in any event, whether the companies breached an obligation to pay Mr Smalley dividends is a matter between Mr Smalley and the companies. In asserting an entitlement to dividends, Mr Smalley relies upon cl 6.1 of the variation to shareholders agreement dated 23 March 2018 which provides, “The companies agree with the shareholders that they will continue to pay dividends
…”. Mr Smalley can pursue a claim for breach of contract by the companies
13 Affidavit of David Michael Hayes dated 12 July 2022 at [4] and [5].
irrespective of whether he is required to transfer the shares to the plaintiffs. Further, I agree with the plaintiffs that any notional right Mr Smalley may have to receive dividends in the future can be accounted for by a valuer in any future valuation.
[32] As far as Mr Smalley’s voting rights as a shareholder are concerned, when Mr Smalley’s obligation to offer his shares for sale was triggered, he lost his voting rights. Clause 2.3 of the variation to shareholders agreement dated 23 March 2018 provides:
The Contractor shall not exercise any voting rights in respect of the shares held in the Companies or demand repayment of any advances from the date on which he ceases to be a contractor to the Companies.
[33] Mr Smalley argues that despite having no voting rights, he retains the ability to withhold approval to any of the transactions listed in cl 11 of the shareholders agreement of 13 September 2006. The plaintiffs submit that, as Mr Smalley has no voting rights, his approval to such transactions is not required. I do not need to decide the issue. There is no factual basis for Mr Smalley’s concern that any such transactions might be contemplated. Further, and for reasons I shall come to, in the circumstances of this case, that Mr Smalley asserts such rights is a matter to be considered in assessing where the balance of convenience lies and supports a finding that no stay should be granted.
[34] Turning to the issue of imputation credits, it is an unfortunate feature of this case, which I commented on in my earlier judgment, that under the guise of giving evidence, Mr Smalley provides a great deal of unhelpful opinion, submission and speculation.14 This is another instance of that. The plaintiffs referred me to s OA 8(2) of the Income Tax Act 2007 and submit that contrary to what Mr Smalley asserts, if he is required to transfer his shares, HHG and OPL will not lose imputation credits. Mr Palmer did not advance any argument to the contrary in his written or oral submissions. I accept the plaintiffs’ position.
[35] In submissions filed after the hearing, Mr Smalley’s counsel made submissions that the transfer of Mr Smalley’s shares might have implications under the NZX
14 Williamson v Smalley, above n 1, at [65].
Participant Rules and the Anti-Money Laundering and Countering Financing of Terrorism Act 2009. There is no evidence before me about these matters. I can take nothing from the submissions.
[36] Mr Smalley has not established he will suffer prejudice if the stay is not granted.
Does the appeal have substantive merit?
[37] Mr Smalley argues the appeal raises novel issues, namely the requirement of an expert valuer to comply with mandatory standards as part of its mandate, and whether the valuer is the sole arbiter of its own compliance with such standards.
[38] The plaintiffs argue Mr Smalley’s appeal has no merit and raises a technical legal argument that is contrary to well-established authorities.
[39] I have already expressed my views on Mr Smalley’s defence and it would not be right to comment further about it. It is enough to say I do not consider the appeal raises a novel issue, but I accept it is arguable.
Is there prejudice to the plaintiffs?
[40] Mr Smalley argues the granting of a stay will not cause prejudice to the plaintiffs. I do not accept that submission.
[41] Under the summary judgment, Mr Smalley was required to transfer the shares within seven working days of the date that judgment was sealed and the plaintiffs were obliged to contemporaneously pay him for the shares. The summary judgment was sealed on 23 June 2022, and the final date for Mr Smalley’s compliance was 5 July 2022. In anticipation of this, on 27 June 2022, the plaintiffs’ solicitors provided Mr Smalley’s solicitors with updated share transfers and sought confirmation that he would sign them. Mr Smalley’s solicitors did not reply until 5.14 pm on 4 July 2022, when Mr Smalley served a copy of his notice of appeal and application for stay on the plaintiffs. However, in the interim, three of the plaintiffs borrowed reasonably large sums to meet their obligations to Mr Smalley under the judgment.
[42] The plaintiffs say that if a stay of execution is granted, the three shareholders will have to continue to pay interest on their borrowings without receiving the benefit of the shares. One of the plaintiffs says his bank has indicated it is considering whether he is in breach of his loan agreements as a result of not having received his portion of the shares. He also says that, in addition to being a stressful situation, this could be detrimental to his ability to obtain credit in the future, and there is a concern that the interest payments may not be tax-deductible in circumstances where the shares have not been transferred to him.
[43] While care must be taken not to overstate the matter, I accept there will be some financial cost to the three plaintiffs if a stay is granted. Mr Smalley’s response is to say “I consider that the apparent “hardship” noted in the plaintiffs’ affidavits can be resolved very quickly; they could simply pay the money that they borrowed back (which they still have)”.15 That fails to recognise that some cost has already been incurred and if the loans are repaid there may be further costs, such as break fees, associated with that. Also it would be foolish to repay the loans at the present time as the plaintiffs must remain in a position to comply with the Court’s order unless a stay is granted.
[44]I accept the plaintiffs will suffer some prejudice if the stay is granted.
Is the appeal pursued in good faith?
[45] The plaintiffs submit Mr Smalley’s sole objective in bringing the appeal, and seeking a stay, is to avenge his removal from the companies. One of the plaintiffs has filed an affidavit describing events on 4 February 2019, when Mr Smalley told him he felt betrayed and wanted ‘utu’, and sought support for a plan to achieve his ends. Mr Smalley does not deny such a discussion occurred, or that he wanted ‘utu’. His evidence that there was no plan, only “discussion and supposition”, is unconvincing. The plaintiffs say that while Mr Smalley’s plan did not come to fruition, he has been very successful in delaying and frustrating the valuation process at every turn, during which period he has received $898,432 in dividends.
15 Affidavit of Mr Smalley in reply dated 14 July 2022 at [6].
[46] The plaintiffs note, also, that Mr Smalley has brought proceedings against the HHG directors in the Employment Relations Authority disputing his holiday pay. He seeks ongoing payment of dividends and threatens litigation in respect to that issue. Further, Mr Smalley continues to seek information and financial records of the companies. The latest such request was made on 13 July 2022, which ignores this Court’s judgment.
[47] I consider it likely Mr Smalley believes EY undervalued his shares and, of course, he has the right to pursue his appeal. However, based on the correspondence that was put before the Court on the summary judgment application, and the evidence filed on this application, it is clear Mr Smalley harbours deep resentment against the plaintiffs, that he has maintained positions that are unreasonable throughout the valuation process, and he is primarily responsible for the delays that occurred in completing it, adding significantly to the plaintiffs’ costs. I consider this is a factor which weighs against granting a stay.
Does Mr Smalley’s appeal raise important questions or matters of public interest?
[48] I do not consider Mr Smalley’s appeal raises an important issue of public interest.
The balance of convenience
[49] Upon the termination of Mr Smalley’s engagement with the companies, he was to “forthwith” offer his shares for sale. The parties must have contemplated a speedy separation of their affairs. Not only that, they also agreed to have the shares independently valued on the basis that neither would challenge the valuation, thereby achieving finality regardless of the result. Yet it is now almost four years on, and there is no finality.
[50] Regardless of the merits of his appeal, there is no relief that either the Court of Appeal or the High Court will grant Mr Smalley that will see him retain his shares. Ultimately, Mr Smalley’s expectation can only be to receive payment of the fair value of his shares. Mr Smalley has made much of his rights as a shareholder, yet he is
highly antagonistic towards the plaintiffs and it is naïve to dismiss the possibility he may be disruptive to the companies if he remains a shareholder. For instance, Mr Smalley asserts he may withhold consent to decisions that may be crucial to the growth and development of the companies, such as whether to admit new shareholders. In circumstances where Mr Smalley will receive a very substantial sum upon the transfer of his shares, and any future proceeding will only be concerned with what (if any) further sum may be payable to him, I consider this is an important factor against granting a stay.
Undertakings
[51] For completeness, I should add that Mr Smalley’s counsel submitted proposed undertakings that the plaintiffs might give to preserve Mr Smalley’s position pending the appeal. The content of those proposed undertakings only reinforced the concern I have identified in [50] above. They also ignore that there is no prospect Mr Smalley will retain his shares, regardless of the outcome of his appeal, and go well beyond what is required to preserve his position pending the appeal.
Result
[52] I am satisfied that the merits on this application clearly favour the plaintiffs and a stay should not be granted.
[53]Mr Smalley’s application is dismissed.
[54] The plaintiffs are entitled to costs on a 2B basis plus reasonable disbursements as fixed by the Registrar.
[55] Mr Palmer advised that if I do not grant a stay, Mr Smalley may appeal. He sought time for an appeal to be filed. I believe Mr Smalley will need leave to appeal.16 In those circumstances, I extend the temporary stay that is presently in place which
16 Senior Courts Act 2016, s 56(3).
shall lapse at 4pm on Thursday, 28 July 2022 unless an application for leave to appeal is filed by then.
O G Paulsen Associate Judge
Solicitors:
Richard Raymond QC, Barrister, Christchurch Janna McGuigan, Barrister, Auckland
Buddle Findlay, Christchurch
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