AMEV-UDC Finance Ltd v Austin

Judgment 1These proceedings arise out of a dispute in relation to a joint venture project for the construction, operation and maintenance of an automated diesel loading and storage facility to service the shipping industry in Mackay, Queensland (the Facility). 2Although the main proceedings involve multi-million dollar claims for unpaid tax invoices in respect of the construction of the Facility and competing claims in respect of alleged contractual breaches, this aspect of the litigation involves the determination of separate questions. 3There are two main contracts that govern the joint venture. 4This aspect of the proceedings requires the analysis and construction of a Shareholders Agreement dated 9 February 2011, the parties to which are the third plaintiff, Blue Oil Energy Pty Ltd (Blue Oil), the sixth defendant, Morgan Stanley Capital Group Inc (Morgan Stanley) (referred to in the Agreement as MSCG), and the first defendant Pioneer Energy Holdings Pty Ltd (Pioneer) (referred to in the Agreement as the Project Company). 5Although it will not be necessary to refer to it in any detail, there was also a Head Contract for the construction of the Facility (the Construction Contract), the parties to which are the fourth plaintiff, Blue Diamond (Australia) Pty Ltd (Blue Diamond), and the seventh defendant, Pioneer Energy Pty Ltd (Pioneer Energy) (a wholly owned subsidiary of Pioneer). 6Blue Oil and Morgan Stanley are the shareholders in Pioneer. Blue Diamond is undertaking the construction of the Facility pursuant to the Contract with Pioneer Energy. The construction is incomplete. Shareholders Agreement 7Blue Oil and Morgan Stanley agreed to participate in "an incorporated joint venture to undertake the Business" (Recital A) being "the construction, operation and maintenance of diesel fuel storage terminals and distribution facilities". It included "the storage or lease of storage facilities for diesel and the "distribution of wholesale diesel" in Australia (cl 1.1). Pioneer was established as the Project Company for the purpose of carrying on the Business. 8Blue Oil and Morgan Stanley agreed to subscribe for shares in Pioneer and decided to "regulate the management and business activities" of Pioneer upon and subject to the provisions of the Shareholders Agreement (Recital C). Pioneer was to be "ultimately responsible" for the construction, operation and maintenance of the diesel terminals through its subsidiaries, the first of which was Pioneer Energy (cl 2.1). 9Pioneer was to carry on and grow the Business in Australia and to ensure it was managed to maximise its value. It was also required to ensure that its processes and those of Pioneer Energy for making decisions were regulated in accordance with the Shareholders Agreement. Pioneer Energy was responsible for holding the Lease, the Pipeline Licence and the Wharf Licence of the Facility. It was also obliged to own, construct and supply equipment for and to commission the Works at the Facility (cl 2). 10In accordance with their agreement to subscribe for Subscription Shares in Pioneer, Morgan Stanley subscribed for 75% of the issued Project Company Shares and Blue Oil subscribed for 15% of the issued Project Company Shares (cl 1.1). The Subscription Price for Morgan Stanley was $75, "calculated as $1.00 per share". The Subscription Price for Blue Oil was $15, "calculated as $1.00 per share" (cl 1.1). 11The parties agreed that the Shareholders Agreement was subject to Conditions Subsequent being: (1) the provision of a Bank Guarantee (complying with a Deed of Priority and the Construction Contract) by Blue Diamond to Morgan Stanley within 15 days of the signing of the Shareholders Agreement; and (2) the execution of Transaction Documents (as defined) within 10 days of the signing of the Agreement (cl 4.1). In the event that either of the Conditions Subsequent were not fulfilled, Morgan Stanley could terminate the Agreement on the condition that it transfer all its Project Company Shares to Blue Oil in accordance with clause 30 (cll 4.3, 5.1). If Blue Oil were to terminate the Agreement on this basis then it and Pioneer were required to reimburse Morgan Stanley for the Subscription Price and any Initial Funding Amount paid by Morgan Stanley (cl 5.2). 12The parties agreed that the Initial Funding, for the sole purpose of funding Pioneer Energy in the construction of the Facility, was to occur by the issuing of 51,777,948 million partly paid shares in Pioneer. Blue Oil and Morgan Stanley agreed to pay the balance of the amount for the shares in accordance with the Initial Funding Budget until the shares were fully paid. The Initial Funding Budget of $51,777,948 was to be paid in full by the end of 45 weeks. Morgan Stanley was to pay $38,833,461 (75% of the total). Blue Oil was to pay $12,944,487 (25% of the total) (cll 7.1-7.3; Schedule 1). 13Amendment to the Initial Funding Budget could occur by simple majority consent of the Board of Pioneer if the increase were less than $5 million. An amendment of $5 million or more required the unanimous consent of the Board (cl 7.4). In the event of an amendment to the Initial Funding Amount, each shareholder was required to subscribe for the additional shares in their requisite percentages (75% and 25%) (cl 7.4(d)). 14If there were any default in providing the Initial Funding (an Initial Funding Default) then a mechanism was agreed whereby each of Morgan Stanley and Blue Oil could require the other (defaulting party) to transfer to it the defaulting party's Project Company Shares (cll 7.6 and 7.7). It is this mechanism that is the subject of the separate questions and to which I will return in more detail later. 15The parties also provided for a Working Capital Loan of $2.785 million to Pioneer. Morgan Stanley was required to lend no more than $2,088,750 (75%) and Blue Oil was required to lend no more than $696,250 (25%) (cl 8.1). The purpose of the Working Capital Loan was to fund incidental expenses related to the development and operation of the Facility that were not covered by the Initial Funding Amount (cl 8.4). 16It is apparent that Blue Diamond had contributed $5.65 million to the project prior to the execution of the Shareholders Agreement. Pioneer was required to reimburse $5.65 million to Blue Diamond within 5 business days of the date on which the last Condition Subsequent was satisfied or waived in accordance with clause 4.2 of the Agreement (cl 9). 17The parties also considered the possibility of the future funding of the project. If that proved necessary the parties were required to subscribe for additional shares in their requisite percentages (cl 10). 18The parties also considered what would occur after the date of Practical Completion. It was agreed that Pioneer would procure Pioneer Energy to procure agreements with a customer for a term of two years or more for diesel to be supplied from the Facility with gross revenue totalling not less than $10 million per annum. If that did not occur then the parties agreed that Morgan Stanley could issue a written notice to Blue Oil and Pioneer notifying them that it would sell all its Project Company shares and those of Blue Oil (acting as the appointed attorney in accordance with clause 30.6) to an External Transferee (cl 11(c)). The proceeds of such sale would go to Morgan Stanley in an amount equal to its Subscription Price, its Initial Shareholding Funding Amount inclusive of the Working Capital Loan and any other amounts invested by Morgan Stanley in the project. The balance would then be paid to Blue Oil (cl 11(e)). 19The parties also agreed that if Blue Diamond achieved practical completion on time and within budget, then Blue Oil would have the option to require Morgan Stanley to transfer to it 5% of its total number of Project Company Shares "for $1" (cl 22.2). 20The parties also agreed on restrictions on competition (cl 23), the way in which future opportunities could be exploited (cl 24), and restrictions on the transfer of their shares to external parties (cl 25). 21Blue Oil agreed that a change in its control without Morgan Stanley's consent would amount to a breach of the Shareholders Agreement. If this occurred Morgan Stanley had the option to require Blue Oil to transfer to it "for $1" 4 million Project Company Shares (cl 25.6(a)). It was also agreed that if Blue Diamond committed a Blue Diamond Change of Control Default under the Construction Contract or the Side Deed then Morgan Stanley had the option to require Blue Oil to transfer 4 million Project Company Shares to it for "$1 consideration" (cl 25.6(b)). Morgan Stanley and Blue Oil agreed that the option to require these transfers was "a genuine estimate of the damages" Morgan Stanley "will suffer as a consequence" of such Change of Control Default (cl 25.6(c)). 22The parties defined various Default Events in respect of which the non-defaulting party could issue a notice to remedy the default within 14 days. If the default were not remedied, the non-defaulting party had the option to purchase the defaulting party's "interest in the Project Company at a Fair Market Value minus 10%" (cl 29). 23The parties also agreed that if a dispute arose and continued for a period not less than 12 months, Morgan Stanley could elect to purchase Blue Oil's "interest" in Pioneer for Fair Market Value in accordance with clause 31 of the Agreement or to sell its Project Company Shares to Blue Oil or a third party for not less than the Fair Market Value (cl 33.4). Background facts 24The "Initial Funding Budget" amounts, $38,833,461 for Morgan Stanley and $12,944,487 for Blue Oil, were paid. 25At a Pioneer Board meeting on 11 April 2013, the Board resolved, by majority, to increase the Initial Funding Budget by $4.99 million pursuant to clause 7.4(a) of the Shareholders Agreement and to issue new shares in Pioneer corresponding to the amount raised (the Resolution). Morgan Stanley was to fund 75% ($3,742,500) and Blue Oil 25% ($1,247,500) of the total amount, with the contributions to be received by 26 April 2013. Morgan Stanley paid its amount due under the Resolution. 26Blue Oil did not pay the amount it was required to pay by 26 April 2013. On 30 April 2013 Morgan Stanley issued a notice in accordance with clause 7.6(a) of the Agreement requiring Blue Oil to pay the sum of $1,247,500 pursuant to the Resolution within 20 business days, by 28 May 2013. Blue Oil did not pay the amount by that date or at all. 27Morgan Stanley has not purported to exercise its option pursuant to clause 7.6(b)(i) and the relevant defendants have given undertakings to the Court preventing Morgan Stanley from exercising the option for the time being. Separate Questions 28On 27 May 2013 orders were made for the determination of separate questions, which can be stated as follows: