Belgiorno-Zegna v. Exben Pty. Limited & Ors. [2000] NSWSC 884

Supreme Court of NSW|2000-08-23

INTRODUCTION 1.1. Exben Pty Limited ("Exben" hereafter) and Amifra Pty Limited ("Amifra" hereafter) are each jointly owned as to 10% by Amina Belgiorno-Nettis ("ABN") and as to 30% by each of Marco Belgiorno-Zegna ("MBZ"), Luca Belgiorno-Nettis ("LBN") and Guido Belgiorno-Nettis ("GBN"). Franco Belgiorno-Nettis ("FBN") has an "A" class share providing voting control during his lifetime in each of Exben and Amifra. Exben is also the trustee for the Exben Family Trust whose beneficiaries are, amongst others, all of the shareholders of Exben and Amifra (collectively Exben, Amifra & the Exben Family Trust are referred to as "the Exben Group").

1.2. Exben is governed by its Articles, Shareholders' Agreement and the Transfield Corporate Governance Agreement.

1.4. Exben's principal asset is its 100% shareholding in Transfield Holdings Pty Limited ("Holdings" hereafter) plus its shareholding in those companies formerly owned by Exben & Romap which subsequently became wholly owned subsidiaries of Exben ('the Romap Companies" hereafter). Collectively Holdings and its subsidiaries and the Romap Companies are referred to as "the Transfield Group".

1.5. For reasons associated with generational succession planning, the Parties wish to restructure their joint ownership of the Exben Group and record their agreement as to the organisation and operation of the Transfield Group. The result of the restructure will be the creation of two separate holding companies, Exben I, to be owned as to 10% by ABN and as to 45% by each of LBN and GBN, with FBN holding for his lifetime an "A" Class share with similar rights to the Exben "A" Class share & ABN holding for her lifetime a "B" Class share which assumes the rights of an "A" Class share when FBN's "A" class share lapses (collectively "the Exben I Shareholders") and Exben II, to be owned by ABN as to 10% and by MBZ as to 90% ("the Exben II Shareholders"). Amifra will be owned as FBN and ABN decide. (Collectively the Exben I Shareholders and the Exben II Shareholders are "the Parties".) A proposed structure post implementation is attached as Schedule 1.

1.6. Subject to Clause 5.4 it is contemplated that the dividend rights in Exben I and Exben II will reflect shareholdings.

1.7. This Memorandum sets out the broad principles of a transaction agreed between the Parties to effect the restructure ("the Transaction" hereafter).

1.8. The Parties will work together in good faith to implement the Transaction as expeditiously as possible. In so doing, the interests of FBN and ABN will need to be addressed.

BROAD PRINCIPLES 2.1. This Memorandum contemplates a division of the assets of the Exben Group such that all Exben Group real property except for the Transfield Group real property is transferred to Amifra or to FBN and/or ABN as they wish. As to the balance of the assets of the Exben Group, Exben II will own those assets listed in Schedule 2 while Exben I will own the remainder.

2.2. The Parties agree to the establishment of a Foundation in honour of FBN and that it will be seeded with all of the Transfield artworks and such other assets as determined by the Trustee.

2.3. While the precise method of implementation of the division is subject to agreement between the Parties, at present it is contemplated that this might be achieved by Exben selling its shares in Holdings on or before 30th June 1999 to a newly formed and nominally capitalised company owned by the Exben I Shareholders ("Exben I" hereafter). Until the Implementation Date appropriate security arrangements will be put in place to protect the interests of the Exben II Shareholders.

2.4. The Romap companies would then be liquidated. Exben would be left with a loan to Amifra, a loan to Holdings and a loan to Exben I and sundry assets and liabilities, all of which would be distributed in specie to the shareholders of Exben on voluntary liquidation of Exben. It is contemplated that the Exben I Shareholders will use their proceeds from the above liquidation to subscribe for a combination of equity and loan funds in Exben I, that the Exben II Shareholders will use their proceeds to subscribe for a combination of equity and loan funds in Exben II. Amifra will be capitalised to the extent necessary to purchase the Exben real property. ABN will hold 10% in both Exben I and Exben II. Unlike the Exben I Shareholders, MBZ is not subscribing for equity or subordinated debt in Exben I. It is contemplated that the loans of MBZ to Exben I, Holdings and Amifra will rank prior to any such loans of the Exben I Shareholders and will be repaid in accordance with predetermined schedules.

2.5. Upon the liquidation of Exben, Amifra will become the trustee of the Exben Family Trust and the trustee of the FBN Foundation.

2.6. Following Exben's sale of its Holdings' shares to Exben I, it is contemplated that the Schedule 2 assets ("the Exben II Assets" hereafter) will be sold by Exben I and/or its subsidiaries to a wholly owned subsidiary of Exben II ("Transfield Investments" hereafter) and/or its subsidiaries, with the purchase price being settled by Exben II making predetermined repayments on commercial terms.

EFFECTIVE DATE AND IMPLEMENTATION DATE 3.1. The Effective Date of the Transaction is the date of this Memorandum of Understanding.

3.2. The Implementation Date is the date by which the Transaction is completed and the structures set down in Schedule 1 have been formed and is to be on or before 20th December, 1999.

DIRECTORS 4.1. The directors of Exben I will include FBN (Founding Chairman), ABN, LBN and GBN.

4.2. The directors of Exben II will include FBN (Founding Chairman) ABN and MBZ.

4.3. The shareholders' agreements for both Exben I and Exben II will provide for life appointments of FBN as Founding Chairman and for ABN as Director.

4.4. On the Implementation Date the Transfield Corporate Governance Agreement will cease to have effect.

DIVISON OF ASSETS/INCOME 5.1. Broadly, it is contemplated that Transfield Investments shall own the Exben II Assets as listed in Schedule 2 and shall be entitled to all income arising from them from the Effective Date.

5.2. It is contemplated that Exben I shall retain all of the Exben Assets remaining after the Exben II Assets are transferred to Transfield Investments ("the Exben I Assets" hereafter). Exben I shall be entitled to all income arising from the Exben I Assets from the Effective Date.

5.3. Exben II shall accept the Exben II Assets in full settlement of its entitlement to its interest in the value of the Exben Group.

5.4. It is contemplated that FBN & ABN will receive as income the whole of the income of Amifra and the Exben Family Trust. In addition, it is contemplated that FBN will receive Director's fees of $600,000 per annum indexed by $30,000 per annum, of which two thirds will be paid by Exben I and/or its subsidiaries and one third by Exben II and/or its subsidiaries. Additionally, FBN will receive for his lifetime 22.5% of the dividends from each of Exben I and Exben II, subject to a minimum annual payment equivalent to a franked dividend of $1 million indexed at $25,000 per annum, of which two thirds will be paid by Exben I and/or its subsidiaries and one third by Exben II and/or its subsidiaries. ABN will receive 10% of the dividends from each of Exben I and Exben II, provided that the total annual dividend payments is not less than $600,000, indexed at $12,500 per annum in the proportion of two thirds from Exben 1 and/or its subsidiaries and one third from Exben II and/or its subsidiaries. Minimum annual dividend distributions from each of Exben I and Exben II shall be 30% of after tax profits. Subject to restrictions imposed in covenant tests by bankers to Exben I and Exben II, ABN will be entitled to drawings from her loan accounts with Exben I and Exben II from time to time but always such that the drawings will be in the ratio of 2 parts from Exben I and one part from Exben II. At any time total drawings from both sources may total $1.5 million, over the $600,000 annual sum in any one year repayment of which will be interest free and out of future dividends. 6. MANAGEMENT OF ASSETS 6.1. From the Effective Date, GBN and LBN will have day to day management of the Exben I Assets. Similarly, from the Effective Date, MBZ will have day to day management of the Exben II Assets.

6.2. From the Effective Date Exben II and Exben II shall conduct separate sets of accounts for the Exben 1 Assets and the Exben II Assets respectively. If it is agreed to change the makeup of the Exben II Assets ("the Revised Exben II Assets" hereafter) during the period from the Effective Date to the Implementation Date , the two sets of accounts will be retrospectively adjusted to reflect the transactions related to the Revised Exben II Assets.

6.3. Notwithstanding the provisions of the Transfield Corporate Governance Agreement and only for the purposes of day to day management, during the period from Effective Date until the Implementation Date MBZ shall have the title of Executive Director - Transfield Investments, GBN shall have the title Executive Director, Transfield Pty Limited and LBN shall have the title Executive Director, Transfield Pty Limited.

6.4. It is acknowledged that amendments to the Transfield Corporate Governance Agreement are necessary to allow the respective management groups to have day to day management of their businesses ("the Amended Corporate Governance Agreement" hereafter). From the Effective Date until the Implementation Date, the Amended Corporate Governance Agreement will apply.

6.5. In the event that, for whatever reason, the Transaction is not implemented by 20th December 1999, this Memorandum of Understanding will come to an end and the Amended Corporate Governance Agreement will lapse in favour of the Transfield Corporate Governance Agreement and MBZ will resume the position of Managing Director of Transfield as provided in the Transfield Corporate Governance Agreement dated 3rd February, 1998.

6.6. On the Implementation Date, the employees of the Transfield Group listed in Schedule 3 will be transferred to Exben II subject to their concurrence. Their work assets, such as but not limited to computers, software, relevant files, motor vehicles, furniture, etc. and their employee entitlements will be similarly allocated. The superannuation entitlements will be actuarially determined as at the Implementation Date and the entitlements of the employees of the Party employing the lesser number of Transfield Superannuation fund members will be transferred to a newly constituted superannuation fund as soon as practical after the Implementation Date.

6.7. On the Implementation Date MBZ will resign from all offices held in companies which from that date fall under the ownership of Exben I. Similarly LBN & GBN will resign from offices held in companies which fall under the ownership of Exben II.

NON-COMPETE COVENANT/TRANSFIELD NAME 7.1. It is acknowledged that Transfield Pty Limited will own the name of Transfield. The Party which owns Transfield Pty Limited will permit the use of the Transfield name by the other Party for the shorter of: 7.1.1. A period of three (3) years from the Implementation Date, or 7.1.2. The period that FBN remains on the Board of the other Party.

7.2. The Parties agree that neither shall engage in activities carried on by the other ("the Exben I Non-Compete Activities" and Exben II Non-Compete Activities" respectively) during the period that both use the Transfield name.

7.3. The Exben I Non-Compete Activities and the Exben II Non-Compete Activities are defined by the Transfield Group's current activities and any new activities that either Exben I or Exben II and/or their subsidiaries commence in the period of 3 years from the Effective Date providing that the initiating Party notifies the other in writing of the natures of the new activities.

7.4. In the event of a dispute between the Parties as to whether an activity is part of either the Exben I Non-Compete Activities or the Exben II Non-Compete Activities, the Parties agree to be bound by the decision of an independent arbitrator as stipulated in Clause 11.1.

7.5. The Parties contemplate that whilstever both Parties use the Transfield name, neither they nor any related entities shall seek to recruit employees from the other's business/businesses, except with the prior agreement of the other.

TRANSACTION COSTS 8.1. All costs of implementing the Transaction (for example capital gains tax, stamp duty, including stamp duty, valuation fees and legal fees relating to the transfer of the Exben real property and the costs of jointly employed advisers), except for costs associated with advisers employed by the Exben I Shareholders on the one hand or the Exben II Shareholders on the other, shall be borne as to two thirds by Exben I and as to one third by Exben II.

8.2. The Parties will work together in good faith to develop a Transaction structure which minimises transaction costs and is also mutually acceptable.

8.3. An implementation team will be established to assist the Parties to implement the Transaction. The team under the direction of Brian Eslick and Glenn Fraser (the joint Project Managers) will be comprised of Holdings staff and jointly employed advisers, such as advisers assisting with the sale and transfer of assets for the Transaction, with the requisite skills, such as taxation, treasury, legal, investment advisory and accounting skills. The team will work in good faith to bring about an optimal result for Exben, Exben I, Exben II, Amifra and the Exben Family Trust. All internal and external advisers will be jointly briefed by a representation of MBZ and LBN or GBN or their respective nominees.

8.4. In terms of Clause 5 above, the advisers will be briefed as to develop a workable restructure that is the most efficient possible from a transaction costs, tax and external advisory cost basis. Should it become apparent that, while working with the nominated allocation of assets, the transaction costs become prohibitive, the Parties may explore other rearrangements of these assets to help deliver a cost effective restructure.

EXTERNAL APPROVALS 9.1. The statement of intention as summarised in this Memorandum of Understanding is subject to any required external approvals and clearances.

9.2. The Parties will jointly approach Holdings' banks as soon as practical after the Effective Date to negotiate revised and mutually acceptable financing arrangements.

9.3 Subject to not materially prejudicing the implementation of this MOU, it is agreed that any bids and any financial commitments in relation to the acquisition of ADI will be subject to the approval of the Transfield MFA Syndicate Banks and will not be subject to MBZ veto.

With regard to the acquisition and financing of ADI, there will be no communication between Exben II and banks, partners or other parties associated with the bid without Exben I approval.

COMMUNICATIONS 10.1. All general communications with the employees and all external parties in relation to the Transaction shall be jointly agreed by the Parties.

10.2. There shall be no media comment on the Transaction or the revised management arrangements unless jointly agreed by the Parties. 11. DISPUTE RESOLUTION 11.1. Any dispute arising over any matter pursuant to this Memorandum of Understanding shall be arbitrated by Mr. Bill Neill with technical assistance to be provided by PricewaterhouseCoopers. The Parties agree to be bound by the decision of the arbitrator.

SCHEDULE 2 Exben II Assets

100% of Transfield's interest in: Perisher Blue Macarthur Water Yan Yean Water

All of Transfield non-operational properties as below: South side of Seven Hills (balance of Seven Hills to Operations) Lots 355 & 356 and 12 Karoonda Close, Rathmines 27-49 Nelson Rd, Yennora 374 Vardys Road, Kings Park Unit 14B, 52 Old Burleigh Road, Surfers Paradise Apartment 39, Snow Crystal Inn, Falls Creek Lots 2 & 3 Cnr Hope Valley & Lee Rds, Kwinana Lot 5, Cnr Lee Rd & Lionel Street, Kwinana Lots 525, 527 & 528 Lionel Street, Kwinana 27 Wst Street, Mt Isa Hudson Ave, Castle Hill (InstalComm)

$5.00 million debt owing. Principal to be repaid on the third anniversary of the Implementation Date. Security to be Tulk Osbome Park property and terms to be commercial including appropriate environmental considerations. Interest payments to be monthly.

We are instructed as follows:

MBZ owns one "C" class share in Exben Pty Ltd (Exben) and a 30% interest in Exben.

The other shareholders of Exben are as follows: Franco Belgiorno-Nettis (FBN) Both "A" class shares giving him voting control of Exben during his lifetime. Amina Belgiorno-Nettis (ABN) The "B" class share and a 10% interest in Exben. Luca Belgiorno-Nettis (LBN) One "C" class share and a 30% interest in Exben Guido Belgiorno-Nettis (GBN) One "C" class share and a 30% interest in Exben Since 1996, Transfield Holdings Pty Ltd and its subsidiaries and certain other associated companies (Transfield) have been wholly owned subsidiaries of Exben. That state of affairs arose from a series of transactions by which Romap Pty Limited (a company controlled by the Salteri family) sold its 50% interest in Transfield in exchange for the defence business which had previously been carried on by Transfield.

Following the desire of LBN and GBN, supported by FBN, to become involved in the senior management of Transfield and disagreements in relation to the management of Transfield, MBZ initiated discussions on how he could be bought out of Exben. Although the Shareholders Agreement provides a mechanism for one shareholder to be bought out by the others, GBN and LBN have made it clear that they cannot afford to buy MBZ out and were not prepared to have another person acquire his shares. Against that background, it was agreed 'm principle that the shareholders of Exben should investigate how MBZ might be bought out. For that purpose in May 1997, the shareholders retained Macquarie Bank to advise them in relation to the restructuring of the assets owned by Exben and the financial viability of that restructuring.

In early 1998 MBZ, GBN, LBN and FBN reached an agreement, referred to as the Corporate Governance Agreement, setting out a number of matters relating to the management of Transfield pending an investigation of how the assets of Exben might be divided between NMZ, GBN, LBN and ABN. Under the terms of that agreement and in the context of MBZ's proposed separation from Exben occurring, it was agreed that MBZ would remain as managing director for 2 years to allow for proper management succession with an option for a further 12 months should the separation be delayed. LBN was appointed Executive Director - Asia some 7 years ago. GBN was appointed CEO of the Engineering & Construction Division in August 1998. GBN and LBN were appointed Deputy Managing Directors in December 1998 whilst still retaining those previous responsibilities. The scope of MBZ's powers as managing director were set out in the Agreement. The Agreement provided that a number of decisions of Transfield required unanimous approval of the "A" class and "C" class shareholders. One of those decisions was the decision to appoint the managing director at the expiry of MBZ's term in the event he had not departed as a shareholder.

Notwithstanding the Corporate Governance Agreement, disputes in relation to the management of Transfield continued. The circumstances relating to those disputes are complicated. In substance, however, they arise because both LBN and GBN, with the approval of FBN, have frustrated MBZ in the proper execution of his duties as managing director. In doing so, Transfield companies at the instigation of both LBN and GBN have entered into a number of transactions which MBZ believes are not in the interests of shareholders as a whole and were contrary to good commercial judgment and, on occasion, expert advice. LBN and GBN have also given instructions to executives of Transfield in relation to those transactions (and others) which were inconsistent with the views which had been expressed by MBZ or which were given without the knowledge of MBZ.

Examples of these transactions are the Bakun and Nam Theun hydro-electric projects and General Construction - Asia and also Project Development in Asia and the Coal Seam Methane Project in Australia. Losses on these examples alone are more than A$70 million and continuing. In addition to these examples, other major losses exist in areas GBN has had responsibility for (for example, Project Development - Asia, Eastern Gas Pipeline, Technipetrol NSW Construction and Century Zinc) and under LBN's control (for example, Construction Asia and the representative offices in Asia, and for some time, Materials Handling and Modular Waste Systems). Within only two months of setting the 1999/2000 Transfield budget, the most recent full year forecast (as at October) is showing a reversal of over $48 million.

In MBZ's opinion, these examples, among others, illustrate that LBN and GBN are not capable of managing Transfield in the interest of the shareholders as a whole and that, if they continue, similar losses are likely to be incurred in the future due to inadequate risk assessment and pricing, and poor choice of management and poor commercial judgment. These examples also illustrate that Transfield has become unmanageable under the present arrangements.

On 25 May 1999 each of the shareholders of Exben signed a Memorandum of Understanding (MOU) which sets out broadly the terms on which the parties had agreed on how the assets of Exben would be divided between the shareholders.

The MOU also provided that LBN and GBN would take management control of part of Transfield in the period 5 May 1999 to 20 December 1999.

Clause 6.5 of the MOU relevantly provides that if the transaction contemplated by the MOU was not implemented by 20 December 1999, the MOU would come to an end and MBZ would resume the position of managing director of Transfield as provided in the Corporate Governance Agreement and that the Corporate Governance Agreement would apply in its original form.

As a result of the deteriorating financial position of Transfield, Transfield's bankers would not agree to the transaction contemplated by the MOU. Consequently, it has become clear that the transaction will not be implemented by 20 December 1999.

On 20 October 1999 LBN and GBN convened a general meeting of Exben. The notice of meeting stated that the business to be considered at the meeting was, relevantly, the progress of the MOU.

In fact, at that meeting, without adequate prior notice to MBZ, LBN and GBN, exercising a proxy in their favour from FBN and ABN respectively, purported to pass a resolution appointing GBN as managing director of Transfield and LBN as associate managing director from 1 January 2000. MBZ opposed that resolution. The resolution which was purportedly passed is a breach of the Corporate Governance Agreement. At a later Board meeting of Transfield, GBN and LBN purported to confirm those appointments despite the fact that each of them had participated in a Resolution of the Transfield Management Board on November 18 which expressly affirmed commitment to adherence to the processes set out in the Corporate Governance Agreement. When MBZ challenged LBN on his disregard for the Corporate Governance Agreement, LBN said "when you're in the minority it is tough, the minority member can get pushed around but that's the way it is". In his letter of 17 November, LBN advised that, on expiry of the MOU, MBZ would become a non-executive director. The effect of the decisions which have been taken is to exclude MBZ from the management of Transfield.

Our client has no confidence that Transfield will be managed in the interest of the shareholders as a whole. At a meeting on 25 November 1999 which was called by the Group's banks, the banks expressed serious concern in relation to the financial state of Transfield. The banks indicated that Transfield's credit rating had been downgraded since September 1999 and was continuing to fall. This is in the context of an existing breach of a financing charges covenant and the threat by the banks to impose an event of default in the event of any repetition of conduct in breach of the requirement to obtain approval for capital expenditure. MBZ does not believe GBN and LBN have managed Transfield's banking relationship in a way to give the Banks confidence in Transfield's management.

Against this background, we have advised our client that he should seek relief under section 246AA of the Corporations Law. Relevantly, that section permits a court to make any order or orders as it thinks fit where the affairs of a company are being conducted in a manner that is oppressive or unfairly prejudicial or unfairly discriminatory against a member or in a manner that is contrary to the interests of the members as a whole. The orders that a court might make under that section include:

(b) an order appointing a receiver or a receiver and manager of property of Exben including all of the shares in Transfield Holdings Pty Ltd;

(d) an order for regulating the conduct of the affairs of Exben and Transfield;

Our client has attempted for some weeks now to engage you in discussions to find an amicable solution for all parties. While he remains reluctant to commence proceedings your actions leave him little choice. As an alternative, he is willing to sign a mediation agreement for the appointment of Mr Trevor Morling QC or such other mediator as is agreed, for the purpose of attempting to resolve by agreement all issues relating to the management of Transfield and the circumstances in which our client should be bought out of his interests in Transfield or the assets of Transfield should be fairly divided between the shareholders. We enclose a draft Mediation Agreement for this purpose. Mr Morling has confirmed that he is available in January to mediate the dispute.

Unless each of GBN, LBN, ABN and FBN sign a Mediation Agreement substantially in the form of the enclosed draft and return it to us by Friday 10th December 1999 - or, if the Mediation Agreement is signed, unless a settlement is reached before the Mediation Agreement expires - our client will have no alternative but to make an application to the court for appropriate relief under section 246AA of the Corporations Law. ***********

Last Modified: 09/27/2000 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.

CITATION : Belgiorno-Zegna v. Exben Pty. Limited & Ors. [2000] NSWSC 884 CURRENT JURISDICTION: Equity Division FILE NUMBER(S) : SC 1777/00 HEARING DATE(S) : 14, 15, 16, 17, 21, 22, 23 August 2000 JUDGMENT DATE : 6 September 2000

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