Burbank Trading Pty Ltd v Allmere Pty Ltd [2009] VSCA 82

2 The appellant appeals from the following declarations and orders of a judge of the Trial Division made on 2 May 2008:

1. Burbank has unreasonably withheld its approval of Godfrey Hirst Australia Pty Ltd ('Godfrey Hirst') as transferee of the three shares of the respondent, Allmere (subject to a deed or company arrangement) in Carpet Call Holdings Pty Ltd.
2. Subject to the transfer of the shares to Godfrey Hirst being upon terms and conditions no more favourable than those disclosed in the letter to Burbank dated 19 October 2006 from the Administrator of Allmere, Burbank approve Godfrey Hirst as transferee of the shares and procure that the board of Carpet Call approve the transfer.
3. Burbank pay Allmere's costs of the proceeding, including reserved costs.

3 The respondent and the appellant are the only shareholders of Carpet Call Holdings Pty Ltd ('Carpet Call'), in which each holds three shares. They are parties to a shareholders' agreement dated 7 February 1997 ('shareholders' agreement'). Carpet Call conducts a large carpet retailing business as a joint venture by its shareholders.

4 Clause 10 of the shareholders' agreement prohibits the parties from selling their shares in Carpet Call save in accordance with its provisions. Clause 10 provides, broadly, that if either party (as 'offeror') wishes to sell its shares or undergoes a change in ultimate control, the other party (as 'offeree'), will obtain pre-emptive rights to the shares, to be exercised as specified, failing which the offeror is entitled to transfer the shares to a third party on certain conditions, including the approval (which shall not be unreasonably withheld) of the offeree.

5 On 21 September 2006, voluntary administrators were appointed to the respondent. In October 2006, the respondent sent the appellant an offer notice ('October 2006 offer notice') attaching an offer of Godfrey Hirst Australia Pty Ltd ('Godfrey Hirst') to purchase its share in Carpet Call for $10 million.

6 The respondent alleged that the October 2006 offer notice was valid and enlivened the appellant's pre-emptive rights, which were subsequently lost by its inaction, thus entitling the respondent to complete the transfer of the shares to Godfrey Hirst.

7 The appellant contended that the October 2006 offer notice was invalid, on the following grounds:

(a) the appointment of voluntary administrators to the respondent in September 2006 constituted a change in ultimate control and enlivened prior pre-emptive rights in the appellant, which were undetermined at the date of the October 2006 offer notice, thereby invalidating it.

(b) if otherwise valid, the October 2006 offer notice did not comply with the applicable requirements, as it did not disclose that the price specified for the shares was arrived at as part of wider, non-arms length transaction between the respondent's shareholders and Godfrey Hirst, the proposed purchaser of its shares in Carpet Call.

8 The appellant alternatively argued that if the October 2006 offer notice were valid, it was nevertheless entitled on reasonable grounds to withhold its consent to the proposed transfer of the shares to Godfrey Hirst. Further, as the offer notice did not satisfy the applicable disclosure requirements, its non-compliance constituted a further reasonable basis on which to withhold consent.

(a) the appointment of administrators did not amount to a change in ultimate control giving rise to pre-emptive rights in the appellant prior to the October 2006 notice. The October 2006 offer notice was thus the sole source of the appellant's pre-emptive rights;

(b) the October 2006 offer notice was not required to disclose that the price offered for the Carpet Call shares was an element of a wider, non-arms length transaction, and was not invalidated or vitiated by its failure to do so.

(c) If the appointment of administrators did amount to a change in ultimate control, it did not invalidate the subsequent October 2006 offer notice, as multiple concurrent offer notices were permissible.

(d) The appellant failed to comply with the requirements of cl 10 of the shareholders' agreement, as it did not give notice of a dispute as to price, or did not give it in writing, and took no steps to appoint an expert to determine the price within the requisite time. The appellant's pre-emptive rights under the October 2006 offer were therefore lost.

(e) The appellant's grounds for withholding consent to the proposed transfer to Godfrey Hirst were not reasonable.

10 The appellant appeals on the following six grounds:

1. The learned trial judge made an error in the construction which she placed on the phrase 'change in ultimate control' as used in clause 10.2 of the Shareholders Agreement dated 7 February 1997 ('the Shareholders Agreement'). In particular, her Honour was in error in holding that despite:

1.1 'ultimate control' for the purposes of clause 10.2 of the Shareholders Agreement being exercised by the person who or which has the ultimate decision-making power in respect of the company's business, property and affairs; normally the ultimate holding company of the company; and

1.2 the appointment of an administrator to the Respondent having severed the control of its ultimate holding company,

that was only a temporary change in control, and as such, did not constitute a 'change in ultimate control' for the purposes of clause 10.2 of the Shareholders Agreement.

1. The learned trial judge made an error deciding that the Respondent's offer notice dated 19 October 2006 ('the Offer Notice') was valid. In particular, her Honour was in error in holding that, under clause 10.3(b) of the Shareholders Agreement, the Respondent was not required to:

2.1 disclose in the Offer Notice details of all dealings affecting the proposal to transfer the Respondent's shares; and/or

2.2 give in its Offer Notice any information concerning various dealings relating to the larger Feltex Group sale.

1. The learned trial judge made an error in determining that the Appellant had not disputed the price contained in the Offer Notice for the purposes of clause 10.3(d) of the Shareholders Agreement. In particular, her Honour was in error in holding that:

3.1 despite the finding her Honour made as to what was said by Mr Smith at the meeting on 17 November 2007, the Appellant had not in fact disputed the price contained in the Offer Notice; and

3.2 the Respondent was required to give notice in writing to the Appellant that it disputed the price contained in the Offer Notice in order to trigger the referral to an expert.

1. The learned trial judge made an error in deciding that the Appellant had unreasonably withheld approval of Godfrey Hirst as a transferee. In particular, her Honour was in error in holding that the Appellant was unreasonable in withholding approval of Godfrey Hirst insofar as the Appellant had relied on the grounds that:

4.1 it was the fact that, and/or the Appellant apprehended that, Godfrey Hirst would be obtaining the Respondent's shares in CCH on more favourable terms and conditions than those disclosed in the Offer Notice because:

(a) Godfrey Hirst was offered the Respondent's shares as part of a 'package deal';

(b) the 'package deal' was reflected in:

(i) Godfrey Hirst's offer letter, dated 28 September 2006, to the receivers and managers of Feltex Carpets Ltd;

(ii) the fact that the proposed sale of the Respondent's shares to Godfrey Hirst was conditional upon, or part of, the completion of the Feltex buy-out and the Feltex sale agreement; and

(iii) Godfrey Hirst proposed to buy the Respondent's shares simply because they came as part of the other assets of the Feltex Group;[1] and/or

(c) the other elements of the 'package deal' were not offered to the Appellant in the Offer Notice;

4.2 the Appellant could not be in a joint venture with a supplier/manufacturer of carpets (i.e. Godfrey Hirst), who supplies carpets to other retailers of carpets, in running CCH's business (a retailer of carpets);

4.3 Godfrey Hirst had refused to supply CCH with carpets for 20 years and continued to refuse to supply carpets labelled as Godfrey Hirst carpets;

4.4 the relationship between Mr Smith and Mr McKendrick was such that the two of them could not work together, and as a result the Appellant and Godfrey Hirst could not work together as joint venturers in CCH;

4.5 CCH will experience trading difficulties with other suppliers/manufacturers of carpets once it is widely known that it is part-owned by a competitor in the same market; and

4.6 Godfrey Hirst does not have a long-term commitment to CCH's business.

1. The learned trial judge made an error in ordering that the Appellant procure the board of CCH to approve the transfer to Godfrey Hirst of the Respondent's shares in CCH provided that the terms and conditions of the transfer to Godfrey Hirst be no more favourable than those contained in the Offer Notice. In particular, the learned trial judge erred in that:

5.1 The order is uncertain because it depends upon a determination (which the Court has not made because her Honour held that it would be premature to do so) as to whether the terms and conditions of the proposed transfer to Godfrey Hirst are more favourable than those contained in the Offer Notice, and the requirement that the Appellant procure that the board of CCH approve the transfer is inconsistent with the Constitution of CCH.

5.2 Her Honour made that order despite her findings that:

(a) it was premature to determine whether the Respondent's shares in CCH would be transferred on better terms to Godfrey Hirst because there is no actual agreement (only on offer from Godfrey Hirst) in place between Godfrey Hirst and the Respondent's Administrator; and

(b) the Appellant was protected because it could use its representation on the board of CCH to prevent the registration of any transfer of shares to Godfrey Hirst.

5.3 Her Honour made inconsistent determinations in that:

(a) she decided that the answer to the question of whether the Respondent's shares in CCH would be transferred on better terms to Godfrey Hirst could not be a valid ground for withholding consent to Godfrey Hirst as a transferee; and

(b) the Appellant was protected because it could use its representation on the board of CCH to prevent the registration of any transfer of shares to Godfrey Hirst.

1. The learned trial judge ought to have held that, because the Offer Notice was given by the Respondent at a time when:

6.1 an expert had not made a determination pursuant to clause 10.3(d) in respect of the 'deemed' offer notice provided for by clause 10.2, upon the appointment of the Administrators (to the Respondent) on 21 September 2006; and/or

6.2 the 30-day period within which the Appellant was entitled to accept the determined price applying to the 'deemed' offer notice provided for by clause 10.2 (following the determination referred to in paragraph 6.1 above) impliedly contemplated by clause 10.3(d) had not elapsed,

the Offer Notice was invalid, as the Shareholders Agreement did not entitle the Respondent to make a clause 10.3 express offer notice until after the determination referred to in paragraph 6.1 and the expiry of the 30-day period referred to in paragraph 6.2.

11 Ground 6 of the Notice of Appeal was added by an amendment made pursuant to leave (which was unopposed) granted on 12 February 2009.

12 By a Notice of Contention dated 14 July 2008, the respondent contends:

1. If, contrary to her Honour's findings, there was a change in ultimate control within the meaning of clause 10.2 of the shareholders agreement as a result of the appointment of administrators to the respondent and 2 other companies on 21 September 2008 (which is denied):

(a) Upon the proper construction of clause 10, the right to appoint an expert to determine price under clause 10.3(d) must be exercised within 30 days of the deemed offeree becoming aware of the change in ultimate control and the clause 10.2 deemed offer notice.

(b) The appellant failed to exercise the said right within 30 days of becoming aware of the appointment of administrators (namely, within 30 days of 2 October 2002).

(c) In the premises referred to above, the said right was forever lost.

1. Further or alternatively, if, contrary to her Honour's findings, upon the proper construction of clause 10 the consideration for the shares offered must be an arm's length price (which is denied), $10 million was in fact an arm's length price for the respondent's shares in Carpet Call (Holdings) Pty Ltd.

13 Before us, the appellant made clear that it did not contend that cl 10 required an arm's length price. It was therefore unnecessary to determine paragraph 2 of the Notice of Contention.

14 The agreed summary of the facts found by the trial judge is set out below.[2]

1. The Carpet Call business was established in Queensland in 1975. Carpet Call was incorporated on 31 March 1978. Carpet Call is now the largest retailer of floor coverings in Australia. It sells a range of floor coverings and brands in carpet, cork, vinyl, rugs, timber and laminate. In addition to its retail business, it wholesales floor coverings to its network of Solomons Carpets franchise stores.
2. The Carpet Call business was originally wholly-owned by Burbank, a company controlled by Mr James Leslie ('Jim') Smith. However, in 1996, the business needed money to purchase the Solomons Carpets business. To facilitate the purchase, Shaw Industries Australia Pty Ltd ('Shaw') lent Carpet Call $2.55 million. In return, Shaw was given an option over 50% of the equity in Carpet Call. These arrangements were contained in the shareholders agreement between Burbank, Shaw and Carpet Call dated 7 February 1997.
3. Shaw was a wholly-owned subsidiary of Shaw Industries Inc ('Shaw USA'), a large American carpet manufacturer. Shaw USA supplied its carpets to retailers in Australia, including Carpet Call. When Shaw exercised its option to buy 50% of the equity in Carpet Call, it nominated Allmere to hold the shares on its behalf.
4. On 19 May 1997, Carpet Call, Burbank, Shaw and Allmere executed a deed of adoption, by which Allmere agreed to be bound by the terms of the shareholders agreement as if it were originally a party to that agreement.
5. In 2000, Feltex Carpets Limited ('Feltex') acquired Shaw, which was re-named Feltex Australia Pty Ltd ('Feltex Australia'), and thereby gained control of Allmere's shares in Carpet Call. Feltex manufactured carpets in New Zealand, and also supplied its carpets to Carpet Call and other retailers in Australia.
6. At all relevant times, Feltex Australia was a wholly-owned subsidiary of Feltex Australia Holdings Pty Ltd ('Feltex Australia Holdings'), which in turn was a wholly-owned subsidiary of Feltex.
7. The current shareholders of Allmere are Russell Martin and Michael Feeney, who do not hold those shares beneficially. They hold the shares on trust for Feltex Australia. Mr Feeney was a director of Feltex Australia and Feltex Australia Holdings. Both Mr Martin and Mr Feeney have been directors of Carpet Call.
8. The current directors of Carpet Call are Jim Smith, Barry Cook and Michael Feeney. Messrs Smith and Cook are Burbank's nominees to the Carpet Call board. Mr Feeney is Allmere's nominee.[3]

1. In a letter to Burbank dated 25 May 2006, Peter Thomas, the then managing director of Feltex, outlined a process of Feltex's 'proposed sale of its interest in Carpet Call'. At this time, Feltex proposed to call for expressions of interest from prospective buyers of its interest in Carpet Call.
2. By a letter to Feltex dated 8 June 2006, Godfrey Hirst offered to purchase the assets and undertakings of Feltex and its subsidiaries for NZ$135 million, on the assumption that Feltex had a 'consolidated net working capital position for the business of NZ$80 million.' The offer expressly excluded Allmere's shares in Carpet Call, which, the letter noted, Feltex valued at NZ$10 million. Feltex did not accept the offer.
3. By a letter to Feltex dated 17 July 2006, Godfrey Hirst made another offer to purchase all of Feltex's assets and undertakings for NZ$136 million, on the same assumption on which the 8 June offer was made. The offer now included all of the issued shares in Allmere. Allmere's only asset was its shareholding in Carpet Call, so the effect of this revised offer was to add Feltex's interest in Carpet Call into the deal. There is no dispute that had Feltex accepted this offer, Allmere would have been deemed to have given an offer notice in respect of the whole of its shares in Carpet Call, and the pre-emption procedure under clause 10.2 would have been engaged. However, Feltex did not accept the offer.
4. On 21 September 2006, Simon Wallace-Smith and Tim Norman were appointed as administrators of Allmere under Part 5.3A of the Corporations Act 2001 ('Corporations Act'). On the same date, administrators were also appointed to Feltex Australia and Feltex Australia Holdings.
5. The following day, ANZ Banking Group Ltd ('the ANZ') appointed receivers and managers to Feltex, Feltex Australia Holdings and Feltex Australia ('the Feltex receivers'), but not to Allmere, as the ANZ had no security over Allmere or its assets.
6. At a meeting with Allmere's administrators on 26 September 2006, Mr Smith was told that the administrators intended to offer for sale Allmere's shares in Carpet Call. That was confirmed in writing to Burbank on the same day.
7. On 28 September 2006, Michael Humphris and Laurence Fitzgerald replaced the original administrators appointed to Allmere, Feltex Australia Holdings and Feltex Australia. Mr Fitzgerald was the administrator with the principal role for our purposes.
8. On the same day, by a letter to the Feltex receivers, Godfrey Hirst made an offer to buy all of the assets and undertaking (with certain exclusions) of the Feltex group. The consideration included a cash payment of A$122 million and a payment of A$500,000 towards the Feltex receivers' fees. The offer specifically included Allmere's shares in Carpet Call. In relation to those shares, the letter proposed:

(a) 'Receiver to assist in 'pre-emptive rights' process with JV partner if so required';

(b) 'If JV partner duly acquires the 50%, receiver will remit full proceeds to Godfrey Hirst';

(c) 'Allocation of A$10 million of consideration to Carpet Call shares.'

1. On 2 October 2006, Burbank wrote to Allmere's administrators. Burbank asked whether Allmere claimed beneficial ownership of its shareholding in Carpet Call, as Burbank understood there may be a competing claim from Feltex Australia. The question of legal and beneficial ownership was said to be relevant to Burbank's rights of pre-emption consequent upon any 'change in ultimate control' of Allmere. Burbank attached a copy of its letter dated 28 September 2006 to Mr Wallace-Smith, one of the original Allmere administrators, and asked for a response. The Burbank letter of 28 September 2006 asserted that the appointment of the original administrators had in fact constituted a change in ultimate control. Burbank said that, whilst it had not made any final decision, its inclination was not to pursue its right of pre-emption consequent upon that change.
2. Mr Fitzgerald replied to Burbank's letter on 3 October 2006. He asked for a copy of the shareholders agreement and details of 'any pre-emptive rights issues'. Around 16 October 2006, Burbank provided Allmere's new administrators with a copy of the shareholders agreement and the deed of adoption.
3. On 3 October 2006, the Feltex receivers announced publicly that they had accepted an offer from the Godfrey Hirst group 'to acquire the Feltex business as a going concern ...'.
4. In a letter to Burbank dated 4 October 2006, the Feltex receivers said:

'We have received an offer from Godfrey Hirst in relation to the whole of the Feltex business and assets including a specified amount for the interest in Carpet Call. However, as we do not control Allmere, we will request that Godfrey Hirst issue its offer to acquire Allmere's shares in Carpet Call directly to the administrators of Allmere. We expect that, if an offer is made, Allmere will provide to you an offer notice pursuant to the shareholders agreement in respect of a proposed transfer of the shares it holds in Carpet Call.'

1. Mr Fitzgerald wrote to the Feltex receivers on 4 October 2006. In his letter, he referred to a meeting with Matthew Caddy from the receivers' staff on 2 October 2006. Mr Fitzgerald said:

'In our discussions it was mentioned your intention to include the shareholding of Allmere in [Carpet Call] as part of the transaction with Godfrey Hirst. Mr Caddy mentioned verbally that you would work with me in seeking to ensure this was part of the sale to Godfrey Hirst.

I expect the shares in Carpet Call have not been included in the above sale given Allmere has not been to my knowledge a party to the Godfrey Hirst transaction.'

1. On 5 October 2006, Mr Smith of Burbank met with Mr Kim McKendrick at the Carpet Call store in Mulgrave. Mr McKendrick and his family effectively own and control Godfrey Hirst. It is common ground that Mr Smith showed Mr McKendrick the 4 October letter from the Feltex receivers. Mr McKendrick asserted that Godfrey Hirst had bought all the assets of the Feltex group, including Allmere's shares in Carpet Call. Mr Smith asserted that Feltex could not sell its Carpet Call shares to Godfrey Hirst, because he had various rights to them.
2. By a letter to Allmere's administrators dated 9 October 2006, Godfrey Hirst made a separate offer to Allmere to purchase its shares in Carpet Call for A$10 million ('the Godfrey Hirst Allmere offer'), which included the following:

(a) The offer was irrevocable and would remain in force until 5.00pm on Wednesday 11 October 2006;

(b) Completion was to occur within 60 days from the date of execution of a formal share sale agreement; and

(c) Completion of the sale was subject to and conditional on Burbank 'expressly consenting to the sale ... or Burbank giving its deemed consent by failing to accept an offer to purchase the shares from Allmere in accordance with clause 10.3 ...' of the shareholders agreement.

1. By a letter from their lawyers to Godfrey Hirst's lawyers dated 11 October 2006, Allmere's administrators purported to accept the Godfrey Hirst Allmere offer. I say 'purported to accept', because the letter was really a counter-offer, as the acceptance was subject to the following additional conditions:

(a) The 'Feltex Companies' (Feltex, Feltex Australia Holdings[4] and Feltex Australia) and the ANZ must provide their written consent to the proposed sale pursuant to the Godfrey Hirst Allmere offer;

(b) The Feltex Companies and the ANZ must provide Allmere's administrators with written confirmation that they had and made no claim to have any legal or beneficial interest in the shares; and

(c) The only warranty Allmere's administrators were prepared to provide in their agreement with Godfrey Hirst was that which was required by clause 10.3(b), namely that the shares are and will at completion be the sole legal and beneficial property of the transferring party.

54. In his report to creditors dated 11 October 2006, Mr Fitzgerald said:

'Since mid 2005 up until the appointment of the receivers the directors of the Feltex Group were involved in discussions with various parties, including [Godfrey Hirst] pertaining to, inter alia, the sale of the shares in the Australian based entities of the Feltex Group, the sale of the New Zealand based businesses and assets, or alternatively, the business and assets of the Feltex Group in their entirety which may have included [Allmere's] interest in Carpet Call.

This process has attracted extensive media interest in New Zealand and Australia. Given the sale of the Feltex Group's assets to Godfrey Hirst and the requirements of the shareholders' agreement I do not propose to advertise the interest in Carpet Call for sale.

Subsequent to my appointment I was informed by the receivers that Godfrey Hirst would submit an offer to me for [Allmere's] interest in Carpet Call. On Monday 9 October 2006 I received a formal offer for [Allmere's] interest in Carpet Call.'

1. In an email sent on 11 October 2006 to the lawyers for the Feltex receivers and the ANZ, Mr Fitzgerald said:

'The only other aspect of the sale of Allmere's stake in Carpet Call that may be an issue is the value.

Whilst I have reviewed the financials of Allmere as well as the identified carrying value of the investment in the accounts of [Feltex], I have not openly tested the market.

As the only identified stakeholders in the ultimate realisation & proceeds are Feltex Australia through its receivers & managers, and the ANZ Bank by virtue of its guarantee & indemnity claim, I seek confirmation from these two parties that the offer of $10 million is acceptable to them in their capacity as creditors of Allmere and thus beneficiaries of the proceeds. Thus I do not seek an indemnity nor the like rather a response that the sum is 'acceptable' or 'fair' or some such description.

In my view this would obviate any requirement for the administrator to have gone through a public and exhaustive advertising process, as the only likely affected parties are agreeable to the value of the transaction.

The only other party involved being [Burbank], has its rights governed and thus protected through the shareholders agreement.'

1. By an email sent to Mr Fitzgerald on 11 October 2006, the Feltex receivers' lawyers confirmed that 'the offer of $10 million is acceptable' to the Feltex receivers and the ANZ in their capacity as creditors of Allmere.
2. On 13 October 2006, the lawyers for Allmere's administrators confirmed to Godfrey Hirst's lawyers that the administrators would provide a warranty that they had been validly appointed as administrators of Allmere.
3. On the same date, the Feltex receivers and the ANZ separately confirmed that the Godfrey Hirst Allmere offer was acceptable to them, and they had no claim to any legal or beneficial interest in Allmere's shares in Carpet Call.
4. Burbank wrote to Mr Fitzgerald on 16 October 2006, asking for a response to its letters of 28 September 2006 and 2 October 2006 about the 'change in ultimate control' issue.
5. Godfrey Hirst's lawyers said on 17 October 2006 that their client had no concerns with the first two conditions in the administrators' 11 October letter, but required a further warranty that the administrators were validly appointed and will still be appointed at completion. The email also said that a draft contract for sale of shares would be forwarded shortly.
6. In a letter to Burbank dated 19 October 2006, Mr Fitzgerald said:

'I have received an offer from [Godfrey Hirst] for the company's shareholding in Carpet Call. Pursuant to the requirements of clause 10 of the shareholders' agreement I will under separate cover serve an 'offer notice' as defined and stipulated by the shareholders' agreement upon [Burbank].

I do not accept that any change in ultimate control of the Company has occurred as a consequence of our appointment ... However ... I agree that Burbank has certain rights under the shareholders' agreement in relation to the company's shares in Carpet Call, and I will respect those rights.'

1. Late in the afternoon of 19 October 2006, Burbank received the offer notice. A copy of the Godfrey Hirst Allmere offer was attached to the offer notice, and was said to form part of the offer notice. As the offer notice was sent after 4.00 pm, it is treated as having been served on 20 October 2006.[5] In accordance with clause 10.3(b), the offer notice noted that the purchase price equated to a consideration of $3,333,333.33 per share, and contained the necessary warranty.
2. Burbank did not accept the offer notice within 30 days of 20 October 2006, and has not purported to accept it since.

1. By an agreement made on 20 October 2006 ('the Feltex sale agreement') between the Feltex receivers, Feltex Australia (as seller), Feltex and Feltex Australia Holdings (as sureties), Feltex Carpets Pty Ltd ('Feltex Carpets') (as buyer) and Godfrey Hirst (as guarantor of the buyer's obligations):

(a) Feltex Australia was identified as 'the owner of the business and assets' (as defined);

(b) Feltex Australia agreed to sell to Feltex Carpets the assets and the right to conduct the business as a going concern for the purchase price of A$53,211,000; and

(c) The assets were a package of assets, which included Allmere's shares in Carpet Call, the consideration for which was expressed to be apportioned at A$10 million of the total purchase price.

1. Allmere was not a party to the Feltex sale agreement.
2. Clause 23 of the Feltex sale agreement provided for the establishment of an escrow account for the $10million, which was described as the Carpet Call consideration. The Carpet Call consideration was to be kept in the escrow account pending completion of the proposed agreement between Allmere and the buyer of the Carpet Call shares. There would be an adjustment to the purchase price if the proposed agreement was not able to be completed within 150 days of the completion date for the Feltex sale agreement.
3. In a letter sent to Mr Fitzgerald on 24 October 2006, Burbank maintained the view that there had been a change in ultimate control of Allmere, by reason of the appointment of administrators. Burbank said that it seemed that what should happen next was the expert procedure under clause 10.3(d), but asked the administrator what he thought.
4. Burbank followed up its letter of 24 October 2006 with a letter to Mr Fitzgerald dated 3 November 2006. The administrators responded on 13 November 2006, saying that they did not regard there as having been any change in ultimate control. The administrators also said they saw nothing to be gained in appointing an expert, unless Burbank was prepared to submit an offer in excess of $10 million.
5. Burbank sent another letter to Mr Fitzgerald on 3 November 2006, concerning the offer notice. Burbank disputed that the offer notice was a proper one under the shareholders agreement, and asked for certain information to be provided.
6. In a letter to Mr Fitzgerald dated 14 November 2006, Burbank said that 'we would not approve [Godfrey Hirst] as a transferee of Allmere's shares', even if the offer notice was valid. It said there were 'numerous serious reasons' for refusing its approval, but did not give details of any such reasons. It asked Mr Fitzgerald to confirm that he did not wish to be involved in discussions about the appointment of an expert. There was no response to that letter.
7. On 17 November 2006, Mr Smith and Mr Michael Naphtali met with Mr Fitzgerald and his assistant, Mr Ahmed Bise, at the offices of Hindal Corporate, where Mr Naphtali worked. Mr Naphtali, a former Allmere-nominated director of Carpet Call, attended the meeting as an adviser to Mr Smith and Burbank. The dispute as to exactly what was said at the 17 November meeting and, in particular, whether Mr Smith disputed the price in the offer notice, will be considered later in these reasons.
8. In a letter to Burbank dated 27 November 2006, Mr Fitzgerald said that Allmere intended to transfer its shares in Carpet Call to Godfrey Hirst, as Burbank had not accepted the offer notice within 30 days. He sought confirmation of Burbank's approval of the proposed transfer by close of business on 30 November 2006.
9. In a letter to Burbank dated 15 December 2006, the lawyers for Allmere's administrators requested that Burbank state by 20 December 2006 whether it approved Godfrey Hirst as transferee of Allmere's shares, and that, if it did not approve, it provide its reasons for not approving.
10. Burbank responded on 20 December 2006. It declined to give reasons for refusing to approve Godfrey Hirst as transferee, asserting that reasons had already been given at the 17 November meeting. Burbank otherwise maintained its earlier attitude.
11. On 22 December 2006, Allmere commenced this proceeding.
12. Although a draft formal share sale agreement between Allmere (as seller), the Allmere administrators and Godfrey Hirst (as buyer) was prepared, it has not been executed.

15 The shareholders' agreement includes the following terms:

Clause 1.1

'Insolvency Event' means:

(a) any resolution is passed or proposed or application is made to the Court or appointment is made or any other steps are taken for official management, receivership, administration, winding up, dissolution, provisional liquidation, assignment, compromise, arrangement or composition with any creditors (except any application or proceeding which is bona fide contested and is withdrawn or vacated within 30 days of it so being made or is made for the purpose of corporate restructure of amalgamation);

(b) being unable or taken under the Corporations Law to be unable to pay debts as and when they fall due;

'Offeree' means whichever of Burbank or Shaw is not the Transferring Party under clause 10.3;

'Offer Notice' means a notice under clause 10.3 by the Transferring Party to the Offeree;

'Sale Shares' means the number of Shares specified in an Offer Notice;

'Shares' mean shares in the capital of the Company from time to time issued;

'Transfer' means:

(a) transfer, assignment, sale, distribution, pledge or other disposition of Shares voluntarily or involuntarily, with or without consideration;

(b) the appointment of a receiver or other legal custodian of the property of a Party unless no Shares are included in the property subject to the appointment;

(c) the taking of possession by an encumbrancer or trustee of the property of any Party;

(d) declaration of trust;

but shall not include

(e) a bona fide mortgage, pledge, charge or other encumbrance given in accordance with Clause 9.

'Transferring Party' means a party to this agreement who Transfers or proposes to Transfer Shares which it then holds.

...

10.1 Neither Burbank nor Shaw may directly or indirectly Transfer or otherwise dispose of any legal or beneficial interest in Shares except in accordance with this clause.

10.2 If there shall be any change in ultimate control of either Burbank or Shaw, the respective party shall be taken to have given an Offer Notice in respect of the whole of its Shares at a price to be determined under paragraph 10.3(d). It is acknowledged that Mr Jim Smith controls Burbank, and that Shaw Industries Inc. of the United States controls Shaw.

10.3 (a) If Burbank or Shaw proposes to Transfer an interest in Shares, the Transferring party must send an Offer Notice to the Offeree. A Transfer of less than 10 per cent of the issued share capital is not permitted.

(b) The Offer Notice shall give details of the proposed Transfer including, but not restricted to:

(i) the number of Shares to be Transferred;

(ii) the terms and conditions of the Transfer including the consideration per Sale Share,

and shall contain a warranty that the Sale Shares are and will at completion be the sole legal and beneficial property of the Transferring Party.

(c) Upon receipt of the Offer Notice, the Offeree shall have 30 days within which to purchase the whole of the Sale Shares for the consideration and upon the terms and conditions disclosed in the Offer Notice.

(d) If the Offeree disputes the price the dispute shall be referred to an expert to be agreed or in default of agreement nominated by the President for the time being of the Institute of Chartered Accountants in Australia. The person shall be acting as an expert and not an arbitrator. His decision shall be final and binding. The parties must bear their own costs of submitting the dispute to the expert.

(e) Upon receipt of a notice of acceptance, the Transferring Party shall have 30 days from the date of the notice within which to deliver unencumbered title, and in particular to deliver:

(i) a certificate representing that number of the Shares covered by the Offer Notice; and

(ii) an instrument of transfer in registrable form,

in return for payment of the consideration for the Sale Shares.

(f) If [the] Offeree fails either to:

(i) accept the Offer Notice within 30 days of receipt of the Offer Notice; or

(ii) tender the consideration when the Transferring Party delivers the certificate and instrument pursuant to sub clause (c) [sic], (e)

the Transferring Party may Transfer the Sale Shares to any person approved by the other Shareholder (which approval shall not be unreasonably withheld) upon no more favourable terms and conditions than those disclosed in the Offer Notice.

(g) The Transferring Party may only Transfer Shares pursuant to sub-clause (e) [sic] (f) if the transferee enters into an agreement with the Offeree covenanting to assume all obligations under and to be bound by this agreement as if it were a party.

(h) The Parties shall procure that the Board approves a Transfer under these provisions.

...

15. NOTICES

15.1 Method of Giving Notices

A notice, consent, approval or other communication (each a "Notice") under this agreement shall be in writing, signed by or on behalf of the person giving it, addressed to the person to whom it is to be given and:

(a) delivered;

(b) sent by pre-paid mail; or

(c) transmitted by facsimile,

To that person's address.

...

The trial judge's construction of 'change of ultimate control'

16 The trial judge observed that the expression 'change in ultimate control' and the individual terms therein were not defined in the shareholders' agreement. She accepted that the expression 'ultimate control' was not synonymous with 'ultimate shareholding' but rather, as was common ground, that:

Ultimate control, for the purposes of clause 10.2, is exercised by the person who or which has the ultimate decision-making power in respect of the company's business, property and affairs. Normally, but not inevitably, that person will be the ultimate holding company of the company.[6]

17 Her Honour rejected Burbank's contention that the appointment of the voluntary administrators to Allmere on 21 September 2006 effected a change in ultimate control, principally because she considered that the word 'ultimate' indicated the 'big picture', 'long-term' character of the contemplated change in control, and excluded mere temporary losses of shareholder control.

Most importantly, clause 10.2 refers to a change in 'ultimate control', not merely 'control'. This points to an 'upstream' control concern, to do with the identity of the person or company who is the real joint venture partner and decision-maker. That seems to be concerned with long-term, 'big picture' issues, rather than the appointment of administrators, or some other means by which control of the shareholder may be temporarily lost.[7]

Her Honour's observations make clear that she viewed the appointment of voluntary administrators as a means by which the shareholders of a company temporarily lost control of it.

19 Her Honour's conclusion that the appointment of administrators was not a change in ultimate control was fortified by the language used in clause 10.2 and surrounding provisions of the shareholders' agreement.

20 First, cl 1.1 of the shareholders' agreement defined 'insolvency event' to include the appointment of an administrator and 'transfer' to include the appointment of a receiver. Her Honour considered it relevant, but not determinative, that one consequence of an insolvency event was specified elsewhere in the shareholders' agreement and assigned a specific consequence in cl 12 (the option to terminate the shareholders' agreement). She took that drafting to suggest that the reference in cl 10 to a change in ultimate control did not include the appointment of an administrator.

21 The term 'change in ultimate control' is not defined in the shareholders' agreement and counsel identified no authorities in which the term is construed or discussed.

Macquarie Dictionary, Fourth Edition: adjective: ... final; decisive ... impossible to exceed or override ... the final point ... final result ...

The Oxford English Dictionary, Second Edition: final ... final, determinate, absolute ... final, decisive ... final, last ...

Stroud's Judicial Dictionary of Words and Phrases, Seventh Edition: "Ultimate" and "final" are synonymous ...

Words and Phrases Legally Defined, Fourth Edition, Australia: "... ultimate" and "final" are synonymous.

23 In my opinion, in the phrase 'change in ultimate control', grammatically, the adjective 'ultimate' qualifies the control, rather than the change in that control. On a natural reading of the term, it indicates the supreme or most authoritative decision making power, rather than a long-term or final change. As the appellant submitted, it does not refer to an 'ultimate change in control'.

24 Nor is the respondent's construction of cl 10.2 supported by the surrounding provisions, context and evident objectives of the shareholders' agreement.

25 The learned judge acknowledged that the definition of insolvency event and specification of a consequence elsewhere in the shareholders' agreement was not decisive. Counsel for the respondent conceded that liquidation, also defined as an 'insolvency event', constituted a change in ultimate control for the purpose of cl 10.2. The failure to draft an exhaustive list of the different consequences of an insolvency event in the shareholders' agreement is unsurprising. There is clearly not, in any event, a complete coincidence between a change in ultimate control and an insolvency event as defined, although there is overlap. For example, a composition with creditors (defined as an insolvency event) may not entail a change in control. Conversely, many instances of changes in control (whether ultimate or otherwise) of a corporation would not involve insolvency. Despite the overlap between insolvency events and changes in ultimate control, the two events are distinct and cl 10.1 addresses a change in ultimate control, however caused.

26 It is also unsurprising that cl 10.2 did not specify, for avoidance of doubt, that an insolvency event or the appointment of an administrator constituted a change in ultimate control. The incorporation of the various underlying causes of a 'change in ultimate control' into the definition would prove unwieldy.

27 Likewise, the respondent's construction is not greatly assisted by the omission, of any reference to 'transfer' in cl 10.2 ('transfer' is defined to include, inter alia, an appointment by a party of a receiver or other legal custodian of its property (save for shares)).

28 In my opinion, a change in ultimate control signifies a de jure change in the identity of the supreme decision maker, which need not be long-term or permanent. While some changes may be too ephemeral (see below), the appointment of an administrator is comprehended by the concept.

29 An examination of the context and objective of the shareholders' agreement fortifies the conclusion that the appointment of voluntary administrators under Part 5.3A of the Corporations Act 2001 (Cth) ('Corporations Act') constitutes a change in ultimate control.

30 The shareholders' agreement created a joint venture between two equal shareholders to enable a subsidiary of Carpet Call to acquire Solomons Carpets and to develop the combined business of Carpet Call and its subsidiaries. (Recital A).

31 The 'business' is defined to mean 'the wholesale and retail sale of domestic and commercial floor coverings and incidental goods and services through the Carpet Call ... franchise system'.

32 Each joint venturer has 50% of the capital and that equal proportion is to be maintained.

33 Each joint venturer has equal representation on the board. The chairman does not have a casting vote. Mr Smith of Burbank is appointed the Managing Director pursuant to a service contract, which can be terminated only on the opinion of an independent QC.

34 The shareholders' agreement is predicated on unanimity in decision-making and policy as a necessary consequence of the equal representation of both parties on the board, with no casting vote. In the event of the board's failure to pass a resolution supported by Mr Smith or to support his decision, the parties are required to 'negotiate in good faith in an endeavour to resolve the position within 30 days after notice from Burbank or Shaw to the other requiring the matter to be resolved. If the matter is not resolved on the expiration of this period, the decision will not be implemented'.

35 The need for unanimity is underscored by cl 6.1(e), which states 'without limiting the requirements under this Clause for unanimity in relation to decisions of the Board, the matters set out in Schedule 2 shall require unanimous Board approval'.

36 Schedule 2 sets out a number of transactions, some of which are major decisions in relation to corporate structure, capital and control, such as rights issues, mergers with other entities, payment of dividends, reduction of capital or proposals to wind up any Carpet Call company.

37 Other transactions specifically requiring agreement are, or could be, relatively minor matters arising in the ordinary course of business, either because they are inherently so or because they impose no minimum monetary amount. For example, the making of any donation, or the giving of any guarantee or the making of any loan, irrespective of quantum, requires unanimous approval.

38 The shareholders' agreement thus assumes and governs a relationship necessarily predicated on a very high degree of co-operation, trust and close interaction, requiring full joint engagement in decision-making and governance, not limited to the highest, 'big picture' levels, but extending to day-to-day decisions necessary for the ordinary conduct of the business. Disputes are to be resolved by negotiation in good faith and a 30 day time limit for their resolution is imposed.

39 In that context, upon either party suffering an insolvency event, the other is entitled to terminate the shareholders' agreement.

40 'Insolvency event' is defined widely in cl 1.1, to include not only all statutory corporate insolvency regimes, but also the proposal of resolutions to institute such regimes or the making of applications for the same.

41 Nevertheless, an application or proceeding which is bona fide contested and is withdrawn or vacated within 30 days of it being made, is excepted from the definition of 'insolvency event'.

42 It may therefore be inferred that a change of corporate status on insolvency or an application for the same (if of more than 30 days' duration) was regarded, potentially, at least, as incompatible with the maintenance of the parties' relationship under the shareholders' agreement, thus justifying the option to terminate it. Such insolvency regimes typically involve the replacement of existing management by an insolvency practitioner or creditors' appointee, or at least, the distraction of existing management from their usual duties and functions.

43 On the other hand, a mere bona fide disputed application or proceeding to initiate any insolvency regime, if withdrawn or vacated within 30 days, was not adjudged sufficient to enliven the option to terminate the shareholders' agreement.

44 Significantly, the exception is limited only to applications or proceedings which are of short duration. Although the parties turned their minds specifically to the impact of insolvency developments of short duration, the exception does not extend to a change of corporate status by the institution of an insolvency regime or entry into a compromise, no matter how short-term.

45 The trial judge (whilst recognising the broad scope of the voluntary administrator's extensive powers) appeared principally to emphasise that the short duration and the lack of permanence or finality associated with a voluntary administration disqualified it as a change in ultimate control. The respondent, while not entirely consistent, emphasised the short duration and temporary nature of a voluntary administration, but also pointed to the objectives and structure of the voluntary administration procedure, in contrast to, for example, a liquidation, which was conceded to qualify as a change in ultimate control.

46 Before us, the respondent emphasised that the voluntary administration procedure under Part 5.3A of the Corporations Act imposes very short statutory timeframes.

47 The first meeting of creditors must be held within eight days (increased from the original five day period).[8] The second meeting of creditors, at which the creditors determine the fate of the company, must ordinarily be held within 21 business days of the commencement of the administration.[9]

48 The respondent contended that, although the statutory timeframes can be extended,[10] extensions were exceptional and should not obscure the intended, ordinarily short-term duration of the voluntary administration procedure. While the respondent did not expressly so contend, it implicitly submitted that the administrators' control was intended as a 'stop-gap' measure, and therefore outside the contemplation of the parties as a change in ultimate control.

49 The respondent also emphasised that the objective of Part 5.3A[11] was to preserve the business of the company if possible, thereby suggesting that voluntary administration was primarily directed at continuation of the status quo. The respondent submitted that it was essentially an interruption or short interlude, analogous, perhaps, to a brief abeyance in a director's control due to temporary illness.

50 The respondent emphasised, in that context, that at the second creditors' meeting the creditors may resolve that the voluntary administration should end, and consequently, the company will return to the control of its directors.

51 The voluntary administration procedure under Part 5.3A was introduced in order to maximise the prospects of the business of an insolvent or nearly insolvent company being preserved, or if that were not possible, achieving a better return for creditors.

52 The procedure provides for an initial investigatory phase by an administrator who displaces the existing controllers, while the company benefits from a short moratorium in which proceedings and claims against it are stayed or restrained.

53 The appointment of a voluntary administrator effects a radical and sweeping change in the powers of ultimate decision-making in a corporation. The decision-making power is transferred from the directors (albeit they remain in office) to the voluntary administrator (s 437C), who exercises unparalleled powers to control the company's affairs (s 437A). An administrator is empowered, for example, to sell the entire undertaking of the company (s 437A(1)(c)) and to make other major decisions without recourse to, and without the prospect of restraint by, the shareholders in general meeting. The shareholders' powers and the company's constitution do not constrain the exercise of the administrator's wide statutory powers. At the first meeting of creditors, the creditors' sole powers are to appoint a committee of creditors and to replace the voluntary administrator (s 436A(1)). A committee of creditors (if appointed) cannot dictate policy, intervene or advise on the management of the company's affairs. It may consult with the administrator and receive reports, but other than for reasonably requiring a report, a committee cannot give directions to the administrator (s 436F).

54 Section 439C of the Corporations Act provides:

At a meeting convened under section 439A, the creditors may resolve:

(a) that the company execute a deed of company arrangement specified in the resolution (even if it differs from the proposed deed (if any) details of which accompanied the notice of meeting); or

(b) that the administration should end; or

(c) that the company be wound up.

55 The voluntary administration procedure thus contemplates that at the second meeting of creditors under s 439C, as one of three alternatives, the company may return to its existing controllers after the initial investigatory phase which (unless extended) is of approximately one month's duration. That is, however, only one of the three statutory alternatives. It would be incorrect to characterise voluntary administration under Part 5.3A as a procedure which necessarily, or even principally, envisages a speedy return to the status quo. While that is one recognised possibility, it is not an exclusive or predominant prospect in the legislation, and as a matter of practice, it is a rarity. As observed in Ford's Principles of Corporations Law, only in 'an unusual case' does the company 'revert to normal operation under the control of those who controlled the company before the administrator was appointed'.[12]

56 In practice, in the vast majority of cases, the company is, in fact, wound up and a liquidator is appointed. In most other cases, a deed of company arrangement ('DOCA') is executed and the administrator typically administers the DOCA.

57 Thus, the appointment of voluntary administrators cannot properly be viewed as a typically short-term displacement of existing controllers and a brief suspension of the corporate status quo. It is a radical change of status, which mandates the transfer of all corporate control and decision-making power to the administrators for an initially short period, which nevertheless is characteristically a prelude to long-term control by deed administrators or liquidators. As observed in Ford's Principles of Corporations Law, 'One effect of the [voluntary administration] legislation is that it provides a quick route to a creditors' voluntary winding up. A study in late 1995 showed that over 80 per cent of all companies using voluntary administration were subjected to winding up'.[13]

58 In the present case, the respondent submitted that the fact that the DOCA it had executed was likely to result in a permanent change in control was a subsequent development, irrelevant to the construction of cl 10.2.

59 It is, however, not only permissible, but necessary, to consider the general nature of the voluntary administration procedure and its probable consequences as a whole when determining whether it constitutes a change in ultimate control.

60 The object of Part 5.3A is stated in s 435A of the Corporations Act as follows:

The object of this Part is to provide for the business, property and affairs of an insolvent company to be administered in a way that:

(a) maximises the chances of the company, or as much as possible of its business, continuing in existence, or

(b) if it is not possible for the company or its business to continue in existence - results in a better return for the company's creditors and members than would result from an immediate winding up of the company.

The objective is not, in my opinion, predicated on preservation of the powers of the existing controllers. It assumes the administration of an insolvent company and primarily aims to maintain only the existence of the company, and so much of its business as possible.

61 The question arises whether the rejection of the respondent's construction will produce the unreasonable result that even a director's short illness would amount to a change in ultimate control and trigger pre-emptive rights. As the appellant submitted, the temporary incapacity of an office holder due to illness or like reasons could, in many cases, be discounted on a de minimis analysis.

62 Moreover, the appointment of administrators is not analogous to the temporary inability of an existing controller to act due to illness or similar incapacity. Such de facto incapacity is distinguishable from a de jure change in the identity of the decision-makers.

63 In my opinion, both the language and context of the shareholders' agreement establish that a change in ultimate control comprehends the appointment of a voluntary administrator.

64 It follows that a change in ultimate control of the respondent occurred on 21 September 2006, when voluntary administrators were first appointed. In my opinion, ground 1 of the appeal is made out.

65 At trial, and on an appeal by its Notice of Contention, the respondent contended that if the appellant's construction of change in ultimate control were correct, the appellant had nevertheless lost its pre-emptive rights under cl 10.2, because, by cl 10, properly construed, the offeree under a deemed offer notice was obliged to exercise (unilaterally if necessary) its right to appoint an expert under cl 10.3(d) within 30 days of becoming aware of the change in ultimate control. In the present case, the appellant was aware by 26 September 2006 of the change in control constituted by the appointment of voluntary administrators, but it took no action to appoint an expert within 30 days from that date.

66 The trial judge did not determine that issue, as, given her construction of a 'change in ultimate control', it was unnecessary to do so.

67 Neither the obligation nor the timeframe for which the respondent contended is specified in cl 10.

68 Clause 10 of the shareholders' agreement establishes a pre-emptive mechanism. Clause 10.1 prohibits either party from directly or indirectly transferring or disposing of their share in Carpet Call, other than in accordance with that clause.

69 Clause 10 provides, in clauses 10.2 and 10.3, for two discrete circumstances which will trigger pre-emptive rights in one party over the Carpet Call shares of the other.

70 Clause 10.3 deals with a voluntary proposal by one party to transfer an interest in its Carpet Call shares. In such circumstances, it must send an offer notice (as defined) to the other party. The subject matter of the proposed transfer need not be the entire shareholding. Other than for the prohibition on a transfer of less than 10% of issued share capital, there is no restriction.

71 Clause 10.3 requires the offer notice to give details of the proposed transfer, including, but not restricted to, the number of shares to be transferred and the terms and conditions of the transfer, including the consideration per sale share.

72 There is no requirement that an offer notice under cl 10.3 must relate to a proposed transaction with a third party, such as occurred in the present case. An offer notice could be addressed to the other joint venturer in the absence of any dealings with another party. Nevertheless, no proposed transfer to any third party can proceed without first enlivening and exhausting the pre-emptive rights of the remaining joint venturer.

73 Clause 10.2 provides that if there shall be any change in ultimate control, the respective party shall be taken to have given an offer notice in respect of the whole of its shares at a price to be determined under paragraph 10.3(a).

74 The definition in cl 1.1 of 'offer notice' as 'a notice under clause 10.3 by the Transferring Party to the offeree', adds nothing to the content specified in clause 10.3(b).

75 In contrast to the physical offer notice provided for in cl 10.3, cl 10.2 provides for a deemed or fictional offer notice which has no physical basis, but arises automatically upon the occurrence of the defined event.

76 Clause 10 is, as the trial judge observed and the parties acknowledged, poorly drafted. While cl 10.3 specifies in some detail the parties' rights and obligations in relation to an offer notice thereunder, together with the applicable time limits for different stages of the process, there is no specific provision for the operation and consequences of a cl 10.2 offer notice. Some of the sub-paragraphs of cl 10.3 appear capable of uniform application to both kinds of offer notice (for example, sub-paras (e), (g) and (h)). Other sub-clauses, however, are predicated on, or presuppose, an actual offer notice and could not apply to a deemed offer notice in their entirety or without modification (sub-paras 10.3(d) and (f)).

77 Clause 10.2 does not expressly state that all provisions of cl 10 will, so far as they are apt to do so, apply to a cl 10.2 offer notice. It expressly provides, however, that the price of the sale shares is to be determined under paragraph 10.3(d). Clause 10.3(d) is incapable of literal application to a deemed offer notice, because it assumes a disclosed price which, if the subject of a dispute, shall be referred to an expert. Unlike a cl 10.3 offer notice, which must disclose the consideration sought for each sale share, a deemed offer notice cannot, due to its fictional nature, incorporate any contemporaneous proposed price or consideration. The want of a proposed price renders a dispute about it, and, in turn, the referral of that dispute to an expert, impossible.

78 Further, cl 10 does not specify any circumstance which would correspond to, or constitute, receipt of an offer notice under cl 10.2 sufficient to engage cl 10.3(c), which gives the offeree 30 days from receipt of the offer notice to purchase the shares for the consideration and on the terms and conditions disclosed in the offer notice.

79 A deemed offer notice under cl 10.2 cannot, of course, be physically received and the general provisions in cl 15 of the shareholders' agreement governing the giving and time of receipt of notices, which assume exclusively physical notices, are necessarily inapplicable.

80 One drafting deficiency of cl 10.3(d) affects deemed and actual offer notices equally. Clause 10.3(d) prescribes no timeframes for the sequential processes it prescribes, including the notification that a dispute exists, the consequent referral to an expert and the delivery of the expert's determination.

81 While cl 10.3(c) prescribes a 30 day time limit from receipt of the offer notice for the offeree to purchase the shares, implicitly that time limit must be modified when there is a dispute over price leading to an expert determination, as cl 10.3(c) assumes that the consideration is known. Where the processes under cl 10.3(d) have been invoked, in my view, the consideration referred to in cl 10.3(c) must be that determined by the expert under cl 10.3(d). It is clear that a time limit should apply to the exercise of the pre-emptive rights in such cases. In my opinion, the time limit of 30 days should apply and should run from the date of the offeree's receipt of the expert determination. That construction provides a certain time limit from the date of the ascertainment of the consideration on the subsistence of the pre-emptive rights under both cl 10.2 and cl 10.3 offer notices.

82 Despite the defective drafting, it was common ground that cl 10, and cl 10.2 in particular, should, in accordance with the principles recognised in MLW Technology Pty Ltd v May[14] and like authorities, be construed robustly to give it commercial effect.

83 The parties nevertheless advocated different constructions of the offeree's obligations and the applicable time limits.

84 The respondent contended that cl 10 conferred on the offeree under a deemed cl 10.2 offer notice a unilateral right to appoint an expert under cl 10.3(d), which must be exercised within 30 days of becoming aware of the change in ultimate control. The point of becoming aware of that event was said to be the only reasonable circumstance corresponding to the receipt of a physical offer notice and the 30 days stipulated for the purchase of an offer notice under cl 10.3(c) was, by analogy, the appropriate time limit for action.

85 The respondent contended that co-operation or agreement was unnecessary for the appointment of an expert under cl 10.3(d). It was open to the offeree unilaterally to have an expert nominated by the President of the ICAA or to seek curial relief to break an impasse.

86 The respondent submitted that its construction made commercial sense as, unless it were adopted, months could pass before an expert determination took place, during which time the status of the pre-emptive rights and the parties' mutual positions would remain indefinitely unresolved.

87 The respondent submitted that in the present case, the appellant did not exercise its right to appoint an expert within the applicable time and purposely 'sat on the fence' to keep its options open. In such circumstances, even if cl 10.2 were engaged by the appointment of voluntary administrators, any consequent pre-emptive rights were lost due to inaction.

88 The appellant accepted that an offeree under cl 10.2 must necessarily be obliged to take certain action within a time limit if the clause were to be workable and have commercial effect. The appellant did not dispute that the offeree's obligation was triggered by its becoming aware of the change in ultimate control. The appellant disputed, however, the respondent's construction of the nature of the offeree's obligations and ultimately, the application of the 30 day time limit derived from cl 10.3(c) to those obligations.

89 The appellant's submissions on those questions shifted somewhat. In written submissions, it contended that, on a proper construction of cl 10, the recipient of an offer notice under cl 10.2 must give notice, within 30 days of becoming aware of the change in ultimate control, that it is entitled to exercise its right of pre-emption. The appellant satisfied that requirement, it said, by its assertions in correspondence to the administrators.[15]

90 Before us, however, the appellant modified its original position both in relation to the nature of the offeree's obligations and the applicable timeframe. It submitted that an offeree under cl 10.2 must notify the other party of its desire to appoint an expert under cl 10.3(d) within a reasonable time of becoming aware of the change in ultimate control.

91 The appellant also initially disputed that an offeree could unilaterally appoint an expert under cl 10.3(d). Ultimately, however, while emphasising that the appointment of the expert assumed the co-operation of both parties, counsel for the appellant appeared not to press the impossibility of the offeree appointing an expert in the absence of co-operation. Counsel did not accept, however, that the offeree's obligation was to appoint the expert. Rather, he submitted that it must merely notify the offeror of its desire to do so.

92 Given that there is no apparent means of determining a price for a cl 10.2 offer other than by an expert determination, the onus to initiate the process might be thought to rest, principally at least, on the offeror. The appellant's original assertion that its obligation was merely to assert its entitlement to pre-emptive rights may be plausible when viewed in that light.

93 In my opinion, the appellant's revised construction of the offeree's obligations and the applicable timeframe is nevertheless preferable. An offer notice under cl 10, whether deemed or actual, results from developments in, or action by, the offeror, which enlivens pre-emptive rights in the offeree. The mechanism for determining the price established by cl 10.3(d) (potentially applicable to a cl 10.3 offer notice, and applicable so far as appropriate to a cl 10.2 offer notice) in my opinion contemplates a joint submission and co-operation, expressly providing for cost sharing, consistent with the character of the shareholders' agreement as a whole.

94 Although cl 10.3(d) contemplates that the costs of the expert determination will be borne by both parties, it might be possible for an offeree unilaterally to instruct the President of the ICAA to nominate an expert in the event of lack of co-operation, or even obstruction, by the other party. There could be no assurance, however, that the attempt to do so would succeed within 30 days. Similarly, if it proved necessary to institute a proceeding in order to compel co-operation, 30 days is, in my opinion, an unduly tight timeframe particularly to obtain a court order resulting in an appointment.

95 The derivation of a 30 day time limit from cl 10.3(c) is based on an unpersuasive analogy. Clause 10.3(c) contemplates that the offeree has 30 days from receipt of the offer notice to purchase the shares, on the assumption that it has known the specified consideration from the outset. The 30 day period is thus prescribed for the assessment of, and a response to, an offer the consideration and essential terms of which are known. Thirty days is, on the other hand, an arbitrary and unrealistic timeframe for the unilateral achievement of an appointment which assumes the mutual co-operation of the parties, and in respect of which the initiation, course and duration of the processes are beyond the offeree's sole control. Given the nature of the process contemplated under cl 10.3(d), in my opinion the offeree's obligation should be limited to notifying the other party of its desire to appoint an expert within a reasonable time. The court should decline to impose upon the offeree unduly onerous obligations and timeframes which are not expressed in the shareholders' agreement and would have the draconian effect of terminating its pre-emptive rights.

96 The appellant's construction produces a fairer, more commercially workable, outcome, with flexibility to accommodate matters beyond the control of either or both parties. It better accords with the co-operative tenor of the shareholders' agreement. Such a construction does not, in my opinion, entail oppressive consequences for the offeror. The offeror can readily avoid prolonged uncertainty due to the indefinite subsistence of pre-emptive rights in the offeree, because the offeror's co-operation (or perhaps its own unilateral action) under cl 10.3(d) will immediately set in train the processes leading to the termination of the offeree's pre-emptive rights, either by its purchase of the shares the subject of the offer notice or its failure to do so.

97 The question arises whether the appellant in the present case notified the respondent of its desire to appoint an expert under cl 10.3(d) within a reasonable time. In my opinion, it did.

98 What amounts to reasonable time depends on the circumstances of the particular case. The appellant knew of the appointment of voluntary administrators by 26 September 2006, but was not notified of any proposed price at that time. The appellant's assertions of a change in ultimate control enlivening its pre-emptive rights were disputed. On 4 October 2006, the Feltex receivers advised the appellant that they would request Godfrey Hirst to make an offer directly to the administrators of Allmere, which was expected to provide the appellant with an offer notice.

99 The appellant did not receive the offer notice from Allmere (which stated a price of $10 million for the shares) until 19 October 2006. By its letter of 24 October 2006, the appellant again asserted that it had pre-emptive rights and that it seemed what should happen next was the expert procedure under cl 10.3(d). It sought the administrators' opinion. It followed up with another letter. By a letter in response dated 13 November 2006, Mr Fitzgerald asserted that the administrators saw nothing to be gained by appointing an expert unless the appellant were prepared to submit an offer of $10 million. The appellant, by a letter dated 14 November 2006, asked Mr Fitzgerald to confirm that he did not wish to be involved in discussions about the appointment of an expert. It received no response.

100 In my opinion, when read in context, the appellant's letters of 24 October 2006 and 14 November 2006 constitute a sufficient notification to the offeror, which, in the circumstances, was made within a reasonable time, that, having asserted its pre-emptive rights under cl 10.2, the appellant required the appointment of an expert under cl 10.3(d) to determine the price.

101 In my opinion, the appellant did not lose its pre-emptive rights under the cl 10.2 offer by failing unilaterally to appoint an expert under cl 10.3 within 30 days of becoming aware of the change in ultimate control of the respondent. The contention in paragraph 1 of the Notice of Contention is not established.

102 The appellant submitted that the trial judge erred in failing to hold that the cl 10.3 offer notice was invalid because it was given before the price under the 10.2 offer had been determined under cl 10.3(d) and hence before the 30 days provided for in cl 10.3(c) had elapsed.

103 The appellant contended that, on a proper construction of cl 10.2 and 10.3, there could be no concurrent offer notices, and, in any event, a cl 10.2 offer notice necessarily took precedence over a cl 10.3(a) offer. Before us, the appellant alternatively submitted that, at least in the present case, the prior cl 10.2 offer notice took precedence over and, being still on foot, rendered invalid, the subsequent cl 10.3 notice.

104 The appellant based its principal submissions on the following contentions:

(a) the expert determinations required under cl 10.2 and cl 10.3 offer notices were materially different in kind. Under cl 10.2, the expert must determine the monetary value of all the shares, while in contrast, under cl 10.3, the expert was required to determine the consideration contained in the offer notice, including non-cash terms and conditions, not necessarily in respect of all the shares. The expert was required to determine different questions under each sub-clause, and the price under a cl 10.2 notice was likely to be more favourable.

(b) the shareholders' agreement accorded primacy to a party's right to avoid a new and unapproved ultimate controller of its joint venturer being thrust upon it in the event of a change in ultimate control.

(c) concurrent valid offer notices would have a problematic effect on timing and could operate to truncate the time permitted for the consideration and acceptance of an earlier offer. Further, the costs associated with successive multiple offer notices could also have an oppressive impact on the offeree.

105 The respondent contended that multiple offer notices were not expressly prohibited and would not cause any prejudice. It submitted that there was no commercial rationale for a restriction to a single valid offer notice, and indeed, multiple offer notices would enhance the pre-emptive rights of the non-transferring party. While conceding that there was an indefinite number of contingencies, the respondent pointed to examples in which concurrent offer notices would work no prejudice.

106 The respondent also submitted that the nature of the expert's determination under cl 10.3(d) was the same under both clauses 10.2 and 10.3, namely to determine a fair and reasonable price in all the circumstances. There was no basis to assume that the price under a cl 10.2 offer would be more favourable than under cl 10.3 or that the objective of avoiding an unsuitable joint venturer under cl 10.2 was any more significant than avoidance of a new shareholder by means of a transfer under cl 10.3.

107 Further, the respondent submitted that timing problems could be addressed, because the offeree could prevent the offer period under an earlier offer notice from being truncated under a subsequent offer by giving notice of a dispute under the later offer notice.

108 While the respondent asserted that an indefinite number of valid concurrent offers was possible, it conceded that the offeree's equitable rights under earlier offers would prevail, and if the shares were sold under a subsequent offer notice, the purchaser thereunder would take title subject to the offeree's pre-emptive rights under the earlier offer.

109 In my opinion, there was little in the appellant's contention that the consideration determined by an expert would differ materially according to whether it was determined under cl 10.2 or cl 10.3. Moreover, the offeree's interest in excluding an unapproved shareholder from the joint venture by the exercise of pre-emptive rights is substantially the same, whether the proposed alteration arises from a change in ultimate control of the existing joint venture or a proposed sale of some or all of the existing joint venturer's shares.

110 Nevertheless, the problems, inconsistencies, and inconveniences potentially resulting from competing priorities under an indefinite number of concurrent, multiple offer notices in respect of the same share are such that, in my opinion, they would render the shareholders' agreement unworkable and cannot have been intended.

111 While, as the respondent contends, each concurrent offer notice would raise pre-emptive rights in the offeree, if not accepted by the offeree in accordance with the applicable requirements of cl 10, it would also ultimately entitle the offeror to sell the subject shares. As cl 10.3(e) makes clear, however, the transferring party must deliver unencumbered title thereto.

112 Further, cl 10.3(b) provides that an offer notice must contain a warranty that the sale shares are and will at completion be the sole legal and beneficial property of the transferring party. The effect of that requirement is to preclude a valid offer notice under cl 10.3(b) if there is already any prior valid offer notice on foot giving rise to pre-emptive rights in respect of the same shares. It would be impossible in such a case to warrant that the sale shares were, at the date of the offer notice, and would be at the date of completion, the sole legal and beneficial property of the transferring party. To the contrary, the offeree would have and might retain, pre-emptive rights over the subject shares pursuant to the prior undetermined offer notice. While the requirement of the warranty applies in terms only to an actual offer notice under cl 10.3 and arguably might not apply to a cl 10.2 offer notice, the requirement for the delivery of unencumbered title in cl 10.3(e) fortifies the impression that the parties did not contemplate the possibility of priority competitions between a third party purchaser of the shares under one offer notice and the offeree claiming outstanding pre-emptive rights in respect of the same shares under a different, undetermined offer notice.

113 The identity of the offeror and the offeree under cl 10.2 and cl 10.3 offer notices must necessarily be the same and, save in the case where a cl 10.3 offer notice relates to only some of the offeror's shares (in contrast, a cl 10.2 offer notice is, by definition, in relation to all of the offeror's shares), the shares the subject of multiple offer notices would also be identical.

114 In the case of a prior cl 10.3 offer notice in respect of only some of the offeror's shareholding, followed by a cl 10.2 offer notice in respect of all of the shares, both offer notices could have some operation, because their subject matter would not completely overlap. The subsequent cl 10.2 offer notice could create pre-emptive rights in respect of the shares not included in the prior cl 10.3 offer notice.

115 Save for that exceptional case, in my opinion, valid concurrent offer notices are precluded under cl 10 because they cannot be reconciled with the requirement (express in relation to cl 10.3 offer notices and implicit in relation to cl 10.2 offer notices) that the offeree have legal and beneficial title to the shares at the date of the offer notice and completion, and the express requirement that they must be unencumbered upon transfer.

116 An offer notice, whether under cl 10.2 and 10.3, not only enlivens pre-emptive rights in the offeree but also, if they are not duly exercised, entitles the offeror to sell (albeit conditionally) to a third party. An indefinite number of concurrent offer notices in respect of the same shares would not serve any legitimate commercial purpose, as either pre-emptive rights under still undetermined offer notices could be rendered nugatory by subsequent but earlier determined offer notices, or the prospect of complex priority competitions with purchasers would arise. The contention that the offeree could address such problems by invoking successive expert determinations or applying for injunctive relief is unrealistic.

117 It follows that, in my opinion, an offer notice may not validly be made in respect of shares under cl 10 while a prior offer notice in respect of the same shares remains undetermined.

118 In the present case, it was not disputed that as at 19 October 2006 when the offer notice under cl 10.3 was given, there had been no expert determination under cl 10.3(a) in relation to the cl 10.2 offer notice and, necessarily, the 30 day period for purchase had not expired.

119 In my opinion, ground 6 of the appeal is made out.

120 From the foregoing, it follows that, in my opinion, the appellant acquired pre-emptive rights in relation to the respondent's Carpet Call shares pursuant to a deemed offer notice under cl 10.2 of the shareholders' agreement given on 21 September 2006 by reason of a change in ultimate control of the respondent upon the appointment of voluntary administrators. On the basis of the facts before this Court, those pre-emptive rights have not determined, because, in the absence of agreement or a valid cl 10.3(d) determination of the consideration, the time limit under cl 10.3(c) will not commence to run. (We were informed from the bar table that some form of expert determination had occurred, but there was no admissible evidence on that matter.)

121 In the light of the foregoing, it is unnecessary to determine the remaining grounds of appeal. Counsel for the respondent nevertheless urged that course in order to avoid the uncertainty which, he said, would otherwise persist. Therefore, for completeness, I deal briefly with the principal outstanding grounds of appeal.

122 In my opinion, the appellant's contention that a valid offer notice under cl 10.3(b) should disclose that the proposed price was allocated to the shares in the context of a wider, non-arms length package, was persuasive. While the shareholders' agreement does not prohibit non-arms length transfers, cl 10.2 inclusively requires disclosure of 'details' of the proposed transfer and its terms and conditions, which include, but are not restricted to, the consideration. The shareholders' agreement governs a fiduciary relationship between joint venturers. Clause 10 provides pre-emptive machinery which may exert considerable pressure on an offeree to meet a price disclosed in an offer notice. While the offeree's option to require an expert determination would, if exercised, address the problem of an inflated price in the offer notice, that option may never be invoked if a material matter alerting the offeree to the possibility of an inflated price were omitted from the offer notice. The fact that a price is a component of a wider, non-arms length transaction is such a material matter, and the legitimacy of a non-arms length transaction does not relieve the offeror of an obligation to disclose it. As clause 10.3 requires details of the proposed transfer (emphasis added), an intended, associated non-arms length transaction, although not yet formally executed, should be disclosed.

123 Therefore, in my opinion, the cl 10.3 offer notice, even if otherwise valid, failed to conform to the disclosure requirements of cl 10.3(b). Ground 2 of the Notice of Appeal is made out.

124 Her Honour found that the appellant did not in fact dispute the price under the cl 10.3 offer notice at the meeting on 17 November 2006 or otherwise. Although it was consequently unnecessary to determine whether cl 15.1 of the shareholders' agreement applied to require a dispute as to price to be communicated in writing, her Honour considered that it did.

125 It is clear that not all communications between the parties are caught by cl 15.1 of the shareholders' agreement. In my opinion, as the appellant submitted (in contrast to the detailed requirements of an offer notice under cl 10.3(b) or a dispute pursuant to cl 5.4) the existence of a dispute as to price is a simple matter of fact, which in the absence of an express requirement need not be the subject of written communication. It is, however, unnecessary to decide that question, as her Honour also determined that Mr Smith's statements at the meeting on 17 November 2006, when taken in context, did not in any event amount to notification of a dispute. Her Honour had the great advantage of seeing and hearing the witnesses give evidence on that issue and I am not persuaded that her conclusion on the facts was in error. In my opinion, ground 3 of the notice of appeal is not made out.

Ground 4 - Whether approval of transfer unreasonably withheld

126 In my opinion, the failure to disclose the fact that the price was part of a wider, non-arms length transaction was a significant non-compliance with the requirements of cl 10.3(b). It would render reasonable the withholding of approval under cl 10.3(f) of the transfer to Godfrey Hirst pursuant to the cl 10.3(b) offer notice (were it otherwise valid). That objection could not, however, apply to the cl 10.2 deemed offer notice. The other grounds for the appellant's withholding approval of the proposed transfer under the cl 10.3 offer notice to Godfrey Hirst were assertions of fact, all of which her Honour considered and concluded, convincingly, in my opinion, to be without substance.

127 Nevertheless, ground 4 of the Notice of Appeal is made out.

Ground 5 - Whether order made 2 May 2008 uncertain, premature or inconsistent

128 In my opinion, the order made on 2 May 2008 was not uncertain, premature,

inconsistent or ambiguous. Ground 5 of the Notice of Appeal, which was not strongly pressed before us, is not made out.

129 It follows that in my opinion, the appeal should be allowed.

130 I have had the advantage of reading in draft the reasons for judgment prepared by Dodds-Streeton JA. I agree, for those reasons, that the appeal should be allowed.

131 I too agree with Dodds-Streeton JA that the appeal should be allowed, for the reasons she gives.

[1] This was the substance of the evidence of Mr McKendrick as accepted by her Honour.

[2] Allmere Pty Ltd (Subject to Deed of Company Arrangement) v Burbank Trading Pty Ltd [2008] VSC 139, [30]-[76].

[3] Each party is entitled to one half of the votes at a board meeting, irrespective of the number of its nominated directors: clause 6.1(d).

[4] Although the letter actually refers to 'Feltex Holdings Pty Ltd', it appears that should be a reference to Feltex Australia Holdings Pty Ltd.

[5] By reason of clause 15.2 of the shareholders agreement.

[6] Allmere Pty Ltd (Subject to Deed of Company Arrangement) v Burbank Trading Pty Ltd [2008] VSC 139, [106].

[8] Section 436E(2) Corporations Act 2001 (Cth) (amendment effective 31 December 2007).

[10] Section 439A (6)-(8).

[11] Section 435A of the Corporations Act states:

435A The object of this Part is to provide for the business, property and affairs of an insolvent company to be administered in a way that:

(a) maximises the chances of the company, or as much as possible of its business, continuing in existence; or

(b) if it is not possible for the company or its business to continue in existence - results in a better return for the company's creditors and members than would result from an immediate winding up of the company.

[12] LexisNexis Butterworths, Ford's Principles of Corporations Law, vol 2 ([26.010]).

[13] Ibid [26.010]. (See [1996] BCLB No 6 [92]).

[14] [2005] VSCA 29, [76] - [81]; Also see, for example, Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; (2004) 218 CLR 451, 461-2 (Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ); [2004] HCA 35; Toll (FGCT) Pty Limited v Alphapharm Pty Ltd & Ors [2004] HCA 52; (2004) 219 CLR 165, 179 (Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ); [2004] HCA 52.

[15] That is, Burbank's letters of 28 September 2006, 2 October 2006 (which stated that the appellant regarded the rights of pre-emption as very valuable and maintained its rights in respect of them), 24 October 2006 (which repeated the above assertions, including that there had been a change in ultimate control, such that 'Allmere is twice taken to have given an offer notice in respect of its shares at a price to be determined under paragraph 10.3(d). It therefore seems to us that what should be happening now is the expert procedure under section 10.3(d) of the shareholders' agreement') and 14 November 2006.