The issues
19Ultimately, the bases on which the validity of the 3 September share issue was disputed - apart from the equitable improper purpose [cf Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285; (1987) 70 ALR 251; (1987) 61 ALJR 216; (1987) 11 ACLR 715; (1987) 5 ACLC 421; [1987] HCA 11] and oppression grounds not presently for determination - were two-fold, namely (1) non-compliance with clause 6.1 of the constitution, and (2) non-compliance with clauses 4.6(b) and 5.1(b) of the shareholders' agreement.
20For the defendants, it was submitted that clause 6.1 of the constitution - the effect of which is to require 75% shareholder approval, in writing or at a shareholders meeting, of a direct or indict variation of the rights or obligations of an existing class of shares - remained applicable, and was not superseded by clauses 4.6(b) and 5.1(b) of the shareholders' agreement, as it did not cover the same ground as item (i) of Schedule C to the shareholders' agreement; and that it had not been complied with in respect of the 3 September share issue, which at least indirectly varied the rights of the ordinary shareholders.
21The plaintiffs submitted that in referring to "any" shares, paragraph (i) of Schedule C necessarily included preference shares, and that so read, clause 5.1(b) of the shareholders agreement and clause 6 of the constitution covered the same topics - relevantly, the issuing of shares, including preference shares, with the consequence that, pursuant to clause 18.1 of the shareholders agreement, the former prevailed. While I accept that the reference in item (i) of Schedule C to "any" shares includes preference shares, I do not agree that that supercedes clause 6 of the constitution. The role of clause 5.1(b) is to reserve to shareholders the power, inter alia, to issue shares. Its effect is that the shareholders, rather than the directors, have the power to resolve to issue shares, and to do so by simple majority. However, the role of clause 6 is rather different, namely to protect the interests of the holders of specific classes of shares, when a share issue is contemplated. Its effect, in the light of clause 5.1(b), is that if the shareholders propose to make a share issue which affects class rights, they can do so only with the concurrence of 75% of the class, in accordance with clause 6. Accordingly, clauses 4.6(b) and 5.1(b) of the shareholders' agreement and item (i) of Schedule C do not supplant clause 6 of the constitution. Their effect is to remove from the directors and reserve to shareholders the power to issue shares; but not to remove the prohibition on varying class rights without the approval in writing, or a resolution, of holders of 75% of the shares of the affected class.
22The ordinary shares were an existing class of shares. The rights attached to them would be varied, at least indirectly, by the issue of preference shares which would, at least in some respects, rank ahead of them. Accordingly, the concurrence of 75% of the ordinary shareholders was required.
23In any event, it was uncontroversial that the 3 September share issue involved "the issue of ... shares ... of the company" within paragraph (i) of Schedule C, if not also a "reconstruction of the share capital of the company" within paragraph (h). Clause 11 of the shareholders' agreement provided the procedure for the holding of shareholders' meetings in order to enable decisions on matters set out in Schedule C to be made. There has been no approval by a simple majority of shareholders at a shareholders' meeting, in conformity with clause 4.6(b) and 5.1(b) of the shareholders' agreement (let alone of 75% in conformity with clause 6 of the constitution). The contrary was not suggested.
24However, the plaintiffs contend that clause 7.1(d) of the shareholders' agreement, together with the confirmation of 8 January 2013 and the consent of 19 April 2013, manifests the unanimous agreement and approval of the shareholders for LBH to make the 3 September share issue, dispensing with what would otherwise be the requirement for shareholder approval pursuant to clauses 4.6(b) and 5.1(d) and paragraph (i) of Schedule C of the shareholders' agreement (and presumably also clause 6 of the constitution) [cf Re Duomatic Ltd [1969] 2 Ch 365; MYT Engineering Pty Ltd v Mulcon Pty Ltd (1999) 195 CLR 636, 649 [24]].
25In my judgment, however, clause 7.1(d) does not amount to an agreement to make the 3 September share issue. By clause 7.1(d), the shareholders agreed that the company would enter into a binding commitment with Bligh Capital, or another financier determined by the board, appointing it to raise at least $1 million in capital. However, an agreement to enter into a commitment with a financier or underwriter is not the same as an agreement to issue the shares in question. Moreover, clause 7.1(d) was silent as to the form of the capital raising, and in particular whether it would be loan capital or share capital. Indeed, the possibility that a capital raising might be by way of debt rather than equity is expressly contemplated in subclauses 7.1(a) and (e). Further, the indicative term sheet, to which Mr Koulis at one point consented, contemplated loan capital, though providing that it might be converted into shares. In my view it cannot be said that by clause 7.1(d) the shareholders unanimously assented to the 3 September share issue, in a manner that dispensed with the requirement to comply with clauses 4.6(b) and 5.1(b). Indeed, it cannot be said that they thereby assented to a share issue - as distinct from retaining a financier to raise capital by some means or another - at all.
26It follows that I am unable to accept the plaintiffs' submission that upon the proper construction of the constitution and the shareholders' agreement, the board had power and authority to make the 3 September share issue. It follows that the plaintiffs are not entitled to the relief claimed in paragraph 1(a) of the summons.
27The plaintiffs invoked Corporations Act, s 124(1)(a), which provides that a company has all the powers of a body corporate, including the power to issue shares; s 254A(1), which provides that a company's power to issue shares under s 124 includes the power to issue preference shares; and s 125, which provides that a company's constitution may contain an express restriction or prohibition on the company's exercise of any of its powers, but that "the exercise of a power by the company is not invalid merely because it is contrary to an express restriction or prohibition in the company's constitution". However, the fact that the company is empowered to issue shares, including preference shares, does not mean that there was a valid and effective exercise of those powers in this case, having regard to the provisions of the constitution and the shareholders agreement. To declare in the abstract that there was power to make the 3 September share issue, without adverting to whether the power was exercised validly in the instant case, would be pointless, and potentially mischievous.
28Moreover, the declaration sought, if made, would quell only part of the dispute. Were the plaintiffs to succeed, the declaration would resolve the question of legal power and authority to issue the shares, but would leave open the application to set aside the issue on the ground that it was not made bona fide for the purposes of the company, or was oppressive. In those circumstances, the declaration if made would have the potential to be misleading, given that it would apparently declare the share issue valid, when ultimately its validity would still be subject to the applications to impugn it on equitable grounds. These are additional reasons why it would be inappropriate to make any such declaration as sought by the plaintiffs.
29I will hear the parties as to what if any orders should now be made consequent on that conclusion, and what directions should be made for the further conduct of the matter.