De Tocqueville Private Equity Pty Ltd v Linden & Conway Limited, in the matter of Linden & Conway Limited

Factual Background 3 The primary facts as to the background circumstances giving rise to this application are not in contention. On 11 August 1933 the first defendant, Linden & Conway Limited ('LND'), was registered pursuant to the laws of Queensland. On 15 July 1968 the second defendant, Mr Allan Rowe, became a director of LND. In the same year he became the Chief Executive Officer of LND. On 10 July 2003 the second plaintiff, Leopard Asset Management Pty Ltd ('LAM'), was incorporated pursuant to the Act. Mr Michael de Tocqueville is the sole director and shareholder of LAM. In the period from June 2005 to October 2005 LAM acquired parcels of shares in, and became a member of, LND. 4 The LND directors' report showed that, as at 12 August 2005, Mr Rowe was the major shareholder in LND and held interests in, amongst others, the following voting shares in LND: 180,009 (i.e. 85.36 per cent) of the 210,872 fully-paid ordinary shares in LND, and 2,230 (i.e. 73.38 per cent) of the 3,043 fully-paid 9 per cent fixed cumulative preference shares in LND. 5 On 18 November 2005 the first plaintiff, De Tocqueville Private Equity Pty Ltd ('DPE'), was incorporated pursuant to the Act. Mr de Tocqueville is a director and shareholder of DPE. On 3 March 2006, DPE acquired all of LAM's shares in, and became a member of, LND. On 20 March 2006 DPE wrote to Mr Rowe and LND and expressed concerns about the management of LND. DPE sought responses to each of those concerns. On 8 May 2006, LND wrote to its shareholders and reported, amongst other things, that LND had received a letter dated 28 April 2006 from Australian Stock Exchange Limited ('ASX'), requiring it to comply with listing rules 12.3 and 12.4. ASX wrote: Thank you for your letter dated 25 November 2005. As you are aware, Australian Stock Exchange Limited ("ASX") has been corresponding with the Company since 8 March 2005 in relation to the requirements of listing rules 12.3 and 12.4, and has previously highlighted that ASX may impose a suspension of trading on an entity's securities where compliance with these rules is at issue. During this time, ASX has endeavoured to provide the Company with a reasonable period of time within which to take steps necessary to demonstrate compliance with these rules - in other words, to undertake the investment of sufficient of its cash, to ensure that rule 12.3 no longer applied to it, and to enable the Company to take steps to increase the number of holders of its main class of securities with marketable parcels to approximately 250 to 300 holders, to meet ASX's requirements under rule 12.4. To date, the Company has stated that it is not in a position to take action necessary to comply with the requirements of these rules. ASX has considered this matter further and has made the following determination. 1. The Company will be afforded a period of six months from the date of this letter to demonstrate to ASX that it complies with listing rule 12.3. If the Company has not demonstrated compliance with the rule to ASX's satisfaction by 31 October 2006, ASX will suspend the Company's securities from official quotation prior to the commencement of trading on 1 November 2006. 2. The Company will be afforded a period of 12 months from the date of this letter to demonstrate compliance with listing rule 12.4, to ASX's satisfaction. If the Company is unable to demonstrate a level of spread acceptable to ASX by 30 April 2007, ASX will suspend the Company's securities from official quotation on 1 May 2007. 6 The relevant listing rules, 12.3 and 12.4, referred to in the letter from ASX, provide as follows: Proportion of assets in cash 12.3 If half or more of an entity's total assets is cash or in a form readily convertible to cash, ASX may suspend quotation of the entity's securities until it invests those assets or uses them for the entity's business. The entity must give holders of ordinary securities in writing details of the investment or use. This rule does not apply to the following. · A bank or a non-bank financial institution. · A mining exploration entity, unless ASX decides otherwise. Level of spread 12.4 An entity must maintain a spread of security holdings in its main class which, in ASX's opinion, is sufficient to ensure that there is an orderly and liquid market in its securities. If CDIs are issued over securities in the main class, holders of CDIs will be included. 12.4.1 If ASX requires the entity to obtain sufficient spread, the entity must do each of the following. (a) Obtain the required spread within 3 months after the date ASX requires it to do so. (b) Tell all holders of its quoted securities in writing that if the required spread is not obtained within 3 months after the date when ASX requires the entity to obtain it, ASX may suspend quotation of the entity's securities. The entity must tell the holders in writing within 10 business days after the date ASX requires it to obtain the spread. 12.4.2 ASX's requirement is not met if the spread is obtained by artificial means. 7 On 18 May 2006 LAM acquired a parcel of shares in, and again became a member of, LND. On 30 May 2006 Mr Rowe gave notice pursuant to s 671B of the Act that, as and from 12 December 2005, Nerowe Pty Ltd, a company associated with Mr Rowe, had acquired 100 fully-paid 9 per cent fixed cumulative preference shares in LND with the result that on and from that date Mr Rowe held the following interest in the voting shares of LND: 180,009 (i.e. 85.36 per cent) of the 210,875 fully-paid ordinary shares in LND, and 2,333 (i.e. 76.67 per cent) of the 3,043 fully-paid 9 per cent fixed cumulative preference shares in LND. 8 There was a meeting of directors on 22 June 2006 which discussed the letter from ASX dated 28 April 2006 and the letter from Mr de Tocqueville dated 20 March 2006. The minutes of that meeting record the following: The directors were not able to arrive at a solution to the requirements of the ASX in view of the fact that the major shareholder was not willing to sell any part of its shareholding, nor did it feel it appropriate to deviate from the company's present investment policy. Investments in other than Cash or Cash Equivalents were discussed. It was considered that, as the economy was uncertain at present, interest rates were rising around the world, the property market had slowed and the stock market had declined, it was not the time to leave the safety of having the company's investments in other than bank deposits and government bonds. The chairman advised the meeting that the cost of the listing was $13281 per annum, payable to the Australian Stock Exchange and a further minimum charge of $440 per month to maintain the company's register of members in accordance with the Exchange's requirements. Because of the small number of shareholders and the fact that there was a buyer willing to pay a price equal to the "Net Tangible Asset" backing of the shares, it seemed in the best interests of the company as a whole that the company not renew its listing with the Australian Stock Exchange and thus not incur these costs. The position of the minority shareholders was discussed. As one of the major shareholders had indicated its willingness to buy their shares at a price equivalent to the net tangible asset backing of the shares, and the fact that the company not being listed did not affect the benefits of the franking credits to such entities as Superannuation Funds and low income earners, the directors believed that the move to not have the company listed would not adversely affect any shareholder. It was noted that Mr. de Tocqueville had also pointed out in his letter dated 20 March 2006 that the company did not meet the listing rules of the Exchange. His belief that the interests of minority shareholders would be best protected and advanced by the development of a proper business plan, or the shareholders would be better off with a return of capital, and thus reduce the size of the company, is not logical when there is a buyer willing to pay a price equal to the "Net Tangible Asset" backing for the shares and thus have the company in a position where it can take advantage of a business opportunity if it arises. In fact the company's size is part of its problem with the ASX. Succession Mr. Rowe advised that the Rowe group has in place a succession plan which has been considered by experts to be quite adequate. Rowe Private Interests It is obvious that as a shareholder Mr. de Tocqueville has no right of access to the particular Linden & Conway records to which he refers and in any case the company's auditors have not found anything in those records on which to report. Review and Restructure If as Mr. de Tocqueville suggests, the company paid out a divided of $38 per share, the dividend would exceed the company's retained earnings and even if it paid out only the retained earnings, the capital of the company would be $449338 and Linden & Conway could not retain its listing. The Rowe family has indicated they are not willing to sell any of their shares. The company already has two independent directors in Mr. C Tait and Mr. K Betts. If Mr. de Tocqueville's plan is followed the company would be starting with shareholders funds of $NIL. Hence it was decided that while Mr. de Tocqueville's intentions may be genuine, they were not logical and should be dismissed. 9 The day after, on 23 June 2006, LND announced to the market that, amongst other things: · the major shareholder in LND was not willing to dispose of its shares in LND to increase the number of shareholders; · LND's directors considered it not to be feasible to issue more shares in LND on the market; · further investments in other than cash or cash equivalents were deemed not appropriate; and · LND directors were of the opinion that LND should not continue with its listing on the Australian Stock Exchange. 10 LND gave notice of an extraordinary general meeting of its shareholders to be held on 20 July 2006 at which to consider, and if thought fit pass, a special resolution in the following terms: That the company not renew its listing with the Australian Stock Exchange and not pay the annual listing fee. 11 On 29 June 2006 the plaintiffs' solicitors wrote to the Australian Securities and Investment Commission ('ASIC'), and to ASX to express the plaintiffs' concerns regarding LND. On 13 July 2006, the plaintiffs' solicitors wrote to LND and stated, amongst other things, that: · delisting LND would be oppressive to the minority shareholders in LND; and · unless by 10.00 am on Monday 17 July 2006 LND withdrew the proposed resolution to effect the delisting of the company, and cancelled the proposed extraordinary general meeting, DPE would immediately commence proceedings seeking an injunction restraining the meeting from proceeding, and for other relief, on the basis of oppressive conduct of the affairs of LND. 12 On 18 July 2006, the plaintiffs commenced this proceeding and on 19 July 2006, at the directions hearing in the proceeding, LND and Mr Rowe undertook until the hearing and determination of the proceeding not to hold the proposed extraordinary general meeting of members. 13 On 28 July 2006 LND informed the plaintiffs that: · the directors had resolved to withdraw the special resolution set out in the Notice of Extraordinary General Meeting of Shareholders (23 June 2006); · the extraordinary general meeting to consider the resolution would not proceed;and · LND had paid its annual listing fee on the 27th July 2006. In addition, LND declared a fully-franked dividend of $28 per fully-paid ordinary share in LND. 14 On 1 August 2006, DPE sold 680 of its shares in LND for $46 each. Together the plaintiffs then held a total of 3,900 fully-paid ordinary shares in LND. 15 On 17 August 2006, after payment of the interim dividend declared by LND on 28 July 2006, LND had net tangible assets in excess of $10.65 per fully-paid ordinary share. 16 As of 22 August 2006, neither LND nor Mr Rowe had responded to DPE's request first made on 20 March 2006 that LND respond to and address DPE's concerns about LND's failure to satisfy the requirements of the ASX listing rules. 17 There is no doubt that LND had for many years prior to the involvement of LAM and DPE been a listed company that had been, relevantly, investing in cash or its equivalent, such as government-inscribed stock and interest-bearing deposits, and that the shares were tightly held by interests associated with Mr Rowe. It is also clear that at all relevant times, for the purpose of these proceedings, the market in LND's shares was illiquid. All these matters would have been apparent to Mr de Tocqueville before LAM and DPE purchased their shareholdings. 18 It is also apparent that the failure to comply with the relevant listing rules, namely listing rules 12.3 and 12.4, arises from the existing long-term investment strategy and level of shareholder spread of LND, which are inherent in the nature of LND and the decisions of its directors made over many years.

Relevant Legal Principles 19 The relevant principles of law seem not to be in contention. 20 Campbell J in Turnbull v National Roads & Motorists Association Ltd (2004) 186 FLR 360 at 365 - 370 ('Turnbull') discussed the background to ss 232 and 233. 21 In Turnbull, his Honour discussed the proper construction of those provisions and said at 370, amongst other things: An action is capable of being "contrary to the interests of the members as whole" in ways other than being commercially unfair. Being pointlessly wasteful is one example…The ground of being "contrary to the interests of the members as a whole" in s 232 is intended to be an independent one to the ground of being oppressive to, unfairly prejudicial to or unfairly discriminatory against, a member or members whether in that capacity or any other capacity. 22 Campbell J also considered the heading that precedes s 232 and said, amongst other things, at 371: The deliberate change in the law which Parliament has made by enacting s 232 [of the Act] in its present form, with the differences which I have earlier identified from the previous legislation, are such that it is so clear that "contrary to the interests of the members as a whole" is a ground on which the Court could make an order under s 233, independently of whether conduct, etc, is oppressive to, unfairly prejudicial to, or unfairly discriminatory against a member or members, that the Part heading cannot be used to limit the meaning of s 232(d). 23 In Shelton v National Roads & Motorists Association Ltd (2004) 51 ACSR 278 ('Shelton'), Tamberlin J agreed with the conclusions reached by Campbell J in Turnbull in respect of the proper construction of ss 232(d) and (e) of the Act. Also in Shelton, when speaking particularly of s 232(e) of the Act, Tamberlin J said, amongst other things at [23], that: It is not practicable to delineate the numerous ways in which oppressive conduct may be established. The Court will generally look at the overall course of conduct and consider whether it is so unfair that reasonable directors would not consider it fair. If directors exercise a power so as to impose a disability or burden on a member that is unfair according to ordinary standards of reasonableness and fair dealing, then such conduct may be described as oppressive…The test of unfairness is objective: see Wayde v NSW Rugby League Ltd (1985) 180 CLR 459 at 472 per Brennan J; Morgan v 45 Flers Avenue Pty Ltd (1987) 11 NSWLR 573. The Court should not take a narrow approach to cases of oppression. It is necessary for the Court to come to a conclusion that there has been conduct unfairly prejudicial to or unfairly discriminatory or oppressive to a member before it makes an order to this effect: see John J Starr (Real Estate) Pty Ltd v Andrew (Australasia) Pty Ltd (1991) 6 ACSR 63. His Honour then went on to say, at [24]: The onus of establishing unfairness rests on the applicant asserting the conduct that is contrary to the interests of the members as a whole, or that is oppressive, unfairly prejudicial or discriminatory. An applicant must actually prove oppression before obtaining relief. It is not established simply by showing that the majority are in control of the company, or that the applicant is consistently out-voted, or that the majority have made some questionable decisions from a business point of view. The mere disadvantage of being in a minority does not in itself constitute oppression. It is necessary for each single allegation in an oppression case to be pleaded clearly in order to assess whether the totality may amount to oppression: see Weatherall v Satellite Receiving Systems (Australia) Pty Ltd (1999) 92 FCR 873. Disagreement with a decision by a majority of shareholders and directors on the part of a minority shareholder does not entitle that shareholder to relief under the section: Re Bountiful Pty Ltd (1994) 12 ACLC 902. 24 It is not necessary to prove lack of probity or want of good faith: see, e.g. Thomas v HW Thomas Ltd [1984] 1 NZLR 686 in relation to analogous provisions of the Companies Act 1955 (NZ). In that case, Richardson J reminded us, at 694: Where the member is adversely affected in that sense, the determination as to whether it is unjustly so within subs(1), calling for the granting of relief under subs(2), must turn on an overall assessment of the position in the company. Fairness cannot be assessed in a vacuum or simply from one member's point of view. It will often depend on weighing conflicting interests of different groups within the company. It is a matter of balancing all the interests involved in terms of the policies underlying the companies legislation in general and s 209, in particular: thus to have regard to the principles governing the duties of a director in the conduct of the affairs of a company and the rights and duties of majority shareholder in relation to the minority; but to recognise that s 209 {695} is a remedial provision designed to allow the Court to intervene where there is a visible departure from the standards of fair dealing; and in the light of the history and structure of the particular company and the reasonable expectations of the members to determine whether the detriment occasioned to the complaining member's interests arising from the acts or conduct of the company in that way is justifiable. 25 Finally, it is not necessary that the conduct of which the plaintiffs complain be continuing at the time of the application or at the time when the court comes to consider the matter. However, that question may well be relevant as to whether relief is granted at all or what is the appropriate relief: Re Spargos Mining NL (1990) 3 WAR 166.

Consideration 26 One must look to all the circumstances, including the timing of the actions of the defendants, to ascertain whether particular conduct is within the terms of ss 232(d) or (e). One event or one act in itself may not constitute an act which will provide the basis for the court to conclude that the conduct is within these provisions. However a number of events or acts, when viewed cumulatively, may well provide such a basis. 27 The main complaint in this case is that the defendants unfairly took action to put a restriction upon the plaintiffs' ability to sell their shares through the taking of a positive action to delist LND. 28 The restriction was not so much one which realistically imposed any greater restraint upon the volume of shares that could be sold, but it was said that it did impact upon the price that could be achieved. The evidence seems clear that, whether listed or not, the plaintiffs would have difficulty in selling their shares, even if they were so minded to sell. There was evidence of a recent sale of some 680 of DPE's shares for the price of $46 each which seemed to be above the 'fair value' attributed by the directors of LND. 29 In addition to this positive action to delist, the plaintiffs call in aid a number of other factors which indicate the unfair dealing, such as the failure to respond to requests addressing their concerns and other correspondence, compelling the institution of these proceedings and failing to notify in a timely matter various matters affecting LND. 30 It seems strange that no response was made to the correspondence from the plaintiffs, particularly the letter setting out the concerns of the plaintiffs, dated 20 March 2006, although it seems clear that all the concerns were considered by the Board of LND at the meeting on 22 June 2006. Clearly, the Board took the view that the plaintiffs were seeking to interfere with the administration and investment strategy of LND, which the directors were not prepared to accept. Whilst a response may have been prudent, I do not view the failure to respond to this letter or the other correspondence, in the circumstances, as constituting a basis to support the plaintiffs' case, either in isolation or combined with the other factors relied on by the plaintiffs. Equally, I do not put much store upon the allegations of the untimely manner of informing the plaintiffs in relation to certain of LND's affairs, particularly in relation to the communications and negotiations with ASX. It seems to me that these are matters which could be discussed by the directors prior to any notification necessarily being given to the other shareholders, including the plaintiffs. 31 The question of whether the directors of LND put the plaintiffs in a position where the only possible remedy was litigation, to use the arguendo comments of Kitto J in M Dalley & Co Pty Ltd v Sims (1968) 120 CLR 603 at 606, will depend upon the view I take as to the merits of the plaintiffs' case prior to the litigation commencing. If the plaintiffs do not have a basis for claiming relief in these proceedings then I do not see how the observations of Kitto J - which are said, in any event, in a different context - can be of much assistance to the plaintiffs. 32 The main issue comes down to whether the actions of the directors on 22 June 2006 and 23 June 2006 were such as to constitute conduct which was contrary to the interests of the members as a whole, or oppressive to, unfairly prejudicial to or unfairly discriminatory against, a member or members, whether in that capacity or in any other capacity. 33 Taking into account the history of LND as detailed above, the fact that the market in its shares is illiquid, even whilst listed, and the decisions made by the directors as to the express concerns of the plaintiffs, it is difficult to see any unfairness to the plaintiffs. 34 The plaintiffs have not demonstrated to me that the decisions made by the directors, either in their investment strategy or in addressing the concerns of the plaintiffs, have been made other than by resort to a properly exercised commercial judgment. The plaintiffs obviously desire a greater input into the management of LND. Whilst they may feel locked in to LND, in the sense of having difficulty selling on the market, this in my view is not due to the current actions of the directors, but more to the nature of the strategies and constitution of LND which have been in existence for some time. 35 The circumstances are not too dissimilar to certain aspects of the case before Crockett J in Re G Jeffrey (Mens Store) Pty Ltd and G Jeffrey Pty Ltd (1984) 9 ACLR 193. Of course, each case must be looked at on the basis of its own facts and circumstances. It is significant that ASX itself is taking the initiative to delist LND. Having regard to the nature of the listing rules, it seems to me to be up to LND itself to make a decision whether to comply or not. It seems that to comply would involve a change in direction for LND which the directors themselves consider to be commercially inappropriate. As far as the evidence shows, the investment strategy and approach of the directors has been very successful. 36 It was said on behalf of the plaintiffs that, prior to delisting, some opportunity should have been given to the plaintiffs to sell their shares in the market. I am looking at the position prior to the institution of proceedings unaffected by the decision made by LND on 28 July 2006, and recalling that it is not suggested that the resolution of LND on 22 June 2006 and announcement on 23 June 2006 were made in bad faith or for an improper purpose. In not giving some further opportunity to sell, I am not satisfied that there is any element of unfairness, commercial or otherwise, having regard to the particular circumstances of LND and the current market. 37 Delisting seems inevitable if ASX persists with its current attitude. Further, I am not satisfied on the evidence that the immediate delisting without giving LAM or DPE an opportunity to sell their shares would have made any substantial difference to those companies in disposing of their shares in a sufficient quantity and at an appropriate price. I will accept that there may be a value to be attached to the listed shares over and above unlisted shares, however the evidence is a little unsatisfactory in that regard. 38 However, I am not satisfied that even if LAM and DPE had been given the opportunity to sell on the market, they would have been able to achieve the sale of any further shares. Further, at the time LND made its decision to delist, the company noted the willingness of one major shareholder to buy the minority shares at a price equivalent to the net tangible asset backing of the shares, which presumably meant all the shareholdings of the minority. Whilst the plaintiffs may not be able to obtain the price they aspired to, they would have sold all their shares which is a difficulty they seem to have on the open market. 39 Further, at least since 8 May 2006, the plaintiffs have known of the problems with the listing requirements and, having regard to the nature of those requirements and the history of LND and its shareholders, I would have thought that it was obvious to each of the plaintiffs, or at least they would have been put on notice, that LND could possibly be delisted. In fact, after 8 May 2006 it appears that LAM acquired a parcel of shares in LND on 18 May 2006 and this was after Mr de Tocqueville, as a director of DPE, was aware of the concerns DPE had expressed in its letter of 20 March 2006. 40 Therefore, I am not satisfied that the plaintiffs have shown that the conduct complained of comes within ss 232(d) or (e). I have not, in the course of these reasons, referred to any of the cross-examination of either of the deponents who gave evidence and it will be apparent that, in my view, this case can be determined on the affidavit material that has been relied upon, which is basically beyond contention. The only element of contention may well have been the issue between the parties as to the value of listed and unlisted shares, which I do not regard as of significance in this case. 41 In any event, even if I am wrong that the conduct does not come within ss 232(d) or (e), I would not grant the relief sought by the plaintiffs. Since the institution of the proceedings, circumstances have changed. On 28 July 2006 LND informed DPE and LAM that the directors had resolved to withdraw the special resolution set out in the Notice of Extraordinary General Meeting of Shareholders, the extraordinary general meeting to consider the resolution did not proceed, and LND paid its annual listing fee on 27 July 2006. Further, LND declared a fully-franked dividend of $28 per fully-paid ordinary share in LND. 42 The delisting now will not occur until either 1 November 2006 or 1 May 2007 according to the letter from the ASX dated 28 April 2006. Whether to comply or not with the listing rules seems to me, in the circumstances of this case, a matter for LND and its directors. As matters now stand, DPE and LAM have the ability to sell their shares whilst LND is still listed. I will therefore not impose a sale as this would not be appropriate. As to the other remedies sought, I consider there to be no warrant for such an intrusion into the affairs of LND: see, generally, Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (No 2) (1998) 28 ACSR 688 and Martin v Australian Squash Club Pty Ltd (1996) 14 ACLC 452, 475. 43 For these reasons, I would dismiss the application with costs. I certify that the preceding forty-three (43) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Middleton.