Dick v Comvergent Telecommunications

1 IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

2080/2000 MALCOLM STUART DICK & ANOR v COMVERGENT TELECOMMUNICATIONS LIMITED & ANOR

JUDGMENT Preliminary Facts 1 The plaintiffs are directors of the first defendant, Comvergent Telecommunications Limited (Comvergent). The second defendant RSL Com Asia Limited (Asia) holds all the shares in Comvergent. In turn it is a wholly owned subsidiary (apart from the plaintiffs' entitlements) of RSL Communications Limited, a company incorporated in Bermuda, but having an office in New York. The plaintiffs are entitled to 8.5% of the shares in Asia pursuant to certain agreements. Separate Questions 2 On 17 April 2000 I ordered that the questions which arose under paragraphs 1, 2 and 3 of the amended summons filed that day be determined separately from and prior to the other issues in this action. Under those paragraphs the plaintiffs seek orders (a) that Comvergent be restrained from proceeding at an extraordinary general meeting of members convened for 19 April 2000 to consider any resolution for the removal of the plaintiffs or either of them as directors; (b) in the alternative that Asia be restrained from voting at that meeting for the removal of the plaintiffs or either of them as directors; (c) an order pursuant to s1322(2) of the Corporations Law declaring that the notice convening the extraordinary general meeting is invalid. The action was heard yesterday and must be determined today and therefore these reasons are short and do not contained reference to authorities, although I trust they conform to authority. Most relevant authorities are listed in the outline written submissions I will leave with the papers. Additional Facts 3 In 1997, under a series of agreements the plaintiffs' interests in a group of companies which can be called the Tasman Group were sold to Comvergent. The plaintiffs are both resident in New Zealand. They received substantial sums as a result of this sale. Under a document described as a shareholders agreement they became entitled to purchase 8.5% of the shares in Asia for a consideration of $5 million to be funded out of moneys to which they were entitled under other arrangements with Asia. This agreement provided that upon the completion date of the share sale Asia would arrange a meeting at which the plaintiffs would be appointed directors. They were so appointed. Clause 5.3 of this agreement is as follows: 5.3 Removal Except to the extent provided by regulation 65 of the Articles, an RSL Director appointed to the Board under Clause 5.2 shall only be removed from office by the Company or RSL if at anytime that appointee: (a) ceases to be beneficially entitled to at least 0.5% of the total Shares on issue: (b) by his or her association with the Company, brings the Company, RSL or the Parent into disrepute; or (c) is an Tasman Party in relation to which any of the events referred to in Clause 10(a) have occurred.

None of the events has occurred which would give rise to an entitlement to end the directorships of the plaintiffs. 4 Each of the plaintiffs has the right, pursuant to put options and floor price agreements of 1 December 1997, to require the parent company, RSL Communications Limited, to acquire his or her shares in Asia for a sum not less than the floor price, but otherwise at a market value determined by the value of the shares in Comvergent. Thus they have an economic interest in Comvergent. 5 There are plans to list Comvergent on the stock exchange and to this end there have been negotiations between the company through its three other directors and the plaintiffs as to the possible surrender of their rights under the shareholders agreement and other documents and for their resignation as directors. These negotiations have broken down. On 28 March 2000 Mr Coote, the managing director of Comvergent, instructed Mr Smullen, the secretary of Comvergent, to sign a notice of meeting of the company to be held on 19 April to consider a resolution for the removal of the plaintiffs as directors and the notice convening the meeting was sent on that day. 6 The plaintiffs convened a meeting of directors for 7 April. The other directors on 4 April convened a meeting to commence at 10.30 a.m. on that day, notice of which was given to the plaintiffs in New Zealand a very short time before the meeting was due to commence. A further meeting was convened for 12.30 p.m. with the same short notice to the plaintiff directors. No notice was given of the business to be conducted. Questions as to the validity of these meetings arise on the amended summons. The meeting at 10.30 appointed seven new directors of Comvergent. It also increased the number of directors necessary to constitute a quorum at a directors' meeting from two to three. The plaintiffs had sought information about the proposed listing and, in a letter of 30 March, Mr Smullen, the company secretary, replied stating that as Asia would vote for their removal information about the proposed listing was not necessary for them to carry out their duties as directors. This somewhat extraordinary statement was followed by the giving of some information on an even more extraordinary basis, namely that it was "without prejudice". It is however not necessary to go into this further. 7 In response to a letter from the plaintiffs' solicitors seeking an adjournment of the meeting and giving notice that in the absence of proper discussions proceedings would be commenced, the solicitors for Comvergent responded stating that the meeting for 19 April had been properly convened in accordance with the Corporations Law. 8 Rule 7 of the constitution of Comvergent provides for the calling of general meetings. It provides that the directors may, when they think fit, call and arrange to hold a general meeting and that a general meeting may be called and arranged to be held only as provided by Rule 7 or as provided by Chapter 2G.2 of the Corporations Law. Rule 8.1(j) of the constitution is as follows: J. The company may: (i) by resolution passed in accordance with the Corporations Law remove a director from office; … 9 There is nothing to suggest that the directors resolved to call this meeting, the evidence being that Mr Coote told the secretary to sign the notice of meeting and send it to Asia and the plaintiffs. Nevertheless power is given under s249C of the Corporations Law to a director to call a meeting of members. That section being a replaceable rule, applies to Comvergent as it adopted a new constitution on 3 September 1999. Section 203D of the Corporations Law is as follows: 203D. Removal by members---public companies

(1) A public company may by resolution remove a director from office despite anything in:

(a) the company's constitution (if any); or (b) an agreement between the company and the director; or (c) an agreement between any or all members of the company and the director.

If the director was appointed to represent the interests of particular shareholders or debenture holders, the resolution to remove the director does not take effect until a replacement to represent their interests has been appointed.

Notice of intention to move resolution for removal of director

(2) Notice of intention to move the resolution must be given to the company at least 2 months before the meeting is to be held. However, if the company calls a meeting after the notice of intention is given under this subsection, the meeting may pass the resolution even though the meeting is held less than 2 months after the notice of intention is given.

(3) The company must give the director a copy of the notice as soon as practicable after it is received.

(4) The director is entitled to put their case to members by: (a) giving the company a written statement for circulation to members (see subsections (5) and (6)); and (b) speaking to the motion at the meeting (whether or not the director is a member of the company).

(5) The written statement is to be circulated by the company to members by: (a) sending a copy to everyone to whom notice of the meeting is sent if there is time to do so; or (b) if there is not time to comply with paragraph (a)---having the statement distributed to members attending the meeting and read out at the meeting before the resolution is voted on.

(6) The director's statement does not have to be circulated to members if it is more than 1,000 words long or defamatory.

That the company has proceeded under its constitution and therefore the shareholders agreement is binding on Asia and on it as a party to it.

That if s203D is applicable then as it overrides contractual rights it should be construed as operating to prevent a resolution for removal once passed from being ineffective, but its operation should be limited to that.

That the plaintiffs were appointed to represent the interests of particular shareholders so that pursuant to s203D any resolution does not take effect until a replacement to represent their interests has been appointed.

That the requirements of s203D have not been met.

That relief should not be given under s1322, first because assuming there is a procedural irregularity, what was done was deliberate, and second because validation would cause substantial injustice to them. 11 The defendants say that their statutory right is clear; that s203D has been complied with, or if not relief should be given, because there is no substantial injustice caused to the plaintiffs in so doing and they should be left to their claim in damages. In addition they say that as the plaintiffs have lost the confidence of the members of Comvergent then equity will not force the maintenance of a relationship of trust and confidence where that no longer exists. 12 The second and third arguments of the plaintiff can be disposed of first. There is no basis for limiting the meaning of s203D as suggested. If a company may remove a director in accordance with that section it could hardly be said that the court should have power, in the absence of improper conduct, to restrain the exercise of that right. As to the argument of representation of interests of particular shareholders, it is clear the relevant interests of particular shareholders are as shareholders in the company to which the director is appointed, not the interests of shareholders of some other company, even if it is the holding company. Constitution or s203D 13 It is not necessarily easy to determine which way the directors or the company decided to go if they decided at all. A direction by the managing director to the secretary to call a meeting is not a determination of the directors under Rule 7.1, but neither is it under s203D. However, it does seem clear the notice was not given under s203D as on no basis could it be thought that the s203D procedure had been followed. If then the meeting was called pursuant to the terms of the constitution, then both the company and Asia are bound by the terms of their agreement with the plaintiffs not to take action to remove the plaintiffs as directors. They can do so only under s203D. In Link Agricultural Pty Limited v Shanahan (1998) 28 ASCR 498 the statutory procedure and the articles procedure were described as concurrent and alternative procedures with the result that if one path is chosen the other is not relevant (page 516 et seq). In the instant case it was not argued or only faintly argued that if the meeting was convened under the rules then the agreement was not binding, or relevant: See Russell v Northern Bank Development Corporation Limited [1992] 1 WLR 588 It was however argued that it would not be enforced by injunction and I will return to this. Section 203D 14 If, contrary to what I have said, the meeting has been called pursuant to s203D, then it is necessary to consider the requirements of that section. There is no doubt the proposed resolution is to remove directors despite the agreement between the company and the directors and despite the agreement between the only member and the directors. Section 203D(2) appears to assume a meeting requisitioned by members rather than its having application to a meeting called by the other directors. The section is not happily worded. Nevertheless it would not be purposeful to hold that it was not a procedure available to directors. The instructions of the managing director to the secretary could not amount to notice under s203D(2). The meeting called is not a meeting called after notice of intention is given. It could not be said the procedure required was put in place. That in itself is reason for thinking that s203D was not in the mind of the secretary, particularly as it only came into operation two weeks before the notices were sent, the prior s227 not providing for the equivalent of s203D(1)(c). Section 1322 of the Corporations Law 15 The plaintiffs argued that if the meeting were convened under s203D then it was a deliberate action of the company or the other directors not to comply with the requirements of that section and so it should not be validated: P.W. Saddington & Sons Pty Ltd and the Companies Code (1990) 19 NSWLR 674. I do not consider that applies. I do not think any consideration was given to s203D; if the procedure falls within it then that is good luck, rather than a purposeful result. 16 I will assume, as it was not argued to the contrary, that if the error were not deliberate, then the defect would amount to a procedural irregularity under s1322(2) although I have some slight doubt about this in view of what I would have thought was the importance of the interest involved. 17 It is argued by the defendant that there is no substantial injustice to the plaintiffs through their non-compliance with the requirements of the section. I do not accept that. It is not possible to determine what might have occurred. It is true that the directors or Asia might have given notice of the resolution to Comvergent and that a meeting might then have been called immediately on 21 days' notice. That is perhaps likely, but not certain, as one must assume no attention was paid to the section at all. The plaintiffs would have been entitled to put their case to members; they would have been entitled as directors to ascertain the proposals for listing which might affect them and make representations about those; they would have been entitled to put their case to the new directors if they were properly appointed. The power to make representations is extremely important where the section provides a right to abrogate common law rights. While I appreciate the argument that the plaintiffs did not give evidence of prejudice, I consider that it is obvious. Thus if I considered s203D were relevant in that the meeting was called under that section, I would have made the order sought in paragraph 3 of the amended summons. Should there be an injunction? 18 In general terms the plaintiffs would be entitled to an injunction to restrain breach of an implied negative stipulation in the agreement. If the matter were being considered under s203D then likewise I consider that the plaintiff's would be entitled to an injunction. It is not possible to determine what the damages might be and there is no reason why the defendants should not act properly in accordance with s203D. The fact that there may be some loss to the defendants if there is a delay in obtaining the listing of Comvergent on the stock exchange is not a reason to deny an injunction. No reason has been put forward for the removal of the directors other than that the negotiations for their resignation have come to nought. The fact that additional directors have been appointed is not in itself a reason to seek the removal of existing directors. The fact that a prospectus requires signature of all directors does not in itself mean that there would be any delay in having it signed as it should not be thought that the plaintiffs would act improperly in their decision on whether they should sign the prospectus. The position of director in a company is not the same as the position of master and servant or employer and employee so far as injunctions which would have the effect of keeping that relationship in place are concerned. 19 The plaintiffs are entitled to succeed. I turn now to the relief claimed. In view of what I have said the most appropriate relief is probably that in paragraph 2, but I am prepared to hear submissions on that after which I will answer the separate questions.

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