Alleged errors which were contrary to the evidence
91 Mr Sulan submitted that the primary judge made a number of additional findings which were either contrary to the evidence or did not arise as a matter of inference.
92 The first was said to appear in paragraph [63] of the primary judge's reasons where her Honour said:
Second, a comparison of the rates under each of Nimble's existing financing facilities as against the terms of the proposed New Investors' Subordinated Notes issue demonstrates that in the context of this company the proposed rates are commercially comparable to those agreed to by the company in the past. Such a comparison also elucidates that the interest burden on Nimble under the new debt arrangement will likely be reduced relative to the status quo.
93 It was submitted that the second sentence was in error because the new debt arrangements did not take into account the amount of the debt which would arise from the members participating in the Follow-on Offer.
94 The Board's decision of 10 November 2021 involved the replacement of the existing subordinated notes with the new Series 14 and 15 Notes and it was not disputed that the interest burden of those new notes in the first and second years was lower than the effective rate payable under the Series 13 Notes which they replaced. It is also undoubted that the existing debt of $4.5m was to be replaced by new debt in the same amount under the secured note issuance program which Nimble had in place, albeit subject to any participation in the Follow-on Offer. In its notice to shareholders the Board indicated that it had the intention to afford existing shareholders the opportunity to participate in the Follow-on Offer whereby they might subscribe for between $2m to $4m worth of the Series 14 and 15 notes. The Board subsequently made the Follow-on Offer on 26 November 2021, in which it invited applications to subscribe for $3m worth of notes. It was in these circumstances it was submitted that the primary judge erred in concluding that Nimble's interest burden would likely be reduced relative to the status quo, because the Follow-on Offer had the consequence that additional debt might be taken on. The submission appears to be that whilst the interest rate Nimble was required to pay on the Series 14 and 15 Notes was lower, at least in the first two years, because there was greater debt the cumulative interest payment would be higher.
95 Enares' submissions in this respect fail to accord context to the impugned finding. At paragraph [63] of her reasons her Honour was concerned with two issues, being the rate of interest payable on the new finance, and the ability of Nimble to service its debt. In so doing her Honour referenced the evidence of Mr Mackenzie, Nimble's CEO, which she accepted. It was to the effect that he expected there would be no increase in the size of Nimble's debt, subject to any additional notes issued under the Follow-on Offer, and that the rates under the new refinancing arrangements in the first two years would be less than the effective rates under the existing Series 13 Subordinated Notes. He also expressed the view that Nimble would be able to service the debt on any new borrowings, that stress testing had occurred of Nimble's ability to repay debt, and that he was satisfied that it had sufficient liquidity to do so. These matters were explained in detail by Mr Mackenzie in his affidavit. In general terms his evidence was that the impact of issuing new notes had been considered and it had been concluded that it would leave Nimble in generally the same position if not slightly better in terms of its interest burden and that the company had the ability to service its new debt.
96 It is apparent from Mr Mackenzie's evidence and the context in which her Honour was discussing it in relation to the alternative refinancing scenarios, that her Honour's reference to the size of the debt was to the replacement of the subordinated debt of the then current financiers. Mr Mackenzie had made it clear in his affidavit that his opinion as to the size of Nimble's debt was subject to notes that may be issued under the Follow-on Offer. It would appear that her Honour understood it in that way as she was acutely aware of the importance of the Follow-on Offer which she had referenced on a number of occasions in her reasons. Relevantly, at the time of Mr Mackenzie swearing his affidavit no new notes had been issued and the time limit for submitting an application under the Follow-on Offer had not expired. It was not suggested that there was any other evidence which her Honour should have considered as to Nimble's expected debt levels other than that of Mr Mackenzie and the finding was open to her Honour.
97 It was also not suggested that her Honour would have reached any other conclusion had she specifically referenced the possibility of additional debt being taken on as a result of the Follow-on Offer. It might be presumed that any additional funds raised would have been utilised in Nimble's business in the same manner as the finance raised from the new investors, such that they would generate relatively similar returns which would be sufficient to meet Nimble's interest liabilities.
98 The second complaint in relation to this finding was that the interest rates on the Series 14 Notes increased in the third year to 24%, which was higher than the Series 13 Notes, such that her Honour's conclusion about the overall interest burden was incorrect. Again, it is necessary to consider the finding in the context of the material before the Court. Mr Mackenzie's evidence was referrable to the interest rate in the first two years of the Series 14 and 15 Notes. He did not assert that the third year of the Series 14 Notes would not be higher. His evidence was clear on this and it is unlikely that the primary judge misunderstood it. It is important to note that, central to Enares' asserted concerns, was that the debt refinancing strategy was inappropriate in the circumstances pertaining at that time, being when Nimble was under financial stress. It was a constant refrain of Enares' submissions that the Board's decision was unsatisfactory given Nimble's financial circumstances at that particular point in time. It is, therefore, unsurprising that the primary judge focused her attention on the relatively immediate effect of the refinancing and sought to ascertain what difference, if any, there would be to the existing debt obligations. As her Honour had noted, the Board had justifiable optimism for the company's growth as did the current investors and shareholders. In such circumstances it is apparent that her Honour's reference to the relative interest burden was in relation to the immediate or near immediate effect of Nimble adopting obligations under the new notes issue. There was no information as to what the position might be in two years' time and that was largely irrelevant to the point in issue. The circumstances show that the issue before her Honour was the immediate effects of the new notes issue and, in that context, her finding was entirely correct.
99 Again, it can be added that even if the higher interest rates payable on the third year of the less popular Series 14 Notes had been regarded as relevant, it is far from apparent that it would have made any difference to the outcome. The nature of Enares' asserted concern was the debt refinance in the then current circumstances and the fact that the interest obligation might increase in two years' time must necessarily have been of marginal relevance. That is particularly so in the light of Nimble's entitlement to redeem the notes at any time without payment of any additional fee. Whether the higher rate would ever be payable was, necessarily, hypothetical.
100 It was next submitted that the primary judge erred in making the finding (at PJ [64]) that, "The Follow-On Offering provides Nimble with equity at a higher valuation than either of Enares' proposals, which were, in any event, withdrawn." It was first submitted that this statement was in error because Enares' November Proposal had not been withdrawn. Whilst the October Proposal had been expressly withdrawn, it is correct that the November one had not. Nevertheless, as at 10 November 2021, Nimble had entered into a binding but conditional refinancing agreement involving the issuing of the new notes. It is apparent that, by that time, the Board had largely determined to pursue the debt refinancing strategy. However, as the facts recited above reveal, the November Proposal was received from Enares on 12 November 2021 and it was sent to the members for their consideration on 16 November 2021. The Board indicated that it would assess the proposal in the context of the conditional agreement which it had entered into with the new investors. By its 23 November 2021 shareholder update, it advised that it had executed definitive documentation with the new investors which carried with it the implication that it had rejected the November Proposal. On the assumption that an error existed because the November Proposal had not been withdrawn, it too was not material. At the time when the Board first agreed to the debt refinancing strategy the October Proposal had been withdrawn and no other live proposal was open for consideration. Despite having entered into an agreement with the new funders, the Board nevertheless considered the November Proposal when it was subsequently presented. Therefore, whilst her Honour may have mistakenly believed the November Proposal had been withdrawn, the practical effect was the same in that when the Board first made the decision to proceed with the debt refinance strategy, Enares had withdrawn the first proposal and had not made any further offer.
101 As the point developed during the appeal the essential question became whether, as at the end of November 2021, the Board should have pursued negotiations in relation to the November Proposal as a potential alternative to the debt refinancing strategy. For the many reasons which have been given, her Honour was correct to conclude that it was not so required. It mattered not whether the November Proposal had been withdrawn by Enares or the Board had rejected it as a viable proposition. The reality was that it did not present as a relevantly viable means of raising finance.
102 The next alleged error was said to be contained in the statement that, "the Follow-On offering provides Nimble with equity". It was submitted that the Follow-on Offer merely provided for those who took up the Series 15 Notes to exercise an option to purchase equity and that Nimble was not provided with it merely because the notes were taken up. This alleged error involves reading the primary judge's reasons with an eye attuned to error, rather than fairly. In that part of her reasons her Honour was considering the nature of the benefits from the Follow-on Offer and properly recognised that one such benefit was that it provided members with the opportunity to acquire further equity which, if the opportunity was availed of, would further capitalise the company. In this light her Honour's statement was correct.
103 Mr Sulan then submitted that the primary judge erred in her conclusions as to Enares' claims about the alleged information asymmetry as between it and VDLF. It had been submitted to the primary judge that because Mr Edney was VDLF's nominee director he would have provided additional information to it which was not available to other shareholders. In particular, it was said that her Honour erred in finding that Mr Edney "was not freely passing information to the 14% shareholder, VDLF". Mr Edney did not give evidence at the hearing although no point was taken in that respect. However, Mr Mackenzie was cross-examined about his understanding of Mr Edney's communications with VDLF. The relevant evidence was recorded in the primary judge's reasons as follows:
And Mr Edney is the director that you understand to be associated with the shareholder VDL; correct?---Yes.
And, in effect, he's a nominee of VDL, isn't he?---I'm not sure the exact - the exact relationship in terms of whether he's a nominee or whether - whether he's - yes, on how his directorship has been formed.
Yes. But you would fully expect him to be reporting matters back to VDL as to what's going on with the company, wouldn't you?---Yes.
Yes. And so VDL, being a 14 per cent shareholder, has got access to a whole lot of information that the 15 per cent shareholder, being my client, doesn't have access to; you would agree with that?---I know there are some document - some - what's the word I'm looking for? Is a documented procedure for what - what that sharing is entitled to and when it's not entitled.
Yes. Well, to your knowledge, Mr Edney knows who the new investors are, doesn't he?---Yes.
And to your knowledge, one of the pieces of information the company is seeking to keep away from my client is who those new investors are?---Yes.
So you're accepting, as the CEO, that there's going to be information asymmetry between the two major shareholder groups?---Yes.
And that's a position that the company is happy with, that is, that one shareholder group has a lot more information about the new investors than another.
MS ROUGHLEY: I object.
104 It is notable that Mr Mackenzie was not asked whether information about the identity of the new investors was the type of information which a nominee director might pass on to their nominating shareholder. If it had been intended that a submission was to be made that Mr Mackenzie had accepted that was the case, that matter ought to have been squarely put to him. It was not.
105 In the submissions to this Court Mr Sulan stated:
… but I did put it to Mr Mackenzie, the CEO, and the relevant part of the transcript is recorded at paragraph 70, and in effect, I said, "You would fully expect him to be reporting matters back to VDLF as to what's going on with the company?" And he said yes. And then later on, one of those pieces of information was who the new investors were …
And so we were saying, "well, come on, just at least tell who these new investors are", and he was accepting that Mr Edney would know that, and he was, no doubt, passing it back to VDLF.
106 Those submissions materially misstate Mr Mackenzie's evidence. He did not agree with the proposition that Mr Edney would pass on the information about the identity of the new investors to VDLF. Rather, the evidence can only be taken as being that Mr Edney passed on the information which he was entitled to under the company's Information Protocol. The primary judge concluded that the information as to the identity of the new investors may have fallen within the prohibitions in the Information Protocol and, in the light of Mr Mackenzie's evidence, there was no reasonable basis for believing that Mr Edney had disclosed the identity of the new investors.
107 Mr Sulan challenged the primary judge's conclusion that the information in question fell within the scope of the prohibition in the Information Protocol, although he did not explain why that conclusion was incorrect. Clause 3(a) of it provided that nominee directors might provide information to a nominating shareholder unless, inter alia:
(a) the information falls within one of the following categories or types, in which case it must be redacted and removed, prior to any provision of the information to a Nominating Shareholder:
…
(3) information regarding any product, service, transaction or other matter relating to Nimble's business where the Nominating Shareholder has (in any capacity) a relevant or competing interest in that product, service, transaction or other matter;
108 It seems that the prohibition in cl 3(a)(3) of the Information Protocol is sufficiently wide to cover the information in question. The identity of the new investors was information regarding a matter relating to Nimble's business where VDLF had a relevant or competing interest in it. The Series 15 Notes granted to the holders an entitlement to exercise options to acquire shares in Nimble at the identified prices. The issue of additional equity in the company is a matter in which VDLF must surely have a "relevant or competing interest" as any new issue of shares will necessarily result in a dilution of the proportion of its 14% holding. Further, the potential for the introduction of new substantial shareholders to Nimble is a matter in which VDLF would have had a relevant interest. It is, with respect, difficult to read the broad words of cl 3(a)(3) of the Information Protocol in any other manner.
109 However, Mr Sulan further submitted (ts 24) that the primary judge's finding was in error because Nimble did not submit at the first instance hearing that the reason why it could be inferred that Mr Edney was not passing on information was because of the requirements of the Information Protocol. The complete answer to this is that her Honour's finding was entirely consistent with the evidence which had been adduced on this topic. Although it was only lightly touched upon, Mr Mackenzie's evidence was that any information passed on to nominating shareholders was in accordance with the documented procedure in the Information Protocol. In the context of Enares alleging that there existed some information asymmetry arising from Mr Edney's position it is unclear why the learned primary judge was not entitled to rely upon the substance of Mr Mackenzie's evidence and consider the terms of that document to ascertain whether information as to the identity of the new investors would or would not be disclosed.
110 It is relevant that there was not a skerrick of evidence that Mr Edney had passed the alleged information on to VDLF. All that Enares relies upon is an assumption that it might have occurred. In the context where Enares' bore the onus of establishing that it was bringing the application in good faith and for a proper purpose it was required to establish the existence of some substance to its concerns and there was nothing but speculation in relation to this issue of passing on information. Accordingly, the primary judge was correct when she held (at PJ [74]), "I do not think there is a reasonable basis for inferring that VDLF (as opposed to Mr Edney) is receiving information concerning the refinancing arrangements including the New Investors' Subordinated Notes". As a result, her Honour concluded that there was no information asymmetry of the type alleged such there was no foundation for the asserted concern.
111 It was also submitted by Mr Sulan (AS [23]) that inspection should be permitted under s 247A on the basis that it would correct the alleged information asymmetry as between Enares and VDLF. However, if VDLF had been given information in accordance with the Information Protocol as accepted by the Board, it is not immediately apparent why the Court should upset the consequences of the legitimate internal arrangements which the company has in place. In circumstances where there is no question about the legitimacy of the Information Protocol, inspection should not be permitted merely to circumvent the company's internal procedures which, it might be presumed, had been agreed upon by the members. In this respect it is relevant that Enares had appointed its nominee, Mr Fitzalan, to the Board in May 2021, but he had been removed as a Board member at a general meeting. There was no evidence as to why it had not appointed a replacement nominee.
112 Enares also submitted that the primary judge focused upon irrelevancies. First, it was submitted that her Honour placed weight on the fact that the cause of the financial distress suffered by Nimble was not the result of mismanagement but was caused by COVID-19 and the company's long-term change of business strategy in which a downturn was expected. However, her Honour's findings in this respect (PJ [62]) were for the purpose of providing context to the decision which the Board was to make and, in particular, for demonstrating the "air of commercial unreality" in Enares' submissions. As her Honour identified, the company had suffered significant financial difficulties but also that there were signs that the business and financial circumstances were improving, and that optimism was being demonstrated by financiers and members alike. This was an important contextual matter in which to ascertain whether there was any suggestion of inappropriate conduct by the Board which was required to act in response to immediate difficult financial circumstances albeit with the prospects of improvement in the near future. Rather than being irrelevant, her Honour was obliged to consider the context in which the impugned decision was made or in which the alleged conduct occurred.
113 It was also submitted that her Honour erred by considering the high interest rates which were payable pursuant to the Series 13 Notes. It was contended that merely because Nimble had paid high interest under those notes and would pay rates which were high, but not as high, under the Series 14 and 15 Notes, that was not a reason to issue the latter notes. It was submitted that the focus on the comparative interest rates distracted from Enares' objective concern that the financially distressed Nimble should not enter into a transaction which replaced high interest finance with other high interest finance. The difficulty for that submission is that the reduction in the interest rate payable to be achieved by the debt refinance strategy was particularly relevant in circumstances where Enares was claiming to be concerned about the ongoing financial pressure on the company. Again, this was far from an irrelevant consideration. To that it can be added that it had not been shown that the interest rates payable in any way imperilled Nimble's financial security. The only evidence was that it had the ability to service the new debt arrangements at the new interest rates.
114 A complaint was also made that her Honour had relied upon Mr Mackenzie having "stress tested" Nimble's ability to repay the interest on the Series 14 and 15 Notes. It was submitted that as the notes matured in three years it was difficult to predict what might occur such that any such testing could only have been of little weight. Complaint was also made that Mr Mackenzie's asserted belief that based on the current financial forecasts Nimble would return a profit and be able to pay the debt, was insufficient evidence on which her Honour might act. The precise legal nature of these criticisms was not entirely clear. It was acutely relevant to whether there was an objective foundation for Enares' concerns that the CEO had assessed the company's ability to repay the principal and interest on the new loans, and had formed the view that profits would be forthcoming. The same could be said of the CEO's consideration that the company would soon return to a profitable position as was reflected in the option prices in the Series 15 Notes offer.
115 Finally, it was submitted that her Honour should not have given weight to the fact that by November 2021 there was insufficient time to formulate or implement an equity rights issue. It was said that the correct question should have been whether there was time in October 2021 to implement an equity issue and that Enares' concern was that it should have been pursued with vigour from that earlier time. In support of this submission Mr Sulan relied on the circumstances which arose in Hanks v Admiralty Resources NL where the member sought and obtained inspection long after a decision had been made in circumstances which, so it was said, were less concerning than the present. However, in that case Gordon J had determined that there was a clear basis for investigation. The circumstances in which the Board's decision had been made raised questions about whether the directors had complied with their fiduciary duties when they did not entertain competing offers in relation to the subsidiary entity which was being sold. Here, the circumstances are quite different. There was no express or articulated basis for any apprehension that any legal wrong had been done. On the contrary, it would have been surprising if the Board did not pursue the debt refinancing strategy which generally maintained the status quo but, instead, attempted to have negotiated a rights issue with Enares despite the absence of any evidence that any better offer would be forthcoming.
116 In relation to the specific complaint that the Board should have pursued the rights offer earlier, it is to be kept in mind that the October Proposal required the approval of all members who held over 1% of the shares. That approval had not been forthcoming and the offer was withdrawn. No new proposal emerged until 12 November 2021, being after the Board had entered into the binding but conditional agreement in relation to the new notes. Even then, the November Proposal was indicative only and, even if it matured into an actual offer by Enares, it would have been conditional in any event. For the reasons referred to above there was nothing which required the Board to pause to pursue uncertain negotiations with Enares.
117 It follows that the alleged errors relied upon by Enares were either irrelevant or not made out on the material. It must also be said that the alleged errors, even if they were all made out, would not have affected the outcome. They do not alter the underlying premise that, as a matter of substance, the debt refinancing strategy was the only course open for the Board. Therefore, if the alleged errors vitiated the primary judge's conclusion, on this appeal they do not alter the conclusion that Enares has not established that it was acting in good faith and for a proper purpose.