Fantuz v Totem Road Pty Ltd

Supreme Court of NSW|2023-11-01|Before: Black J

Solicitors: Rockcliff Lawyers (Plaintiff/Respondent) Panetta Lawyers (Defendant/Applicant) File Number(s): 2023/171291

Judgment - EX TEMPORE (Revised 3 November 2023)

By Summons filed on 29 May 2023 the Plaintiff, Mr Fantuz, sought two forms of relief under ss 247A and 1324 of the Corporations Act 2001 (Cth) ("Act") respectively. The relief now sought by Mr Fantuz, at the hearing, has narrowed significantly, and I will refer to the narrower relief which he now seeks below. By Interlocutory Process filed 9 October 2023, in the nature of a cross-claim, the Defendant, Totem Road Pty Ltd ("Company") in turn sought relief seeking to require the sale of shares held by Mr Fantuz to the Company or its nominee ("Cross-Claim"). The form of relief that is sought by the Company has in turn been reformulated orally by Ms Lim, who appears for the Company, in the course of oral submissions and I will return to that reformulated relief below.

Affidavit evidence

The parties relied on several affidavits and on a series of documents exhibited to those affidavits in respect of the application. Mr Fantuz relied on his affidavit dated 29 May 2023, which referred to his shareholding in the Company, and the circumstances in which he initially ceased to be a director of the Company from June 2018 and then ceased to be an employee of the Company in April 2022. He had previously sold down some of his shares in the Company to reach his present level of a holding of 15 ordinary shares in the Company, comprising 7.5% of its shares on issue. He also refers to correspondence between the parties, in respect of a proposal that he sell his shareholding in the Company.
By a second affidavit dated 23 October 2023, in reply, Mr Fantuz addresses aspects of evidence led by Mr Garvan, who is a director of the Company, and particularly the extent to which Mr Fantuz had access to financial information concerning the Company in earlier years. There is a dispute as to that matter, which it is not necessary for me to decide. Even if Mr Fantuz had access to at least some financial information in earlier years, that has little to do with the matter which I need to determine, which is whether he now has a proper basis for seeking access to current financial information of the Company under s 247A of the Act so as to obtain expert assistance in respect of the valuation of his shares, and for the purposes of any negotiation as to the sale of those shares. The fact that Mr Fantuz may have had some access to financial information in the past would not provide an answer to the fact that any valuation of the shares in the Company at their current value could only be undertaken by reference to current financial information. There is, as I will note below, now no dispute as to the fact that he should be allowed access to such information, on an undertaking as to confidentiality, if the Company does not succeed in its Cross-Claim.
Mr Fantuz also addresses the circumstances in which he did not proceed with an earlier proposal for the sale of his shareholding, referring to his concerns as to whether he then had sufficient information to value that shareholding, and particular concerns in respect of a dealing with a trade mark relating to the Company's business. It is not necessary to determine any substantive question as to the dealing with that trade mark in order to determine this application, although it may be a matter to which valuers acting for the relevant parties would have regard in valuing the shares in the Company.
Mr Fantuz also relies on the affidavit dated 23 October 2023 of Mr Firth, who is a chartered accountant and business valuer, and indicates that he has expertise in expert forensic accounting consultancy and business valuation, and refers to some 20 years' experience in that field. Mr Firth indicates that he has read the Expert Witness Code of Conduct and agrees to be bound by it and indicates, in Annexure B to his affidavit, the categories of books regarding the Company to which he would need access in order to determine the value of its business. As events have developed, there is now no dispute that Mr Fantuz should be given access to those categories of documents if the Company does not succeed in its Cross-Claim.
As I noted in an ex tempore judgment dealing with the admissibility of the relevant paragraph of Mr Firth's affidavit, Mr Firth does not develop any substantial reasoning to support the proposition that the relevant categories are necessary for a valuation. However, those categories are such that it is self-evident that the relevant documents would be required in order to allow a valuation to be undertaken, so little by way of supporting reasoning was required. To put that proposition another way, to value a company (or shares in a company) which held or used trade marks, one would plainly need information as to which trade marks were held or used; if one was valuing a company which had lease agreements, one would plainly need copies of the lease agreements, to identify the rental that was payable and the terms of the leases that may increase or reduce the company's earnings and value; one would plainly need documentation as to related party loans and related party transactions, because they may either increase or decrease the valuation of the company; financial statements and management accounts are the most basic information that would be required for a valuation; tax returns are obviously relevant; budgets are relevant so far as they may inform the discount rate that would be adopted in respect of future cash flow, on a discounted cash flow valuation; and documents such as general ledger transaction reports and bank account statements are also relevant. In those circumstances, I readily accept Mr Firth's evidence as to the categories of documents which are required to prepare a valuation, again noting that there is now no dispute about them, if the Company is not successful in its Cross-Claim.
Mr Fantuz also read an affidavit of Ms Kalsy dated 23 October 2023, which related to the extent of his access to financial information at an earlier point. I have noted above that it is ultimately not necessary to decide that question.
The Company read the affidavit dated 9 October 2023 of its director, Mr Garvan, which also referred to Mr Fantuz's involvement in the Company and the circumstances in which he ceased to be a director and subsequently an employee of the Company. The Company does not rely on "bad leaver" provisions in the Letter of Agreement dated 2 December 2020 ("Letter of Agreement") on which it relies in its Cross-Claim. In those circumstances it is not necessary to determine, and I did not admit evidence concerning, questions of Mr Fantuz's performance as an employee of the Company, which are not relevant to the issues I need to decide.
Mr Garvan also addressed issues as to the Company's financial position and steps which it may in future need to take in respect of its business. I also need not address those matters, so far as they are matters which valuers retained by the Company or Mr Fantuz would each address in undertaking a valuation of the Company. Mr Garvan also addresses confidentiality issues in respect of Company information, but that has now been addressed by an undertaking offered by Mr Fantuz in respect of the categories of documents which he seeks. Mr Garvan also addresses the costs which he anticipates will be incurred in respect of preparing audited accounts, if the Court were to order it to do so, where Mr Fantuz had previously issued notices under s 293 of the Act requiring the production of audited financial reports and director's financial reports for the years ended 30 June 2022 and 30 June 2023. I broadly accept Mr Garvan's evidence, admitted with a limiting order under s 136 of the Evidence Act as submission, that there would be costs attached to the provision of audited reports. There is also some force in his view that those costs would be disproportionate, given the size of the Company, its turnover and the potential value of Mr Fantuz's shares, although I recognise that the value of those shares is yet to be determined by valuations undertaken by both parties. As events have developed, Mr Fantuz does not press the claim for relief on that basis, if he is successful in obtaining the orders that he seeks under s 247A of the Act.

The relief sought by Mr Fantuz under s 247A of the Act

As I noted above, the first aspect of the relief sought by Mr Fantuz is an order, under s 247A of the Act, authorising the inspection of documents, now limited to those recorded in Annexure B to Mr Firth's affidavit. As I also noted above, Mr Firth there expresses the view that access to those documents is necessary to allow him to value the business of the Company and, implicitly, value Mr Fantuz's shares in the Company which operates that business.
Mr Gauja, who appears for Mr Fantuz in the application, draws attention to the case law in respect of s 247A of the Act and there was no controversy between the parties as to the scope of the relevant principles in that regard. That section relevantly provides that, on application by a member of a company, the Court may make an order authorising that member to inspect books of the company, or authorising another person to inspect books of the company on a member's behalf. That section is expressly subject to the requirement that the Court may only make that order if it is satisfied that the member is acting in good faith and that the inspection is to be made for a proper purpose. Section 247B deals with certain ancillary orders that may be made in that respect. Mr Gauja submits, and I accept, that it would ordinarily be a proper purpose for such an application that a shareholder seek access to documents in order to undertake a valuation of his shares with a view to a sale of those shares: Tinios v French Caledonia Travel Service Pty Ltd (1994) 13 ACSR 658 at 661; Snelgrove v Great Southern Managers Australia Ltd [2010] WASC 51 at [66]. Mr Gauja relies on the fact that Mr Firth's evidence supports access to the relevant categories of documents as necessary to determine the value of Mr Fantuz's shareholding.
Mr Gauja recognises that the evidence suggests that Mr Fantuz and Mr Garvan, may no longer be on good terms, and rightly points out that the fact that the relationship between a company or its directors on the one hand, and a shareholder on the other has deteriorated is not a matter that will necessarily deprive the shareholder of a proper purpose, where one otherwise exists, for an application for inspection of relevant documents: Acehill Investments Pty Ltd v Incitec Ltd [2002] SASC 344 at [29]. No submission was ultimately made by Ms Lim that any failure of Mr Fantuz to proceed with the earlier negotiations in respect of the sale of his shares gave rise to a lack of good faith or an improper purpose. It seems to me that that proposition could not have been sustained, where Mr Fantuz explains any earlier failure to proceed with that sale by reference to his concerns as to the proper value of his shares, and the application that is now brought is directed to obtaining a proper valuation of those shares.
In the event, the Company now accepts that, subject to the result of its Cross-Claim, orders should properly be made for access to the relevant categories of documents on the basis of the confidentiality undertaking made by Mr Fantuz. That Cross-Claim will fail for the reasons noted below. In those circumstances, I will make the orders sought by Mr Fantuz for access to the relevant documents under s 247A of the Act.

Mr Fantuz's alternate application as to audit of financial reports

Mr Fantuz did not, if those orders were made, press his application for an order under s 1324 of the Act requiring the completion and delivery of audited financial reports and a director's report for the financial year ended 30 June 2022 or any extended application for the year ended 30 June 2023. That approach was a sensible one, because it is not apparent here that the preparation of audited financial reports would have added anything of real value to the provision of the documents which will now be provided to Mr Fantuz, for the purposes of allowing Mr Firth to undertake a valuation of Mr Fantuz's shares in the Company. If an auditor expressed a positive audit opinion, in respect of the Company's financial statements, it is likely that the valuer retained by Mr Fantuz would still make an independent assessment of the matters shown in those financial statements. If an auditor expressed a qualified opinion as to those financial statements, that would also likely not advance Mr Fantuz's position, because it would merely emphasise the need for any valuer that he retained to undertake the inquiries that a valuer would likely undertake in any event. In the context of a small proprietary company, where Mr Fantuz will obtain access to financial documents for the purposes of a valuation of his shares, and it is implicit that he may proceed with a sale of his shares at a proper valuation, there would have been real difficulty in establishing any utility in the preparation of audited accounts, and exposing the Company to what may well be wasted costs in that regard.

The Company's Cross-Claim

As I noted above, the Company initially sought, by way of cross-claim, an order that the parties agree a joint expert valuer to value Mr Fantuz's shares, or alternatively that the Court appoint a single expert to value Mr Fantuz's shares, and that Mr Fantuz do all things necessary to transfer his shares to a purchaser nominated by the Company, upon the Company paying the value of the shares determined by that expert. In oral submissions, Ms Lim reformulated the relief that the Company sought in respect of that Cross-Claim as follows: "1. Direct the parties confer on the identity of the parties' single expert for business valuation and the Letter of Instructions to that expert. 2. Declare that, on the proper construction of a Letter of Agreement signed 2 December 2020, Mr Fantuz is obliged to sell his shareholding in [the Company] for the amount determined by the parties' single expert."
This Cross-Claim depends on the proper construction of a Letter of Agreement signed by the relevant parties in early December 2020. Ms Lim submits, and I accept, that it is likely that that Letter of Agreement was drafted by lay persons, and I approach it on that basis. I proceed on the basis that the Letter of Agreement is to be construed as a commercial contract, but with regard to its somewhat informal character. I should say something further as to the applicable principles of construction, beyond the reference to them in my oral ex tempore judgment. In Australian Broadcasting Commission v Australasian Performing Right Assn Ltd (1973) 129 CLR 99 at 109, Gibbs J (as his Honour then was) observed that: "It is trite law that the primary duty of a court in construing a written contract is to endeavour to discover the intention of the parties from the words of the instrument in which the contract is embodied. Of course the whole of the instrument has to be considered, since the meaning of any one part of it may be revealed by other parts, and the words of every clause must if possible be construed so as to render them all harmonious one with another. If the words used are unambiguous the court must give effect to them, notwithstanding that the result may appear capricious or unreasonable, and notwithstanding that it may be guessed or suspected that the parties intended something different. The court has no power to remake or amend a contract for the purpose of avoiding a result which is considered to be inconvenient or unjust. On the other hand, if the language is open to two constructions, that will be preferred which will avoid consequences which appear to be capricious, unreasonable, inconvenient or unjust."
I also have regard to the High Court's observations as to the objective approach to construction in Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165; 211 ALR 342; [2004] HCA 52 at [40], Electricity Generation Corporation (t/as Verve Energy) v Woodside Energy Ltd (2014) 251 CLR 640; 306 ALR 25; [2014] HCA 7 at [35] and Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; 325 ALR 188; [2015] HCA 37 at [46]-[52], [59] and I proceed on the basis that construction should commence with the language used by the parties, although the Court may also have regard to objective surrounding circumstances. In Price (as executor of the estate of Price (dec'd)) v Spoor (as trustee) (2021) 391 ALR 532; [2021] HCA 20 at [27], the High Court again observed that an objective approach is applied in determining the rights and liabilities of a party to a commercial contract, by reference to its text, context and purpose, and "[t]he meaning to be given to its terms is determined by reference to what a reasonable business person would have understood those terms to mean".
Turning now to the Letter of Agreement, clause 2 refers to a previously completed transaction, recording that: "Fantuz has agreed to sell 7.5% of those shares [then held in the Company] to either [the Company] or any other third party nominated by [the Company] Board in consideration for $32,500. Fantuz shall be paid the $32,500 within 28 days of this agreement."
Clauses 3 and 5 of the Letter of Agreement then respectively provide that: "[the Company] or a third party nominated by [the Company] has the option to purchase Fantuz's respective remaining 7.5% shares in [the Company] at an agreed market value up until 12 November 2023 whereupon that option will expire... Any external valuation of the [C]ompany or the shares held by Fantuz and requested by Fantuz will be funded by Fantuz."
Ms Lim also submits that the Letter of Agreement should be construed, in its context, as enabling the appointment of an external expert to act as a single expert for the parties, if the parties have not reached agreement as to the value at which the shares should be sold. It seems to me, with respect, that that conclusion cannot be reached on the proper construction of the relevant clauses, read in the context of the Letter of Agreement as a whole. First, as I noted above, cl 3 of the Letter of Agreement refers to sale at an "agreed market value" rather than "market value" and that plainly contemplates that the market value which is the subject of that sale will be agreed between the parties. There is nothing that is commercially unreasonable about reading that clause in accordance with its terms, so as to provide for sale at an "agreed market value", as distinct from a market value determined by a third party. That provision would potentially be supported by an implied term that the parties must at least act in good faith in negotiations to agree the market value of the shares.
Clause 5 of the Letter of Agreement contemplates an external valuation of the Company for the shares held by Mr Fantuz, if requested by Mr Fantuz, and funded by Mr Fantuz. That clause is not superfluous, so far as Mr Fantuz might well wish to undertake such a valuation, or possibly wish to have the Company undertake such a valuation, prior to the sale of his shares. It has utility in making clear that, if Mr Fantuz wishes to undertake such a valuation, he rather than the Company must fund it. There is nothing in that clause, it seems to me, which supports the concept that that valuation will be undertaken as a single expert valuation, as distinct from a valuation requested by Mr Fantuz for Mr Fantuz's benefit and at Mr Fantuz's cost.
That reading of that Letter of Agreement is, it seems to me, consistent with the approach adopted by Darke J to the construction and the enforceability of provisions of a somewhat similar character, in Shogroup Hotels Pty Ltd v Harris Street Holdings Pty Ltd [2022] NSWSC 1119, to which I drew the parties' attention. The clause in issue in that case provided that the parties would "discuss and agree" upon an additional rent reduction, and that agreement also included dispute resolution provisions. His Honour there recognised that the agreement which was before him should be construed in accordance with the well-established principles that apply to the construction of written commercial agreements, and referred to the several cases which I have referred to above. His Honour addressed the question whether that clause was unenforceable as an "agreement to agree", referring to Booker Industries Pty Ltd v Wilson Parking (QLD) Pty Ltd (1982) 149 CLR 600 at 604 and United Group Rail Services Ltd v Rail Corporation New South Wales (2009) 74 NSWLR 618; [2009] NSWCA 177 ("United Group Rail Services") at [56]. His Honour also referred to the possibility that a clause might not be unenforceable as an "agreement to agree" if it were construed as an obligation to negotiate in good faith: United Group Rail Services at [74] (Allsop P, with whom Ipp and Macfarlan JJA agreed).
Here, applying the principles of construction to which I have referred above, it seems to me that the clauses of the Letter of Agreement to which I have referred and that agreement as a whole do not support the relief sought by the Company, whether in its original form or in the form articulated by Ms Lim in submissions. First, as I have noted above, there is nothing in the Letter of Agreement which provides for the appointment of a single expert, as distinct from contemplating the possibility that Mr Fantuz may undertake an external valuation of his shares in the Company at his own cost, or possibly that the Company may undertake such a valuation if requested by Mr Fantuz to do so, also at Mr Fantuz's cost. There is nothing in the agreement which contemplates that the result of that valuation will be binding upon Mr Fantuz, or indeed upon the Company, although it may well inform any negotiation as to the "agreed market value" to which cl 3 refers. It seems to me that cl 3 would arguably be enforceable, when reinforced by an obligation to negotiate in good faith towards an agreed market value, although it is not necessary to reach a final decision in that respect. However, that clause cannot support the relief sought by the Company, to require Mr Fantuz to sell as the result of the suggested single expert valuation, not least because that would not give effect to the concept of "agreed market value", if the result of that valuation was one with which Mr Fantuz, or the Company, did not agree.
I recognise that, as Ms Lim submits, that has the consequence that the option granted by the Letter of Agreement may be less valuable to the option holder, because it can only be exercised if there is agreement as to the market value of the shares. That does not, however, have the consequence that the option is worthless, or incapable of having commercial effect, because it contemplates a right to acquire Mr Fantuz's shares at an agreed market value, which would be informed by any external valuation of the Company's shares as contemplated by cl 5, and potentially reinforced by the obligation to negotiate in good faith to which I have referred. It is not impossible that there would be circumstances in which a refusal by Mr Fantuz to sell at a particular price, as determined by such a valuation, would amount to a failure to negotiate in good faith so as to give rise to a breach of that clause and any implied term that supports it.
For these reasons, I cannot make the orders sought by the Company in respect of the Cross-Claim.

Orders and costs

Accordingly, I make orders in accordance with the form of orders proposed by Mr Fantuz, omitting paragraph 1 which dealt with the provision of audited financial reports and omitting paragraph 5 which was directed to the position if those orders were made by consent. I also order that the Interlocutory Process dated 9 October 2023 filed by the Company be dismissed.
Counsel have referred to the possibility that it will be necessary to have further submissions as to costs, and possibly a determination as to costs in Chambers, and I will allow that opportunity if they require it. Having said that, it seems to me, by way of preliminary view, that there has been a mixed result in this case. Mr Fantuz has not pressed his application for audited accounts, which was pressed until the hearing today; there appears to have been at least some degree of consensus as to the orders sought under s 247A of the Act, as to which the Mr Fantuz has succeeded, from an earlier point; and the Company has failed in its Interlocutory Process. That, it might have been thought, was a circumstance in which it was likely that the Court would make no order as to costs, on the basis that the mixed result is best reflected by that position. There is also a real risk that any order that provides for the assessment of costs of separate aspects of the proceedings that the parties won or lost - for example, that Mr Fantuz pay the Company's costs of the claim for audited accounts which he did not press and the Company pay Mr Fantuz's costs for the Interlocutory Process, which failed - will expose both parties to wasted costs in a complex assessment, where an assessor would need to attribute costs as between those aspects of the proceedings.
I note that the parties, or at least Mr Fantuz, did not accept that preliminary view and I therefore made directions to allow written submissions and the provision of a document bundle as to costs, with the question of costs to be determined in Chambers.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 09 November 2023

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