Huang v Wang

Nature of the proposed proceedings and affidavit evidence

1. The Court here has the advantage of a draft Commercial List Summons, proposed to be filed by Mr Solsky on WCH's behalf in the Commercial List, and a draft Commercial List Statement, both of which identify the case which is sought to be brought on WCH's behalf in straightforward terms. The draft Commercial List Summons indicates that relief is sought in the nature of a declaration that WCH is the owner of all intellectual property rights and interests owned or held by Ms Sacher in connection with a specified book, and an order restraining Ms Sacher from purporting to exercise such rights and interests other than as provided for in an IP Transfer Agreement (as defined in the proposed Commercial List Statement). Alternative relief is sought by way of estoppel or a claim for misleading and deceptive conduct.
2. The draft Commercial List Statement in turn outlines, in a brief pleading of the material facts, Ms Sacher's role as the author of a book published in 2017, the incorporation of WCH to hold intellectual property associated with that book, and a pleaded agreement for the assignment by Ms Sacher to WCH of specified intellectual property rights. The terms of that agreement are then further identified. I will note below that the agreement was not executed although it is not necessary to address the reasons that may have occurred. The proposed Commercial List Statement identifies a dispute, which plainly now exists, as to the fact of, or at least the extent of, the transfer of Ms Sacher's rights and interests in the relevant intellectual property to WCH.
3. Alternatively, an estoppel case is pleaded, by reference to a claim that WCH and Ms Sacher have conducted themselves on the basis that WCH was the owner of the relevant intellectual property, including reflecting the value of that intellectual property in financial reports of WCH, and there recording the amount paid to Ms Sacher as a credit to her loan account in respect of the assignment of those intellectual property rights to WCH, and WCH's incurring business expenditures in order to commercialise those intellectual property rights. Alternatively, a claim for misleading and deceptive conduct is put, seeking to recover compensation for, relevantly, the business expenses incurred by WCH on the basis that it owned the intellectual property and, possibly, loss incurred in dealing with a third party in respect of a potential arrangement with WCH which involved those rights.
4. With that background, Mr Solsky relies, in the application for leave, on his affidavit dated 5 October 2023, which refers to Ms Sacher's authorship of the book, and identifies the dispute which has now arisen as to the suggested assignment by Ms Sacher to WCH of the relevant intellectual property rights. Mr Solsky outlines the circumstances of his involvement with, and his family's investment in, WCH and recognises that other persons have also invested as shareholders in WCH, notwithstanding that Ms Sacher remains the majority shareholder of WCH. Mr Solsky there refers to negotiations for the sale and assignment of particular intellectual property from Ms Sacher to WCH, and the preparation of an "IP Transfer Agreement" as to which both Ms Sacher and WCH, or interests associated with Mr Solsky, had legal representation. It appears that agreement was reached as to the terms of the relevant documentation. Mr Solsky then indicates why, to his understanding, Ms Sacher did not execute the relevant document. It is not necessary for me to reach a finding as to that matter in order to determine this application and it is preferable that I not do so where it may be in issue in any proceedings brought by WCH against Ms Sacher.
5. Mr Solsky's evidence, admitted with a limiting order under s 136 of the Evidence Act 1995 (NSW) as a submission, is that WCH proceeded on the basis that the intellectual property was transferred by Ms Sacher to it. Importantly, he refers to WCH's profit and loss statement for the year ended 30 June 2020 which records an increase in the value of its intangible assets, in an amount that is plainly referable to the value attributed to the rights to be transferred by Ms Sacher to WCH, and to journal entries which recorded a debit to an account titled "Intellectual Property" and a credit to Ms Sacher's loan account, such that she obtained the consideration referable to the alleged transfer of the intellectual property to WCH.
6. Mr Solsky also outlines steps taken to establish WCH's business, which would be relevant to establish aspects of the Commercial List proceedings, but as to which it is not necessary for me to reach findings for the purposes of this application. He refers to a subsequent dispute with Ms Sacher regarding the fact of, or at least the scope of, the assignment of the intellectual property rights from Ms Sacher to WCH, which arose in circumstances that WCH was negotiating an arrangement with a third party childcare operator in order to commercialise aspects of the intellectual property. It appears that Ms Sacher has subsequently taken up a role with a competing childcare operator to that third party. Mr Solsky outlines the process of negotiations, and preparation of documentation with that third party, which included arrangements to deal with licensing of intellectual property rights from Ms Sacher to that third party. That process appears to have generated a wider dispute between the parties, addressed by documents tendered by Ms Sacher in this application, as to the reasons that the arrangement with the third party failed. I will explain below why it seems to me that that matter is ultimately of little significance for this application, where the evidence supports a finding that the proceedings are in WCH's best interests, irrespective of the reasons that those negotiations with that third party failed.
7. An exhibit to Mr Solsky's affidavit includes a current company search for WCH, which records the fact that Mr Solsky and Ms Sacher are the two current directors of WCH, a matter which has contributed to a deadlock as to whether the proceedings against Ms Sacher should be commenced by WCH. The company search records Ms Sacher's shareholding in WCH, which is a majority holding, and that has the consequence that other means to authorise the commencement of the proceedings, for example, by removing Ms Sacher as a director, are likely not readily available. The exhibit includes WCH's financial statements and the journal entries which record the financial transactions connected with the assignment, or proposed assignment, of the intellectual property from Ms Sacher to WCH to which I referred above. Attention was drawn, in the course of submissions, to the fact that the financial statements were signed by both Ms Sacher and Mr Solsky, by electronic means, a matter on which WCH would likely rely in respect of any estoppel claim in the proposed proceedings.
8. The exhibits to Mr Solsky's affidavit also include correspondence between Mr Solsky and Ms Sacher, as the dispute developed as to the extent of the assignment of intellectual property rights from Ms Sacher to WCH, and that correspondence makes clear that the dispute extended to questions as to, for example, whether the intellectual property rights that were assigned extended to copyright in the book and to any social media presence connected with the book, or possibly with Ms Sacher's activities generally. The exhibit also includes documentation relating to the transaction with the third party, on which Ms Sacher places substantial weight, to contend that that transaction with that third party failed, not because of any question as to whether the intellectual property rights were then assigned by Ms Sacher to WCH, but because the third party sought a wider restriction on Ms Sacher's development of platforms in respect of nutritional information than Ms Sacher was prepared to provide.
9. The exhibit also contains correspondence from Mr Solsky's solicitor, by which he sought Ms Sacher's consent to the commencement of the proposed proceedings, by way of passage of a board resolution authorising their commencement, supported by a draft Commercial List Statement for the proceedings. By letter dated 10 May 2023, Mr Solsky's solicitor gave notice of the proposed application for leave to bring derivative proceedings, for the purposes of section 237(2)(e) of the Act. By letter dated 19 May 2023, Ms Sacher responded, at length, taking issue with a number of the premises of the proposed proceedings, denying the basis of the claim identifying complaints in respect of Mr Solsky's involvement with WCH, and explicitly threatening other proceedings in that respect. Obviously enough, as is common ground between the parties, Ms Sacher does not propose to authorise the commencement of the proceedings by WCH against her, in her capacity as a director of WCH.
10. Ms Sacher in turn tendered correspondence between herself and the third party which was negotiating the potential transaction, debating the scope of the intellectual property rights which would be obtained by that third party, and the extent to which Ms Sacher would be required to narrow her future activities as a nutritionist to accommodate those rights.
11. By a second affidavit dated 4 December 2023, Mr Solsky addressed the question of steps that would be taken to meet any adverse costs order against WCH. He extended an offer of an undertaking made in his first affidavit that he would be personally liable for WCH's legal costs of the proceedings and would indemnify WCH with respect to cost orders made against it, and offered a further undertaking on behalf of the trustee of a family trust. While Ms Sacher raised a question, in submissions, as to the adequacy of these undertakings, there is no reason to doubt Mr Solsky's evidence as to his and the trust's capacity to meet those undertakings and no evidentiary basis for any genuine dispute as to Mr Solsky's or the trustee's capacity to meet those undertakings. That is not, of course, to assume that Ms Sacher has any legal onus to establish any matter in that respect.
12. Ms Sacher led no affidavit evidence in the proceedings, and took no issue, for example, as to the question whether the claim raised a serious question to be tried, but indicated her intent to defend the proceedings if they were ultimately brought. So far as there are disputed issues which I need to address, I infer that Ms Sacher's evidence as to those disputed issues would not have assisted her.

Submissions and determination

1. The parties advance detailed submissions, and I have had regard to those submission, although it is not necessary to address them at length.
2. The first criteria for leave to bring the proposed proceedings is that it is probable that WCH will not bring the proceedings, absent the grant of leave. That matter was not contested here, and it is plain from the evidence that WCH cannot bring the proceedings, without leave, where its directors, Mr Solsky and Ms Sacher, are deadlocked as to that matter and Ms Sacher is the majority shareholder and therefore has control of appointments to WCH's board.
3. The second criteria for a claim for the grant of derivative leave is that Mr Solsky is acting in good faith in bringing the proposed claim. Again, there is no contest as to that matter here. Having said that, it seems to me that the Court can readily conclude that Mr Solsky is acting in good faith. Relevant factors include Mr Solsky's belief that a good cause of action exists and has a reasonable prospect of success, and the absence of any collateral purpose that would amount to an abuse of process, and it is generally easier to satisfy that requirement where an application is made by a person who has a real economic interest in the company. Here, the Court can conclude that Mr Solsky believes that a good cause of action exists and has a reasonable prospect of success because of the efforts that have been devoted to formulating the claim in the draft Commercial List Summons and draft Commercial List Statement, and because of the steps which have been taken to bring this application. Nothing in the proposed formulation of WCH's claim raises any doubt as to that question. Here, Mr Solsky, or at least Mr Solsky's family members, have an economic interest in WCH and that also supports a finding, which is not contested, that the proceedings are brought in good faith.
4. It is convenient next to deal with the fourth criterion in section 237(2) of the Act, whether there is a serious question to be tried. I bear in mind that that test requires the application of the same test as applied by the Court in determining whether to grant an interlocutory injunction: Swansson at [25]; Wonga Pastoral at [57]. Mr Balafoutis, with whom Ms Ernst appears for Mr Solsky, made detailed submissions as to whether there is a serious question to be tried. Ms Sacher did not contest the existence of a serious question to be tried, although Mr Collins, who appears for her, indicated that she would wish to make further submissions if that question were to be determined in this application. It seems to me that, where that question has not been contested, it is preferable that I do not address that issue in any detail, since a judge in any proceedings brough by WCH will ultimately need to form a view as to the merits of the proceedings. It is sufficient that I note that there is no reason, having regard to the form of the draft Commercial List Statement and the evidence to which I have referred above, to doubt the correctness of the basis on which the parties proceeded, that a serious question to be tried is established.

Whether the proceedings are in WCH's best interests

1. The issue that remains in dispute between the parties, which I should address at somewhat greater length, is the question whether the proposed proceedings are in WCH's best interests. In Swansson at [55]-[60], Palmer J noted that this requires that the Court be satisfied that the proposed action actually is, on the balance of probabilities, in the company's best interests and that, in order to prove that leave is in a company's best interests, an applicant should generally give evidence of the character of the company in the sense of the nature of its operations and its business so that the effects of the proposed litigation on the conduct of the company's business may be appreciated; whether there are other means of obtaining the same relief; and the proposed defendant's ability to meet at least a substantial part of any judgment in favour of the company, so that the Court may ascertain, whether the action is of practical benefit to the company.
2. Here, Mr Solsky has addressed these matters in his affidavit evidence. That evidence indicates that WCH now has limited business activities, so far as Mr Solsky is funding it to maintain its existing website, but the prospect of third party transactions has been limited by the effect that the assignment of the intellectual property from Ms Sacher to it has not been executed. As I noted above, Mr Solsky also led evidence as to the dealings with the third party in respect of the commercialisation of the intellectual property. That provoked a substantial dispute, addressed at length by Mr Collins in submissions, as to the reasons that the transaction with the third party failed. It seems to me that, as I noted above, that dispute is ultimately of little significance for the matters which I have to decide.
3. Here, the evidence indicates that the steps necessary to assign intellectual property rights, having a specified scope, from Ms Sacher to WCH, had substantially advanced, to the point that there was agreement between the parties as to the terms of the documentation, although it was not executed for reasons that I do not need to determine. The evidence indicates that the financial aspects of that transaction were implemented, by WCH reflecting the value of the intellectual property in its financial reports, and by allowing Ms Sacher a credit on her loan account, which reflected the value of the intellectual property which she was to transfer to WCH, a financial benefit to Ms Sacher that was real.
4. As matters stand, it appears that WCH has paid for, but not obtained, the value of the assignment of that intellectual property. In those circumstances, as Mr Collins fairly accepted, the Court could generally conclude that it was in the interests of WCH to bring proceedings to recover an asset which it had paid for, because ordinarily one would infer that asset could be put to productive use in the future. Here, that position is reinforced by the fact that the intellectual property is at the core of WCH's business purpose and, without ownership of it, it is difficult to see that WCH can develop its business in any productive way.
5. Mr Collins responds to that apparently straightforward proposition by a number of subtle responses. The first is that Ms Sacher is the majority shareholder of WCH, and the founder and creator of the relevant brand, and he submits that it is not in WCH's best interests to be in dispute with its majority shareholder, its founder and the creator of the relevant brand and, further, the third parties who may deal with WCH may be deterred from doing so by the fact of that dispute. I accept, of course, that generally speaking it would be preferable that WCH were not in dispute with Ms Sacher; that the fact of that dispute may ultimately be destructive of value both for WCH and Ms Sacher; and it may ultimately prevent both WCH and Ms Sacher from dealing with third parties in respect of the relevant rights.
6. Having said that, it seems to me that that proposition does not go very far. Many companies have founders and majority shareholders and it does not follow that the undesirability of a dispute with a majority shareholder or a founder is such that a company should not enforce its legal rights against that majority shareholder or founder where to do so will preserve value in the company. Here, it seems to me that there is a strong case that, without action by WCH, it will be left without the intellectual property rights for which it paid Ms Sacher, and that it can be properly be found to be in its best interests to bring that action so as to obtain those rights, even if that is to the detriment of its relationship with Ms Sacher or causes difficulties with third parties in due course. To put that proposition differently, it is hard to see that WCH's best interests are served by accommodating the interest of its founder and majority shareholder, leaving itself without the intellectual property that it has paid for, where that will bring it no closer to any opportunity to commercialise that intellectual property with or without Ms Sacher's assistance.
7. A further, and more complex submission, put by Mr Collins, was that the transaction with the third party did not fail by reason of any issue as to assignment of the intellectual property rights, or the fact that that assignment had not been completed, but because of a question as to the wider commitments which were sought from Ms Sacher as to the extent to which she would develop competing platforms, and Ms Sacher's unwillingness to give a wider commitment in that respect. As I have noted above, it seems to me that it is not necessary to reach detailed findings as to the basis on which that transaction with that third party failed, or whether that transaction with that third party could have succeeded in other hypothetical circumstances, in order to determine this application.
8. Let it be assumed, for the sake of the argument, that that was the reason that the transaction failed; and that as the correspondence suggests, that third party would have gone a substantial way to accommodate Ms Sacher, but ultimately, Ms Sacher was not able to, or willing to, restrict her activities to the extent that third party required to preserve the value of the assets that it sought to acquire in the transaction with WCH. It seems to me that that proposition does not contradict a finding that, as I have noted above, WCH's only ability to realise value in its business arises from acquisition of the intellectual property rights which it has paid for, and it is not to the point that those rights may then be less valuable if WCH and third parties with which it deals cannot also obtain other concessions from Ms Sacher. It is also not to the point that the particular third party may then not proceed with a further transaction, although Mr Solsky, has indicated his hope, or expectation, that it may do so, absent wider concessions from Ms Sacher.
9. These matters are not to the point because, returning to the fundamental proposition which I noted above, WCH is likely better off with an acquisition of the intellectual property rights which it has paid for than without that acquisition, in circumstances that it appears that is has no opportunity to develop its business without that acquisition. For these reasons, it seems to me that the close analysis undertaken by Mr Collins of the dealings with the third party, and of the positions which it took and Ms Sacher took through a lengthy negotiation process, and the implicit invitation for me to assess the reasonableness of those positions, is not to the point. Findings as to those matters would not contradict the finding that I reach on narrower grounds that the commencement of the proceedings is in WCH's best interests, notwithstanding that it plainly may have disadvantages so far as WCH's relationship with Ms Sacher as its major shareholder is concerned, and indeed so far as the public profiles of both WCH and Ms Sacher are concerned.
10. There was here no contest as to the fact that notice was given to Ms Sacher of the intent to commence the claim, for the purposes of section 237(2)(e) of the Act.

Orders

1. For these reasons, I am satisfied that, on noting the undertakings that are offered by Mr Solsky as to his indemnity to WCH and to procure an indemnity from the associated trustee for WCH, in respect of the legal costs of the proceedings and any costs order made against WCH in the proceedings, leave will be granted to Mr Solsky to bring the proceedings on behalf of WCH, effective from the receipt of those undertakings.
2. The orders initially proposed by Mr Solsky adopted the common position, in applications of this kind, of reserving the question of costs to await the outcome of the proceedings for which leave is sought. Mr Balafoutis foreshadowed that a different approach may be pressed in oral submissions, although it was not immediately apparent that that different approach was likely to be prospective. While I indicated that I would hear the parties to the extent that they sought to be heard in that regard, Mr Balafoutis subsequently did not press any different approach as to costs.
3. I note the following matters and make the following orders:
4. The Court notes that the plaintiff undertakes to pay the first defendant's costs of the proceedings referred to in paragraph 3 below, and to indemnify it in respect of any costs orders made against it in those proceedings.
5. The Court notes that the plaintiff undertakes by 5pm on 8 December 2023 to procure an indemnity from Danlay Holdings Pty Ltd as trustee for the Danlay Family Trust to pay the first defendant's legal costs of those proceedings and to indemnify the first defendant with respect to any costs orders made against it in those proceedings. THE COURT ORDERS THAT:
6. Upon the provision to the defendants of a copy of the indemnity referred to in paragraphs 1 and 2 above, leave be granted to the plaintiff to: (a) file a Summons and Commercial List Statement substantially in the form annexed to the Originating Process dated 11 October 2023 in the name of the First Defendant; and (b) bring those proceedings on behalf of Wholesome Child Holdings Pty Ltd under s 237 of the Corporations Act 2001 (Cth).
7. Costs reserved pending a final determination in the Commercial List of the Supreme Court of the proceedings referred to in paragraph 3, or until further order.
8. The exhibits be returned.

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: 08 December 2023