Johnstone v Hastings Fund Management Limited [2003] VSC 191

[2003] VSC 191

Interlocutory injunction - Shareholders' Agreement - Construction of Agreement - Threatened breach by termination of employment of Chief Executive Officer - Relief granted

2. By summons filed in this Court on 12 May 2003, the three plaintiffs, Mr P.J. Johnstone, First Green Park Pty Ltd and Tino Spin Pty Ltd, seek interlocutory relief against Hastings Fund Management Ltd and seven other defendants. The essential relief sought is an interlocutory injunction restraining the conduct of a meeting proposed to be held at 10.00 am on 14 May 2003, or of any other meeting, at which a resolution to terminate the plaintiff's employment, that is, Mr Johnstone's employment, as Chief Executive Officer of Goodstone International Pty Ltd is proposed for the approval of directors in accordance with clause 6.4 of the Shareholders' Agreement. Goodstone International Pty Ltd ("Goodstone") is the eighth defendant. An originating motion seeking like injunctive relief, and declarations, was also filed on 12 May 2003.

5. The matter came on before Coldrey J on 13 May 2003 and, as a consequence of an undertaking by the first defendant that it would procure an adjournment of the meeting of the board until 2.15 pm today, 28 May, the matter was adjourned over with directions by his Honour.

8. The matter thus came before me yesterday. I had the benefit of comprehensive submissions by Mr O'Callaghan of counsel for the plaintiffs and by Mr Archibald of Queen's Counsel and Mrs Marks for the first defendant. There was no appearance for the other seven defendants.

11. Mr Johnstone is the Chief Executive Officer of Goodstone.

14. Essentially the plaintiffs say that, unless restrained, the first defendant (whom I shall call "HFM"), which holds only 27% of the shares in Goodstone, will conduct a meeting of the board of Goodstone with a quorum of which, so HFM asserts, its sole director may terminate the employment of Mr Johnstone as CEO.

17. The first defendant says that it is entitled indeed to that consequence by reason of clause 6.4 of the Shareholders' Agreement. The pivotal question is the proper construction of the Shareholders' Agreement, and also the balance of convenience. The Shareholders' Agreement is PJJ3 exhibited to the first affidavit of Mr Johnstone, being of 12 May 2003.

20. This is a case of enforcement of a shareholders' agreement, not a case of enforcement of a contract of employment.

23. The relevant factual material is deposed to in a number of affidavits and exhibits thereto. They are of Mr P.J. Johnstone, the first plaintiff, of 12 and 23 May 2003 (the first and second affidavits) and of Mr T.M. Poole, associate director of the first defendant of 20 May and 21 May 2003 (the first and second affidavits). Mr Poole also has been a director of the eighth defendant since 5 April 2001. Exhibited to Mr Poole's second affidavit is Exhibit TMP1 marked "confidential exhibit". Because of the conclusions I shall come to, it is unnecessary here to rehearse in any detail the contents of that confidential exhibit.

26. Drawing upon the affidavit material, including the exhibits, the essential background to this application is this. Mr Johnstone is the Chief Executive Officer and a director of the eighth defendant, Goodstone. Goodstone is the parent company of a group of companies known as the Integrated Packaging Group ("IPG"), which group carries on business as a manufacturer of polyethylene film. Mr Johnstone and his family hold 33.5% of the shares in Goodstone and he says he has the support of the directors representing 66.6% of the shares. The first defendant holds 27% of the shares in Goodstone

29. Goodstone is an Australian private company, being the parent of the IP Group. That group is a global manufacturer of industrial and agricultural stretch film and a leader in stretch film technology. The IP Group has manufacturing plants in Australia, New Zealand and Ireland. The IP Group was originally formed in 1982 as a partnership between the first plaintiff, Mr Johnstone, and the fifth defendant, Mr K.N. Good.

32. In April 2001, HFM, on behalf of Hastings Private Equity Fund, and the second defendant, Seafirst Australia Pty Ltd, invested $27.5m. for a 22.28% holding in Goodstone, in the form of fully paid ordinary shares. In about September 2000, HFM commenced discussions with Mr Johnstone and Mr Good in relation to its proposed investment. On 5 April 2001, a Share Subscription Agreement was entered into between the relevant parties, and also on 5 April 2001 the critical agreement, the Shareholders' Agreement, was entered into between the parties. The documents are exhibited to the first affidavit of Mr Johnstone. There are 12 parties to the Shareholders' Agreement and eight defendants to the present proceedings, all but one of whom (irrelevant for this purpose) are parties to the Agreement. There are currently six directors of Goodstone. Its chairman is Mr R.J. Magowan. The HFM director as defined by the Agreement is Mr T.M. Poole.

35. Commercial transactions occurred between the parties, as variously set out in paragraphs 11 to 22 of Mr Johnstone's first affidavit and in paragraphs 40 to 72 of Mr Poole's first affidavit. The first defendant became dissatisfied with Mr Johnstone's performance as CEO of Goodstone and now seeks his removal from that position. That is what brings the parties before this Court.

38. On 16 April 2003, Mr Johnstone received a fax from Mr Poole and Mr D.E. Leary, directors of Goodstone, entitled "Notice of Board Meeting", and which is exhibited as PJJ7 to Mr Johnstone's first affidavit. Under the heading "Provisional Agenda", the following appears in that notice:

"For the purpose of clause 5.6(c) of the Shareholders' Agreement, the provisional agenda for the meeting is as follows: 1. Open meeting. 2. Confirm quorum in accordance with clause 5.8 of the Shareholders' Agreement. 3. Propose the following resolution for the approval of Directors entitled to vote on it in accordance with clause 6.4 of the Shareholders' Agreement, by a Special Majority Decision (as defined in the Shareholders' Agreement): `That: (a) in accordance with clause 11.1 of the Employment Deed between the company and Peter Johnstone dated 29 March 2001, Peter Johnstone's employment be terminated as soon as practicable following the meeting by paying Peter Johnstone an amount of remuneration in lieu of three months' notice and in any event such that his employment terminates by no later than one week after this resolution has been passed; and (b) John Magowan be authorised to give Peter Johnstone notice of termination, to do all other things necessary to effect termination of Peter Johnstone's employment, and to do anything incidental to such termination, in accordance with the Board's resolution under paragraph (a).' "

Mr Magowan is as I have said the chairman of the Goodstone board.

43. Mr Johnstone immediately instructed his solicitors to act on his behalf in relation to that notice of meeting. A notice of dispute was provided. Correspondence passed between Messrs Middletons on behalf of the plaintiffs and Messrs Freehills on behalf of the first defendant.

46. The meeting of the board was in fact held on 7 May 2003. Mr Johnstone was not present at that meeting. The minutes are exhibited as PJJ11 to his first affidavit. The minutes record that because no quorum was present the chairman advised that the business would be adjourned pursuant to clause 5.9 of the Shareholders' Agreement to 10 a.m. on 14 May 2003. The minutes further noted:

"Chairman noted that the agenda of the adjourned meeting would be the same as the agenda proposed in the notice meeting from Messrs Poole and Leary dated 16 April 2003."

On 7 May 2003, Mr Johnstone received a notice as to that proposed next meeting, exhibited as PJJ12 to his first affidavit. That brings the history of the matter immediately to the proposed meeting.

51. The first affidavit of Mr Poole, at paragraphs 18 to 24, sets out what he deposes were the circumstances of the parties entering the Shareholders' Agreement. However, I consider the Agreement itself is plain and meaningful on its face and therefore I do not have recourse to the circumstances there deposed by Mr Poole, nor to their rebuttal by Mr Johnstone in his second affidavit at paragraphs 4 to 5.

54. It is to a meeting of the board of directors of Goodstone, the eighth defendant, that these proceedings are directed, for it is at that meeting that a resolution is proposed to terminate Mr Johnstone's retainer by Goodstone as its CEO. The claimed efficacy of that meeting to that end derives from the following. There are six directors of Goodstone: the Chairman, Mr R.J. McGowan, here the sixth defendant; the first plaintiff, Mr Poole; Mr K.N. Good, here the fifth defendant; Mr D.E. Leary; and Mr D.J. Calvert-Jones. Mr Poole is the HFM director of the first defendant under clause 5.2(a) of the Shareholders' Agreement. As I have stated, the meeting of the board of directors of Goodstone of 7 May 2003 lapsed for want of a quorum. The chairman advised that the business would be adjourned pursuant to clause 5.9 of the Shareholders' Agreement to a meeting at 10 a.m. on 14 May 2003. By clause 5.9, where any meeting of the board is adjourned for want of a quorum, providing that the HFM director is present at the adjourned meeting, any directors in attendance shall constitute a quorum. Thus the meeting of 14 May, now to be held today because of its adjournment as agreed before Coldrey, J. on 13 May, is likely to be Mr Johnstone's Waterloo as the CEO, unless restrained by this Court. The concatenation of these circumstances means, the plaintiffs say, that, unless restrained, HFM, which holds only 27% of the shares in Goodstone, will, with a quorum of one, terminate the employment of the CEO - despite the clear terms of the Shareholders' Agreement.

57. I thus turn to the basal document for the determination of this application, the Shareholders' Agreement, Exhibit PJJ3 to the first affidavit of the first plaintiff, for it is the construction of this document which essentially determines the outcome of this application for an interlocutory injunction.

60. Under clause 7.2(a) of the Agreement, the following is provided:

(a) will be appointed by the board by a special majority decision and may only be removed by the board by a special majority decision."

The CEO is defined by clause 1 as follows:

"Chief Executive Officer means the chief executive officer for the time being of the company and the initial Chief Executive Officer will be Johnstone."

"Special majority decision" is also defined by clause 1, which in relevant part states:

"Special majority decision means a decision, authorisation or approval that is made or given by: ... (b) a resolution at a board meeting passed with the approval of directors attending and entitled to vote on that resolution at that board meeting, and who together represent shareholders who hold not less than 85% of the represented share capital."

"Represented share capital" is defined in clause 1 as follows:

"Represented share capital means, in respect of a resolution of a board meeting, that part of the share capital which is held by shareholders who are entitled to appoint a director to the board under clause 5, and which director is entitled to attend and vote on that resolution at that board meeting."

Schedule 5 is headed "Critical Business - Special Majority Decisions", and, in clause 17 of that schedule, states:

"The appointment or removal of the Chief Executive Officer of the company."

74. Clause 7.2(b)(iii) of the Shareholders' Agreement provides:

"The Chief Executive Officer will have the power and authority to manage the company ... (iii) subject to the approval powers of the board under clause 6.3."

Clause 6.3 provides that the items listed in Schedule 5 (and thus including dismissal of the Chief Executive Officer) require approval of the board by Special Majority Decision. That Clause may be contrasted with the next succeeding clause, Clause 7, which provides that termination of the contract of employment of a Manager

"may be made by a resolution of the Board, in which only the Chairman and the HFM Director are entitled to vote on the resolution."

80. The plaintiffs rely upon the provisions I have cited and the plain meaning of them: Mr Johnstone is defined to be CEO and the CEO can only be removed by a Special Majority Decision of the board.

83. The first defendant commences from a different point, and follows a different pathway, in its construction of the applicable terms of the Shareholders' Agreement. The first defendant commences not with clause 7.2, the Chief Executive Officer clause, but clause 6.4, the termination of Managers' employment clause. By clause 6.4 is provided:

"Any decision by the company to terminate the contract of employment of a Manager may be made by a resolution of the board in which only the chairman and the HFM director are entitled to vote on the resolution."

By clause 6.5, provision is made for certain consequences

"(i)f a Manager ceases to be an employee of any group company for any reason other than ...

(b) pursuant to clause 6.4 ..."

'Manager' is defined by clause 1 as follows:

"'Managers' mean each of Peter James Johnstone and Kerry Neil Good and 'Manager' means either of them."

The first defendant further relies upon part of the character of the Chief Executive Officer as set forth in clause 7.2, where, in 7.2(b) is provided:

"The Chief Executive Officer will have the power and authority to manage the company ..."

93. The first defendant relies on the provisions I have cited and the plain meaning of them: Mr Johnstone is defined to be a manager, and the contract of employment of a manager may be terminated by a resolution of the Board in which only the Chairman and the HFM Director are entitled to vote on the resolution. It is just such a resolution which is proposed for this afternoon.

96. Mr Archibald for the first defendant relied upon the references to management in relation to the position of Chief Executive Officer - the very heading to Clause 7, the verb 'manage' in clause 7.2(b), paragraph 26 of Schedule 5 - to the end that the function of Chief Executive officer is one of management and thus attracts the power in Clause 6.4. However the question is not whether the Chief Executive officer has, or also had, a management function; the question is what are the provisions in the Agreement governing the termination of the position of the Chief Executive Officer? Mr Archibald pointed to paragraph 2.1 of the Employment Deed of Mr Johnstone, exhibited as PJJ2 to Mr Johnstone's first affidavit, and which provides:

"The Company must employ the Employee in the position of Chief Executive Officer, or other position determined by the Company from time to time in accordance with this Deed."

However, the question is not whether (or that) Mr Johnstone may be employed other than as Chief Executive Officer; the fact is he is employed as CEO.

101. In my view, the construction, operation and consequence of the Shareholders' Agreement as contended by the plaintiffs is clearly to be preferred. I regard the fixing upon the character of manager by the first defendant as erroneous and inadequate. It is plain, on the face of the critical document, that the Chief Executive Officer Mr Johnstone has provided to him certain rights and security, and in my view that is not to be deflected or derogated from by fixing upon a lesser characterisation or character of Mr Johnstone as manager. So far as Mr Johnstone's employment is concerned, the terms relied upon by the plaintiffs, commencing with clause 7.2(a), in my view, are the epicentre of the Agreement, and the peripheral character of manager is not to govern or dominate the proper construction of the Agreement. The plain meaning and intent of the terms of the Agreement, and its structure and internal cohesion, establish the primacy of the position of Chief Executive Officer (with its concomitant protections) over that of Manager, and that primacy is not negated by the lesser entity.

104. There were two further submissions made on behalf of the first defendant and which I find unpersuasive. I shall refer to them briefly and in turn.

107. It was submitted that, in any event, the 85% requirement is satisfied by the proposed meeting as it has 85% of shareholders "who are entitled to be represented by directors voting on that resolution" at the proposed meeting. That argument, in my view, is circular. The a priori requirement is that the voting is on a resolution, and the resolution is one which, as I have said, is secured and protected by that pathway of reasoning, properly contended for by the plaintiffs, commencing at clause 7.2(a). Because of those requirements, the meeting is not competent to do what it purports to do, that is, the resolution is not properly before that constituted meeting. The fact that the directors voting represent 85% of those entitled to be represented is inconsequential. It is the voting on the resolution which is the critical function, and that is protected by the agreement in the way I have said.

110. Finally, it was submitted that the calling and holding of the meeting is on its face lawful, and the remedy sought by the plaintiffs is misconceived. Unlike Dick and Anor. v. Convergent Telecommunications Ltd and Ors.,[1] which meeting was invalid on its face (and also was to do with directors and not employees), the defendant has here submitted that as the meeting on its face is a lawful meeting to be called and held, the remedy sought is misconceived. I am unpersuaded by that submission. The purpose and function of the meeting is primarily to vote on the resolution, which is not competently to be voted on, and accordingly the circumstance that the shell of the meeting may appear to be lawful is a matter of form, not of substance.

113. However, I agree with that submission to this limited degree, that I think the Order sought by the plaintiff ought to be refined. That is because, if there is some other business of the meeting under the item "General Business" which does not involve the error which the paragraph 3 of the notice involves, that can properly be dealt with. The agenda is stated in exhibit PJJ7 to Mr Johnstone's first affidavit. The offending proposed resolution is agenda item 3. Agenda item 5 is additional business. There may be some business on the agenda which is competent. But agenda item 3 certainly is not.

116. Accordingly, I am satisfied that there is a clearly arguable case that the relief ultimately sought on the motion by the plaintiffs is made out and there is a serious question to be tried.

119. On the question of the balance of convenience, I consider the balance of convenience clearly is in favour of the plaintiff. Unlike the first defendant, the plaintiff is a human being and the impact upon him of dismissal will be direct and personal as an individual, both as to his reputation and as to his immediate position. I am conscious of the arguments put on behalf of the defendant as to the deleterious financial consequences which are set forth in the confidential exhibit TMP1, from the foot of page 2 to page 4, which I do not need to recite but I bear in mind. However I consider that, given the impact upon Mr Johnstone personally, the balance of convenience clearly is in his favour. The proposition by Mr Archibald that Mr Johnstone has a remedy in damages if error later is shown is cold comfort indeed.

122. For those reasons I am persuaded that the injunctive relief ought issue. As to the proposed order, paragraph 1, that the meeting be restrained, it is resolution on item 3 on the meeting which I consider ought to be restrained. If there is some other business not to do with the termination of the employment of Mr Johnstone as CEO, I do not see why that should be precluded.

125. Accordingly, I propose to grant the relief sought, but in that somewhat more limited form.

[1] [2000] NSWSC 331; [2003] 34 ACSR 86.