Karger v Paul

Judgment 1HER HONOUR: This is an application by CWK Nominees Pty Limited as trustee for the CWK Incentive Option Plan Trust for judicial advice as to whether it would be justified in determining to transfer, by way of distribution in specie, various Options held by it as trustee of the said trust in the circumstances outlined in the s 63 Statement served with this application. 2Section 63(1) of the Trustee Act 1925 (NSW) permits a trustee to apply to the court for an opinion, advice or direction on any question respecting the management or administration of the trust property, or respecting the interpretation of the trust instrument. A statement of general principles relevant to applications under s 63 is to be found in Macedonian Orthodox Community Church v His Eminence Petar the Diocesan Bishop of the Macedonian Orthodox Diocese (2008) 237 CLR 66 at [54]-[75]. The High Court (at [70]-[71]) recognised that the proper purpose for seeking judicial advice includes relief aimed at resolving legitimate doubts held by the trustee as to the proper course of action and protecting the trust and those entitled to it. 3The present application is not one where the questions on which the trustee is seeking judicial advice concern the respective rights of beneficiaries or their identity; nor is it one in which there is a question raised as to the trustee's powers or the construction of the relevant trust deed. Rather, what is sought is advice as to whether the trustee (CWK) would be justified in exercising a discretionary power in a particular manner. Background 4CWK Nominees is a wholly owned subsidiary of Coalworks Limited, a company listed on the Australian Stock Exchange on 24 June 2008. At the time of its listing the stock in Coalworks traded at 20 cents; as at 13 June 2012 the stock is trading at a price of just over one dollar. 5On 20 May 2008 the shareholders of Coalworks Limited approved an Incentive Option Plan. The Rules of the Coalworks Incentive Option Plan as constituted provided (in Rule 11) that: The plan shall be in all respects administered under the direction of the Board. and went on to note that the Board of the company may make such rules for the conduct of the plan, not being inconsistent with the provisions of the plan, as it thinks fit. 6Rule 14 provided that, by applying for a grant of an Option a Member agrees to be bound by the terms and conditions (of the Plan) and that those are governed by and shall be construed in accordance with the laws of New South Wales. 7Those terms and conditions included, under Rule 2 (headed Application for and Grant of Options), a procedure for the application for and grant of Options (a procedure that is in some respects inconsistent with what appears to have been contemplated under the Trust Deed, to which I will refer shortly). 8In summary, by Rule 2, the Plan made provision (2(a)) for the application by Executives (deemed to include all staff including any person engaged in, inter alia, employment, consultancy or directorship with the company or a sub-contractor with the company) to be made to the Board (following a once yearly invitation by the Board) for "Options to be allocated to them by the Board in accordance with the [ASX Listing Rules]", within the limits therein specified. The Board then was to allocate the number of Options to be issued to an Executive or a method of calculation of the number of Options (2(b)) and once this was done the number of Shares that could be acquired pursuant to the Plan was not to exceed the number of Options allocated to the Executive. 9Rule 2(d) obliged the company to grant Options to every Executive who duly applies for them in accordance with the Plan "unless the Board considers it undesirable to grant Options to the Executive" because of one of the specified circumstances in that rule (each of those circumstances relating to the termination or proposed termination of the Executive's employment). (In passing, I note that this is an early indication of the link between the continued employment of the person to whom an Option was granted and the subsistence of the Option so granted to that person.) 10Rule 3 provided for the issue of Option Certificates and the maintenance of a register of Members (defined as Executives who are granted Options under the Plan). 11Rule 6(c) provided for what was to happen to Options allocated to a Member in the event of termination of employment of that Member by reason of any of the circumstances therein listed (ie whether there was to be an entitlement thereafter to exercise those Options and if and when such Options were to lapse). Again, this indicates the link between the grant of Options and the employment of the person to whom they were granted. 12Rule 8 of the Plan dealt with the allotment issue or allocation of shares on the exercise of Options. Rule 8(b) provided that the company might establish a trust and fund it by way of loan or other financial assistance for the purpose of acquiring shares in the company to provide a pool of shares out of which shares might be allocated to satisfy the exercise of Options under the Plan. 13Relevantly, for present purposes, Rule 9 (headed Takeover or Change in Control of the Company) provided: In the event that a party acquires a relevant interest in the issued voting Shares of the Company which exceeds 20% of the issued capital ... resulting in a full take over or an acquisition of more than 20% of the issued capital of the Company then the Board of the Company may exempt the Member from any of the provisions hereof and issue substitute Options where appropriate. 14Amendments to the Plan (pursuant to Rule 13) were permitted by resolution of the Board with the exception that no amendment conferring an unfair benefit on the Member was to be approved unless first approved by shareholders of the company. 15Acceptance to be bound by the terms and conditions of the Rules (necessary before an application of Options was to be accepted by the Company - rule 2(c)) would thus give rise to a contract between the Member and the company. 16A Prospectus was lodged by Coalworks with ASIC on 26 May 2008, disclosing the intention of the Board to issue incentive Options. Section 10.4.2 of that prospectus made reference to the incentive Options and at section 10.4.3 the Option terms and conditions were summarised. 17On 17 June 2008, CWK Nominees was incorporated. On the same day, Coalworks issued 15,000,000 incentive Options to CWK Nominees. The ASX release issued on that day noted that the Options were issued to CWK Nominees "to hold as trustee under a trust deed entered into between the Company and CWK on or about the same date". In that announcement, the beneficiaries of the trust were identified as the directors and consultants of the Company (or their nominees) who were identified as the proposed grantees of the Options in section 10.4.2 of the Prospectus. 18The ASX announcement continued: The Trustee was issued the Incentive Options subject to the option plan rules summarised in section 10.4.2 of the Prospectus and the option terms and conditions listed in section 10.4.3 of the Prospectus. The Trustee has entered into a restriction agreement in relation to the Incentive Options in terms of which they are escrowed for a period of 24 months from the listing date of the Company. 19I am informed that the reference to escrow under a "restriction agreement" is a reference to an Appendix 9A restriction agreement required pursuant to Chapter 9 of the ASX Listing Rules, which restricts seed capitalists, vendors of classified assets, promoters, professionals, consultants and persons under an employee incentive scheme from trading their securities for a period of time after a company is admitted (or re-admitted) to quotation on the ASX. 20By Trust Deed dated 19 June 2008 between Coalworks and CWK Nominees, the trust was established. (The Trust Deed was later amended by a Supplemental Deed dated 23 November 2011.) 21The Trust Deed contains the following three brief recitals: (A) as to the establishment by Coalworks of an incentive Option Plan on 20 May 2008; (B) as to the wish of the parties to the deed "to create this trust as an interim custodian for the Options which are to be issued under the Plan"; and (C) that, at a meeting of shareholders of the company on 20 May 2008, the Incentive Option Plant [sic] was approved. 22The operative provisions of the Trust Deed provided for the appointment and establishment of the trust fund "on the terms and conditions contained herein with reference to the Incentive Option Plan" and irrevocably appointed CWK Nominees to be the trustee of the fund. Clearly, it was intended that the Trust Deed be read conformably with the Plan. 23Clause 2 contains a declaration of trust by the trustee that the Fund and any shares, Options, securities, rights or other amounts provided to the Fund "will be held on trust for the beneficiaries of the Fund for a term of 6 years after which the Fund shall vest in any remaining beneficiaries". (It is noted by Senior Counsel appearing for the trustee on this application, Mr Leeming SC, that this operates in effect to accelerate the vesting of the Options that have been issued since they are expressed to expire in December 2014, whereas the six year vesting period under the Trust Deed will expire in June 2014.) 24Clause 3 identified the persons who are beneficiaries of the Fund as "discretionary beneficiaries pending expiry from escrow of the shares Options securities or rights under the trusts herein" and provided that: ...the Trustee shall exercise its discretion to allow early distributions of Options or rights or make distributions from the trust in accordance with the Incentive Option Plan provided that no beneficiary shall be entitled to any shares Options securities rights or other assets of the Fund until the Trustee exercises its discretion. 25Insofar as the Executives as defined in the Employee Incentive Plan are identified as discretionary beneficiaries, this would seem to be inconsistent with the allocation to them of Options under the procedure provided for in the Rules of the Plan (although it may be that what this clause was intended to indicate was that the company Executives formed the pool or part of the pool of potential beneficiaries of the Fund, depending upon the acceptance of the company of an application by them for Options and the allocation of Options in their name, at which time the Options would be held by CWK for them as trustee). 26The trustee's powers are set out in clause 4. Relevantly, the trustee is obliged to assign a reason for the exercise or failure to exercise any power (clause 4.2) and clause 4.4 provides that every power of the trustee shall be exercisable at the trustee's absolute and unconditional discretion. 27When amendments were made in 2011 to the Trust Deed by way of the Supplemental Deed, references to escrow arrangements were removed from the end of the last sentence of clause 3 (namely the words "or until after expiry of the escrow relating to any such Options or rights") and after the words "absolute and unconditional discretion" in clause 4.4 but not from the opening words of clause 3 (and nor was there any change to the recital recording the intent that the trustee be an interim custodian). (There is some doubt as to what was intended by the reference to the escrow arrangements, that escrow period in any event expiring in June 2010. It was suggested by Mr Leeming that the escrow arrangement was to meet the requirements of the Listing Rules. If so, then the purpose of that arrangement would presumably have been to preclude an Option holder from exercising a right to acquire shares under the Options until the expiry of the escrow period but not to affect the title of the trustee thereto in the interim.) 28Clause 5 (which requires the trustee to keep a register of discretionary beneficiaries) in its terms appears to contemplate that the trustee has a discretion that it may exercise pursuant to the Incentive Option Plan. 29Clause 9 contained a power of variation that was "subject to being in accordance with the Corporations Act 2001 and the Incentive Option Plan ..." as deemed necessary to vary all or any of the trusts provided that the Incentive Option Plan is not breached and that such variation alteration or addition is not in favour of or will not result in any benefit to any party other than the beneficiaries. 30On 6 October 2011, the Board of Coalworks approved an amended Executive Option Plan. At the same time it resolved that the company ratify and approve all prior issues of Options to CWK "as trustee and custodian of Coalworks incentive Options under the revised Option Plan" and that a supplementary trust deed be entered into to rectify "clerical errors" in the current trust deed. (Given that the Options had been issued to CWK prior to the revision of the Option Plan, it seems to me that this can only sensibly be read as a resolution to ratify all prior issues to CWK in the stated capacity of trustee and 'custodian' and to indicate that those are to be held henceforth having regard to the terms of the revised Option Plan.) 31It is noted by Mr Leeming that ASX Listing Rule 7.1 requires a listed company to obtain shareholder approval prior to the issue of shares or securities convertible into shares representing more than 15 per cent of the issues capital of the company in any 12 month period. ASX Listing Rule 7.2 (exception 9) provides that Listing Rule 7.1 does not apply to an issue under an employee incentive scheme if, within 3 years before the date of the issue, shareholders have approved the issue as an exception to Listing Rule 7.1. 32A resolution for the purposes of ASX Listing Rule 7.2 (exception 9) and for all other purposes to approve the re-adoption by the company of its Executive Option Plan (as amended) was put to Coalworks' shareholders at the company's Annual General Meeting on 11 November 2011. (The notice of meeting noted that 22,273,000 Options had been issued under the Plan since the date of last approval (being 20 May 2008).) 33Resolution 6, providing for approval of the revised Option Plan, was not passed by the shareholders. (Nevertheless, that does not seem to me to affect the earlier ratification and approval by the company of the issues of Options to CWK as trustee.) 34The resolution to enter the Supplemental Trust Deed was passed (removing some of the references to the escrow arrangement as noted earlier). 35In evidence before me were copies of Option Certificates issued by Coalworks in respect of the various Options. Those Options are expressed to expire on 31 December 2014. The schedule to the Option Certificates sets out the terms and conditions of the Options. I note that there are three different Options that have been issued to date - 50c, 80c and $1 Options. 36Also provided to me were copies of letters that have been issued to the holders of Options outlining their rights in relation to Options allocated to them. First, by letter issued in June 2011, various Option holders were advised that the company wished to provide or had agreed to allocate particular Options to them. Those letters are expressed in terms that suggest an immediate entitlement was thereby being conferred (although some tranches of Options so allocated were subject to conditions precedent to their exercise that depended on particular "entitling events" occurring (namely, completion of certain works on developments in which the company was involved). Those conditions precedent are able to be waived by the company (the letters noting that the vesting condition applies "unless special circumstances apply and the directors of Coalworks waive this milestone"). The June 2011 letter notes that all Options shall be held by CWK and will vest in favour of the Option holder at his or her request, subject to the entitling events and provided he or she still remains employed by company (again providing a link between employment and exercise of the Options). 37Further letters were sent in December 2011 "clarifying" the contents of the earlier letter. Those confirmed an agreement by Coalworks to allocate Options to the particular addressee or his or her nominated super fund or family trust (again indicating certain tranches of Options, some exercisable without any particular event having first arisen, others on the completion of certain milestones unless waived by the directors of the company). 38The December letters stated that: The Options are held by CWK Nominees Pty Ltd's Incentive Option Trust Fund and will vest in favour of you and be transferred to you on request providing that: