Limited v Harwood

REASONS FOR JUDGMENT 1 There are two interlocutory applications before the Court. An interlocutory application on behalf of the plaintiff, Pendant Software Pty Limited ("Pendant Software") for an order that the second defendant, Mr Berend Hoff, be restrained from taking any further step directly or indirectly in a proceeding/application commenced by him in the Takeovers Panel pursuant to the application made by him dated 25 May 2006. 2 There is also a notice of motion filed on behalf of the first, fourth and fifth defendants, that the proceeding be dismissed generally, or as against them with no order as to costs and in the alternative, an order that the proceeding be stayed generally or against them, until further order. 3 The background to the applications is set against a takeover offer by Pendant Software for all of the shares in the capital of Tower Software Engineering Pty Limited ("Tower"). Tower has an issued capital of 31,176,500 shares held by approximately 124 shareholders. It carries on the business of the supply of software for document management in large organisations, primarily to government and large bureaucratic institutions. Pendant Properties Pty Limited, a company associated with Pendant Software, holds 9,521,000 shares in the capital of Tower representing approximately 30.54 per cent of its issued capital. 4 The second defendant, Mr Hoff, a director of Tower, owns 9,432,464 shares in the capital of Tower representing approximately 30.26 per cent of its issued capital. Tower's Constitution has pre-emptive rights for existing shareholders which restrict the opportunity for shareholders to transfer shares in Tower without first offering them to existing shareholders. These pre-emptive rights are found in rule 120 of the Constitution of Tower. Rule 120.1 provides that: "Subject to rule 120.8, no shares may be transferred to a person who is not a member so long as any member or members are willing to purchase them." Thereafter follow provisions to determine whether or not there are any such members who are willing to purchase any shares which a member wishes to transfer or offer for sale. 5 Rule 121 which is headed, "Registration of Transfers - Directors' discretion", provides that subject to rule 120.8 the directors may in their discretion refuse to register a transfer of shares from a member to a non member without assigning any reason for refusal. Rule 120.8 is not relevant for present purposes but it provides for the transfer of shares to family members or related entities of a member. 6 On 9 January 2006, Tower sent to shareholders a transfer notice received from a shareholder, Equity Partners One Pty Limited ("Equity Partners"), which was seeking to sell 4,500,000 shares in Tower for $1.45 per share. Tower's notice to shareholders offered these shares to existing members in accordance with the pre-emptive rights provision contained in rule 120. No shareholders wanted to purchase any of the shares offered for sale by Equity Partners. On 2 February 2006, Tower notified Equity Partners of this fact and stated in a letter: "I wish to formally confirm that pursuant to the Notice and subsequent offer for sale of shares held by Equity Partners One Pty Limited (EP) that TOWER Software Engineering, acting as agent on behalf of EP has not found any member or members willing to purchase any of the shares offered for sale by EP. Accordingly, EP is at liberty, subject to rule 121 to sell or transfer the shares (or any of them) to any eligible person at a price not less than the price placed on the shares in the Notice at any time before 2nd May 2006." 7 On 18 April 2006, Pendant Software announced a takeover offer for all the shares in Tower and served a bidder's statement and offer on Tower on that date. The offer price was $1.45 per share. The takeover announcement and offer also noted that rule 120 of Tower's Constitution applied. The conditions of the offer also included a condition numbered 10.8, headed "Registration of Transfers" which provided: "This Offer and any contract that results from your acceptance of it are subject to the further condition that: the directors of Tower Software agree to register all acceptances and transfers received by Pendant under the Offer no later than 10 days after acceptances become unconditional or 10 days from the end of the Offer Period (unless extended under the Corporations Act) whichever is the earlier. If this condition is not fulfilled, all contracts resulting from the acceptance of the Offer will be automatically void. This condition cannot be waived by Pendant." 8 On 18 April 2006 the directors of Tower agreed, with Mr Hoff dissenting, to the following resolution: "The Board resolved, Brand [sic] Hoff dissenting, to acknowledge receipt of the Bidder's Statement and further resolved, without Bill Frost participating in the vote, to consent to the Bidder's Statement being sent by Pendant Software Pty Ltd to all Company shareholders and option holders as soon as Pendant Software Pty Ltd chooses, noting that this may be earlier than otherwise provided in the Corporations Act. The majority of the Directors were of the opinion that it was in the interests of Tower Software to consent to early distribution so that shareholders, and staff in particular, were as fully informed as practicable. Mr Frost declared his interest as a Director and shareholder in the Bidder." On 20 April 2006, Pendant Software received an acceptance and transfer dated 19 April 2006 from Equity Partners in respect of its 4,500,000 shares. The acceptance and transfer form was signed by Pendant Software and dated 20 April 2006. 9 On 1 May 2006 Pendant Software declared its offer unconditional pursuant to s 650F of the Corporations Act 2001 (Cth) ("the Act"). It served a notice on Tower which stated: "Pendant Software Pty Limited (Pendant) gives notice under Section 650F of the Corporations Act and Section 10.11 of Pendant's Offer dated 18 April 2006 (Offer) made pursuant to the Bidder's Statement dated 18th April 2006 (Bidder's Statement) and Supplementary Statement dated 19 April 2006, in relation to its takeover bid for all of the issued ordinary shares and to any person who becomes registered or entitled to be registered as the holder of shares in Tower Software Engineering Pty Limited (Tower Software) that: 1. It declares each Offer and any contract resulting from acceptance of such Offer free from all the conditions set out in Section 10.7 of the Bidder's Statement. 2. As at 9.00 am on the date of this Notice, Pendant has received acceptances under the Offer for 4,500,000 shares in Tower Software, being 14.43% of all shares in Tower Software on issue. Pendant therefore has voting power in these shares. It is noted that while Pendant is not the registered holder of any shares in Tower Software that Pendant Properties Pty Ltd, which is associated with Pendant, holds 9,521,000 shares in Tower Software comprising a further 30.54% of Tower Software's shares. Pendant also has or is deemed to have voting power in those shares. Accordingly, as at 9.00 am on the date of this Notice, Pendant has voting power in a total of 14,021,000 Tower Software shares, being 44.97% of all Tower Software shares on issue." 10 On 1 May 2006, Mr Frost, a director of Pendant Software, and also a director of Tower, wrote to the Chairman of Tower, Mr Service, in the following terms: "A Section 650F Notice was given to Tower Software Engineering Pty Limited (Tower Software), effective today (copy attached). As Pendant Software Pty Ltd (Pendant) has a legally binding unconditional acceptance and transfer from Equity Partners One Pty Ltd (Equity Partners) for 4,500,000 shares (14.43%) I formally request a meeting of Tower Software directors to be held at the soonest possible date. At that meeting I will request that the directors resolve to agree to register all acceptances and transfers received by Pendant under the Offer to acquire all the shares in Tower Software as per Condition 10.8 of the Bidder's Statement. Also Pendant will require a separate resolution agreeing to register the aforementioned transfer of 4,500,000 shares in Tower Software from Equity Partners. I draw your attention to the 10 day time frame under Condition 10.8 of the Bidder's Statement and request a meeting of directors be held in sufficient time to give Pendant Software (if the directors so resolve to register all the acceptances and transfers) 3 working days to have the Equity Partners transfers stamped under ACT law and then registered in Pendant Software's name." 11 A directors' meeting was called for 4 May 2006. Prior to the meeting the Chairman of Tower, the fifth defendant, obtained a memorandum of advice from Tower's solicitors, Mallesons Stephen Jaques. In this memorandum of advice the solicitors summarised the background to the takeover offer and the transfer from Equity Partners, gave advice in relation to the exercise of directors' discretion and as to the legality of the agreement in relation to the transfer of Equity Partners' shares to Pendant Software. In particular section 4.7 of the advice which was headed, "Can directors take a further possible bid into account?" stated: "In exercising their discretion to refuse to register a transfer, the Directors must have regard to what they consider is in the best interests of the company. In our view, where registration of a transfer might prevent or discourage a new bid at a higher price and there is a real prospect of such a bid, that is a factor to which the Directors could properly have regard in exercising their discretion to refuse registration." A copy of that advice was given to Mr Frost who sought counsel's advice in response to it and obtained that counsel's advice on 2 May. Counsel's advice joined issue with the advice of Mallesons Stephen Jaques and in substance argued that it was improper for the directors to take into account the possibility of another bid at a higher price as being a reason for justifying the refusal to register the shares. This particular matter was dealt with in paragraphs 41, 48 and 49 of counsel's advice. 12 The directors' meeting was held on 4 May 2006. The chairman tabled a letter from Quadrant Private Equity Pty Limited which stated that Quadrant submitted a confidential, non binding proposal on behalf of funds advised by it to acquire on a friendly basis Tower, and set out in summary the proposal with an indicative price of $1.55 per share. The proposal was noted to be incomplete, confidential and non binding. 13 Item 5 on the agenda before the Board was the transfer by Equity Partners to Pendant Software. According to Mr Frost he tabled the acceptance and transfer form executed by Equity Partners in respect of the 4,500,000 shares held by it and moved two resolutions. The first was that the directors of Tower agree to register the acceptance and transfer received by Pendant Software under its offer dated 18 April 2006 from Equity Partners. The second resolution was that the directors of Tower agree to register all acceptances and transfers received by Pendant Software under the offer no later than 10 days after acceptances became unconditional or 10 days from the end of the offer period, unless extended under the Act, whichever was the earlier. 14 According to the Chairman, Mr Service, and the company secretary, the resolution which was put was that the transfer tabled by Mr Frost in respect of 4,500,000 shares in the company from Equity Partners to Pendant Software, for a total consideration of $6,525,000 be registered. For present purposes nothing turns on the difference in the versions of the resolution which were put. In the events which occurred the resolution in relation to the transfer was put, and was defeated. Mr Frost abstained from voting. The second resolution was put and that was defeated as well and again Mr Frost abstained from voting. 15 What then occurred was that after discussion by the Board a further resolution was proposed in the following terms: "The Directors of Tower agree to register all acceptances and transfers received by Pendant Software Pty Limited under the Offer, such registration to occur after the Offer Period, provided that: