Mathews Capital Partners Pty Ltd v Coal of Queensland Holdings Limited

Judgment 1By Originating Process filed on 11 April 2012, the Plaintiff, Mathews Capital Partners Pty Limited ("MCP") brings an application under s 237 of the Corporations Act 2001 (Cth) for leave to bring proceedings ("Proposed Proceedings") in the name of the Defendant, Coal of Queensland Holdings Limited ("COQ Holdings") in the form of a draft Summons and draft Commercial List Statement which are in evidence. MCP also seeks orders under s 247A of the Corporations Act that two persons employed by its solicitors be authorised to inspect specified books of COQ Holdings. Factual Background 2COQ Holdings raised $35.6 million by two capital raisings in mid-2011. As a result of participating in the first of these capital raisings, MCP acquired a 15.4% interest in COQ Holdings. Interests associated with the Teoh family, which also support the present application, also acquired an interest of 48.49% in COQ Holdings. Part of the amount raised by COQ Holdings, $20.5 million, was then paid by it to Queensland Coal Corporation Pty Limited and Queensland Coking Coal Pty Limited ("QCC Parties") to acquire shares in Coal of Queensland Pty Limited ("COQ") and the balance to subscribe for new shares in COQ. The funds subscribed for new shares in COQ were in turn to be applied by COQ to explore and develop certain coal tenements ("Tenements") owned by COQ. As a result of these transactions, COQ Holdings acquired an interest of approximately 21.4% in COQ which, through subsidiaries, owned the Tenements. The remaining ordinary shares in COQ were owned by the QCC Parties. COQ Founders Nominees Pty Ltd ("Founder") also holds 4 million converting shares in COQ. 3A first capital raising ("Raise 1") for COQ Holdings took place in June 2011 and potential investors were provided with a written investor presentation dated 18 June 2011. That presentation referred to a proposed Initial Public Offering ("IPO") of shares in COQ Holdings involving a raising of a further $51m, with $30m to be paid to the QCC Parties, with the outcome that COQ Holdings would hold all of the shares in COQ. The appendix to that presentation, which was expressly described as "indicative", also set out the capital structure of COQ Holdings following a listing and showed the QCC Parties as holding 50% of the shares in COQ Holdings. A letter dated 18 June 2011 from Grant Thornton, COQ Holdings' then financial adviser, to MCP also attached an annexure setting out the "indicative capital structures of COQ Holdings and COQ on each capital raising", but emphasised that "the indicative targeted capital structure may be amended at any time and may vary depending on the then prevailing conditions". 4MCP contends that, on or about 18 June 2011, the QCC Parties, COQ Holdings and COQ entered into a shareholders agreement which, it contends, contemplated the parties would use their best endeavours to enter into formal documentation that was fuller, but consistent with, the terms of that document. (MCP refers to that document as the "Initial Shareholders Agreement" and I will also adopt that term, although whether that document had contractual effect is in issue). That document is headed "Shareholders Agreement" and commences with the words: "This document is legally binding and records the key terms to be incorporated into a formal Shareholder Agreement between the parties set out in Item 1 ("Shareholders Agreement")". That document then identifies the "primary objectives and purposes of COQ" including a condition that the QCC Parties (or their nominee) would be issued that number of shares in the IPO that will equate with 50% of the issued capital of COQ Holdings immediately after the IPO, assuming an IPO raising $51 million and, in consideration for those shares, the QCC Parties would transfer all of their shares in COQ to COQ Holdings which would then directly or indirectly own 100% of the Tenements. 5That document was provided to MCP as an annexure to the offer letter dated 18 June 2011 which stated that COQ, COQ Holdings and others "have agreed" to use the their best endeavours to enter into various agreements including a Shareholders Agreement between the QCC Parties, COQ Holdings and others regarding COQ. The document which is in evidence is not executed and COQ Holdings contends that it was not executed. 6A detailed Shareholders Agreement was executed between COQ Holdings, COQ, the QCC Parties and Founder on 28 June 2011 ("Shareholders' Agreement"). Clause 5.1(a) of the Shareholders Agreement (as amended on 10 August 2011 as noted below) provides that: "The parties agree to negotiate in good faith and use reasonable endeavours to agree the terms of and complete a compliant IPO by the IPO Date." The term "IPO Date" is defined in the Shareholders Agreement as 30 April 2012. (It should be noted that the hearing before me commenced on Friday 27 April 2012 and was completed on Monday 30 April 2012.) 7Clause 5.2 of the Shareholders Agreement in turn required each shareholder, including the QCC Parties, COQ Holdings and Founder, to do all things and provide all assistance as was reasonably required to complete a Compliant IPO by the IPO Date, including specified matters. Clause 5.5 of the Shareholders Agreement provided that, if for any reason other than breach of the Transaction Documents (including the Shareholders Agreement) by the QCC Parties, a Compliant IPO had not been completed by the IPO Date, then the board of COQ may take certain steps and, without prejudice to the rights of the QCC Parties under clause 6, the Shareholders (referring to the shareholders in COQ including the QCC Parties, COQ Holdings and Founder) will use reasonable endeavours to work together to identify a revised timeline for a Compliant IPO and discuss an alternative process for the Shareholders to realise their investment in COQ. In that situation, the QCC Parties also have the right to take certain steps under clause 6.1 of the Shareholders Agreement. 8A representative of the Teoh family attended a meeting concerning a second capital raising by COQ Holdings in July 2011 ("Raise 2") and received an offer letter and investor presentation for Raise 2 on 28 July 2011. A number of entities associated with the Teoh family invested in Raise 2 after that meeting. 9The Shareholders Agreement was further amended by a Deed of Amendment effective as of 10 August 2011 following the completion of Raise 2. The terms of the amended document ("Amended Shareholders Agreement") were updated to refer to Raise 2 and were otherwise substantially consistent with the Shareholders Agreement. 10An exchange of emails between several advisers to the parties took place on 27 October 2011, which was copied to executives of the parties. In the first of those emails, a representative of Grant Thornton (then the financial adviser to COQ Holdings) sent an email to the solicitors for the QCC Parties stating that he understood "a change to the IPO Date has been agreed with an extension to 30 June 2012 (previously 30 April 2012) to reflect the revised development timeline" and requested the QCC Parties' solicitor to draft a variation agreement for that extension; an officer of the QCC Parties then confirmed that that document should be prepared. A presentation by COQ Holdings to investors on 27 October 2011 also referred to a timeline for an IPO in the period April-June 2012. By a further email on 2 November 2011, Grant Thornton followed up on that variation and the QCC Parties' solicitor indicated that he would prepare a variation document. 11A non-executive director of COQ Holdings, Mr Carroll, gives evidence that, in November 2011, he was sent a draft deed of amendment of the Amended Shareholders Agreement by Grant Thornton which provided for extension for the IPO Date to 30 June 2012 but, shortly after receiving that document, he was advised by the then Chief Operating Officer of the QCC Parties that the QCC Parties did not intend to sign that deed of amendment and did not think it was in their interests to give an extension of the IPO Date. A second non-executive director of COQ Holdings, Mr Vorias, also gives evidence that, to the best of his knowledge, the IPO date was not extended to 30 June 2012. 12The QCC Parties also rely on a document circulated on 25 January 2012 which referred to a timetable for a Compliant IPO by the end of the June quarter 2012. 13By at least March 2012, a dispute had arisen between MCP and the QCC Parties as to the terms on which the QCC Parties' shares would be transferred to COQ Holdings in connection with an IPO. By letter dated 23 March 2012, MCP's solicitors gave notice of the Proposed Proceedings to COQ Holdings. By letter of the same date to solicitors for COQ Holdings' directors, MCP's solicitors asserted that the Shareholders Agreement contained clauses which were materially adverse to COQ Holdings compared to the Initial Shareholders Agreement. 14COQ Holdings wrote to the QCC Parties on 26 March 2012 requesting an extension of the date for a compliant IPO from 30 April 2012. That request was declined by the QCC Parties. 15By letter dated 30 March 2012, the solicitors for COQ Holdings advised the solicitors for MCP that, inter alia, COQ Holdings had been working towards, and continued to work towards, a Compliant IPO; that achieving a Compliant IPO by 30 April 2012 became more difficult and was now "very likely to be practically unachievable"; and that COQ Holdings had been advised by the QCC Parties on 29 March 2012 that they did not agree to any extension to the IPO Date and had never agreed to extend that date beyond 30 April 2012. 16The Proposed Proceedings were considered by the Board of COQ Holdings on 13 April 2012, which decided not to bring them. The board meeting was attended by the two non-executive directors of COQ Holdings, Mr Carroll and Mr Vorias; a third director, Ms Ward, who is associated with the QCC Parties, did not attend that meeting. Mr Carroll's evidence is that, in deciding not to bring the claim, his aim was to maximise shareholder value for shareholders in COQ Holdings and COQ, including the QCC Parties, by maximising the prospects of a successful IPO of COQ Holdings and avoiding action that would harm those prospects, and he expressed the view that bringing the Proposed Proceedings would harm those prospects. I should note that MCP vigorously criticises this reasoning for failing to distinguish the interests of COQ Holdings, COQ and their respective shareholders. Probability that COQ Holdings will bring the Proposed Proceedings 17In order to grant leave under Corporations Act s 237(2), the Court must be satisfied of five matters, and must grant that leave if satisfied of those matters. The first requirement, under s 237(2)(a) of the Corporations Act, is that it is probable that COQ Holdings will not bring the proceedings. That requirement is satisfied, since, as noted above, the board of COQ Holdings has resolved not to bring the Proposed Proceedings. Whether MCP is acting in good faith 18The second criterion, specified in s 237(2)(b) of the Corporations Act, is that MCP is acting in good faith. MCP must establish this matter to the Court's satisfaction: Chahwan v Euphoric Pty Ltd t/as Clay & Michel [2008] NSWCA 52; (2008) 245 ALR 780; 227 FLR 43; 65 ACSR 661; Showtime Management Australia Pty Ltd v Showtime Presents Pty Ltd [2008] NSWSC 618 at [77]. Factors relevant to the good faith requirement include the applicant's honest belief that a good cause of action exists and has reasonable prospects of success (although that belief will be tested against whether a reasonable person in the circumstances would hold that belief) and whether the applicant is seeking to bring the action for a collateral purpose, and it is relatively easy to satisfy this requirement if an application is made by a current shareholder who has more than a token shareholding and the derivative action seeks recovery of property so that the value of the applicant's shares would be increased: Swansson v RA Pratt Properties Pty Ltd [2002] NSWSC 583; (2002) 42 ACSR 313 at 320-321; Maher v Honeysett and Maher Electrical Contractors Pty Ltd [2005] NSWSC 859 at [29]; Gerard Cassegrain & Co Pty Ltd v Cassegrain [2010] NSWSC 91 at [110]-[111]; Re Gladstone Pacific Nickel Ltd [2011] NSWSC 1235; (2011) 86 ACSR 432 at [58]. 19The Court does not consider the merits of the claim in deciding whether the applicant has satisfied the criterion under s 237(2)(b) since they are considered in respect of the question in s 237(2)(d) whether there is a serious question to be tried: Fitzpatrick v Cheal [2010] NSWSC 717 at [41]. The Court will otherwise have regard to all the circumstances of the claim to decide whether a person seeking orders under s 237 is acting in good faith: Fitzpatrick v Cheal above. It is not essential that an applicant say, by sworn evidence, that he or she believes in the existence of a good cause of action with reasonable prospects of success in order to establish good faith and inferences can be drawn from the nature and circumstances of the case sought to be brought: Maher v Honeysett and Maher Electrical Contractors Pty Ltd above at [28]. 20No officer of MCP has given evidence asserting that it is acting in good faith. However, MCP is a current shareholder of COQ Holdings and, if the Proposed Proceedings succeeded, would benefit as a shareholder in COQ Holdings from preserving the opportunity of a Compliant IPO as a result of the orders made in them. The commencement of the proceedings are supported by the Teoh family, another major shareholder in COQ Holdings. There is no obvious collateral purpose to be served by MCP in promoting the proceedings and it has acted diligently in its pursuit of the application under s 237 of the Corporations Act. I would accordingly find that the application is brought in good faith. Whether grant of leave is in the best interests of COQ Holdings 21The third criterion, under s 237(2)(c) of the Corporations Act, is that the grant of leave is in the best interests of the company. This test requires more than a prima facie indication that the proceedings may be or are likely to be in the interests of COQ Holdings and the court must be satisfied that the proposed action actually is, on the balance of probabilities, in the company's best interest: Swansson v Pratt above. Relevant matters include the prospects of success of the proceedings, their likely costs, the likely recovery if the proceedings are successful and the likely consequences if they are not: Maher v Honeysett and Maher Electrical Contractors Pty Ltd above at [44]. In Re Gladstone Pacific Nickel Ltd above at [57], Ball J observed that: "In considering what is in the best interests of the company, it is necessary to consider the prospects of success of the action, the likely costs and likely recovery if the action is successful and likely consequences if it is not. One relevant matter in considering these issues is the nature of any indemnity the applicant has offered to the company if the action is brought and the likelihood that the company will recover under that indemnity. It is also necessary to consider the resources the company will be required to devote to the action and the resources it has available, together with the effect that the action may have on other aspects of its business. Finally, it is necessary to consider whether some other remedy is available to the applicant so as to make the proposed action unnecessary from its point of view ..." 22MCP contends that matters which indicate that the Proposed Proceedings are in COQ Holdings' best interests are the potential loss to COQ Holdings arising from the failure to hold a Compliant IPO and the loss of the alleged "Uplift Right" (to which I will refer below); that there is no alternative means available to obtain the redress which MCP seeks, since shareholders in COQ Holdings are not parties to the Amended Shareholders Agreement; and that the scale of the QCC Parties' interests in the Tenements is such that they can meet at least a substantial part of any judgment in favour of COQ Holdings. (I should note, however, that the proposed Summons seeks relief other than damages.) 23The primary basis of MCP's contention that the Proposed Proceedings are in COQ Holdings' interest is that they are necessary to preserve COQ Holdings' alleged right, on a Compliant IPO, to acquire from the QCC Parties, for a fixed consideration, all of the remaining shares in COQ Holdings. The evidence indicates that such a right, if it exists, would be potentially very valuable to COQ Holdings. MCP contended such a right, which it described as the "Uplift Right", existed and COQ Holdings denied that such a right existed. The existence of that right is not itself raised in the Proposed Proceedings but is relevant to the extent of the commercial benefit which COQ Holdings might obtain if the Proposed Proceedings were successful so as to preserve any such right. 24The Uplift Right depends on the proposition that the QCC Parties will transfer all of their shares in COQ to COQ Holdings for payment of the specified amount and the issue of a 50% interest in COQ Holdings or another IPO vehicle (together referred to as "IPOco"). There are several difficulties with that proposition, as a matter of construction of the Shareholders Agreement and the Amended Shareholders Agreement: