White's and Kortesis' legitimate expectations of participation
21 The case as put on behalf of the White-Kortesis parties was to restrain threatened oppressive conduct. It was said that Mr White and Mr Kortesis held a reasonably based expectation to participate in the management of MWL, which would be denied if the members resolved at the meeting to remove them. Doing so would therefore be oppressive. Mr White and Mr Kortesis contend that their expectations were founded upon assumptions to be inferred from the background and objective surrounding circumstances, including the establishment of MWL's business as well as from the growth of the business. They also rely on representations said to contain certain implicit representation to the effect that Mr White would enjoy continuing and ongoing management of the company at the Board level. In essence they contend that it was the tacit assumption of negotiations for the investment in MWL by Focus USA that the existing executive directors would continue in their roles post the Focus USA investment. Further, Mr White and Mr Kortesis point to a number of factors which would make it oppressive for their assumption to be dispelled by a resolution removing them as directors. These include Mr White's role, together with Mr Markousis, as co-founders of the business and Mr White's substantial financial investment in the business and his exposure to guarantees given to support the company's business.
22 The White-Kortesis parties primarily relied on three authorities concerning applications to restrain board meetings to vote on the removal of directors: Remrose Pty Ltd v Allsilver Holdings Pty Ltd (2005) 225 ALR 588 per Hasluck J; In the Matter Of Eden Resort Hotel Pty Limited [2013] NSWSC 493 per Black J; and Benjamin Corporation Pty Ltd v Smith Martis Cork and Rajan Pty Ltd [2003] FCA 1471 per Carr J. Further authorities were referred to by the White-Kortesis parties in submissions in reply: In the matter of Optimisation Australia Pty Limited [2018] NSWSC 31; 362 ALR 374; and Brown v Bray & Anor [2019] EWHC 2304 (Ch).
23 The legitimate expectations were said to flow from certain matters analogous to matters found to be supportive of a legitimate expectation in Remrose, Eden Resort, and Benjamin, and certain other matters unique to this case. I will focus on the matters relevant to Mr White, as the factors relevant to his case for a legitimate expectation rise the highest as between he and Mr Kortesis.
24 I now turn to the principal facts and circumstances which the White-Kortesis parties say support their legitimate expectation to ongoing involvement in the management of MWL's business.
25 Mr White has been the Managing Director of MWL for 10 years. For nine years prior to MWL being formed, he was the manager of the entities combined to create MWL. The White-Kortesis parties point to the similarities between their circumstances and the circumstances in Remrose and Benjamin concerning the tenure of the directors in those cases. In Remrose the relevant director had been Managing Director for 8 years, and in Benjamin 10 years (see [11], [17] and [55] of Remrose, and [32] and [67] of Benjamin).
26 Mr White deposed to being personally liable under guarantees he had given on behalf of MWL. These included MWL's lease of its business premises in Melbourne. The total liability was said to be in the order of $8 million. Similarly in Remrose the director was liable under personal guarantees to trade creditors (at [16]).
27 Under the Deed Mr White is subject to significant purported restraints on his future employment. This too was a factor relied upon in support of the expectations to which I have referred. On its face, cl 20 of the Deed restrains Mr White from engaging in business activity similar to MWL's for a maximum of five years from ceasing to be a member (not ceasing to be employed). Restrictive covenants were also a feature of Benjamin (at [64]).
28 Mr White was also said to be the 'key man' in the management of MWL, having headed the business for 10 years. He personally led the growth by acquisition strategy the business had adopted, including the acquisition of Mr Kortesis' accounting practice, and otherwise led the expansion of the business. The status of Mr White as a key man is reflected in the Deed by the requirement, apparently fulfilled, that specific insurance be obtained for him (see similarly Benjamin at [74]). The Deed also named Mr White personally as the Managing Director.
29 Mr White also relies on the fact that, at least in the short term, he is effectively locked-in to his shareholding in MWL. The Deed contains certain restrictions on Class B shareholders being able to sell their shares. They are subject to a mechanism for making shares available, pre-emptively, to co-shareholders in the first instance. This was said to effectively restrict Mr White's ability to sell his shares without approval from other shareholders.
30 Mr White deposes that he would not have agreed to treat with the Focus entities but for the tacit agreement between the parties that he would continue as the Managing Director of MWL post any investment by them in MWL. Although the White-Kortesis parties accepted that this agreement could not be found in any document, they drew attention to what was said by Hasluck J in Remrose at [136]:
… It clearly emerges from the decided cases that an understanding or agreement underlying the concept need not be established by reference to signed documents or any explicit agreement. The necessary level of agreement can be inferred from the conduct of the parties.
31 The respondents submitted that a legitimate expectation to management could not continue subsequent to Mr White having agreed to the Focus entities' investment in MWL as described above. They contended that the terms of the Deed and Constitution were contrary to the continuation of any such expectation.
32 The Focus entities contended that the present case is to be distinguished from the cases relied upon by the White-Kortesis parties as MWL is not a 'closely held quasi-partnership', but rather a substantial enterprise with a significant body of shareholders whose rights are defined in detail and regulated by the Deed and Constitution.
33 Focus relied upon terms in the Deed which it contends are inconsistent with the expectation. The definition of "director" is any director from time to time. Though Mr White was named as Managing Director, Clause 5.11 expressly provides for the removal of the Managing Director by the Board. A power to remove a director is also found in cl 55 of the Constitution. The Deed also contains an entire agreement clause.
34 In support of these submissions, counsel for the Weingarten parties referred to cl 5.15 and the role of the "Executive Committee". This clause provides for an Executive Committee to retain oversight of MWL. The Committee is to be populated by persons nominated by the Class B shareholders.
35 Focus further distinguished the authorities relied upon by Mr White and Mr Kortesis, characterising MWL as a large sophisticated company with substantial annual revenue. I note that the Focus entities' investment was AUD 14 million.
36 I turn now to the cases the White-Kortesis parties raised in reply: Brown v Bray and Optimisation Australia. These cases were primarily referred to rebut Focus' contention that there was no analogous case of a legitimate expectation being found where there was a negotiated shareholders' deed.
37 Brown v Bray provides little assistance to the White-Kortesis parties. In that case membership of the company was governed by a shareholders deed. However, the case is otherwise distinguishable from the present. The applicant in that case put his claim to a legitimate expectation on the basis that the shareholding was a "quasi-partnership" (at [5]). The shareholding of the company in question was made up of the three directors and their wives (see [4]). That company was in effect a corporate entity through which three couples conducted a business in partnership or joint venture. Further, the shareholders deed there provided expressly for good faith (at [105]). It was these features of the parties' relationships which founded a conclusion that they owned each other duties akin to partners or joint venturers (at [108]-[110]). The interests in MWL, at least post the investment by the Focus entities, cannot be compared with a joint venture between three couples.
38 Optimisation Australia takes the White-Kortesis parties no further. Attention was drawn to the statement of Brereton J at [295] to support the proposition that a legitimate expectation may continue despite there being a shareholders deed. His Honour said (with emphasis added to the words on which particular reliance was placed):
Relevant unfairness may arise not only from what the parties have positively agreed, but also from the majority using its legal powers to maintain the association in circumstances to which the minority can reasonably say it did not agree; thus an applicant for relief does not necessarily have to show a breach of promise or breach of undertaking, and the denial of a 'legitimate expectation' arising out of the dealings of the parties may suffice. Such a 'legitimate expectation' is a manifestation of the equitable consequences of circumstances such as shareholders associating on the understanding, albeit unexpressed in the articles or any shareholders agreement, that each who has ventured capital will participate in management, creating an "equitable restraint" in the nature of a condition attaching to the exercise of the majority's legal power, namely that while the majority may if it wishes exercise its legal power to dismiss the minority shareholder from participation, it must afford an opportunity to withdraw his or her investment, because participation in the conduct of the business was an implicit basis on which the investment was made. …
(citations omitted, emphasis added)
39 That case concerned a company described by his Honour (at [137]) as a "start-up family enterprise". MWL could not be described as a "start-up" and, as I have said above, it was not a "family" company. The MWL shareholding structure, the spread of its shareholders and the arm's length arrangement between shareholders documented in the Deed and Constitution preclude MWL being characterised as a quasi-partnership with analogous fiduciary duties arising between the shareholders.