Become entitled to more than 40% of the voting shares
123IOOF by its notice of contention challenges the primary judge's conclusion that on 1 May 2009 (in fact, 30 April 2009) when the Scheme became effective, AWM Voting Members became entitled to more than 40% of the voting shares in IOOF. The legal position was then clear. From that time, although no shares had been issued and allotted to them, all AWM members had a presently enforceable right to sue on the Deed Poll for the IOOF shares to which they were entitled. What is more, they were entitled to trade the rights to shares on a deferred settlement basis, while their rights to trade AWM shares were suspended upon the Scheme taking effect. Further, the Executives point to the ordinary meaning of "entitlement" as a right which falls short of legal and beneficial ownership, and to the fact that a person can materially influence a company prior to the issue of shares to the person. In the present case, the board of IOOF was reconstituted to include AWM appointees, and its Chief Executive Officer replaced on 1 May 2009, 11 days before this was required under the Implementation Deed, because, as the Executives observe, the commercial reality turned upon the AWM members and the Court approving the Scheme, not the issuing of new shares.
124The primary judge relied on what White J had said in Fardell v Coates Hire Operations Pty Ltd at [69]-[71], where the question was whether, two days before a members' scheme became effective, Mr Fardell enjoyed a right of contractual termination pursuant to a clause which required notice "within 12 months after any person becomes entitled to more than 50% of Coates Hire's shares". Argument was focused there, as it was in the present appeals, on "entitled". White J said:
"69 ...In my view NED Group Holdings Pty Ltd had become 'entitled' to the shares in Coates Hire. 'Entitled' means having a title, right or claim to something. By that date all necessary approvals for the scheme of arrangement had been provided. NED Group Holdings Pty Ltd was both entitled and obliged to complete the acquisition of the shares by paying the consideration on 9 January 2008. It had an equitable interest in the shares not amounting to full beneficial ownership. It is clear that it was ready, willing and able to complete the purchase as it in fact did. It had a beneficial interest in the shares commensurate with its right to specific performance.
70 Counsel for the defendant submitted that in clause 7.3 'entitled' meant legally entitled to exercise the voting rights attaching to the shares. Counsel rightly submitted that the object of a 'change of control' provision of the kind in clause 7.3 was to recognise that a party to a contract may have an abiding interest in the identity of those whose decisions may affect the substance and purpose of the arrangement. He submitted that the court should construe clause 7.3 in a way that gave effect to that purpose. So far as that submission went, I agree with it. But it does not follow that the change in entitlement referred to requires a change in legal title. Clearly a change in beneficial ownership could produce a change in control before legal title to the shares was transferred. Does it matter that the notice was given before the consideration was paid, although the purchaser was obliged and was able to pay?
71 The clause should be read as a whole. The word 'entitled' takes its colour from the following words. That is to say, the clause is referring to a change in 'entitlement' to the shares that may have a material effect on the plaintiff's employment. A person in the position of NED Group Holdings Pty Ltd could exercise influence over Coates Hire before it acquired legal title to the shares. That it did so was evidenced by the fact that by 7 January 2008 the new finance director, Ms Brennan, had been engaged and Mr Jackman had been engaged as chief executive officer of the merged business. As at 7 January 2008 NED Group Holdings Pty Ltd had the right to become registered holder of all of the shares in Coates Hire and was obliged to pay the consideration to the vendors of the shares. It was able to perform that obligation. In my view, its equitable interest in the shares meant that it had then become entitled to the shares within the meaning of clause 7.3."
125Mr Jopling sought to distinguish that reasoning on the basis that whereas NED Group Holdings had a right to acquire existing shares in Coates Hire, the Voting Members merely had rights to future property, in shares not yet issued by IOOF. Although that is so, I do not accept it as a valid point of distinction. The Voting Members had the right from 30 April 2009 to compel IOOF to issue shares to them. The ordinary meaning of "entitled" extends to rights less than full legal ownership of voting shares, and, as White J said, the meaning is informed by the language of the whole clause, which is directed to controlling or influencing, both of which may occur prior to the exercise of voting power.
126The salient difference, to my mind, between the facts in these appeals and Fardell is not the strength of Voting Members' entitlement, but the ephemeral nature of the alleged association and the different quality of entitlement enjoyed by AWM and the Voting Members. Taken at its highest, the Executives' case turned on an "association" for a matter of weeks from around 20 April until no later than 12 May 2009. Of course, the Voting Members who, in my opinion, were "entitled" to IOOF shares from 30 April 2009 when the Scheme became effective, would after 12 May 2009 receive legal ownership of those shares. However, the question is whether AWM "and that person's Associates together become entitled" to more than 40% of IOOF shares. At no time did the nature of the IOOF shares to which AWM was entitled resemble that to which the Voting Members were entitled. Prior to 12 May 2009, AWM had legal title to IOOF shares, whilst Voting Members had the benefit of a contract to issue shares to them. After 12 May, AWM's shares could not be voted because of s 259D, whilst Voting Members became registered as members of IOOF and could vote their shares. Did those distinct interests in IOOF shares answer the description of "together become entitled"?
127In Galaxy Communications Pty Ltd v Paramount Films of Australia Inc (Court of Appeal, 27 March 1998, unreported), Stein JA (with the agreement of Meagher JA and the general agreement of Priestley JA) addressed the meaning of a clause which essentially provided that "if either party hereto becomes bankrupt", the other might elect to terminate. The competing constructions were whether the corporate party needed to be insolvent at the time of the election, or whether it was necessary for the state of insolvency to exist at the time the election was made. Stein JA said at [21] (emphasis in original):
"While I accept that it is open to construe 'becomes insolvent' as meaning 'coming to be in the state of insolvency' I do not accept that this leads to a right to elect to terminate without the necessity of identifying when that insolvency occurred. The preferable construction is, in my opinion, that argued for by the claimants. To construe cl 13(c) as requiring the state of insolvency to exist at the time of the giving of the notice of election to terminate lends certainty to the determination that state."
128To my mind, that reasoning is the key to construing the Share Sale Agreement. The clause 7.15 right to elect to receive the Accelerated Deferred Payment only arises if a "Change in Control" "occurs" (in fact, "occurs" is repeated in the chapeau of the clause, and in clause 7.15.3). A "Change in Control" only occurs if a person and its associates "together become" entitled to more than 40% of the shares.
129When on 13 May 2009 the Executives purported to exercise their option to elect for an Accelerated Deferred Payment, and when much later steps were taken in respect of the put and call options, there was no longer an association between AWM and the Voting Members. There could only ever have been a transitory association, lasting throughout the days between the Scheme becoming effective and it being implemented. And, during that time, the interest of AWM in its IOOF shares was qualitatively different from the entitlement of its members to the shares they were to receive on 12 May. In particular, AWM could never join with its members and vote. Whilesoever AWM could vote its parcel of IOOF shares, its members had not been issued shares. As soon as they were issued, AWM lost its right to vote its own shares.
130In those circumstances, I am doubtful that the alleged associations (AWM either individually or collectively with Voting Members) amount to their together becoming entitled to voting shares in IOOF. However, the argument which was advanced on appeal focused on "entitled" as opposed to "together becomes", and Galaxy Communications was identified after judgment was reserved. If the outcome of the appeals turned on these points, I would have invited the parties to make further submissions on them. Since it does not, I merely express my view, and do not rely on it to support the conclusion I have reached.
131My ultimate conclusion is fortified by the commercial purpose of the "Change in Control" clause. That was to ensure payment in the event that new ownership or management altered the profitability of PIPL, as the primary judge found at [118]-[122]. I agree with his conclusion. Substantially the same purpose is found in relation to the Shareholders' Agreement. That commercial purpose is promoted by the constructions I would give to "becomes entitled to" and to "Associate". It is in my opinion entirely appropriate in a case like this, where ambiguity looms at every turn, to have regard to commercial purpose. It is orthodox to do so, see for example the approach of Allsop P, with whom Macfarlan and Meagher JJA agreed, in OneSteel Manufacturing Pty Ltd v BlueScope Steel (AIS) Pty Ltd [2013] NSWCA 27 at [61].
132For those reasons, a combination of textual and contextual considerations lead to the rejection of the Executives' submissions. I would dismiss each appeal, and order the appellants to pay the respondents' costs.