PHARMAUST LTD -v- ADVANCE HEALTHCARE GROUP LTD & ORS [2007] WASC 125 (15 June 2007)

3 The following summary of the action is based upon the contents of an affidavit sworn on 23 March 2007 by Ms Tantiprasut, a solicitor in the employ of the solicitors for the plaintiff.

4 The action was commenced by originating process on 10 August 2006. The plaintiff sought relief to the effect of declaring resolutions ("Resolutions") which were passed at an annual general meeting of the first defendant held on 2 and 3 August 2006 (AGM) invalid and sought other consequential relief in relation to securities issued pursuant to the Resolutions, which securities the plaintiff contended should be undone. The basis of the plaintiff's claim was that the chairman of the AGM unlawfully rejected an appointment of corporate representative form which had been submitted by HSBC Custody Nominees (Australia) Ltd for 5.5 million shares (Appointment). It was common ground that the rejection of the Appointment affected the outcome of the AGM in the sense that the result of the Resolutions would have been different had the Appointment been accepted. Following the meeting the first defendant issued the securities pursuant to the Resolutions declared passed at the AGM.

5 On 15 August 2006 the matter was entered into the expedited list.

6 A listing conference occurred on 1 December 2006. By that time the parties had exchanged affidavits that were to be relied upon at the trial and orders had been made in relation to discovery and expert evidence.

7 On 5 December 2006 the matter was listed for trial for five days commencing on 14 February 2007.

8 A mediation conference took place on 8 January 2007.

9 On 29 November 2006 the first defendant had made an announcement to the ASX that it intended to hold an extraordinary general meeting in late January 2007. The announcement said that the meeting was for the purpose of shareholders approving transactions by which Hawkesbridge Private Equity agreed to sell the entire convertible note holding in the first defendant held by the second, third and fourth defendants to Covenant Nominees Pty Ltd, an entity associated with Mr Michael Boyd. The announcement stated that the sale would also include Covenant acquiring 80 million shares in the first defendant from Hawkesbridge, reducing Hawkesbridge's shareholding in the first defendant to approximately 5 per cent.

10 On 8 January 2007 the first defendant made an announcement to the ASX which was stated to be a further update to its 29 November 2006 ASX announcement with regard to the sale to Covenant of the entire convertible note holding in the first defendant of the second, third and fourth defendants. The 8 January 2007 announcement said that the sale would require the approval of shareholders in the first defendant at an extraordinary meeting expected to be held in March. The announcement further said that at the extraordinary shareholders' meeting shareholders would also be asked to ratify a number of the resolutions from the AGM which are the subject of these proceedings. The announcement stated that the first defendant believed that ratifying the resolutions from the AGM "should enable the litigation to be resolved without incurring the costs of a trial".

11 On 10 January the plaintiff filed and served its affidavit of discovery. On 15 January the first defendant filed and served its affidavit of discovery.

12 On 18 January the first defendant applied to vacate the trial dates. On 18 January the application was adjourned to 23 January for hearing.

13 On 19 January the first defendant's solicitors wrote to the plaintiff's solicitors. The letter stated, amongst other things:

"If shareholders ratify the transactions, there appears little utility in your client maintaining its claim. If shareholders do not ratify the transactions, the adjourned trial could still be held expeditiously."

14 On 23 January, at the hearing of the first defendant's application to vacate the trial dates, counsel for the first defendant submitted that the basis of the application was the first defendant's intention to have ratification of the Resolutions and the issue of the securities considered at the shareholders' meeting which was proposed for 1 March 2007 and further submitted that if the Resolutions were not passed at the proposed meeting then that would not dispose of the action. I made orders vacating the trial dates.

15 On 24 January the first defendant made a further ASX announcement. The announcement referred to the shareholders' meeting proposed to be held in early March at which the first defendant proposed to seek ratification of the issues of securities approved at the AGM. The announcement stated "if the resolutions are passed it will render [the plaintiff's] current proceedings futile and unnecessary".

16 On 22 February 2007 the matter was set down for trial commencing 2 April 2007. The matter was set down for trial on the basis that the outcome of the extraordinary general meeting would be known by that time.

17 On 19 March the extraordinary general meeting of the first defendant ("EGM") was held. The ratification resolutions were passed. Later that day the plaintiff's solicitor informed the solicitors for the defendants that the trial should be vacated at the directions hearing listed for 20 March and that the discontinuance of the action should be argued at a later time as there may be an issue as to costs. In a later telephone conversation on 19 March the solicitor for the plaintiff informed the solicitor for the first defendant that the plaintiff proposed to apply to discontinue and the costs issue could be determined in that application. On 23 March the plaintiff made the present application that it have leave to discontinue the action on terms that there be no order as to the costs of the action and that the counterclaim be discontinued on the terms that there be no order as to costs of the counterclaim.

18 McHugh J in Re Minister for Immigration and Ethnic Affairs; Ex parte Lai Qin [1997] HCA 6; (1997) 186 CLR 622, considered the relevant principles for determining costs orders where there has been no hearing on the merits of the case. His Honour stated at 624 - 625:

"The court cannot try a hypothetical action between the parties. To do so would burden the parties with the costs of a litigation which by settlement or extra-curial action they had avoided. ...

If it appears that both parties had acted reasonably in commencing and defending the proceedings and the conduct of the parties continued to be reasonable until the litigation was settled or its further prosecution became futile, the proper exercise of the cost discretion will usually mean that the court will make no order as to the cost of the proceedings."

19 In One.tel Ltd v Commissioner of Taxation (2000) FCA 270; 101 FCR 548, Burchett J said at [6]:

"In my opinion, it is important to draw a distinction between cases in which one party, after litigating for some time, effectively surrenders to the other, and cases where some supervening event or settlement so removes or modifies the subject of the dispute that, although it could not be said that one side has simply won, no issue remains between the parties except that of costs. In the former type of case, there will commonly be lacking any basis for an exercise of the court's discretion otherwise than by an award of costs to the successful party. It is the latter type of case which more often creates problems, since there may be difficulty in discerning a clear reason why one party, rather than the other, should bear the costs."

20 The plaintiff submits that the ratification of the Resolutions at the EGM was a supervening event that modified the subject of the proceedings such that the further prosecution of the proceedings was futile. The plaintiff further submits that it acted reasonably in commencing the action for the following reasons. Firstly, the plaintiff is a shareholder of the first defendant. Secondly, the outcome of the AGM was affected by the rejection of the Appointment. Thirdly, the plaintiff as a shareholder acted reasonably in commencing the action to protect its rights as a shareholder in circumstances where the passing of the Resolutions has the effect of approving a change in control of the first defendant and diluting the then existing shareholding of the plaintiff. Fourthly, the plaintiff sought an urgent trial within weeks of the commencement of the proceedings, however, this was opposed by the defendants as they wished to raise discretionary matters beyond the validity of the Resolutions.

21 The first defendant submitted that there has been no supervening event that necessarily made the further prosecution of the plaintiff's case futile and it is a case where the plaintiff has effectively surrendered. That submission is based on a statement by counsel for the plaintiff at a directions hearing on 6 February 2007. Counsel for the plaintiff then made submissions to the effect that a trial of the action may still be necessary if the Resolutions, the validity of which was disputed in these proceedings, were ratified at the EGM.

22 The plaintiff has sought to explain that statement. However, in my view the relevant issue is whether, as a matter of fact and law, the proceedings have been rendered futile by the ratification of the resolutions at the EGM, not what counsel said or believed on 6 February 2007. The ratification at the EGM of the Resolutions made the issue of the securities lawful irrespective of the validity of the Resolutions at the time they were passed. The real point of the proceedings is to cancel or set aside the issue of the securities. Further prosecution of the proceedings was rendered futile by the ratification of the Resolutions at the EGM. I find that this is a case where a supervening event rendered the continuation of the proceedings futile.

23 The first defendant further submits that the court should exercise its discretion against the plaintiff because the plaintiff acted unreasonably. The first defendant submitted that the plaintiff acted unreasonably for the following reasons. Firstly, the plaintiff was a competitor of the first defendant. Secondly, the plaintiff has repeatedly sought to merge with the first defendant. Thirdly, the plaintiff obtained its shares in the first defendant only days prior to the AGM. Fourthly, the terms on which the plaintiff acquired its shares in the first defendant were such that it paid only nominal consideration. Fifthly, the plaintiff acquired its shares in the first defendant unlawfully and in contravention of s 622 of the Corporations Act 2001 (Cth) ("the Act"). Sixthly, the plaintiff unlawfully failed to disclose the terms on which the shares were acquired as required by s 671B of the Act in that the plaintiff did not give to the first defendant or to the ASX details of, or copies of, the relevant agreements through which they acquired a substantial interest in the first defendant. Seventhly, if, at the AGM, the plaintiff had not exercised its purported right to vote attaching to its unlawfully acquired shares there could be no question that the Resolutions were validly passed, in that the number of shares held by the plaintiff exceeded those held by HSBC Custody Nominees (Australia) Ltd. Eighthly, the plaintiff understood that the consequences of it obtaining its substantive relief would result in the first defendant being unable to meet its debts as and when they fell due and, in all probability, would lead to the appointment of an external administrator to the first defendant. Ninthly, the plaintiff's conduct at the AGM was generally unreasonable.

24 The plaintiff disputes that it acquired its shares in the first defendant unlawfully or in breach of s 622 of the Act. The plaintiff disputes that it unlawfully failed to disclose the terms on which the shares were acquired as required by s 671B of the Act. It is not necessary to attempt to determine those contested issues in the course of this application because if those matters were determined in favour of the first defendant that would not establish that the plaintiff acted unreasonably in commencing and presenting the proceedings.

25 None of the matters advanced by the first defendant, if established, amount to unreasonableness requiring the Court to exercise its discretion to order costs in favour of the defendants. The plaintiff did not act unreasonably in commencing the litigation. The defendants accept that this is not a case where from the commencement of the litigation the plaintiff was almost certain to have failed if the matter had been fully tried.

26 Counsel for the first defendant submitted that in considering whether the plaintiff had acted reasonably, the court was not confined to considering the conduct of the plaintiff in instituting and maintaining the proceedings or in the events the subject of the litigation but that the court might also consider the conduct of the plaintiff in events preceding and leading up to the matters that are the subject of the proceedings, although not a matter in issue in, or directly related to, the proceedings. Counsel for the first defendant submitted that the court might also have regard to "other matters that may or may not impinge upon the bona fides and motivation in commencing the proceedings themselves" and that "might be seen in some instances as a little bit into an abuse of process".

27 At the time the plaintiff commenced these proceedings it may well have had commercial objectives beyond the cancellation of the securities issued pursuant to the Resolutions. However, it wished to use these proceedings for a proper purpose, that is obtaining a declaration that the Resolutions were not validly passed and the securities should be cancelled. The plaintiff was guilty of no abuse of process in commencing these proceedings. It broke no contract and was guilty of no fraud in commencing the proceedings. In short, the plaintiff did nothing that amounts to unreasonableness in commencing the proceedings.

28 The first defendant submits that the plaintiff acted unreasonably in continuing to prosecute the proceedings after the first defendant gave notice to the ASX on 29 November 2006 of its intention to hold an extraordinary general meeting in late January 2007. Notwithstanding having received the notice of the first defendant's intention to hold the EGM, the plaintiff continued to prosecute its claim. The first defendant submits that if the EGM was a supervening event, it was unreasonable for the plaintiff to continue to prosecute its claim upon receiving notice of the first defendant's intention to hold the EGM.

29 The first defendant's notice of 29 November 2006 gave no notice of an intention to put to the EGM motions to ratify the Resolutions. The first defendant did not give notice of its intention to put to the EGM motions to ratify the Resolutions until 8 January 2007. On 8 January 2007 the trial of the matter was scheduled to commence on 12 March. Most of the work in preparation for the trial had been done. It was not known whether the motions to ratify the Resolutions would be passed at the EGM. In all the circumstances, the plaintiff did not act unreasonably in continuing to prosecute the proceedings after 8 February 2007.

30 The second to fifth defendants submitted that the action contained at its inception the seeds of its own futility and that the plaintiff assumed the risk of the proceedings becoming futile. Those defendants referred to the decision of Finn J in ACN 116 149 092 Pty Ltd v Coopers Brewery Ltd [2006] FCA 1119. The following summary of that proceeding is based upon paragraphs 1 - 12 of the judgment of Finn J. The proceeding was one of a number instigated by Lion Nathan Australia Pty Ltd and its sympathisers in the context of Lion Nathan Australia's ultimately unsuccessful attempt to take over Coopers. Lion Nathan had, under Coopers' articles of association, a third-ranking pre-emptive right to any Coopers' shares offered for sale. The relevant provisions in the articles were revokable by virtue of Coopers' memorandum if there was a "change in control" of Lion Nathan. A change in control was defined to be any acquisition of a relevant interest in 40 per cent of Lion Nathan's shares. Further, article 53 permitted the transfer of shares by members to a "member's relative" without activating the pre-emptive rights regime that otherwise applied to share transfers. In April 1998 Kirin Brewery acquired a 45 per cent interest in the issued share capital of Lion Nathan. In March 2002 Coopers filed a summons in the Supreme Court of South Australia seeking a declaration that the effect of the acquisition operated as a change in control within the meaning of its articles. On 1 September 2005 Lion Nathan announced its intended takeover bid of Coopers. On 2 September 2005 Perry ACJ determined that there had been a change in control, a decision upheld by the Full Court of the Supreme Court in October 2005. On 6 September 2005, after Perry ACJ's decision, but prior to the appeal, ACN was registered in New South Wales. Its issued share capital consisted of two ordinary shares held by a trustee company. The shares in the trustee company were held by Lion Nathan. On 16 September 2005 ACN entered into an agreement with a Coopers' shareholder, Barry Schrapel, for the sale to it of some 500 Coopers' shares. The agreement allowed for his transfer to be effected under article 53. Coopers' directors refused to register the transfer. After the favourable decision of Perry ACJ, on 21 September 2005 they gave notice of an extraordinary general meeting on 20 October 2005 to consider and approve an amendment to Coopers' constitution removing Lion Nathan's pre-emptive and other rights. On 27 September 2005 ACN commenced proceedings claiming it was entitled to be registered as a transferee of the 500 shares in Coopers from Mr Schrapel on the basis that it was a "member's relative" of Mr Schrapel. It sought orders that the transfers be registered. At the time of commencing those proceedings ACN sought an interlocutory injunction preventing the proposed EGM from going ahead. The injunction was granted but later discharged on 18 November 2005. On 15 November 2005 Lion Nathan filed an application for special leave to appeal to the High Court from the decision of the Full Court of the Supreme Court of South Australia. On 14 December 2005 the extraordinary general meeting was held and Coopers' shareholders voted in favour of the proposed resolution to amend the Coopers' articles. Those amendments were duly made, so removing Lion Nathan's pre-emptive rights and preventing it from being able to purchase or to be a holder of Coopers' shares. Lion Nathan's application for special leave to appeal to the High Court was subsequently dismissed.

31 In those circumstances ACN sought leave to discontinue the proceedings with no order as to costs. The basis of ACN's no costs contention was that, in commencing the proceedings, it had acted reasonably and that its conduct had continued to be reasonable until the further prosecution of the litigation became futile. That futility came about by the amendments to Coopers' articles removing Lion Nathan's pre-emptive and exemption rights.

32 Finn J ordered that ACN be granted leave to discontinue the proceedings but that it pay the defendant's costs. At [22] Finn J said:

"As I foreshadowed, I am satisfied that an order for costs is appropriate. While it cannot be said that the institution of this proceeding was in any way unreasonable - it was one of a complex of legal manoeuvres in a hostile take over bid - it was done in the full knowledge that, consequent upon the decision of Perry ACJ, Coopers would act to alter its constitution to remove Lion Nathan Australia's pre-emptive rights and exemptions unless either that decision was reversed on appeal or the holding of the necessary extraordinary general meeting could be prevented. Neither of these contingencies eventuated. From its inception this matter contained the seeds of its own futility, yet ACN was prepared to proceed and to put Coopers to its defence. In so doing ACN assumed the risk of the proceedings becoming futile. It cannot escape the consequences of that by the assertion that it nonetheless conducted itself reasonably. It gambled and it lost. It is entirely appropriate that it pay Coopers' costs occasioned by the discontinued claim including reserved costs and its costs of this motion."

33 This case is quite different from ACN v Coopers. ACN commenced its proceedings after Coopers had given notice of an extraordinary general meeting to consider and approve an amendment to Coopers' constitution removing Lion Nathan's pre-emptive and other rights. Finn J found that ACN commenced the proceedings in the full knowledge that Coopers would act to alter its constitution to remove Lion Nathan's pre-emptive rights and exemptions unless either the decision of Perry ACJ was reversed on appeal or the holding of the necessary extraordinary general meeting could be prevented. His Honour found that from the inception of the proceedings by ACN it contained the seeds of its own futility.

34 By contrast, at the time the plaintiff in this case commenced proceedings the first defendant had not given notice of intention to hold an EGM to ratify the Resolutions. There is no evidence that the plaintiff should have foreseen the holding of such an EGM or that the EGM was likely to ratify the Resolutions. Indeed, the first defendant pressed for an early trial of the proceedings on the ground that it was necessary because of the Covenant transaction.

"[S]erved only to address any irregularities that might arise if the plaintiff's claim were to be successful. The first defendant's counterclaim is therefore entirely consequent upon the plaintiff's claim. Accordingly, the costs of the first defendant's counterclaim should be treated in the same manner as the costs of the first defendant's defence."

36 I accept that submission that the costs of the counterclaim should be treated in the same manner as the costs of the plaintiff's action.

37 In all the circumstances the plaintiff should have leave to discontinue the action on terms that there be no order as to the costs of the action, including reserved costs, and the counterclaim should be discontinued on terms that there be no order as to costs of the counterclaim, including reserved costs.