PharmX Pty Ltd (in its capacity as trustee of the PharmX Unit Trust) v Fred... [2019] VSC 748 | Case summary

Supreme Court of Victoria|2019-11-21|Before: LYONS J

CONTRACT - Construction - Change of Control clause - 'Relevant Interest' requirement - 'Power to control the exercise of a power to dispose of' shares - Relevance of similar words in statutory definition of Relevant Interest in construction of contractual provision - Power to restrain transfer of shares of other shareholders in company for a period - Pre-emptive right over shares of other shareholders in company - Power to require other shareholders to sell shares in company to third party - Power to refuse consent to transfer to third party unless of good standing - Whether each is a 'power to control the exercise of a power to dispose of' shares.

CONTRACT - Construction - Shareholders' Agreement - Unit Trust Deed - Deemed but unpaid income distribution of Trust - Unitholder 'presently entitled' with ' vested and indefeasible interest' to distribution under Trust Deed - Whether provision in Shareholders' Agreement imposes requirement for Special Majority Approval of Trustee to pay - Nature of entitlement to unpaid income distribution - Obligation on Trustee to pay Dividend without demand - Provision in Shareholders' Agreement not apposite given nature of entitlement.

1 In this proceeding, the trustee of the PharmX Unit Trust (the 'Trustee' and the 'PharmX Trust' respectively) seeks the determination of questions of construction relating to agreements relevant to the Trust. Those questions arise from proceedings issued by one of the unit holders in the Trust. The Trustee also seeks judicial advice in respect of its conduct of those proceedings.

2 The shares in the Trustee are 'stapled' to the units in the PharmX Trust so that each shareholder is also a unitholder in the PharmX Trust in the same proportions (collectively, the 'Stapled Securities'). The holders of the Stapled Securities (called 'Stapled Securities Holders' but which I will refer to as the 'Holders') are:

(2) Mountaintop Systems Pty Ltd ('Mountaintop') as to 20%;

3 The questions of construction raised by the Trustee relate to two separate issues which arise from proceedings instituted in this Court by Fred IT against the Trustee in late 2018 (the 'first proceeding')[1] for unpaid income entitlements under cl 27.3 of the Trust Deed for the PharmX Trust dated 27 February 2006 (the 'Trust Deed').

4 The first question of construction relates to the acquisition of 50% of the shares in Fred IT by Telstra Corporation Ltd ('Telstra') pursuant to an agreement executed in late September 2013 (the 'Fred IT Shareholders' Agreement'). The issue is whether that acquisition triggers the 'Change of Control' provisions in cl 15 of the Stapled Securities Agreement dated 27 February 2006 which binds the Holders (the 'SSA'). If it does, it may affect Fred IT's entitlement to unpaid income which is the subject of the first proceeding. Further, if it does, there may have been a breach of the obligation to give notice of the Change of Control as a result of which the other Holders may obtain, or have obtained, the right to purchase the Stapled Securities of Fred IT.

5 The second question of construction relates to each Holder's deemed entitlement to income under cl 27.3 of the Trust Deed (which applies in default of a resolution of the Trustee for distribution of income in the relevant year). The issue is whether the Trustee requires 'Special Majority Approval' to pay to such income to each Holder. Special Majority Approval requires approval by directors representing Holders who collectively hold 70% or more of the Stapled Securities.

6 This second question affects Fred IT's unpaid income entitlements which are the subject of the first proceeding. It also affects Corum, which has made a demand for unpaid income entitlements under cl 27.3. This is in circumstances where Mountaintop and Daleflag together hold 40% of the Stapled Securities and do not agree to the payment.

7 In light of these issues, I ordered that each of the Holders be joined to this proceeding and that the questions of construction be set down for hearing and determination.

8 The two questions (adopting the definitions in these reasons) are:

On a proper construction of the SSA relating to the PharmX Trust, has there been a "Change of Control" in Fred IT for the purposes of the SSA following the acquisition, by Telstra in 2013, of 50% of the shares in Fred IT, having regard to the terms of the Fred IT Shareholders' Agreement between (amongst others) Telstra and Fred IT?
On a proper construction of the SSA and Trust Deed, does the Trustee require Special Majority Approval of Directors to pay to Holders amounts to which they are presently entitled by operation of clause 27.3 of the Trust Deed?[2]

9 For the reasons that follow, the answer to Question 1 is 'Yes' and the answer to Question 2 is 'No'.

10 The PharmX Trust operates the business of developing, implementing and operating an electronic ordering gateway to facilitate the transmission of orders for the purchase of pharmaceuticals and related products by pharmacists from distributors, wholesalers and manufacturers (the 'Business').

11 The PharmX Trust was created on 27 February 2006. The relevant documents executed at that time were:

(2) a circular resolution adopting the new constitution of the Trustee (the 'Constitution'); and

(3) the SSA between each of the unit holders and shareholders in the PharmX Trust at the time.[4]

12 The SSA was of central importance in regulating the relationship between the parties. Clause 2 of the SSA provides that the SSA prevails over any inconsistent clause in the Trust Deed or the Constitution of the Trustee. The SSA is also referred to in the Constitution.[5] Clause 2.3 of the Constitution provides that the SSA will prevail over any inconsistent clause of the Constitution and the members agree that the Constitution will be amended to remove any inconsistency.

13 Further, cl 2.5 of the Trust Deed provides that the Trust Deed is subject to the terms of the SSA, which 'prevails over any inconsistency with this deed' and that each Holder agrees that the Trust Deed must be amended to remove any inconsistency.

14 Clauses 4 and 5 of the Constitution deal with the rights attaching to shares and the issue of shares and other securities. First, cl 4 provides that, subject to the Constitution, the SSA and the terms of issue of shares, all shares attract, among other things, the right to attend and vote at general meetings at one vote per share and the right to receive dividends.

15 Second, cl 5.1 provides that, subject to the Constitution, the SSA and the Corporations Act 2001 (Cth) (the 'Corporations Act'), the directors of the Trustee may issue or dispose of shares and other securities to persons on terms, at an issue price and at a time determined by the directors. Clause 5.2 provides that no shares may be issued unless there is a contemporaneous and corresponding issue of the same number of units in the PharmX Trust.

16 As to the SSA itself, recital E records that the Trustee and the PharmX Trust will be managed and controlled in accordance with the terms of the SSA.

17 Clause 5 of the SSA provides that each Holder must exercise its rights to ensure that the composition of the Board of the Trustee and the procedures for meetings of the Board are as set out in Schedule 2. In summary, Schedule 2 relevantly provides that each Holder holding 15% or more of the Stapled Securities may appoint to the Board one non-executive Director. The result is that each Holder may appoint one Director to the Board of the Trustee who for ordinary resolutions has one vote.[6] In addition, the Board must contain a non-executive chair appointed by the Directors by Special Majority Approval, but who then may only vote on a resolution that does not require Special Majority Approval.[7]

6. Management

Subject to clause 7, each Stapled Security Holder must ensure:

(a) management of the Trustee, the Trust and the Business is vested in the Board;

(b) the Trustee, the Trust and the Business are managed in accordance with this agreement;...

19 In light of the summary relating to the PharmX Trust and its management, I will now turn to the provisions relating to each of the questions for determination. For convenience, I will first set out the provisions relevant to Question 2.

2.2 Provisions of PharmX Documents relevant to Question 2

7.1 Special Majority Approval of Directors

The Trustee either in its personal capacity or as trustee of the Trust must not do, or commit to do, any of the things listed in Schedule 3 without the Special Majority Approval of Directors.

21 Special Majority Approval is defined in cl 1.1 to mean a vote, resolution or consent of directors passed or given by directors who together represent Holders holding 70% or more of the Stapled Securities on issue. For convenience, I will refer to this as the 'Special Majority Approval requirement'.

22 Further, paragraph 2 of Schedule 2 of the SSA provides that, at a board meeting of the Trustee, in the case of a decision requiring Special Majority Approval, the number of votes a director may exercise is equivalent to the number of Stapled Securities held by the Holder that appointed that director[8] and the chairman has no vote.[9]

23 Schedule 3 of the SSA lists 35 separate items which require Special Majority Approval pursuant to cl 7.1. These include a broad variety of matters, for example:

(1) to appoint or remove the chairman, general manager, chief operating officer or chief financial officer (Item 1);

(2) to acquire or dispose of assets of the Trustee having a value of $10,000 or more except in accordance with the Business Plan (Item 11); and

(3) to make a loan or provide credit or other financial accommodation to a person, except in accordance with the Business Plan (Item 20).

24 Relevantly, Item 26 provides that Special Majority Approval is required to:

(Dividends and distributions) Declare, make or pay a dividend of the Trustee or distribution of the Trust.

25 Clause 12 of the SSA is headed "Dividend and distribution policy". It provides:

The amount of any:

(a) Trust capital or income distribution to a [Holder] must be made in accordance with clause 27 of the Trust Deed; and

(b) dividends issued in the Trustee must be as determined by the Board.

26 It is now necessary to turn to the Trust Deed. As noted above, cl 2.5 provides that the Trust Deed is subject to the terms of the SSA. Under cl 1.1 of the Trust Deed, Income is defined as follows:

in respect of any financial year .... means the net income of the Trust for that period (being an amount calculated after deducting expenses of the Trust) determined according to generally accepted accounting principles and approved accounting standards and, unless the Trustee determines otherwise:

(a) without regard to any loss on income account incurred in any preceding financial year...; and

(b) without regard to any loss on capital account incurred in the current financial year or in any preceding financial year....

27 Further, Trust Year is defined in cl 1.1 to mean a year or other period in relation to which taxable income of the PharmX Trust for the purposes of the Income Tax Assessment Act 1936 (Cth) or the Income Tax Assessment Act 1997 (Cth) must be determined.

28 Clause 27 of the Trust Deed is headed 'Distributions'. It provides as follows:

27.1 Cash distributions

(a) During the period in which the Stapled Securities Agreement is in force the Trustee may at any time determine that:

(i) an amount of Income be distributed to the Holders (Distributable Income); and

(ii) any amount of capital be distributed to a Holder pro rata to the number of Units held in the Trust as at a time determined by the Trustee,

(b) Where the Trustee makes a determination under clause 27.1(a)(i), the amount to be distributed to an individual Holder is the amount calculated in accordance with Schedule 2.

(c) When the Stapled Securities Agreement is not in force, the Trustee may at any time elect that any amount (capital or income) of the Trust be distributed to Holders pro rata to the number of Units held in the Trust as at a time determined by the Trustee, provided that only cash is distributed.

27.2 Distribution of Distributable Income

Within two months after the end of each Trust Year, the Trustee must distribute any undistributed share of Distributable Income to which any Holder is entitled.

27.3 Holders' interest in Income

Each Holder is presently entitled as at the end of each Trust Year to a share of Income for that Trust Year, if any, which has not previously been distributed:

(a) during the period in which the Stapled Securities Agreement is in force, which is an amount equal to the amount calculated in accordance with Schedule 2, as if the Income were Distributable Income; and

(b) during the period in which the Stapled Securities Agreement is not in force, which is an amount equal to the proportion of Income that is equivalent to the proportion of the number of Units held to the aggregate of all Units then on issue on the Trust.

Each Holder has a vested and indefeasible interest in all amounts of Income to which that Holder becomes entitled in accordance with the operation of this clause.

29 Schedule 2 to the Trust Deed sets out a formula which provides the basis upon which the calculation of trust distributions is to be made. Relevantly, and in summary, the formula is not based upon the interest of each Holder in the PharmX Trust. Rather, it appears to be based on the performance of each Holder in procuring or obtaining orders placed on the PharmX Trust's ordering gateway software in respect of each supplier.

2.3 Provisions of PharmX Documents relevant to Question 1

30 Clause 14 of the SSA provides for certain restrictions on the sale of Stapled Securities. For example:

(1) clause 14.1(a) provides that a Holder must not transfer any of its Stapled Securities within 18 months of the date of the SSA without the consent of all the other Holders; and

(2) clause 14.3 provides that a Holder wanting to transfer any of its Stapled Securities must give a written notice to each of the other Holders (a 'Transfer Notice') offering those securities to the other Holders pursuant to a right of pre-emption in clause 14.4 and following provisions.

31 Clause 15 is headed 'Change of Control'. It is of central relevance to Question 1. As a result, I will set it out in full:

15 Change of Control

15.1 Defined term

In clause 15, Change of Control means, in relation to a [Holder], a change in the holding of Voting Shares of the [Holder] by a Relevant Person so that:

(a) the Relevant Person acquires a Relevant Interest in more than 50% of the Voting Shares of the [Holder]; and

(b) by reason of that acquisition, the Relevant Person also acquires a Relevant Interest in the Voting Shares of the Trustee or Units in the Trust held by the [Holder].

15.2 Relevant Interest

A person has a relevant interest in shares or units if they:

(a) are the holder of the shares or units; or

(b) have power to exercise, or control the exercise of, a right to vote attached to the shares or units; or

(c) have power to dispose of, or control the exercise of a power to dispose of, the shares or units.

It does not matter how remote the relevant interest is or how it arises. If two ore [sic] more people can jointly exercise of [sic] these powers, each of them is taken to have the power.

15.3 Control exercisable through a trust, agreement or practice

For the purposes of clause 15.2, power or control includes:

(a) power or control that is indirect;

(b) power or control that is, or can be, exercised as a result of or by means of a body corporate;

(c) power or control that is, or can be, exercised as a result of, by means of or by the revocation or breach of:

(i) a trust; or

(ii) an agreement; or

(iii) a practice; or

(iv) any combination of them,

whether or not they are enforceable; and

(d) power or control that is, or can be made, subject to restraint or restriction.

It does not matter whether the power or control is express or implied, formal or informal, exercisable alone or jointly with someone else. It does not matter that the power or control cannot be related to a particular share or unit.

15.4 Deemed Relevant Interest

If at a particular time all of the following conditions are satisfied:

(a) a person has a Relevant Interest in issued shares or units;

(b) the person (whether before or after acquiring the Relevant Interest):

(i) has entered or enters into an agreement with another person with respect to the shares or units; or

(ii) has given or gives another person an enforceable right, or has been or is given an enforceable right by another person, in relation to the shares or units (whether the right is enforceable presently or in the future and wether [sic] or not on the fulfilment of a condition); or

(iii) has granted or grants an option to, or has been or is granted an option by, another person with respect to the shares or units;

(c) the other person would have a Relevant Interest in the shares if the agreement were performed, the right enforced or the option exercised,

the other person is taken to have a Relevant Interest in the shares or units from the date the agreement is entered into, the right is given or the option is granted.

15.5 Mandatory transfer

If there is a Change of Control in a [Holder], the [Holder] (Seller):

(a) must immediately give notice to the Trustee of the Change of Control; and

(b) if the [Holders] holding 40% or more of the Stapled Securities on issue that are not owned by the Seller agree, the Seller is taken to have given an irrevocable Transfer Notice to each other [Holder] under clause 14.3 on the earlier of:

(i) the date it gives notice of the Change of Control to the Trustee; or

(ii) the date the Trustee becomes aware that the Change of Control has occurred,

for all Stapled Securities held by it (Sale Securities) at a cash price per Stapled Security determined in accordance with Schedule 6.

Clauses 14.1(b), 14.2 and 14.4 to 14.13 apply with necessary changes to any Transfer under this clause 15.5.

32 'Relevant Person' is defined in cl 1.1 of the SSA to mean a person who, immediately prior to the acquisition of any Voting Shares in a Holder, held no Relevant Interest in the Voting Shares of the Trustee.

33 'Relevant Interest' is defined in clause 1.1 as to be 'determined by clauses 15.2 and 15.3'. I note in passing that cl 1.2(j) of the SSA provides that a word or expression defined in the Corporations Act has the meaning given to it in the Corporations Act unless the context otherwise requires.

34 Clause 18 of the SSA is headed 'Default'. Clause 18.1(a) relevantly provides that an event of default occurs in relation to a Holder, if the relevant Holder breaches the SSA and either:

(i) the breach is capable of being remedied and the [Holder] does not remedy the breach within 30 days after receiving a notice of the breach from a party requesting the breach to be remedied; or

(ii) the breach is incapable of being remedied, and the breach is a material breach of the agreement; ...

35 Clause 18.2 provides, in summary, that if an event of default occurs in relation to a Holder (the 'Defaulting Party'), the Holders holding 40% or more of the Stapled Securities may give a notice to all other Holders:

(1) suspending all rights attached to the Stapled Securities held by the Defaulting Party until the default is remedied; or

(2) requiring the Defaulting Party to sell its Stapled Securities (the 'Sale Securities') to the other Holders at a price determined in accordance with Schedule 6.

36 Pursuant to a share sale agreement dated 23 September 2013 between Telstra as Buyer and the shareholders in Fred IT as Sellers (the 'Sale Agreement'), Telstra acquired 50% of the issued shares in Fred IT.

37 Under the Sale Agreement, Completion was to take place on 30 September 2013. Clause 2.2 provided that the shares were sold to Telstra with all rights attached to them as at 23 September 2013 and all rights accruing between that date and the Completion Date.

38 Clause 5.2(a) of the Sale Agreement provided that, on or before Completion, each party to the Sale Agreement must carry out the Completion Steps referrable to them in accordance with Schedule 4. In addition to the provision of executed share transfers, one of the steps in Schedule 4 was the completion of each Transaction Agreement, which was relevantly defined to include the 'New Shareholders Agreement' between Telstra, Fred IT and the Sellers.

39 The form of the New Shareholders Agreement did not form part of the Sale Agreement. However, the argument before me proceeded on the basis that the Fred IT Shareholders' Agreement was the form of the New Shareholders Agreement finally agreed. It was executed by Telstra, Fred IT and the Sellers on or before the Completion Date of 30 September 2013, pursuant to Schedule 4 the Sale Agreement. In this regard, I note that Telstra acquired the shares in Fred IT on the Completion Date of 30 September 2013.[10]

40 The Fred IT Shareholders' Agreement is relevant to the Change of Control issue raised by Question 1.

41 Clause 3.1 of the Fred IT Shareholders' Agreement provides that, if there is any inconsistency between the Shareholders' Agreement and the Fred IT Constitution, the Shareholders' Agreement prevails.

42 Relevantly, cl 4.3 of the Fred IT Constitution provides:

4.3 Rights Attaching to Ordinary Shares

The ordinary shares confer upon their holders;

(a) ...

(b) the right to receive notice of and attend any general meeting of the Company;

(c) the right to cast one vote upon a show of hands at a general meeting of the Company and to cast one vote for each ordinary share held upon a poll; ...

43 The Fred IT Shareholders' Agreement then provides for the structure of Fred IT. Clause 4 records that Telstra owns 50% of the shares in Fred IT with two other shareholders owning 35% and 15% each. Clauses 5 and 6 relate to the Board of Fred IT. Clause 5.1 provides that, while Telstra retains a minimum of 45% of the shares in Fred IT, Telstra is entitled to appoint three of the six directors of Fred IT. Clause 5.3 provides that:

(1) the chairman of the board will be appointed by Telstra whilst it retains 45% or more of the shares; and

(2) if there is an equality of votes at a meeting of the Board, the chairman will have a casting vote except in relation to decisions specified in clause 7.1.

44 Clause 6.3(a) provides that each Shareholder's appointee on the Board will be entitled to exercise one vote. However, cl 6.3(b)(i) provides that each Telstra Director can exercise the number of votes equal to the number of votes that would have been exercisable by the Telstra Directors if all of the Telstra Directors had been present, divided by the number of Telstra Directors actually present.

45 Clause 7.1 provides that, subject to the Corporations Act, the Fred IT Constitution and the Fred IT Shareholders' Agreement, all decisions of the Board or of the shareholders of Fred IT will be made by Simple Majority Vote. A Simple Majority Vote is defined in cl 1.1 to mean a vote or resolution passed by, as the case may be:

(a) 50% or more of the directors provided that a Simple Majority Vote of only 50% of the directors includes the casting vote of the chairman; or

46 Clause 7.2 provides in summary that, to the extent permitted by law, a director may make a decision in the interests of the shareholder appointing him or her without being required to have regard to the interests of the other shareholders individually or as a whole.

47 I note that, although not presently relevant, cl 7.1 also provides that:

(1) certain decisions require the unanimous agreement of the Board, including any change to the composition of the Board of Fred IT;

(2) failing the unanimous agreement of the Board, such decisions will be put to the shareholders who must agree by Special Majority Vote, which is defined in cl 1.1 to mean shareholders who together hold 75% or more of the shares in Fred IT.

48 I note that cl 21.1 of the Fred IT Constitution provides that, subject to the Corporations Act, the Fred IT Constitution itself and any resolution of Fred IT, the Directors will manage the business of Fred IT and may exercise all such powers of Fred IT that are not by the Corporations Act or the Fred IT Constitution required to be exercised by the shareholders of Fred IT in general meeting.

49 The Fred IT Shareholders' Agreement also provides a number of proscriptions on the sale of shares in Fred IT.

Subject to clauses 15.2 and 27.2(f), the parties agree that a Shareholder may not Transfer its Shares during the period of 2 years from the date of this Agreement (the Standstill Period).

51 I will refer to this as the 'Standstill provision'.

52 Second, cl 16 (headed 'Procedure on Transfer of Shares') provides in summary that, after the expiry of the Standstill Period, a shareholder may transfer shares only if that shareholder serves a Transfer Notice on Fred IT for those shares to be first offered for sale to the other shareholders in accordance with the provisions of cl 16 (the 'pre-emptive rights provision'). The sale price is to be determined in accordance with cl 17.

53 Third, cl 18 is headed 'Drag Along Option'. In summary it relevantly provides that, if Telstra (while it holds 45% or more of the shares in Fred IT) receives an arm's length offer in good faith for the sale of its shares in Fred IT from a third party after the expiry of the Standstill Period, Telstra may require all the shareholders in Fred IT to sell their shares to the third party on the same terms and conditions (the 'Drag Along provision').

18.1 Application

Following expiry of the Standstill Period and subject to complying with clauses 15 and 16 (for the avoidance of doubt the process in clause 16 may be conducted simultaneously with the process under this clause 18 but on the basis that the Shareholders must first be able to exercise their rights under clause 16), a Dragging Shareholder has the Drag Along Option if a Dragging Shareholder has received an arm's length offer or invitation in good faith for the sale and Transfer to a Third Party purchaser (Third Party Drag Purchaser) of 50% or more of the Shares.

18.2 Method of exercise

A Dragging Shareholder may exercise the Drag Along Option only by:

(a) giving a Drag Along Notice to the other Shareholders; and

(b) giving a copy of the Drag Along Notice to [Fred IT].

...

18.4 Obligations and prohibitions

If the Dragging Shareholder exercises the Drag Along Option under this clause 18, each other Shareholder must sell each of the Shares which are held by that other Shareholder:

(a) at the Drag Along Share Price and otherwise on the terms and conditions set out in the Drag Along Notice; and

and do all things and execute such documentation as is necessary or required by the Dragging Shareholder to effect the Transfer including a share sale deed and share transfer form on terms which are prepared or approved by the Dragging Shareholder by giving notice to the other Shareholders and [Fred IT].

(a) Telstra, provided it holds 45% or more of the shares in Fred IT; or

(b) if Telstra hold less than 45%, one or more shareholders of Fred IT who in aggregate hold 50% or more of the shares in Fred IT.

(2) 'Drag Along Option' means the option to require all of the other shareholders in Fred IT to transfer all their shares to the Third Party Drag Purchaser.

56 Fourth, cl 20 relates to all transfers of shares in Fred IT. Clause 20.2(b) relevantly provides that a transfer cannot be made to a third party unless the third party is, in the reasonable opinion of the shareholders of Fred IT (other than the Seller), of good standing, financial substance and reputation and, if the transfer is due to occur within 5 years of the Fred IT Shareholders' Agreement, is not a Competitor of a remaining shareholder.

57 The Trustee was informed of Telstra's purchase of a 50% interest in Fred IT soon after it occurred. The minutes of the Trustee meeting on 16 October 2013 record that the effect of Telstra's acquisition of 50% of the shares in Fred IT on the ongoing governance and operation of the PharmX Trust was raised. They also record that the chair advised it would not affect the Trustee as the relevant clause in the SSA requires a shareholder change in ownership of greater than 50%.

58 As to the relevant income distributions of the PharmX Trust, there was a meeting of the Trustee on 14 August 2018. One director for each of the Holders was present.

59 One of the items which was considered at that meeting was the 2017/2018 financial statements which were approved. The minutes record that the directors considered two resolutions for Special Majority Approval. The first was to approve the payment of a final distribution of $467,378 for the year ended 30 June 2017 (the '2017 year'). This was broken down as follows:

60 The second was to approve the payment of a final distribution of $2,666,293 for the year ended 30 June 2018 (the '2018 year'). This was broken down as follows:

61 The minutes record that the directors representing Corum and Fred IT (totalling 60%) voted in favour of both resolutions. The directors representing Daleflag and Mountaintop voted against both resolutions. As the directors representing only 60% of the issued units voted in favour of the resolution, the resolution was not passed.

62 As noted above, the financial statements for the PharmX Trust for the 2018 year were unanimously approved. The financial report for the 2018 year records 'distribution[s] to unit holders' totalling $2,666,293. Note 2 to the financial statements records that 'distributions payable' for the 2017 year were $467,483 and 'distributions payable' for the 2018 year were $2,666,293. The breakdowns set out in paragraph 59 and 60 above are also set out in the distributions reflected in note 5 to the financial statements.

63 On 2 November 2018, Fred IT issued the first proceeding against the Trustee seeking unpaid distributions from the 2017 year and the 2018 year. As noted above, it was as a consequence of the first proceeding that the Trustee issued this proceeding.

64 Both questions now for determination depend on the principles of contractual construction. Those principles are not in dispute. They were succinctly summarised by French CJ, Nettle and Gordon JJ in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd ('Mount Bruce Mining'):[11]

The rights and liabilities of parties under a provision of a contract are determined objectively, by reference to its text, context (the entire text of the contract as well as any contract, document or statutory provision referred to in the text of the contract) and purpose.

In determining the meaning of the terms of a commercial contract, it is necessary to ask what a reasonable businessperson would have understood those terms to mean. That inquiry will require consideration of the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract.

65 This passage was referred to with approval by the Court of Appeal in Eureka Operations Pty Ltd v Viva Energy Australia Ltd. [12] The Court (Santamaria, Ferguson and McLeish JJA) went on to state:

It follows that the meaning of a word or clause cannot be determined by reference to its own text alone. As such, resort to the 'ordinary meaning' of the word or clause can be no more than a starting point in a process which in every case requires the reader of the contract to look further to context and purpose. Nor is it necessary that there be ambiguity, however understood, before undertaking that further process. Context (as defined above [in Mount Bruce Mining]) and purpose are always relevant, no matter how clear the 'ordinary meaning' is said to be.

66 In this proceeding, counsel for Mountaintop and Daleflag (who I will refer to for convenience in the context of the submissions as Mountaintop) referred to a number of authorities decided under the precursors to s 608 of the Corporations Act. That section provides a definition of 'Relevant Interest' for the purpose of Chapter 6 of the Corporations Act relating to Takeovers (the 'statutory definition'). Some of the language in the statutory definition mirrors the definition of Relevant Interest under cl 15 of the SSA.

67 Mountaintop submitted that the Court should infer that the parties elected to utilise the words of the statutory provision with a settled meaning when the SSA was drafted and agreed.[13] As a result it submitted that the parties should be understood to have objectively intended the SSA to have the same meaning and effect as the statutory definition.

68 Counsel for Mountaintop was unable to point to any authority in support of this proposition. By contrast, counsel for Fred IT referred to authorities to the effect that:

(1) parties to commercial contracts are taken to have contracted against a background which includes the earlier case law authorities on the construction of similar contracts;[14] and

(2) when courts of law have construed a contract in a particular way, and that interpretation is accepted in trade and business and people afterward make contracts on that understanding, a later court ought to hold itself bound by that decision.[15]

69 Counsel for Fred IT submitted that neither applied here. I agree.

70 Further, in my view, there is no principle to the effect that it can be inferred that commercial parties intend that the words in their contract have the same meaning as the same words in a statute. A different situation may apply if the contract expressly adopts that statutory meaning or if such an intention is based on relevant, admissible and proven background facts. In other cases, the decisions of the Courts on the same or similar language in a statute may be of some utility in construing commercial contracts. But one must be very cautious. This is because statutory construction depends very much upon the context in which the words are used and the purpose the legislation seeks to achieve. As a result, the same meaning cannot necessarily be given to the same language in a commercial contract as in a statute.

71 The relevant clause in relation to Question 1 is cl 15 of the SSA relating to a 'Change of Control' of a Holder in the PharmX Trust. As set out above, cl 15.1 provides:

15.1 Defined term

In clause 15, Change of Control means, in relation to a [Holder], a change in the holding of Voting Shares of the [Holder] by a Relevant Person so that:

(a) the Relevant Person acquires a Relevant Interest in more than 50% of the Voting Shares of the [Holder]; and

(b) by reason of that acquisition, the Relevant Person also acquires a Relevant Interest in the Voting Shares of the Trustee or Units in the Trust held by the [Holder].

72 This definition of 'Change of Control' contains two elements, each of which must be satisfied for a Change of Control to be established.

73 First, cl 15.1(a) requires that the Relevant Person acquires a 'Relevant Interest in more than 50% of the Voting Shares of the ... Holder'. This focuses on the nature and extent of the interest acquired by the purchaser in the Holder. Second, cl 15.1(b) requires that, by reason of that acquisition, the Relevant Person also acquires a Relevant Interest in the Voting Shares of the Trustee or the Units in the PharmX Trust. This focuses on the nature and extent of the interest acquired by the purchaser in the Voting Shares in the Trustee and/or the Units in the Trust.

74 It is accepted for the purpose of the clause that:

(2) Telstra has acquired under the Sale Agreement 50% of the Voting Shares of Fred IT for the purpose of cl 15.1(a); and

(3) the shares in PharmX held by Fred IT are Voting Shares of the Trustee for the purpose of cl 15.1(b).

75 In light of the concessions set out above, there are two separate issues which arise on Question 1.

76 The first issue is whether Telstra has acquired a Relevant Interest 'in more than 50% of the Voting Shares' of Fred IT for the purpose of cl 15.1(a) of the SSA (the 'cl 15.1(a) issue'). This is in a context where it is conceded that Telstra has acquired a Relevant Interest in 50% of the Voting Shares of Fred IT.

77 The second issue is whether, by reason of that acquisition, Telstra has acquired a Relevant Interest in the Voting Shares of the Trustee or Units in the PharmX Trust held by Fred IT for the purpose of cl 15.1(b) of the SSA (the 'cl 15.1(b) issue').

78 In summary, Mountaintop submitted that Telstra has acquired a Relevant Interest satisfying the requirements of cll 15.1(a) and 15.1(b). In doing so, Mountaintop focused on the words of the relevant clauses and in particular the broad definition of Relevant Interest in cl 15.2(b) and (c) and cl 15.3. It also focused on the nature of the rights obtained by Telstra under the Fred IT Shareholders' Agreement.

79 Fred IT submitted that there had been no Change of Control of Fred IT under cl 15. It focused on the words used in light of the commercial purpose of the Change of Control provision: to provide stability and certainty as to the identity of the co-venturers and to give rights to them upon the occurrence of a Change of Control. It argued that Mountaintop's construction was not commercially sensible in a case like this where Telstra had not acquired 'more than 50%' of the shares in a co-venturer. I will now deal with the detail of the submissions made.

80 Mountaintop submitted that, in addition to Telstra's 50% of the Voting Shares of Fred IT:

(1) the Fred IT Shareholders' Agreement gives Telstra certain rights which constitute 'the power to control the exercise of a power to dispose of' the shares held by the other shareholders of Fred IT within clause 15.2(c) of the SSA; and

(2) therefore Telstra has a Relevant Interest in more than 50% of the Voting Shares in Fred IT for the purpose of cl 15.1(b) of the SSA.

81 Mountaintop relied upon the following provisions of the Fred IT Shareholders' Agreement:

82 Mountaintop submitted that Telstra has 'power to control the exercise of a power to dispose' of the other shares in Fred IT because it can restrict, prevent or require the disposal of those shares under all or any of these clauses.

83 Mountaintop noted the broad definition of Relevant Interest in cll 15.2(b) and (c): those provisions do not look to ownership but at the power to control the exercise of a right to vote (in the case of cl 15.2 (b)) and the power to control the exercise of the power to dispose of shares (in the case of cl 15.2(c)). Mountaintop submitted that the breadth of the concepts of power and control for the purpose of the definition of Relevant Interest is confirmed by cl 15.3. It also submitted that the broad definition of these words was confirmed by the decisions under the precursors to s 608 of the Corporations Act which held that a pre-emptive right gives a shareholder a negative power of control over the disposal under the statutory definition.

84 Fred IT focused on both the words in cl 15.2(c) and the nature of the rights obtained by Telstra under the Fred IT Shareholders' Agreement. It submitted that to prevent a disposal is not to 'control the exercise of a power' of disposal. Fred IT submitted that the phrase 'exercise of a power' speaks to the exercise of a power to dispose (i.e. to the manner of that exercise), not whether it can be exercised in the first place. It submitted that Mountaintop's argument proceeded as if cl 15.2(c) provides: A person has a relevant interest in shares or units if they ... control the exercise of a power to dispose of, the shares or units.

85 This was relevant in relation to the Standstill provision. Fred IT submitted that to prevent a sale under cl 15.2 of the Fred IT Shareholders' Agreement is not to 'control the exercise of a power' of sale under cl 15.2 of the SSA. Further, it submitted that there was an awkwardness in Mountaintop's construction, namely that Telstra has a Relevant Interest for the first two years of the Fred IT Shareholders' Agreement but not thereafter. Indeed as of today, Telstra would have no qualifying Relevant Interest pursuant to the Standstill provision for the purpose of cl 15.2 of the SSA.

86 In relation to the pre-emptive rights provision, counsel for Fred IT submitted that Mountaintop's argument proceeded on a false premise that cl 16 imposed a negative power of control. However, Fred IT referred to cl 10.3 of the Fred IT Constitution which stipulates that a share must be offered to other members before the Directors may authorise a transfer of shares.

87 Further, Fred IT submitted the logical conclusion of Mountaintop's argument was that a shareholder in Fred IT who owned one share had a Relevant Interest in all the other shares of Fred IT for the purpose of cl 15.1(a) of the SSA. It submitted that could not be the commercial context or purpose of cl 15 of the SSA, which focuses on a Relevant Interest of 'more than 50%'.

88 In relation to the Drag Along provision, Fred IT submitted that the operation of the clause is conditional on an offer being made to a 45% shareholder like Telstra. It is highly prescribed. As a result, at the time of acquisition of its interest, Telstra did not obtain the power to dispose of the other shares in Fred IT.

89 In response to this submission, counsel for Mountaintop noted the breadth of the definitions of 'power' and 'control' in cl 15.3 of the SSA, in particular cl 15.3(d) which includes a power or control that is or can be made subject to restraint or restriction. He submitted that cl 18 is an even greater power or control than a negative pre-emptive right, giving Telstra a positive right to require other shareholders to sell their shares.

90 Further, in response to the submission about the uncommercial nature of the 'logical conclusion' of Mountaintop's construction, counsel again noted the breadth of the words used. Further, he noted that each of cll 15.1(a) and (b) had to be satisfied before a Change of Control occurred.

91 The first issue relates to the meaning of the phrase 'power to dispose of, or control the exercise of a power to dispose of, the shares or units' in the definition of Relevant Interest in cl 15.2(c) of the SSA. It is appropriate that I set out cll 15.2 and 15.3 again in full.

15.2 Relevant Interest

A person has a relevant interest in shares or units if they:

(a) are the holder of the shares or units; or

(b) have power to exercise, or control the exercise of, a right to vote attached to the shares or units; or

(c) have power to dispose of, or control the exercise of a power to dispose of, the shares or units.

It does not matter how remote the relevant interest [sic] is or how it arises. If two ore [sic] more people can jointly exercise of these powers [sic], each of them is taken to have the power.

15.3 Control exercisable through a trust, agreement or practice

For the purposes of clause 15.2, power or control includes:

(a) power or control that is indirect;

(b) power or control that is, or can be, exercised as a result of or by means of a body corporate;

(c) power or control that is, or can be, exercised as a result of, by means of or by the revocation or breach of:

(i) a trust; or

(ii) an agreement; or

(iii) a practice; or

(iv) any combination of them,

whether or not they are enforceable; and

(d) power or control that is, or can be made, subject to restraint or restriction.

It does not matter whether the power or control is express or implied, formal or informal, exercisable alone or jointly with someone else. It does not matter that the power or control cannot be related to a particular share or unit.

...

92 There are a number of matters that arise from the construction of these provisions. First, these clauses are contained in the Change of Control provisions in a commercial agreement between co-venturers. The significance of these clauses is reflected in cl 15.5 of the SSA which provides that, in the event of a Change of Control, the relevant Holder, called the Seller, must immediately give notice to the Trustee of the Change of Control and, if Holders holding 40% or more of the Stapled Securities not owned by the Seller agree, the Seller is taken to have given an irrevocable Transfer Notice to each other Holder under clause 14.3.

93 Further, failure to give notice may constitute an event of default under cl 18 of the SSA which may result in the rights of the Holder being suspended under cl 18.2(a) or trigger a right of the other Holders to purchase the Stapled Securities of the defaulting party under cl 18.2(b). Thus, a Change of Control is an event of great significance under the SSA.

94 Second, as noted above, a Change of Control under the SSA contains two elements: (1) the acquisition of a Relevant Interest in more than 50% of the Voting Shares of the Holder; and (2) by reason of that acquisition, the acquisition of a Relevant Interest in the Voting Shares of the Trustee or Units in the Trust.

95 Third, the definition of Relevant Interest in cl 15.2 is not merely concerned with ownership of shares or units. It also looks to the 'power to exercise, or control the exercise of, a right to vote attached to the shares or units' in cl 15.2(b) and the 'power to dispose of, or control the exercise of a power to dispose of, the shares or units' in cl 15.2(c).

96 Fourth, the words 'power' and 'control' in the phrase 'power to dispose of, or control the exercise of', which form part of the definition of Relevant Interest, are words of broad meaning. The meaning of the word 'power' is:[16]

1. ability to do or act; capability of doing or effecting something.

the possession of control or command over others; dominion; authority; ascendancy or influence.
someone or something that possesses or exercises authority or influence.

97 The meaning of the word 'control' is:[17]

1. to exercise restraint or direction over; dominate; command.

2. to hold in check; curb.

98 Fifth, the concluding words of cl 15.2 and cl 15.3 confirm that the parties objectively intended that these words have a broad meaning. They provide that:

(1) it does not matter how remote the relevant interest is or how it arises;[18]

(2) it does not matter if the power or control is express or implied or exercisable alone or jointly with someone else;[19]

(3) it does not matter if the power or control cannot be related to a particular unit or share;[20]

(4) they include power or control that is indirect or that is exercised as a result of a breach of agreement or practice whether enforceable or not;[21] and

(5) they include power or control that is, or can be made, subject to restriction or restraint.[22]

99 Sixth, the broad meaning of the words 'power' and 'control' has also been confirmed by the Courts in a variety of contexts including in the cases relied upon by Mountaintop relating to the statutory definition of Relevant Interest.

100 In Kornblums, B owned 10% of the shares in the company, Kornblums. The other shareholders who collectively owned 50.3% in Kornblums entered into an agreement with B which provided for the creation of pre-emptive rights between them to purchase shares in the company. It was agreed that the shareholder parties would not transfer their shares without first offering them to the other shareholder parties and appointing an agent as proxy for each shareholder party including to attend all meetings of the company. B sought a declaration that there was no change in its interest in Kornblums by virtue of that agreement. At that time, s 6A the Companies Act 1961 (Vic) relevantly provided that a person has a relevant interest in a share of a body corporate if that share is a voting share and that person has the power:

(i) to exercise, or to control the exercise of, the right to vote attached to the share; or

(ii) to dispose of, or exercise control over the disposal of, that share.

101 Beach J held, in dealing with the power to dispose of shares, that:

(1) the statutory definition does not require substantial or absolute control over the disposal of a share: it is sufficient if the person has the power to exercise some true or actual measure of control over the disposal of voting shares in a company;[23]

(2) under the provisions of the pre-emptive rights agreement, each shareholder party would be able to restrain by injunction any other shareholder party disposing of its shares other than in accordance with the terms of the agreement;[24] and

(3) as a result, all shareholder parties had a power to exercise control over the disposal of the other shares which were the subject of the pre-emptive rights.[25]

102 This reasoning was followed by O'Bryan J in HWT.[26] That case also involved an agreement between shareholders which provided that, in the event a shareholder party wished to sell its shares, that party had to offer those shares to the other shareholder parties. The relevant statutory provision was the definition of Relevant Interest in s 9(1) of the Companies (Acquisition of Shares) (Victoria) Code which was almost identical language to the statutory definition considered in Kornblums.

103 In following Kornblums, O'Bryan J considered that he was applying the ordinary meaning of the words:

(1) power i.e. 'the ability to do or act'; 'control, influence, ascendancy';[27] and

(2) control i.e. 'to exercise restraint or direction upon the free action of; to hold sway over, exercise power or authority over; to dominate, command').[28]

104 The reasoning in Kornblums and HWT was also followed by the New South Wales Court of Appeal in North Sydney Brick.[29] In that case, the articles of association of the company restricted the manner in which shares could be offered to non-members. Relevantly, the articles provided that a shareholder proposing to transfer a share must first offer it to the other shareholders at what the offeror considered a fair value. Once again, the Court concluded that such a pre-emptive right was within the statutory definition of Relevant Interest then contained in s 9 of the Companies (Acquisition of Shares) (New South Wales) Code.

105 Mahoney JA (with whom Kirby P and Glass JA agreed) observed about the meaning of the word 'control':[30]

"Control" is a word which has a number of possible meanings: it has been described as a word of wide and ambiguous import: Bank of New South Wales v Commonwealth [1948] HCA 7; (1948) 76 CLR 1 at 385 per Dixon J. However, in many contexts it is difficult to find a convenient substitute for it. In its essential meaning in this context, it looks to the doing of something, viz, the disposition of a share; to the ways or circumstances in which, unhindered, that could be done or could occur; and to the power which another person has to restrict or prevent the doing of it in some or all of those ways or circumstances. In this sense it looks to two things: the things which may be done by way of restriction or prevention; and the part which the person in question plays in the doing of them.

106 As to the first aspect, Mahoney JA noted the word 'control' may comprehend anything from a power to prohibit or to refuse consent, to 'something weaker than "restraint"'.[31] He noted that the things that the owner of a share may be prevented from doing may be minor or peripheral to the extent that the other party may not be able to control the doing of the thing. In so concluding, Mahoney JA considered his reasoning was consistent with the concept of 'some true or actual measure of control' in Kornblums and HWT. [32]

107 Mahoney JA noted that the pre-emptive rights clause in the articles operated by way of restriction rather than absolute prohibition.[33] But he concluded that the power of a shareholder to take proceedings for enforcement of the articles was a power to exercise control over the disposal of those shares.[34]

108 In doing so, his Honour did not consider he was giving effect to any particular purpose of the statute other than 'by looking to the language which has been used and deciding the effect of it'.[35] Further, he noted that counsel for the unsuccessful party submitted this construction would result in the absurd situation that, by reason of this provision in the articles, each shareholder would have a relevant interest in all the other shares in the company. Mahoney JA did 'not see this is as such a startling position that the meaning otherwise to be given to the language of the Code should be departed from'.[36]

109 So too, Glass JA noted that he was initially attracted to the proposition that some restriction would be placed on the meaning of control to avoid this consequence. However, Glass JA agreed with the construction of the words used adopted by Mahoney JA_._[37]

110 There are a number of observations which I wish to make in light of these authorities.

111 First, each of the judges in these cases considered the ordinary meaning of the words 'power' and 'control' in order to determine the effect and purpose of the statutory definition of Relevant Interest. That is to say, the judges in these cases did not give a particular meaning to these words in light of the statutory purpose or object. Indeed, in North Sydney Brick, the Court referred to the meaning of the word 'control' in different contexts. As a result, I consider that it is appropriate that I have regard to the meaning of the words 'power' and 'control' in these authorities when construing the meaning of those same words in cl 15.2 of the SSA. However, as I set out below, the language of the statutory definition considered in these authorities is not identical to the language of cl 15.2.

112 Second, in each of the cases the Court concluded that a right to prevent by legal proceedings a transfer of shares in certain circumstances and/or until certain procedures had been complied with was a 'power to exercise control over the disposal' of those shares.

113 Third, in each of these cases, the relevant power was held to have arisen at the time when the agreement creating that right was entered into. The pre-emptive right provision created an immediate right. These cases did not consider whether and when a conditional right might fall within a 'power to exercise control over the disposal' of the relevant shares.

114 While not directly relevant to the question of contractual construction before me, I note that each of the statutes considered by these authorities contained a provision to the effect that, if the right arising from an agreement relating to shares was enforceable in the future or on the fulfilment of a condition, the Relevant Interest was deemed to have arisen at the time of the agreement.[38] Such a provision is now reflected in s 608(8)(b)(ii) of the Corporations Act. I note that White J has held this provision has the effect of accelerating the time at which the Relevant Interest was created in Re Real Estate Capital Partners Managed Investments Ltd.[39]

115 In this case, cl 15.4 of the SSA provides an equivalent of s 608(8) of the Corporations Act. It relevantly provides that:

(1) if a person has a Relevant Interest in issued shares or units; and

(2) that person whether before or after acquiring the Relevant Interest gives to another person an enforceable right in relation to the shares or units 'whether the right is enforceable presently or in the future and wether [sic] or not on the fulfilment of a condition' or that person has granted an option to another person with respect to the shares or units; and

(3) that other person would have a Relevant Interest in the units or shares if the right were enforced or the option exercised,

then that other person is taken to have the Relevant Interest in the shares or units from the time the right is given or the option is granted.

116 In this case, counsel for Mountaintop submitted this clause has no direct application. For the reasons set out below, I disagree. Further, counsel for Fred IT submitted that this clause should only be read as referring to units in the PharmX Trust and shares in the Trustee. I do not agree that this is the proper construction of cl 15.4.

117 Clause 15.4 is to be read in the context of cl 15.2 which sets out the different types of Relevant Interest for the purpose of cl 15.1, namely a Relevant Interest in the Voting Shares in the Holder in cl 15.1(a) and a Relevant Interest in the Voting Shares in the Trustee and Units in the PharmX Trust in cl 15.1(b). 'Share' is defined in cl 1.1 of the SSA to mean a share in the capital of the Trustee and 'Unit' to mean a unit in the Trust.

118 The chapeau to cl 15.2 reads 'A person has a relevant interest in shares or units if they...'. Both cll 15.2(b) and 15.2(c) then refer to 'shares or units' using the lower case. So does cl 15.4. The fact that the defined term is not used in cll 15.2 and 15.4 suggests that these provisions were intended to extend to relevant shares or units whether or not they are Shares in the Trustee or Units of the Trust. As a result, I do not accept the construction of cl 15.4 advanced by Fred IT. Rather, I consider that cl 15.4 may apply in relation to the shares in a Holder for the purpose of cl 15.1(a) of the SSA.

119 In this context, I will turn to each of the provisions of the Fred IT Shareholders' Agreement relied upon by Mountaintop. Before doing so, as noted above, the language of cl 15.2(c) is not the same as the statutory definition in the authorities referred to above. The statutory definition relevantly referred to the 'power to dispose of, or exercise control over the disposal of' the share. By contrast cl 15.2(c) refers to 'the power to dispose, or control the exercise of the power to dispose of' the share. I note that the language of cl 15.2(c) is the same as that used in the current statutory definition of Relevant Interest in s 608(8) of the Corporations Act.

120 Fred IT submitted that the phrase 'exercise of a power' speaks to the manner of the exercise of that power, not whether it can be exercised in the first place. In my view, Fred IT's construction ought not be accepted. It is not consistent with the words used in the context of cl 15.2(c).

121 I have already noted the broad meaning of the words 'power' and 'control'. I note that the word 'exercise' relevantly means 'a putting into action, use, operation or effect'.[40] Again, this meaning is broad.

122 But it is necessary to consider the context of these words in cl 15. The purpose of cl 15.2 is to define what a Relevant Interest is for the purpose of the Change of Control clause. Clause 15.2(a) deals with obtaining a Relevant Interest by ownership. Clause 15.2(b) deals with obtaining a Relevant Interest by one shareholder or unitholder having power over a right to vote attached to the shares or units of another. This power can be obtained in two separate ways: the power to exercise a right to vote (i.e. directly) or the power to control the exercise of a right to vote (i.e. indirectly).

123 Clause 15.2(c) then deals with another means of obtaining a Relevant Interest, namely (and relevantly) one shareholder's power over the disposal of shares in the company owned by another shareholder. Once again, this clause addresses the nature of that power in two separate ways: the power in one shareholder itself to dispose of the shares of another (i.e. directly) or the power in one shareholder to control the exercise of a power to dispose of the shares of another (i.e. indirectly).

124 In this context, I consider that 'power to control the exercise of the power to dispose' of shares includes the power to control the exercise or implementation of a decision or threatened decision to dispose of shares. Thus, it would include the power to prevent a disposal or threatened disposal if that disposal were inconsistent with contractual or other rights. In my view, this construction is consistent with the broad meaning of the words 'power', control' and 'exercise' set out above in the context of cl 15.2(c) and the Change of Control clause as a whole.

125 I also consider that 'power to control the exercise of the power to dispose' of shares includes the power to control the way in which shares are offered or disposed of, in circumstances where the way in which they are offered or disposed of is inconsistent with contractual or other rights. Depending on the nature of the contractual or other rights, this may include the price at which, or persons to whom, the shares may be offered or transferred.

126 In light of this conclusion, I will consider the clauses of the Fred IT Shareholders' Agreement relied upon by Mountaintop.

127 First, there is the Standstill provision in cl 15.1(a) of the Fred IT Shareholders' Agreement. Mountaintop submitted that the only relevant 'power to control' here is the power to issue proceedings to restrain such a transfer of shares in Fred IT in breach of the Standstill provision. I agree. The Standstill provision gives to each shareholder in Fred IT the ability to take proceedings to enforce the promise given by each other shareholder from the time the Fred IT Shareholders' Agreement was executed not to transfer its shares during the Standstill Period.

128 However, I consider that this right is a power to control the exercise of a power to dispose of the shares. This is because it is a power to prevent the implementation of a decision to dispose of the shares. In my view, this is consistent with the meaning of the words 'power', 'control' and 'exercise' in the context of cl 15.2 set out above. As a result, I am satisfied that this power was a 'power to control the exercise of a power to dispose of' the shares of the other shareholders of Fred IT within cl 15.2(c) of the SSA.

129 I am conscious that, at the time of this proceeding, cl 15.1(a) has no operation as the Standstill Period has passed. While that is true, it does not alter the fact that, at the time of Telstra's acquisition of shares and for two years thereafter, each of the shareholders in Fred IT had such a power to control the exercise of a power to dispose of the shares of the other shareholders of Fred IT. I have concluded that the power to control was in existence for 2 years from 30 September 2013.

130 Second, there is the pre-emptive rights provision in cl 16 of the Fred IT Shareholders' Agreement. It relevantly provides that:

(1) following the expiry of the Standstill Agreement, a shareholder of Fred IT may transfer all or some of its shares (the 'Sale Shares') by giving a Transfer Notice to the company;

(2) Fred IT must facilitate the sale of the Sale Shares to the shareholders in Fred IT other than the Seller;

(3) each shareholder is to be offered its proportionate number of the Sale Shares in Round 1. If not all Sale Shares have been taken up by shareholders at the end of Round 1, a Round 2 offer of a proportionate number of the Remainder Shares is then made to those shareholders who took up shares in Round 1. The Seller may deal with the remainder in accordance with cl 16.8; and

(4) if the Sale Shares comprise all the shares of the Seller in Fred IT, and the total number of Accepted Shares after the Round 2 offer is less than the number of Sale Shares, then the Seller may transfer all of the Sale Shares to a third party within 180 days of the Transfer Notice on terms no more favourable than the Round 1 offer.

131 In the case of this pre-emptive rights provision, the only relevant power is said to be the power to issue proceedings to restrain a breach of cl 16, i.e. preventing a shareholder of Fred IT from transferring its shares to a third party without complying with the pre-emptive rights provision in cl 16 of the Fred IT Shareholders' Agreement. In my view, the power is more limited than that. The pre-emptive rights provision in cl 16 of the Fred IT Shareholders' Agreement gives to each Holder the ability to bring proceedings to enforce the promise given by each other Holder from the time the Fred IT Shareholders' Agreement was executed not to transfer its shares without giving a Transfer Notice which in turn would trigger Fred IT offering those shares to the other Holders.

132 Consistent with the plain meaning of the words 'power', 'control' and 'exercise' set out above, I have concluded that this power is also a 'power to control the exercise of a power to dispose' of the shares of the other shareholders in Fred IT for the purpose of cl 15.2(c) of the SSA. This is because it is a right to control the exercise of the disposal of shares otherwise than in accordance with the terms of the pre-emptive rights provision.

PharmX Pty Ltd (in its capacity as trustee of the PharmX Unit Trust) v Fred IT Group Pty Ltd

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