Plaintiff v Defendant

Supreme Court of Victoria|2008-05-02|Before: HOLLINGWORTH J

Contract - Shareholders agreement - Shareholder proposing to transfer shares - Nature and extent of other shareholder's pre-emptive rights - Appointment of administrator to one shareholder - Whether an "ultimate change of control" such as to trigger pre-emptive rights - Whether offer notice valid - Whether offer price validly disputed - Whether consent to transfer unreasonably withheld.

1 The plaintiff ("Allmere") and the defendant ("Burbank") are the only shareholders of Carpet Call Holdings Pty Ltd ("Carpet Call"). Each owns three shares. They are parties to a shareholders agreement dated 7 February 1997 ("the shareholders agreement").

2 Allmere wishes to transfer its shares in Carpet Call to Godfrey Hirst Australia Pty Ltd ("Godfrey Hirst"). Burbank seeks to prevent Allmere from doing so, on the basis that clause 10 of the shareholders agreement gives Burbank certain pre-emptive rights to acquire Allmere's shares.

(a) Allmere sent an offer notice to Burbank on 19 October 2006, under clause 10.3(a) of the shareholders agreement ("the offer notice");

(b) Burbank did not, within 30 days of receipt of the offer notice:

(i) Accept the offer made by Allmere and purchase the whole of the shares for the consideration and upon the terms and conditions disclosed in the offer notice; or

(ii) For the purpose of clause 10.3(d), dispute the price at which Allmere offered to sell the shares;

(c) Accordingly, Allmere may now transfer the shares to Godfrey Hirst upon no more favourable terms and conditions than those disclosed in the offer notice, subject to Burbank's approval of Godfrey Hirst as transferee; and

(d) Burbank has unreasonably withheld its approval of Godfrey Hirst as transferee, contrary to clause 10.3(f).

4 Allmere seeks a declaration that Burbank has unreasonably withheld its approval to Godfrey Hirst as transferee. It seeks an order that subject to the transfer to Godfrey Hirst being upon no more favourable terms and conditions than those disclosed in the offer notice, Burbank approve Godfrey Hirst as transferee and procure Carpet Call board approval of the transfer.

5 Burbank's defence[1] contends that Allmere may not transfer its shares to Godfrey Hirst, because:

(a) On 21 September 2006, before Allmere sent the offer notice, there was a "change in ultimate control" of Allmere within the meaning of clause 10.2, as a result of which:

(i) Allmere is taken to have given an offer notice in respect of the whole of its shares in Carpet Call at a price to be determined by an expert under clause 10.3(d); and

(ii) The offer notice could not be sent under clause 10.3 any earlier than 30 days after such an expert determination;

(b) The offer notice is invalid, such that the pre-emption procedure under clause 10 was never engaged;

(c) Alternatively, if the offer notice is valid, Burbank:

(i) Has disputed the price at which Allmere offered to sell the shares, in which case the dispute must be resolved by an expert determination under clause 10.3(d); and/or

(ii) Has reasonably withheld its approval of Godfrey Hirst as a transferee of Allmere's shares.

6 Burbank seeks declaratory relief by its counterclaim.

7 The principal areas of dispute between the parties are:

(a) Whether there was a "change in ultimate control" of Allmere, within the meaning of clause 10.2;

(i) Whether Burbank disputed the price at which Allmere offered to sell the shares, for the purposes of clause 10.3(d);

(ii) Alternatively, whether Burbank unreasonably withheld its approval of Godfrey Hirst as a transferee of the shares.

8 In its opening submissions, Burbank said that the "principal issue" in this case is whether the consideration in the offer notice is required to be bona fide and at arm's length. By the time of its closing submissions, Burbank was asserting that "the most important issue" of the case is the unreasonableness of its refusal to approve Godfrey Hirst as transferee.

9 The only issue is whether the appointment of administrators to Allmere and two other companies on 21 September 2006 constituted a "change in ultimate control" of Allmere, within the meaning of clause 10.2, such that the pre-emption procedure under clause 10 was engaged.

10 As to the validity of the offer notice, several issues arise.

11 The first is whether, at the time the offer notice was sent to Burbank, Allmere had already accepted Godfrey Hirst's offer and thereby agreed to dispose of its shares to Godfrey Hirst, or had made a commitment that went beyond a proposal, within the meaning of clause 10.3.

12 Secondly, was the offer notice clear and unambiguous in its meaning, as it was undoubtedly required to be?

13 Thirdly, Burbank says that the offer notice was invalid because it put an offer from Godfrey Hirst that did not reflect a bona fide, arm's length price for the shares.

14 The fourth issue is whether, on a proper construction of clause 10.3(b), Allmere's obligation "to give details of the proposed transfer" required it to give details of all dealings affecting the proposal to transfer or otherwise dispose of the shares.

15 The final issue is whether, on a proper construction of clauses 10.2 and 10.3, where the pre-emption procedure under clause 10 has been engaged by operation of clause 10.2, an offer notice may be given under clause 10.3 earlier than 30 days after the expert determination of the price for the purposes of the deemed offer notice under clause 10.2.

16 There is a dispute as to whether Burbank did in fact dispute the price put by the offer notice, for the purposes of clause 10.3(d), at a meeting on 17 November 2006.

17 If Burbank did dispute the price, Allmere contends that the disputing was ineffective because it was not in writing.

18 The issue is whether Burbank has reasonably withheld its approval to Godfrey Hirst. Burbank raises a number of grounds on which it says that Godfrey Hirst is not a suitable or satisfactory transferee. They include claims that Godfrey Hirst's interests as a manufacturer put it in conflict with Carpet Call's interests as a retailer, and that the relationship would be unworkable and harmful to Carpet Call for several reasons.

19 This case primarily concerns the construction of clause 10 of the shareholders agreement.

20 It is common ground that, by operation of a deed of adoption dated 19 May 1997, all references to "Shaw" in clause 10 are to be read as references to Allmere.

10.1 Neither Burbank nor Shaw may directly or indirectly Transfer[2] or otherwise dispose of any legal or beneficial interest in Shares[3] except in accordance with this clause.

10.2 If there shall be any change in ultimate control of either Burbank or Shaw, the respective party shall be taken to have given an Offer Notice[4] in respect of the whole of its Shares at a price to be determined under paragraph 10.3(d). It is acknowledged that Mr Jim Smith controls Burbank, and that Shaw Industries Inc. of the United States controls Shaw.

10.3 (a) If Burbank or Shaw proposes to Transfer an interest in Shares, the Transferring Party must send an Offer Notice to the Offeree. A Transfer of less than 10 per cent of the issued share capital is not permitted.

(b) The Offer Notice shall give details of the proposed Transfer including, but not restricted to:

(ii) the terms and conditions of the Transfer including the consideration per Sale Share,[5]

and shall contain a warranty that the Sale Shares are and will at completion be the sole legal and beneficial property of the Transferring Party.

(c) Upon receipt of the Offer Notice, the Offeree shall have 30 days within which to purchase the whole of the Sale Shares for the consideration and upon the terms and conditions disclosed in the Offer Notice.

(d) If the Offeree disputes the price the dispute shall be referred to an expert to be agreed or in default of agreement nominated by the President for the time being of the Institute of Chartered Accountants in Australia. The person shall be acting as an expert and not an arbitrator. His decision shall be final and binding. The parties must bear their own costs of submitting the dispute to the expert.

(e) Upon receipt of a notice of acceptance, the Transferring Party shall have 30 days from the date of the notice within which to deliver unencumbered title, and in particular to deliver:

(i) a certificate representing that number of the Shares covered by the Offer Notice; and

(ii) an instrument of transfer in registrable form,

in return for payment of the consideration for the Sale Shares.

(i) accept the Offer Notice within 30 days of receipt of the Offer Notice; or

(ii) tender the consideration when the Transferring Party delivers the certificate and transfer instrument pursuant to sub-clause (c) [sic],[6]

the Transferring Party may Transfer the Sale Shares to any person approved by the other Shareholder (which approval shall not be unreasonably withheld) upon no more favourable terms and conditions than those disclosed in the Offer Notice.

(g) The Transferring Party may only Transfer Shares pursuant to sub-clause (e) [sic][7] if the transferee enters into an agreement with the Offeree covenanting to assume all obligations under and to be bound by this agreement as if it were a party.

(h) The parties shall procure that the [Carpet Call] Board approves a Transfer under these provisions.

22 Clause 10 is poorly drafted,[8] which has led to many of the disputes in this proceeding.

23 An evident purpose of clause 10 is to give one shareholder (the offeree) the right to acquire the interest of the other shareholder (referred to in these reasons as the transferring party or offeror), in the event that the transferring party intends to dispose of its shareholding to another person, or undergoes a major corporate transformation. The offeree may decide, within 30 days, to acquire the shares at the price stated by the transferring party in its offer notice, or at a fair and reasonable price determined by an independent expert.[9] If the offeree does not acquire the shares, clause 10 permits a sale of the shares to proceed on terms and conditions no more favourable than those contained in the offer notice, unless the offeree (acting reasonably) does not approve the proposed transferee.

24 The parties agree that clause 10 confers benefits on both shareholders. Accordingly, it is common ground that each party may look after its own interests when it comes to a sale of the shares, the transferring party having the right to try to maximise the price for its shares, and the offeree having the right to try to acquire the shares for the lowest possible price.

25 An offer notice may arise in two contexts. First, if there is any change in ultimate control of a shareholder, clause 10.2 provides that that shareholder shall be taken to have given an offer notice in respect of the whole of its shares. Secondly, if a shareholder proposes to transfer an interest in shares held by it, clause 10.3(a) requires that shareholder to send an offer notice to the other shareholder. Both types of offer notice are relevant in this case.

26 Clause 10.3(b) specifies what an offer notice must contain, namely:

(ii) The terms and conditions of the transfer, including the consideration per share to be transferred; and

(b) A warranty that the shares to be transferred are and will at completion be the sole legal and beneficial property of the transferring party.

27 In this way, clause 10.3(b) provides that the offeree is able to consider whether to accept an offer to acquire the shares for the specified price, with some confidence that they are unencumbered.

28 Clause 10.3(b) contemplates that there may be "terms and conditions of the proposed transfer" other than price per share included in the offer notice. If there are any such other terms and conditions, they do not affect the transferring party's obligation to deliver unencumbered title to the shares within 30 days of acceptance by the offeree, in return for payment of the consideration for the shares (clause 10.3(e)).

29 Any such other terms and conditions will fall to be considered in the event that the offeree fails to accept the offer notice or tender the consideration, because, under clause 10.3(f), a transfer of the shares to another person may only occur "upon no more favourable terms and conditions than those disclosed in the offer notice".

30 The Carpet Call business was established in Queensland in 1975. Carpet Call was incorporated on 31 March 1978. Carpet Call is now the largest retailer of floor coverings in Australia. It sells a range of floor coverings and brands in carpet, cork, vinyl, rugs, timber and laminate. In addition to its retail business, it wholesales floor coverings to its network of Solomons Carpets franchise stores.

31 The Carpet Call business was originally wholly-owned by Burbank, a company controlled by Mr James Leslie ("Jim") Smith. However, in 1996, the business needed money to purchase the Solomons Carpets business. To facilitate the purchase, Shaw Industries Australia Pty Ltd ("Shaw") lent Carpet Call $2.55 million. In return, Shaw was given an option over 50% of the equity in Carpet Call. These arrangements were contained in the shareholders agreement between Burbank, Shaw and Carpet Call dated 7 February 1997.

32 Shaw was a wholly-owned subsidiary of Shaw Industries Inc ("Shaw USA"), a large American carpet manufacturer. Shaw USA supplied its carpets to retailers in Australia, including Carpet Call. When Shaw exercised its option to buy 50% of the equity in Carpet Call, it nominated Allmere to hold the shares on its behalf.

33 On 19 May 1997, Carpet Call, Burbank, Shaw and Allmere executed a deed of adoption, by which Allmere agreed to be bound by the terms of the shareholders agreement as if it were originally a party to that agreement.

34 In 2000, Feltex Carpets Limited ("Feltex") acquired Shaw, which was re-named Feltex Australia Pty Ltd ("Feltex Australia"), and thereby gained control of Allmere's shares in Carpet Call. Feltex manufactured carpets in New Zealand, and also supplied its carpets to Carpet Call and other retailers in Australia.

35 At all relevant times, Feltex Australia was a wholly-owned subsidiary of Feltex Australia Holdings Pty Ltd ("Feltex Australia Holdings"), which in turn was a wholly-owned subsidiary of Feltex.

36 The current shareholders of Allmere are Russell Martin and Michael Feeney, who do not hold those shares beneficially. They hold the shares on trust for Feltex Australia. Mr Feeney was a director of Feltex Australia and Feltex Australia Holdings. Both Mr Martin and Mr Feeney have been directors of Carpet Call.

37 The current directors of Carpet Call are Jim Smith, Barry Cook and Michael Feeney. Messrs Smith and Cook are Burbank's nominees to the Carpet Call board. Mr Feeney is Allmere's nominee.[11]

38 In a letter to Burbank dated 25 May 2006, Peter Thomas, the then managing director of Feltex, outlined a process of Feltex's "proposed sale of its interest in Carpet Call". At this time, Feltex proposed to call for expressions of interest from prospective buyers of its interest in Carpet Call.

39 By a letter to Feltex dated 8 June 2006, Godfrey Hirst offered to purchase the assets and undertakings of Feltex and its subsidiaries for NZ$135 million, on the assumption that Feltex had a "consolidated net working capital position for the business of NZ$80 million." The offer expressly excluded Allmere's shares in Carpet Call, which, the letter noted, Feltex valued at NZ$10 million. Feltex did not accept the offer.

40 By a letter to Feltex dated 17 July 2006, Godfrey Hirst made another offer to purchase all of Feltex's assets and undertakings for NZ$136 million, on the same assumption on which the 8 June offer was made. The offer now included all of the issued shares in Allmere. Allmere's only asset was its shareholding in Carpet Call, so the effect of this revised offer was to add Feltex's interest in Carpet Call into the deal. There is no dispute that had Feltex accepted this offer, Allmere would have been deemed to have given an offer notice in respect of the whole of its shares in Carpet Call, and the pre-emption procedure under clause 10.2 would have been engaged. However, Feltex did not accept the offer.

41 On 21 September 2006, Simon Wallace-Smith and Tim Norman were appointed as administrators of Allmere under Part 5.3A of the Corporations Act 2001 ("Corporations Act"). On the same date, administrators were also appointed to Feltex Australia and Feltex Australia Holdings.

42 The following day, ANZ Banking Group Ltd ("the ANZ") appointed receivers and managers to Feltex, Feltex Australia Holdings and Feltex Australia ("the Feltex receivers"), but not to Allmere, as the ANZ had no security over Allmere or its assets.

43 At a meeting with Allmere's administrators on 26 September 2006, Mr Smith was told that the administrators intended to offer for sale Allmere's shares in Carpet Call. That was confirmed in writing to Burbank on the same day.

44 On 28 September 2006, Michael Humphris and Laurence Fitzgerald replaced the original administrators appointed to Allmere, Feltex Australia Holdings and Feltex Australia. Mr Fitzgerald was the administrator with the principal role for our purposes.

45 On the same day, by a letter to the Feltex receivers, Godfrey Hirst made an offer to buy all of the assets and undertaking (with certain exclusions) of the Feltex group. The consideration included a cash payment of A$122 million and a payment of A$500,000 towards the Feltex receivers' fees. The offer specifically included Allmere's shares in Carpet Call. In relation to those shares, the letter proposed:

(a) "Receiver to assist in "pre-emptive rights" process with JV partner if so required";

(b) "If JV partner duly acquires the 50%, receiver will remit full proceeds to Godfrey Hirst";

(c) "Allocation of A$10 million of consideration to Carpet Call shares."

46 On 2 October 2006, Burbank wrote to Allmere's administrators. Burbank asked whether Allmere claimed beneficial ownership of its shareholding in Carpet Call, as Burbank understood there may be a competing claim from Feltex Australia. The question of legal and beneficial ownership was said to be relevant to Burbank's rights of pre-emption consequent upon any "change in ultimate control" of Allmere. Burbank attached a copy of its letter dated 28 September 2006 to Mr Wallace-Smith, one of the original Allmere administrators, and asked for a response. The Burbank letter of 28 September 2006 asserted that the appointment of the original administrators had in fact constituted a change in ultimate control. Burbank said that, whilst it had not made any final decision, its inclination was not to pursue its right of pre-emption consequent upon that change.

47 Mr Fitzgerald replied to Burbank's letter on 3 October 2006. He asked for a copy of the shareholders agreement and details of "any pre-emptive rights issues". Around 16 October 2006, Burbank provided Allmere's new administrators with a copy of the shareholders agreement and the deed of adoption.

48 On 3 October 2006, the Feltex receivers announced publicly that they had accepted an offer from the Godfrey Hirst group "to acquire the Feltex business as a going concern ...".

49 In a letter to Burbank dated 4 October 2006, the Feltex receivers said:

We have received an offer from Godfrey Hirst in relation to the whole of the Feltex business and assets including a specified amount for the interest in Carpet Call. However, as we do not control Allmere, we will request that Godfrey Hirst issue its offer to acquire Allmere's shares in Carpet Call directly to the administrators of Allmere. We expect that, if an offer is made, Allmere will provide to you an offer notice pursuant to the shareholders agreement in respect of a proposed transfer of the shares it holds in Carpet Call.

50 Mr Fitzgerald wrote to the Feltex receivers on 4 October 2006. In his letter, he referred to a meeting with Matthew Caddy from the receivers' staff on 2 October 2006. Mr Fitzgerald said:

In our discussions it was mentioned your intention to include the shareholding of Allmere in [Carpet Call] as part of the transaction with Godfrey Hirst. Mr Caddy mentioned verbally that you would work with me in seeking to ensure this was part of the sale to Godfrey Hirst.

I expect the shares in Carpet Call have not been included in the above sale given Allmere has not been to my knowledge a party to the Godfrey Hirst transaction.

51 On 5 October 2006, Mr Smith of Burbank met with Mr Kim McKendrick at the Carpet Call store in Mulgrave. Mr McKendrick and his family effectively own and control Godfrey Hirst. It is common ground that Mr Smith showed Mr McKendrick the 4 October letter from the Feltex receivers. Mr McKendrick asserted that Godfrey Hirst had bought all the assets of the Feltex group, including Allmere's shares in Carpet Call. Mr Smith asserted that Feltex could not sell its Carpet Call shares to Godfrey Hirst, because he had various rights to them.

52 By a letter to Allmere's administrators dated 9 October 2006, Godfrey Hirst made a separate offer to Allmere to purchase its shares in Carpet Call for A$10 million ("the Godfrey Hirst Allmere offer"), which included the following:

(a) The offer was irrevocable and would remain in force until 5.00pm on Wednesday 11 October 2006;

(b) Completion was to occur within 60 days from the date of execution of a formal share sale agreement; and

(c) Completion of the sale was subject to and conditional on Burbank "expressly consenting to the sale ... or Burbank giving its deemed consent by failing to accept an offer to purchase the shares from Allmere in accordance with clause 10.3 ..." of the shareholders agreement.

53 By a letter from their lawyers to Godfrey Hirst's lawyers dated 11 October 2006, Allmere's administrators purported to accept the Godfrey Hirst Allmere offer. I say "purported to accept", because the letter was really a counter-offer, as the acceptance was subject to the following additional conditions:

(a) The "Feltex Companies" (Feltex, Feltex Australia Holdings[12] and Feltex Australia) and the ANZ must provide their written consent to the proposed sale pursuant to the Godfrey Hirst Allmere offer;

(b) The Feltex Companies and the ANZ must provide Allmere's administrators with written confirmation that they had and made no claim to have any legal or beneficial interest in the shares; and

(c) The only warranty Allmere's administrators were prepared to provide in their agreement with Godfrey Hirst was that which was required by clause 10.3(b), namely that the shares are and will at completion be the sole legal and beneficial property of the transferring party.

54 In his report to creditors dated 11 October 2006, Mr Fitzgerald said:

Since mid 2005 up until the appointment of the receivers the directors of the Feltex Group were involved in discussions with various parties, including [Godfrey Hirst] pertaining to, inter alia, the sale of the shares in the Australian based entities of the Feltex Group, the sale of the New Zealand based businesses and assets, or alternatively, the business and assets of the Feltex Group in their entirety which may have included [Allmere's] interest in Carpet Call.

This process has attracted extensive media interest in New Zealand and Australia. Given the sale of the Feltex Group's assets to Godfrey Hirst and the requirements of the shareholders' agreement I do not propose to advertise the interest in Carpet Call for sale.

Subsequent to my appointment I was informed by the receivers that Godfrey Hirst would submit an offer to me for [Allmere's] interest in Carpet Call. On Monday 9 October 2006 I received a formal offer for [Allmere's] interest in Carpet Call.

55 In an email sent on 11 October 2006 to the lawyers for the Feltex receivers and the ANZ, Mr Fitzgerald said:

The only other aspect of the sale of Allmere's stake in Carpet Call that may be an issue is the value.

Whilst I have reviewed the financials of Allmere as well as the identified carrying value of the investment in the accounts of [Feltex], I have not openly tested the market.

As the only identified stakeholders in the ultimate realisation & proceeds are Feltex Australia through its receivers & managers, and the ANZ Bank by virtue of its guarantee & indemnity claim, I seek confirmation from these two parties that the offer of $10 million is acceptable to them in their capacity as creditors of Allmere and thus beneficiaries of the proceeds. Thus I do not seek an indemnity nor the like rather a response that the sum is 'acceptable' or 'fair' or some such description.

In my view this would obviate any requirement for the administrator to have gone through a public and exhaustive advertising process, as the only likely affected parties are agreeable to the value of the transaction.

The only other party involved being [Burbank], has its rights governed and thus protected through the shareholders agreement.

56 By an email sent to Mr Fitzgerald on 11 October 2006, the Feltex receivers' lawyers confirmed that "the offer of $10 million is acceptable" to the Feltex receivers and the ANZ in their capacity as creditors of Allmere.

57 On 13 October 2006, the lawyers for Allmere's administrators confirmed to Godfrey Hirst's lawyers that the administrators would provide a warranty that they had been validly appointed as administrators of Allmere.

58 On the same date, the Feltex receivers and the ANZ separately confirmed that the Godfrey Hirst Allmere offer was acceptable to them, and they had no claim to any legal or beneficial interest in Allmere's shares in Carpet Call.

59 Burbank wrote to Mr Fitzgerald on 16 October 2006, asking for a response to its letters of 28 September 2006 and 2 October 2006 about the "change in ultimate control" issue.

60 Godfrey Hirst's lawyers said on 17 October 2006 that their client had no concerns with the first two conditions in the administrators' 11 October letter, but required a further warranty that the administrators were validly appointed and will still be appointed at completion. The email also said that a draft contract for sale of shares would be forwarded shortly.

61 In a letter to Burbank dated 19 October 2006, Mr Fitzgerald said:

I have received an offer from [Godfrey Hirst] for the company's shareholding in Carpet Call. Pursuant to the requirements of clause 10 of the shareholders' agreement I will under separate cover serve an "offer notice" as defined and stipulated by the shareholders' agreement upon [Burbank].

I do not accept that any change in ultimate control of the Company has occurred as a consequence of our appointment ... However ... I agree that Burbank has certain rights under the shareholders' agreement in relation to the company's shares in Carpet Call, and I will respect those rights.

62 Late in the afternoon of 19 October 2006, Burbank received the offer notice. A copy of the Godfrey Hirst Allmere offer was attached to the offer notice, and was said to form part of the offer notice. As the offer notice was sent after 4.00 pm, it is treated as having been served on 20 October 2006.[13] In accordance with clause 10.3(b), the offer notice noted that the purchase price equated to a consideration of $3,333,333.33 per share, and contained the necessary warranty.

63 Burbank did not accept the offer notice within 30 days of 20 October 2006, and has not purported to accept it since.

64 By an agreement made on 20 October 2006 ("the Feltex sale agreement") between the Feltex receivers, Feltex Australia (as seller), Feltex and Feltex Australia Holdings (as sureties), Feltex Carpets Pty Ltd ("Feltex Carpets")[14] (as buyer) and Godfrey Hirst (as guarantor of the buyer's obligations):

(a) Feltex Australia was identified as "the owner of the business and assets" (as defined);

(b) Feltex Australia agreed to sell to Feltex Carpets the assets and the right to conduct the business as a going concern for the purchase price of A$53,211,000; and

(c) The assets were a package of assets, which included Allmere's shares in Carpet Call, the consideration for which was expressed to be apportioned at A$10 million of the total purchase price.

65 Allmere was not a party to the Feltex sale agreement.

66 Clause 23 of the Feltex sale agreement provided for the establishment of an escrow account for the $10million, which was described as the Carpet Call consideration. The Carpet Call consideration was to be kept in the escrow account pending completion of the proposed agreement between Allmere and the buyer of the Carpet Call shares. There would be an adjustment to the purchase price if the proposed agreement was not able to be completed within 150 days of the completion date for the Feltex sale agreement.

67 In a letter sent to Mr Fitzgerald on 24 October 2006, Burbank maintained the view that there had been a change in ultimate control of Allmere, by reason of the appointment of administrators. Burbank said that it seemed that what should happen next was the expert procedure under clause 10.3(d), but asked the administrator what he thought.

68 Burbank followed up its letter of 24 October 2006 with a letter to Mr Fitzgerald dated 3 November 2006. The administrators responded on 13 November 2006, saying that they did not regard there as having been any change in ultimate control. The administrators also said they saw nothing to be gained in appointing an expert, unless Burbank was prepared to submit an offer in excess of $10 million.

69 Burbank sent another letter to Mr Fitzgerald on 3 November 2006, concerning the offer notice. Burbank disputed that the offer notice was a proper one under the shareholders agreement, and asked for certain information to be provided.

70 In a letter to Mr Fitzgerald dated 14 November 2006, Burbank said that "we would not approve [Godfrey Hirst] as a transferee of Allmere's shares", even if the offer notice was valid. It said there were "numerous serious reasons" for refusing its approval, but did not give details of any such reasons. It asked Mr Fitzgerald to confirm that he did not wish to be involved in discussions about the appointment of an expert. There was no response to that letter.

71 On 17 November 2006, Mr Smith and Mr Michael Naphtali met with Mr Fitzgerald and his assistant, Mr Ahmed Bise, at the offices of Hindal Corporate, where Mr Naphtali worked. Mr Naphtali, a former Allmere-nominated director of Carpet Call, attended the meeting as an adviser to Mr Smith and Burbank. The dispute as to exactly what was said at the 17 November meeting and, in particular, whether Mr Smith disputed the price in the offer notice, will be considered later in these reasons.

72 In a letter to Burbank dated 27 November 2006, Mr Fitzgerald said that Allmere intended to transfer its shares in Carpet Call to Godfrey Hirst, as Burbank had not accepted the offer notice within 30 days. He sought confirmation of Burbank's approval of the proposed transfer by close of business on 30 November 2006.

73 In a letter to Burbank dated 15 December 2006, the lawyers for Allmere's administrators requested that Burbank state by 20 December 2006 whether it approved Godfrey Hirst as transferee of Allmere's shares, and that, if it did not approve, it provide its reasons for not approving.

74 Burbank responded on 20 December 2006. It declined to give reasons for refusing to approve Godfrey Hirst as transferee, asserting that reasons had already been given at the 17 November meeting. Burbank otherwise maintained its earlier attitude.

75 On 22 December 2006, Allmere commenced this proceeding.

76 Although a draft formal share sale agreement between Allmere (as seller), the Allmere administrators and Godfrey Hirst (as buyer) was prepared, it has not been executed.

77 A number of the issues in the proceeding involve questions of construction of the shareholders agreement or the offer notice. There was no dispute between the parties as to the general principles of contractual interpretation, which were conveniently summarised by Allmere in its closing submissions.

78 The general principles are well settled.[15] The approach was recently summarised by Hargrave J in Allstate Explorations NL v QBE Insurance (Aust) Ltd[16] as follows:

This requires the Court to consider what reasonable persons in the position of the parties would have understood the words to mean by reference to the text of the agreement, the surrounding circumstances known to the parties and the purpose or object of the transaction. In interpreting the words and resolving any ambiguity, the Court should proceed in a common sense and non-technical way and give the agreement a commercially sensible construction. The Court should have regard to all of the words used in the agreement "so as to render them all harmonious with one another" and to ensure the "congruent operation of the various components as a whole".[17]

79 Accordingly, where a word or clause is capable of more than one construction, the construction which will achieve a reasonable result is to be preferred.[18]

80 The interpretation of contractual notices is approached in a similar way. In Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd[19], in applying an objective approach in considering notices served by a tenant under lease termination clauses, Lord Steyn stated that the "issue is how a reasonable recipient would have understood the notices. And in considering this question the notices must be construed taking into account the relevant objective contextual scene."[20]

81 In MLW Technology, in considering the validity of a contractual notice,[21] Gillard AJA (with whom Winneke P and Buchanan JA agreed) adopted Lord Steyn's approach.[22] His Honour said that that approach was the proper approach and accorded with authority of the Victorian Court of Appeal, and referred to the following statement of Brooking J (as he then was) in Catley & Anor v Watson & Anor:[23]

... a notice ... is not valid unless it is, in relation to its essential features as required by [the relevant] condition, clear and unambiguous. By this I mean, not that its import must be clear beyond the slightest peradventure, but that its terms must be such that a reasonable person, having given it fair and proper consideration, would be left in no doubt as to its meaning.[24]

82 The reasonable person the subject of the inquiry "is a layman, not a lawyer, but the doubt must be a reasonable doubt".[25]

83 The pre-emption right conferred by clause 10 arises in two situations. One situation is where a shareholder proposes to transfer its shares. In that case, the transferring party must give to the other shareholder an offer notice under clause 10.3.

84 The other situation is where there is no proposed transfer of the shares themselves, but where the control over those shares will necessarily change, as a result of a "change in ultimate control" of the shareholder. The change in ultimate control triggers clause 10.2, and the shareholder, the ultimate control in which has changed, is taken to have given an offer notice in respect of the whole of its shares at a price to be determined under clause 10.3(d).

85 Burbank contends[26] that there was a change in ultimate control of Allmere on 21 September 2006, by reason of the appointment on that date of administrators to Allmere, Feltex Australia and Feltex Australia Holdings, under Part 5.3A of the Corporations Act. The administrators are said to have assumed ultimate control of Allmere to the exclusion of Feltex and the intermediate shareholders in the Feltex Group. Burbank says that Allmere is therefore deemed to have given an offer notice on that date, such that the pre-emption procedure in clause 10.3 was engaged.

86 Immediately before the appointment of the administrators:

(a) The shareholders in Allmere were Messrs Martin and Feeney. Each held his share on trust for Feltex Australia;

(b) Feltex Australia was a wholly-owned subsidiary of Feltex Australia Holdings;

(d) Feltex was the ultimate holding company of each of Feltex Australia and Feltex Australia Holdings.

87 Administrators were appointed to each of Allmere, Feltex Australia Holdings and Feltex Australia on 21 September 2006.

88 Importantly, the appointments of 21 September 2006 are the only facts relied upon by Burbank in its defence and its closing submissions.

89 The Feltex receivers were appointed the following day. Feltex Australia and Feltex Australia Holdings went into liquidation on 22 November 2006, with the administrators, Messrs Fitzgerald and Humphris, appointed as liquidators. The directors of Allmere resigned on 22 September 2006 and 18 October 2006, respectively.

90 The current Allmere administrators, Messrs Fitzgerald and Humphris, replaced the original administrators on 28 September 2006.

91 On 8 November 2006, Allmere entered into a deed of company arrangement ("the DOCA"). The deed administrators are Messrs Fitzgerald and Humphris. Clause 2.2 of the DOCA provides for the administrators to continue their control of Allmere until the termination of the DOCA.

92 The stated purpose of the DOCA is to sell the Carpet Call shares owned by Allmere, maximise the return to creditors, and provide that excluded creditors (being the directors of Allmere) shall not share in any proceeds of the DOCA.

93 Burbank does not plead that any of the events after 21 September 2006 gave rise to a change in ultimate control. For example, it does not plead that the coming into operation of the DOCA effected a change in ultimate control.[27]

94 Whether or not there was a change in ultimate control is a matter for the court to determine. The attitude of the administrators is not determinative either way.[28]

95 There is no dispute about the following legal consequences which flow from the appointment of an administrator.

96 The provisions governing voluntary administration are found in Part 5.3A of the Corporations Act. There is an initial phase (usually referred to as a voluntary administration), commencing upon the appointment of the administrator, followed by a second phase involving a number of possibilities. The second phase may involve voluntary liquidation, a return to the company's position prior to the voluntary administration without any change, or (as occurred with Allmere) the entry into a deed of company arrangement with creditors.[29] Voluntary administration is therefore a temporary phase only.

97 The main object of the procedure[30] is to maximise the chances of the company, or at least as much as possible of its business, continuing in existence. Part 5.3A is concerned to regulate the control and distribution of the company's assets in the interests not only of the company and its members, but also its creditors.

98 The appointment of an administrator does not involve any change in ownership of the company's assets.

99 Section 437A(1) provides that:

While a company is under administration, the administrator:

(a) has control of the company's business, property and affairs;

(d) may perform any function, and exercise any power, that the company or any of its officers could perform or exercise if the company were not under administration.

100 The administrator may also carry on the business and manage the property and affairs of the company, or terminate or dispose of the business or any property. When the administrator performs any function or exercises any power that the company or any of its officers could have performed or exercised, the administrator does so as the company's agent.[31] The powers of other officers are suspended during the administration.[32]

101 The control exercised over a company by an administrator may be subject to supervision by the court and may, in some circumstances, be subject to some direction by the creditors. However, it is not subject to the will of the shareholders or the directors of the company, none of whom have any say in how the company's business, property or affairs should, or will, be dealt with during the period of the administration.

102 It is therefore common ground that the appointment of an administrator involves a change in control of the affairs of a company and that the administrators, upon their appointment to Allmere on 21 September 2006, assumed at least temporary control of Allmere.

103 The real point of dispute is whether the appointment of administrators amounted to a change in "ultimate" control.

104 The shareholders agreement does not define the expression "change in ultimate control" or any of the terms contained in it.

105 There is an express acknowledgement in clause 10.2 that, as at the making of the shareholders agreement on 7 February 1997, Mr Smith "controls" Burbank, and Shaw USA "controls" Shaw. Allmere says that the acknowledgment reflects the ultimate ownership of each shareholder (and also, in the case of Burbank, the shareholder's sole director). In fact, as Shaw USA is itself a company, it also has shareholders, who would be the "ultimate" shareholders of Shaw. I agree with Burbank that the expression "ultimate control" could not have been intended to have exactly the same meaning as "ultimate shareholding".

106 It seems to be common ground that the "ultimate control", for the purposes of clause 10.2, is exercised by the person who or which has the ultimate decision-making power in respect of the company's business, property and affairs. Normally, but not inevitably, that person will be the ultimate holding company of the company.

107 It is also not disputed that immediately before the appointment of administrators, the ultimate control of Allmere rested with Feltex, as the ultimate holding company of Feltex Australia, for which the issued shares in Allmere were held on trust by Messrs Martin and Feeney. However, Burbank says that this ultimate control was severed by the appointment of the administrators.

108 As part of its argument that there has been a change in ultimate control, Burbank seeks to look ahead to what may eventually happen to Allmere. It says that the combined effect of clause 12 of the DOCA, s 445C of the Corporations Act and clause 12 of Schedule 8A of the Corporations Regulations 2001, is that the DOCA will terminate upon the deed administrators lodging a notice with ASIC to the effect that the objects of the DOCA have been achieved. At that stage, Allmere would be a corporate shell, without any assets, without any directors, with a beneficial shareholder in liquidation and, presumably, destined for deregistration.

109 Those events may or may not come to pass at some stage in the future. But the question of whether there was a change in ultimate control on 21 September 2006 (the date nominated by Burbank) has to be determined by the facts in existence at that date, not by subsequent or future events or possibilities. The DOCA is not relevant to that determination, as it was not entered into until early November 2006, and whether and how the stated purposes of the DOCA may be achieved is still unknown.

110 Allmere argues that the language used in clause 10.2 and the surrounding provisions makes it clear that the appointment of administrators is not what is contemplated by clause 10.2.

111 The term "insolvency event" is defined in clause 1.1 of the shareholders agreement to include the appointment of an administrator. Allmere points out that clause 12 of the shareholders agreement provides that "Burbank or Shaw may terminate this agreement if the other suffers an insolvency event."[33] So, one consequence of the appointment of administrators is expressly covered in the shareholders agreement.

112 I agree with Burbank that the mere fact that party A has a right to terminate the agreement if party B suffers an insolvency event, does not automatically preclude party A from also having other rights consequent upon that event.

113 But it does not follow that the fact the parties have chosen to use a defined term in some clauses, but not in others, is completely without significance. Clause 10.2 does not use the term "insolvency event", or refer to the appointment of an administrator or other insolvency procedure as constituting a "change in ultimate control"; it could easily have done so. Nor does clause 10.2 refer to "transfer", which is defined in clause 1.1 to include "the appointment of a receiver or other legal custodian of the property of a party ...". By comparison, clauses 10.1 and 10.3 do refer to "transfer".

114 Most importantly, clause 10.2 refers to a change in "ultimate control", not merely "control". This points to an "upstream" control concern, to do with the identity of the person or company who is the real joint venture partner and decision-maker. That seems to be concerned with long-term, "big picture" issues, rather than the appointment of administrators, or some other means by which control of the shareholder may be temporarily lost.

115 For these reasons, I conclude that the appointment of administrators on 21 September 2006, whether to Allmere, Feltex Holdings or Feltex Holdings Australia, did not constitute a "change in ultimate control" under clause 10.2.

116 There having been no change in ultimate control, it is not necessary for me to consider Allmere's alternative argument[34] that the right to appoint an expert to determine price under clause 10.3(d) had to be, but was not, exercised within 30 days of becoming aware of the change in ultimate control and the deemed offer notice.

117 Burbank's case is that Allmere is not entitled to transfer its shares in Carpet Call to Godfrey Hirst or any other person, because it has not sent a valid and effective offer notice under clause 10.3(a). There are a number of separate grounds upon which Burbank claims that the offer notice was invalid.

118 Clause 10.3(a) applies if a party "proposes to transfer" an interest in shares.

119 Burbank alleges[35] that as a matter of proper construction, a proposed transfer means a transfer intended to be done, not a transfer that has already been committed to be done.

120 Burbank pleads that by the time the offer notice was sent to Burbank on 19 (or 20) October 2006, Allmere had already accepted the Godfrey Hirst Allmere offer and thereby agreed to dispose of its shares to Godfrey Hirst, or made a commitment that went beyond a "proposal" within the meaning of clause 10.3. The offer notice is therefore said to be invalid.

121 This argument involves a complete change of Burbank's position.[36] In its letter to the administrators dated 3 November 2006, Burbank had asserted that there could not be a proposal to transfer the shares unless the administrators had accepted the Godfrey Hirst Allmere offer.

122 I agree with Allmere that it had not in fact entered into a binding agreement by 19 or 20 October 2006, to dispose of its shares to Godfrey Hirst. The Godfrey Hirst Allmere offer was expressed to be "subject to and conditional on" Burbank consenting to the transfer of the shares to Godfrey Hirst, or not exercising its pre-emptive rights to acquire the shares under clause 10. That condition was not altered or waived at any time prior to 20 October 2006, or since.

123 In any event, even if a party to the shareholders agreement did enter into a binding agreement to dispose of its shares prior to sending an offer notice, on a proper construction of clause 10, that would not render the offer notice invalid.

124 A sale and transfer in contravention of pre-emption provisions may confer on the purchaser, in addition to contractual rights, equitable proprietary rights which bind the vendor of the shares. However, such a purchaser has no rights as against the company and, in so far as there is a conflict between the purchaser's equitable proprietary rights and the rights of another shareholder wishing to enforce the rights of pre-emption, it was common ground that the equitable rights of the other shareholder would almost certainly prevail.[37]

125 That means that, even if, contrary to the present position, Allmere had entered into a binding agreement to sell its shares, Burbank's position would be protected as against the proposed transferee, without the need to read clause 10 in the manner suggested by Burbank.

126 Finally, to render an offer notice invalid in those circumstances may only serve to deprive the other shareholder (in this case, Burbank) of the opportunity to exercise its pre-emptive rights.

127 There is no dispute that an offer notice under clause 10.3 must:

(a) Be clear and unambiguous, so as to give a reasonable recipient no doubt as to its meaning; and

(b) Conform with the shareholders agreement.

128 The Godfrey Hirst Allmere offer was expressly incorporated by reference into the offer notice. There is no dispute that it formed part of the offer notice.

129 It was an express term of the Godfrey Hirst Allmere offer that the offer was irrevocable and would remain in force only until 5.00 pm on Wednesday 11 October 2006.

130 It was also an express term of the Godfrey Hirst Allmere offer that completion was to occur within 60 days from the date of execution of a formal share sale agreement.

131 Burbank pleads[38] that the offer notice did not comply with clause 10.3 because:

(a) It was not clear and unambiguous in its meaning, in that it posited an offer from Godfrey Hirst which, on its own terms, had already lapsed; and

(b) It did not conform with the shareholders agreement, in that in positing that completion was to occur within 60 days from the date of execution of a formal share sale agreement, it conflicted with clause 10.3(e) which provides for completion to occur within 30 days.

132 I agree with Allmere that the terms of the offer notice were clear and unambiguous, and in conformity with the shareholders agreement, for the following reasons.

133 The offer notice summarised the effect of the Godfrey Hirst Allmere offer as being:

Godfrey Hirst has offered to purchase Allmere's shares for $10million (Purchase Price);
The Purchase Price is to be paid by Godfrey Hirst to Allmere on completion of the sale and purchase of Allmere's Shares; and
Completion is to occur within 60 days from the date of execution of a formal share sale agreement for the purchase by Godfrey Hirst of Allmere's shares.

134 The offer notice then noted that the Godfrey Hirst Allmere offer was subject to several conditions, including the requirement that Burbank give express or deemed consent to the sale.

135 The offer notice referred to clause 10.3(f) and the requirement that Burbank must accept the offer within 30 days or tender the consideration when Allmere delivers the share certificates and transfer form. It said that if Burbank did not do either of those things, Allmere intended (subject to Burbank's approval) to transfer its shares to Godfrey Hirst.

136 If Allmere was not able to get an extension of time for acceptance of the Godfrey Hirst Allmere offer, then obviously that proposed sale could not go ahead. But that does not make the offer notice ambiguous, in terms of what Burbank needed to do if it wished to accept the offer.

137 The irrevocable offer period and the date specified for completion of a transfer to Godfrey Hirst in the attached copy of the Godfrey Hirst Allmere offer did not conflict with clause 10.3(e). They were simply matters as between Allmere and Godfrey Hirst, and the reasonable recipient in the shoes of Burbank could not have had any reasonable doubt in that regard.

138 Clause 10.3(c) provides that upon receipt of an offer notice, the offeree will have 30 days within which to purchase the shares for the consideration and upon the terms and conditions disclosed in the offer notice.

139 Clause 10.3(e) requires the transferring party to deliver unencumbered title to the shares within 30 days of receiving an acceptance of offer by the offeree. So, if Burbank had accepted the offer notice, Allmere would have had to deliver unencumbered title to Burbank within 30 days of receiving Burbank's acceptance. It is not clear why that is said to be inconsistent with the fact that completion under the Godfrey Hirst Allmere offer would occur within 60 days from the date of execution of a formal share sale agreement, if Burbank did not exercise its pre-emptive rights. The different time period relate to two completely different scenarios.

140 For these reasons, I am not persuaded that the offer notice was invalid on this ground.

141 Burbank says that on a proper construction of clause 10, if the transferring party proposes to sell its shares to a third party as part of a package with other assets to be purchased by the third party, the consideration for the shares must be:

bona fide and given at arm's length as if the shares were being sold as a discrete asset; that is, isolated from and unaffected by other liabilities or obligations or dealings which might affect the terms and conditions, especially price, upon which the third party has offered to purchase the shares.[39]

142 For convenience, I will refer to the pleaded requirement simply as "an arm's length price."

At a glance

Court

Decision date

Before

Source

Judgment (460 paragraphs)

Parties

Cases Cited (4)