Plaintiff v Defendant

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;

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

(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:

1. Godfrey Hirst has offered to purchase Allmere's shares for $10million (Purchase Price);
2. The Purchase Price is to be paid by Godfrey Hirst to Allmere on completion of the sale and purchase of Allmere's Shares; and
3. 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."

143 It was not always clear what Burbank meant by "bona fide and at arm's length." In its opening, Burbank said that a "bona fide or genuine offer ... is really the same thing as saying arm's length." In closing, Burbank seemed to use "bona fide" in the more limited sense of there being in existence an actual offer from a third party. By its closing address, Allmere accepted that there has to be a bona fide offer, in the sense of an actual offer from another party,[40] so that an offeror cannot pretend to have received an offer when it has not in fact done so. However, there is no doubt here that there is a bona fide offer in that narrower sense.

144 Furthermore, although Burbank repeatedly described the price as "nominal consideration" (being an allocation from the larger Feltex purchase price), it disavowed any suggestion that the consideration was a "sham" or not the genuine price to be paid for Allmere's shares.

145 Burbank says that the offer notice is invalid because the consideration for which Allmere proposed to sell the shares to Godfrey Hirst was not an arm's length price. Although the offer notice was expressed to be for the shares alone, it implemented or was administered to facilitate an overall deal in which the shares were sold as part of a package with other assets. The price at which Godfrey Hirst offered to buy the shares was not determined as if the shares were being sold as a discrete asset, and was not the subject of separate negotiation. Burbank says that the offer was so affected by the dealings in the Feltex buy-out and the Feltex sale agreement that the consideration stated in the offer notice was not an arm's length price. It says that the price of $10 million offered by Godfrey Hirst was an artificial figure, intended to either deter Burbank from pre-emption, or cause it to pay too much for the shares.[41]

146 Allmere denies that clause 10 requires there to be an arm's length price. In any event, it says that the purchase price was an arm's length price.

Must the purchase price be an arm's length price?

147 Clause 10.3 does not on its face require that the consideration or other terms and conditions of the proposed transfer reflect an arm's length price.

148 To try to overcome this, Burbank now couches its contention in terms of the proper construction of clause 10.3. That is not how it was originally put. In Burbank's original defence and counterclaim, it was pleaded as a term implied "by operation of law". However, there is no basis for saying such a term ought to be implied as a matter of law; nor could such a term ever satisfy the conditions for implying a term into a contract on the basis of business efficacy. Presumably that is why the original implied term allegation was dropped.

149 There is simply no scope for construing clause 10.3 as Burbank suggests. Clause 10.3(b) describes what the offer notice must contain. Relevantly, an offer notice must give details of "the terms and conditions of the transfer including the consideration per sale share". It must disclose the actual consideration, so that one could not, for example, state that the purchase price was $X without also disclosing that there was to be a refund or rebate of $Y (if the true consideration was in fact $X minus $Y). But the clause says nothing at all about the basis upon which the consideration is to be arrived at in a commercial sense.

150 It is not necessary to read the clause as Burbank suggests in order to protect an offeree's position, because an offeree is already protected in the following way:

(a) If the proposed price is lower than, or is, a fair and reasonable price, the offeree can choose to buy at that price;

(b) If the offeree thinks the proposed price is too high, it can dispute the price and avail itself of a fair and reasonable price, as determined by an independent expert under clause 10.3(d);

(c) If the offeree decides not to acquire the shares at the price offered by the offeror or as determined by the expert, then a transfer of the shares to another person may only occur if the proposed transferee is approved by the offeree (acting reasonably) and the transfer occurs on terms and conditions no more favourable than those disclosed in the offer notice;

(d) If there is a contravention of the pre-emptive rights of the offeree, the offeree's rights should prevail over those of the proposed transferee, and the offeree could, absent unusual circumstances, prevent a proposed transfer of shares in breach of its pre-emptive rights or seek relief so as to restore its position after such a transfer.

151 If, for example, the offeror wanted to sell its shares to a related company for less than a fair and reasonable price, the offeree would have first right to buy the shares for that reduced price. Conversely, if the offeror was able to find somebody willing to pay an inflated price for the shares, the offeree can dispute the price and exercise its rights to buy the shares at the price determined by an expert under clause 10.3(d). In each case, the clause operates to adequately protect the offeree's position.

152 Burbank's construction could operate harshly to deny the offeror the benefit of the clause 10 mechanism for transferring its shares if, for example, the consideration it is offered for its shares is affected by factors or dealings to which it is not a party and of which it is unaware, as is the case here.

153 Burbank's construction also introduces a level of uncertainty which may operate against the interests of all parties. On Burbank's case, unless the price is an arm's length price, then there is no offer notice at all. That would mean that any offer and acceptance under clause 10 would always be subject to either party alleging, at any time before the transfer, that in fact no offer notice had been given because it was not an arm's length price. That position could operate unfairly for both shareholders. It could be unfair to the offeree, because it would allow the offeror the possibility of "testing the waters", by putting a non-arm's length offer notice to the offeree in order to find out its commercial position, only to undermine the process once the offeree had declared its position.

154 For these reasons, I reject Burbank's argument that the proper construction of clause 10 requires the consideration to be an arm's length price.

155 It is therefore not necessary for me to consider whether $10 million was in fact an arm's length price.

Were the necessary details stated in the offer notice?

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,

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.

157 There is no dispute that it was an implied term of the shareholders agreement, implied by operation of law, that the parties would do all things necessary on their respective parts to enable the other to have the benefit of the agreement.

158 There is also no dispute that clause 10.3 confers on a shareholder the benefit of:

(a) The opportunity of purchasing the shares proposed to be transferred by the other shareholder for the consideration and upon the terms and conditions disclosed in an offer notice; or

(b) Disputing the price for which the other shareholder proposes to sell its shares, and referring that dispute to an expert determination for a final and binding decision.

159 Burbank's case[42] is that the implied term obliges Allmere, under clause 10.3(b), to give details of all dealings affecting the proposal to transfer Allmere's shares, so as to enable Burbank to consider properly whether or not:

(a) The consideration for which Godfrey Hirst offered to purchase the shares was an arm's length price; and

(b) To match Godfrey Hirst's offer and purchase the shares, or to dispute the price at which Allmere offered to sell the shares and refer that dispute to an expert determination.

160 Burbank says that the offer notice did not comply with clause 10.3(b), in that it did not give any information concerning various dealings relating to the larger Feltex Group sale.[43] These are all matters relied upon in saying that the consideration was not an arm's length price and include: the terms of the earlier Godfrey Hirst offers to Feltex of 8 June and 17 July 2006; the limited role of the Allmere administrators in relation to the sale of the Carpet Call shares, including the setting of the sale price; the connection between the total price under the Feltex sale agreement and the amount owing to the ANZ; and the terms of the escrow clause and its possible effects on the seller and Godfrey Hirst under the Feltex sale agreement.

161 Allmere denies that there was any obligation to give any further information than it in fact did.

162 I have already explained why I reject Burbank's argument that the shareholders agreement requires there to be an arm's length price. It must logically follow that there is no requirement that the offeror give all details necessary for the offeree to determine whether the proposed consideration reflects an arm's length price.

163 What details is the offeror required to give? The clause 10.3(a) requirement to send an offer notice is triggered if a shareholder proposes to transfer an interest in shares. Under clause 10.3(b), an offer notice must give "details of the proposed transfer" including the number of shares to be transferred and "the terms and conditions of the transfer including the consideration". It does not state that "all details" must be given. There is also no express requirement that the offeror give details of any broader sale of assets, notwithstanding that it is reasonable to assume the parties were aware of the possibility that the shares could be included in a broader sale (as Allmere's shares have, throughout the duration of the shareholders agreement, been held within a larger corporate group structure).

164 It is unclear how far Burbank says the description of "all dealings affecting the proposed transfer" must go, or how the adequacy of the description is to be assessed by the offeree and by the transferring party.

165 The construction for which Burbank contends would be impractical and would invite unnecessary conjecture and dispute. That is particularly so in a situation such as this, in which the offeror is not a party or privy to the dealings said to affect the proposed transfer, or the dealings are not agreed at the time the proposed transfer and offer notice are formulated.

166 Further, there is no need for the offeree to know terms other than those concerned with the proposed transfer of the Carpet Call shares, in order for the offeree to enjoy the benefit of the shareholders agreement. Clause 10.3(b) specifies the information that the offeree needs to know in order to decide whether to purchase the shares at the price offered, or at a fair and reasonable price determined by an expert. The offeree is an existing shareholder, not a stranger to the business. The offeree has access to financial information about Carpet Call, based upon which it can make its own commercial decision as to whether it wishes to buy the offeror's shares and, if so, at what price.

167 The offeree's position is protected by the terms of the offer notice itself, in the event of a transfer being proposed on terms more favourable than those contained in the offer notice.

168 Once again, if an offer notice was meant to contain such matters, one would expect clause 10.3 to say so, and in very clear terms.

169 I am not persuaded that the offer notice was invalid on this ground.

170 Burbank's final invalidity argument is that the offer notice is invalid because it was given too soon.[44] It says that on a proper construction of clauses 10.2 and 10.3, where clause 10.2 has been engaged, and an offer notice is deemed to have been given, an offer notice under clause 10.3 cannot be given any earlier than 30 days after there has been an expert determination under clause 10.3(d). Burbank says there cannot be concurrent operative offer notices.

171 Allmere disputes that clause 10 limits or regulates the service of offer notices in the manner Burbank contends. It says that to do so may operate to deny the offeree the opportunity to receive and decide whether to accept other offer notices, possibly on more favourable terms than the deemed offer notice under clause 10.2. Such a construction could therefore tend to undermine the pre-emptive rights, and should not prevail.

172 For the reasons given earlier, I am not persuaded that there was any change in ultimate control under clause 10.2, therefore it is not necessary to determine whether the offer notice is invalid because it was given too soon.

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.

174 Burbank says that, if the offer notice was valid, it disputed the genuineness of the price offered by Godfrey Hirst; therefore, clause 10.3(d) requires the dispute to be referred to an expert.

175 Burbank's case as to when and how it says it disputed the price has changed over time. In its initial defence dated 19 February 2007, Burbank only pleaded an alleged conversation between Mr Smith of Burbank and Mr McKendrick of Godfrey Hirst on 6 or 7 October 2006; reliance on that conversation has since been abandoned.[45] Its current pleading[46] relies upon:

(a) A conversation between Messrs Smith, Fitzgerald and others, at a meeting on 17 November 2006 at the offices of Hindal Corporate. Mr Smith and others gave evidence about the 17 November meeting, which will be considered shortly;

(b) A telephone conversation between Mr Smith and Mr Fitzgerald on 20 November 2006. This conversation was not mentioned in Mr Smith's witness statement, Burbank led no evidence in relation to it and Mr Fitzgerald was not cross-examined on his brief evidence about the conversation[47];

(c) By Mr Smith on 18 April 2007, 9 May 2007, 22 June 2007, 23 July 2007 and 21 August 2007. The pleading does not disclose how or to whom Mr Smith allegedly communicated on those occasions, and no evidence was led about these alleged communications;

(d) A telephone conversation between Mr Smith and Mr Fitzgerald on 1 May 2007. Once again, Mr Smith did not mention this conversation in his witness statement, Burbank led no evidence in relation to it, and Mr Fitzgerald was not cross-examined about his account of this conversation[48]; and

176 In fact, in its closing submissions, Burbank only referred to and relied upon the 17 November meeting. Burbank eventually conceded[49] the correctness of Allmere's argument[50] that there is an implied term of the shareholders agreement[51], that any disputing of the price under clause 10.3(d) is only effective if it occurs within 30 days of receipt of an offer notice. Accordingly, by closing addresses, it was common ground that only the 17 November meeting could be relied upon.

177 Allmere alleges that any disputing of price was not in writing and therefore not communicated in accordance with the notice requirements under the shareholders agreement. Even if not required to be in writing, Allmere says that the price was not in fact disputed at the 17 November meeting.

Must a dispute under clause 10.3(d) be communicated in writing?

178 Allmere says that any disputing of the price at the 17 November meeting was ineffective, because it was not in writing. Burbank disputes the existence of any such requirement.

179 Although clause 10.3(d) does not on its face require a dispute to be notified in writing, Allmere says that clause 15 of the shareholders agreement applies to import that requirement into clause 10.3(d).

A notice, consent, approval or other communication (each a "notice") under this agreement shall be in writing, signed by or on behalf of the person giving it, addressed to the person to whom it is to be given and:

181 Clause 15.1 clearly operates in respect of "notices" required to be given under various parts of the shareholders agreement, namely: clauses 5.1 and 5.2 ("due notice"), clauses 5.4 and 6.3 ("after notice from Burbank or Shaw to the other"), clause 10.3(a) ("offer notice") and clause 10.3(e) ("notice of acceptance"); "consents" required under clauses 9.1(a) and 13.2 ("prior written consent"); and "approvals" required under clause 11 ("board approval"), clause 10.3(f) (approval of new shareholder) and clause 10.3(h) (approval of transfer).

182 However, clause 15.1 is not restricted to notices, consents and approvals. It clearly envisages that there may be some other type of "communication" under the shareholders agreement. There is no specific clause which imposes an obligation by reference to the word "communicate" or "communication". One must therefore look to see whether the shareholders agreement imposes any obligation on one party to communicate something to the other, which is not covered by the term "notice, consent, approval." Does a "dispute" necessarily require a communication?

183 Burbank says that it is the existence of a dispute, not any communication of that dispute, that triggers the operation of clause 10.3(d). It seeks to contrast clause 10.3(d) with very detailed dispute provisions, such as those commonly found in standard form construction contracts, where strict compliance with procedural matters such as form and timing have been held to be preconditions or conditions precedent to the right to dispute a matter.[52] But, obviously, each provision needs to be construed in the context of the particular contract.

184 Burbank says that if the intention of the parties was that a written notice or communication of a dispute from the offeree to the transferring party was a necessary precondition to the exercise of the right conferred on the offeree to refer a dispute concerning the price to an expert for a determination, then clause 10.3(d) would have been in very different terms. That submission assumes that clause 10.3 is otherwise clearly and consistently drafted in terms of questions of notice.

185 Unfortunately, clause 10 of the shareholders agreement is poorly and inconsistently drafted in that respect. Clause 10.3(a) specifically requires the transferring party to send the offeree an "offer notice" if it proposes to transfer its shares. Clause 10.3(b) sets out the required contents of an offer notice. On its face, clause 10.3(b) seems apply to an actual offer notice under clause 10.3(a), as well as a deemed offer notice under clause 10.2; but it clearly cannot have been intended to apply in the case of a deemed offer notice, because there is no physical notice in such a case. Then clause 10.3(e) refers to the receipt by a transferring party of "a notice of acceptance", but nowhere in clause 10 is there any actual obligation on the offeree to send a notice of acceptance if it wishes to accept the offer notice.

186 I agree with Allmere that a "dispute" necessarily involves communication with another party. It cannot be thought that clause 10.3(d) could somehow be triggered by an offeree having a subjective state of mind, without communicating that fact to the offeror.

187 In its ordinary and natural meaning, a "dispute" clearly requires a communication. Its standard dictionary definitions include the following concepts: argument or discussion; wrangle or quarrel; contest; argumentation; a debate or controversy.[53] A dispute must be something more than an uncommunicated state of mind.

188 Once it is accepted that a dispute requires there to be a communication, there is no reason in principle why clause 15.1 should not be intended to apply. This makes commercial sense, as substantive legal rights are affected by whether or not the price is disputed by the offeree. The requirement for written notice gives added certainty to the transferring party, the offeree and the proposed transferee.

189 Were it necessary to decide, I would hold that a dispute under clause 10.3(d) is required to be communicated in writing in accordance with clause 15.1. In fact, for the reasons which follow, I am not even satisfied that Burbank did in fact dispute the price orally at the 17 November meeting.

190 The 17 November meeting was attended by Mr Smith and his advisor, Mr Naphtali, representing Burbank, and Mr Fitzgerald and his colleague, Ahmed Bise, for the administrators. The meeting was arranged by Mr Naphtali, apparently at Mr Smith's request. Mr Smith imposed the requirement that no lawyers attend the meeting.

191 Mr Fitzgerald's evidence, which was not challenged, is that it was "discussed and agreed" at the outset of the 17 November meeting that it was to be "without prejudice". Mr Bise's handwritten notes support that. Mr Naphtali, accepted that the words "without prejudice" may have been mentioned at the outset of the meeting. Although Mr Smith's evidence was that he did not regard the meeting as in fact being "without prejudice", he did not dispute that the parties had discussed and agreed at the outset that the meeting was to be "without prejudice".

192 Allmere originally pleaded that because the 17 November meeting was conducted on a "without prejudice" basis, what Mr Smith said at the meeting about the price was therefore ineffective to "dispute" the price. Initially, it did not waive the privilege and therefore did not address the contents of the 17 November meeting in Mr Fitzgerald's first witness statement.

193 However, during the course of the trial, Allmere made it clear that it waived any privilege in respect of the 17 November meeting. As Burbank had already waived for its part any such joint privilege, the court may now consider the words used.

194 That means it is not necessary for the court to determine whether what was said at the meeting was, as a matter of law, protected by "without prejudice" privilege.[54] But the fact that the meeting was agreed to be held on a "without prejudice" basis is relevant to a consideration of what a person present at the meeting might reasonably have thought was being conveyed by Mr Smith.

195 It is clear that one of the matters discussed at the meeting was the price offered by Godfrey Hirst.

I said (in substance) that the price offered by Godfrey Hirst for the Carpet Call shares was not genuine. I said that, on that basis, the price of $10 million offered to Burbank in the offer notice was not genuine.

197 Mr Naphtali also gave very limited evidence as to what was said at the 17 November meeting. In his witness statement, he confirmed that the substance of what Mr Smith had said was that the price offered by Godfrey Hirst "was not genuine."

198 Mr Fitzgerald had a slightly different recollection of the words actually used. He said that Mr Smith said in substance that the $10 million was "a furphy and had been plucked from the sky. He said in substance that the shares were not worth that much, and were worth a lot less."

199 It is common ground that an offeree is not required to actually use the words "dispute", "clause 10.3(d)", or any other particular expression. Nevertheless, the offeree must clearly convey that it is disputing the price for the purposes of clause 10.3(d). For the reasons discussed earlier, it is necessary to consider what the reasonable person in the position of Mr Fitzgerald (and therefore Allmere), with knowledge of the shareholders agreement, would have understood Mr Smith's words to mean in the context of the meeting.

200 Although any privilege in respect of the 17 November meeting has now been waived, the fact that the parties had agreed that the meeting was "without prejudice" would of itself suggest to the reasonable listener that price was not being disputed for the purpose of triggering contractual rights on that occasion.

201 Mr Smith did not challenge the following evidence by Mr Fitzgerald as to the context in which the comments as to price were made at the 17 November meeting. Mr Smith said he could not work with Godfrey Hirst. He said they had an unworkable relationship, that Godfrey Hirst had not supplied Carpet Call for 20 years, he could not work with Kim McKendrick and he could not be in business with a supplier. After Mr Smith made his comment about what the shares were worth, Mr Fitzgerald said that the offer notice was the only offer on the table. Mr Fitzgerald then asked Mr Smith how they could break the impasse. Mr Smith said he was the only buyer, but was happy for Mr Fitzgerald to find another buyer but only at Mr Smith's acquiescence. Mr Fitzgerald said that what Mr Smith was trying to do was bring about a situation where he could buy the shares and dictate the price for them. Mr Naphtali said at the meeting that he agreed that was what Mr Smith was trying to do. At the conclusion of the meeting, Mr Fitzgerald said he would let Mr Naphtali know as a courtesy, before commencing any legal proceeding.

202 There was no suggestion at the meeting that Mr Smith wanted the price to be determined by an independent expert. On the contrary, he said he wanted to dictate the price. That is entirely consistent with the attitude he had been taking in relation to the change in ultimate control issue.

203 Well before the 17 November meeting, Burbank had already asserted, on legal advice, that there had been a change in ultimate control of Allmere and Feltex Australia, such that the right of pre-emption had arisen under clause 10. But Burbank had carefully chosen not to call for a referral to expert determination, in order to keep its options open.

204 For example, Burbank's 28 September letter to the original administrators had asserted that their appointment had constituted a change in ultimate control. However, it said that, whilst it had not made any final decision, Burbank's inclination was not to pursue its right of pre-emption consequent upon that change. Burbank's later letter to Mr Fitzgerald, dated 24 October, repeated the earlier assertion that there had been a change in ultimate control. Burbank said that it believed that what should be happening was the expert procedure under clause 10.3(d), and asked the administrator what he thought. It did not actually call for a referral to expert determination.

205 Mr Smith confirmed in cross-examination that at the time of the 17 November meeting, his inclination was not to pursue an expert determination under clause 10.3(d), notwithstanding that he believed Burbank was entitled to do so.

206 To the reasonable recipient armed with knowledge of the shareholders agreement and the surrounding context, it would not appear from either version of what was said by Mr Smith as to price at the 17 November meeting, and the manner and forum in which it was communicated, that Burbank disputed price for the purposes of triggering an expert determination pursuant to clause 10.3(d). Rather, the reasonable recipient would have observed Mr Smith engaging in some commercial posturing, designed to try to maximise his bargaining position without actually committing to any particular path.

207 Burbank sat on the fence for a long time. This may have been because Mr Smith could not control the outcome of an independent valuation once clause 10.3(d) had been activated, and did not know what price the expert would determine. Perhaps he wanted to keep all options open as long as possible before committing to any particular path. Whatever Mr Smith's reasons, it would have been apparent to the reasonable recipient standing in Mr Fitzgerald's shoes at the 17 November meeting that Burbank was not wanting to actually trigger a clause 10.3(d) expert determination, either by reason of the asserted "change in ultimate control" or by actually disputing the price for that purpose.

208 Finally, it is interesting (but not determinative) to note that even though the 17 November meeting was the subject of correspondence in late 2006, which had been settled by Burbank's lawyers, that correspondence never suggested that Burbank had disputed the price at the 17 November meeting. It was not until the amended defence of May 2007 that Burbank first alleged that the price had been disputed at the 17 November meeting.

209 For these reasons, I am not satisfied that Burbank did dispute the price at the 17 November meeting, for the purposes of clause 10.3(d).

210 If an offeree does not accept an offer notice within 30 days of receipt, clause 10.3(f) permits the transferring party to transfer its shares to "any person approved by the other shareholder (which approval shall not be unreasonably withheld)".

211 Burbank has withheld its approval of Godfrey Hirst as transferee of Allmere's shares in Carpet Call. It says that, in the circumstances of this case, it has acted reasonably in doing so.

212 The shareholders agreement not only governs the participation of the parties in the capital and management of Carpet Call, but also established a joint venture between the parties to carry on substantial retail businesses in floor coverings throughout Australia.

213 Burbank says that the conduct of that joint venture requires the two shareholders in Carpet Call to have, among other things, mutual business compatibility in the running of the joint venture, a good working relationship, a suitability for the joint venture business, a long-term commitment to the joint venture business, and the absence of any business interests that may conflict with the interests of the joint venture business.

214 In essence, Burbank's case[55] is that Godfrey Hirst is not a suitable or satisfactory substitute or replacement for Allmere because:

(a) The interests of Godfrey Hirst, having the manufacture of carpets as its core business, are incompatible with the interests of Carpet Call, a retailer of various floor coverings;

(b) Godfrey Hirst is a substantial manufacturer of carpet, which it supplies to a number of large retailers that compete directly with Carpet Call;

(c) Carpet Call will experience trading difficulties with other suppliers once it is widely known that it is part-owned by a competitor in the same market;

(d) There is a long-standing acrimony between Burbank and Godfrey Hirst, which is unlikely to abate, and which will likely result in disputations and corporate dysfunction;

(e) Godfrey Hirst does not have a long-term commitment to the Carpet Call business.

215 Burbank also contends[56] that it has not unreasonably withheld its approval under clause 10.3(f), because Allmere proposes to sell or transfer its shares to Godfrey Hirst on terms and conditions more favourable than those disclosed in the offer notice, and therefore in breach of clause 10.3(f). That is because the proposed sale of Allmere's shares in Carpet Call was part of, and conditional upon, completion of the Feltex buy-out or the Feltex sale agreement, or both. Because the offer notice therefore does not contain the real terms and conditions upon which Allmere proposes to transfer its shares to Godfrey Hirst, Burbank has not acted unreasonably in withholding its approval.

216 The purpose of the approval requirement in clause 10.3(f) is to allow the offeree to protect itself against an unsatisfactory replacement as co-shareholder. Allmere accepts that Burbank is entitled to resist the creation of a relationship between itself and the new shareholder which differed from that created under the original agreement, or which might infringe upon Burbank's rights under the shareholders agreement. However, a refusal for other reasons would be unreasonable and would deprive Allmere of the benefit of the contract. By reason of the shareholders agreement, Allmere has the right to transfer its shares to a suitable substitute and the right to seek to maximise the price it can realise for its shares.

217 There is simply no basis for construing the shareholders agreement as implicitly requiring the two shareholders in Carpet Call to have the various features alleged by Burbank. If the parties intended that, it would constitute a serious restriction on their ability to transfer the shares, and one would have expected them to express this in very clear terms indeed.

218 Once again, there was no real dispute between the parties as to the relevant legal principles to be applied, which are summarised briefly below.

219 Most of the cases dealing with the reasonableness of withholding approval or consent are concerned with whether a lessor has acted unreasonably in refusing consent to an assignment of lease. Whilst not all considerations that have been regarded as significant in that context will be applicable in a non-lease context, "logic dictates that the approach should be similar".[57]

220 In the lease context, the usual starting point is the judgment of Balcombe LJ (with whom Mustill and Fox LJJ agreed) in International Drilling Fluids Ltd v Louisville Investments (Uxbridge) Ltd[58] where the following propositions were enunciated:

(1) The purpose of a covenant against assignment without the consent of the landlord, such consent not to be unreasonably withheld, is to protect the lessor from having his premises used or occupied in an undesirable way, or by an undesirable tenant or assignee.

(2) As a corollary to the first proposition, a landlord is not entitled to refuse his consent to an assignment on grounds which have nothing whatever to do with the relationship of landlord and tenant in regard to the subject matter of the lease.

(3) The onus of proving that consent has been unreasonably withheld is on the tenant.

(4) It is not necessary for the landlord to prove that the conclusions which led him to refuse consent were justified, if they were conclusions which might be reached by a reasonable man in the circumstances.

(5) It may be reasonable for the landlord to refuse his consent to an assignment on the ground of the purpose for which the proposed assignee intends to use the premises, even though that purpose is not forbidden by the lease.

(6) [W]hile a landlord need usually only consider his own relevant interests, there may be cases where there is such a disproportion between the benefit to the landlord and the detriment to the tenant if the landlord withholds his consent to an assignment that it is unreasonable for the landlord to refuse consent.

(7) Subject to the propositions set out above, it is in each case a question of fact, depending upon all the circumstances, whether the landlord's consent to an assignment is being unreasonably withheld.[59]

221 Those propositions have been cited with approval by Australian courts[60] and have been refined or explained, including as discussed below.

222 An act must be regarded as reasonable or unreasonable by reference to the circumstances under which it is committed. The circumstances to be considered are the nature of the contract and the relations of the parties resulting from it. The court must look first at the contractual provision and construe it, in order to see what its purpose was when the parties entered into it; what each party must be taken to have understood when they acquired the relevant interest on either side.

As a matter or principle, the question is one of contract and therefore the terms of the contract must always be determinative. It is just that while in one set of circumstances fear of a particular consequence may be seen as falling short of the sort of danger against which the lessee contracted to allow the lessor to protect, in another set of circumstances fear of a similar danger may well be a reasonable basis for the lessor to withhold consent. Consequently, while considerations of the kind identified as relevant in Houlders may prove determinative of the outcome of cases in which the contract and facts are similar to Houlders, in other cases the terms of the contract and therefore the supposed intention of the parties, and the facts, may reveal a conception of reasonableness of broader dimension. In those sorts of cases there may be relevant considerations apart from the character and personality of the proposed assignee and matters affecting the use or exploitation of the rights assigned. It will depend on the contract." [61]

224 The factors relevant to the unreasonableness of withholding approval in a joint venture context were considered by Bryson J in Noranda Australia Ltd v Lachlan Resources NL.[62] His Honour said that in assessing whether the withholding of approval was reasonable:

The role of the court is to look at the whole process and most particularly at the result of it and to decide whether on the basis of the facts as they objectively exist, and not only on the facts as perceived by the other party, the withholding was unreasonable. [63]

225 Reasonableness is to be determined as at the date of refusal of consent.[64] Although the person withholding consent or approval is not confined to the reasons they communicated at the time of refusal[65], unless it is established that there was a relevant matter not known by them at the time, that person is confined to relying on reasons that actually influenced their mind at the relevant date.[66]

226 In this case, Allmere argues that the real reason for Burbank's refusal lies not in any of the reasons or concerns now asserted by Burbank, but in Mr Smith's strategy to try to engineer a situation where he is the only purchaser of the shares and can buy them at a discount. As a matter of principle, it is not the case that some sort of collateral purpose necessarily makes the refusal of consent unreasonable. In Tamsco Ltd v Franklins Ltd[67], Young CJ said:

Accordingly, although the court has to work out what was the real and true reason for the refusal of consent, the mere fact that the landlord has in mind some collateral purpose or some back-up scheme, which is outside what is contemplated by the tenant of the assignment, does not necessarily mean that the refusal of consent will be unreasonable.

If the consent is based on the area of concern that is legitimate for the landlord to take into account, the mere fact that that may involve a motive or a collateral purpose will not be enough for the tenant to succeed in showing that the landlord's refusal was unreasonable."[68]

227 In the earlier case of Provident Capital Ltd v Zone Developments Pty Ltd[69], Young CJ had addressed similar issues by reference to Balcombe LJ's second proposition, as follows:

The proposition itself is quite clear but this means one must work out just what was the ground on which the consent was withheld. It matters not that the landlord might have a motive for using the property itself and thus has been particularly pedantic in scrutinizing the application, so long as the genuine reason for withholding consent is lack of information, or alternatively a ground connected with the personality of the tenant or use of the property. It is not uncommon, even in commercial life, for people to have to weigh their preferences on the one hand, with their contractual duty on the other. There will be cases where the landlord says it declined consent on the basis that the tenant has a bad credit rating, but the Court can see as a matter of fact the real reason is the landlord's desire to occupy the property itself. However, there will also be cases where the real reason for refusal in that scenario is actually the bad credit rating. It is a question of fact in each case. [70]

228 The following observations by Nettle J (as he then was) in Cathedral Place, are particularly apposite in the present circumstances:

As a matter of principle, and as a matter of authority, Hyatt may have regard to the question of whether the proposed purchaser is a suitable substitute - able to go the distance, and also to the possibility of detriment to any other proprietary and financial interests to which Hyatt may be entitled. Accordingly, Hyatt is entitled to resist the creation of a relationship between itself and the new owner which differs from that created under the original agreement, and Hyatt is entitled to withhold consent to an assignment which might trench upon rights accrued under the Hotel Management Agreement and perhaps even rights arising out of the Hotel Management Agreement. The refusal to consent for either reason would be no more than necessary to ensure that Hyatt continued to enjoy the rights for which it contracted. But as a matter of principle and according to the authorities, Hyatt would not be entitled to refuse consent in order only to acquire rights or benefits to which it was not entitled under or arising out of, or at least contemplated by the agreement. As a matter of principle and as a matter of authority, the refusal of consent for those purposes would operate to deprive the Owner of a benefit for which the Owner had contracted, namely, the right to assign to a suitable substitute consistently with the rights and interests of Hyatt. To adopt and adapt the terms employed by Mason J in Secured Income, it would breach the obligation implicit in the agreement to do all such things as are necessary on Hyatt's part to enable the Owner to have the benefit of the contract.[71]

229 At the end of the day, where the question is whether or not the withholding of consent or approval was in the particular circumstances reasonable or unreasonable, the answer must in every case depend upon the facts of the particular case, including the terms of the contract and the intention of the parties as manifested by the contract. It must be remembered that Allmere bears the onus of proving that Burbank has acted unreasonably in withholding its approval of Godfrey Hirst as transferee.

230 Burbank pleads[72] that Godfrey Hirst is not a suitable or satisfactory replacement for Allmere, because Godfrey Hirst is a substantial manufacturer which supplies a large number of retailers that compete directly with Carpet Call. No particulars were given of this allegation.

231 Burbank also pleads[73] that the interests of Godfrey Hirst, having the manufacture of carpets as its core business, are incompatible with the interests of Carpet Call, a retailer of a diverse range of floor coverings. Notwithstanding the apparent breadth of this second allegation, the only particulars provided are to the following effect:

(a) As a manufacturer, Godfrey Hirst is driven to increase the volumes it can sell. It is likely to do so by "forcing" carpet supply through the Carpet Call business. Increasing volume of one type or brand is contrary to Carpet Call's business model, in that it will be required to stock and attempt to sell a large volume of Godfrey Hirst carpets, to the detriment of its ability to stock and sell other floor coverings;

(b) Carpet Call has central warehousing facilities in each of the mainland States, through which it wholesales to its Solomons franchise stores. Burbank says that Godfrey Hirst intends to require Carpet Call to use its warehousing facilities. That would be detrimental to Carpet Call, because its other suppliers will be deterred from delivering their products to Godfrey Hirst warehouses.

232 There is no dispute that Godfrey Hirst is the largest Australian manufacturer of carpet, with about 40-42% market share and a budgeted turnover in the past year of about $400 million. The next biggest manufacturer apparently has a turnover in the vicinity of $55 million per annum. Godfrey Hirst supplies to most of the 1,000 carpet retail outlets in Australia.

233 The key brands which Godfrey Hirst supplies to its customers are the Godfrey Hirst and Hycraft brands. The other brands are a number of sub-brands, including Redbook and, since its acquisition of Feltex, the Feltex brand.

234 As a manufacturer, Godfrey Hirst needs to deal with numerous retailers. In Godfrey Hirst's case, this involves offering products to some retailers, but not others. Indeed, Godfrey Hirst seeks to gain advantage with other retailers by offering them products that it will not supply to Carpet Call. This position is likely to continue if Godfrey Hirst becomes a shareholder.

235 Burbank says that if Godfrey Hirst acquired Allmere's shares, the relationship would be structurally flawed, because of the inherent conflict between Godfrey Hirst's business as a carpet manufacturer, and Carpet Call's business as a floor coverings retailer.

236 Burbank points to some of the problems which developed when Shaw and Feltex, both substantial manufacturers, were shareholders. For example, Shaw and Feltex would try to increase the amount and price of the product which they would supply to Carpet Call, whereas Carpet Call obviously wanted to reduce the price, obtain the best possible trading terms and maintain a diverse range of stock. This led to tensions on the Carpet Call board.

237 In my opinion, it is not reasonable for Burbank to rely upon the mere fact that Godfrey Hirst is a substantial manufacturer, who supplies Carpet Call's competitors with carpet, as a basis for withholding its approval. Throughout the life of the shareholders agreement, one shareholder has been a manufacturer, and the other a retailer. Both Shaw and Feltex were substantial manufacturers of carpets, who also supplied to Carpet Call's competitors, yet Carpet Call was able to grow its business and maintain an appropriate range of floor covering products with them as shareholders.

238 When the shareholders agreement was entered into in 1997, Burbank agreed to a joint venture arrangement with Shaw and accepted $2.55 million in return. At the time, Shaw's parent, Shaw USA, was regarded as the largest manufacturer of carpets in the world. It was a major supplier of carpets in Australia, having purchased existing manufacturers here. By 1997, Mr Smith was already very experienced in the carpet industry and would have known, or ought to have known, of any difficulties or perceived difficulties in dealing with a wholesaler as a joint venturer in a retail business.

239 Notwithstanding his concerns (which included a concern that Carpet Call's other suppliers might not like Carpet Call being 50% owned by another manufacturer), Mr Smith approved Carpet Call becoming a party to the shareholders agreement with Shaw, because he believed it to be in the best commercial interests of Carpet Call. Whilst a strong motivating factor for Mr Smith was undoubtedly the need for funding to buy the Solomons Carpets business, Mr Smith knew that Shaw was very experienced in the industry and perceived there to be advantages in having Shaw as a shareholder. Likewise, there can be no doubting Godfrey Hirst's experience in the industry.

240 Mr Smith agreed that key factors necessary to conduct a successful retail carpet business in Australia include: strong debt management; established brand names; good technical knowledge of the products; proper stock controls; good product presentation; stores located in places exposed to passing consumers; a high standard of financial management; reliable sources of supply; good quality products; products that are good value for money; good staff and staff retention. Those matters are entirely consistent with a joint venture with a major carpet manufacturer.

241 Mr Smith also conceded that, notwithstanding some competing interests, retailers and suppliers are often able to build very strong and mutually-beneficial relationships. Although Mr Smith personally saw no benefit in vertical integration, I agree with Allmere that it is trite that firms can achieve benefits through vertical integration of manufacturing and retail operations, such as co-ordinated marketing, better lines of communication in both directions including more efficient feedback from customers, and potential for rationalisation of administrative functions. Carpet Call, Burbank and Shaw were no doubt mindful of such benefits when they entered into the shareholders agreement.

242 Clause 7.2 of the shareholders agreement provides that Shaw and its successors - including, by operation of clause 10.3(g), a proposed transferee - must provide competitive pricing and terms for Carpet Call and Solomons. That is an obligation which only a manufacturer or other supplier of carpets or other products to Carpet Call could satisfy, and which Mr Smith cannot require of any other supplier. This further confirms that the original contracting parties clearly envisaged that one of the shareholders would be a manufacturer. No doubt clause 7.2 attempts to give Carpet Call certain advantages from having a manufacturer as shareholder.

243 In so far as Burbank has refused to approve Godfrey Hirst merely because it is a substantial manufacturer which supplies Carpet Call's competitors, Burbank's refusal is therefore unreasonable.

244 Although not pleaded or particularised, Burbank alleged that Godfrey Hirst was in direct competition with Carpet Call in relation to the supply of carpet to builders, and that this was a potential source for conflict. Mr Smith said that maybe "a bit more" than 20% of Carpet Call's sales were generated through sales directly to builders. However, Godfrey Hirst's sales and marketing director, Mr Garrett, was not challenged on his evidence that, save in exceptional circumstances, Godfrey Hirst does not in fact sell carpet directly to end users such as builders. That is because its relationships with retailers and contractors are very important, and it would undermine those relationships if Godfrey Hirst focussed on supplying directly to their customers. Burbank led no other evidence of any direct competition between Godfrey Hirst and Carpet Call.

245 Burbank's argument as to the likelihood that Godfrey Hirst as shareholder would "force" Carpet Call to sell Godfrey Hirst carpets is a curious one, being totally inconsistent with one of its major complaints (to be considered shortly), namely, that Godfrey Hirst does not and will not supply Carpet Call with enough products.

246 There is simply no evidence that Godfrey Hirst could[74] or would force carpet supply through Carpet Call. Indeed, since Godfrey Hirst acquired the Feltex business, Carpet Call has voluntarily increased its orders for Feltex-branded carpets. Mr Smith, who makes the ultimate decisions as to where Carpet Call buys its carpet, has asked Godfrey Hirst to also supply Carpet Call with Godfrey Hirst-branded products. As will be seen shortly, far from being forced to take Godfrey Hirst products, Mr Smith is keen to take more products than Godfrey Hirst wants to supply.

247 In any event, even though Shaw apparently tried to increase the amount of its products supplied to Carpet Call, the problems of having a manufacturer-shareholder trying to increase or force supply were not sufficient for Burbank to seek to exercise its pre-emptive rights when Feltex took over Shaw.[75]

248 There is also no substance to Burbank's concerns about Carpet Call being unable to maintain its warehousing arrangements with Godfrey Hirst as co-shareholder.

249 Mr Smith's witness statement refers to a conversation with Mr Garrett in October 2006, in which Mr Garrett said that "he was concerned about Carpet Call building its own warehouse in Brisbane and that Godfrey Hirst would prefer Carpet Call to use Godfrey Hirst's warehouse facilities".

250 Mr Garrett denies having said he was "concerned" about Carpet Call's warehouses, or that Carpet Call would be required to use Godfrey Hirst's warehouses. He says:

I have said in substance to Jim Smith, on one or more occasions, that I do not understand why Carpet Call maintains large warehousing facilities in each state. I have said this because other retailers do not maintain large warehousing facilities and bear warehousing costs - they rely on manufacturers' facilities, like Godfrey Hirst's, and only hold the products that are required to meet customer orders. I have said in substance that we should each leverage our strengths and not invest in non-value-added activities. In that regard I have said in substance that our strength is manufacturing and distribution and his strength is retailing to the consumer, and that by working we could potentially free up working capital to assist in growing the Carpet Call business.

251 Both Messrs McKendrick and Garrett deny that Godfrey Hirst would in fact require Carpet Call to use Godfrey Hirst's warehouses.

252 Even if Mr Garrett had said the things which Mr Smith asserts, that "concern" does not constitute evidence that Godfrey Hirst will try to force Carpet Call to use its warehouses; it merely indicates their preference.

253 Burbank does not explain how Godfrey Hirst could somehow compel Carpet Call to use Godfrey Hirst's warehousing facilities, if this was against Carpet Call's interests and Burbank's wishes. In view of the provisions of the shareholders agreement and Burbank's managerial control of Carpet Call, this could never occur.

254 Clause 6 of the shareholders agreement deals with the composition of the Carpet Call board and the shareholders' powers. Each shareholder is entitled to nominate half of the directors to the board of Carpet Call.[76] A quorum for a meeting of directors is one director appointed by each of the shareholders.[77] The chairman of a meeting of directors does not have a casting vote.[78] The directors present at a meeting nominated by one shareholder collectively hold the same number of votes as the directors present nominated by the other shareholder.[79] Schedule 2 to the shareholders agreement sets out 25 matters, which could mostly be described as higher level decisions, which require unanimous board approval.

255 If the board fails to pass a resolution supported by the managing director or to support a decision of the managing director of Carpet Call, the shareholders must negotiate in good faith in an endeavour to resolve the position within 30 days after notice from one of the shareholders to the other requiring the matter to be resolved. If the matter is not resolved on the expiration of that period, the decision is not implemented.[80] There is no other mechanism for breaking a deadlock between shareholders. Whilst obviously leaving open the real possibility of deadlocks at board level, these decision-making provisions have been in place since the commencement of the shareholders agreement.

256 It can thus be seen that Godfrey Hirst would not have the power to force supply on Carpet Call, or insist that Carpet Call use its warehouses, even if (contrary to the evidence) it wished to do so.

257 Burbank pleads[81] that Carpet Call will experience trading difficulties with other suppliers once it is widely known that Carpet Call is part-owned by a competitor in the same market. Carpet Call buys carpet from a number of suppliers who are in direct competition with Godfrey Hirst. Burbank asserts that there is a real risk that those other suppliers will refuse to supply carpet products, or to disclose necessary commercially-sensitive pricing information, to Carpet Call if it is part-owned by a major competitor.

258 Carpet Call currently deals with about eight carpet suppliers. Obviously it seeks to obtain the best range of products, at the best price, because that is the best way to develop its business. Mr Smith expresses concern that his other suppliers will refuse to deal with Carpet Call if Godfrey Hirst becomes a co-shareholder in Carpet Call. It is said that by supporting a Carpet Call which is half-owned by Godfrey Hirst, the other manufacturers would be, in effect, supporting the company that is the dominant carpet manufacturer in the Australian market.

259 However, there is simply no evidence that Carpet Call will, or even might, experience trading difficulties with other suppliers, as a result of Godfrey Hirst acquiring the shares. Carpet Call has always been owned (directly or indirectly) by a substantial carpet manufacturer; there is no evidence that this has led to other manufacturers being reluctant to supply it. Indeed, Mr Smith said that one of his concerns when he entered into the original deal with Shaw was that this might have an adverse impact in terms of Carpet Call's other suppliers; there is no evidence that his concern on that occasion came to pass either.

The relationship between Godfrey Hirst and Burbank

260 Burbank pleads[82] that there "is long standing acrimony ... which is unlikely to abate, and which will likely result in disputations and corporate dysfunction". The acrimony is said to be based on Godfrey Hirst's failure to supply carpet to Carpet Call for the last 25 years or so, as a result of a dispute about orders and warranty claims. Burbank also pleads that the personal relations between key personnel of Burbank and Godfrey Hirst have become strained, to the extent that co-operative conduct at managerial and Board level is unlikely. Burbank places less weight on the personal relationship problems than the corporate problems.

261 Allmere disputes that there is any such acrimony and says there is no evidence that the parties could not pursue a mutually-beneficial relationship as Carpet Call shareholders.

262 It is common ground that Godfrey Hirst refused to supply Carpet Call with its products for about 25 years. During that period, it supplied them to Carpet Call's competitors. From time to time during that period, Mr Smith would ask Mr Garrett to supply Godfrey Hirst products, but Mr Garrett refused to do so. The decision not to supply was made by Mr Garrett and is supported by Mr McKendrick, whose family have owned and controlled Godfrey Hirst throughout that period.

263 Godfrey Hirst stopped supplying Carpet Call in the early 1980's, after Godfrey Hirst perceived that Carpet Call was making a greater number of claims for manufacturing faults than other retailers. Mr Garrett believed that some of Carpet Call's claims lacked substance. The parties were unable to resolve their differing perceptions of the propriety of some of the claims.

264 The fact that Godfrey Hirst did not supply Carpet Call came to suit Godfrey Hirst, as it became a point of differentiation from Godfrey Hirst's main competitor at the time, Feltex.

265 Since Godfrey Hirst acquired the assets of the Feltex group, it has continued to supply Carpet Call with Feltex-branded carpets and has begun to supply it on a restricted basis with products from the Godfrey Hirst range. As mentioned earlier, Carpet Call has actually increased its orders for Feltex-branded carpets since Godfrey Hirst took over.

266 When Godfrey Hirst was acquiring Feltex, Godfrey Hirst representatives made it clear to Mr Smith that they would continue to supply Carpet Call with Feltex-branded carpets and they wanted to develop the relationship.

267 Godfrey Hirst currently only supplies its own products, as opposed to Feltex-branded products, to Carpet Call to a very limited extent. Of the 2,000 products in its range, Godfrey Hirst currently supplies only about five to Carpet Call; they are re-badged as Carpet Call products.

268 Godfrey Hirst's current intention is that it does not propose to supply a Godfrey Hirst product to Carpet Call unless there is no equivalent product in the Feltex range. It will then consider supplying a Godfrey Hirst product, but re-branded as a Carpet Call product, so the products are not identifiable as Godfrey Hirst products.

269 Even then, under its selective placement policy, Godfrey Hirst will not supply if that would allow Carpet Call to compete with another Godfrey Hirst retailer. This is a way of protecting the profitability of individual retailers. The fact that Godfrey Hirst does not supply its Godfrey Hirst-branded products to Carpet Call makes Godfrey Hirst's products more attractive to Carpet Call's competitors, including Carpet Choice. That position is expected to continue in the future.

270 I am not persuaded that the fact that Godfrey Hirst does not intend to make available to Carpet Call the full range of Godfrey Hirst carpets makes it an unsuitable shareholder in Carpet Call. Godfrey Hirst does not supply its full range to any retailer.[83] Mr Garrett's evidence was that Feltex has products which are identical in every respect to the Godfrey Hirst products, except for the label. Mr Smith apparently agrees. If Godfrey Hirst becomes a shareholder, Carpet Call will continue to have available to it the current Feltex range plus some Godfrey Hirst carpets. It may be better off, and will certainly be no worse off, that it currently is.

271 Some remarks were made in submissions about clause 7.2 of the shareholders agreement which, as previously mentioned, requires competitive pricing and terms for carpet supplied by Shaw and its successors. However, the scope and meaning of clause 7.2 was neither pleaded nor fully argued. It is not necessary for me to decide whether clause 7.2 would impose an actual obligation on Godfrey Hirst to supply its full range of products to Carpet Call, or whether it merely requires that whichever products are supplied are done so on a competitive basis.

272 I accept that the scope of clause 7.2 may be a potential source of future conflict between Godfrey Hirst and Carpet Call, depending on what position the parties ultimately take as to its construction, but the mere possibility of such a conflict does not render Godfrey Hirst an unsuitable shareholder. In particular, there was no suggestion that Godfrey Hirst would not honour clause 7.2 if, at some future stage, it was held to impose an actual obligation to supply products which it does not currently supply.

273 As far as personal relations between key personnel are concerned, Mr Smith sought to characterise them as strained. In particular, he described his dealings with Mr Garrett as "hostile and antagonistic", although his evidence as a whole did not really substantiate such bald assertions.

274 There were some initial difficulties when Godfrey Hirst took over the Feltex business, particularly in relation to some trading practices which Feltex had previously employed. However, it seems that the issues were resolved through a process of negotiation. This included Godfrey Hirst agreeing to honour Feltex warranties, even though Mr Smith concedes that it had no legal obligation to do so. That there might have been some degree of angst consequent upon the change of ownership of the Feltex business is hardly surprising. However, it seems that the parties have been able to work through their issues and resolve them successfully.

275 Whilst I would not necessarily describe their relationship as "warm and friendly", I am satisfied that the relationship between Mr Smith and Mr Garrett, with whom he deals regularly, is a cordial, productive and workable one.

276 It seems that Mr Smith has had trouble working with all of his fellow shareholders. Mr Smith himself concedes that he experienced serious personal difficulties working with both Shaw and Feltex. Mr Naphtali also observed these difficulties during his time as the nominee of Shaw, and later Feltex, on the Carpet Call board. Based on all the evidence and his attitude in the witness box, I would not think that Mr Smith would be an easy person for most people to work with.[84]

277 It appears that those historic tensions were due to a breakdown in the personal relationship between Mr Smith and Sam Magill, who was, until about September 2005, Feltex's chief executive officer, and was managing director of Shaw before that. Mr Smith's evidence was that he and Mr Magill "just couldn't get on", that it was a "constant fight" with "fairly hostile" correspondence between them which "deteriorated into sarcasm and unpleasantness".

278 As already mentioned, Burbank could have relied upon Feltex's acquisition of Shaw as being a change in ultimate control, and thereby severed its relationship, but it chose not to do so. Instead, Mr Smith chose to continue on with Feltex as the new shareholder, notwithstanding the amount of personal conflict he seems to have experienced with Mr Magill, who remained on after Feltex acquired Shaw.

279 Despite the breakdown in personal relations, when Feltex took over the business, Mr Smith still thought there was a chance that the companies could build a unique relationship that would benefit both shareholders.

280 Recognising that personnel on both sides can and do change over time, Burbank sought to place less weight on the personal conflicts than on what it described as the structural flaws in the relationship. However, for the reasons given, I am not satisfied that either the personal or the corporate relationships are such that they are likely to result in "such disputations and corporate dysfunction" as to make Godfrey Hirst an unsuitable shareholder.

Long term commitment to the Carpet Call business

281 Godfrey Hirst does not have an equity interest in any other retailer. Burbank says that Godfrey Hirst does not have any long-term interest in Carpet Call.

282 There is no doubt that Godfrey Hirst only made an offer for the shares as a component of the acquisition of the Feltex business. In June 2006, when Godfrey Hirst first made an offer for the assets of the Feltex group, it did not want to buy Allmere's shares in Carpet Call. This was because it did not want the extra expense of buying the shares. Later, Godfrey Hirst's position was that if the Feltex receivers wanted to sell all of the assets of the Feltex group as a package, and it did not have to pay too much for Allmere's shares in Carpet Call, Mr McKendrick thought Godfrey Hirst might as well buy the shares.

283 As far as the escrow arrangements in the Feltex sale agreement are concerned, Mr McKendrick said he was "indifferent" to whether Godfrey Hirst got the shares or the $10m. But there was no suggestion that he would be indifferent to the Carpet Call business if Godfrey Hirst did in fact acquire the shares.

284 I accept the evidence of Messrs McKendrick, Garrett and Walsh[85] that Godfrey Hirst has made no actual decision as to how long it would hold the shares.

285 In any event, even if Godfrey Hirst had in fact evinced an intention not to have a long term commitment to the Carpet Call business, that would not provide a sufficient basis for Burbank to withhold its approval. The shareholders agreement provides that shares may be transferred, subject to the clause 10.3 pre-emptive rights process, and does not require them to be held for any particular duration. There is no basis for reading into clause 10 a restriction that an incoming shareholder must intend to hold its shares for a particular duration.

286 In fact, it seems that Burbank may not have a long term interest in Carpet Call either. Mr Fitzgerald's evidence was that Mr Smith told him in their telephone conversation on 1 May 2007 that his plan is to "run up the business and then sell out in a couple of years time". Mr Smith said only that he could not recall having a conversation about how long he might remain in the business.

The terms and conditions of the proposed transfer

287 Burbank's final argument as to why it has not unreasonably withheld its approval is based on the fact that Allmere is said to have proposed to transfer its shareholding on terms and conditions more favourable that those disclosed in the offer notice. This is because the proposed sale to Godfrey Hirst was part of or conditional upon completion of the Feltex buy-out and the Feltex sale agreement.

288 The allegation that these facts constitute a breach of clause 10.3(b), and thereby invalidate the offer notice, has already been considered and rejected. How these same facts are said to go to the reasonableness of Burbank's refusal to approve Godfrey Hirst is harder to comprehend.

289 In oral submissions, it seems that what Burbank is saying is that the fact that the purchase of the Allmere shares was part of a "package deal" is relevant to Godfrey Hirst's suitability. But that is not how this part of the defence is pleaded, and the argument was not really developed in Burbank's submissions.

290 The pleaded argument is premature, as there is no actual agreement in place between Godfrey Hirst and Allmere, pursuant to which the transfer will take place, and therefore no "terms and conditions" available for the court to assess against those disclosed in the offer notice, as required by clause 10.3(f). This also means that if this did constitute a reason for Burbank withholding its approval, it was unreasonable, there being no basis in fact for that position.

291 In any event, even if the terms and conditions of the transfer had been agreed and were more favourable than those in the offer notice, this would not provide valid grounds for withholding approval. Clause 10.3(f) provides that there may be a transfer of shares to "any person approved by the other shareholder". The approval therefore goes to the identity of the transferee, not the terms of the proposed transfer. This makes commercial sense and accords with the evident purpose of the approval requirement and the authorities referred to above.

292 The offeree is protected in the event that a proposed transfer (or even an actual transfer) is on terms and conditions more favourable than those disclosed in the offer notice. This is because of the equitable rights of pre-emptive rights holders, which prevail over a transferee's, as previously discussed. Therefore, if the transfer is in breach of clause 10, Burbank could seek to prevent the transfer before it occurs, or seek relief to restore its position after the transfer. As a practical matter, Burbank could use its board representation to prevent the registration of a transfer of shares in breach of the pre-emptive rights.

293 Burbank formally refused its approval of Godfrey Hirst as transferee in its letter of 20 December 2006. It declined to give reasons for its refusal, asserting that reasons had already been given at the 17 November meeting.

294 In evidence, Mr Smith said that the reasons he gave at the 17 November meeting were his reasons. But Mr Smith gave no evidence as to what he actually said at that meeting. Mr Fitzgerald's unchallenged account, discussed earlier, was that Mr Smith pointed only to the following: what he described as an unworkable relationship with Godfrey Hirst; that Godfrey Hirst had not supplied Carpet Call for 20 years; he could not work with Mr McKendrick; and he could not be in business with a supplier. None of the other reasons now relied upon were referred to at all.

295 Allmere argues that the real reason for Burbank's refusal lies not in any of the reasons or concerns asserted now on Burbank's behalf, but in Mr Smith's strategy to try to engineer a situation where he is the only purchaser of the shares and can acquire them at a discount.

296 It is clear on the evidence previously discussed that Mr Smith has been keen to engineer a situation in which Burbank is the only purchaser of the shares, and is able to acquire them at the lowest possible price. Mr Smith candidly acknowledged in evidence that his strategy was to "exclude all players in the carpet industry". Burbank is entitled to pursue its own commercial interests. As mentioned earlier, the mere fact that Burbank may have some collateral purpose does not necessarily mean that the refusal of approval is unreasonable.

297 Whilst there is much force in Allmere's submission that Mr Smith's evidence was unsatisfactory in many respects[86], his credit was not directly attacked. In particular, it was not suggested that he was lying when he expressed the concerns which Mr Fitzgerald says he did at the 17 November meeting. I am therefore not prepared to find that he did not have the concerns expressed at that meeting.

298 But Burbank is not entitled to unfairly prevent Allmere from having the benefit of the shareholders agreement. For the reasons given above, I am satisfied that Burbank has acted unreasonably in withholding its approval to Godfrey Hirst as transferee under clause 10.3(f).

(a) There was no change in ultimate control of Allmere on 21 September 2006;

(c) Burbank did not validly dispute the price at which Allmere offered to sell the shares;

(d) Burbank has unreasonably withheld its approval of Godfrey Hirst as transferee.

300 I will hear from the parties as to the form of orders and costs.

[1] References to "the defence" are references to Burbank's further amended defence and counterclaim dated 24 September 2007.

(a) transfer, assignment, sale, distribution, pledge or other disposition of Shares voluntarily or involuntarily, with or without consideration;

(b) the appointment of a receiver or other legal custodian of the property of a Party unless no Shares are included in the property subject to the appointment;

(c) the taking of possession by an encumbrancer or trustee of the property of any Party;

(e) a bona fide mortgage, pledge, charge or other encumbrance given in accordance with clause 9. (clause 1.1)

[3] "Shares" means shares in the capital of Carpet Call from time to time issued. (clause 1.1)

1. [4] "Offer Notice" means a notice under clause 10.3 by the Transferring Party to the Offeree. (clause 1.1)

"Transferring Party" means a party to the shareholders agreement who Transfers or proposes to Transfer Shares which it then holds. (clause 1.1)

"Offeree" means whichever of Burbank or Shaw is not the Transferring Party under clause 10.3. (clause 1.1)

1. [5] "Sale Shares" means the number of Shares specified in an Offer Notice. (clause 1.1)

[6] The parties agree that the reference to sub-clause (c) should in fact be (e).

[7] The parties agree that the reference to sub-clause (e) should in fact be (f).

[8] Some words are clearly missing and there are patent errors in some of the cross-references. The clause is also silent about a number of matters, some of which will be discussed later in these reasons.

[9] Clause 10.3(d) does not actually specify the price which is to be determined by the expert, but the parties agree that it is to be a fair and reasonable price.

[10] The facts set out in this section are not contentious, save where otherwise indicated. They have been largely reproduced from Burbank's outline of submissions dated 26 November 2007, with which Allmere substantially agreed in para [7] of its outline of closing submissions. Both sides provided very high quality written submissions, which were of great assistance to the court, particularly in summarising the parties' arguments.

[11] Each party is entitled to one half of the votes at a board meeting, irrespective of the number of its nominated directors: clause 6.1(d).

[12] Although the letter actually refers to "Feltex Holdings Pty Ltd", it appears that should be a reference to Feltex Australia Holdings Pty Ltd.

[13] By reason of clause 15.2 of the shareholders agreement.

[14] Feltex Carpets is a company in which Godfrey Hirst is a shareholder and with which it has common directors.

[15] See eg MLW Technology Pty Ltd v May [2005] VSCA 29 at [76]-[81]; Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; (2004) 218 CLR 451 at 461-2 per Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ; Toll (FGCT) Pty Limited v Alphapharm Pty Limited & Ors [2004] HCA 52 at [40], per Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ.

[16] [2007] VSC 380.

[17] Ibid at [23]. Citations omitted.

[18] Di Dio Nominees Pty Ltd v Brian Mark Real Estate Pty Ltd [1992] VicRp 99; [1992] 2 VR 732; Varangian Pty Ltd v OFM Capital Ltd [2003] VSC 444 at [118].

[19] [1997] UKHL 19; [1997] AC 749.

[21] A notice sent by a licensor under an exclusive licence agreement requiring the guarantors of the licence to acquire certain shares.

[22] Op cit at [76]-[83]. See also Finishing Services Pty Ltd v Lactos Fresh Pty Ltd [2006] FCAFC 177 at [25].

[25] Central Pacific (Campus) Pty Ltd & Anor v Staged Developments Australia Pty Ltd (1998) V Conv R para 54-575 at p66,909, per Callaway JA (Buchanan JA agreeing, Ormiston JA similar).

[26] Part D of the defence.

[27] Contrary to such an assertion in its 20 December 2006 letter to the Allmere administrators.

[28] The current Allmere administrators have never accepted that there was a change in ultimate control. Burbank suggests that the original administrators took a different view.

[29] See ss 435C(2) and 439C. This is not an exhaustive list of the possible scenarios that may arise when a company is placed into adminsitration.

[33] See also clause 2.3. The reference to clause 11 is clearly an error and should read clause 12.

[34] Which was not raised in any of the pleadings, but which Allmere sought to raise in submissions.

[35] Paras 20 to 22 of the defence. The argument was raised by Burbank in its opening submissions, but not mentioned in its closing submissions.

[36] The change of position was not explained.

[37] Rathner v Lindholm [2005] VSC 399; (2005) 194 FLR 291 at 311.

[38] Part B of the defence, especially para 32.

[40] In opening, Allmere had seemed to doubt even that requirement.

[41] In support of its argument that $10 million was not an arm's length price, Burbank relies upon the very extensive matters set out in paragraphs A to K in the particulars under para 25 of the defence.

[42] Part C of the defence.

[43] Being the matters pleaded in paras A to K of the particulars under para 25 of the defence.

[45] This was presumably intended to be a reference to the meeting between Mr Smith and Mr McKendrick on 5 October 2006, referred to earlier in these reasons.

[47] Mr Fitzgerald's evidence was that Mr Smith said something to the effect that the price offered was "not real, just an allocation". This accompanied a series of statements by Mr Smith as to why he did not want the shares to be transferred to Godfrey Hirst. Mr Smith did not tell Mr Fitzgerald that he wanted the price to be referred to expert determination. Mr Fitzgerald understood this discussion to be on the same "without prejudice" basis as the 17 November meeting.

[48] Mr Fitzgerald says that Mr Smith told him on 1 May 2007 that the figure of $10M was "bullshit".

[50] Para 52(3) of the further amended reply and defence to counterclaim dated 24 September 2007 ("the reply").

[51] Implied in order to give business efficacy to the shareholders agreement.

[52] See for example Décor Ceilings Pty Ltd v Cox Constructions Pty Ltd (No 2) [2005] SASC 483.

[53] The Shorter Oxford English Dictionary (6th edn) defines "dispute" as: 1. A logical argument. An oral or written discussion of a subject in which arguments for and against are put forward and examined... 2. An instance of disputing or arguing against something or someone, an argument, a controversy, esp. a heated contention, a disagreement in which opposing views are strongly held... 3. The act of disputing or arguing against something or someone: controversy, debate... 4. Strife, contest, a fight, a struggle. The Macquarie Dictionary (4th edn) contains the following definition: dispute verb (disputed, disputing) verb 1. to engage in argument or discussion. 2. to argue vehemently; wrangle or quarrel. 3. to argue or debate about; discuss. 4. to argue against; call in question. 5. to quarrel or fight about; contest. 6. to arrive against; oppose: to dispute an advance, -noun 7. argumentation; verbal contention; a debate or controversy; a quarrel.

[54] It is therefore not necessary to consider Burbank's arguments as to whether what was said at the meeting was technically an admission or an assertion.

[57] Cathedral Place Pty Ltd v Hyatt of Australia Ltd and Ors [2003] VSC 385 ("Cathedral Place") at [18], per Nettle J.

[59] Ibid at 519-521, per Balcombe J (citations omitted).

[60] See for example Tamsco Ltd v Franklins Ltd [2001] NSWSC 1205 at [49]; St Hilliers (Developments) Pty Ltd & Anor v Radmanovich & Anor [2002] NSWSC 524 at [38]- [44]; Cathedral Place, op cit at [13] and [29]; Scarcella v Linknarf Management Services Pty Ltd (in liq) [2004] NSWSC 360 at [10].

[61] Cathedral Place, op cit at [27].

[62] (1988) 14 NSWLR 1.

[64] J A McBeath Nominees Pty Ltd v Jenkins Development Corporation Pty Ltd (1992) 2 Qd R121; Old Papa's Franchise Systems Pty Ltd v Camisa Nominees Pty Ltd [2003] WASCA 11 at [81], per McLure J (with whom Murray and Parker JJ agreed).

[65] See, for example, Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd [1979] HCA 51; (1979) 144 CLR 596 at 611.

[66] Bromley Park Garden Estates Ltd v Moss [1982] 1 WLR 1019 at 1034E, per Slade LJ in obiter. See also J A McBeath Nominees Pty Ltd v Jenkens Development Corporation Pty Ltd, op cit at 129.

[67] [2001] NSWSC 1205.

[69] [2001] NSWSC 843.

[71] Cathedral Place, op cit at [29].

[74] The structure of the Carpet Call board will be considered shortly.

[75] It is common ground that Feltex's acquisition of Shaw constituted a change in ultimate control which would have entitled to Burbank to exercise its pre-emptive rights.

[83] Whilst the evidence as to other manufacturers is limited, it appears to be industry practice for manufacturers to place their carpet ranges with selected retailers.

[84] In saying that, I am not in a position to comment about the extent to which previous Shaw and Feltex personnel may have also contributed to the conflict.

[86] Allmere submitted that I should find that Mr Smith's evidence was full of "exaggeration, inaccuracy, insincerity, selectivity and patchiness, and was totally uncorroborated by any contemporaneous notes or other documents or by any independent sources or data. In addition he demonstrated an appreciation of what evidence might suit Burbank's case and he acknowledged that he would just go along with what the lawyers advised him to do."