Plaintiffs v Defendants

"Where a Joint Venturer is, at any time a subsidiary of another corporation and, by reason of any transaction or event, ceases to be a subsidiary of that corporation, the Joint Venturer must, within thirty days of the transaction or event, offer to sell its percentage Interest to the other Joint Venturers pro rata to their respective Joint Venture Interests..." (Emphasis added.)

9 The meaning of the words "subsidiary of another corporation" and "ceases to be a subsidiary of that corporation" in cl. 20.5 must be determined objectively. What would a reasonable person in the position of the parties have understood those words to mean?[1] This question must be answered by reference to the text of the joint venture agreement, the surrounding circumstances known to the parties and the purpose or object of the transaction.[2] Further, in interpreting the words, the Court should proceed in a common sense and non-technical way and give the agreement a commercially sensible construction.[3] Further, the Court should strive to give effect, wherever possible, to all of the words used in the agreement "so as to render them all harmonious with one another".[4]

10 I start with the words of the joint venture agreement. Part 20 of the joint venture agreement provides for pre-emptive rights in certain circumstances. Relevantly, the structure of pt. 20 is as follows.

11 First, a distinction is drawn in cl. 20.01 between a "transfer" of an interest in the joint venture and a change in corporate ownership or control:

"For the purposes of this Part, to 'transfer' a percentage Interest includes to sell, assign or otherwise dispose of that percentage Interest or to enter into any agreement in relation to the foregoing, but does not include any change in the corporate ownership or control of any Joint Venturer..." (Emphasis added.)

12 Second, cl. 20.2 prohibits a joint venturer from transferring all or part of its joint venture interest to any person without first offering the interest to the other venturers. This is a standard pre-emptive rights provision.

13 Third, cl. 20.3 permits a transfer of a joint venture interest to a "Related Corporation" within the meaning of the Corporations Law.[5] However, cl. 20.3 also provides that, where a related corporation transferee ceases to be a related corporation of the transferor, the transferee must reassign the joint venture interest and the transferor must accept the reassignment. This proviso is obviously an anti-avoidance measure, designed to forestall schemes which might otherwise be devised to transfer a joint venturer's interest to a related corporation with a view to further transfer to a new owner.

14 Fourth, cl. 20.5 provides for pre-emptive rights to arise in the circumstances mentioned. Reading pt. 20 as a whole, it is obvious that cl. 20.5 is concerned with changes in corporate ownership or control as a means of effectively disposing of a joint venture interest to a new owner. In my view, this is another anti-avoidance provision. Clause 20.5 is obviously designed to prevent the transfer of effective ownership of a joint venture interest by means of a change in control of the joint venturer, without first giving the other joint venturers an opportunity to purchase that interest.

15 The issue in this case concerns the reach of cl. 20.5. Is it limited to a joint venturer ceasing to be a subsidiary of its immediate or direct holding company, or does it extend to changes further up the corporate family tree?

16 Beaconsfield and Allstate rely upon the surrounding circumstances in which the joint venture agreement was entered into to support their submissions. There is no dispute about the facts. They can be briefly stated.

17 Before the entry into the joint venture agreement in October 1992, the mine was owned by Beaconsfield Operations Pty Ltd as to 96.3 per cent and Beaconsfield Tasmania Pty Ltd as to 3.7 per cent. Beaconsfield Tasmania was a wholly owned subsidiary of Beaconsfield Operations. Beaconsfield Operations was a wholly owned subsidiary of Beaconsfield Gold Mines Ltd, a public company listed on the Australian Stock Exchange.

18 Beaconsfield Gold Mines was owned by Allstate Prospecting as to 34.9 per cent, ACM Gold Mines Ltd as to 35.8 per cent and the remaining 29.3 per cent of shares were widely held by the public.

19 As a result of a corporate reconstruction, effected by means of a court approved scheme of arrangement, ownership of the mine was vested in joint venturers in accordance with their respective shareholdings in Beaconsfield Gold Mines. A new publicly listed company, Beaconsfield Gold NL, was incorporated. The shareholders in Beaconsfield Gold Mines, except ACM Gold Mines and Allstate Prospecting, became its shareholders.

20 In this way, the shareholders in Beaconsfield Gold Mines substituted their shareholdings for a direct interest in the mine, in the same proportions in which they held shares in Beaconsfield Gold Mines. Beaconsfield Gold Mines remained as the immediate parent company of Beaconsfield Operations, and itself became a wholly owned subsidiary of Beaconsfield Gold NL. Subsequently, Beaconsfield Gold Mines was converted to a proprietary company.

21 Immediately after the entry into the joint venture agreement, there were four joint venturers, two of whom were related.

22 Two of the Beaconsfield companies together owned a 29.3 per cent interest; Beaconsfield Operations Pty Ltd owned 25.6 per cent and Beaconsfield Tasmania Pty Ltd owned 3.7 per cent. However, they had different immediate holding companies, as depicted in Diagram 1 below:

*Beaconsfield Gold Mines Ltd ceased to be a publicly listed company after implementation of a scheme of arrangement and is now called Beaconsfield Gold Mines Pty Ltd.

[ IMAGE ]

23 ACM Gold Mines Ltd (an unlisted public company) owned a 35.8 per cent interest. ACM Gold Mines was wholly owned by another unlisted public company which, in turn, was wholly owned by Poseidon Gold Ltd, a listed public company; as depicted in Diagram 2 below:

[ IMAGE ]

24 Allstate Prospecting owned a 34.9 per cent interest. Allstate Prospecting was, and still is, a wholly owned subsidiary of Allstate Explorations NL, a listed public company; as depicted in Diagram 3 below:

[ IMAGE ]

25 The relevant corporate structure of all of the initial joint venturers immediately after entry into the joint venture agreement is depicted in Annexure B.

26 With the passage of time, there have been changes in the identity of joint venturers and in their respective joint venture interests. The present position is depicted in Annexure C.

27 Returning to the surrounding circumstances at the time of entry into the joint venture agreement, Beaconsfield and Allstate agree that the definition of "subsidiary" in the Corporations Law at that time is a relevant fact to be taken into account in the interpretation of the joint venture agreement.

28 In addition to the content of the Corporations Law at the time of entry into the joint venture agreement, Beaconsfield relied upon the definition of "subsidiary" in the accounting standards applying to Australian public companies at that time. The relevant accounting standards defined subsidiary as "an entity which is controlled by a parent entity" and defined parent entity as "an entity which controls another entity." They defined "control" of an entity as:

"The capacity of an entity to dominate decision-making, directly or indirectly, in relation to the financial and operating policies of another entity so as to enable that other entity to operate with it in pursuing the objectives of the controlling entity."

29 In my view, the applicable accounting standards at the relevant time are not relevant to the proper interpretation of cl. 20.5 of the joint venture agreement. The breadth and imprecision of the definition of control in the accounting standards makes it unlikely that commercial parties would have had these standards in mind when considering whether a joint venturer was a subsidiary of another corporation. I will not refer to the accounting standards further.

30 I turn to consider the purpose or object of cl. 20.5.

31 When Part 20 of the joint venture agreement is read as a whole, its objective purpose is clear. Part 20 aims to prevent a joint venturer disposing of its interest to a new owner, without first offering the interest to the other joint venturers, at two levels. First, by preventing a direct transfer of the interest. This is the subject of cll. 20.2 and 20.3. Second, by preventing corporate re-organisations which have the effect that the joint venturer comes under the control of a new owner who was not, before that time, a related corporation of the joint venturer. This is the subject of cl. 20.5.

32 As I have said, the proviso to cl. 20.3 and the provisions of cl. 20.5 have an obvious anti-avoidance purpose; to prevent devices designed to transfer effective ownership or control of a joint venture interest to a new owner without triggering pre-emptive rights in the other joint venturers.

33 In reaching this conclusion as to the purpose of Part 20 as a whole and, in particular, cl. 20.5, I have considered the subject-matter of the joint venture agreement. Pre-emptive rights are usually included in resource joint venture agreements. Given the importance of the identity, financial capacity and reliability of the participants in a joint venture, pre-emptive rights operate to ensure that existing participants are empowered to exclude new participants by purchasing the outgoing participant's interest if they so desire. They also permit a joint venturer who may take the view that it has expended a significant amount of money in a high risk area to have an opportunity to increase its interest if another joint venturer desires to withdraw from the joint venture. This allows an enhanced opportunity to reap the rewards from past risk-taking and expenditures.[6]

34 These objectives may be defeated if pre-emptive rights provisions are interpreted narrowly. In my view, in interpreting pre-emptive rights provisions, a court should keep this steadily in mind. Where there are two interpretations of a pre-emptive rights clause in a joint venture agreement which are reasonably open, that which accords with the objective purpose of the provision should be preferred.

Are the Allstate Venturers subsidiaries of Otter?

35 I have framed the question in this way because it will determine the dispute between the parties. The statement of claim and the submissions of the parties also proceed on this basis.

36 Beaconsfield's counsel submit that the Allstate Venturers are subsidiaries of Otter within the meaning of cl. 20.5 because, by reason of the chain of majority and 100 per cent shareholdings illustrated in Annexure A, Otter has the capacity to control the casting of a majority of votes at general meetings, and thus to control the composition of their boards of directors.

37 Allstate's counsel submit that the Allstate Venturers are not subsidiaries of Otter because the words "subsidiary of another corporation" appearing in cl. 20.5 refer only to the relationship between a joint venturer and its immediate or direct holding, or parent, company. A number of arguments were put in support of this submission.

38 First, it was submitted that the words "subsidiary of another company" mean, in ordinary language, a company in which another company, the parent or holding company, holds a majority of the voting rights attaching to its issued shares. It was submitted that the words do not extend beyond this relationship to include companies further up the corporate tree which, through a chain of majority or 100 per cent shareholdings, have the capacity to control the casting of a majority of votes at a general meeting of the subsidiary, and thus to control the composition of its board of directors.

39 An attempt was made to support this submission by reference to the development of the concept of "subsidiary" in companies' legislation since the Companies Act 1929 (UK). It was submitted that, at all times, the companies' legislation has given, or assumed as a starting point, a core meaning to the concept of "subsidiary", by fixing upon the direct relationship between a company and its immediate holding company.

40 It was submitted that it was not until the Companies Act 1948 (UK) that the definition of "subsidiary" was extended beyond the relationship between a company and its immediate holding company, to include a company further up the corporate tree which holds more than one half of the issued share capital of the immediate parent.[7] This extended definition of "subsidiary" was not adopted in Tasmania until the Companies Act 1962 (Tas)[8]. Even then, the deeming provision did not extend beyond the holding company of a subsidiary's immediate holding company. This further extension of the definition did not occur until the enactment of s. 7(1)(b) of the Companies (Tasmania) Code 1981, which included a repeated, or recursive, application of the deeming provision. This had the effect of including within the definition of subsidiary the relationship between a company and any company further up the corporate tree which, by means of a chain of majority or 100 per cent shareholdings, has the capacity to control the casting of a majority of votes at a general meeting of the subsidiary, and thus to control the composition of its board of directors.

41 By the time of entry into the joint venture agreement, the Corporations Law was in force. Sections 46 and 49 contain the same provisions as to the meaning of "subsidiary" as appeared in s. 7(1) of the Companies (Tasmania) Code 1981. Those provisions are as follows:

"46. A body corporate (in this section called the 'first body') is a subsidiary of another body corporate if, and only if:

(a) the other body:

(i) controls the composition of the first body's board;

(ii) is in a position to cast, or control the casting of, more than one-half of the maximum number of votes that might be cast at a general meeting of the first body; or

(iii) holds more than one-half of the issued share capital of the first body (excluding any part of that issued share capital that carries no right to participate beyond a specified amount in a distribution of either profits or capital); or

(b) the first body is a subsidiary of a subsidiary of the other body.

"49. A reference in paragraph 46(b) ... to being a subsidiary, or to a subsidiary, of a body corporate includes a reference to being a subsidiary, or to a body corporate that is a subsidiary, as the case may be, of the first-mentioned body by virtue of any other application or applications of this Division."

42 It was submitted that the extended definition of subsidiary in these provisions does not alter the underlying assumption in the legislation that the core meaning of subsidiary is limited to the direct or immediate relationship between a company and its immediate holding company. On this basis, it was submitted that commercial parties acting reasonably in 1992 would not have considered that the ordinary meaning of "subsidiary" in cl. 20.5, without statutory intervention to extend its meaning, included any relationship other than the relationship between a company and its immediate holding company. I reject this submission, for the following reasons.

43 In my view, s. 46(a) does not assume, absent the extensions contained in s. 46(b) and s. 49, that a company is only a subsidiary of another company if the other company is its immediate holding company. This submission ignores s. 46(a)(i), which provides that a company may be a subsidiary of another company if the other company controls the composition of its board. Section 47 makes it clear that the circumstances in which a company will be taken to control the composition of the board of another company are not limited. If the circumstances are not limited, they can include relationships other than that between a company and its immediate holding company.

44 Further, and in any event, the ordinary meaning of the word "subsidiary" extends well beyond the relationship between a company and its immediate holding company. Putting the provisions of the companies legislation aside, in ordinary commercial language a "subsidiary" is a company which is controlled by another company. For example, the Oxford Dictionary of Law defines "subsidiary company" as follows:

"A company controlled by another company, its holding (or parent) company. For general purposes, such control is established when the holding company has a majority of the voting rights attached to its shares... or the right to appoint or remove a majority of its board of directors. If company A controls company B, which itself controls company C, then company C is the subsidiary of both company B and company A." (Emphasis added.)

45 References to "subsidiary" in decided cases support this view. For example, in Opal Group Holdings (Aust) Pty Ltd v Franklins Ltd[9] Barrett J said in respect of a commercial document which referred to "subsidiaries":

"It may be accepted, I think, that the term 'subsidiary', when used today by commercial people in relation to corporations generally indicates a situation in which the corporation described as 'subsidiary' is subject to the control of another corporation of which it is a 'subsidiary'... But accepting that a concept of control by another company is today the distinguishing feature of a 'subsidiary', we may wonder what ordinary and intelligent commercial persons would think about the nature of that control. Such persons would probably say that they would know 'control' when they saw it."[10]

46 In the present case, it is not necessary to determine the full extent of the ordinary meaning of the concept of a company being a subsidiary of another company. It is sufficient if the concept extends to include a company which is controlled by another company further up the corporate tree, by means of a chain of majority or 100 per cent shareholdings. This is both in accordance with ss. 46 and 49 of the Corporations Law[11] and with the ordinary meaning of the word "subsidiary".

47 Second, Allstate's counsel submitted that I should not interpret cl. 20.5 as attracting the extended definition of "subsidiary" in the Corporations Law because the joint venture agreement contains a strong indication that the parties did not intend this. This submission was based upon the fact that the joint venture agreement defines "related corporation" by reference to the definition appearing in s. 50 of the Corporations Law.[12] On the other hand, the parties have not chosen to adopt the statutory definition of "subsidiary". It was submitted that this could easily have been done and that the drafters of the joint venture agreement have made a deliberate choice not to do so.

48 I accept that it is an oddity that the drafters of the joint venture agreement[13] did not define "subsidiary". However, the word subsidiary appears only once in the joint venture agreement, in cl. 20.5. As I have said, it is a word which has a commonly accepted ordinary meaning in commerce. On the other hand, the words "related corporation" appear throughout the joint venture agreement in a number of different contexts.[14]

49 Further, the definition of "related corporation" in s. 50 of the Corporations Law[15] uses and depends upon the extended definition of "subsidiary" appearing in the statute. It would be an odd result indeed if, in considering whether a company is a "related corporation" for the purposes of the joint venture, regard is to be had to the statutory definition of "subsidiary"; but "subsidiary" is to be given a different meaning in cl. 20.5. Such an inconsistent use of the term "subsidiary" would conflict with the principle that the words of a contract should, if possible, be interpreted so as to render them harmonious with each other.[16] No commercial justification was suggested for drawing a distinction between the meaning of the word "subsidiary" when applying the statutory definition of "related corporation" and in the application of cl. 20.5.

50 Third, Allstate's counsel submit that the result of the interpretation contended for by Beaconsfield would lead to commercially absurd results. It was submitted that it could not have been intended that a joint venturer should be required to track changes in shareholdings up what may be a tall corporate tree in order to ensure that it complies with its obligation under cl. 20.5 to offer its joint venture interest for sale when it ceases to be a subsidiary of another company above it in the corporate tree. I reject this submission. In my view that is exactly what cl. 20.5 requires and the parties should be taken to have so intended. It is the Allstate contention which would lead to results which are inconsistent with the purpose of the pre-emptive rights provisions in pt. 20 of the joint venture agreement, and cl. 20.5 in particular.

51 This can be demonstrated by reference to the Beaconsfield corporate structure immediately after the establishment of the joint venture as set out in Diagram 1. If Allstate's submissions are accepted, it must follow that from day one of the joint venture Beaconsfield Gold NL could have sold its 100 per cent shareholding in Beaconsfield Gold Mines to a third party without having to offer the joint venture interests of Beaconsfield Operations and Beaconsfield Tasmania to the other joint venturers. On Allstate's argument, it could have done so for the simple reason that Beaconsfield Gold Mines would remain the immediate holding company of those joint venturers. Similarly, as Diagram 2 demonstrates, Poseidon Gold could have sold its 100 per cent shareholding in ACM Gold without triggering an obligation to offer the joint venture interest of ACM Gold Mines to the remaining joint venturers.

52 Accordingly, if Allstate's argument is correct, the simple insertion of one intermediate holding company has the effect of defeating the commercial purpose of cl. 20.5. I cannot accept that the parties intended this to be the case. The commercial effect of the hypothetical transactions described above would be identical if there was a sale of the shares in the immediate holding companies of the joint venturers-- an event which Allstate accepts would trigger cl. 20.5. There is no commercial reason to suppose that the parties intended cl. 20.5 to be limited to this event only. Such an intention does not accord with business commonsense.

Conclusion

53 The chain of majority and 100 per cent shareholdings depicted in Annexure A establishes that Otter has the capacity to control the casting of a majority of votes at general meetings of the Allstate Venturers, and thus to control the composition of their boards of directors.

54 For the above reasons, I find that each of the Allstate Venturers is a subsidiary of Otter within the meaning of cl. 20.5 of the joint venture agreement, and I will so declare. I will hear the parties as to the precise form of the declaration and as to costs or other necessary orders.

* Beaconsfield Gold Mines Ltd ceased to be a publicly listed company after implementation of the scheme of arrangement and is now called Beaconsfield Gold Mines Pty Ltd.

[1] Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; (2004) 218 CLR 451 at [22]; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165 at [40].

[2] Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; (2004) 218 CLR 451 at [22]; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165 at [40].

[3] Hillas & Co Ltd v Arcos Ltd [1932] UKHL 2; [1932] All ER 494 at 499, 503-4; Upper Hunter County District Council v Australian Chilling and Freezing Co Ltd [1968] HCA 8; (1968) 118 CLR 429 at 437; Australian Broadcasting Commission v Australasian Performing Right Association Ltd [1973] HCA 36; (1973) 129 CLR 99 at 109-10; Vroon BV v Fosters Brewing Group Ltd [1994] VicRp 53; [1994] 2 VR 32 at 67; MLW Technology Pty Ltd v May [2005] VSCA 29 at [76]- [81]; Mannai Investments Co Ltd v Eagle Star Life Assurance Co Ltd [1997] UKHL 19; [1997] AC 749 at 770-1.

[4] ABC v Australasian Performing Right Association Ltd [1973] HCA 36; (1973) 129 CLR 99 at 109.

[5] Clause 1.1 of the joint venture agreement defines "Related Corporation" in these terms. Further, "Corporations Law" is defined in cl. 1.1 to include any legislation amending or replacing the Corporations Law. Accordingly, references in the joint venture agreement to "Related Corporation" must be taken as references to that term as defined in the Corporations Act 2001 (Cth).

[6] WF Manning, "Assignment Clauses in Mining and Petroleum Joint Ventures" (1986) AMPLA Year Book 119 at 119-21.

[7] Companies Act 1948 (UK), s. 154.

[8] Companies Act 1962 (Tas), s. 6(1).

[9] [2001] NSWSC 718.

[10] [2005] NSWSC 718 at [8].

[11] And the present position under ss. 46 and 49 of the Corporations Act 2001 (Cth).

[12] Now s. 50 of the Corporations Act 2001 (Cth).

[13] A large national law firm.

[14] Clauses 7.3, 9.1, 9.6, 9.7, 9.9, 18.1, 20.2 and 20.3.

[15] Now s. 50 of the Corporations Act 2001 (Cth).

[16] ABC v Australasian Performing Right Association Ltd [1973] HCA 36; (1973) 129 CLR 99 at 109.