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[2013] VSC 381
Supreme Court of Victoria
2013-07-31
FERGUSON J
Original judgment source is linked above.
CORPORATIONS - Oppression - Orders for purchase of shares and units - Complex corporate structure - Entities to be taken into account in setting price to be paid - Corporations Act 2001 (Cth) ss 232, 233.
PRACTICE AND PROCEDURE - Pleadings - Necessity to plead matters to be taken into account for fair valuation of shares and units in oppression proceeding - Prayer for relief seeking orders for purchase of specific shares and units at fair value.
1 The Drapac Group is comprised of a number of companies and trusts.[1] It operates a property development and investment business and is ultimately controlled by Michael Drapac. Two former Drapac Group employees, Ashley Wain and Adam Murchie and their companies (who are the Plaintiffs), sought orders for the purchase of shares and units that they own in entities within the Drapac Group. They relied on ss 232 and 233 of the Corporations Act 2001 (Cth) which empower the Court to grant relief where there has been conduct which is oppressive to, unfairly prejudicial to or unfairly discriminatory against a shareholder. After a trial on all but two issues, Mr Drapac and entities that he controls ("the Drapac parties") were ordered to purchase the Plaintiffs' shares and units at a value to be determined by the Court.[2] After that initial trial, the only remaining issue is the valuation of the shares and units. A number of directions hearings were conducted in advance of a trial on that issue. As part of that process, orders were made that the proceeding be listed for hearing on the question of the entities within the Drapac Group to be taken into account in determining the value of the Plaintiffs' interests.[3] This question arises because, in essence, the Plaintiffs say that the value to be attributed to their shares and units should reflect that the profits from the various entities in the Drapac Group as a whole were intended to flow through to the entities in which they hold shares and units. The Drapac parties contend that the case pleaded and run at the initial trial only concerned shares and units in particular companies and trusts and no claim was made to an interest in the whole of the Drapac Group. Consequently, they contend that each entity in which the Plaintiffs hold units or shares should be valued without reference to the value or assets of any other entity.
2 For the reasons which follow, I have reached the conclusion that the Plaintiffs' case for which they contend was pleaded and the initial trial was opened and run on that basis. I have also concluded that, with some limited exceptions, the Plaintiffs' shares and units ought be valued to reflect that profits were intended to flow through to the Drapac Holdings Trust and Drapac Management Ltd.[4] The main exceptions are two managed investment schemes - Drapac Trust No. 2 and Drapac Sustainability Fund. The units in those schemes ought be valued in accordance with their constitutions.
Do the pleadings limit the case of the Plaintiffs to the entities in which they directly hold shares and units?
3 Throughout the proceeding, the Plaintiffs have referred to a chart that they contend illustrates the Drapac Group structure and how funds were intended to flow to the entities in which they hold shares and units ("the Chart"):
4 The Plaintiffs hold shares in the following companies:
5 They submitted that they did not receive their interests in a vacuum but rather in a context - that is, a context that informs the fair valuation of their interests. That context reveals, so they contend, that the profits of the various entities within the Drapac Group were intended to flow into the entities in which they held their shares and units. They say that the Chart graphically demonstrates that Mr Drapac and the key employees were to own 100 per cent of Endoline, Drapac Holdings Trust and Drapac Management Limited and that these three entities were, in turn, to receive any profits made by the entities that sit beneath them on the Chart. They submitted that the key employees were granted their interests on the basis that the Drapac Group constituted one enterprise and it was envisaged that the key employees would share in the profits of all of the Drapac Group's endeavours in accordance with their respective holdings (13.5 per cent for Mr Wain and 3.5 per cent for Mr Murchie). As such, they submitted that the fair value of their interests ought to be set on the assumption that the profits generated by the Drapac Group flow into the companies and trusts in which they have a direct interest.
6 The Drapac parties submitted that the case now sought to be put by the Plaintiffs was not part of their pleaded case[5] and the relief sought in the statement of claim and the relief granted to them by the Court's orders on 1 June 2012, are disconnected from what they now seek. They say that the Plaintiffs did not plead or run a case at trial that they owned interests in something called the 'Drapac Group' with the profits of any entity in the Drapac Group intended to flow into the entities in respect of which they held their interests. Rather, they submitted, the case was pleaded and conducted on the basis that the Plaintiffs owned certain shares and units. The Drapac parties say that the fact that the Plaintiffs own shares in a company that itself owns shares in a company which is trustee of a trust does not entitle them to a percentage of the trust assets as if they were beneficiaries.
7 In summary, the defendants say that if the Plaintiffs wished to bring a claim for payment of an amount to them based on the profits of the Drapac Group as a whole, then they ought to have pleaded a completely different case.
8 The Supreme Court (Corporations) Rules 2003 (Vic) apply to this proceeding because relief is sought under the Corporations Act, specifically under the oppression provisions in ss 232 and 233. The Rules require such proceedings to be commenced by originating process supported by affidavit. That is what happened in this case with the initial supporting affidavit being made by Mr Wain. In his affidavit, Mr Wain stated that he sought orders for his various interests in the Drapac Group to be bought at fair value by Mr Drapac or one of his related entities. He deposed that his relationship with Mr Drapac had completely deteriorated such that he wished to sever totally his connections with the Drapac Group at a fair price. In the next section of the affidavit, Mr Wain set out the five entities that he said he had interests in within the Drapac Group.[6] In a later part of his affidavit, he set out matters that he considered to be relevant to a valuation of his interests. Mr Wain deposed that Endoline had made various loans to other companies in the Drapac Group which were then still owing.[7] He also referred to other intercompany transactions and the interests which he stated Endoline held in the Drapac Sustainability Fund and another trust. Mr Wain then turned to deal with Drapac Capital Pty Ltd. He made it clear that in valuing his interests, his view was that regard must be had, among other things, to the involvement of Drapac Capital Pty Ltd and the Drapac Capital Trust. Mr Drapac is the sole director of Drapac Capital Pty Ltd with Endoline (as trustee of the Drapac Holdings Trust) being the sole shareholder. Drapac Capital Pty Ltd is the trustee of the Drapac Capital Trust. Mr Drapac is the specified beneficiary. The general beneficiaries include any entities in which he has an interest. Mr Wain deposed that profits received by Drapac Capital Pty Ltd are meant to be distributed to Endoline as trustee of the Drapac Holdings Trust. At no stage did Mr Drapac dispute this, nor did he object to this part of Mr Wain's affidavit on the ground that it was irrelevant, despite taking that objection to many other parts of the same affidavit. Nevertheless, the Drapac parties submitted that what Mr Wain sought in his first affidavit was the purchase of his interests in certain defined companies and trusts in the Drapac Group rather than in the whole of the Drapac Group.
9 At a later stage, Mr Murchie filed an affidavit in support of the application. He too deposed that he sought orders for the purchase of his interests in the Drapac Group at fair value by Mr Drapac, or entities related to him, and set out his interests in the Drapac Group being shares and units held in five Drapac Group entities.[8]
10 As sometimes happens with proceedings brought under the oppression provisions, orders were made for pleadings not long after commencement of the proceedings. The final statement of claim relied upon by the Plaintiffs was filed during the course of the initial trial. In the first paragraph of the statement of claim, under the heading 'The Drapac Group', the Plaintiffs set out that references in the pleading to 'Drapac Group' meant the companies and trusts listed in the Chart. The defendants responded to that paragraph listing various entities that comprised the Drapac Group. There was very little difference between that list and the entities included in the Chart.
11 Following the definition paragraph, the statement of claim went on to plead formal matters concerning each of the Plaintiffs and the units and shares held by them in the various Drapac Group entities. Similar pleadings about Endoline and Drapac Management Ltd followed. In substance, all of those allegations were admitted by the Drapac parties.
12 Further on in the statement of claim under the heading 'Issuing of Equity in the Drapac Group' the Plaintiffs pleaded:
13 This was followed by a pleading that in accordance with the Key Employees equity proposal, on or about 27 June 2005 the Drapac Holdings Trust was constituted and units and shares in the various Drapac entities were issued to the Plaintiffs.
14 The Plaintiffs then pleaded that they had a legitimate expectation that their equity would be realised. Part of that claim was based on a 'Drapac Share Scheme Discussion Paper August 2008' ("the Discussion Paper"). The Drapac parties admitted that that document had been signed by Mr Drapac and the key employees (which included Mr Wain and Mr Murchie). The Plaintiffs pleaded that Mr Drapac informed Mr Wain that he agreed to an orderly realisation of the equity held by the entities associated with Mr Wain in the Drapac Group for fair value and on reasonable terms on the basis that Mr Wain would continue to provide Mr Drapac with the right to invest up to 30 per cent of the equity at cost in new property investments sourced by Mr Wain for a period of two to three years. It was further alleged that Mr Drapac subsequently agreed to a similar arrangement with all of the key employees. These allegations were denied by the Drapac parties. The Plaintiffs concluded this part of their pleading by alleging that, because of what Mr Drapac had said, they had a legitimate expectation that there would be an orderly realisation of the equity held by entities associated with them in the Drapac Group for fair value and on reasonable terms on the basis that Mr Wain would continue to provide Mr Drapac with the right to invest up to 30 per cent of the equity at cost in new property investments sourced by Mr Wain for a period of two to three years. Again that allegation was denied by the Drapac parties.
15 The pleading then dealt with other matters said to constitute grounds for the relief sought. The statement of claim concluded by alleging that by reason of the earlier matters pleaded, including the absence of a reasonable offer to purchase the Plaintiffs' interests in the Drapac Group, the conduct of the affairs of Endoline and Drapac Management had been oppressive to, unfairly prejudicial to, or unfairly discriminatory against the Plaintiffs' interests. This was immediately followed by the prayer for relief seeking orders pursuant to s 233 that the Plaintiffs' interests be purchased at fair value.
16 The Drapac parties denied that there had been any oppressive conduct.
17 The Plaintiffs submitted that the statement of claim did all that was necessary for a pleading to do in an oppression case - it pleaded the material facts upon which they relied and sought relief under the statutory provisions. The Plaintiffs submitted that it is not necessary in an oppression proceeding to plead in a statement of claim the method of valuation, the date of valuation or other factors relevant to the fair valuation of a plaintiff's interests. Rather, they contended that those are all matters which pertain to the form of relief and are not necessary preconditions for the granting of the relief itself. They drew an analogy with a claim for damages and noted that a statement of claim would not plead material facts that go to the way in which damages are to be assessed. As they observed, at best they might be provided by way of particulars but here, where the proceeding was commenced by way of originating motion supported by a detailed affidavit, the evidence in that affidavit is of greater force than particulars.
18 In any event, the Plaintiffs submitted that the statement of claim did raise the issue of their ownership of shares and units in various entities representing ownership of an interest in the whole Drapac Group.
19 The Drapac parties submitted that the statement of claim simply did not raise any issue beyond ownership of shares and units in particular entities. They relied on the relevant paragraph in the statement of claim that pleaded that the Plaintiffs were to hold interests in particular entities forming part of the Drapac Group and noted that it was not pleaded that they would hold interests in the whole group. They submitted that as a consequence, Mr Drapac therefore only responded in his affidavit to issues raised on the pleadings and not to other peripheral matters included in the affidavits of Mr Wain and Mr Murchie which were not relevant to those issues. The Drapac parties contended that it was no part of the Plaintiffs' pleaded case that the intention, understanding or belief of the parties was that ownership of the shares and units held by them resulted in them having an interest in the whole Drapac Group. The Drapac parties submitted that this is a completely separate and new cause of action. They drew a comparison with the more usual oppression case where one of the acts of oppression is an inappropriate payment made to an associate of the oppressor. In that circumstance, evidence about the diversion of funds would be given and then the Court, having found that act to be oppressive, is in a position to order that in conducting the valuation an adjustment be made. Here, by contrast they submitted, there was no allegation of any oppressive conduct going to the diversion of assets or of an understanding reneged upon that the Plaintiffs held an interest in the whole Drapac Group by virtue of their share and unit holdings in particular entities.
20 In my view, the case contended for by the Plaintiffs was pleaded. In particular, the paragraphs pleading that the Plaintiffs had a legitimate expectation that their equity would be realised makes it clear that it was equity in the whole Drapac Group that they claimed. First, the Plaintiffs pleaded the Discussion Paper (to which I will refer in more detail below). That document clearly showed the intention of the parties to be that the key employees and Mr Drapac would have interests in the whole Drapac Group. They next pleaded:
15A. On 14 September 2009 Michael Drapac informed the key employees that he agreed to an orderly realisation of [their] equity in the Drapac Group for fair value and on reasonable terms ....[9]
21 In my view, it was not necessary for the Plaintiffs to set out in the statement of claim matters to be taken into account in valuing the shares and units that they hold. It is not usual to plead such matters and there is no reason to require that it be done in this case.
22 Further, the case was opened and run on the basis that the Plaintiffs' claim was to an interest in the whole of the Drapac Group. In the opening section of the Plaintiffs' written submissions they stated:
The Plaintiffs seek an order pursuant to the [Corporations] Act with the effect that the first defendant (Mr Drapac) and the second defendant (Briaroaks) - being a company wholly owned and controlled by Mr Drapac - purchase the Plaintiffs' interests in the Drapac Group at fair value.
23 The Drapac Group was defined in the written submissions as the collection of companies and trusts set out in the Chart. In his oral opening, Senior Counsel for the Plaintiffs frequently referred to the Drapac Group. Whilst at times counsel referred to the specific entities in which the Plaintiffs held shares and units, it was clear that he was referring to those interests as encapsulating an interest in the whole of the Drapac Group. There are many examples,[10] but perhaps the best example is when counsel in referring to the Chart said:
One sees the key employees at the top holding 100 per cent of the capital or the units in the various entities which, in turn, hold 100 per cent of the units or shares in the various other entities within the group.
We place emphasis on that fact and on the description of the key employees as key employees to show that this was a group conducted very much on the basis of close personal relationships of mutual confidence between the key employees and, in particular, between Mr Drapac and the other key employees. And we say that that is why, within the relevant period, Mr Wain was appointed as a director of various entities, in particular, Endoline and Drapac Management, why Mr Mercuri, likewise was appointed a director of Drapac Management....
And we say all of this explains why these key employees were issued with units and were issued with shares in the various entities that I have described.[11]
Now, your Honour, one of the issues, as your Honour's seen, raised by the defendants in this proceeding is the basis upon which the Plaintiffs hold their interests in the Drapac Group ...[12]
25 In addition to the Chart, in opening Senior Counsel for the Plaintiffs took the Court to various documents including the Discussion Paper. As I have said, the Discussion Paper made it clear that the key employees were to have an interest in the whole Drapac Group.
26 Moreover, I am satisfied that on a fair reading of the whole of the statement of claim and other pleadings it is clear that the case was not about the extent of the Plaintiffs' interests in the Drapac Group but rather whether they had any beneficial interest at all. The thrust of the Drapac parties' defence and evidence was that the interests which the Plaintiffs held in the Drapac Group were not held beneficially and ought to be returned to the Drapac parties.
27 It is clear to me that the Drapac parties understood the case brought by the Plaintiffs. In their written opening they concluded with the following:
The reference in the first of these paragraphs to an 'interest in Drapac Group or the Drapac business' goes beyond the specific entities in which the Plaintiffs hold shares and units. When the two paragraphs are read together, it is apparent that the Drapac parties understood that what was put against them was that the Plaintiffs' holdings in the specific entities entitled them to an interest in the whole Drapac Group.
28 In addition, before the trial, the parties prepared a joint agreed list of issues to be determined by the Court. One of the issues in that list was whether, in all the circumstances, the conduct of the affairs of Endoline and Drapac Management had been oppressive to, unfairly prejudicial to, or unfairly discriminatory against any of the Plaintiffs. If that question was answered in the affirmative, then a further issue for determination agreed between the parties was whether Mr Drapac or one of his related entities should be ordered to purchase at fair value their interests in the Drapac Group. The parties did not phrase the issue for purchase in terms of the specific entities in which shares were held despite having framed the previous issue about whether there was any oppression in that way.
29 Further, at no stage during the course of the oral opening by Senior Counsel for the Plaintiffs was any objection taken that the case being opened had not been pleaded. Indeed, the crossexamination of Mr Wain proceeded on the basis that what Mr Drapac proposed was an arrangement for the employees to share in the whole Drapac Group business provided they worked for 10 or 12 years to grow and develop it.
30 Finally, the evidence made it clear that Mr Drapac understood the Plaintiffs' case. In an affidavit that he made after the original statement of claim was filed, he described the Chart as 'setting out the relationship between the entities constituting the Drapac Group'.[13] There are many examples in his evidence from which it is clear that he understood that what the Plaintiffs sought was payment for their interest based on the whole of the Drapac Group as depicted in the Chart. Taking just one example, in the first affidavit that he swore in the proceeding, he deposed:
The units and shares ... were issued, or transferred to [the Plaintiffs] ... in circumstances where I had told Messrs Wain and Murchie that the reason why there were allocated any interest in the Drapac Group was in anticipation of them (and the other employees) growing and developing the Drapac Group business over a period of 10 years.[14]
31 That Mr Drapac would understand the claim made by the Plaintiffs and that the parties knew that what was at stake was an interest in the whole Drapac Group is consistent with how the business operated as one enterprise, albeit constituted by a number of separate companies and trusts.
32 Indeed, as I have noted above, the Drapac parties' case was based upon the Plaintiffs having no claim to beneficial ownership of their interests in the Drapac Group. In part, that argument relied on there being no concluded agreement between the parties in respect of the share and unit holdings. The Drapac parties did not argue that if, contrary to their submissions, the Plaintiffs held their interests beneficially, those interests were not interests in the whole Drapac Group. There was no dispute between the parties about whether ownership of the shares and units equated to ownership in the whole Drapac Group until towards the very end of the initial trial and, more specifically in the directions hearings that followed after the orders made in respect of the issues in that trial. Towards the conclusion of the initial trial, the Plaintiffs made submissions about the matters that the Court should determine. One such matter was that 'the plaintiffs received their proportionate interests in the [Drapac] Group by means of shareholdings and unit holdings in particular companies and trusts forming part of the [Drapac] Group on the basis that all profits made by any entity within the [Drapac] Group would flow through to those companies and trusts in which the plaintiffs had direct interests'. In response to this suggestion, Senior Counsel for the Drapac parties submitted:
In particular, Your Honour, we say that Your Honour should reject the idea ... that the plaintiffs received their proportionate interests in the group by means of shareholdings and unit holdings in particular companies and trusts forming part of the group and then the magic words, 'On the basis that all profits made by any entity within the group would flow through to those companies and trusts in which the plaintiffs had direct interests'. That's pleading an agreement and yet, there is no - was no agreement and our learned friends don't plead any agreement between the relevant parties that any particular benefits or proportions would flow through on any particular basis.
Their claim is that they have certain identifiable shares. Their claim is that they have certain identifiable units. If Your Honour were hereafter to decide that our learned friends have made out a case, not just of owning those shares and units, but also in all the circumstances that there is oppression which ought to lead to the sorts of results that they claim, then that might be an occasion for Your Honour to investigate further in the process of valuation what are the assets and what are not the assets of companies and particular trusts.
33 In other words, counsel for the Drapac parties accepted that the issue that the Plaintiffs now wish to ventilate would arise in the valuation part of the case.
34 Further confirmation that the Drapac parties understood the case against them comes from consideration of an application that the Plaintiffs made concerning Drapac Developments Pty Ltd. That company purchased and developed a property in Parkville. During the course of the initial trial, the Plaintiffs made application for a freezing order to prevent the Drapac parties from removing from Drapac Developments the proceeds of sale of any part of the Parkville development. It was clear from the Plaintiffs' submissions that they contended that they would be entitled to a proportionate share of any profit from the Parkville development and that it was a matter that affected the valuation of their interests. It was also clear from the submissions of the Drapac parties that they understood the position taken by the Plaintiffs.
35 The Plaintiffs are entitled to argue that the price to be paid by the Drapac parties for their shares and units should reflect the profits of the whole Drapac group. I will now consider whether their contention about this should be accepted.
36 Section 233(1)(d) of the Corporations Act provides that:
The Court can make any order under this section that it considers appropriate in relation to the company, including an order...for the purchase of any shares by any member or person to whom a share in the company has been transmitted by will or by operation of law....
Although s 233(1)(d) gives the court power to make an order for the purchase of shares by a member, the Corporations Act is silent about the terms on which such a sale may be ordered. In particular, the Corporations Act does not identify the basis upon which the price for the shares is to be fixed if an order for compulsory purchase is made. Under earlier forms of the oppression provisions of companies legislation, orders were made for the compulsory sale of shares by one member to another at prices to be fixed according to various criteria. In some cases the price has been fixed at the value the shares would have had at the commencement of the proceedings but for the effect of the oppressive conduct. In other cases a date other than the date of commencement of the proceedings has been fixed. Again, there is no reason to give the present oppression provisions some narrower construction. In particular, the power given to the court by s 233(1)(d) should not be hedged about by implied limitations.[16]
38 In that case it was not necessary to consider s 233(1)(d) and the principles to be applied in setting a price for the purchase of shares in any more detail. However, earlier the Full Federal Court in Smith Martis Cork & Rajan Pty Ltd v Benjamin Corporation Pty Ltd[17] conveniently summarised the relevant principles for fashioning relief under s 233 as follows:
The authorities make it clear that once the discretion conferred by s 233 of the Act has been enlivened by a finding of oppression under s 232, the court has a wide discretion as to both the appropriate remedy and, if it orders compulsory purchase of shares, as to the mode of valuation of the shares. The authorities are set out in a recent decision of Campbell J in United Rural Enterprises Pty Ltd v Lopmand Pty Ltd [2003] NSWSC 910; (2003) 47 ACSR 514 (United Rural Enterprises) at [34]-[38].
If the court considers it is appropriate to make an order that the other members purchase the shares of the oppressed shareholder, its task is to fix a price that represents a fair value in all the circumstances: see Coombs v Dynasty Pty Ltd [1994] FCA 1193; (1994) 14 ACSR 60 at 102 (von Doussa J) and on appeal Dynasty at FCR 143 (Spender, O'Loughlin and Branson JJ).
As Davies JA observed in Shirim Pty Ltd v Fesena Pty Ltd [2002] NSWSC 10; BC200200074 (Shirim) at [12], the purpose of an order that the oppressor purchase the shares at a fair price is to compensate the oppressed shareholder for the oppression which has taken place. His Honour noted that this principle has been regarded as established ever since the decision of the House of Lords in Scottish Co-operative Wholesale Ltd v Meyer [1959] AC 324; [1958] 3 All ER 66.
Davies JA in Shirimat [13] and Campbell J in United Rural Enterprises at [35], both referred to a passage from the judgment of Oliver LJ in Re Bird Precision Bellows Ltd [1986] 1 Ch 658 at 669. There, his Lordship specifically rejected a submission that the determination of the price was to be arrived at only by ordinary valuation principles.
As the Full Court said in Dynasty at FCR 146, it is not just a question of value; it is a matter of fixing a price that should be paid.
In United Rural Enterprises at [36] Campbell J observed that s 233(1)(d) of the Act does not specify the price for which the purchase of shares can be ordered and it says nothing about the basis on which the price is to be calculated. As his Honour noted, the only restriction on the way in which the price may be calculated is that it must be a proper exercise of judicial discretion.
Other authorities which refer to the width of the discretion include Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd [2001] NSWCA 97; (2001) 37 ACSR 672 at [3]-[5] (Spigelman CJ) and ES Gordon Pty Ltd v Idameneo (No 123) Pty Ltd (1994) 15 ACSR 536 at 540 (Young J).
Even if there is an agreement between the parties, as for example in the statutory contract contained in the constitution or articles of association, as to the way in which the shares are to be valued, the court is free to override the agreement if it makes a finding of oppression: see Dynasty at FCR [146].
In Dynasty the Full Court referred with approval to a passage from the decision at first instance in Re Bird Precision Bellows Ltd [1984] Ch 419 at 430. There, Nourse J said that once a finding of oppression has been made, it would be unfair that the oppressed shareholder be bought out on the fictional basis applicable to a free election to sell the shares in accordance with the articles "or indeed on any other basis which involved a discounted price".[18]
39 At the heart of these principles is that the price to be paid is compensatory in nature and is aimed at redressing the wrong done (the oppressive conduct). Consequently, the price to be paid will not always reflect the actual or real worth of the shares that might be obtained on the open market. Whilst the valuation might be conducted on the basis of one of the traditional methods (including net tangible assets or capitalisation of maintainable earnings) the valuation will invariably take into account various adjustments that should be made to remove the effect of the oppression. For example, in United Rural Enterprises Pty Ltd v Lopmand Pty Ltd,[19] a number of adjustments were made including an adjustment to the amount of management fees that had been charged.[20] Adjustments might be made if assets or profits have been diverted, with the valuation to be conducted as if there had been no diversion. Yet another example is Dynasty Pty Ltd v Coombs.[21] In that case, the Full Federal Court upheld the trial judge's valuation orders where one of the acts of oppression was the dilution of the Plaintiff's shares. The trial judge calculated the amount to be paid not on the basis of the shares actually held but rather on the basis of the shares that would have been held had there been no dilution.
40 In Tomanovic v Global Mortgage Equity Corporation Pty Ltd,[22] the New South Wales Court of Appeal concluded that a claim of oppression had been made out in respect of two companies, one of which acted as trustee of a unit trust. The court determined that a compulsory buy out order should be made. Campbell JA noted that no attention was paid by the parties at trial or on appeal to the way in which the available remedy for oppression operated in respect of the units in the trust. His Honour stated:
Even if the court were to make a buyout order concerning [the trustee company], that would not have any effect on the beneficial ownership of the assets it held on trust - the beneficial ownership of those assets could be altered only if a buyout order were to be made concerning the units in the [Trust]. When the Trust has at all times been an important part of the overall commercial group, failure to deal with ownership of units in the Trust would result in any relief granted by the Court not totally resolving the commercial relations between the parties.[23]
41 For reasons which are not relevant to this case, the court did not determine whether a buy out order could be made in respect of the units in the trust. However, Campbell JA did observe that it was likely that it would 'still be necessary for some aspects of the dealings between the trust and other corporate entities to be investigated as part of the process of valuing the shares in the two companies.[24]
42 In the present case, the question of interests in trusts has not been overlooked with the Plaintiffs urging the Court to value the shares and units on the basis that profits from the business of the Drapac Group flowed into the entities in which they hold direct interests.
What should be taken into account in setting the price to be paid?
43 The starting point in considering what matters should be taken into account in valuing the interests of the Plaintiffs must be to look at the oppressive conduct which is sought to be redressed by the purchase order. In Wain & Ors v Drapac & Ors,[25] I set out my conclusions about the oppressive conduct in the following terms:
Although Mr Drapac held the majority interest in the companies and trusts that did not diminish the fact that the type of relationship he had with the key employees when their interests were granted was one of mutual confidence; Mr Drapac and the key employees expected to take an active role in management and there were to be restrictions on when the interests could be realised. In those circumstances, equitable considerations become relevant.
The relationship between the parties having broken down completely, there is perhaps little to be gained by a detailed analysis of why that has occurred. The termination of Mr Wain's employment was not based on proper grounds.... Mr Drapac used his power as the majority owner unfairly to exclude Mr Wain from management. Mr Murchie's continued employment was untenable. There was no offer to purchase their interests. Rather, their equity was to remain trapped even though they would no longer be part of the Executive Team charged with management of the Drapac Group business. These are all hallmarks of oppression.
In addition, there is the conduct of Mr Drapac in relation to the Le Boulevard project. The Drapac parties submitted that all that occurred in relation to this project was that an offer was made by Camindu on the basis that the beneficiary of the trust would be changed. That offer was not accepted because Drapac Management's interests were being looked after by Mr Mercuri and Mr Murchie as directors and employees and Mr Bazzani as the company's independent solicitor. They say that Mr Drapac was acting in his capacity as an officer of Camindu, not Drapac Management and therefore his conduct could not be oppressive. Viewed in isolation, what Mr Drapac did may be considered reasonable. However, when considered in the context of the other conduct, including the plans to get rid of Mr Wain and Mr Murchie with "zero payout" if possible, and to dilute their interests (but not the interests of Mr Drapac), it can be seen that it was really aimed at diminishing the value of their interests. All of this simply adds to the conclusion that the allegations of conduct oppressive to, unfairly prejudicial to, or unfairly discriminatory against Mr Wain and Mr Murchie have been made out.[26]
44 On one view, none of this conduct warrants the orders sought by the Plaintiffs - all that needs to be redressed is their exclusion from management whilst their capital is trapped. It might be said, as the Drapac parties contended, that that can be compensated by a price being set for the shares and units in the particular entities based on the financial reports for the companies with the units in the trusts to be valued in accordance with their constitutions, particularly Drapac Trust No. 2 which is a managed investment scheme under the Corporations Act. In this regard, the Drapac parties submitted that there has been no evidence in relation to that trust that the value of the units had been diminished by the oppressive conduct and there is no reason why the units ought not be valued in accordance with the method prescribed by the provisions of the Trust in the same manner as the interests of a person who is not a party to the proceeding would be valued. To do otherwise say the Drapac parties, would have the undesirable result of drawing a distinction between the Plaintiffs and members of the public who hold the majority of units in that trust. Further, the Drapac parties submitted that none of the oppressive conduct led to a change in the value of the shares and units in the other relevant companies and trusts. Consequently they contended that there was no need to place a value on them on a hypothetical basis. For example, none of the acts of oppression led to a diminution in the assets of the company or trust such as if there had been a flow of funds away from a particular entity or if an entity had been required to pay an inflated rent for premises owned by one of the parties. There is, so they say, no basis for adding in assets from elsewhere that were never owned by the entity in which the Plaintiffs hold shares and units. The Drapac parties submitted that in effect what the Plaintiffs seek is a derivative claim which they are not entitled to make because it is a claim for what is a reflective loss. In this regard, the relevant principle is that a shareholder in a company is not entitled to claim or recover damages for a loss which is a diminution in the value of the shareholder's shareholding that merely reflects the loss suffered by the company.[27] Here, the Drapac parties submitted that the Plaintiffs were asking the Court to value their shares on the basis that, for example, Endoline does not have assets it should have. The Drapac parties submitted that that is a claim for reflective loss because any loss suffered is a loss suffered by Endoline and not by the shareholders. That submission misunderstands what is required here - what has to be set is a fair value for the shares and units to redress the effect of the oppressive conduct and that value may need to take into account that profits from a subsidiary or trust were intended to flow through to the Plaintiffs by virtue of their share and unit holdings. That is not a claim for loss suffered by Endoline. It is not a derivative claim.
45 However, I do accept the Drapac parties' submissions, as did the Plaintiffs, that the Plaintiffs' interests in Drapac Trust No. 2 (being a registered managed investment scheme) ought be valued in accordance with that trust's constituent documents because otherwise there would be a difference in treatment between unitholders, some of whom are members of the public. The same is true of the units held in the Drapac Sustainability Fund.
46 Turning then to the other entities, it seems to me that the approach contended for by the Drapac parties ignores the context in which the oppressive conduct occurred. What must not be forgotten is that the price to be paid by the Drapac parties should represent the fair value in all the circumstances.[28] The circumstances in this case include the plan to diminish the value of the interests of the Plaintiffs,[29] to pay them as little as possible,[30] and the arrangement discussed with Mr Drapac in September 2009 whereby he would pay out the key employees' equity subject to certain caveats being fulfilled.[31] Consequently, it seems to me that if, before the oppressive conduct occurred, the understanding between the parties was that by holding the shares and the units that they did, that gave them an interest in the whole Drapac Group, then that is the basis upon which their interests ought be valued. This is so even if a valuation based on the formal legal structure of the Drapac Group, the constitution of the companies, the trust deeds and the accounts for the specific entities in which the shares and units are held would result in a different outcome. It does not matter that the price set would be based on an assumed state of affairs rather than the actual legal structure and actual distributions made. What must not be forgotten is that it is the price to be paid that is being set, not how much the shares and units are worth on the open market. That price must be a fair price to redress the wrong done by the oppressive conduct. It is akin to paying the price for shares which had been diluted based on an assumption that there had been no dilution.
47 A further matter to be kept in mind is that it was Mr Drapac who created the complex corporate structure of the Drapac Group. To the extent that its legal framework does not reflect the understanding of the parties as to their entitlement before there was any oppression, Mr Drapac ought not be permitted to benefit from it. To allow this would be unfair. It would enable Mr Drapac to carry out his plans to dilute the interests of the Plaintiffs and to pay them as little as possible.
48 The evidence supports the Plaintiffs' case that before there was any oppression, it was the parties' intention that what would be shared would be the profits of the whole of the Drapac Group, excluding Mr Drapac's private investments. So, for example, in a document headed 'Drapac Staff Investment Trust' the following appears:
Objectives
To offer the key employees ('KE') in the Drapac Group ownership of the business and reward them for their loyalty to the business ('capital entitlement').
To allocate a share of annual profits to all employees in the Drapac Group for their loyalty, commitment and performance during the year ('annual income entitlement').
The Drapac Group defined
All profits (both revenue and capital) realised post 1 January 2005 will form part of the overall Drapac Group Profit Pool. The 'Drapac Group' currently comprises the following entities:
Drapac Holdings Pty Ltd (holding company):
Drapac Management Ltd
Drapac Investment Pty Ltd
Drapac Consulting Pty Ltd
Drapac Developments Pty Ltd
Drapac Property Holdings No. 1 Pty Ltd as trustee for:
Staff Property Trust No. 1
101 Dodds Street Unit Trust
Drapac Capital Pty Ltd as trustee for:
Drapac Capital Trust
Any new standalone companies/trusts established will form part of the Drapac Group, eg, La Trobe/Mackenzie Street Unit Trusts, etc (refer Appendix 1).
49 Perhaps the best indication of what was intended before the oppression are the principles outlined in the August 2008 Discussion Paper. By this time, the Plaintiffs already held the shares and units which are now to be valued. The introduction to the Discussion Paper states that a share scheme with the key employees had been a point of discussion before January 2005 and had been through a number of iterations with Mr Drapac and the key employees working on the basis that the spirit of the unsigned document would be fulfilled and would apply from January 2005. The paper is set out in three sections: an overview of the 'draft scheme', an outline of the 'proposed scheme', and an action plan for implementing the 'proposed scheme'. One of the objectives of the 'draft scheme' is described in the Discussion Paper as being to 'offer the key employees in the Drapac Group ownership of the business (capital entitlements), a share of ongoing profits (annual profit entitlement) and reward them for their loyalty to the business both [then] and into the future'. The key features of the 'draft scheme' were said to include the ability of the key employees to gain equity in Drapac Holdings Trust, Drapac Trust No. 2 and Drapac Management Ltd. So it seems, the intention was that holdings in those entities gave the key employees and Mr Drapac ownership of the whole business and a share of profits. The Discussion Paper makes it clear that at that time what was intended was that entitlements were based and were to continue to be based on the consolidated performance of the Drapac Group. In the section of the Discussion Paper dealing with the 'proposed scheme', one of the key objectives of the scheme was listed as being 'to provide reward to key employees for the overall performance of Drapac Enterprise an[d] not performance of individual funds'. Another objective was that no 'foundation key employees ... would be disadvantaged with the transition to the finalised scheme'. The following diagram is included in this section of the Discussion Paper:
50 That diagram shows that what was intended was that the profits and losses and investment returns from the various Drapac Group entities would flow into Drapac Holdings Trust. The Discussion Paper set out a list of the entities included in the 'Drapac Enterprise'. That list contains most of the entities in the Chart. The Discussion Paper listed separately a number of entities which were described as Mr Drapac's private investments and which were to be excluded from the group of entities in which the employees would share an interest.
51 About a month after the Discussion Paper had been signed, Mr Drapac wrote a letter to Mr Wain about his salary:[32]
Your salary package will be $250,000 inclusive of statutory superannuation, of which you will be paid 80% of this amount totaling [sic] $200,000. You will be advanced the additional $50,000, which will be made up of a $30,000 advance payment against distributions from your equity entitlement as set out in the [Discussion Paper], and the additional $20,000 subject to meeting your KPI's that have been agreed between us. In the event that you fail to meet your KPI's, the additional $50,000 will be allocated entirely as an advance against distributions from your equity entitlement as set out in the [Discussion Paper].
52 Mr Drapac said much the same thing to Mr Murchie in a letter of the same date. These letters support the conclusion that the intention of the parties is reflected in the Discussion Paper, that being that the profits from the various entities in the Drapac Group were principally to flow through to the Drapac Holdings Trust and that the key employees would have an interest in the whole Drapac Group (which did not include Mr Drapac's private interests as listed in the Discussion Paper). The letters also go to establish that Mr Drapac was content to implement the intention of the parties.
53 Mr Drapac's evidence was also consistent with this conclusion as to the parties' intention. He deposed that:
In or about mid-2004, at the offices of Briaroaks, I said to the employees words to the effect that:
54 Later on in his affidavit, Mr Drapac deposed that he wanted the 10year handcuff period and the development of the business of the Drapac Group to be the quid pro quo for giving the employees a share in the Drapac Group. He stated:
From 2005, the Drapac Group approach to remuneration of employees changed from two elements a) low salary and b) project by project discretionary bonus to a dramatically different model of:
55 Whilst his affidavit is directed to refuting the proposition that the Plaintiffs held a beneficial interest in the Drapac Group, what it does make clear is that his intention was that the key employees (including Mr Wain and Mr Murchie) would share equity in the whole group and would also share in ongoing profits of the group. Mr Drapac clearly treated the companies and trusts in the Drapac Group as one enterprise. He did not treat the entities in which the Plaintiffs hold their interests as separate and distinct entities isolated in terms of profit share from other entities within the Drapac Group. Evidence given by other witnesses consistently referred to the Drapac Group and the business and the employees' interests in the whole enterprise.
56 Further support for the conclusion that the Drapac Holdings Trust was to be the central repository for the majority of the profits of the Drapac Group is found in correspondence from Mr Bruce Cameron, the solicitor engaged after the Discussion Paper had been signed. In an email of 4 September 2008, Mr Cameron stated his understanding that Endoline, as trustee of the Drapac Holdings Trust, held all of the assets of the Drapac Group (other than Drapac Management) and that this included all direct and indirect investments in properties and property owning entities. At no time did Mr Drapac take issue with this nor take steps to correct any misunderstanding that Mr Cameron may have had.
57 The Drapac parties submitted that all of the early documents and the Discussion Paper must be read in the context in which they were written - that is, that the parties were working towards an agreement, but no such agreement was ever reached. They also contended that the Discussion Paper cannot be relevant to the position in relation to the shares and units held by the Plaintiffs when those interests were obtained three years before the Discussion Paper. As to the structure depicted in the Discussion Paper, they noted that no such structure was ever brought into being. In essence, they contended that what might have been intended had an agreement been reached cannot be used as the basis for determining how the shares should be valued and what ought to be taken into account in such a valuation.
58 I accept that the documents must be read in context. However, it seems to me that part of that context is that at the time of the Discussion Paper, the Plaintiffs already held their interests. The Discussion Paper observed that the employees were not to be disadvantaged and provided:
The Key Employees in the draft agreement who are still employed by Drapac at the time this agreement is signed, are to be nominated as foundation employees in the scheme and will gain unit holdings in Drapac Enterprise as shareholders in Drapac Holdings Trust from 1 January 2005. As such the equity interests that the foundation employees will carry into the scheme will be as follows:
59 I accept the Plaintiffs' submission that the Discussion Paper was a clarification of the existing position - that is, that Mr Wain and Mr Murchie own 13 per cent and 3.5 per cent respectively of the Drapac Group as a consolidated enterprise. As the Plaintiffs contended, although the structure depicted in the paper was never brought into being, it is reflective of the fact that the entities in which they have interests are intended to reflect the profit and loss position of the Drapac Group as a consolidated enterprise. To the list of entities in the Discussion Paper that were to form part of the 'Drapac Enterprise' must be added any new entities that were brought into existence for the purpose of projects that postdate that document, such as the Le Boulevard project.
60 In my view, all of the evidence to which I have referred above, makes it plain that the intention of the parties was that the Plaintiffs would hold an interest in the whole Drapac Group through their various share and unit holdings. For the purposes of valuation, the Chart provides the best guide to which entities ought be taken into account in setting a price to be paid by the Drapac parties. Whilst the Drapac parties submitted that the Chart only identified relationships between companies and the directors of the various companies but did not deal with shareholdings nor make any reference to the flow of funds between the various entities in the Drapac Group or the intentions or understanding of the parties, as I have noted above, Mr Drapac described the Chart as 'setting out the relationship between the entities constituting the Drapac Group'.
61 In light of the conclusion at which I have arrived as to the intention of the parties and using the Chart as a guide, the valuation of the Plaintiffs' interests should be undertaken on the assumption that the majority of the Drapac Group's profits ought be reflected in the Drapac Holdings Trust with some limited exceptions. Those exceptions are:
(a) the managed investment schemes - Drapac Trust No. 2 and the Drapac Sustainability Fund;
(c) 1144 Nepean Hwy Pty Ltd, Drapac Hastings Trust and Drapac Sustainability Fund (which the Plaintiffs do not press for inclusion in the group); and
(d) Drapac Management Limited and its subsidiaries as depicted on the right hand side of the Chart[33] and the Drapac Developments & Quigil Joint Venture.
Drapac Management Ltd should be valued taking into account an assumed flow of profits from the subsidiaries and joint venture referred to in (d) above.
62 In view of the specific submissions made by the parties about them, I will say something further about Drapac Capital Trust and Drapac Developments Pty Ltd.
63 The financial statements for Drapac Capital Trust evidence that it made a significant profit of approximately $28 million in 2009. As I have already observed, Endoline holds (for the Drapac Holdings Trust) the shares in Drapac Capital Pty Ltd which is the trustee of the Drapac Capital Trust. The Drapac Capital Trust is a discretionary trust.
64 The Drapac parties submitted that as Drapac Capital Pty Ltd has no beneficial interest in the Drapac Capital Trust assets, it has no value other than its value as a $2 company. They observed that Mr Drapac is the only director of Drapac Capital Pty Ltd such that it would be his views that would determine how the discretion of the trustee in making distributions would be exercised. The beneficiaries of the trust include entities in which Mr Drapac has an interest - those in which Mr Drapac has a private interest (in which the Plaintiffs do not share) and those in which both Mr Drapac and the Plaintiffs share an interest. The Drapac parties submitted that it would effectively be a fetter on the trustee's discretion if the Drapac Capital Trust was to be taken into account in valuing the Plaintiffs' shares and units.
65 The Plaintiffs submitted that if an order is not made which allows the assets of Drapac Capital Trust to be taken into account, then that would enable Mr Drapac, as the oppressor, to effectively make no compensation for the oppression. Effectively, what would be valued would be bare interests in either holding companies, trustee companies or trusts that do not contain assets.
66 As noted above, Mr Wain gave evidence that profits received by Drapac Capital Pty Ltd were intended to be distributed to Endoline as trustee of the Drapac Holdings Trust. Mr Drapac did not dispute this in his responding affidavit. Other documents from the period before this litigation began are consistent with Mr Wain's evidence. In an email of 5 August 2009, the internal accountant confirmed that the balance of Drapac Capital Trust's distribution of over $2 million was to be paid to Drapac Holdings Trust. In a subsequent email, Mr Drapac's personal assistant, confirmed that she had discussed the matter with Mr Drapac and that the funds from the Drapac Capital Trust should be distributed to Drapac Holdings Trust. Drapac Capital Trust is included in the Chart and was also included in the list of trusts and companies forming the 'Drapac Enterprise' in the Discussion Paper.
67 In my view, for the reasons I have given above and taking into account the specific evidence to which I have referred in the preceding paragraph, the fair valuation of the Plaintiffs' interests ought be based on an assumption that the discretion of the trustee of the Drapac Capital Trust would have been exercised such that distributions would be paid to Drapac Holdings Trust. This is not a fetter on the exercise of the trustee's discretion. The reality is that there is no exercise of the discretion - it is simply an exercise based on an assumption to arrive at a price that is fair in all the circumstances and ought be paid by the Drapac parties. The assumption which will underlie the valuation is based on the intention of the parties as to what was to occur. In my opinion, it would be most unfair to calculate a price that did not take into account what the parties intended and what has previously occurred in relation to distributions.
68 The position in relation to Drapac Developments Pty Ltd also warrants separate consideration. Drapac Developments was the vehicle used for the purchase and development of a property in Parkville. The expected profit from the project is in the vicinity of $3 million. The Plaintiffs do not hold shares in Drapac Developments. However, it is a subsidiary of Drapac Management Ltd in which two of the Plaintiffs hold shares.
69 During the course of the initial trial, the Plaintiffs sought a freezing order in respect of the proceeds of sale from the Parkville project. As part of that application, Mr Drapac claimed that Drapac Developments is holding assets as trustee for the Michael John Drapac Family Trust. He produced documents from the books and records of the Drapac Group which supported his contention. However, this is in conflict with his original affidavit sworn in the proceeding. In the earlier affidavit, Mr Drapac deposed to the likely profit that the 'Drapac Group' would eventually have made from the project. He went on to state that the townhouses built on the property had been sold at an undervalue and he lay the blame for that on Mr Wain. He concluded that Mr Wain had caused 'Drapac Management' to potentially make less profit on the Parkville development. As the Plaintiffs submitted, that evidence demonstrates that Mr Drapac accepted at an early stage of the proceeding that any profit from the Parkville project was intended to be ultimately reflected in the value of Drapac Management Ltd. Further, Drapac Management Ltd was included on the Chart and in the entities listed in the Discussion Paper as part of the 'Drapac Enterprise'. It was not listed as one of Mr Drapac's private investments. Consequently, the proper basis for valuation of the Plaintiffs' interests in Drapac Management Ltd is on the assumption that the profits from Drapac Developments Pty Ltd were intended to flow through to Drapac Management Ltd for the benefit of its shareholders.
70 In my opinion, the Plaintiffs held their shares and units on the collective understanding that by virtue of those shares and units they had an interest in the whole Drapac Group. With some limited exceptions, their shares and units should be valued on the basis that the profits of the entities in the Drapac Group were to flow through to the entities in which they hold shares and units. The principal exceptions relate to the managed investment schemes: Drapac Trust No. 2 and the Sustainability Fund.[34]
71 I will hear the parties as to the form of order to be made to give effect to these reasons and as to directions to be made for determination of the remaining questions which are still at issue.
The following companies and trusts form the Drapac Group. The list is taken from paragraph 1 of the amended defence of the Drapac parties filed 25 July 2011.
[1] Annexure A to these reasons sets out a list of the entities within the Drapac Group.
[2] Orders made 1 June 2012: Wain & Ors v Drapac & Ors [2012] VSC 156. The form of the orders for purchase are set out in Annexure B to these reasons. These reasons should be read in conjunction with the reasons in Wain & Ors v Drapac & Ors [2012] VSC 156.
[3] These reasons concern that question. The remaining questions, which will be dealt with subsequently, relate to the date for valuation of the shares and units and the method of valuation.
[5] As set out in their second further amended statement of claim dated 7 June 2011 ("statement of claim").
[6] Endoline Pty Ltd, Drapac Holdings Trust, Drapac Management Ltd, 1144 Nepean Highway Trust and Drapac Trust No. 2.
[7] A loan of $4 million to Drapac Developments Pty Ltd; loans totalling $11.5-$12.5 million to Drapac Management Ltd; a loan of $3-$4 million to 1144 Nepean Highway Pty Ltd; a loan of $300,000-$500,000 to Drapac Agriculture.
[8] Shares in Endoline and Drapac Management Limited, units in the Drapac Sustainability Fund, Drapac Trust Number 2 and Drapac Holdings Trust.
[9] The references to equity in the pleading are to Mr Wain, the key employees and entities associated with them.
[10] Amongst them passages at T5.9-13, T8.21-26 and T12.7-24.
[13] Paragraph 6(b) of the first Drapac affidavit.
[14] Affidavit of Michael John Drapac sworn 27 August 2010 [48d].
[16] Ibid 360-361 [178] (citations omitted).
[18] Ibid [70]-[78]. See also the later decision of Foody v Horewood (2007) 62 ACSR 576, [35]-[37] where the Court of Appeal confirmed that the overriding consideration in setting the date for valuation is fairness.
[26] Ibid [277]-[279] (citations omitted).
[27] Johnson v Gore Wood & Co [2002] 2 AC 1.
[28] Smith Martis Cork & Rajan Pty Ltd v Benjamin Corporation Pty Ltd [2004] FCAFC 153; (2004) 207 ALR 136 [71] and the cases cited in that paragraph.
[29] Wain & Ors v Drapac & Ors [2012] VSC 156 [251]-[256], [279].
[33] Drapac Holdings Pty Ltd, Drapac Consulting Pty Ltd, Drapac Investment Pty Ltd, Drapac Car Park Pty Ltd and Drapac Developments Pty Ltd.
Wain & Ors
Drapac & Ors
(2009) 238 CLR 304
(2004) 207 ALR 136
(1995) 138 ALR 64
(2011) 288 ALR 310