Plaintiffs v Defendants

Plaintiffs v Defendants - [2013] VSC 381 - VSC 2013 case summary — Zoe

[14]

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.

[56]

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]

[64]

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]

[65]

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.

[71]

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:

At a glance

Court

Decision date

Before

Source

Judgment (134 paragraphs)

Parties

Legislation Cited (1)

Cases Cited (4)