Praetorin Pty Ltd v TZ Ltd

Supreme Court of NSW|2009-11-17|Before: Barrett J

Introduction 1 The four plaintiffs are members of TZ Limited ("TZL"), a company admitted to the official list of Australian Securities Exchange ("ASX"). Trading in the securities of TZL on the stock market maintained by ASX has been suspended for some five months.

2 The first plaintiff, Praetorin Pty Ltd (a company associated with Mr Karangis) and Mr Karangis and his wife (who are together the fourth plaintiff) together control 550,000 shares in TZL. Mr Gallagher, the second plaintiff, holds 130,114 shares, while he and his wife (who are together the third plaintiff) hold 679,543 shares. 3 By their originating process, the plaintiffs seek orders giving them access to certain documents of TZL. Two claims are made. The first is a claim for an order for preliminary discovery under rule 5.3(1) of the Uniform Civil Procedure Rules 2005. The second (and alternative) claim is for an order under s 247A of the Corporations Act 2001 (Cth). In the course of submissions, however, the second claim was pressed virtually to the exclusion of the first. I therefore concentrate on the application based on s 247A. The relevant documents 4 Four documents or classes of document are the subject of the plaintiffs' application. They seek: (a) a copy of a deed (referred to as the "convertible note deed") the parties to which include TZL and an unrelated company called TZ Resurgence Nominees Pty Ltd ("Resurgence") relating to certain convertible notes issued by TZL to Resurgence and a copy of an amending deed; (b) a copy of a "term sheet" referred to in an announcement made by TZL to ASX on 18 September 2009; (c) copies of correspondence between TZL and Resurgence (and their respective lawyers) "negotiating the terms of" the convertible note deed; and (d) copies of correspondence between TZL, Resurgence and an entity described as "QVT" relating to the convertible note deed. 5 The application is made in a factual context to which I now turn. Factual background 6 On 24 December 2007, TZL announced to ASX that a conditional placement of 24,000 "senior unsecured convertible notes" had been made for $24 million to a New York based fund known as "QVT" (there were apparently two investors but it is sufficient to refer to them together as "QVT"). The issue was made to fund the continued growth of a particular TZL product. Each note was expressed to have a face value of $1,000 and to be convertible into TZL shares at $4.00 per share "only upon a NASDAQ listing or after two years, whichever occurs first". Conversion would thus result in the issue of 6 million shares by TZL. The notes were also expressed to have a five year term at the expiration of which, one assumes, the $24 million would be repayable by TZL unless conversion into shares had intervened. 7 TZL announced to ASX on 19 February 2008 that the placement of convertible notes had been "finalised" that day and that $24 million had been received. This apparently followed approval of the placement at a meeting of TZL shareholders on 4 February 2008. 8 Early in June 2009, the board of TZL was reconstituted. Mr Bouris became a director and the chairman. Other new directors were also appointed. The former chairman, Mr Sigalla, and companies associated with him were later sued by TZL on account of alleged breaches of duties owed by Mr Sigalla to TZL. Those proceedings are pending. The new board found TZL to be in a financial state much less favourable than had been expected. In particular, the cash resources of TZL were found to be depleted. 9 On or shortly before 18 June 2009, TZL defaulted in the payment of interest due to QVT. The default was announced to ASX on 18 June 2009. As a result of the default, the full $24 million of principal under the convertible notes issued in February 2008 became immediately due and payable, together with more than $2 million in interest. TZL also announced, however, that a moratorium had been agreed with QVT to allow the negotiation of a workout plan. It was at this point that trading in TZL securities on ASX was suspended. 10 On 16 July 2009, TZL announced to ASX that it had entered into a convertible note subscription deed with Resurgence and QVT (this is the deed I have called the "convertible note deed"). The announcement said that TZL had, pursuant to that deed, borrowed $913,000 from Resurgence and issued 913,000 convertible notes to Resurgence. The funds were required for working capital, according to the announcement. It was also said that TZL expected to borrow a further $450,000 (approximately) from Resurgence within the following two weeks and that a corresponding number of convertible notes (presumably approximately 450,000) would be issued to Resurgence. Further details of the notes - including conversion rights, maturity and interest rate - were given, plus, at the end: "The Convertible Notes are secured by a first ranking charge over all of the assets of the Company other than the Company's shares in its subsidiaries Product Development Technologies Inc and PDT Holdings Inc."

(Counsel for the plaintiffs said in submissions that this revelation was "secreted into the last bullet point"). 11 On 17 July 2009, TZL announced to ASX that it had, under the convertible note deed, borrowed a further $365,000 from Resurgence and issued 365,000 convertible notes to Resurgence. 12 On 20 July 2009, TZL announced to ASX that TZL and QVT had agreed to a further extension of the date for payment of outstanding interest on QVT's convertible notes and that negotiations were in progress with respect to the workout plan. Subsequently, on 23 July 2009, TZL announced that agreement had been reached with QVT to extend until 27 July 2009 the date for payment of interest; also that the negotiations for the workout plan were expected to continue for a further three weeks. On 28 July 2009, it was announced that the interest payment date had been extended until conclusion of the negotiations which were expected to conclude within two weeks. 13 On 29 July 2009, TZL announced to ASX that it had borrowed a further $160,000 from Resurgence under the convertible note deed and that a further 160,000 convertible notes had been issued. At that point, a total of $1,438,000 had been borrowed from Resurgence and 1,438,000 convertible notes had been issued to it. 14 There was an announcement on 13 August 2009 of a borrowing of a further $80,000 from Resurgence and the issue of a further 80,000 convertible notes. The total amount borrowed from Resurgence was then $1,518,000. 15 On 18 September 2009, TZL made an announcement to ASX concerning negotiations with QVT. It was announced that the parties had "entered into a binding term sheet" pursuant to which a workout plan had been adopted for payment of overdue interest, interest to become due on 31 December 2009 and part of the $24 million principal (this is the "term sheet" referred to at paragraph 4 above). The "material terms" of the term sheet were then stated as follows: "1. Subject to the conditions described in item 2 below, TZL and QVT have agreed as follows: (a) QVT will convert 12,000 of their convertible notes (with an aggregate face value pf $12 million), being half of their present convertible note holding, into equity in TZL at a conversion price ('First Conversion Price') equal to the lesser of $1.00 per share and the lowest issue price of any new issue of shares, agreed to be issued, or issued, by TZL on or before the date of issue of the relevant conversion notice by QVT (as the price may be adjusted under the Convertible Note and Option Deed); (b) the remaining 12,000 convertible notes of QVT's present convertible note holding (with an aggregate face value of $12 million) will remain on issue on the existing terms of the Convertible Note and Option Deed, except that the conversion price will be at a 20% premium to the First Conversion Price; (c) TZL must issue QVT with that number of fully paid ordinary shares equal to A/B where B is the First Conversion Price and A is the aggregate of: i. the 2008 Interest Payment and the 2009 Interest Payment, in full and final satisfaction of TZL's obligation to pay the 2008 Interest Payment and the 2009 Interest Payment in accordance with the Convertible Note and Option Deed; ii. the amounts paid by QVT to its Australian lawyers in connection with the issue of default notices by QVT to TZL, relating to the failure to pay the 2008 Interest Payment, QVT's consent to the issue of convertible notes to TZ Resurgence Nominees Pty Limited and QVT's consent to the issue of any further convertible notes that may be issued by TZL which require the consent of QVT under the Convertible Note and Option Deed and the preparation, negotiation and execution of the Term Sheet and the documents contemplated by the Term Sheet, up to a maximum amount of $400,000; and iii. those amounts of money which QVT has paid and will pay on behalf of TZL in connection with, amongst other things, the engagement of forensic accountants and lawyers to investigate and report on the financial position of TZL and to assist in the recovery of moneys that may be due and payable to TZL; and (d) all shares to be issued in accordance with paragraphs (a), (b) and (c) shall be subject to a 12 month escrow from the respective date of issue of the shares. 2. The matters described in item 1 above are conditional on and subject to various conditions being satisfied or waived by QVT in writing, including the following: (a) TZL obtaining all shareholder, regulatory or other third party approvals or consents that are required; (b) no material adverse event, event of default or claim that could reasonably be expected to constitute a material adverse event occurring under the terms of the Convertible Note and Option Deed; and (c) approval being received by TZL from ASX indicating that it will grant official quotation to any shares to be issued to QVT. If the conditions are not satisfied on or before 28 February 2010 (or such later date as agreed by QVT), the Term Sheet will terminate. 3. QVT has consequently agreed with TZL to extend the term of the moratorium period applying to the repayment of all principal and interest under the Convertible Note and Option Deed to 1 March 2010 (or any earlier date on which the Term Sheet may be terminated). 4. The Term Sheet constitutes a legal and binding agreement between QVT and TZL in accordance with its terms." 16 Then followed this statement: "If the conditions in item 2 above are able to be satisfied and the share issues take place as contemplated in item 1 above, then the effect of the Term Sheet is that the amount of principal that will be owing to QVT under the Convertible Note and Option Deed will be reduced from $24 million to $12 million. This remaining debt of $12 million will accrue interest at 10% per annum and the first interest payment that will have to be paid by TZL to QVT will be on 31 December 2010." 17 On 13 October 2009, TZL announced to ASX that Sydcomp Pty Ltd had "become a party to and bound by" the convertible note deed between TZL, Resurgence and QVT. It was also announced that TZL had borrowed $175,000 from Sydcomp under the deed and that 175,000 convertible notes had been issued to Sydcomp. TZL further stated that the terms of those convertible notes were the same as those stated in the announcement of 16 July 2009, with certain variations. An announcement of 15 October 2009 stated that a further $133,000 had been borrowed from Sydcomp and a further 133,000 convertible notes had been issued to it. 18 An ASX announcement made by TZL on 2 November 2009 should be stated in full: "TZ Limited (ASX Code: TZL) refers to the announcement made on 16 July 2009 and advises that the first ranking charge over all of the assets of TZL (other than TZL shares in its subsidiaries Product Development Technologies Inc. and PDT Holdings, Inc.) that had been granted by TZL in favour of TZ Resurgence Nominees Pty Limited has now been released in full with the consent of the parties. As noted in TZL's announcement made on 13 October 2009, Sydcomp Pty Limited ('Sydcomp') has acquired convertible notes on the same terms as those described in TZL's 16 July 2009 announcement (apart from the differences outlined in the 13 October 2009 announcement). Accordingly, all convertible notes which have been issued by TZL and have been acquired by Sydcomp will remain secured by a first ranking charge over all of the assets of TZL other than TZL's shares in its subsidiaries Product Development Technologies Inc. and PDT Holdings, Inc." 19 Something more should be said about Resurgence and Sydcomp, the companies to which convertible notes were issued under the convertible note deed after TZL's default under its arrangements with QVT. Despite the inclusion of "TZ" in its name, Resurgence is not related to TZL. It has one shareholder, Mr Patrick Chew who is a holder of shares in TZL. Mr Karangis refers in his affidavit to a document which he says links Mr Chew to the "spill of board positions" within TZL in June 2009. Sydcomp is also a single shareholder company. The sole member is a Mr Khaira. It is suggested that he too is a TZL shareholder but I do not have any evidence on that matter. 20 It can thus be seen that the $1,518,000 borrowed from Resurgence was raised from (or from interests associated with) an existing shareholder who stood to increase his shareholding by exercise of the conversion rights inherent in the convertible notes. The same may be true in relation to the $308,000 borrowed from Sydcomp. At the same time, however, there seems to be no doubt that the borrowings were made in circumstances where TZL had a pressing and urgent need for cash. Apart from anything else, $24 million had become due and payable to QVT and a workout plan was under discussion with QVT. 21 Against the background of the chronology of announcements by TZL to the market, I turn to matters concerning the plaintiffs. Events involving the plaintiffs 22 On 14 September 2009, there was a meeting attended by Mr Karangis, Mr Gallagher, Mr Bouris (the chairman of TZL), Mr Ting (TZL's secretary) and Mr Houston (TZL's solicitor). This was almost three months after TZL's announcement on 18 June 2009 of its default under the QVT arrangements (and the suspension in trading of TZL securities on ASX) and two months after the announcement that TZL had entered into the convertible note deed with Resurgence and QVT. In the intervening period, there had been advances of the full $1,518,000 by Resurgence to TZL and the issue of convertible notes by TZL to Resurgence accordingly. Issues of convertible notes to Sydcomp lay, at that point, in the future. 23 Discussion at the meeting of 14 September 2009 centred on the convertible note deed between TZL, Resurgence and QVT. Mr Houston gave affidavit evidence of a conversation as follows at the meeting: "Karangis said: 'I believe the TZ Resurgence convertible note is highly illegal. I have advice to this effect from 6 QCs.' I said: 'I would be happy to talk to your legal advisors.' Karangis said: 'How could all of TZ's assets be secured for $1.5 million as the assets are worth much more than that.' Bouris said: 'With respect, you do not understand how loan security works.' I said: 'TZ Resurgence does not have a power of foreclosure under the charge as it is a chargee, not a mortgagee. TZ Resurgence can not be paid more than it is owed under the charge.'" 24 There was then discussion about the need that TZL had had to raise cash. According to Mr Houston, Mr Bouris said that the deal with Resurgence allowed TZL time to negotiate with QVT and avoid having to put TZL into administration, adding (to Mr Karangis and Mr Gallagher): "If both of you want to invest in convertible notes on the same basis as TZ Resurgence, then you are welcome to do so." 25 On Mr Houston's evidence, Mr Gallagher said, "We could raise at least $5 million for TZ". Discussion then ensued about sources to which Mr Karangis and Mr Gallagher might resort in order to obtain funds and investors for TZL. Specifics were discussed in relation to several possible investors - for example, that TZL was already talking to one, that another, on Mr Bouris's assessment, would not have money to invest and that family connections of a third had said that he did not plan to invest in TZL. 26 Each of Mr Karangis and Mr Gallagher has given evidence on affidavit about the meeting just mentioned. There are some differences between their accounts and that of Mr Houston but the differences are not great. It is neither necessary nor, in the absence of cross-examination, appropriate that I attempt to resolve them. 27 Mr Karangis deposed: (a) that he said words to the effect: "We are extremely concerned at the way the company is going. We are significant shareholders in it. We represent a number of other shareholders who have similar concerns. We are very worried about the deal done with TZ Resurgence and Patrick Chew. The deal done there on that convertible note we think is illegal. The deal at $1.00 per option for $1.5 million secured by way of a first registered security is just wrong. It's hard to imagine how it has happened. You basically hocked all of the assets of the company for $1.5 million. You know what the intellectual property is worth and so do we. It's worth a lot more than that." (b) that Mr Gallagher said: "This is clandestine. No other shareholders were offered the chance to raise money or participate. You went straight to Patrick Chew who we know is on your side. He was the bloke behind getting rid of the old board. Why weren't we given the chance to participate on these or even better terms for the Company. It is a great deal for Chew and a bad deal for the shareholders." (c) that Mr Gallagher also said: "We are willing to put up $5 million immediately. The condition is that you as a Board go. If the company is in money trouble I know an administrator would immediately take this investment, pay out QVT's interest and restructure the loan with no dilution of shares. You wouldn't have to mortgage the IP. The $5 million or more in further capital we represent could be obtained at a better par ratio for shareholders. There is no way we are going to ask for the intellectual property as security. I still have no idea why you have mortgaged the IP for such a small amount." (d) that he himself said: "I want a copy of the Patrick Chew TZ Resurgence deed and any communications you've had with QVT. I want to know the basis upon which you have done this deal." (e) that he also said: "I think it is subject to shareholder approval for you to do this sort of thing. You haven't got it. You've basically hocked the prime asset of the company for a small amount. This is just wrong. This is particularly so when we are able to find $5 million at a better par ratio and with no mortgage. I guarantee you we can do a better deal for the shareholders of the company generally as long as we are given a chance. We need to know what the Chew deal says so that we can work out the position." (f) that he later asked again for "the Chew TZ Resurgence note and the board minutes behind it" and that he was "entitled to it as a shareholder". 28 Mr Gallagher's account is substantially similar to that of Mr Karangis. 29 Some eight days after this meeting - with the request by Mr Karangis and Mr Gallagher for a copy of the convertible note deed still outstanding - TZL's solicitors wrote to Queensland solicitors acting for the Karangis and Gallagher interests. The letter is dated 22 September 2009. It conveyed on TZL's behalf a request for confirmation of the purpose for which the convertible note deed was sought and said that a confidentiality deed would have to be signed if it were to be handed over. The Queensland solicitors replied on 23 September 2009 that their clients were "genuine in considering further investment in TZ Limited", repeated the request for the convertible note deed and invited submission of a confidentiality deed. TZL's solicitors wrote back the next day saying that they had instructions to make the convertible note deed available on receipt of a signed confidentiality deed, a draft of which they enclosed. 30 No further correspondence between TZL's solicitors and the Queensland solicitors for the Karangis and Gallagher interests appears in the evidence. It seems that the Karangis and Gallagher interests chose to instruct Sydney solicitors. Those Sydney solicitors, apparently newly instructed, wrote to TZL's solicitors on 28 September 2009 referring to TZL's stock exchange announcements concerning the entering into of a convertible note deed with Resurgence (presumably the announcement of 16 July 2009) and the adoption of a workout plan with QVT (clearly enough, the announcement of 18 September 2009). The letter expressed several "concerns" of the plaintiffs in relation to these "transactions", as follows: "1. They are oppressive or unfair conduct against them as shareholders. 2. The conduct by the Directors of TZL in entering into these transactions may constitute breach of their statutory duties owed to the Company to exercise reasonable care, good faith, not to profit for themselves and not to cause detriment to the Company. 3. The announcements made to the ASX may themselves be misleading and deceptive conduct. 4. The entering into of these agreements subject to their terms may permit them to bring an action on behalf of TZL as a statutory derivative direction subject to leave of the Court. 5. That the transactions may in part constitute related party transactions under the Corporations Act 2001 (Cth)." 31 The solicitors then asked that copies of certain documents be made available to the plaintiffs. The documents requested are, in essence, those to which the present application relates. Reference was made to s 247A of the Corporations Act and rule 5.3 of the Uniform Civil Procedure Rules. 32 TZL's solicitors replied to the Sydney solicitors for the Karangis and Gallagher interests on 2 October 2009. They referred to certain aspects of s 247A and rule 5.3 and sought particulars of the allegations quoted at paragraph [30] above. The requested particulars were given on 20 October 2009 in these terms (with the numbering apparently corresponding with that in the 28 September 2009 letter): "1. By their nature the transactions are oppressive in that they benefit either the current directors or a small group of shareholders at the expense of the preponderance of shareholders of the company. 2. Given the above, and on the basis that such a claim prevails, there are consequential and prospective breaches of director's duties by the current directors of TZL; 3. Our clients have a residual concern that the announcements made to the ASX are not fulsome. This concern is derived from the fact that whilst the company is willing to make announcements that address aspects of the transactions, it is not willing to expose the transactions themselves by providing the transaction documents fully. Our client has concerns based on the inconsistent conduct of the company in this way. 4. We repeat the answers above. 5. This is a matter that needs to be explored in the context of the transaction with TZ (Resurgence) Pty Ltd and the convertible note deed entered into with that company in particular." 33 TZL's solicitors wrote back on 21 October 2009 saying that "the purported explanation of your clients' position is wholly unsatisfactory" and making observations about s 247A. The letter concluded: "If the position set out in your letter is correct, it would entitle a single member of a listed company to troll [sic] through the company's records in an attempt to find a contravention of the Corporations Act merely because the shareholder was 'concerned' that a contravention may have occurred (irrespective of whether that concern was objectively justified). That cannot be, and is not, the law in this country." 34 These proceedings were commenced on 22 October 2009. Some legal principles 35 I consider next the legal principles. Sections 247A(1) and (2) of the Corporations Act are in these terms: "(1) On application by a member of a company or registered managed investment scheme, the Court may make an order: (a) authorising the applicant to inspect books of the company or scheme; or (b) authorising another person (whether a member or not) to inspect books of the company or scheme on the applicant's behalf. The Court may only make the order if it is satisfied that the applicant is acting in good faith and that the inspection is to be made for a proper purpose.

(2) A person authorised to inspect books may make copies of the books unless the Court orders otherwise." 36 It is therefore for the present plaintiffs, being members of TZL, to satisfy the court that they are "acting in good faith" and that the inspection they seek is to be made "for a proper purpose". The content of that composite requirement was recently explained by Goldberg J in Re Style Ltd; Merim Pty Ltd v Style Ltd [2009] FCA 314; (2009) 255 ALR 63: "Merim must do more than demonstrate that it is dissatisfied with the management decisions: Re Augold NL [1987] 2 Qd R 297 at 308; (1986) 11 ACLR 362 at 370; Cescastle Pty Ltd v Renak Holdings Ltd (1991) 6 ACSR 115 at 117. Merim must satisfy me that it is entitled to inspect the books because the information sought relates to matters that it as a shareholder ought to be informed of by the company: see, for example, Czerwinski v Syrena Royal Pty Ltd (No 1) (2000) 34 ACSR 245 ; [2000] VSC 125 at [12]." 37 Propositions stated by Debelle J in Acehill Investments Pty Ltd v Incitec Ltd [2002] SASC 344 at [29] were approved by Goldberg J and quoted as follows (with citations omitted): "1. The requirement that the applicant is acting in good faith and that the inspection is to be made for a proper purpose expresses a composite notion and the court will determine whether each has been demonstrated by applying an objective test.

The onus is on the applicant to demonstrate that he is acting in good faith and that the inspection is for a proper purpose.

The section operates where the applicant seeks to protect some specific or a personal right by the making of the order. Examples are where a shareholder contemplates proceedings under s 233 of the Corporations Act (the statutory successor of s 320 of the Companies Code) … or where a shareholder reasonably takes the view that a transaction could adversely affect his investment and he seeks to investigate the transaction for the purpose of determining what action he should take … or where a shareholder seeks to ascertain facts for the purpose of considering a takeover offer …

If the applicant's primary or dominant purpose is a proper purpose, it is not to the point that an inspection may be of benefit to the applicant for some other purpose …

The rights provided by s 247A should not be regarded as affecting the basic rule of company law that a shareholder should not ordinarily have recourse to the courts to challenge a managerial decision made by or with the approval of the directors.

Since every shareholder has a right to apply under the section for an inspection order, it is no answer to an application that, if an order is made, the applicant may acquire information not available to other shareholders and thereby be in a more advantageous position than those shareholders.

Applicants do not necessarily lack a proper purpose merely because (a) they are hostile to other directors; or (b) they will, after inspection, have more information than other members.

The procedure under s 247A is not intended to be a process as wide-ranging as the process of discovery of documents so that, as a general rule, inspection will be confined to, say, the results of decisions of directors rather than all the documents such as board papers leading to decisions … I emphasise that this is a general rule. There may be occasions where it is proper to admit inspection of board papers …

Even where an applicant is acting bona fide and has shown a proper purpose, the court has a discretion whether to order inspection." 38 Two additional points may be made. First, it was said by Brooking J in both Intercapital Holdings Ltd v MEH Ltd (1988) 13 ACLR 595 and Knightswood Nominees Pty Ltd v Sherwin Pastoral Co Ltd (1989) 15 ACLR 151, that the requirement of good faith and proper purposes carries with it a need for the applicant for access to show "a case for investigation" - a concept his Honour expanded in the latter case to "a case for investigation as regards past or future wrongful or other undesirable conduct". Brooking J also said in that case: "If he [the applicant] is unable to show some reasonable ground for believing that misconduct or maladministration (or whatever else is suggested) has taken place, or is going to take place, he may well fail to establish the prerequisite to the making of an order, namely, that he is acting in good faith and that the inspection is to be made for a proper purpose." 39 Mr Sirtes SC noted, on behalf of the plaintiffs, that the Knightswood case was referred to by Goldberg J but that his Honour did not, in his summary of principles, include reference to the "case for investigation" criterion. That, however, does not mean that the criterion is not a useful one. In my opinion, it emphasises the need for some objective basis for intervention. 40 Second, and as a corollary, s 247A is not intended for cases in which an established cause of action has been identified. Thus, as Lunn J observed in McLean v DID Piling Pty Ltd [2009] SASC 205 at [19], if there is enough in the possession of the plaintiff already to mount an oppression action, the availability of the ordinary processes of disclosure of documents in such an action means that the plaintiff does not need relief under s 247A. 41 Several matters of significance arising from the evidence must now be considered in the light of these principles and, in particular, the need for the plaintiffs to show "a case for investigation". The plaintiffs' concerns 42 The "concerns" of the plaintiffs were first articulated in the course of the meeting attended by Mr Karangis and Mr Gallagher with Mr Bouris, Mr Ting and Mr Houston on 14 September 2009 - which, as I have said, occurred almost three months after the announcement of TZL's default under the QVT arrangements and almost two months after the announcement that the convertible note deed had been entered into. By the time the meeting took place, the full $1,518,000 had been advanced by Resurgence. There are references in the affidavits to "$1.5 million" having been mentioned at the meeting by Mr Karangis. 43 After the meeting of 14 September 2009, concerns were raised at three stages: first, in correspondence between solicitors; second, in the affidavits of Mr Karangis and Mr Gallagher read on the present application; and, third, in counsel's submissions. 44 It is desirable that the concerns be identified and described; and that each thereafter be assessed in the light of the legal principles to which I have referred. The first concern

45 The main "concern" expressed by Mr Karangis and Mr Gallagher at the 14 September 2009 meeting was that the transaction with Resurgence announced some two months earlier was, on some unstated basis, "highly illegal" (a view represented as substantiated by advice "from 6 QCs") and "clandestine". An associated concern was that "it is subject to shareholder approval for you to do this sort of thing". The second concern 46 The aspect of the convertible note transaction with Resurgence that drew particular criticism from the Karangis and Gallagher interests was that a first ranking charge had been granted over all TZL's assets (except shares in two named subsidiaries), including valuable intellectual property, as security for what was, in the face of a pressing need for some $26 million to satisfy principal and interest due and payable to QVT, the relatively small sum of $1.5 million. The concern is summed up in the statement of Mr Karangis, deposed to in his own affidavit: "You basically hocked all of the assets of the company for $1.5 million." The third concern 47 The third matter of concern voiced at the 14 September 2009 meeting was that the required funds had been sourced from (and convertible notes issued to) a company owned by an existing shareholder in circumstances where the Karangis and Gallagher shareholder interests were not "given the chance to participate on these or even better terms for the Company". Words attributed to Mr Gallagher by Mr Karangis summed up that aspect thus: "It is a great deal for Chew and a bad deal for the shareholders." The fourth concern 48 The next theme that emerged at the 14 September 2009 meeting was the stated willingness and desire of the Karangis and Gallagher interests to provide (or procure from their contacts) further capital of $5 million on terms more favourable to TZL than those reflected by the Resurgence transaction. The fifth concern 49 A new series of concerns was expressed after the Karangis and Gallagher interests began to instruct Sydney solicitors in place of their Queensland solicitors (whose efforts had been focussed on obtaining a copy of the convertible note deed so that investment by the Karangis and Gallagher interests and, perhaps, others might be considered). The first letter from the Sydney solicitors (see paragraph [30] above) was in somewhat general terms. They were invited to be more specific and accepted that invitation in their letter of 20 October 2009 (see paragraph [32] above). 50 The first additional concern mentioned there (which I refer to as the fifth concern) was that the completed transactions were said "[b]y their nature" to be "oppressive" and that "there are consequential and prospective breaches of director's duties by the current directors of TZL". There were, in these parts of the letter, apparently definite statements of the availability of causes of action under the Corporations Act to a shareholder of TZL and to TZL itself (which might be asserted through a statutory derivative action). What I have just said relates to the matters in items 1 and 2 of the letter of 20 October 2009. The sixth concern 51 No such clearcut assertion of the availability of a cause of action was conveyed by the remaining numbered items in the 20 October 2009 letter. The next matter mentioned was a "residual concern" that TZL's stock exchange announcements were "not fulsome", which one would think means that they omitted things that they ought to have included. The basis for the "residual concern" was said to be that a perceived willingness of TZL to make announcements "that address aspects of the transactions" was not matched or accompanied by a willingness "to expose the transactions themselves by providing the transaction documents fully". The seventh concern 52 The remaining matter mentioned in the letter of 20 October 2009 from the solicitors for the Karangis and Gallagher interests is that flagged in the 28 September 2009 letter as: "That the transactions may in part constitute related party transactions under the Corporations Act 2001 (Cth)." 53 The letter of 20 October 2009 said that this matter "needs to be explored in the context of" the convertible note deed. The eighth concern 54 I move now to Mr Karangis's affidavit and matters on which he says that he wishes to obtain legal advice. The first of these is setting aside the transaction referred to in paragraph 1(c) of the announcement of 18 September 2009 "to the extent possible on the basis of breaches of the Corporations Act 2001 (Cth) or the law generally". Mr Karangis states no basis for any suspicion in that respect. And given the explicit condition in paragraph 2(a) of the announcement to the obtaining of all approvals of consents that are required (including shareholder approvals), no ground is apparent from or suggested by the announcement itself. The ninth concern

55 Mr Karangis next says in his affidavit that he wishes to seek legal advice on "prospective claims against the directors of TZ Limited in the name of the company itself arising from breaches of their duties in relation to the setting aside of the transaction or of claims for damages". The tenth concern 56 The next concern expressed in Mr Karangis's affidavit centres on "claims against the directors of TZ Limited for prospective misleading and deceptive conduct should there have been any such conduct in relation to the ASX announcements made as set out above in the context of the transaction", that is, the "term sheet" transaction announced on 18 September 2009. The eleventh concern 57 In a later part of his affidavit, Mr Karangis refers to the condition in paragraph 2(a) of the announcement of 18 September 2009. It is made clear in that paragraph that the whole of the "workout plan" transaction outlined in paragraph 1 is conditional on all necessary approvals and consents, including any necessary shareholders' approvals. Mr Karangis then says: "I am concerned that: (a) a proposal is put before shareholders without me having the chance to review both the term sheet with QVT and more generally the TZ Resurgence transaction; (b) I will not be able to obtain full and complete legal advice on the compliance by the company with all relevant legal restrictions on it in this context; (c) a meeting of shareholders will be called on 28 days notice thereby not providing me with the opportunity to properly consider these matters so as to: (i) if necessary take action by way of Court proceedings against the company or in the company's name; and (ii) frame an alternate proposal so as to put to the company and shareholders that may be in all material terms more beneficial to them."

The twelfth concern 58 Mr Karangis's affidavit concludes with a summation of the reasons why he has a "need to evaluate the propriety of the convertible note deed". He says that he needs "the documents" - presumably all sought in these proceedings, not just the convertible note deed - "in order that I can make my own assessment as an investor whether TZ Limited has acted in my best interests as a shareholder". He says that Mr Bouris's refusal to give him a copy of "the document" despite his direct request "has only galvanised my view that the convertible note deed and the circumstances in which it arose are not in the interests of shareholders and that TZ Limited's directors (or some of them) are trying to hide something from its shareholders". He concludes: "This directly affects the decision I make whether to maintain my investment in the company or to try to off load my shares either off market or on market (if and when the trading halt ceases)." The thirteenth concern 59 Mr Gallagher's reason for wishing to obtain access to the documents now sought is stated in his affidavit as follows: "I wish to obtain legal advice to ascertain whether the transaction is in any way a breach of the law either by the company, its directors and/or TZ Resurgence. If it is, and the transaction is unfavourable to the Second and Third Plaintiff's shareholding in TZ Limited I may bring legal proceedings to ensure the value of the investment is best protected." The fourteenth concern 60 Yet further "concerns" were articulated by counsel for the plaintiffs in the course of the hearing of the application. One is that the convertible note deed and the grant of security in connection with it entailed breach of covenants on the part of TZL in its financing agreements with QVT. Reference was made to particular provisions which, on their face and viewed in isolation, could justify that view. The fifteenth concern 61 Another matter referred to in the course of the hearing was a fear of breach of ASX rules requiring shareholder approval of certain transactions or forbidding certain transactions not approved by resolution of shareholders. The sixteenth concern 62 A third matter referred to in submissions as "part of the concern" is that the Karangis and Gallagher interests do not know whether the moneys raised from Resurgence were used for the purpose of the borrowing as stated in the ASX announcement, that is, "to fund its ongoing working capital requirements". The seventeenth concern 63 It was next said in submissions in relation to the original convertible note transaction with Resurgence that $931,000 is "a very odd sum" and that that raised concern. Assessment of expressed concerns 64 The first, eighth, ninth and thirteenth concerns may be dealt with together. They are, in essence, a single expression of concern that TZL or its directors (or both) have committed some legal wrong, including (in the case of the directors) by committing TZL to an unwise or improvident transaction. But there is no expressed or articulated basis for any apprehension that legal wrong has been done. A submission put by Mr Thomas of counsel for TZL on this aspect was as follows: "If I was a shareholder of BHP or Macquarie Bank and I wanted a copy of the management agreement from Macquarie Airports, which is a confidential document which had never been disclosed to the market, and I just wanted to check it out that no-one had done anything wrong, because I have a circularity problem and I don't know what I don't know. Now, with respect, that argument is an absurdity and if that is as high as the applicant's case reaches, then this court and every court in the land will be swamped by applications by any shareholder who says well, I would just like to find out a bit of further information about this because I am not sure whether or not they comply with their duties." 65 In the absence of anything in the evidence to ground an apprehension of legal wrong, the position is as Mr Thomas stated.

66 The second, third and fourth concerns may also be dealt with together. They are, in essence, that the convertible note transaction was entered into with one shareholder only on terms unduly favourable to that shareholder and without shareholders generally having been given an opportunity to participate on the same terms, so that there was a dilutive effect as regards those other shareholders (there are also here overtones of the allegation of improvidence that forms part of the first, eighth, ninth and thirteenth concerns). 67 Directors' powers over unissued shares are broad. Exercise of the powers is generally impeachable only if some purpose other than the raising of capital is sought to be achieved. Particular latitude will be allowed where, as here, the company is in financial difficulties and has a pressing need to reach some accommodation with a party to which substantial sums are immediately due and payable following the company's default under its financing arrangements. Particularly telling, in this connection, is the statement at the 14 September 2009 meeting attributed to Mr Ting by Mr Karangis himself: "This is the only way we could raise any capital. We had to give the IP as a guarantee. Otherwise QVT would have wound up the company and it is a write off. The shareholders would get nothing if this occurred." 68 In the particular factual context, there is a significant objective basis for such an assessment. No purpose other than that of coping with a financial emergency has been postulated by the plaintiffs. In addition, of course, there is no rule - or even expectation - that directors should resort to existing members on a pro rata basis when a need for new capital arises. 69 It may also be noted in relation to the second, third and fourth concerns that, at the meeting of 14 September 2009, Mr Bouris said that Mr Karangis and Mr Gallagher were "welcome" to invest in convertible notes on the same basis as Resurgence; also that TZL's solicitors made it clear that a copy of the convertible note deed would be made available to them for the purpose of enabling them better to consider the investment possibility, subject only to their undertaking not to use the information in the deed for any other purpose and otherwise to keep it confidential. The Karangis and Gallagher interests, for reasons unexplained, did not see fit to take up that offer. 70 The fifth concern was expressed in the Sydney solicitors' letter of 20 October 2009 in clear cut and unequivocal terms. The completed transactions were said "[b]y their nature" to be "oppressive". TZL's solicitors must be taken to have used the word "oppressive" in the sense relevant to the operation of s 232 of the Corporations Act. This is curious. It is at odds with the basic proposition behind a number of the other concerns, that is, that the information in the documents is needed in order to decide whether any cause of action exists. In the end, therefore, the position is either that the apparently unequivocal statement is really just a version of the first, eighth, ninth and thirteenth concerns or that it reflects a considered and final opinion that an established cause of action exists. If it is to be understood in the first of these ways, the assessment made above in relation to the first, eighth, ninth and thirteenth concerns again applies. If, on the other hand, it reflects a final opinion that an established cause of action exists, the observation of Lunn J in McLean v DID Piling Pty Ltd (above) applies: the plaintiffs do not need relief under s 247A. 71 I turn now to the sixth concern. The proposition upon which it seems to depend is an odd proposition indeed. It implies that no stock exchange announcement about a particular transaction can be adequate (or "fulsome") - and is therefore deficient and non-compliant - unless it includes (or provides a means of access to) "the transaction documents fully". 72 Even a brief perusal of the ASX listing rules shows that this simply cannot be so. Chapter 3 of the rules is concerned with the disclosure of "information" of various kinds and requires communication of that "information" to ASX: see, for example, rules 3.1, 3.1A, 3.1B, 3.2, 3.3 and 3.4, each of which describes particular "information" that a listed company must give to ASX. Rule 3.10 deals with, among other things, a proposed issue of securities and, by virtue of one of its footnotes, is expressed to apply to an "agreement which, alone or with another agreement, may result in an issue of securities". Rule 3.10 says: "An entity must immediately tell ASX the following information … 3.10.3 A proposed issue of securities. If the issue is a bonus issue or pro rata issue the entity must complete Appendix 3B and give it to ASX at the same time. If the issue is not a bonus issue or pro rata issue the entity must give ASX the following information when it announces the proposed issue Class of securities to be issued. Number of securities to be issued (if known) or maximum number that may be issued. Principal terms of the securities to be issued. Issue price or consideration. Purpose of the issue. Whether the entity will seek security holder approval in relation to the proposed issue of securities. Whether the issue will be a class of security holders. The entity must immediately tell ASX if there is a change to any of the information after it has been given to ASX." 73 Given the terms of these ASX rules (and, in the case of an agreement for the issue of securities, the absence of a requirement that the agreement be given to ASX), there can be no objective basis for suspicion of non-compliance just because an announcement in respect of a particular transaction does not include (or provide a means of access to) the transaction documents themselves. 74 The seventh concern raises the spectre of possible breach of a provision of Part 2E.2 of the Corporations Act headed "Related parties and financial benefits". It is known that Resurgence is owned by Mr Chew. It was said by Mr Karangis or Mr Gallagher or both at the 14 September 2009 meeting that Mr Chew had been active in the events that saw the previous board of TZL replaced by a new board in June 2009. The suggestion that the matter of related party transactions "needs to be explored" must be based on a suspicion that Resurgence or Mr Chew is, in relation to TZL, a "related party" by virtue of s 228 of the Corporations Act. 75 The plaintiffs have not shown any objective basis for such a suspicion. The facts that a particular shareholder shares the views of the directors or some of them on matters concerning the company's welfare does not make anyone a "related party" of anyone else; nor does the fact that the persons concerned vote the same way at a general meeting or are disposed to do so. Facts such as these do not ground any "reasonable ground for believing that misconduct or maladministration (or whatever else is suggested) has taken place, or is likely to take place", to repeat the words of Brooking J already quoted. 76 The tenth concern reflects no more than speculation. Nothing is put before the court to ground any suspicion of past conduct of a misleading or deceptive kind - much less any "prospective misleading and deceptive conduct". 77 The eleventh concern seems to be a more specific articulation of the "prospective misleading and deceptive conduct" concern, with emphasis on the word "prospective". It is apparently feared, for some unexpressed reason, that future disclosures - that is, disclosures the content of which is today entirely unknown - will be misleading or deceptive. The plain fact is that there are no objective grounds for any suspicion that, if and when a meeting of TZL's shareholders is called, there will be other than diligent compliance with all requirements concerning the giving of information to shareholders for the purposes of the meeting. 78 In expressing the twelfth concern, Mr Karangis says that his desire to have a copy of a document that is not generally available (and the detailed contents of which are not known to the market at large) is related to a possible decision to sell his shares. The proposition seems to be that the court should put him into a better informed position than that occupied by the generality of members so that he may, if he chooses to, use for the purposes of share trading the additional information that is not possessed by or available to the shareholders generally. 79 It has been held in some cases that a desire of an applicant under s 247A to assess the value of his or her shares may constitute a ground for permitting inspection of books. In the context of an ASX listed company, however, such a desire requires assessment in the light of the disclosure rules of ASX itself to which reference has already been made and the statutory underwriting of those rules by Chapter 6CA of the Corporations Act. 80 The tenor of the disclosure regime emerges from a combination of s 674 of the Corporations Act and rule 3.1 of the ASX listing rules. The section says that if a listed company has information that the listing rules require to be notified to the exchange and the information "is not generally available" and "is information that a reasonable person would expect, if it were generally available, to have a material effect on the price or value of quoted securities of the company", the company must notify the exchange of the information in accordance with the listing rules. Listing rule 3.1 imposes such a requirement in respect of information of which a listed company becomes aware concerning itself "that a reasonable person would expect to have a material effect on the price or value of" its securities. 81 The law and the listing rules both require that there be made generally available information of the relevant price-sensitive kind. The notion that, in such an environment, the court should give one shareholder alone access to internal and unannounced information that that shareholder thinks might more adequately equip him to make an informed judgment whether to sell shares is one that the court would be very slow to accept. It does not accept it in this case. It has not been shown that TZL has failed to communicate to ASX information that s 674 and listing rule 3.1 require to be available to enable shareholders to make properly informed decisions about whether to sell or hold. Nor has it been shown that there are grounds for any suspicion to that effect. But even if there had been such a failure, the correct course would be one that made the information available to all shareholders, not just one who applied to the court under s 247A. 82 I consider next the fourteenth concern. Let it be assumed that, as postulated, TZL breached a covenant in the QVT financing agreements by entering into the convertible note deed with Resurgence and QVT and creating security over its assets in favour of Resurgence. What follows? Default had occurred under the QVT arrangements long before the convertible note deed was entered into. QVT had relied on that default to call up the principal sum. Another default, if it occurred, could scarcely produce additional adverse consequences. Furthermore, it is particularly significant that QVT was itself a party to the convertible note deed under which notes were issued to Resurgence and that the execution of that deed followed an agreed moratorium on enforcement by QVT. The very strong inference is that QVT consented to the creation of the security granted to Resurgence (which security was, in any event, released on or about 2 November 2009). It is inconceivable that QVT would have executed a document by or pursuant to which TZL granted security to Resurgence and at the same time have opposed the creation of that security. 83 Articulation of the fifteenth concern that there had been or would be a breach of some ASX listing rule concerning shareholder approval did not identify any particular rule. The apprehension of breach therefore remains amorphous. To the extent that it relates to the content of the "term sheet" the subject of the announcement of 18 September 2009, the concern is, to my mind, entirely met by paragraph 2(a) of the announcement already mentioned (that paragraph is set out at paragraph [15] above). 84 The sixteenth concern may be dealt with briefly. There is absolutely nothing before the court to suggest that the moneys were not applied (or are not being applied) for the stated purpose - which is, in any event, a very broadly expressed purpose. 85 The seventeenth concern - that the $931,000 raised initially under the convertible note deed was "an odd sum" - can be disposed of simply by quoting from the transcript: "HIS HONOUR: What would be not an odd sum?

SIRTES: Your Honour, I won't take that any further." Summation 86 The matters raised by the plaintiffs seek to call into question what are essentially commercial decisions made by the directors of TZL - the decision to borrow money from and issue convertible notes to, first, Resurgence and, subsequently, Sydcomp, with the borrowing from Resurgence at first secured by a first ranking charge over the assets of TZL (except shares in the two named subsidiaries) but later unsecured and the borrowing from Sydcomp secured in that way; and the decision to enter into the "term sheet" with QVT. 87 As Mr Thomas pointed out in submissions, the very substantial focus of the affidavits of Mr Karangis and Mr Gallagher is upon the convertible note deed, as distinct from the term sheet. 88 In relation to the convertible note deed, that fact that QVT is a party to it makes irresistible the inference, first, that the arrangements with Resurgence and later with Sydcomp received the approval of QVT and, second, that it was consistent with the workout plan formulated by TZL and QVT for TZL to enter into those arrangements. Because of its default under the QVT arrangements and the fact that the principal sum of $24 million became immediately due and payable, together with more than $2 million interest, TZL's ability to negotiate was obviously hampered.

89 As the principles derived from decided cases confirm, an applicant under s 247A must do more than show dissatisfaction with or disagreement with management decisions. The Karangis and Gallagher interests have not done this. Their expressed concerns about illegality are entirely undeveloped and unexplained. The closest they come to some direct assertion of a cause of action is to allege "oppression" - that is, no doubt, the composite basis for relief referred to in s 232(1)(e) of the Corporations Act by the words "oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members whether in that capacity or in any other capacity". When it comes to management decisions, however, this description will not be attracted unless the relevant board decisions are shown to be, in the words of Mason ACJ, Wilson J, Deane J and Dawson J in Wayde v New South Wales Rugby League Ltd [1985] HCA 68; (1985) 180 CLR 459 at 468, "such that no board acting reasonably could have made them".

90 There is nothing before me in this case to suggest that that description is arguably warranted in relation to the convertible note deed (and the things done pursuant to it) so as to give any substance at all to the concerns and suspicions on which the plaintiffs rely. TZL was in urgent need of funds. The convertible note deed was the chosen method of dealing with that pressing problem. While there have been general allegations of legal wrong or non-compliance with ASX rules, nothing even vaguely specific has been alleged in such a way as to give even preliminary or possible substance to the allegations. 91 The same is true in relation to the term sheet transaction - the more so because of the condition making the transaction subject to the grant of all necessary approvals, including shareholder approvals.

92 The position of TZL is that it does not oppose the making of an order in respect of the convertible note deed and a subsequent amending deed (item (9) at paragraph [4] above). TZL does not, however, consent to the making of such an order, so that the court must still come to a decision whether the plaintiffs have made out their case in respect of that deed. 93 The conclusion is that the plaintiffs have not made out their case under s 247A in respect of the convertible note deed or any of the other documents referred to in the originating process. 94 As I have said, the plaintiffs also base their claim on rule 5.3 of the Uniform Civil Procedure Rules, although no submissions were directed by their counsel specifically to that provision. One of the things about which the court must be satisfied before it grants preliminary discovery under that rule is that the applicant "may be entitled to make a claim for relief". As Mr Thomas pointed out in submissions, the equivalent requirement under the Federal Court rules caused Lindgren J to say, in Glencore International AG v Selwyn Mines Ltd [2005] FCA 801; (2005) 223 ALR 238 at [16], "there must be some tangible support that takes the existence of the alleged right beyond mere 'belief' or 'assertion' by the applicant". For the reasons I have stated, the plaintiffs have not reached that point in this case. 95 The originating process is dismissed with costs.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.

CITATION : Praetorin Pty Ltd v TZ Ltd [2009] NSWSC 1237

Acehill Investments Pty Ltd v Incitec Ltd [2002] SASC 344 Glencore International AG v Selwyn Mines Ltd [2005] FCA 801; (2005) 223 ALR 238 Intercapital Holdings Ltd v MEH Ltd (1988) 13 ACLR 595 CASES CITED : Knightswood Nominees Pty Ltd v Sherwin Pastoral Co Ltd (1989) 15 ACLR 151 McLean v DID Piling Pty Ltd [2009] SASC 205 Re Style Ltd; Merim Pty Ltd v Style Ltd [2009] FCA 314; (2009) 255 ALR 63 Wayde v New South Wales Rugby League Ltd [1985] HCA 68; (1985) 180 CLR 459

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