Quatro Limited v Argo Investments Limited [1999] VSC 231

5. The parties are at loggerheads as to the appropriate order for costs. Quatro submits that the respondents should pay its costs on the basis that costs should follow the event, save for an allowance for those costs such as the making of the application for confirmation and hearings that must have been incurred by Quatro in any event. On this submission the costs that are sought are essentially those incurred after the joinder of the respondents as parties (which occurred on 28 May 1998) and the initial hearing date of 5 June 1998.

8. In the alternative Quatro submitted that if, having regard to Re Castlereagh Securities Ltd [1973] 1 NSWLR 624 at 640-641; Re Ampol Ltd (1989) 14 ACLR 772 at 780: Re Arrowfield Group Ltd (1995) 17 ACSR 649 at 661; and Re Matine Ltd (Supreme Court of New South Wales, Santow J, 11 August 1998, unreported), the question is whether the respondents' objections to the confirmation application were "properly and justifiably" advanced, the answer is they were not. Not only, was it submitted, that all of the respondents' objections had failed but the consideration per preference share was fair and reasonable and, in any event, the reality was that the provision of the further information which the respondents contended should have been provided would not have changed their vote because their interest was simply to obtain more value for their shares. That interest was served by the defeat of the reduction proposal, not by its passing or confirmation by the Court.

11. For these reasons, counsel for Quatro submitted that the respondents should pay the costs. I understood counsel to submit, although faintly, that as an alternative the respondents be left to bear their own costs.

14. In his submissions counsel for the respondents stated that the question was whether the objections were "properly and justifiably advanced". He submitted that they were and that the fact that the respondents' objections did not result in a refusal of the application for confirmation did not mean that the objections should be characterised otherwise. It followed that Quatro should pay their costs. Failing that, counsel submitted, the respondents should not be ordered to pay Quatro's costs. On that alternative basis the parties would bear their own costs.

17. The discretion on costs is to be exercised having regard to all the relevant circumstances. In this case those circumstances include that the majority interest in a company has obtained a resolution of members under which an unwilling minority of preference shareholders face a disposal of their interest for a consideration they do not approve. The legislation imposes as part of the approval process before the resolution can operate a requirement that the company apply to and obtain from the court an order confirming the reduction. That provides an independent forum before which an objecting or dissentient shareholder can object to the application for approval and be heard in opposition. It is important that the minority shareholder is at risk of losing his or her property interest on allegedly unacceptable terms.

20. Another relevant factor is that the presence and submissions of an objector on a company's application for confirmation of a capital reduction can be of material assistance to the court. Thus, for a long time now, as the authorities to which I was referred show, courts have been prepared to allow objectors their costs. See Carruth v Imperial Chemical Industries Ltd [1937] AC 707 at 771.

23. In Re Castlereagh Securities Street C J in Eq confirmed a capital reduction in the context of a merger of two companies. The application was opposed. The judgment discloses (at 633) that at the conclusion of the second day of the hearing the representatives of the objectors succeeded in obtaining access to a detailed valuation report prepared by accountants which the directors of the company had withheld from shareholders. After considering the report counsel for the objectors formulated the two grounds of opposition which the hearing considered. The first ground was that the accountants erred in their approach to the valuation. This was rejected. The second ground was that in certain respects the shareholders were given inadequate and misleading information. It was held that in one respect there was an incomplete disclosure but Street C J in Eq concluded (at 640) that this did not have "such significance as to render the information to shareholders unfair or deficient to the point of invalidating the business transacted at the meeting". His Honour concluded that deficiencies in the information did not provide "justification for the court, in its discretion, withholding confirmation of the reduction of capital". In concluding his judgment his Honour said at 640-641, that in addition to orders confirming the capital reduction there would be an order that the company pay the costs of the objectors. He said that:

"There were undoubtedly matters proper to be brought forward on behalf of the shareholders as a whole in criticism of the withholding of the accountants' report. In this sense the objectors were properly and justifiably advancing a class right of the shareholders, and they are entitled to have their costs paid by the company."

27. In Re Ampol Cohen J confirmed a capital reduction and ordered payment of an objector's costs. He mentioned the following matters as relating to the costs order: that the history revealed a likely opposition to the capital reduction; haste in holding the meeting and in applying to the court which must have raised concerns in shareholders; that it was not unreasonable for a shareholder to appear and require the company to establish the fairness of the reduction; and that the resolution was passed by the preference shareholders only because of the vote of Pioneer which held 82.4% of the preference shares (the majority vote in favour being 82.6% of those shareholders) (at 780).

30. In Re Arrowfield Group Cohen J confirmed a capital reduction in a contested application. The application was presented as an urgency, being heard on 24 and 25 July 1995 with judgment, on what Cohen J described as "difficult questions of law", being required two days later on 27 July. His Honour complained (at 650) at the application being made so late as to put him in that position. As it happened an objector appeared by counsel and as part of his opposition tendered the expert evidence of a chartered accountant. At 651 his Honour identified six issues raised for determination. In the circumstances it must have been of considerable assistance to Cohen J to have the benefit of a represented objector. In concluding his judgment Cohen J dealt with the matter of costs. His Honour referred to Carruth and Re Castlereagh and quoted the concluding passage of Street C J in Eq set out above. Cohen J observed that Re Castlereagh was a more complex matter, although it did involve a resolution to reduce capital. Cohen J then concluded that the objector's costs should be paid by the company. He stated his reasons for that conclusion as being that in the circumstances " and particularly . . . the rush and the limited time available . . . the objector was entitled to have these matters which are of considerable importance, properly dealt with by the court".

11 Re Matine Ltd (1998) 28 ACSR 268, involved a scheme of arrangement and an associated reduction of capital. Two shareholders objected and raised three questions (see at 271) which were decided adversely to the objectors and the reduction of capital was confirmed. In the subsequent decision in this case referred to above Santow J considered how costs should be dealt with. Counsel for the applicant scheme companies submitted that there was no general rule that objectors receive their costs, indeed counsel "accepted that this would depend upon whether the objections were on the whole frivolous, or without substance, or otherwise could not be said to be properly and justifiably advanced". In holding that the objectors' costs should be paid by the scheme companies Santow J described the case as being "close to the line" (at 3). He said that some of the objections were technical in the extreme, that there was no basis for the allegation that the experts were not independent, and that the objections did not succeed. Nonetheless there were matters to which the objections went which "were substantive in terms of time and content and did pass the test of being properly and justifiably advanced" (at 3). The time spent on the lesser objections was sufficiently slight that there should not be an apportionment.

34. Quatro may have been encouraged to seek its costs from the respondents by reason of the fact that in concluding my judgment I said that there would be such an order. But I ventured that view without the benefit of argument on the point, which I have now had.

37. The cases cited provide relevant indicators as to the proper exercise of the discretion on costs in the present type of case. They do not control let alone determine the result in this case. The task is to order what is just in the particular case and that is done by paying close regard to the facts and circumstances of the case at hand. Those facts and circumstances include the reasonableness of the conduct of the company and an objector in relation to the reduction proposal and the confirmation hearing, and the substance or lack of substance of the point or points raised by an objector. In Re Castelreagh Street C J in Eq referred to "matters proper to be brought forward" and to the objectors "properly and justifiably advancing a class right". In Re Arrowfield Cohen J referred to the objector, in the circumstances in that case, being "entitled to have these matters which are of considerable importance, properly dealt with by the court". I do not consider that these expressions were intended to constitute or that they do constitute a test or tests the application of which must automatically be determinative of the issue of costs in every case. Rather, I understand them to be statements by Judges of the circumstances which in their opinion were relevant to the exercise of the discretion on costs in the particular case. Of course they are instructive and they do provide guidance and I take them into account. Further, the sentiment underlying them, which is concerned with the position of a minority shareholder wishing to object in the forum provided by the legislation to the loss of his or her interest on terms that he or she does not approve of, is well understandable. So also is the relative importance of the role which an objector may play on a confirmation application.

40. In seeking costs Quatro submitted that the objectors' went a good deal further than is usually the case. First, they became parties and had the advantage of interlocutory proceedings. This is correct. On 22 May 1998 on their application I ordered that the objectors be added as respondents to the application. The stated reason for seeking that joinder was to obtain discovery from Quatro. The desire for discovery and the opposition to the confirmation application would not have been entirely unexpected in view of the prior communications between them and Quatro and their request at the meeting for the provision of more materials and an adjournment, and their vote at the meetings. Added to this is the fact that the parties did have differences as to discovery by Quatro and on 29 July 1998 the respondents filed a summons seeking an order that Quatro make an affidavit of discovery of documents in certain categories. I heard argument on that application on 5 August. In the result I adjourned the further hearing of that summons to the trial which had already been fixed for 26 August on an estimate of duration of two to three days.

43. In my view it was not unreasonable for the respondents to seek to be added as parties, rather than remain as objecting non-parties. As to discovery, the provision of information by Quatro had been a contentious matter prior to the meetings on 8 May. Further, as parties the respondents had a clear right of appeal if they were so advised. Finally, it is apparent from the cases that objectors, even if not parties, have been able to act in a manner akin to being a party and as such have taken steps such as requesting the production of documents, calling evidence - even expert evidence, and cross-examining witnesses. In other words, objectors have participated in a forensic process on confirmation applications without, in the above cases, being a party or being required to pay costs.

46. In my view the mere fact that the respondents became parties does not mean that they should be ordered to pay Quatro's costs or be otherwise denied their costs as objectors. While the fact that the objectors in this case became parties to the proceedings on their own application may be a relevant factor it is but one factor to be considered and taken account of on the approach to costs which I have indicated above.

49. Secondly, Quatro relied on the respondents having propounded a case by their statement of contentions and on their having engaged in a wide-ranging cross-examination of witnesses. Having done so, in final address they relied only on four matters and on an alleged absence of authority in the articles of association.

52. The respondents' statement of contentions came about in the following way. On the hearing of the respondents' application for discovery I was confronted with a wide-ranging request for discovery. The application was contested. But what was relevant? There were no pleadings, only affidavits, and the respondents' demands were both extensive and opposed. Having heard argument and made some comments myself I took the course of ordering, as an aid to clarification of the issues arising for determination, and therefore in determining what documents might be relevant if there continued to be disputation on this point, that the respondents file and serve a statement of the contentions on which they intended to rely in opposition by 4pm on 10 August, that Quatro file and serve a statement of their contentions by 4pm on 14 August, and adjourned the further hearing of the application to the trial. In the event I was not required to rule on the application.

55. The respondents' statement of contentions was a long and detailed document. It ran to 11 pages and was made up of 28 paragraphs with 66 sub-paragraphs. It identified a wide range of issues, a seeming barrage of points.

58. When counsel for the respondents came to his final address he identified five "key issues" on which he relied (at 32), one of which (the fifth) he later abandoned without presenting argument upon it. As I have mentioned counsel also relied on a contention that Quatro's articles of association did not authorise the reduction. Counsel made this submission at an early stage in his final address.

61. The matter came on for hearing on 26 August but because of the late provision of documents and some further affidavits by Quatro the hearing was stood over to the next day. The hearing commenced on the 27th and including that day ran over five sitting days.

64. A large number of affidavits was filed. In the end Quatro tendered 14 affidavits, one by the English solicitor Millmore who flew out from England to give evidence, in other words to be cross examined. Of Quatro's other deponents, Adams (the expert), and Howard and Quinert (directors) were cross-examined. The respondents tendered six affidavits including two by Kidd (the expert) who was cross-examined. He was the only deponent of an affidavit filed by the respondents that was cross-examined. His cross-examination runs over some 32 pages of the transcript. The cross-examination of Quatro's deponents is recorded over the following number of pages in the transcript respectively: Millmore 33, Howard 59, Quinert 29 and Adams 45. I might add that the final address of counsel for the respondents runs to some 92 pages, that of counsel for Quatro to some 47 pages, and there was a brief reply of some six pages by counsel for the respondents. All of this had been preceded by a succinct opening by counsel for Quatro.

67. The respondents ran their opposition hard, akin to - indeed no different from - a closely and vigorously contested proceeding inter parties. Of course the respondents had a commercial interest and were entitled to vote against and to object in court to the application. That is not to be denied and I do not suggest otherwise. Their motivation was of course to achieve more value for their shares and in that respect they had a legitimate interest. (So too did the majority have a legitimate interest.) In aid of their interest the respondents objected to the reduction proposal, and kept objecting notwithstanding the evidence as it developed and stood at the end of the trial. Their purpose was to defeat the reduction by whatever argument might be available. Thus the matter was pursued.

70. Quatro's submissions in counsel's final address analysed each point on which the respondents ultimately relied. I do not propose to go over again what I have written in my judgment on these matters. It is obvious that some of the respondents' arguments were of more weight or substance than others. Some were of no or little weight or substance and at times there was a scraping of the bottom of the barrel in my view. The difficulty which confronts a judge in our system is that all points are required to be dealt with in the judgment with reasons, and a weak or substantial point can take a deal of explanation in a judgment to expose the weakness in the point and provide the answer. There were elements of that in this case, in my view. I concluded against the respondents on each point.

73. I have regard to all that the respondents submitted on costs. Essentially it was that all the issues raised by them were properly and justifiably advanced on the hearing of the confirmation application. They contend that their participation at the hearing raised matters of substance which materially assisted the process. While there is substance in that submission, I had the strong impression at the hearing and I remain of that view that the formulation and pursuit of their objections was carried to an extent - in content and time - that regarding the matter overall I consider it would be quite unjust to require Quatro to pay the respondents' costs generally.

76. I do not consider the case was over the line to the extent that it would be just to order that the respondents pay Quatro's costs. I reject Quatro's submission in that regard. Nor do I consider that there should be no order for costs. The respondents had an interest and were entitled to object and raise matters for consideration. But having sat through the trial and observed the length of the effort to seek to establish ground for objections, including unsuccessfully fishing in cross-examination for factual bases which did not exist, and in part running an expert on insubstantial bases in an endeavour to bring the thing down, just to mention some - but not all - matters, I have the clearest reaction that the court would be doing an injustice if the respondents were to have a general costs order against Quatro.

79. The case was fixed for trial on an estimate of duration of two to three days. That was long enough when one considers the issues involved and the attendant and high costs of a contested proceeding in court. There was a rigorous request for information and documents. Then we ended up with a trial that ran into the fifth day, excluding the first day (26 August) when it was adjourned. In my view it is just that the respondents bear some of the burden of their costs of the hearing which I regard as having been unduly prolonged by the respondents' pursuit of their objections. Even in this area involving the protection by a minority of its interest there must be a line of reasonableness in justice beyond which an objector must be prepared to bear to some extent the financial burden of his objections. In my view that is this case.

82. Another factor to be considered is that the first three respondents on the one hand and the fourth and fifth respondents on the other were represented by different firms of solicitors, although there was throughout a single representation of counsel. The applicant should not have to bear a duplication of costs.

85. In all the circumstances and regarding the matter overall the order which I consider appropriate, and which I will make, is that the applicant pay the respondents' costs including reserved costs, on a party and party basis, such costs being those incurred subsequent to the commencement of the proceeding on 13 May 1998, and on the basis:

(a) that at all times the respondents were represented by one firm of solicitors only,

(b) that the respondents' counsel was instructed on one brief with a single fee, that is as though he was briefed for a single party,

(c) that the trial occupied only three days commencing on 27 August 1998.

91. In case it be necessary I will reserve liberty to apply further on the matter of costs.