The first defendant, Mon Purse Pty Ltd, sells leather goods.
The first plaintiff, Mr Shub is a director and Chief Operating Officer of Mon Purse.
The second and third plaintiffs, Berkeley Pty Ltd and Savoy Shub Pty Ltd (companies associated with Mr Shub), together with Mr Shub's wife, Ms Heather Shub, hold some 14.06 per cent of the shares in Mon Purse.
Mon Purse was incorporated on 19 May 2014.
At that time, its only directors were the third defendant, Ms Svetlana Hopkins, and her husband, Mr James Hopkins. Its only shareholder was then a company of which Ms and Mr Hopkins are sole directors and shareholders; the seventh defendant, Can of Worms (Australia) Pty Ltd.
On 1 August 2015, Can of Worms held all 9,000 issued shares in Mon Purse.
On that day, as a part of a capital raising, Mon Purse issued a further 12,991 shares. The effect of the share issue was that Can of Worms' shareholding was reduced to 40.92 per cent of the issued capital of Mon Purse, with the remaining shareholding held by a variety of parties, including Berkeley with 12.7 per cent and the sixth defendant, Mr Larry Galansky with 9.23 per cent.
On the same day, the shareholders of Mon Purse executed a Shareholders Agreement.
Clause 3 of the Shareholders Agreement is headed "Board of Directors" and, relevantly, provides:
"3.1 Number of Directors
The maximum number of Directors of the Company at any time (excluding alternate Directors) is 5 unless decided otherwise by the Board.
3.2 Appointment and removal of Directions
(a) A Shareholder, or a group of Shareholders acting together for the purposes of this clause may, by written notice to the Company, appoint one Director for every 20% of the shares held by that Shareholder [or group of Shareholders]. For the avoidance of doubt, each Shareholder may only use each Share held by it once to appoint a Director under this clause 3.2(a).
(b) Can of Worms may appoint a Director for so long as it holds between 10% and 20% of the Shares.
(c) Berkley [sic] Trust, for so long as it holds between 10% and 20% of the Shares and for so long as Andrew Shub is engaged in the Business on a full time basis or a part time basis (as outlined in any appointment or grant letter between Andrew Shub and the Company (or as may otherwise be agreed)), may appoint a Director.
(d) Larry Galansky may appoint a Director for so long as he holds at least 1% of the Shares.
(e) A Shareholder entitled to appoint a Director under this clause 3.2 may remove and replace that Director by notice in writing to the Company.
3.3 Removal of Directions
…a Shareholder that has appointed a Director under clause 3.2 must remove that Director from the Board by giving written notice to the Company…if:
(a) at any time that Shareholder does not meet the requisite Share Qualification for the appointment of the relevant Director…".
It is common ground that cl 3.2(a) should be read as if the addition I have made ("[or group of Shareholders]") were included in the text.
The Shareholder Agreement provided that:
"Board means the board of Directors of the Company, which at the date of this agreement comprises the persons set out in the table in Schedule 1."
Schedule 1 sets out details of all of the shareholders on Mon Purse as at 1 August 2015.
In the case of Can of Worms, Berkeley and Mr Galansky, Schedule 1 sets out, under the heading "Director", the names of Ms and Mr Hopkins, Mr Shub and Mr Galansky, respectively.
In fact, as at 1 August 2015, neither Mr Shub nor Mr Galansky were directors of Mon Purse. Mr Shub did not become a director until 30 May 2016. Mr Galansky now claims to be a director, but only as from 22 August 2017. Mr Galansky's status as a director is one of the matters in dispute in these proceedings.
On 1 August 2015, only Ms and Mr Hopkins were directors of Mon Purse.
However, as Mr Kidd SC, who appeared for the plaintiffs, submitted, the wording of the definition of the "board" in the Shareholders Agreement shows that the parties contemplated that Mr Shub and Mr Galansky would or may become directors (as was also anticipated by cll 3.2(c) and (d) of the Shareholders Agreement).
Immediately prior to 17 August 2017, the directors of Mon Purse were:
1. Ms Hopkins;
2. the fourth defendant, Mr Justus Hammer;
3. the fifth defendant, Mr Rolf Krecklenberg; and
4. Mr Shub.
(Mr Hopkins ceased to be a director on 30 May 2016).
The dispute before me concerns the question of whether the second defendant, Mr Albert Wong, and Mr Galanksy are also directors of Mon Purse.
Mr Wong claims he was appointed a director on 17 August 2017 by resolution of a "group of Shareholders" pursuant to cl 3.2(a) of the Shareholders Agreement.
Mr Galansky claims that, on 22 August 2017, he exercised his right under cl 3.2(d) of the Shareholders Agreement to appoint himself a director.
On 22 August 2017, Ms Hopkins signed a Notice of Meeting of Directors, to be held on 28 August 2017, to consider, and if thought fit, to pass resolutions including that:
1. Mr Shub's employment as COO be terminated; and
2. for the purposes of cl 3.1 of the Shareholders Agreement, the maximum number of directors of Mon Purse be reduced from five to four (unless decided otherwise by the board from time to time).
On 25 August 2017, Pembroke J, as Duty Judge, made an ex parte order on Mr Shub's application, restraining Mr Wong, Ms Hopkins, Mr Hammer, Mr Krecklenberg and Mr Galansky from voting on the proposed resolutions until 29 August 2017.
On 28 August 2017, as Duty Judge, I extended that order until 5pm on 31 August 2017, and on that date again extended the order until 5pm today.
On 28 August 2017, I made an order pursuant to Uniform Civil Procedure Rules 2005 (NSW) r 28.2 the effect of which is that the following questions be heard separately from and prior to any other issues in the proceedings:
1. Was Mr Wong validly appointed as a director pursuant to cl 3.2(a) of the Shareholders Agreement?
2. Was Mr Galansky validly appointed as a director pursuant to cll 3.2(a) and (d) of the Shareholders Agreement? And;
3. Does cl 3.1 of the Shareholders Agreement, on its proper construction, empower the directors to resolve to reduce the number of directors of Mon Purse from five to four if the effect of such a decision would be to prevent or hinder a shareholder referred to in cll 3.2(b), (c) or (d) of the Shareholders Agreement from exercising any rights contained in those clauses, or to reduce the maximum number of directors of Mon Purse to a number that is less than the number of directors that then existed.
I heard argument about these matters on 31 August 2017.
[3]
Decision
In my opinion, the answers to these questions are:
1. Yes.
2. No.
3. Yes.
These are my reasons for coming to those decisions.
[4]
The purported appointment of Mr Wong
The purported appointment of Mr Wong as the director of Mon Purse was made by a notice dated 17 August 2017 signed by a group of shareholders of Mon Purse. The notice stated that the group of shareholders was acting together for the purpose of cl 3.2(a) of the Shareholders Agreement.
The shareholders who executed the notice were:
1. Can of Worms (which, by then, held 27.92 per cent of the shares in Mon Purse);
2. the eighth defendant, Setone Pty Ltd (4.38 per cent);
3. the tenth defendant, G Negev Superannuation Pty Ltd (0.75 per cent);
4. the eleventh defendant, Gilad Mordechai Grinbaum (2.75 per cent);
5. the eighteenth defendant, Jacqueline Anne Taranto (0.81 per cent);
6. the twenty-third defendant, Incubator Holdings Pty Ltd (2.43 per cent);
7. the twenty-fifth defendant, Labafer Pty Ltd (1.06 per cent); and
8. the twenty-sixth defendant, Nikbra Pty Ltd (1.06 per cent).
Thus, the group of shareholders held, collectively, 41.16 per cent of the issued share capital in Mon Purse.
However, Mr Kidd submitted that Can of Worms was not entitled to participate in the appointment of Mr Wong and that as the remaining shareholders held only 13.4 per cent of the issued share capital of Mon Purse, their vote was not effective to appoint Mr Wong as director (as they represented less than 20 per cent of shareholders).
Mr Kidd's submission relied upon the second sentence of cl 3.2 which provides that:
"For the avoidance of doubt, each Shareholder may only use each Share held by it once to appoint a Director under this clause 3.2(a)."
Mr Kidd's submission was that:
"A reasonable business person in the position of the parties to the Shareholders Agreement would understand the words in clause 3 together with Schedule 1 to mean that the 9,000 shares…held by Can of Worms [on the date of the Shareholders Agreement] representing 40.31% of the issued share capital were, for the purpose of clause 3.2, to be taken to have been used by Can of Worms to appoint Svetlana and James Hopkins as directors of Mon Purse and were not shares that were able to be used again to appoint an additional director or directors under clause 3.2(a)." [Emphasis added]
Mr Kidd's point was that it must have been a fact mutually known to the parties to the Shareholders Agreement that, on the date of the Agreement, Ms and Mr Hopkins were the only directors of Mon Purse, that Ms and Mr Hopkins were the only directors and shareholders of Can or Worms and that:
"…the 9,000 shares held by Can of Worms were shares that, for the purpose of clause 3.2 of the Shareholders Agreement, were implicitly taken to have been used by Can of Worms to appoint Ms Hopkins and James Hopkins as directors, and were not shares that were able to be used again to appoint additional directors under clause 3.2(a)." [Emphasis added].
I see a number of difficulties with this submission.
The first is that Ms and Mr Hopkins were not appointed as directors under cl 3.2(a) of the Shareholders Agreement. They were the founding directors of Mon Purse. They became directors by reason of s 120(1) of the Corporations Act 2001 (Cth) which provides that a person becomes a director of a company "on registration if the person is specified in the application with their consent as a proposed…director…of the Company" (as was the case with Ms and Mr Hopkins).
Second, the language of cl 3.2(a) is clear and speaks prospectively.
Mr Kidd did not suggest that any part of the language of cl 3.2 was ambiguous and did not explain how the words of cl 3.2(a) could bear the meaning for which he contended. I cannot see how they could bear that meaning. Acceptance of Mr Kidd's submission would involve a dramatic re-writing of cl 3.2(a).
Rather, Mr Kidd pointed to what he submitted were the inconvenient and uncommercial results which would flow from a literal reading of cl 3.2(a) which, Mr Kidd submitted, the parties could not have intended.
In that regard, Mr Kidd pointed out that as at 1 August 2015, Can of Worms held more than 40 per cent of the shares in Mon Purse and could immediately after execution of the Shareholders Agreement on 1 August 2015, have resolved to appoint two further directors.
That is true but equally, Berkeley and Mr Galansky could have exercised their right immediately themselves to appoint a director to Mon Purse.
The structure of cl 3.2 is that each of Can of Worms, Berkeley and Mr Galansky are given bespoke rights to appoint a director, provided that the conditions in cll 3.2(b),(c) and (d) (respectively) are met.
On the other hand, cl 3.2(a) provides shareholders, generally, a right to vote, either individually, or together with other shareholders (provided that, either way, 20 per cent of shareholders vote) to appoint a director.
Once any shareholder, including Can of Worms, Berkeley or Mr Galansky, has exercised its, his or her right to vote under cl 3.2(a), that shareholder cannot exercise that right again.
But I cannot see how cl 3.2 (a) (in particular, the second sentence) can be read somehow to catch, retrospectively, events which occurred 15 months earlier, and disqualify Can of Worms from joining (for the first time) with other shareholders in acting under cl 3.2(a).
In my opinion, Can of Worms was entitled to participate in the resolution to appoint Mr Wong and that Mr Wong's appointment as a director is effective.
[5]
The purported appointment of Mr Galansky
Mr Wong thus became the fifth director of Mon Purse.
Clause 3.1 of the Shareholders Agreements provides that, unless otherwise decided by the board, the maximum number of directors of Mon Purse is five.
The right given by cl 3.2 of the Shareholders Agreement to shareholders to appoint directors is given in the context of their agreement, in the immediately preceding sub-clause of the Shareholders Agreements, that the maximum number of directors will be five (unless otherwise decided by the board).
The shareholders thus implicitly, if not explicitly, agreed that their right to appoint a director was subject to their agreement as to the maximum number of directors that the company could have.
Thus, the effect of cl 3.1 must be that for so long as the company had the maximum number of directors, any further right of appointment of directors was, in effect, suspended until that position changed.
Otherwise, the agreement recorded in cl 3.1 would have no effect.
The result is, in my opinion, that Mr Galansky's delay in exercising his rights under cl 3.2(d) means that, in the events that have happened, he is not able now to effect a further appointment as a director.
[6]
The resolution to reduce the maximum number of directors
There are now five directors of Mon Purse.
The resolution proposed in the Notice of Meeting of Directors of 22 August 2017 is that the maximum number of directors of Mon Purse be reduced from five to four.
If that resolution were passed one of those five directors would have to resign or otherwise cease to be a director.
Further, so long as the remaining four directors held their position on the board, no shareholder of Mon Purse would be able to exercise its, his or her right to appoint a director under cl 3.2.
However, I do not see that it follows, as a matter of construction, that the directors have no power to reduce the maximum number of directors under cl 3.1.
Mr Kidd eschewed the submission that, on its proper construction, cl 3.1 did not permit the directors of Mon Purse to reduce (as oppose to increase) the maximum number of directors.
Rather, Mr Kidd submitted that, as a matter of construction, the directors could not resolve to reduce the number of directors if, in the circumstances then prevailing, that would reduce the number of directors that then existed or prevent or interfere with the exercise by shareholders of their rights under cl 3.2.
I do not see how this could follow as a matter of construction.
It may be that the directors could not, in those circumstances, exercise that power consistently with their duty to act in good faith in the best interests of Mon Purse, and for a proper purpose (s 184 of the Corporations Act). That would depend upon the particular circumstances existing at the time of the proposed resolution.
However, I am not persuaded, as a matter of construction of cl 3 of the Shareholders Agreement that the directors have no power to pass such a resolution.
[7]
Conclusion
For those reasons, my answers to the separate questions are as set out at [26].
I will hear the parties as to costs and the future course of the litigation.
[8]
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Decision last updated: 05 September 2017