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[2018] VSCA 180
Court of Appeal (Vic)
2018-07-27
Ferguson CJ, Whelan JA, Leish JA
Original judgment source is linked above.
CORPORATIONS - Implied prohibition against financial assistance to acquire shares - Meaning of 'financial assistance'- Onus of proof - Funding legal proceedings directed at compelling one shareholder to offer shares to other shareholders held to be provision of financial assistance - Corporations Act 2001 (Cth) - ; ; ; ; applied.
CORPORATIONS - Application for injunction to prevent financial assistance to acquire shares - Onus of proof - Corporations Act 2001 (Cth) s 1342(1B) - Kinarra Pty Ltd v On Q Group Ltd [2008] NSWSC 190; (2008) 216 FLR 89 applied.
PRACTICE AND PROCEDURE - Application for leave to appeal a determination not embodied in an order - Order and reasons to be read together - Supreme Court Act 1986 s 17(2) - Yates Property Corporation Pty Ltd v Boland (1998) 89 FCR 78; Athens v Randwick City Council [2005] NSWCA 317; (2005) 64 NSWLR 58 applied.
1 In 2003 a mortgage aggregation business was established by Sofianos Tsialtas, Glen Lees and Murray Lees. Others also became involved in the business, most notably Mark Haron and Graham Maloney. Two companies were incorporated to conduct the business, Connective Services Pty Ltd and Connective Services OSN Pty Ltd. We will refer to them together as the 'Connective companies'.
2 It seems that the business was successful. Relations between the individuals were not. Since 2011 they have been involved in litigation with each other. A number of proceedings have been instituted. The significant proceedings currently on foot are an oppression proceeding brought by Mr Tsialtas' company, Slea Pty Ltd ('Slea'), against the Connective companies and others ('the oppression proceeding');[1] and this proceeding whereby relief is sought by the Connective companies compelling Slea to offer its shares to the other shareholders. Recently, Slea was given leave to institute a new derivative proceeding in the name of the Connective companies against the other shareholders and others.[2] That order is the subject of an application for leave to appeal.[3]
3 This application for leave to appeal concerns an ultimately unsuccessful attempt by Slea and Minerva to stay, or enjoin the continuation of, this proceeding.
4 At the relevant times the shareholding of the Connective companies has been:
Millsave Holdings Pty Ltd ('Millsave'), a company that is, or was, associated with the Lees:[4]
5 Until May 2008 Mr Tsialtas was a director of the Connective companies. Since 2011 the directors of the Connective companies have been Glen Lees, Graham Maloney, and Mark Haron.
6 The constitutions of the Connective companies each contain what are commonly known as pre-emptive rights provisions. It is necessary to set out the relevant provisions in full. They are:
77. Pre-emption for existing Members on transfer of Shares
77.1 Before transferring Shares of a particular class, a Member must offer them to the existing Shares of that class.
77.2 As far as practicable, the number of Shares offered to each shareholder pursuant to clause 77.1 must be in proportion to the number of Shares of that class that they already hold.
77.3 To make the offer, the Member must give the Members a statement setting out the terms of the offer, including:
(a) the number of Shares offered;
(b) the price; and
(c) the period for which the offer will remain open.
77.4 If some of the Shares offered have not been fully accepted by the end of the period, the Member must re-offer the remaining Shares on the same terms to those Members (if any) who accepted the offer in proportion to the number of Shares of that class that they are deemed to then hold by virtue of having already accepted some of the Shares on offer.
77.5 The Member appoints the Company its attorney in respect of any shares it is proposing to transfer to execute an instrument of transfer of shares in the name and on behalf of the Member.
77.6 The Member may transfer any Shares not taken up under the offers pursuant to clauses 77.1 and 77.4 as they see fit provided that the terms, including price, are no more commercially attractive or advantageous to a third party than the terms in the original offers.
We will refer to these provisions as 'the pre-emptive rights provisions'.
7 In May 2009 Mr Tsialtas entered into an agreement with Minerva Financial Group Pty Ltd ('Minerva') for the sale of his shares in Slea ('the 2009 agreement'). It was, and is, alleged by the other shareholders that that agreement contravened the pre-emptive rights provisions. After its existence was disclosed, the 2009 agreement was terminated, as Slea and Minerva contend; or 'purportedly' terminated but not terminated in fact, as the Connective companies contend.
8 On or about 12 August 2010 Slea and Mr Tsialtas entered into an agreement with Minerva entitled 'Accommodation Agreement'. That agreement is the focus of contention in this proceeding.
9 Amongst the earlier proceedings instituted between the parties was a proceeding by Mr Haron. The Accommodation Agreement was discovered by Slea in that proceeding.[5] That proceeding was eventually settled,[6] although not before a further proceeding was instituted by Slea contending that the initial settlement of Mr Haron's proceeding contravened the pre-emptive rights provisions.[7]
10 Slea commenced the oppression proceeding in August 2011. The Accommodation Agreement was also discovered in that proceeding.
11 Significant amendments to the allegations made by Slea in the oppression proceeding were introduced by leave of Associate Justice Efthim in 2014. The amendments allege a corporate restructure, involving the incorporation of a number of new subsidiaries and the introduction of Macquarie Bank Limited as a new equity holder. Slea alleges this re-structure improperly circumvents the pre-emptive rights provisions, reduces Slea's effective ownership interest, and otherwise prejudices Slea's position. The defendants to the oppression proceeding plead and rely upon the Accommodation Agreement as a ground upon which they contend Slea should be refused relief in the oppression proceeding.[8]
12 The Connective companies instituted this proceeding in 2016. They are the only plaintiffs. The defendants against whom relief is claimed are Slea and Minerva. Millsave and Mr Haron are joined as defendants on the basis that they are necessary and proper parties, but no relief is claimed against them.
13 The claim made by the Connective companies in this proceeding is that the 2009 agreement (which the Connective companies say was never in fact terminated) and the Accommodation Agreement breach the express terms, and an alleged implied term, of the pre-emptive rights provisions. It is alleged that Slea intended, and still intends, to transfer its shares in the Connective companies to Minerva without complying with the pre-emptive rights provisions, and that it intended, and intends, to subvert and/or avoid those provisions 'in effecting a transfer' of its shares to Minerva. The Connective companies then allege:
14 It is further alleged that 'pursuant to' the Accommodation Agreement Slea has 'purported to transfer, assign, or sell' its interest in its shares in the Connective companies, and that it has done so in breach of the pre-emptive rights provisions by failing to offer its shares to the other shareholders.
15 The first claim for relief sought by the Connective companies in the statement of claim is as follows:
16 The Connective companies also seek injunctions against breach of the pre-emptive rights provisions and specific performance of those provisions.
Slea and Minerva's application for a stay or injunction
17 On 4 October 2016 Slea and Minerva issued a summons seeking the following relief:
(1) Pursuant to rules 22.16 and 23.01 of the Supreme Court (General Civil Procedure) Rules 2005 (Vic) and sections 62 and 63 of the Civil Procedure Act 2010 (Vic) the proceeding be dismissed or stayed.
(2) Further or alternatively, an injunction pursuant to section 1324 of the Corporations Act 2001 (Cth) restraining the plaintiffs from prosecuting the proceeding.
18 Slea and Minerva's application was heard by Almond J in the Trial Division on 8 December 2016. Slea and Minerva contended for an entitlement to relief on three grounds. The first was that by commencing the proceeding in reliance upon the Accommodation Agreement which had been obtained through discovery in other proceedings, the Connective companies had breached their implied undertaking not to use that agreement for any purpose other than those proceedings. The second was that by bringing and prosecuting the proceeding the Connective companies had contravened and would continue to contravene the implied prohibition in s 260A of the Corporations Act 2001 (Cth) ('the Act') on giving financial assistance to acquire their own shares. Finally, Slea and Minerva contended that the Connective companies lacked standing to enforce the pre-emptive rights provisions.
19 Almond J delivered judgment on 12 May 2017.[9] He rejected the contention that the Connective companies lacked standing to bring the claim. There have been no further proceedings taken in relation to that rejection.[10] Almond J also rejected Slea's contention as to contravention of s 260A of the Act. That is the aspect of the matter which is the subject of this application for leave to appeal.
20 Almond J upheld the contention that the Connective companies had breached their implied undertaking not to use the Accommodation Agreement for any purpose other than in relation to the proceedings in which it had been obtained by way of discovery. Almond J consequently made an order on 12 May 2017 that the 'proceeding be stayed generally pursuant to Order 23.01 of the Supreme Court (General Civil Procedure) Rules 2015'. He also made a costs order in favour of Slea and Minerva.
21 The Connective companies then applied by a summons dated 2 June 2017 for leave to use the Accommodation Agreement in this proceeding and for retrospective relief to validate its prior use. By a separate summons of the same date they sought similar relief in the oppression proceeding. On 6 June 2017 Almond J extended time for any application for leave to appeal from his order of 12 May 2017 until 14 days after determination of the Connective companies' summons of 2 June 2017.
22 The Connective companies' application for leave to use the Accommodation Agreement was heard by a different judge in the Trial Division, Judd J, on 12 September 2017. On 22 November 2017 Judd J granted the relief the Connective companies sought, and made the following orders:[11]
(1) The Connective Companies have leave, nunc pro tunc, to use the Accommodation Agreement for the purposes of commencing the Pre-emptive Rights Proceeding.
(2) The stay granted by Almond J on 12 May 2017 is lifted.
(3) The Connective Companies pay Slea's costs of and incidental to the summonses in each proceeding dated 2 June 2017 on an indemnity basis.
23 The 'Pre-emptive Rights Proceeding' is this proceeding.
24 Slea and Minerva (who we will now refer to together as 'the applicants') seek leave to appeal from the decision of Almond J. Their application for leave describes the decision from which they seek leave to appeal as follows:
The Applicants seek leave to appeal against that part of the decision in which the primary judge decided that the prosecution of the proceeding by the First and Second Respondents does not contravene the implied prohibition against giving financial assistance in s 260A of the Corporations Act 2001 (Cth) (Act) and accordingly declined relief on that aspect of the Applicants' summons dated 4 October 2016.
25 Given that the applicants had obtained an order for a stay from Almond J, at the outset of the hearing this Court raised the issue as to what 'determination' of the Trial Division under s 17(2) of the Supreme Court Act 1986 Slea sought to appeal.
26 The parties each filed written submissions after the hearing of the application addressing this issue.
27 The applicants submitted that the Court of Appeal had jurisdiction to hear the application for leave to appeal from the decision described in the application on two bases. First, it was submitted that under ss 10 and 17 of the Supreme Court Act 1986 there had been a 'determination' which was capable of being appealed even if that determination had not been embodied in an order of the Court. In that respect they relied upon City of Camberwell v Camberwell Shopping Centre Pty Ltd.[12] The second basis was that the order made by Almond J had impliedly dismissed the applicants' claim for an injunction for contravention of s 260A of the Act. In that respect they relied upon Yates Property Corporation Pty Ltd v Boland[13] and Athens v Randwick City Council.[14]
28 The Connective companies submitted that the matters 'determined' should be identified by reference to the order which was made and that that order was for a general stay. It was submitted that the applicants had been granted the primary relief which they had sought and that it was impermissible to read into the plain terms of the order any 'implicit' order dismissing the claim under s 260A. They had not sought to appeal Judd J's order lifting the stay.
29 In our opinion the applicants' analysis of the order made by Almond J is correct. Almond J did dismiss the claim for an injunction under s 1324 of the Act relying upon a contravention of s 260A of the Act. This is clear when the order and the Reasons are read together. For the reasons set out below, the order should not be read in isolation.
30 In Yates Drummond J, with whom Sundberg and Finkelstein JJ agreed, said it was both 'impermissible' and 'quite unrealistic' to attempt to read and understand an order in isolation from the context of the reasons for it being made.[15] In Athens Santow JA expressed a relevantly similar view, observing that treating the originating judgment as merely providing context for resolving ambiguity in an order understated 'the primacy of that judgment as a source of interpreting the order'.[16]
31 When the Reasons and the order are read together it is clear that:
32 The order which was made did, impliedly, dismiss the application for an injunction. This is so notwithstanding that a stay was ordered on other grounds and that a costs order was made in favour of the applicants. As matters transpired, the stay was lifted. In our opinion the applicants are entitled to apply for leave to appeal from the determination not to grant the application for an injunction.
33 Section 140 of the Act provides that a company's constitution has effect as a contract 'between the company and each member' and 'between a member and each other member', under which the company and each member agrees to observe and perform the constitution.
(1) A company may financially assist a person to acquire shares (or units of shares) in the company ... only if:
(a) giving the assistance does not materially prejudice:
(i) the interests of the company or its shareholders; or
(ii) the company's liability to pay its creditors.
...
(2) Without limiting subsection (1), financial assistance may:
(a) be given before or after the acquisition of shares (or units of shares)
...
(3) Subsection (1) extends to the acquisition of shares (or units of shares) by:
(a) issue; or
(b) transfer; or
(c) any other means.
35 Section 9 of the Act relevantly defines 'unit' as a 'right or interest, whether legal or equitable, in the share', and as including 'an option to acquire such a right or interest in the share'.
36 Section 1324 of the Act provides that the Court may grant an injunction where a person has engaged in conduct, or is proposing to engage in conduct, that constitutes, or would constitute, a contravention of the Act. Section 1324(1B) provides that if the ground relied upon in an application for an injunction is conduct or proposed conduct of the company or another person that it is alleged constitutes or would constitute a contravention of s 260A(1)(a) then 'the Court must assume that the conduct constitutes, or would constitute, a contravention of that paragraph ... unless the company or person proves otherwise'.
37 It is apparent from the Reasons that the primary focus of attention before Almond J was the alleged breach of the implied undertaking, a contention on the part of the applicants which Almond J upheld.
38 In relation to the applicants' contention that there was a contravention of s 260A of the Act, Almond J held that 'to the extent that Slea can prove that bringing or maintaining the proceeding constitutes the giving of financial assistance, it will be for Connective to prove an absence of material prejudice'.[17]
39 As to the meaning of financial assistance, Almond J relied upon the oft-cited description of the term given by Hoffmann J in Charterhouse Investment Trust Ltd v Tempest Diesels Ltd.[18] He also relied upon Australian Securities and Investments Commission v Adler[19] and Adler v Australian Securities and Investments Commission[20] in holding that the Court's task was to consider the relevant transaction as a whole, with all its interlocking elements, and to consider whether the commercial realities of the transaction indicated the provision of assistance of a financial kind.[21]
40 Almond J held that, given the potential consequences of contravention, including civil penalties for individuals involved in a contravention, a court 'should not strain' the provision so as to cover transactions which do not fall squarely within it.[22]
41 The Connective companies had argued that before a contravention of s 260A could be found it was necessary to identify something which could aptly be described as a 'transaction' conferring financial assistance on an acquirer or potential acquirer. Almond J did not accept that, but he did accept that 'the fact that there is no transaction tends to suggest that the company is pursuing the action for its own purposes'.[23]
42 Almond J concluded that, looking at the 'commercial realities', the Connective companies' pursuit of the proceeding could not readily be described as giving financial assistance.[24] Almond J said:
It seems to me that the better view is that the Connective companies have simply brought the proceeding in order to ensure that their constitutions are followed according to their terms.[25]
43 Almond J accepted a submission put on behalf of the Connective companies that there was 'no conferral of any benefit' on Millsave or Mr Haron. He also accepted that there was a relevant distinction to be drawn between 'the provision of an offer', which would be the result of the proceeding if the Connective companies succeeded, on the one hand; and 'the acquisition of shares which could only occur if such an offer were taken up', on the other.[26]
A legitimate objective of the proceeding, it seems to me, is to ensure that existing shareholders' rights are properly recognised and administered according to the constitutions. No new rights are being created. Although the Connective companies are spending funds on the litigation, it is for a proper purpose - ensuring adherence to their respective constitutions. To expose the directors of the Connective companies to personal liability with respect to such a course of action does not seem to me to further the aims of the legislation.[27]
Submissions on the application for leave to appeal
46 Counsel on behalf of the applicants submitted that the judge's observation that the Court should not 'strain' the provision given the potential consequences of contravention is not consistent with current High Court authority. In that respect the applicants cited Beckwith v The Queen,[28] Waugh v Kippen[29] and R v Lavender.[30]
47 The applicants submitted that the primary judge erred in considering the existence of a 'transaction' as being a relevant consideration in relation to the application of s 260A of the Act. They submitted that s 260A does not use the word 'transaction', and that identification of a 'transaction' is not an element of the statutory provision or a matter which is relevant to an assessment of whether there is financial assistance in the relevant sense.
48 The applicants submitted that the learned primary judge erred by taking into account, and 'giving primacy to', the purpose of the conduct in question rather than its effect. It was submitted that in taking this course the judge had introduced an extraneous element into the construction of s 260A. The applicants submitted that an inquiry as to purpose might be relevant to a consideration of whether the directors had breached their duties in instituting the proceeding, but it was not relevant to a consideration of contravention of s 260A.
49 The applicants submitted that the primary judge had erred in finding that the Connective companies had prosecuted and funded the proceeding so as to ensure adherence to their constitutions in the absence of any evidence as to the relevant purpose of the Connective companies or their directors. It was submitted that the inference was clearly open that the purpose of the directors of the Connective companies was to remove Slea as a shareholder, motivated by the disagreements between the shareholders. The applicants characterised this as a desire to remove a 'troublesome' shareholder. The applicants submitted that the Connective companies had elected to adduce no evidence as to their purpose and that there was accordingly no evidence upon which the primary judge could find that their purpose was to ensure that the constitutions were followed or adhered to.
50 It was submitted on behalf of the applicants that the primary judge had erred in finding that the institution of the proceeding would not confer any benefit on Millsave or Mr Haron. It was submitted that the distinction which the primary judge had drawn between an offer and an acquisition was not relevant for the purposes of s 260A. A number of reasons were advanced in support of that contention. The first was that the prohibition in s 260A applies to both shares and units, and a 'unit' includes an option to purchase. The second was that s 260A(2)(a) makes it clear that financial assistance can occur before the relevant acquisition takes place. Thirdly, it was submitted that, even if it were assumed that the pre-emptive rights provisions had been triggered by execution of the Accommodation Agreement, Slea was not complying and the Connective companies' prosecution of the proceeding was directed at compelling Slea's compliance. If Slea was compelled to offer its shares to Millsave and Mr Haron that would 'assist' Millsave and Mr Haron to acquire the legal interest in Slea's shares, even if they already have an equitable interest, or to acquire an option to so acquire a legal interest in Slea's shares. It was submitted that that was sufficient to enliven s 260A of the Act, and did confer a benefit on Millsave and Mr Haron.
51 The applicants submitted that the primary judge had been correct to conclude that the onus of showing that financial assistance did not materially prejudice the interests of the Connective companies was on the companies themselves. It was submitted that the companies had adduced no evidence on that issue and could not have discharged the onus.
52 The applicants submitted that they had sought an injunction under s 1324 of the Act and that pursuant to s 1324(1B) the Court was required to assume that the conduct of the Connective companies alleged to be in contravention of s 260A did constitute such a contravention unless the Connective companies proved otherwise. It was submitted that the Connective companies had failed to do so.
53 In the course of oral submissions counsel for the applicants noted that they had not located any analogous case to this one where a contravention of the prohibition on the provision of financial assistance had been found.
54 Counsel for the Connective companies submitted that the judge had been correct in saying that a court should not 'strain' the provision to cover transactions that do not fall squarely within it. It submitted that the judge was correct in that approach, not because the provision potentially has penal consequences, but because the provision is both beneficial and penal in nature. It was submitted that the provision in its current form, consequent upon statutory amendments in 1998, was intended to be beneficial in its operation in that financial assistance is prima facie permitted, although subject to a requirement that the financial assistance does not materially prejudice the interests of the company, its shareholders or its creditors. The Connective companies emphasised that the correct approach was to engage in an assessment of the interlocking elements of the relevant conduct and to consider whether the commercial realities revealed the provision of financial assistance to acquire shares.
55 It was submitted on behalf of the Connective companies that the judge had not erred in addressing the issue of whether there was a 'transaction'. It was submitted that the absence of a 'discrete transaction' was relevant, and that the only 'transaction' which could be impugned here was that between the Connective companies and their lawyers whereby the lawyers provided legal services for a fee. It was submitted that the primary judge had correctly addressed the commercial realities of this conduct and had concluded that it could not constitute the giving of financial assistance to anyone to acquire shares. It was submitted that the judge had been correct in concluding that the relevant conduct did not confer any benefit upon Millsave or Mr Haron. It was submitted that it was clear that the primary judge had assessed the impugned circumstances as a whole.
56 The Connective companies submitted that the primary judge had not improperly focused upon the purpose of the Connective companies in commencing the proceeding but had focused upon the effect of the relevant conduct. It was submitted that the trial judge's reference to purpose was in the context of an assessment of the commercial realities of the conduct. It was submitted that in assessing that conduct as a whole, as his Honour had done, the effect was not to create any new rights in, or to confer any benefits on, Millsave or Mr Haron.
57 It was submitted that there was no evidentiary basis for the applicants' submission that the purpose of the Connective companies was to rid the companies of a 'troublesome' shareholder and that no such submission had been made to the primary judge. It was submitted that the more 'probable inference', assessing the commercial realities of the relevant conduct, was that the Connective companies sought to ensure compliance with the provisions of their constitutions.
58 The Connective companies submitted that the proceeding could not create any rights in Millsave or Mr Haron which did not already exist and that no order of the Court made in the proceeding could create or confer any such right. It was submitted that all that the proceeding could achieve is compliance with existing obligations. It was submitted that if the proceeding were successful, the Court would not grant to Millsave or Mr Haron any right or option to purchase the shares of Slea, as the pre-emptive rights provisions themselves already create any such interest.
59 In oral submissions counsel for the Connective companies also indicated that they had not found any analogous case to this one. They submitted that that suggested that circumstances such as these are outside the ambit of s 260A. As to the onus of proof, the Connective companies submitted that the onus was on the applicants on all issues and that the primary judge had been wrong in construing s 260A as imposing an onus on the Connective companies to establish an absence of material prejudice if financial assistance was found to have been given.
60 There was a substantial level of agreement between the applicants and the Connective companies in relation to the legal principles to be applied. They both submitted that the expression 'financial assistance' had no technical meaning and that it required the Court to examine the commercial realities of the entirety of the relevant conduct.[31] They both also submitted that material prejudice concerned the issue of whether there was a 'net transfer of value' from the company to the acquirer or potential acquirer of the shares.[32] The submissions of both parties substantially relied upon the decisions in ASIC v Adler, Adler v ASIC, and the decision of Robson J in Kinarra Pty Ltd v On Q Group Ltd.[33] Reference was also made to the seminal English authority, Trevor v Whitworth,[34] and to Charterhouse. The parties differed substantially on the issue of who bore the burden of proof.
62 In Trevor v Whitworth the House of Lords determined that a company had no power to purchase its own shares. The particular vice with which the House of Lords was concerned was identified by Lord Macnaghten as follows:
If shareholders think it worth while to spend money for the purpose of getting rid of a troublesome partner who is willing to sell, they may put their hands in their own pockets and buy him out, though they cannot draw on a fund in which others as well as themselves are interested. That, I think, is the law and that is the good sense of the matter.[35]
63 Similarly in Australia, Kirby P observed in Darvall v North Sydney Brick & Tile Company Ltd that legislation prohibiting financial assistance (then in a form different to its current form) sought to ensure that persons who acquire shares in a company do so from their own resources and not with the financial assistance of the company itself.[36]
64 In Charterhouse Hoffmann J gave a description of what constitutes 'financial assistance', in terms which have been cited on many occasions since. Hoffmann J said:
The words have no technical meaning and their frame of reference is in my judgment the language of ordinary commerce. One must examine the commercial realities of the transaction and decide whether it can properly be described as the giving of financial assistance by the company...[37]
65 Hoffmann J went on to explain that it was necessary to look at the relevant transaction as a whole with a view to determining 'where the net balance of financial advantage lay'.[38]
66 In ASIC v Adler Santow J undertook a detailed analysis of the provision in its current form. He quoted and endorsed what Hoffmann J had said in Charterhouse as to the necessity of assessing the interlocking elements of the commercial transaction as a whole.[39] He concluded, relying in this respect on Ford's Principles of Corporations Law, that the onus of demonstrating a lack of material prejudice was on those seeking to defend the transactions.[40] The New South Wales Court of Appeal (Giles JA, with whom Mason P and Beasley JA agreed) in Adler v ASIC agreed with Santow J's conclusion as to onus of proof, whilst observing that that Court did not find s 1324(1B) of assistance in that respect.[41]
67 In Kinarra the issue of the significance of s 1324(1B) of the Act arose more directly. There, as here, the parties had adopted Hoffmann J's description of financial assistance in Charterhouse, and had accepted that the relevant inquiry was as to the effect of the conduct looking at all of its interlocking elements.[42] Robson J then said:
Further, the elements of financial assistance and material prejudice are linked. That is, the financial assistance to the acquirer is affected by the company transferring net value to the acquirer which may be prejudicial to the company whose shares are being acquired, its shareholders or creditors.[43]
68 Robson J adopted Giles JA's analysis in Adler v ASIC in determining that the onus of proving an absence of material prejudice was upon the company.[44]
69 In Kinarra Robson J was considering (amongst other things) an application for an injunction. In that context he addressed the effect of s 1324(1B). After rejecting an argument as to construction advanced on behalf of the company in that case, Robson J continued:
Accordingly, in my opinion, on the injunction application, and on the case alleged by the plaintiffs, the plaintiffs only bear the onus of proving the transaction that the plaintiffs allege constitutes or would constitute a breach of s 260A(1). In other words, the plaintiffs must prove the conduct or proposed conduct of [the relevant company] the effect of which may constitute financial assistance to a person to acquire shares in [the relevant company].
It seems to me that consistent with this approach the assumption required to be taken by the Court would only arise if the alleged effect was open on the conduct or proposed conduct proved by the plaintiffs. If the alleged effect was not open on the conduct proved then the presumption by the Court that the conduct constitutes or would constitute a contravention of s 260A(1)(a) would not arise.
In this case the plaintiffs have to prove a transaction of the kind that leaves open the allegation that by the transaction [the relevant company] is financially assisting [the alleged proposed acquirer] to acquire shares in [the relevant company]. Thus in this case, if the plaintiffs do so the Court must assume that the conduct so proved constitutes or would constitute a contravention of s 260A(1)(a) unless [the relevant company] proves otherwise or [the relevant company] makes out the defence available in para (a).[45]
70 In our view, Robson J's analysis is correct. If the relevant conduct is not open to be assessed as the provision of financial assistance, the presumption will not arise (or will be immediately displaced).
71 Robson J went on to find that although the plaintiffs in that case had 'proved the conduct necessary to attract the presumption', the defendant had proved 'otherwise' by establishing that the conduct did not provide financial assistance to acquire shares.[46]
72 In summary, then, the principles to be applied to the issues raised here are as follows:
(1) The expression 'financial assistance' has no technical meaning. It is necessary to examine the commercial realities of the conduct relied upon in its entirety in order to determine whether that conduct constitutes the provision of 'financial assistance', the frame of reference being the language of ordinary commerce.
(2) Where relief other than an injunction is sought, a plaintiff must establish that the relevant conduct amounts to the provision of financial assistance. If it does so, the onus is then upon the defenders of the conduct to establish an absence of material prejudice.
(3) Where an injunction is sought, a plaintiff must establish that the conduct relied upon is open to be assessed as constituting the provision of financial assistance. If it does so, the onus is then upon the defenders of the relevant conduct to establish that it does not amount to financial assistance and/or that there is an absence of material prejudice.
73 Section 260A is framed in permissive terms. A company may financially assist a person to acquire shares in the company, but only if specified conditions are met. The section is thus sometimes described as containing an implied prohibition on financial assistance.
74 The conduct alleged to constitute financial assistance in the acquisition of shares in this case is unusual, in the sense that counsel were not able to identify any prior case which is relevantly analogous. While that is a matter worthy of note, it cannot, of course, dictate a conclusion that the conduct does not fall within the implied prohibition in s 260A.
75 The conduct complained of here is the institution of the proceeding itself. No further or other facts are relied upon by the applicants in asserting a breach of the implied prohibition, and there are no further or other facts relied upon by the Connective companies in meeting that claim. Thus, this is a situation where the applicants have established the conduct upon which they rely. If that conduct is open to be assessed as constituting the provision of financial assistance to acquire shares, then the Court is required to presume, under s 1324(1B), that there is a contravention.
76 In our opinion the conduct relied upon is not only open to be assessed as constituting the provision of financial assistance to acquire shares, or an option to acquire shares, but is properly so characterised.
77 The relief sought in the proceeding is an order compelling Slea to offer its shares to Millsave and Mr Haron. It is correct that, upon the assumption that the pre-emptive rights provisions have been triggered, Millsave and Mr Haron already have an entitlement to receive that offer. But Slea has not made the offer. Moreover, on the Connective companies' case, absent a court order Slea will not make the offer. The commercial consequence is that some action has to be taken to enforce the existing right. The purpose of the proceeding is to compel Slea to make the offer. If Slea is forced to do so, Millsave and Mr Haron will have the option of accepting the offer and, if they do accept, of acquiring the shares. The proceeding seeks to procure that outcome. This 'assists' Millsave and Mr Haron to both obtain the offer (which is an 'option') and to acquire the shares (if they decide to do so). The 'assistance' is properly characterised as 'financial assistance' because the assistance given to Millsave and Mr Haron comes at a financial cost. The Connective companies have incurred, and will continue to incur, legal costs in instituting and pursuing the proceeding. They have also undertaken a potential cost liability. There is no evidence that Millsave and Mr Haron have incurred any costs or taken on any potential cost liability. On the material before us, there is in the relevant sense a net transfer of value from the company, which is bearing the cost, to the shareholders other than Slea, who will receive the benefit.
78 The section asks whether there is financial assistance and, if so, whether it is directed to the object of the recipient of that assistance acquiring shares. For the above reasons, there was financial assistance to Millsave and Mr Haron, and that assistance was directed to the object of enabling them to acquire shares, should they wish to do so. The assistance may also be characterised as assistance to acquire units in shares in the form of an option to acquire shares. The assistance was directly related to facilitating the acquisition of shares or units in the companies and in that way was financial assistance 'to acquire' those shares or units.
79 The primary judge identified the correct principle to be applied. He correctly said that it was necessary to examine the commercial realities of the conduct complained of, and to decide whether that conduct could properly be characterised as the giving of financial assistance by the company to the other shareholders, the frame of reference being the language of ordinary commerce. We are, however, unable to agree with his conclusion on the application of that principle.
80 It seems to us that a combination of the factors referred to in the five proposed grounds of appeal led to what was, in our view, an erroneous conclusion by the primary judge.
81 First, it seems to us that the judge put too much weight on the potential penal consequences of a contravention of s 260A.
82 In Waugh v Kippen Gibbs CJ, Mason, Wilson and Dawson JJ said:
The modern approach in construing penal statutes was stated by Gibbs J (as he then was) in Beckwith v The Queen as follows:
'The rule formerly accepted, that statutes creating offences are to be strictly construed, has lost much of its importance in modern times. In determining the meaning of a penal statute the ordinary rules of construction must be applied, but if the language of the statute remains ambiguous or doubtful the ambiguity or doubt may be resolved in favour of the subject by refusing to extend the category of criminal offences... The rule is perhaps one of last resort.'[47]
83 There is no relevant ambiguity in s 260A, in our view, and no warrant for taking potential penal consequences into account in assessing whether financial assistance to acquire shares was being provided in this case.
84 Secondly, the judge considered that the absence of conduct which could properly be described as a 'transaction' (or a 'discrete transaction') was supportive of a finding that Slea was pursuing the action for its own purposes. We do not consider that the absence of a 'transaction' is a significant matter.
85 The judge addressed the issue of purpose at a number of points in the Reasons. In this Court, the Connective companies submitted that the section properly looked to the purpose of the actions said to constitute assistance, rather than to the purpose of the responsible actor, albeit that the subjective purpose of the actor may bear upon the evaluation of the actions. The applicants made a similar submission, while eschewing the relevance of subjective purpose. To the extent that the judge relied on subjective purpose, this would have been in error because that was not the subject of evidence. But the language of purpose may mislead in any event by wrongly suggesting that subjective purpose is a focus of inquiry under s 260A. Rather, as explained earlier, the section asks whether there is financial assistance (not whether there is intended to be financial assistance) and, if so, whether it is directed to the object of the recipient of that assistance acquiring shares or units in shares.
86 For the reasons already explained, in our view the judge erroneously concluded that there was no benefit to Millsave and Mr Haron as a result of the conduct of the Connective companies.
87 In relation to the issue of onus, we reject the approach contended for by the Connective companies. The conduct complained of here is open to be characterised as the provision of financial assistance to acquire shares and, accordingly, pursuant to s 1324(1B) it is necessary to presume that the conduct does constitute a contravention. The Connective companies have not displaced that presumption.
88 We will accordingly grant leave to appeal on the proposed grounds. We will allow the appeal. We will hear the parties on the form of the injunction to be ordered.
MINERVA FINANCIAL GROUP PTY LTD (ACN 124 171 759)
[2] Slea Pty Ltd v Connective Services Pty Ltd [2017] VSC 609 ('the derivative judgment').
[4] The Agreed Summary on this application states that at all relevant times Mr Glenn Lees has been the sole director and secretary of Millsave: [4]. In the derivative judgment Robson J found as a fact that Messrs Glenn Lees and Murray Lees 'each held their one-third interest in the Connective companies through Millsave ...': [12].
[5] The derivative judgment [12]-[14].
[6] The derivative judgment [19]-[20].
[8] Defence to Amended Statement of Claim dated 4 September 2014 filed in the oppression proceeding: [23], [37], [44] and [64].
[9] [2017] VSC 182 ('Reasons').
[10] The primary judge was correct in concluding that the Connective companies had standing to bring the claim, putting to one side any alleged contravention of s 260A of the Act or breach of directors' duties in doing so. The House of Lords so held in Lyle & Scott Ltd v Scott's Trustees [1959] AC 763.
[12] [1994] VicRp 10; [1994] 1 VR 163, 174-5.
[13] (1998) 89 FCR 78 ('Yates').
[14] [2005] NSWCA 317; (2005) 64 NSWLR 58 ('Athens').
[15] Yates (1998) 89 FCR 78.
[16] Athens [2005] NSWCA 317; (2005) 64 NSWLR 58, 78 [129]. Hodgson JA at 70 [28]-[29] had treated the judgment as being relevant to context in terms which could be seen as more closely equating the position to that which applies to extraneous material on issues of contractual interpretation. Santow JA agreed with Hodgson JA subject to additional observations to the effect set out. Tobias JA at 80 [141] agreed with Hodgson JA but also agreed with the additional observations of Santow JA.
[18] [1986] BCLC 1, 10 ('Charterhouse').
[19] [2002] NSWSC 171; (2002) 168 FLR 253 ('ASIC v Adler').
[20] [2003] NSWCA 131; (2003) 179 FLR 1 ('Adler v ASIC').
[31] First and Second Applicant, 'Written Case for the Applicants', 6 December 2007 [10]; First and Second Respondent, 'Written Case for the First and Second Respondents', 24 January 2018 [10].
[32] First and Second Applicant, 'Written Case for the Applicants', 6 December 2007 [12]; First and Second Respondent, 'Written Case for the First and Second Respondents', 24 January 2018 [13].
[33] [2008] NSWSC 190; (2008) 216 FLR 89 ('Kinarra').
[36] (1989) 16 NSWLR 260, 292.
[37] [1986] BCLC 1, 10.
[41] [2003] NSWCA 131; (2003) 179 FLR 1, 87-8 [408]-[411].
[42] [2008] NSWSC 190; (2008) 216 FLR 89, 93-4 [26]-[27].
[47] [1986] HCA 12; (1986) 160 CLR 156, 164 (citations omitted).
Slea Pty Ltd & Ors
Connective Services Pty Ltd & Ors [2018] VSCA 180
(2002) 168 FLR 253
(2003) 179 FLR 1
(2008) 216 FLR 89
(1998) 89 FCR 78
(2005) 64 NSWLR 58
(1976) 135 CLR 569
(1986) 160 CLR 156
(2005) 222 CLR 67
(1989) 16 NSWLR 260