(2) Are the circumstances sufficiently "special" to exclude the general rule?
86The threshold issues have been resolved. Ami is entitled to call for the transfer to him of the two "A" class shares and half of a sub-divided "B" class share in Zipor that Mr Henley holds for Hedy's estate. The Court should order the transfer to Ami of these shares, unless there are "special circumstances" or "good ground to [order] the contrary".
87Tami argues that there are sufficient special circumstances for the Court not to order the transfer. Ami contends there are no special circumstances. Mr Henley takes a neutral position on this issue. For the reasons that follow, the Court advises that there are no special circumstances inhibiting the Court from ordering the transfer to Ami.
88Tami's argument for special circumstances relies upon the probable consequences of a transfer. Using the language of Sugerman J in Manfred v Maddrell, her argument takes up only one branch of the "practical considerations" to which his Honour refers; namely considerations of "the risk of prejudice to other beneficiaries". Tami's argument accepts that the "considerations of the convenience of division" are not obstacles here. One of the two "A" class shares in Hedy's estate is transferable, and the "B" class share can be split.
89Tami claims she will suffer "real detriment" if the transfer proceeds. Her argument requires consideration of the shares in Zipor held by both Leo's and Hedy's estates.
90Tami paints the following picture of what will happen upon a distribution to Ami of the shares he claims in Zipor. At present Mr Henley holds all the "A" class shares in Zipor - the only ones with voting rights (held as to 50% by Leo's estate and 50% by Hedy's estate). Presently Mr Henley can in both his capacities as representative of each estate control Zipor and realize full value from it including winding it up. Mr Henley also controls all the "B" class shares, which carry the entitlements to dividends and repayment of paid up capital (together with the "C" class shareholders) and the sole surplus capital entitlement (again at 50% for Leo and 50% for Hedy). Thus at present the plaintiff, Mr Henley, can through both his capacities on behalf of each of Leo's and Hedy's estates, either cause a winding up and see the return of all surplus capital to the two estates, or, by selling all the "A" class and "B" class shares, transfer the full ability to control and benefit from the economic value of the shares, to an outsider - and thus realize the full value for the two estates.
91Tami contrasts what will happen if Ami's Saunders v Vautier request is satisfied. She submits that the moment Mr Henley distributes 50% of the "A' and "B" class shares in Zipor from Hedy's estate (and the other 50% to Tami, that Mr Henley has lost the ability, acting on his own, to cause the winding up of Zipor, or to transfer full control and economic value to an outsider. The value of the parts thus created - including Tami's part - is thus necessarily less than the value inherent in what she currently has.
92The resulting shareholding if Ami's objective succeeds would be: (1) Mr Henley holding for Leo's estate, 2 "A" class shares and "1/2" a "B" class share -which under the distribution contemplated in Leo's will means 66.67% of each "A" class and "B" class shares for Ami and 33.33% if each for Tami. In addition Ami would have in his own right (via Hedy's estate) 1 "A" class share and "1/2" "B" class share. The result is the plaintiff on his own cannot pass an ordinary or special resolution; but he would require one or other of Ami or Tami to agree with him before he could pass either an ordinary or a special resolution (such as a resolution for winding up). Tami further submits that only if both Ami and Tami agree that the benefits from being able to offer 100% of the shares to an outsider could be achieved. Tami says these conclusions are supported by accounting evidence as to the fair valuation of Zipor.
93But in my view: this argument is inconsistent with the course of English and Australian authority that considers "special circumstances" in relation to shares in private companies; and, there is no evidence here to support a finding of special circumstances.
94There are four main English cases to be considered on the finding "special circumstances" in relation to the transfer of shares in private companies in response to a Saunders v Vautier direction, including Re Sandeman's Will Trusts, which has been partly considered above. Neither counsels' research nor my own have found Australian any cases dealing with the precise issue covered by these English authorities: of a Saunders v Vautier direction in respect of some of the shares in a private company.
95The first of the English cases is In re Marshall [1914] 1 Ch 192, which concerned shares in a public company but which is the foundation of the reasoning in the later private company cases. The Court found the following relevant facts In re Marshall. The appellants were absolutely vested indefeasibly in possession of approximately one quarter of the residue of an estate, which residue principally consisted of ordinary and preference shares in a public company. The other three quarters of residue was settled on trusts, which would probably last for 30 to 40 years. The testator's share capital was about one sixth of the issued capital of the public company, which had some 360 shareholders. The trustees had a power to postpone sale and conversion. The appellants sought the distribution to them of their proportionate share of the capital in the public company. The other residuary beneficiaries objected and said that the appellants should wait until the vesting of the trusts over the three quarters of residue.
96It was accepted that if the trustees transferred the shares as the appellants requested that they risked losing control over the management of the business and over the market price of the shares, which the trustees saw as advantages to be retained in the interests of all shareholders. The other beneficiaries argued that the testator did not intend that the appellants would have a right to call for the transfer, unless they could show that the transfer would not injuriously affect the other beneficiaries. The trustees accepted that the transfer would weaken the value of the shares of the other beneficiaries.
97The Court of Appeal upheld the appeal and allowed distribution of the shares to the appellants. After explaining the rationale for the rule not applying to real estate, because it would be "detrimental to the other beneficiaries", Cozens - Hardy MR (at 199-200) examined why the rule does not apply to personal property such as shares in public companies, and held out the possibility that the position might be different for private companies:
But that doctrine, it seems to me, has no application, apart from special circumstances, to personal property. It may apply to a case of a mortgage debt which you cannot conveniently split up into shares; but when you are dealing with the case of a limited company with ordinary and preference shares, you want to know a great deal more than that before you can say that the trustees are entitled to deprive an absolute owner of his right to claim a transfer. When the case was first before us we suggested that we should like to know what were the facts about the company; what was its capital, and the number of its shareholders, and what were the special circumstances of the case; and it stood over in order that we might have better information. That information has now been furnished very conveniently and satisfactorily, and it appears that this is not in any sense a private company in which the testator held a control by holding the majority of the shares, or anything of that kind. It is a case in which there are some 360 shareholders. The amount of the capital now represented by the testator's residuary estate is substantially one sixth of the capital. The present appellants hold one fifth of that amount, in regard to which they say to the trustees, "Please transfer to us our one fifth of the block of shares which you are now holding; in our opinion there is no reason whatever why you should be entitled so to hold them....
There may be cases with reference to the particular position of a company like this, at a particular time, which may justify the trustees in exercising their discretion, if they can satisfy the Court that these special circumstances exist; but the case of the present trustees is not put on that ground at all
98Then Cozens-Hardy MR declared that the trustees in In re Marshall were not relying on any special circumstances in relation to themselves and the company, but just on their power to postpone sale, a matter, which these reasons have already shown is not an answer to a Saunders v Vautier direction. But The Master of the Rolls here traced out a bare outline of what might be special circumstances: the "particular position" of the company at "a particular time". Harman J added a little further detail to this outline forty years later in Re Weiner when (at 584) his Honour contemplated that the trustees' temporary plans for the company could well constitute special circumstances.
99In Re Marshall Phillimore LJ's reasons (at 202) also keep open the possibility that the trustees maintaining a large block of shares, to prevent the share becoming valueless, may "in certain cases" be a sound reason not to transfer in response to a Saunders v Vautier direction, but still noted that the Court had to determine a "balance of conflicting rights and interests":
If there is such a right it rests upon the duty of the trustees to do their best for all the beneficiaries, it being their consequential duty to keep as large a block of shares as possible together so as to have large voting power, because it may be for the interests of some of the beneficiaries - such as tenants for life of settled estates - to keep the shares; and while they are kept it is very important that the policy of the company should be wisely directed, else the shares may be valueless. In certain cases I think this would be a true and sound reason for refusing the appellants' request, but in this case I agree that upon the balance of conflicting rights and interests there is not enough to deprive the appellants of their prima facie right.
100The facts of Re Sandeman's Will Trusts have already been described in relation to the second threshold issue. But some other facts are presently relevant. The parcel of shares of the private company in the estate represented 1018 votes out of a total of 1927 (or 52%) and could pass an ordinary resolution in the company's affairs, but not a special resolution. And the private company concerned had in recent years been paying dividends in excess of profits, so that at the time of the proceedings the trustees were of the opinion "that in view of the position of the company" it was for the benefit of the trust fund that "for the time being that voting power should be kept intact".
101But in breaking up the controlling interest and finding that the grandsons could immediately enjoy their moiety of the shares Clauson J addressed these considerations directly. He found (1) no evidence of presently existing prejudice to the other part of the trust fund held for the benefit of the testator's daughter for life and (2) no basis to infer that either the trustees or the grandsons would exercise their voting power other than bona fide, saying (at 372F - 373D):
It is suggested that I am entitled to ignore that right for this reason. It is said that, if these shares are left in the hands of the trustees, the effect of that will be that the trustees can have control of the company, as against the holders of the remaining shares, in connection with any resolution which they may think desirable to have passed at a general meeting. That is perfectly true, but it is to be remembered that the trustees can do that only having regard to the interests of their beneficiaries. If you have two sets of beneficiaries equally concerned in the trust, and those two sets of beneficiaries take differing views as to the course which the trustees ought to take, the court will certainly see that those trustees, before exercising their power of voting, pay due regard to the wishes of those two sets of beneficiaries. It is foolish to say that the trustees, having shares in their name, have anything in the nature of an independent right to deal with voting power of the shares. However that may be, there is no fact, at the present moment, which seems to show that the interests of anybody concerned in the trust will be in the slightest degree prejudiced by the proper division being made-in other words, by the shares to which the plaintiffs are entitled being handed over to them.
I can conceive that there might be circumstances-they would have to be very special-which would justify the court in refusing to give effect to the plaintiffs' rights; but I cannot find, on the evidence before me, anything to suggest that such circumstances exist in this case. I have no reason to suppose that either the trustees, on the one hand, or the plaintiffs, when they become transferees of their shares, on the other hand, will exercise their voting power otherwise than perfectly bone fide; and I cannot see that any harm will be done to anybody by giving effect to the prima facie right of the plaintiffs to have their shares, and the voting power on their shares, in their own control.
If that is the right view on the facts, whether my view of the construction of the will is right or not, it is quite plain that the plaintiffs' rights must be given effect to; and they must have their half of the shares in question transferred to them. In my view, that is the order, and the only order which I can make.
102The next case is In re Weiner, another decision about shares in a private company. At the time of the hearing the testator's residuary estate comprised almost entirely by 75% of the issued capital of the testator's private company, J Weiner Ltd. The plaintiff was absolutely and indefeasibly entitled to 45% of the residuary estate and the defendants together spoke for settlements, which would eventually become entitled to the balance of 55% of the residuary estate. The plaintiff called for the distribution of his 45% of the residuary estate. The defendants opposed the distribution on the basis that "the shares in a private company are not so valuable severally as they are when they are put together" or put another way that "these being shares in a private company, they ought not be distributed because it will injure the settled 55%".
103Counsel for the defendants put a case that breaking up the controlling interest in the testator's private company would justify a refusal to distribute to the plaintiff. But Harman J found the case indistinguishable from In re Sandeman's Will Trusts and dealt with the defendant argument in the following way:
Mr Edwards put his case as high as this, as I think he must, and argued that in the case of any private company where the trustees held a control, no special circumstances need be adduced at all; the mere fact that a controlling interest was held and would not be held if the shares were to be divided was enough to make the court refuse to make the trustees divide. I cannot take that view at all. It would mean, in effect that, there never could be a division, because that must always involve the loss of control. I cannot see that there is anything short of some special circumstances which would justify me in holding up these cases. The trustees have not come forward and said that there are good reasons why they do not wish to divide now, since they may be able to effect some scheme within the next year or so, and they happen to know that the plaintiff is opposed to the scheme. No special circumstances are made here.
104The last English case to be analysed took a different view and for different reasons. In Lloyds Bank plc v Duker a testator died holding 999 of the 1000 issued shares in a private company, which owned a private hotel in Torquay with a probable current value of GBP3 million. Under the trusts created by his will his wife's entitlement to residue was to "one half of what is left". After his death because of a partial intestacy a deed of family arrangement divided the testator's residuary estate into 1/80th units. Under the deed the testator's wife became entitled to 46/80th of the residuary estate and the remaining 34/80th was divisible among the other beneficiaries. The wife called on the plaintiff trustee to transfer to her the nearest equivalent number of shares to the fractional 46/80th of 999 shares, namely 574 shares. The wife died and she appointed the plaintiff her executor. She gave her entire estate to the first defendant, who continued to call for the 574 shares from the first defendant.
105The other defendant beneficiaries in Lloyds Bank plc v Duker resisted the first defendant's call for the 574 shares. Taken together their individual holdings amounted to 425 shares (or 34/80th of the 999 shares). They argued that the first defendant would receive much more than 46/80th of the total value received by all the beneficiaries as a group because his majority 46/80th holding is worth more per share than a minority holding. On somewhat limited expert evidence and on the correspondence between the parties Judge Mowbray QC found: that the shares were worth between GBP3,000 and GBP3,500 on the open market, a value per share which would be substantially reflected in a parcel of 574 shares; that the minority parcels could not be expected to unlock the asset value of the company "to any appreciable extent" and would be worth markedly less per share; and, that there would be no dividends for the minority in the foreseeable future due to planned capital expenditure on the hotel.
106Judge Mowbray QC concluded that although the normal rule would be that the first defendant would be entitled to call for the transfer of the 574 shares such a transfer would not be in accordance with the testator's will which despite the deed of family arrangement was still relevantly operative and required equal division by value of the wife's (now the first defendant's) interests from the interests of the other defendant beneficiaries.
107Judge Mowbray QC distinguished the three English cases already considered, In re Marshall, Re Sandeman's Will Trusts, and In Re Weiner. The following passage shows that he distinguished these cases on the basis that they did not involve the transfer of a majority holding of shares in the companies in question and did not consider the question of the discrepancy between share values and numbers:
The first three decisions I have named do not, as decisions, throw any light on the question whether the discrepancy between share numbers and values is to be considered a sufficiently special circumstance to exclude the general rule. The reason is that there was no such discrepancy in those cases. In all of them, beneficiaries immediately entitled called for transfers of their aliquot parts of a block of shares held in residue by the trustees, and this was ordered. In Re Marshall the block only formed about a sixth of the issued shares in a public company with some 360 shareholders. It was not suggested (and could not have been) that shares in the part of the block to be distributed were worth more per share than the shares retained. The block of shares in In Re Sandeman's Will Trusts was a controlling interest which carried 1,018 out of the 1,927 votes which would be cast at general meetings of a private company. Half the estate was distributable, and half the holding was ordered to be distributed. Nothing at all seems to have been said about differential share values, and naturally enough, because the half distributed would have had just the same value per share as the half retained. In the third case, Re Weiner's Will Trusts the block in the estate was 75% of the shares in a private company and 45% of this was ordered to be distributed. Again, the shares in such a holding could not have been worth more per share than the shares in the 55% of the block that remained with the trustees.
I accept Re Sandeman's Will Trusts and Re Weiner's Will Trusts as authorities which ought to be followed at first instance that the general rule is not excluded by the fact that the distribution breaks up a controlling interest, and so reduces the value of the whole.
I assume that is correct, and if that were the only reason for ordering a sale of the 999 shares as a whole in the present case, the decisions in Re Sandeman's Will Trusts and Re Weiner's Will Trusts would be against it. But it is not the only reason for a sale in the present case, as I see it. The operative reason is that, if the shares were transferred out in the 1/80th fractions, Mr Duker would get a greater value per share than the other beneficiaries and so would get more than his 46/80ths of the total value received by the beneficiaries as a body.
I have not had much help from dicta in the authorities I have mentioned. In Re Marshall [1914] 1 Ch 192 at 199, [1911-13] All ER Rep 671 at 674 Cozens-Hardy MR gave it as the reason why the general rule did not apply to land that to allow one of the beneficiaries to take an undivided share of the land would be detrimental to the others, because it would leave them with undivided shares, which would be worth less than their proper proportion of the proceeds of sale of the entire estate. But the later authorities have decided that with shares in a private company it is no objection that those remaining undistributed lose value, so I am not able to build on Cozens-Hardy MR's dictum.
I have not found any helpful dicta in the later authorities.
I can, though, get some help from another general principle. I mean the principle that trustees are bound to hold an even hand among their beneficiaries, and not favour one as against another, stated for instance in Snell p 225. Of course Mr Duker must have a larger part than the other beneficiaries. But if he takes 46/80ths of the shares he will be favoured beyond what Mr Smith intended, because his shares will each be worth more than the others'. The trustees' duty to hold an even hand seems to indicate that they should sell all 999 shares instead. Counsel for the minority beneficiaries pointed out that it is this duty which imposes a trust for sale under the first branch of the rule in Howe v Earl of Dartmouth, Howe v Countess of Aylesbury (1802) 7 Ves 137, [1775-1802] All ER Rep 24. Here, too, it points in the direction of a duty to sell.
108But in my view the guiding authorities here are In re Marshall, Re Sandeman's Will Trusts, and In Re Weiner deceased. And Tami's argument is otherwise not persuasive for the following reasons.
109The approach in this discussion is to look at the special circumstances that Mr McHugh SC's argument identifies, to see whether they do constitute special circumstances warranting refusal of Ami's Saunders v Vautier direction to Mr Henley. But first I accept the correctness of Mr McHugh's contentions that it may be misleading to focus on expressions such as "special circumstances", which are after all, not the only language in the authorities about the subject. Rather he puts the issue in the words of Sugerman J in Manfred v Maddrell: as whether "a beneficiary may have the present enjoyment of his share is governed by practical considerations and, in particular, by considerations of... the risk of prejudice to other beneficiaries". He points on behalf of Tami to a number of such risks of prejudice.
110Tami's first matter relevant to special circumstances (or risk of prejudice) is that if there is an in specie distribution of Hedy's shares in Zipor that will destroy a large amount of value in those shares because it will no longer be possible for Mr Henley to cooperate with himself as the administrator of Leo's estate to sell 100% of shares and obtain a control premium for them. For the purposes of this argument I am quite prepared to accept the expert evidence adduced on Tami's behalf from Mr Claude Jugmans, that control premiums for controlling interests (that is more than 50%) in private companies in Australia generally range between 15% and 20% and could be higher depending upon the circumstances. Tami's point is that Mr Henley will have only 2 voting "A" class shares in Zipor as the administrator of Leo's estate, which will not be enough for him to force a winding up of the company and the realisation of its value for all shareholders.
111Mr Jackman SC's answers to this argument are persuasive. This first claimed special circumstance is really an argument that Tami will suffer prejudice because of the breaking up of a controlling interest in Zipor. As my analysis of the cases above shows, that argument has already been put and answered in In re Sandeman's Will Trusts and In re Weiner. Both of those cases contemplated the breaking up of a controlling shareholding and In re Weiner directly contemplated the loss of value that might occur to remaining shares in the trust fund as a result of that break-up. I should not readily depart from such long-standing authority.
112But Mr Jackman SC's other point, in answer to the first special circumstance, also has merit. Mr Henley holds two of the 4 "A" class shares that he holds in Zipor as administrator of Hedy's estate. He does not hold all those 4 shares as the trustee of his estate. It is wrong in my view to look at the present situation as one in which Mr Henley holds a single majority parcel of shares. The uncertain administration of Leo's estate, and the possible need to realise cash in that estate, may require him in his capacity as administrator to act quite differently from the way he would as trustee of Hedy's estate. In my view the correct analysis here is that Ami is simply calling for one half of the "A" class and "B" class shares that Mr Henley holds as trustee of Hedy's estate. Mr Henley did not advance any present proposal as to how he was going to deal with Leo's estate and where the Zipor shares would fit in with his plans for Leo's estate. In particular this is not a case of the kind hinted at by Harman J In re Weiner, where special circumstances might arise because of a particular plan that the trustee had for the company which would be temporarily or permanently frustrated by the distribution. In those circumstances the Court should look to the interest about which Mr Henley is seeking the Court's advice - the Zipor shares in Hedy's estate. They do not represent a controlling interest in Zipor.
113But even if I were to treat Mr Henley's interests in both estates as a composite shareholding and ignore In re Weiner the result would not be any different. There is simply too much uncertainty in the future to predict that there is a risk of prejudice to Tami from breaking up this particular shareholding in the way that is sought. Although Leo's will gives two thirds of his Zipor shares to Ami it is certainly not very clear whether that will ever come to pass, and if it did, it is what was independently intended by Leo's will.
114Tami's second matter relevant to special circumstances (or risk of prejudice) is that an in specie distribution of the Zipor shares in Hedy's estate will result in a massively unequal distribution of value between Ami and Tami by allowing Ami to take control of Zipor. Mr McHugh points in the evidence to what occurred when Ami and his wife Helen had control of Zipor between 2003 and 2010. That evidence shows that Ami and Helen use their power as directors and majority voting shareholders to declare dividends, which went by very substantial margin to LWFC. As dividends were declared over "B" and "C" class shares equally for example in the year 2004 Ami and Hedy's estate each holding one "B" class share, receive $3,676.40. But the same year LWFC's 1000 "C" class shares received dividends of $3,676,400.
115But in my view, there are several answers to this. It is true as Mr McHugh SC points out that clause 5 of Hedy's will requires Mr Henley as trustee to hold the residuary estate for each of Tami and Ami "in equal shares". But this is not a case like Lloyds Bank Limited v Duker where there is immediate inconsistency between the command of a distribution of equal value under a will and a proposed unequal distribution (in Lloyds Bank Limited v Duker at least 46/80th). In Lloyds Bank Limited v Duker where the estate controlled 999 of 1000 shares the proposed distribution was inconsistent with the will's command of equality of value to be distributed. Here the "A" and B" class shares that would be distributed to each of Ami and Tami only represent a minority interest and Tami and Ami can now receive an equal division of that minority interest. There is no obvious inequality of value in these two parcels. It is only when a distribution from Leo's estate later occurs that inequality might arise; and as earlier found there is no certainty when and if that will occur.
116Moreover, if and when distribution occurs from Leo's estate in accordance with his will the consequences for Tami of her minority interest in Zipor will be regulated under corporations legislation. And Corporations Act 2001 s233 would give her ample remedies against future oppressive conduct. Mr McHugh SC says that a repetition of Ami's past conduct may not be readily remediable as oppressive. But in my view this argument really only illustrates the limitations of attempting to administer corporations through the law of trusts and succession, which are ill-equipped for that purpose.
117Tami's third matter relevant to special circumstances (or risk of prejudice) is the parties' immense appetite for litigation. Of that appetite there can be no doubt. But it does not seem to me to be a special circumstance. On the past history of these parties, the risk of prejudice from this quarter is no different whether or not a distribution occurs.
118Tami's fourth matter relevant to special circumstances (or risk of prejudice) is that the "B" class share cannot presently be distributed in its present form unless it is divided. That share can only be split through an ordinary resolution on which Mr Henley would vote as administrator of Leo's estate. A point is made that Mr Henley has not sought judicial advice in his capacity as administrator of Leo's estate. But as Mr Coles QC submits, this seems to me to be a purely administrative matter. The capacity to split the B class shares clearly exists under Zipor's constitution. Mr Henley is quite free to decide to vote in favour of a split if he wishes to in the interest of Leo's estate. That does not seem to me to be a relevant special circumstances preventing distribution in accordance with Ami's Saunders v Vautier direction in Hedy's estate. In the absence of any other special circumstances preventing his acting on the Saunders v Vautier direction he would be obliged to vote for such a "B" class share split as trustee of Hedy's estate.
119In the result Tami's contention that there are special circumstances here fails, and I will advise the trustee Mr Henley that he may transfer the Zipor shares as Ami has requested.