Milburn and Ors v. Pivot Ltd

[1997] 78 FCR 472
149 ALR 439

(Judgment by: Goldberg J)

Milburn and Ors
v.Pivot Ltd

Court:
Federal Court of Australia

Judge:
Goldberg J

Hearing date: 11, 12, 14, 17, 19, 21, 26 February 1997
Judgment date: 8 October 1997


Judgment by:
Goldberg J

Introduction and background

The proceeding before the court is an application by three shareholders in the respondent, Pivot Ltd (Pivot), pursuant to s 205(12) of the Corporations Law that the court make an order pursuant to s 205(13) of the Corporations Law disapproving the giving of the financial assistance to which a special resolution, passed by an extraordinary general meeting of members of Pivot on 11 November 1996, relates.

For many years Pivot, an unlisted public company, has carried on business manufacturing and distributing fertilisers, chemicals and related products, operating substantially within the farming community and as a farmers' co-operative. Most of its shares have been, and continue to be, held by farmers or retired farmers. Pivot was not incorporated under the Co-operation Act 1958 (Vic) or any predecessor Co-Operation Act but was rather incorporated on 28 April 1919 under the Companies Act 1915 (Vic).

The capital structure of Pivot as at 30 September 1996 comprised 507,887 ordinary shares held by 39,151 shareholders and 43,114 investor shares held by 5298 shareholders all fully paid with a par value of $10 each. Only agricultural customers of Pivot can apply for ordinary shares. Ordinary shares carry full voting rights subject to article 68(1) of the articles of association which provides a sliding scale of voting depending on the number of shares held with a maximum limit of five votes for each shareholder regardless of the number of shares held. The applicants jointly hold 50 ordinary shares.

Mr Douglas Stephen Shears, through a company with which he is associated, Citifarm Pty Ltd (Citifarm), held or controlled shares representing approximately 7.5% of the shares in Pivot of which all but 495 investor shares were ordinary shares. For convenience I will call all these shares 'the Citifarm shares''. Mr Shears had acquired this voting control, notwithstanding the relevant provisions in the articles of association of Pivot, by purchasing shares from shareholders in Pivot, not registering the transfers but obtaining powers of attorney from the registered holders entitling him to cast the votes attached to those shares. The manner in which he had acquired his shareholding and his entitlement to use these voting rights has been the subject of previous litigation: Shears v Phosphate Co-operative Co of Australia Ltd (1988) 14 ACLR 747; Phosphate Co-operative Co of Australia Pty Ltd v Shears [1989] VR 665 at 669.

In 1994 a class of investor shares was created by Pivot which shares were designed to be held by farmers who were no longer actively farming, who had ceased to trade with Pivot and who wished to obtain a return on their shares. Holders of these shares only had the right to vote at general meetings on resolutions relating to a reduction of capital, the rights attached to investor shares, winding-up, the disposal of the whole undertaking during the course of a winding-up or if the preferential dividend on these shares had been in arrears for at least six months.

The holders of ordinary shares did not receive dividends but became entitled to receive rebates in respect of their purchases from Pivot which rebates varied up to a maximum level depending upon the number of shares held. Rebates were not paid in respect of the investor shares but the holders of the investor shares received dividends on them. Article 6 of Pivot's articles of association gave the board of directors the power to convert shares held by non-active farmers from ordinary shares to investor shares. However, this power did not extend to the Citifarm shares as those shares had been acquired by Citifarm prior to the date on which Art 6 in its current form took effect.

As Pivot was a co-operative the price of shares in Pivot had been set by the board of directors from time to time and since the late 1980s, and as at 1996, the price fixed by the board for shares in Pivot had been $50 per share. Transactions had regularly taken place between buyers and sellers at this price. By 1996 the shares had an asset backing well in excess of $50 per share and this was recognised by the board. A fully franked dividend of $2 per share had been paid in respect of the investor shares for the year ending 30 September 1995 and a fully franked dividend of $4 per share was paid in respect of the investor shares for the year ended 30 September 1996.

For a considerable period of time prior to 1996 it had been a concern of the directors of Pivot that the corporate structure of Pivot was such as to ensure that its control remained in the hands of active farmer members. The directors of Pivot had been concerned for some time about the Citifarm holding in Pivot because they took the view that this holding, from a practical point of view, entitled Mr Shears' company to control about 40% of votes cast at shareholders' meetings. In recent times the average holding of ordinary shares in Pivot has been 10 to 11 shares. Although the Citifarm holding represented only approximately 7.5% of the ordinary voting shares there was a traditionally low attendance of shareholders at Pivot general meetings either in person or by proxy with the result that the Citifarm holding usually represented about 40% of the votes actually cast at any meeting.

The relationship between Mr Shears and his company and the board of Pivot was not friendly and at meetings held in October 1990 and February 1996, Mr Shears and Citifarm had used their votes to defeat the re-election of board members. Mr Shears had sought representation on the board of Pivot for his interests and he had also made representations to the board that the price of the Pivot shares should be increased to a level closer to their net tangible asset backing. It is fair to say that no share restructure proposal could be implemented without the support of the Shears/Citifarm interests if shareholder participation at meetings remained at its traditional level. Put shortly, the Shears/Citifarm interests exercised significant influence over the affairs of Pivot.

Lead-up to proposed capital restructure

On 11 April 1996 there was a meeting of the membership committee of the board to consider the issue of 'membership restructure''. Pivot's chief executive, Mr Bob Campbell, prepared a position paper for that meeting in which he set out what he saw as the objectives and priorities of any restructure as follows:

1.
Maintaining and enhancing the farmer control of the company;
2.
Implementing a plan to reflect the accumulated benefits in the share price on an ongoing basis;
3.
To utilise the franking credits currently available to the benefit of the company and its members;
4.
To provide a facility to obtain significant permanent capital as and when it is required;
5.
To ensure availability of shares for active farmers on an equitable and attractive basis in the future.

In the paper Mr Campbell set out the arguments in favour and against each of these objectives. In particular he noted the difference between the price for which shares were being issued and transferred ($50) and what he said might be considered as the 'real'' value of the shares. The paper proceeded on the basis that Mr Shears had no intention of selling the Citifarm shares.

The board committee agreed that farmer control was to be the principal objective of the capital restructure and that the strengthening of farmer control would be best achieved by:

(a)
conversion of all non-actively farming ordinary shareholders into investor class shareholders;
(b)
increasing the participation of active ordinary shareholders in the business of the company and in particular by exercising their voting rights at meetings;
(c)
inducing as many non-shareholder customers as possible to become ordinary shareholders;
(d)
making ordinary shares available on an attractive and equitable basis to active farmers who were trading with the company.

It was also resolved to recommend to the board that:

(a)
there be a bonus issue at $50 a share to utilise accumulated franking credits;
(b)
a share split be implemented to bring share value closer to the 'real'' value of the shares. The majority view of the committee was that the share value should be $10;
(c)
whatever the value of the individual shares the cost of acquisition of shares should remain at $50;
(d)
existing relativities in voting rights be maintained notwithstanding any other changes to the membership structure of Pivot.

On 14 March 1996 Deloitte & Associates, corporate advisers, at Mr Campbell's request, had given Pivot an indicative valuation of the company in the range of $143,000,000 and $185,000,000. That range had been derived from Pivot's earnings after deducting rebates paid to the holders of the ordinary shares. Deloitte said that if such rebates were not deducted but were treated as dividends the indicative value of the company would be in the range of $176,000,000 to $220,000,000.

A further meeting of the membership committee of Pivot was held on 6 June 1996 at which it was resolved that the chairman of the company should send a letter to all shareholders setting out the proposals as to the share restructure. The minutes of the meeting noted what the committee saw as the key points to be included in the letter to shareholders and these included:

(a)
a statement of Pivot's commitment to the principle that Pivot should remain owned and controlled by farmers with members benefiting from the profitability of Pivot's trading proportionately to their patronage of the company;
(b)
that Pivot wished to expand its shareholder base in line with the expansion of its geographic coverage then underway;
(c)
that Pivot wished to utilise its franking credits for the benefit of its shareholders.

In June 1996 Mr James Graham, a merchant banker from Gresham Partners, telephoned Mr Campbell and told him that Mr Shears might consider selling the Citifarm shares. (Initially Mr Campbell put this conversation in August 1996 but I am satisfied it must have occurred earlier.) Around the same time Mr Campbell spoke to the corporate adviser Loftus Capital Partners Pty Ltd (Loftus) about looking for a buyer for the Citifarm parcel as Pivot thought Mr Shears might be a seller. Mr Abernethy, a Loftus executive, was on holidays at that time and in July 1996 he commenced speaking to potential purchasers. Mr Abernethy was told that Pivot would support the sale of the Citifarm shares on the basis that either they be sold as investor shares (having been converted) or sold on the basis that the buyer would consent to them being converted to investor shares.

Mr Campbell suggested to Mr Abernethy that he speak to Peter McKay at ICM Australia Pty Ltd (ICM Australia) a company associated with Mr Shears and Citifarm. Mr McKay told Mr Abernethy that they would sell the shares at a premium to net tangible asset backing. Mr Campbell told Mr Abernethy that Pivot was considering a restructure of Pivot's capital involving the issue of shares based on net tangible asset backing and he asked Mr Abernethy to advise on the restructure. Mr Abernethy was told that the restructure would involve the sale of the Citifarm shares and their conversion to investor shares, that Pivot needed to raise capital in the future and that it wanted to make use of available franking credits. Mr Campbell also told Mr Abernethy that Pivot was concerned about Mr Shears' disproportionate voting power. Although Mr Campbell asked Mr Abernethy whether it might be possible to get Pivot shares listed, Mr Abernethy told him it could not be done under the present structure and no advice was sought from Mr Abernethy as to what would have to be done to have the Pivot shares listed.

Loftus prepared a proposal which Mr Abernethy told Pivot would make the Shears parcel attractive to an outside investor. The Loftus proposal involved:

(a)
the acquisition of the Shears parcel subject to the approval of the other components of the restructure and approval by a general meeting of members due to legal advice that Pivot might be deemed to be giving financial assistance to a purchaser of its shares;
(b)
Pivot making a one for one bonus issue out of its franking account;
(c)
a special dividend being declared;
(d)
members being invited to reinvest the special dividend in Pivot investor shares pursuant to a dividend reinvestment plan;
(e)
an underwriting of the dividend reinvestment plan for a commitment to subscribe for a minimum number of shares;
(f)
the shares being split to take the net tangible asset backing of the shares to $10.

Loftus had conceived the idea of the dividend reinvestment plan and underwriting early in August 1996 because, as Mr Abernethy told Mr Campbell, there was no buyer for the Citifarm shares at Mr Shears' price and an underwriter of a dividend reinvestment plan shortfall possibly would buy the Citifarm shares. At this point of time no potential purchaser of the Citifarm shares was in sight. The Loftus proposal required the underwriter to be the purchaser of the Citifarm shares. Mr Campbell said that the underwriting agreement had been discussed with Mr Abernethy before Pivot knew that Mr Shears was a possible seller and that at the time of this discussion they were looking at Ingot Capital Partners. However this evidence is inconsistent with Mr Campbell's evidence as to how he became aware that Mr Shears was a possible seller and what he did as a result of this information. In my view Mr Campbell was mistaken and this view is confirmed by his later evidence that at the time he first became aware that Mr Shears might be a seller, which was in a telephone conversation with Mr James Graham from Gresham Partners, he had not had any discussion with Mr Abernethy about a possible underwriting agreement.

During August 1996 Mr Abernethy sought legal advice from a solicitor, Mr David Gonski about the proposal but Loftus was not asked by Pivot to obtain the advice.

Mr Gonski was given a copy of Pivot's articles of association and a summary of the Loftus proposal which was in the following terms:


Structure of deal as follows:

·
LCP [a reference to Loftus] as agent bids Shears for stock at $240-$287 per share. Effectively bid low and negotiate.
·
Bid is subject to approval of a reconstruction of capital and a capital raising approved by general meeting.

Approval required by members due to legal advice that Pivot may be deemed to be giving financial assistance to a purchaser of its shares. Members will thus approve the assistance.
·
Meeting called with 21 days notice and requisite notice to ASC.


Scheme is as follows:

·
1 for 1 bonus issue (out of franking account).
·
Declaration of 'special'' dividend.
·
Invitation to members/investors to reinvest dividend (DRP) into Pivot investor shares.
·
Loftus to arrange underwriting of the DRP for a commitment to subscribe to a minimum of $Xm.
·
Split of stock to take share value to NTA at say $10.


Result

· Shears shares will be bought upon approval of members at meeting.
· Pivot is paying out franking credits to shareholders/investors before reconstruction but seeks capital replenishment via DRP.
· Loftus are to place investor shares to investors to improve spread with intention to list a Pivot investor share structure in future.

Mr Abernethy had also had telephone conversations with Mr Gonski in which he had explained his proposal which involved the sale of the Citifarm shares, the restructuring of Pivot's capital and the contribution of franking credits. On 16 August 1996 Mr Abernethy sent Mr Gonski a note of Pivot's current thoughts and Loftus' additions in the following terms:


The current thoughts by Pivot for reconstruction are as follows.

Current issued shares:

·
ordinary shares: 490,000
·
investor shares: 50,000


The board of Pivot wishes the share price to more correctly align the NTA backing, thus:

·
issue a 1 for 1 bonus issue as a dividend out of franking account. Pivot has $58m in franking credits and the bonus will consume 540,000 x $50 or $29 million. Pivot directors can declare this bonus without shareholder approval.
·
Pivot would then split the shares so they have a value of $10 per share equivalent to the NTA. This would involve a 15 for 1 split. This would require shareholder approval.
·
Directors will declare a dividend and state an intention going forward of paying a commercial rate dividend on supplier and investor shares. The commercial rate will be slightly higher than available on listed shares but based on performance of the company.


Loftus additions

·
Pivot declare a capital raising to all shareholders to fund a known acquisition underwritten by an external investor.
·
Pivot directors inform shareholders of the acquisition by the underwriter above of the Shears shares and requires shareholder approval for this.

There was a meeting with Mr Gonski attended by Messrs Campbell, Shanahan (chairman) and Little (a director) of Pivot. Mr Gonski gave advice which was recorded in a draft unsigned letter dated 21 August 1996 sent to Mr Abernethy for the purpose of him ensuring that the facts stated in it were correct. No signed letter of advice was received but Mr Gonski did not express any views different to those set out in the draft letter in which he set out his understanding of what he had been told as to the proposal and his advice.

Mr Gonski in the letter set out a summary of his advice as follows:


1. It is my understanding that the essence of the proposal is that the directors wish to achieve three aims:

(A)
Restructuring of the capital of the company so that it is more accepted (particularly by way of spread) within Australian capital markets -- thus facilitating a better price for shareholders who may wish to sell and a better price for the company should it wish to raise further capital in the future.
(B)
The payment of an extra benefit to shareholders so that they might gain from the franking credits currently held within the company itself.
(C)
Provide the opportunity for a large shareholder -- an associate of Mr Shears -- to sell its shares and thereby increase the spread of shareholders and, at the same time, ensure that the company does not become controlled by a party without that party making a bid to all shareholders in the company.


2. In considering both achievement of the above aims and the specific steps involved, the board of the company must have regard, among other matters, to:

(A)
The obligation of directors to act honestly and diligently for the benefit of the company as a whole (see s 232 of the Corporations Law);
(B)
The fact that a company cannot give financial assistance in connection with the acquisition of shares in the company itself or in its holding company (see s 205 of the Corporations Law); and
(C)
The provisions of the takeovers legislation contained in Ch 6 of the Corporations Law which must also be adhered to.


3. In my view, the structure of the transaction, as summarised in the attachment to this letter, will not breach either the provisions of s 205 or the provisions of Ch 6 of the Corporations.

This opinion is based upon the facts I have been given and a proper approval within the terms of s 205(10) being sought and obtained in connection with any financial assistance which may be proposed pursuant to the transaction (such approval requiring a special resolution to be passed at a general meeting of the company called in accordance with the provisions of s 205(10)). It is also based upon an assumption that the shares being acquired from the associate of Mr Shears and by way of issue pursuant to the transaction, do not result in Loftus, or any other party, becoming entitled to an interest in excess of 20% of the shares on issue in the company at any time as part of the transaction.

4. The issue of whether in instigating the transaction the directors have acted in a manner consistent with s 232 is a more difficult one for an outsider to give an opinion on.

This question is very much a question of judgment for the directors themselves.

Placing the transaction before a general meeting of the company (as is proposed) does not totally excuse the directors if they have not acted properly. However, it is suggested that commercially a strong approval from shareholders at such meeting should go a long way to reassuring directors that the stand they have taken is the proper one.

If the motivation for the transaction is purely to remove a troublesome shareholder from the company's register, the taking of the steps may well not constitute acting properly for the purposes of the Corporations Law and, indeed, the common law on fiduciary duties.

However, if the directors genuinely believe that the transaction, with the aims as stated above, is for the benefit of all shareholders and the company generally, then it is likely that the transaction will be a proper one and the directors will have fulfilled their duties as referred to above.

5. I have discussed with you a number of other alternative proposals aimed at achieving the objectives referred to above. None of these, in my view, (other than the one referred to above and in the attachment) comply with the provisions referred to above.

6. Accordingly, it is my view that, if the directors of the company believe it is in the interests of the company as a whole to achieve the aims referred to above, the proposal will adhere to the provisions of the Corporations Law relating to the giving of financial assistance and the takeovers legislation.

The reference to the attachment is a reference to the summary of the Loftus proposal to which I have already referred.

Loftus' proposal which had been submitted to Mr Gonski had not specified the amount of the dividend reinvestment plan to be underwritten or the minimum number of shares to be taken up under the underwriting agreement. The figure of $1.75 million which ultimately emerged was derived by Loftus late in August 1996 by working out what would be required to achieve a yield of 101/2% fully franked on the Citifarm shares and on the underwriting or placement of shares on the basis of the Citifarm shares being purchased for net tangible asset backing value, any further shares to be issued on the same basis and a 7% franked dividend being declared on investor shares. Mr Abernethy said that Loftus assessed that a combined yield of about 101/2% fully franked was where the market would be for an unlisted non-voting share.

It is apparent from Mr Abernethy's evidence that there was no buyer for the Citifarm shares at the price which Mr Shears wanted. The shares were unlisted, carried no rights to board representation, had a notional value of $50 and an inadequate yield (from a commercial point of view) if converted to investor shares. However Mr Abernethy's proposed restructure resulted in a yield which he regarded as attractive to a special type of investor in what he called an 'amazingly limited'' market. In short, Mr Abernethy's view was that a purchaser of the Citifarm shares had to be offered a further attraction, namely the opportunity to obtain a minimum number of further shares at a price less than Citifarm was being paid, albeit concurrently with every other shareholder being offered the same price.

However, according to Mr Abernethy, the success of the sale of the Citifarm shares to an investor depended upon the Pivot board resolving on a dividend policy on the investor shares which would generate a combined yield on the Citifarm shares and the underwritten shares of around 101/2%. Mr Abernethy's opinion was that it would not have been possible to find a purchaser for the Citifarm shares without the total package (including the proposed yield) being put together.

Mr Abernethy advised Pivot, according to Mr Campbell, that to attract a purchaser of the Citifarm shares and to give an adequate return the amount of $25 a share for the new shares was the amount to be fixed. Mr Abernethy told Mr Campbell that it would be difficult if not impossible to get a buyer for the Citifarm shares at $280-$300 a share (the price Mr Shears wanted) and so Mr Campbell authorised Mr Abernethy to try and devise a package that would make the purchase of the Citifarm shares acceptable. Mr Abernethy's package included the dividend reinvestment plan, the minimum allotment of 70,000 shares and the allotment price of $25 per share. Mr Campbell accepted that the 70,000 minimum shares to be taken up under the dividend reinvestment plan and the price of $25 per share were determined by reference to what Mr Abernethy had said would be the necessary yield (somewhere between 10% and 12%) to offer to a potential buyer of the Citifarm shares. Mr Campbell agreed that the only reason the amount of 70,000 shares and $25 per share were arrived at was to attract a potential buyer of the Citifarm shares and that the dividend level was part of the package to be put to the potential purchaser of the Citifarm shares. However he rejected the proposition that the dividend of 7% would not have been proposed on 3 September 1996 if there had not been a potential sale of the Citifarm shares, as the board reviewed dividend policy annually and had increased the dividend in 1995 and 1996. Nevertheless, according to Mr Campbell, the board of Pivot accepted that a combination of the proposed dividend policy, the number of new shares to be subscribed for under the underwriting agreement and the price at which they were taken up was necessary to be fixed to produce an overall yield to attract a potential buyer of the Citifarm shares.

Mr Campbell had not told Mr McKendrick, Pivot's company secretary, when he became aware of Mr Abernethy's proposal that the components of the restructure (dividend reinvestment, minimum underwriting, yield) were necessary to attract a buyer for the Citifarm shares. Mr Campbell said his reason for not doing so was that Mr McKendrick had no need to know these matters. It was submitted by the applicants that I should infer from this a consciousness of guilt about the true purpose of the proposal put to shareholders. In an affidavit sworn on 11 December 1996 Mr McKendrick said that the purpose of the underwriting agreement was to prevent an outflow of cash funds and to ensure the whole issue was taken up. That statement is inconsistent with the evidence of Mr Abernethy and Mr Campbell but is explained by Mr McKendrick's evidence in cross-examination that the first time he heard that the reason Mr Abernethy gave Mr Campbell for the minimum number of shares to be taken up under the underwriting agreement and the price of $25 per share was to attract an investor to pay the price Mr Shears wanted for the Citifarm shares, was when Mr Abernethy gave that evidence in court. Although Mr Campbell says he told Mr McKendrick this matter before the extraordinary general meeting was held he did not condescend to any detail of any relevant conversation nor did he explain the entitlement (as distinct from the obligation) to take up 70,000 shares. I accept Mr McKendrick's evidence on this point.

There is no doubt that, at the least, a substantial purpose of the underwriting agreement was as an attraction for a purchaser of the Citifarm shares. I do not need therefore to make a finding of consciousness of guilt by Mr Campbell, as the purpose of the proposal put to shareholders for which the applicants contend emerges from the evidence, namely to provide an attraction to a purchaser who would acquire the Citifarm shares and remove the voting block represented by the Citifarm shares by agreeing to having them converted to investor shares. In my view this was not put explicitly to the shareholders and I will return to this issue.

On 2 September 1996 Mr Gonski sent Mr Abernethy notes which the chairman of Pivot could use at the board meeting to consider the restructure proposal. In particular the notes stated that the chairman might wish to draw the following matters to the attention of directors:


Advice has been received to the effect that:

(a)
no expert's report is required;
(b)
Shears can vote, though commercially the desirability of this should be considered later;
(c)
Shears can contract now that he will support the transaction;
(d)
all of the reconstruction would be interrelated so no part can occur without the other.

On the same day Mr Abernethy wrote a letter to Mr Campbell confirming Loftus' interest in being retained as corporate adviser to Pivot in the restructuring of its capital base and to advise on matters pertaining to the shareholder resolutions and approval associated with such restructuring. In the letter he set out the proposed fee structure and his proposal that his company arrange an underwriting of a dividend reinvestment plan. There is no reference in this letter to the proposed sale of the Citifarm shares being part of the retainer but I am satisfied on the evidence that it was the indication that Mr Shears might sell the Citifarm shares which was the catalyst and motivation for Loftus' retainer and that the sale of these shares was a major component of the retainer. Mr McKendrick said that 'the indication received by Pivot that Shears may be a seller is the fact which produced Loftus' engagement, yes''. Mr Campbell was more guarded. He did not accept that the reason why Loftus was engaged was because Pivot believed Mr Shears might be a seller but agreed that was one of the reasons, other reasons being to try and attract a buyer, and the necessity to come up with a package to attract a buyer. I am satisfied that the main, if not the principal, reason for Loftus' engagement was to assist in effecting a sale of the Citifarm shares.

There can be little doubt that the proposal which subsequently went to the general meeting of members was a proposal which had as its centrepiece or core the sale of the Citifarm shares. The special resolution authorising Pivot to enter into the underwriting agreement was conditional upon a binding agreement by ANZ Securities Ltd (ANZ Securities) to acquire the Citifarm shares and the other resolutions were dependent upon Pivot becoming entitled under s 205(10) of the Corporations Law to give the financial assistance referred to in that special resolution. As both Mr Campbell and Mr Abernethy said, the purpose of the dividend reinvestment plan and its underwriting was to attract an investor for Citifarm shares. The fact that all the other shareholders were offered participation in the dividend reinvestment plan does not detract from the conclusion that the principal reason for it being propounded, in conjunction with its underwriting, was to provide a carrot to an investor. Mr Campbell accepted that the reason why an underwriting agreement was raised was as a necessary part of a package to obtain a purchaser for the Citifarm shares and that there would not have been an underwriting agreement if Mr Shears had not been a seller. Mr Abernethy's proposal was that the underwriter did not get the underwriting agreement unless he bought the Citifarm shares.

On 3 September 1996 Mr Campbell sent the chairman of Pivot a redraft of the notes for the board meeting which included the chairman drawing to the attention of the directors that 'it is believed that the reconstruction would be acceptable to Shears as it provides him with the opportunity to exit Pivot''. On 3 September 1996 a board meeting was held at which the directors resolved to commence the various steps involved in the share restructure by retaining Loftus and requesting that company to prepare the necessary documentation and take the necessary steps to put the share restructure proposal to a meeting of shareholders. At the meeting the directors resolved that the following representations be made in the documentation to be circulated to shareholders and potential investors:


(i)
The board intends to offer investors subscribing for investor shares equity type returns through growth in dividends and increased capital value;
(ii)
Subject to the ongoing need for cash to meet anticipated expenditure and compliance with bank covenants, it is the expectation of the current board that investor shares will yield at least 7% fully franked based on the share price as set by NTAB (or if unfranked the grossed up pre tax equivalent);
(iii)
That the total payout from after tax earnings to shareholder by Pivot will not exceed 60%. The payout comprises rebates and dividends on ordinary and investor shares.

The reference to the dividend yield of at least 7% had come about through dialogue with Loftus. Mr Abernethy had recommended this amount and had also recommended that Pivot announce what the dividend policy would be so as to attract a buyer of the Citifarm shares. The purpose of passing the resolution was, in part, to enable potential purchasers of the Citifarm shares to be informed. At that time there was no reason to believe that the dividend level of 7% would not be the minimum level for some years. Mr Campbell suggested that that rate might go down because, as the explanatory statement sent to shareholders said, the rate of dividend was subject always to Pivot's operating results. However there was nothing in the material sent to shareholders that suggested that the dividend level of 7% might not be a reality.

The directors also resolved that the restructure would be interrelated so that no part could occur without the other parts and that an enforceable and irrevocable written undertaking supporting the resolution from Citifarm and related parties be obtained. On 2 October 1996 Deloitte Touche Tohmatsu provided Mr Campbell with their calculation of the consolidated NTAB per share in Pivot as being $280.68.

On 2 October 1996 Mr Campbell and Mr Clive Little, a Pivot director met with Mr Shears and Mr Peter McKay of ICM Australia and they discussed the proposed restructure and the possibility of Mr Shears selling his shares. Messrs Campbell and Little told Mr Shears that the NTAB of the shares was $280 to $281. By this date Mr Abernethy had a proposed investor interested in acquiring the Citifarm shares, Ingot Capital Management Pty Ltd a funds management company which was also prepared to underwrite the dividend investment plan.

On 8 October 1996 Loftus sent Pivot a draft sale agreement which provided for Loftus as agent for others acquiring the whole of the Citifarm shares for an unspecified price. The sale was expressed to be subject to a general meeting of Pivot shareholders approving the restructure of Pivot's capital but did not contain any provision in relation to the underwriting of any share issue of Pivot. On the following day 9 October 1996, Loftus confirmed in writing to Mr Campbell, its commitment to underwrite 100% of Pivot's dividend reinvestment plan with a minimum subscription requirement of $1,750,000. On the same day Mr Abernethy on behalf of Loftus wrote to Mr Shears and confirmed that his client Ingot Capital Management Pty Ltd was prepared to acquire the whole of the Citifarm shares in Pivot and he enclosed a draft agreement which provided for a sale price of $280.61 per share resulting in a total sale price of $10,360,963. Again, the agreement provided that the sale was subject to a general meeting of Pivot shareholders approving the restructure of Pivot's capital. Ingot Capital Management Pty Ltd wrote to Mr Abernethy on the same day agreeing to assume Loftus' obligation to subscribe for shortfall shares under the underwriting agreement.

A short time before this date ICM Australia had approached ANZ Securities to see if it was interested in acquiring the Citifarm shares. ANZ Securities indicated that it was interested and on 9 October 1996 Peter Leigh on behalf of ANZ Securities wrote to Mr Campbell confirming ANZ Securities' commitment to underwrite Pivot's dividend reinvestment plan with a minimum subscription requirement of $1,750,000. ANZ Securities' offer for the Citifarm shares was $300 per share.

On 10 October 1996 Mr Campbell met with Mr McKay from ICM Australia and Mr Leigh from ANZ Securities and Mr McKay told Mr Campbell that ICM Australia had an alternative purchaser to Ingot Capital Management Pty Ltd. They discussed the proposed restructure including the fact that the proposed buyer would underwrite the dividend reinvestment plan and it was proposed that as part of the restructure Pivot would guarantee a minimum shortfall of 70,000 shares under the dividend reinvestment plan so that the underwriter would be entitled to take up, whether required to or not, no less than 70,000 shares.

On 10 October 1996 Messrs McKay and Gordon from ICM Australia met with Messrs Leigh, Paine and Plumridge from ANZ Securities and the proposal for ANZ Securities to buy the Citifarm shares and the underwriting of the dividend reinvestment plan was discussed. Pivot submitted that evidence of this meeting was inadmissible as no Pivot representative was present. However no reliance is placed on any conversations at this meeting and its only relevance is that it identifies the point of time at which there was included in the draft sale agreement a provision making the sale subject to Pivot entering into the underwriting agreement. At that meeting a form of draft agreement between Mr Shears, Citifarm, Ingot Capital Management Pty Ltd and Loftus was produced which provided for the sale of the Citifarm shares subject to the approval of a general meeting of Pivot. After the meeting either on the same day or the following morning Mr Paine altered the draft so as to make the sale subject to Pivot entering into an underwriting agreement with ANZ Securities providing for a minimum subscription for shares to the value of $1,750,000, this having been agreed in principle at the meeting. This condition was drafted into a more precise form and in the sale agreement as executed between Mr Shears, Citifarm and ANZ Securities on 11 October 1996, the sale was expressed only to be binding if Pivot entered into an underwriting agreement with ANZ Securities in the scheduled form by 14 October 1996. Otherwise the ANZ Securities proposal was on materially the same terms as the Ingot Capital Management Pty Ltd proposal except that the price per share had risen from $280 to $300. The sale agreement was sent to Pivot and no objection was raised by Pivot to the execution of the underwriting agreement as a condition of the sale. From Pivot's point of view it was essential that both the sale agreement and the underwriting agreement were dependent on each other.

There was a further meeting the following day, 11 October 1996 between representatives of Pivot and ANZ Securities. Mr Campbell sought assurances from ANZ Securities that there was no arrangement with Mr Shears to re-purchase the Citifarm shares. ANZ Securities was told that if it felt it did not have the capacity to take all the shares there was another party that would be prepared to share in the deal (it was not clear whether this was a reference to the Citifarm shares, the underwritten shares or both). Mr Madden, the managing director of ANZ Securities, said that ANZ Securities had the appetite for the full number of the shares and did not want to halve the deal. The yield on the Citifarm shares and the shares to be acquired under the underwriting agreement was attractive to ANZ Securities. Mr Campbell asked ANZ Securities for an assurance and undertaking that there was no agreement or understanding with Mr Shears' interests which gave them any rights in respect of the Citifarm shares, such as voting rights and that ANZ Securities would only nominate Australia and New Zealand Banking Group Ltd to subscribe for shares under the underwriting agreement. These assurances and undertakings were given by ANZ Securities in writing on 11 and 12 October 1996.

ANZ Securities and Citifarm entered into the sale agreement on 11 October 1996 and ANZ Securities agreed to hold the agreement in escrow until the documents required to implement a general meeting of Pivot shareholders had been approved. On 11 October 1996 ANZ Securities wrote to Pivot agreeing that all the shares acquired by it from the Shears interests would be converted to investor shares with limited voting rights and that no agreement existed with the vendors giving the vendors any right to vote in respect of the shares or repurchase them. On 12 October 1996 ANZ Securities undertook that any power it had under the underwriting agreement to nominate another person to subscribe for shares under the dividend reinvestment plan would not be exercised so as to nominate anyone other than Australian and New Zealand Banking Group Ltd.

The share sale agreement and the underwriting agreement were finally executed on 14 October 1996. By the share sale agreement Citifarm and Shears sold to ANZ Securities 36,428 ordinary shares and 495 investor shares in Pivot for the sum of $300 per share an aggregate purchase price of $11,076,900. That sale, however, was conditional on Pivot entering into the underwriting agreement with ANZ Securities by 14 October 1996 (which it did on that day) and the general meeting of Pivot shareholders approving the restructure of Pivot's share capital, the terms of which were set out in a draft notice of the extraordinary general meeting, chairman's letter, explanatory statement and statement by directors. By the underwriting agreement ANZ Securities confirmed its commitment to underwrite 100% of the dividend reinvestment plan with a minimum subscription requirement of $1.75m. ANZ Securities undertook to subscribe for any shortfall not taken up under the dividend reinvestment plan and cll 7 and 8 were in the following terms:


7. Minimum subscription requirement : The issue in 6 above [Pivot's allotment of shortfall shares] must provide ANZS or, if ANZS elects, ANZ Bank with a minimum aggregate subscription of $1.75 million ('the minimum subscription requirement'').

8. Top up mechanism : If the minimum subscription requirement is not achieved then Pivot will arrange on the same day as specified in 6 above for a placement of investor shares to ANZS (in its own name or, if ANZS elects, the name of ANZ Bank) such that the amount of shares subscribed at the DRP price by ANZS and/or ANZ Bank when multiplied by the DRP price equals the minimum subscription requirement.

These clauses enabled ANZ Securities to subscribe for a minimum of 70,000 shares at $25 per share.

On 15 October 1996 ANZ Securities wrote to Pivot informing Pivot that any profit made from the sale of the shares acquired would accrue to ANZ Securities Ltd or Australian and New Zealand Banking Group Ltd.

On 29 October 1996 the managing director of ANZ Securities sought confirmation of the purchase and the commitment to the dividend reinvestment plan from the general manager of the Australian credit operations of the ANZ Bank. The memorandum set out details of the proposed restructure and noted that:


Pivot is an unlisted company. Shears/Citifarm have been shareholders in Pivot since 1987. The relationship has at times been hostile, with Shears/Citifarm exercising significant influence, particularly in removing directors from the board at recent annual general meetings.

There is no doubt that the Pivot board and senior management wanted to remove the voting block represented by the Citifarm shares but it is less certain that the board wished to remove Mr Shears and his interests from the register other than in the context of eliminating the voting block represented by the Citifarm shares. Mr Campbell acknowledged that the board's preferred position was to have Mr Shears' interests no longer holding a large voting block of shares; the board and senior management were concerned about the strength of the voting power of the Citifarm shares and the control it involved. Mr McKendrick gave evidence to similar effect. He did not agree that to his knowledge the directors of Pivot had made it a priority to get Mr Shears off the register and that they wanted him off the register. He did agree that they wanted to remove Mr Shears as the holder of such a large parcel of shares because of his voting power, that is to say they wanted to remove his large voting block.

It was submitted by the applicants that the directors of Pivot and its senior management were concerned to ensure that Mr Shears and Citifarm were removed as a threat to the control of Pivot and the position of the directors on the board. Certainly Mr McKendrick admitted that he told Mr Paine that the company was concerned that the Shears interests might use their voting block to ensure that sitting board members were not re-elected. But in making that statement Mr McKendrick said that in referring to 'the company'' he was referring to the board and senior management, yet no director had expressed that concern to him and Mr McKendrick based his view on his own reaction when the Shears interests had, according to Mr McKendrick, removed a director from the board at the 1995 annual general meeting. It was clear from Mr McKendrick's evidence that he was making an assumption of that concern by them. However, no such statement was attributed to any director. At a later point in cross-examination Mr McKendrick said that the directors and senior management were concerned about Mr Shears' voting power putting him in a position to determine who is or is not a director of Pivot and to determine how other business of Pivot was conducted at general meetings and that this was a material reason why they were concerned to see whether they could arrange for a sale of his shares into friendlier hands. This evidence, however, must be understood in the light of Mr McKendrick's evidence that no director had said to him that Mr Shears might use his voting block to ensure that sitting board members were not re-elected. Mr Paine recalled that he had been told at the meeting on 11 October 1995 that the Pivot directors wanted the Shears interests to sell the Citifarm shares because he had caused them some anxiety in relation to challenging their positions when they came up for re-election.

Mr Hayes QC, who appeared with Mr Martindale for the applicants, put to Mr Campbell that Mr Shears' voting block was perceived as a threat to the position on the board of many of the existing directors. Mr Campbell disagreed and when asked whether that matter had been expressed to him by the board replied that the exact opposite had been expressed to him by individual board members. I accept Mr Campbell's evidence on this issue; it was not seriously contradicted by other evidence, certainly not by Mr McKendrick, the only other Pivot employee called as a witness. Indeed Mr McKendrick denied telling Mr Paine that the board of Pivot was concerned that the Shears interests might use their voting block to ensure that sitting board members were not re-elected. Mr McKendrick acknowledged that it had been a matter of concern that in February 1996 Mr Shears had used his voting rights to defeat a special resolution but said that that concern had been in the context that the voting power represented by the Citifarm shares was over-riding the majority in number of voting shareholders.

No Pivot director was called to give evidence and I do not have any evidence directly available from any Pivot director in relation to his motivation or purpose in approving of the proposed restructure. Although one might expect that directors might have concerns that a person with Mr Shears' voting power might use that power to ensure that sitting board members are not re-elected, especially when the exercise of that voting power had resulted in the non re-election of a board member in 1995, I am not prepared to infer from the evidence that either the reason, or a substantial reason, for the board proposing or approving of the restructure was to protect or entrench the position of existing board members or management. However there is no doubt that the board and senior management wished to restore what they saw as the co-operative basis of Pivot, namely the limitation on voting power, by ensuring that there would no longer be a single holder of a large voting block.

I am satisfied on all the evidence that Pivot and its board's and management's involvement in the sale of the Citifarm shares and agreement to the terms of the underwriting agreement and the other aspects of the capital restructure proposal was to ensure that the voting block represented by the rights attached to the Citifarm shares was removed so as to restore to Pivot the co-operative nature of its structure. I am satisfied that although the board had been caused some anxiety because of the use of the large voting power attached to the Citifarm shares and that although the board wanted that voting power reduced so that the voting power attached to Pivot shares was capable of being exercised more on co-operative lines, the board's purpose in implementing the capital restructure and facilitating the sale of the Citifarm shares was not to entrench their position, nor to remove a recalcitrant shareholder from the register but rather to restore what the board saw as being the true, proper or appropriate voting structure of Pivot. I am not satisfied on the evidence that the reason why the board of Pivot and its senior management agreed to the terms of the restructure proposal such as the underwriting agreement, dividend reinvestment plan and proposed yield on the restructured capital was to entrench the position of the board and senior management. As Mr Campbell said, the company and the board wanted to see the end of the Shears interests holding a large voting block, not so much the end of Mr Shears on the register altogether. Indeed his interests retained 1000 ordinary shares.

Documentation sent to shareholders

In order to implement the restructure and fulfil the conditions upon which the share sale agreement between Citifarm and ANZ Securities had been entered into Pivot prepared the following documents:

(a)
A letter from the chairman to Pivot shareholders;
(b)
A notice of extraordinary general meeting of shareholders;
(c)
An explanatory statement;
(d)
A statement by directors pursuant to s 205(10)(c) of the Corporations Law which included a form of special resolution.

As it is part of the applicants' claim that this documentation was deficient, inadequate and misleading in a number of respects it is necessary to set out the contents of this documentation in some detail.

Chairman's letter to Pivot shareholders

The letter was in the following form:


Dear Pivot Shareholder

Changes to Pivot's share structure

Pivot's board of directors has given careful consideration as to how the co-operative's share structure might be improved for the benefit of shareholders and to facilitate the ongoing development of the company.

In developing this proposal the board determined the following objectives needed to be satisfied:

·
To recognise the underlying value of the shares and to equitably distribute this value to the current shareholders.
·
To utilise a substantial portion of the accumulated franking credits and formulate a mechanism whereby these can be utilised in the future.
·
To establish a means by which the value of the shares (both ordinary and investor) recognises changes in the net tangible asset backing (NTAB) of the shares and having this reflected in the issue or transfer price of the shares.
·
Over time to develop a structure whereby investor shareholders will be able to more readily dispose of their investment.
·
To provide a means by which the 36,428 ordinary shares and 495 investor shares held or controlled by two shareholders can be transferred to an investor shareholding on a fair and equitable basis. Achievement of this objective also significantly strengthens the voting control of active farmer shareholders.
·
To increase over time the marketability of the company's investor shares through the potential for growth in dividends and increased capital value.


I have much pleasure in being able to inform you that the directors have developed a proposal which they believe will meet these objectives, and now submit this for your approval. The proposal, if adopted, equitably distributes the accumulated value of the company among current shareholders. Your directors also believe this distribution is desirable and timely, prior to the company's planned expansion into northern New South Wales and Queensland.

To achieve these objectives it is proposed that:

(a)
A 1 for 1 fully franked bonus share issue to all shareholders (ordinary and investor) be paid from reserves.
(b)
A special fully franked dividend of $5 per share be declared on the enlarged share capital following the bonus share issue. This dividend will apply to all ordinary and investor shares.
(c)
Shareholders be invited to reinvest this special dividend in shares of the same class as those held pursuant to the dividend reinvestment plan at $25 per share. Fractions of less than $25 will be remitted in cash.
(d)
ANZ Securities Ltd has agreed to underwrite the dividend reinvestment with an entitlement to and an undertaking by ANZ Securities Ltd to subscribe in its own name or in the name of Australia and New Zealand Banking Group Ltd for a minimum of 70,000 investor shares at $25 per share. The underwriting will ensure that there is no net outflow of capital from the company as a consequence of the payment of the special dividend.
(e)
Each individual share in the company, (following the bonus and dividend reinvestment issues referred to above) be split into 10 shares of $1 par value.


The effect of these proposals is to increase the value of your current shareholding from the recent issue price of $50 per share to approximately $230.

The net tangible asset backing (NTAB) per share will decrease proportionately and will approximate the value of each share. The proposed amendments to the articles, if approved, will ensure all future share issues will be at a price approximating NTAB.

Enclosed with this letter are:

·
Notice of extraordinary general meeting to be held on Monday 11 November 1996;
·
Proxy form (not included for investor shareholders, who do not vote); and
·
Explanatory notes relating to the resolutions to be put to the meeting.


For your information the proposals have the approval of the company's solicitors. While the structure, in the opinion of the directors, is of obvious benefit to all shareholders we have been advised by our solicitors that to ensure there is no perception that any incentive is being provided to any individual or group to invest in the company and to ensure all members are fully informed, that the members' approval should be sought.

...

This proposal, is in the opinion of your directors, one of the most important submitted to shareholders in the history of Pivot Ltd and your support will facilitate its ongoing development while ensuring you as a shareholder will participate in the wealth created by the co-operative's growth. Equally important is the fact that it will further strengthen the farm/shareholder voting control of the company.

Notice of meeting

The notice of meeting provided for three resolutions. The first resolution was in the following form:


To consider, and if thought fit, to pass the following resolution as a special resolution on the basis that this resolution will take effect on the date on which the company becomes entitled, under s 205(10) of the Corporations Law, to give the financial assistance referred to in, and in accordance with, the special resolution set out in C below.

That the articles of association of the company be amended as follows:

The manner in which the articles of association of Pivot were to be amended so as to provide the restructure was then set out in the body of the resolution. In particular proposed article 13B provided that on and after 1 January 1997 ordinary shares and investor shares would only be issued for a consideration that was a minimum of an amount equivalent to, or which approximated, the NTAB per share. It then set out the manner in which the NTAB was calculated.

The second proposed resolution, an ordinary resolution, provided for the subdivision of Pivot shares from shares of $10 each into shares of $1 each. The third proposed resolution was headed 'Special Resolution -- Financial Assistance'' and was in the following form:


Subject to and conditional upon the passing of the resolutions set out in A and B above by the requisite majority, to consider, and if thought fit, to pass the following resolution as a special resolution:

'That subject to and conditional upon ANZ Securities Ltd having entered into a binding enforceable agreement to acquire or procure the acquisition of 36,428 ordinary shares in the company and 495 investor shares in the company from two shareholders presently holding, or entitled to, those shares, the company is hereby authorised to enter into an underwriting agreement with ANZ Securities Ltd whereby:

1.
ANZ Securities Ltd or Australia and New Zealand Banking Group Ltd will be entitled to receive the 1 for 1 bonus in respect of those shares;
2.
ANZ Securities Ltd will underwrite the subscription of shares in the company under the company's dividend reinvestment plan at the rate of $25 per share which subscription results from the company's invitation to its shareholders to reinvest the whole of a special dividend of $5 per share proposed to be declared on all shares;
3.
ANZ Securities Ltd, as underwriter, or Australia and New Zealand Banking Group Ltd as its nominee, will be entitled and required to subscribe for a minimum of 70,000 investor shares at the rate of $25 per share; and
4.
Subsequent to the issue of the 1 for 1 bonus, ANZ Securities Ltd and/or Australia and New Zealand Banking Group Ltd will be entitled to receive the special dividend in respect of its holdings of shares in the company, in common with all other shareholders,.'


NOTWITHSTANDING that by doing so the company may be deemed to be giving financial assistance for the purpose of, or in connection with, the acquisition or proposed acquisition of shares in the company by ANZ Securities Ltd and/or Australia and New Zealand Banking Group Ltd within the meaning of s 205 of the Corporations Law, AND to the extent that financial assistance may be being given by the company in doing so the company is authorised to give such assistance.

The explanatory statement

The explanatory statement was expressed to be designed 'to provide shareholders with a brief commentary giving the reasons for the three resolutions proposed for consideration at [the] general meeting''. It noted that the three resolutions were inter-dependent and explained the consequences of the passing of the resolutions. The explanatory statement set out the following in relation to the proposed special resolution in relation to financial assistance:


1. The Corporations Law, under s 205, requires that the company shall not give any financial assistance for the purpose of, or in connection with the acquisition by any person of shares in the company unless the giving of that financial assistance is authorised by a special resolution of shareholders.

2. Our solicitors have advised that it is by no means clear that the arrangements entered into between Pivot and ANZ Securities Ltd constitute the giving of any financial assistance by Pivot to ANZ Securities Ltd and/or Australia and New Zealand Banking Group Ltd but, given the broad ranging nature of the prohibition contained in the Corporations Law, have indicated that the directors should seek shareholder approval in order to remove any doubt.

3. A special resolution is one that requires at least 21 days written notice of intention to propose it as a special resolution and which is passed by a majority of at least three-quarters of those members of the company as, being entitled to do so, vote in person or by proxy at the meeting.

4. It is also a requirement of the Corporations Law that the notice specifying the intention to propose a special resolution authorising the giving of financial assistance be accompanied by particulars of the financial assistance proposed to be given, the reasons for that proposal and the effect that the giving of the financial assistance would have on the financial affairs of the company.

5. The arrangements with ANZ Securities Ltd are summarised in the special resolution put forward under s 205 of the Corporations Law. Briefly, those arrangements are:

ANZ Securities Ltd, has entered into an agreement to acquire 36,428 ordinary shares and 495 investor shares. Under that agreement, ANZ Securities Ltd may nominate Australia and New Zealand Banking Group Ltd (a related company of ANZ Securities Ltd) as purchaser in place of ANZ Securities Ltd. ANZ Securities Ltd or Australia and New Zealand Banking Group Ltd will be entitled to the 1 for 1 bonus and the subsequent special dividend in respect of the shares acquired. The ordinary shares acquired by ANZ Securities Ltd or Australia and New Zealand Banking Group Ltd will be converted to investor shares.
As in the case of all other shareholders, ANZ Securities Ltd or Australia and New Zealand Banking Group Ltd will be entitled to receive the special dividend declared on the shares acquired pursuant to the agreement above.
ANZ Securities Ltd have agreed to underwrite the subscription of 220,380 shares under the dividend reinvestment plan relating to the offer by the company to shareholder to reinvest the special dividend of $5 per share in shares at the rate of $25 per share.
As part of that underwriting arrangement, ANZ Securities Ltd as underwriter or Australia and New Zealand Banking Group Ltd as its nominee is entitled and required to take up and pay for a minimum of 70,000 investor shares of $10 par value each at the rate of $25 per share -- the same price at which they are offered to all shareholders in relation to the reinvestment of the special dividend. There may be a perception that there is an element of financial assistance to ANZ Securities Ltd and/or Australia and New Zealand Banking Group Ltd by Pivot in those arrangements.


6. To the extent that financial assistance is involved, the effect that the financial assistance will have upon Pivot is regarded by your board as being a significant positive factor and certainly not negative in impact. All shareholders will participate proportionately in the bonus issue and the special dividend so the participation by ANZ Securities Ltd and/or Australia and New Zealand Banking Group Ltd in those components is a common participation with other shareholders. Nevertheless, the entitlement of ANZ Securities Ltd or Australia and New Zealand Banking Group Ltd, as its nominee, to take up 70,000 investor shares at $25 per share (a cash inflow to Pivot of $1,750,000) is a benefit over and above the offer to other shareholders to reinvest their special dividend in investor shares at the same rate. Despite that benefit, your directors are of the opinion that the issue of those investor shares to ANZ Securities Ltd or Australia and New Zealand Banking Group Ltd at that price will have no material negative effect upon the financial position of Pivot.

Given the nature of Pivot as a non-listed public company and the consequent lack of any readily available market in its shares, it would be difficult to find other investors who would be prepared to purchase the available shares, particularly considering the limited voting rights and tradeability attached to investor shares.

Statement pursuant to s 205(10c) of the Corporations Law

The statement provided:


In the opinion of all the directors of the company, after taking into account the financial position of the company (including future liabilities of the company), the giving of the financial assistance referred to in the special resolution set out in the schedule to this statement would not be likely to prejudice materially the interests of the creditors or members of the company or any class of those creditors or members.

The extraordinary general meeting

The extraordinary general meeting of Pivot was held on 11 November 1996. The first two resolutions relating to the changes to the articles of association and the subdivision of the shares were passed unanimously and the third resolution relating to the 'financial assistance'' was passed with only one shareholder voting against the resolution. The applicants did not attend or vote at the meeting.

On the following day 12 November 1996, the chairman sent a letter to shareholders informing them of the passing of the resolutions and urged shareholders to participate in the dividend reinvestment plan. He attached to the letter an example which showed the effect of the restructure and what was said to be the extra benefit of participating in the dividend reinvestment.

On 5 December 1996 the board of Pivot passed resolutions to implement the 1 for 1 bonus issue and a declaration of the special dividend of $5 per share. On the same day applications for reinvestment of the special dividend in the dividend reinvestment plan closed at which time 29,584 shareholders had accepted representing 66.58% of eligible shareholders. The consequence of this level of acceptance was that ANZ Securities was required under the underwriting agreement to subscribe for 70,081 shares at $25 per share.

Expert evidence

Both parties led expert evidence directed to the net tangible asset backing of Pivot shares, the yield on them, what was said to be their value and what was said to be the effect of the restructure proposal and any financial assistance on Pivot. It was not surprising that there was disagreement among the experts on some of these issues because not only were the shares in Pivot unlisted, the investor shares did not carry voting rights. There was therefore no ready market for the shares which would enable a market price to be established easily. There was little dispute about the net tangible asset backing of a share in Pivot as at 30 September 1996. Mr John Selak, a qualified chartered accountant and experienced adviser called on behalf of the applicants fixed it at $283.56; Mr Peter Crofts and Mr Peter Kempen, qualified chartered accountants and experienced advisers called on behalf of Pivot did not disagree.

Mr Selak estimated the net tangible asset backing of Pivot shares, after the restructure proposal assuming no shortfall arising from the dividend reinvestment plan so that 70,000 new shares were issued to ANZ Securities, as $11.35; if there was a shortfall of 70,000 shares then he estimated the NTAB of the shares as $11.82.

What was more controversial was Mr Selak's evidence as to the benefits said to accrue to ANZ Securities as a result of entering into the underwriting agreement. He estimated a benefit of between $6,192,900 and $7,000,000 which allowed ANZ Securities to reduce significantly the average cost per share of its investment in Pivot including the Citifarm shares. However such a benefit assumed what Mr Selak called 'the fair value'' of the shares being NTAB per share or what ANZ Securities had agreed to pay the Shears interests for the shares. Mr Selak also concluded that ANZ would receive a significant financial benefit from Pivot's change in dividend policy in relation to its investor shares from $4 per $50 share to 7% fully franked on NTAB.

Mr Selak's conclusion as to the benefit obtained by ANZ Securities depends upon the assumption that the NTAB of the shares represents their fair value. This assumption was challenged by Pivot, principally on the basis that the NTAB of the shares did not represent their fair value, that there was no ready market for the shares and that historically they had changed hands at $50 per share, a price fixed by the board. Mr Selak acknowledged that without doing a full valuation (which he had not done) he could not put a fair value on the shares. He understood 'fair value'' to mean the price that would apply between an arm's length purchaser and an arm's length vendor acting with the same knowledge. However he was not prepared to place a figure on the fair value of a parcel of 50 shares before the restructure as he said he had no evidence of what he called their fair market value. Mr Crofts, called by Pivot, believed that the fair value of the Pivot shares prior to the restructure was the value for which they could be traded, namely $50.

Mr Peter Kempen called by Pivot, agreed that ANZ Securities had obtained a benefit of $6,250,000 representing the difference between the $25 it paid for each of the 70,000 shares and the true value of the shares assessed by reference to their NTAB and the proposed yield. This was on the assumption that the restructure took place. Mr Kempen was prepared to accept that the NTAB of the shares represented their true value provided that a commercial rate of dividend relating to the NTAB was paid in respect of the shares and provided that the restructure took place. He regarded 7% based on the NTAB of the shares as a commercial dividend. He could not divorce the value of the shares based on NTAB from the commercial rate of dividend calculated by reference to NTAB. Putting the matter another way, without the dividend of 7% calculated on NTAB the value of the shares was not their NTAB. As Mr Kempen said 'one underpins the other''. Without that dividend the shares would not be worth $283 per share.

Mr Selak also assessed a substantial benefit would accrue to ANZ Securities as a result of Pivot's change in dividend policy and that it would cost Pivot more to declare a dividend on the 70,000 shares which represented the amount obtained from the 70,000 shares taken up by ANZ Securities. Mr Selak also said that shareholders would be adversely affected by the proposed restructure because they would suffer a net loss in the value of their shareholding because ANZ Securities would be able to acquire shares in Pivot at below fair value and such acquisition would reduce overall the NTAB of shares in Pivot. However, Mr Selak based that analysis on a restructure 'value'' of $283.56. But the NTAB of pre-restructure shares as fixed by the board for the purpose of transacting sales of Pivot shares was $50, not $283.56. The figure of $283.56 in my view is an artificial 'value'' of the pre-restructure shares in the sense that it was never achievable by a Pivot shareholder. In any event, as Mr Kempen said, it was dependant on the dividend payable in respect of the shares being a commercial rate based on NTAB. As Mr Selak acknowledged his figure of $283.56 did not make any allowance for any value which might be derived from the franking of dividends, the fact that the shares were unlisted and the fact that shareholders who participated in the dividend reinvestment plan suffered no loss in value. It followed from Mr Selak's analysis that if a shareholder participated in the dividend reinvestment plan the shareholder would not have been materially adversely affected and it was only if a shareholder did not so participate that the shareholder, according to Mr Selak suffered any loss.

It is apparent from the manner in which the proposed restructuring was developed that it would not have seen the light of day if the underwriting agreement had not been entered into. Thus even if Mr Selak is right in his analysis in assuming a pre-restructure value of a share of $283.56 (NTAB), the opportunity to derive a benefit from bringing the share price and dividend yield into line with NTAB would not have been available. I therefore think that Mr Selak's loss in 'value'' is artificial and contrived in the sense that it has no practical significance in relation to what was available to shareholders before the restructure. I should also point out that on the day after the extraordinary general meeting the chairman of Pivot sent a letter to shareholders informing them of the passing of the resolutions approving the restructure, urging them to participate in the dividend reinvestment plan and attaching two arithmetical examples showing the value of a parcel of 50 shares after the restructure where the shareholder participated in the dividend reinvestment plan (total value $1320) and where the shareholder did not participate in the dividend reinvestment plan (total value of $1150).

It seems to me therefore that even if Mr Selak is correct in his view that the restructure and in particular ANZ Securities' rights under the underwriting agreement resulted in a loss in value for shareholders in respect of their original shares, they were given the option to avoid most of that loss and to the extent that there was any loss based on a pre-restructure value determined by reference to NTAB sustained by shareholders participating in the dividend reinvestment plan that loss was of the order of 3.9%-4%. It should also be noted that if the pre-restructure value of the shares fixed by the board was $50, namely the price for which the shares could in fact be sold, then the restructure, which recognised or unlocked the NTAB of the shares resulted in an increase in the value of the shares held by all shareholders.

Mr Selak's real complaint was that ANZ Securities should have paid more than $25 a share for the 70,000 shares because their value was higher. This bears upon the issue of whether or not Pivot gave financial assistance in connection with the 70,000 shares and whether it was not in the interests of shareholders to allow ANZ Securities to acquire these shares for $25 per share. I will return to these issues later but it should be remembered that the benefit ANZ Securities derived from taking up the shares at $25 per share was also a benefit derived by all Pivot shareholders who took up shares under the dividend reinvestment plan. Nevertheless the relevant issue for present purposes is: was ANZ Securities given assistance by Pivot, not did it receive a benefit from Pivot.

Mr Selak's comparison of the dividend yield received by Pivot shareholders with the average dividend yield for all companies listed on the Australian Stock Exchange Ltd was of little assistance as it included an unknown number of companies who did not pay dividends. Mr Selak did not work out the average dividend yield for companies that paid dividends.

Mr Selak also expressed the view that the restructure proposal would have an adverse impact on the financial position of Pivot, although not immediately, because the percentage of investor shares would increase which, when combined with the change in dividend policy, would increase the amount required for the payment of dividends. It is not immediately apparent why the increased dividend burden will have a material adverse impact on Pivot's financial position. Although it will result in an increased outflow of funds from Pivot the increased dividend will not have such an impact unless it leaves Pivot short of working capital or is not sufficient to enable it to undertake any activity or acquisition it would otherwise wish to undertake. The board indicated in the documentation sent to shareholders that it would not pay out more than 60% of after tax profits in dividends and it was not suggested that retention of 40% of after tax profits was not sufficient to cover Pivot's needs. The board had also made it clear that the rate of dividend proposed, 7% calculated on NTAB, was subject to capital and funding requirements.

The issue of benefits to shareholders in general and ANZ Securities in particular loomed large in the proceedings. It was accepted by the experts to whom I have referred that ANZ Securities derived a benefit from its entitlement under the underwriting agreement by having the opportunity to acquire 70,000 shares for a price substantially less than their value measured by reference to NTAB on the assumption that a dividend rate of 7% on NTAB was declared and the restructure proceeded.

Mr Selak did not see any benefits to shareholders generally from ANZ Securities participation in the underwriting agreement and saw the change in dividend policy as providing a substantial benefit to ANZ Securities. However, it also provided a substantial benefit to shareholders holding investor shares as they had only received a dividend averaging 6% in the two years in which dividends had been declared on the investor shares with their value fixed by the directors at $50 per share. It was common ground that post-restructure holders of investor shares would receive a greater dividend on shares having a value greater than existed prior to the restructure. The restructure unlocked and exposed that value.

The proceeding and statutory framework

On 29 November 1996 the applicants filed an application in the court pursuant to s 205(12) of the Corporations Law seeking an order pursuant to s 205(13)(f) of the Corporations Law disapproving the giving of financial assistance by Pivot to ANZ Securities or Australia and New Zealand Banking Group Ltd. The application raises a number of matters for consideration and it is therefore necessary to understand the statutory context in which the application arises. Section 205(1) of the Corporations Law prohibits a company from giving any financial assistance for the purpose of or in connection with the acquisition of shares in the company 'except as otherwise expressly provided by this Law''. Section 205(10) provides that that proscription does not prohibit the giving by a company of financial assistance for the purpose of or in connection with an acquisition by a person with shares in the company if a number of requirements are satisfied. For present purposes the relevant provisions of s 205(10) are:


205(10) Nothing in subsection (1) prohibits the giving by a company of financial assistance for the purpose of, or in connection with, an acquisition or proposed acquisition by a person of shares or units of shares in the company or in a holding company of the company if:

(a)
the company, by special resolution, resolves to give financial assistance for the purpose of or in connection with, that acquisition;
(b)
...
(c)
the notice specifying the intention to propose the resolution referred to in paragraph (a) as a special resolution sets out:

(i)
particulars of the financial assistance proposed to be given and the reasons for the proposal to give that assistance; and
(ii)
the effect that the giving of the financial assistance would have on the financial position of the company and, where the company is included in a group of corporations consisting of a holding company and a subsidiary or subsidiaries, the effect that the giving of the financial assistance would have on the financial position of the group of corporations;

and is accompanied by a copy of a statement made in accordance with a resolution of the directors, setting out the names of any directors who voted against the resolution and the reasons why they so voted, and signed by not less than 2 directors, stating whether, in the opinion of the directors who voted in favour of the resolution, after taking into account the financial position of the company (including future liabilities and contingent liabilities of the company), the giving of the financial assistance would be likely to prejudice materially the interests of the creditors or members of the company or any class of those creditors or members;
(d)
the notice specifying the intention to propose the resolution referred to in paragraph (b) as a special resolution is accompanied by a copy of the notice, and a copy of the statement, referred to in paragraph (c);
...
(j)
no application opposing the giving of the financial assistance is made within the periods referred to in subsection (12) or, if such an application or applications has or have been made, the application or each of the applications has been withdrawn or the court has approved the giving of the financial assistance; ...

Section 205(11) provides:


Where, on application to the Court by a company, the Court is satisfied that the provisions of subsection (10) have been substantially complied with in relation to a proposed giving by the company of financial assistance of a kind mentioned in that subsection, the Court may, by order, declare that the provisions of that subsection have been complied with in relation to the proposed giving by the company of financial assistance.

Section 205(12) provides that where a special resolution referred to in subs (10)(a) is passed by a company an application to the court opposing the giving of the financial assistance to which the special resolution relates may be made, inter alia, by a member of the company within 21 days after the publication of the notice referred to in subs (10)(h). Where such an application is made s 205(13) provides that the court:

(a)
shall, in determining what order or orders to make in relation to the application or applications, have regard to the rights and interests of the members of the company or of any class of them as well as to the rights and interests of the creditors of the company or of any class of them; and
(b)
shall not make an order approving the giving of the financial assistance unless the court is satisfied that:

(i)
the company has disclosed to the members of the company all material matters relating to the proposed financial assistance; and
(ii)
the proposed financial assistance would not, after taking into account the financial position of the company (including any future or contingent liabilities), be likely to prejudice materially the interests of the creditors or members of the company or of any class of those creditors or members;

and may do all or any of the following:
(c)
if it thinks fit, make an order for the purchase by the company of the interests of dissentient members of the company and for the reduction accordingly of the capital of the company;
(d)
if it thinks fit, adjourn the proceedings in order that an arrangement may be made to the satisfaction of the court for the purchase (otherwise than by the company or by a subsidiary of the company) of the interests of dissentient members;
(e)
give such ancillary or consequential directions and make such ancillary or consequential orders as it thinks expedient;
(f)
make an order disapproving the giving of the financial assistance or, subject to paragraph (b), an order approving the giving of the financial assistance.

The applicants rely upon a number of the provisions in subss (10) and (13) of s 205 in support of their claim that those subsections have not been complied with by Pivot and that the court ought not to make an order approving the giving of the financial assistance, having regard to the rights and interests of the members and because it ought not to be satisfied of the matters set out in subs (13)(b). I should point out that although the only application before the court is one by the applicants that the court not approve the giving of the financial assistance it is not sufficient for the court simply to dismiss the application if it concludes that the application should fail on the merits. By reason of the provisions of s 205(10)(j) because the application has been made, a dismissal of the application does not satisfy s 205(10); for that purpose it is necessary that the court actually approve the giving of the financial assistance. In any event Pivot has filed a cross-claim in which it seeks relevant declaratory relief.

The submissions

Points of claim and defence were delivered and the applicants' contentions were amended from time to time. Ultimately, the applicants put their case as to the identification of the relevant financial assistance in the following way (omitting particulars):


34. ANZ Securities would be financially assisted to purchase the vendors' shares by Pivot allowing ANZ Securities to subscribe for a similar size parcel of shares at a much lower price per share in the following respects:

(a)
the high yield on the subscription shares (33.08%), resulting from the low price, would enable ANZ Securities to make a substantially higher overall return on its funds (10.23%) than if it could only purchase the vendors shares (6.61%) ATTACH="F";
(b)
the discount to NTAB at which the subscription shares are to be issued (contrasted with the premium to NTAB payable for the vendors' shares) would:

(i)
give ANZ Securities the expectation of an immediate unrealised capital profit on the subscription shares (based on NTAB) of between $6,194,900 and $6,520,500 or (based on the price paid for the vendors' shares) of $7,000,000;
(ii)
alternatively, make the transaction substantially risk free in that the value of Pivot's investor shares would fall by 47% before ANZ Securities would lose any money on its investment.

(c)
by the share sale agreement being conditional upon the underwriting agreement being entered into by Pivot.


35. ANZ Securities would be financially assisted to subscribe for subscription shares by:

(a)
the price at which Pivot was prepared to allow ANZ Securities to subscribe for those shares compared to the value of the shares (based on NTAB);
(b)
the participation of the vendors' shares (and the bonus shares issued thereon) in a special dividend of $5 per share ($369,000) which ANZ Securities could re-invest in the purchase of investor shares at $25 per share.

Although these paragraphs were expressed in terms which rolled up some of the alleged consequences of the financial assistance with the financial assistance itself, the actual assistance by Pivot relied on is the making of the underwriting agreement and its terms as to ANZ Securities' minimum entitlement and the price per share to be paid by ANZ Securities. Although it was pleaded that there was financial assistance in relation to the shares acquired pursuant to the underwriting agreement, the main thrust of the applicants' claim was that the financial assistance was given for the purpose of and in connection with the acquisition of the Citifarm shares. Accordingly in these circumstances one cannot consider the acquisition of the shares under the underwriting agreement independently of the acquisition of the Citifarm shares.

The applicants then allege that Pivot's purpose in entering into the underwriting agreement with ANZ Securities was:

(a)
to ensure active farmer control of Pivot by removing Mr Shears and Citifarm as the holders of the Citifarm shares or the vast majority of them; and
(b)
to maintain management control of Pivot

by implementing the capital restructure thereby enabling Pivot to provide the benefits and financial assistance to ANZ Securities relied upon so as to cause ANZ Securities to purchase the Citifarm shares at $300 per share and on the terms and conditions demanded by the vendors. The applicants then allege that it would be a breach of the fiduciary duties which the directors of Pivot owed to Pivot for the directors to cause Pivot to enter into the underwriting agreement for that purpose.

The applicants attack the documentation provided by Pivot to its shareholders on the grounds that:

(a)
it did not set out the effect that the giving of the financial assistance would have on the financial position of Pivot;
(b)
the terms of the special resolution pursuant to s 205(10)(a) does not refer to the terms of the underwriting agreement;
(c)
it did not set out the particulars of the financial assistance alleged;
(d)
it did not set out the reasons for the proposal to give the financial assistance to ANZ Securities;
(e)
it did not state that the investor shares in Pivot might be listed or that the listing of such shares was being considered;
(f)
in the chairman's letter it was stated that the underwriting would ensure that there was no net outflow of capital from Pivot as a consequence of the payment of the special dividend whereas the effect of the underwriting agreement was not to minimise the cashflow from Pivot but to require it to pay substantially more by way of dividends to ANZ Securities than would have been required had the dividend reinvestment plan not been underwritten.

In summary the applicants allege that all shareholders in Pivot may be adversely affected by the underwriting agreement and they say that contrary to s 205(10)(c) Pivot's notice specifying the intention to propose the resolution referred to in s 205(10) did not:

(a)
provide proper particulars of the financial assistance proposed to be given;
(b)
provide proper particulars of the reasons for the proposal to give that assistance;
(c)
give proper particulars of the effect of the giving of that financial assistance would have on the financial position of Pivot.

In their further amended points of claim Pivot claim substantial declaratory relief in addition to the order specified in the application that the court disapprove of the giving of financial assistance.

Pivot denies that any financial assistance was given by it to ANZ Securities and, in the alternative, says that it disclosed to members the information required by s 205(10)(c)(i) and (ii). By way of cross-claim Pivot claims declaratory relief that there was no financial assistance given within the meaning of s 205 and in the alternative if there was such financial assistance that the court make an order approving the giving of financial assistance pursuant to s 205(13)(f).

Applicants' bona fides

Before turning to relevant legal principles I should consider Pivot's submission that the application brought by the applicants was not bona fide and was brought for a purpose which has not been disclosed to the court. Pivot relies upon the fact that the applicants hold 50 ordinary shares out of a total of 507,887 issued ordinary shares, that no other shareholder has commenced any proceedings and that none of the applicants attended the extraordinary general meeting at which the resolutions were passed nor did they lodge a proxy for that meeting. The first applicant said that he had never asked Pivot to explain anything to him about the transaction and that he was not paying wholly for the costs of the proceeding. It was submitted that it was inconceivable that a person with such a small interest in Pivot would incur the costs involved to protect an unrealised gain on NTAB.

I do not consider that the issue of the bona fides of the applicants is relevant to the issue, first whether or not Pivot has given financial assistance to ANZ Securities in connection with the purchase of the shares in Pivot and secondly, whether s 205(10) has been complied with. However, the issue of the bona fides of the applicants may be relevant in considering what orders, if any, should be made under s 205(13) having regard to the fact that the court must have regard to the rights and interests of the members and creditors of the company.

Proscription against the giving of financial assistance

The prohibition contained in s 205 is one against a company giving financial assistance. The relevant inquiry is not whether a person acquiring shares in the company has obtained a benefit but rather whether the company has given either directly or indirectly financial assistance for the purpose of or in connection with that acquisition. The proscription against the giving of financial assistance has been contained in companies' legislation for many years: cf Companies Act 1938 (Vic) s 45; Companies Act 1958 (Vic) s 56; United Kingdom Companies Act 1929 s 45; United Kingdom Companies Act 1948 s 54. However, there is no exhaustive definition of 'financial assistance'' for the purposes of s 205 although the cases identify numerous examples of financial assistance (the purchase of an asset: Belmont Finance Corp v Williams Furniture Ltd (No 2 ) [1980] 1 All ER 393; the forgiving of a debt: EH Dey Pty Ltd (in liq) v Dey [1966] VR 464; giving security over a company's assets: Firmin v Gray & Co Pty Ltd [1985] 1 Qd R 160; agreement to pay consultancy fees: Independent Steels Pty Ltd v Ryan [1990] VR 247).

The range and scope of financial transactions and instruments now available are such that it is important to look at the commercial substance of any particular transaction rather than its form to see whether s 205 has been breached. As Hoffman J said in Charter House Investment Trust Ltd v Tempest Diesels Ltd [1986] BCLC 1 at 10 speaking of 'financial assistance','


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, bearing in mind that the section is a penal one and should not be strained to cover transactions which are not fairly within it.

(Approved in Dempster v National Companies and Securities Commission (1993) 10 ACSR 297 at 352-3).

The expression 'financial assistance'' is given a very wide scope in s 205(2) as including:


The giving of financial assistance by means of the making of a loan, the giving of a guarantee, the provision of security, the release of an obligation or the forgiving of a debt or otherwise.

In EH Dey Pty Ltd (in liq) v Dey McInerney J construed the words 'or otherwise'' as meaning 'in any other way'' and said (at 470) that:


In my view, the prohibition is not confined to financial assistance to the purchaser; it is directed to financial assistance to whomsoever given, provided that it be for the purpose of a purchase of shares or in connection with a purchase of shares.

(See also Armour Hick Northern Ltd v Whitehouse [1980] 1 WLR 1520 at 1525).

In WALL ERsteiner v Moir [1974] 1 WLR 991 Lord Denning said (at 1014):


You look to the company's money and see what has become of it. You look to the company's shares and see into whose hands they have got. You will then soon see if the company's money has been used to finance the purchase.

A similar approach was taken by Connolly J in Rossfield Group Operations Pty Ltd v Austral Group Ltd [1981] Qd R 279 at 286 where he said:


Giving financial assistance, in my judgment, means making a provision in money or money's worth to which the shareholder is not already entitled in his capacity of shareholder.

However, focussing on 'the company's money'' can over simplify the issue and ignore the commercial substance of a transaction. In Darvall v North Sydney Brick & Tile Co Ltd (1989) 16 NSWLR 260 Kirby P, who dissented, adopted a broader approach where he said (at 292):


To take too narrow an approach to the section would ignore and frustrate the achievement of its clear purpose. Relevantly, that is to ensure that those who acquire shares in a company do so from their own resources and not with the help of the company itself: see Burton v Palmer [1980] 2 NSWLR 878 at 886.

There is a debate in some of the authorities as to whether, in order for there to be financial assistance, it must be demonstrated that the giving of the financial assistance involves an actual diminution in the company's resources. In Burton v Palmer [1980] 2 NSWLR 878 Hutley JA said (at 881):


The ways in which a company can infringe s 67 of the Companies Act 1961 [the predecessor of s 205] are infinitely various but the essence of the matter is clear -- has the company diminished its financial resources, including future resources, in connection with the sale and purchase of its shares. As the reduction may be indirect, it is not to be determined by considering only what is done by the parties to the transaction. Others may acquire rights against the company which diminish its resources in connection with the transaction and thus bring the section into play. The issue is what is the impact upon the company of what took place, it being borne in mind that the assumption by a company of obligations, even if it is unlikely that they may have to be honoured, diminishes its resources.

In Darvall v North Sydney Brick & Tile Co Ltd at 296, Kirby P was not convinced that it was necessary in every case that there be an actual diminution in the company's resources in order to establish the giving of 'financial assistance''. Nevertheless he applied this test to the facts before the court having earlier acknowledged that in Burton v Palmer the New South Wales Court of Appeal:


has held that a transaction by a company cannot constitute the giving of financial assistance unless the transaction involves some diminution of the financial resources of the company.

This issue was not addressed by the majority of the court in Darvall , Mahoney and Clarke JJA. In Re Myer Retail Investments Pty Ltd (1983) 8 ACLR 102 at 108, Sheppard J preferred the view of Hutley J and in ZBB (Australia) Ltd v Allen (1991) 4 ACSR 495 at 503 the point was left open. In Re National Mutual Royal Bank Ltd (1990) 3 ACSR 94 at 101 McPherson SPJ was not persuaded that what Hutley J had said in Burton v Palmer (at 881-2) justified Kirby P's observation in Darvall v North Sydney Brick & Tile Co Ltd (at 296).

His Honour did not think that it followed from Hutley JA's observations that:


because there is no such diminution, there has been no financial assistance within the meaning of s 129(1).

I share McPherson SPJ's reservation on acceptance of the proposition that there has to be diminution of the company's financial resources before the company can be said to have given financial assistance. In Burton v Palmer (at 881) Hutley J noted that the ways in which the section can be infringed are infinitely various. I agree with that observation (bearing in mind that it is always necessary to identify assistance which is financial assistance) but it leads me to the conclusion that there may be situations which arise where no diminution of resources occurs but there is still nevertheless financial assistance given by the company. In Dempster v National Companies and Securities Commission Malcolm CJ (with whom Walsh and Anderson JJ agreed) after a detailed analysis of the authorities rejected the 'impoverishment test'' (the diminution of the company's assets) as determinative of whether a contravention of s 205 has occurred. His Honour said (at 353):


The most which may be said about the impoverishment test is that it may provide some assistance in determining whether the transaction was a genuine commercial transaction. It may be relevant to the question of financial assistance and to the question of purpose, but, in my opinion, it would not be decisive of either question.

An example of a situation where there is no diminution of a company's resources is where the company gives a guarantee. In such a situation a contingent liability is created yet no diminution of resources occurs. Nevertheless s 205(2) of the Corporations Law includes the giving of a guarantee within the giving of financial assistance. This view may be seen to conflict with the observations of Hutley JA in Burton v Palmer (at 881):


The issue [is there an infringement of s 67] is what is the impact upon the company of what took place, it being borne in mind that the assumption by a company of obligations, even if it is unlikely that they may have to be honoured, diminishes its resources.

It is not easy to see how the giving of a guarantee by a company diminishes its resources except in a contingent sense. But even in this sense one cannot point, at the time of giving of the financial assistance, to any diminution in fact of the company's resources. In any event for reasons to which I shall refer I consider that there was a diminution in Pivot's financial resources as a result of the making of the underwriting agreement.

Purpose of financial assistance

As I noted earlier it is important to look at the commercial reality of what has occurred and seek to divine the substantial intention and purpose behind it because the relevant giving of financial assistance has to be 'for the purpose of or in connection with'' the acquisition of the shares. In Independent Steels Pty Ltd v Ryan the purchasers of shares in the company acquiesced in the proposal of the seller to structure the purchase price in such a way that the company whose shares were being purchased undertook to pay consultancy fees to the purchasers calculated as a percentage of increase in turnover in the five years following the sale. This was held to be financial assistance notwithstanding the fact that it was the seller who made the proposal and not the purchaser who required it. Fullagar J said (at 251-2):


The authorities show that the court, in deciding whether or not s 67 [of the Uniform Companies Act] has been breached, must look beyond the form adopted to the substance and reality of what was done. The court must look also at the dominant intention and purpose with or for which the substance was done, and the dominant intention with which the form was adopted.

Fullagar J concentrated on whether the company provided financial assistance from its coffers in money terms. He said (at 254):


In my opinion it is correct to say that in a sense, 'financial assistance'' must be 'something wanted or needed by the purchaser for the purchase'', but not in the sense in which Mr Hayne used his alleged equivalent of 'something which is at least wanted''. If the sole or dominant real intention in incurring or creating the critical obligation is to provide from the coffers of the obligated company a part of the money consideration otherwise payable by the purchaser itself for the critical shares in order to obtain them, then generally speaking the obligated company, as a matter of fact and law, has given, (or contracted to give) financial assistance for or in connection with the purchase.

In that case the company was obliged to pay for the relevant consultancy fees to be provided. What is important about this statement by Fullagar J is that it focuses on the purpose of the assistance, something wanted or needed by the purchaser.

Apart from the paying of dividends on the special shares and the proposal to pay dividends on the future shares no money has been provided from the coffers of Pivot. Ordinarily the payment of a dividend in good faith in the ordinary course of commercial dealing is not regarded as the giving of financial assistance for the passage of or in connection with an acquisition of shares: s 205(8)(a). (See Rossfield Group Operations Pty Ltd v Austral Group Ltd (at 286-7)). However, the payment of a dividend might fall into the category of the provision of relevant financial assistance if it was paid for the purpose of or in connection with an acquisition of shares in the company. In such circumstances it would not be paid in good faith or in the ordinary course of commercial dealing.

A transaction which, on its face, appears to be an appropriate commercial transaction may nevertheless result in a contravention of s 205 if the transaction is not a commercial transaction in its own right, albeit for a fair price, but is rather part of a scheme or proposal to enable a purchaser to purchase shares in the company: Belmont Finance Corp v Williams Furniture Ltd : cf Jury v Vogt (1993) 10 ACSR 718 where the relevant grant of the option to a vendor of the shares was not part of the consideration for the sale of the shares in the company nor was it entered into for the purpose of or in connection with the acquisition of the shares.

The prohibition in s 205(1)(a) focuses upon 'the purpose'' of an acquisition of shares and on whether the financial assistance is given 'in connection with'' the acquisition. The focus on 'purpose'' is highlighted by s 205(3) which provides, in substance, that a company is taken to have given financial assistance for the purposes of an acquisition of shares in it if that purpose was only one of the purposes of the acquisition so long as it was a substantial purpose. The consequence of this is that even where a company entered into a transaction which is commercially justifiable and not necessarily disadvantageous to it, if a substantial purpose of the transaction was the acquisition of shares in it then the proscribed financial assistance will have been given, assuming there is a relevant financial component in the assistance.

Such a situation was considered in Belmont Finance Corp v Williams Furniture Ltd where a company, Belmont Finance, acquired the issued capital of another company, Maximum, and the persons who held the shares in Maximum agreed to acquire the issued capital of Belmont Finance. The Court of Appeal held that the agreement by Belmont Finance to purchase the issued capital of Maximum was an exceptional and artificial transaction in which an inflated price had been paid by Belmont Finance. It was not a commercial transaction in its own right but part of a scheme to enable the purchasers of the shares in Belmont Finance to acquire those shares at no cost to themselves. It did not enable Belmont Finance to acquire anything it needed genuinely for its own purposes and even if the purchase price had been a fair price there would still have been a contravention of s 54 (the English equivalent of s 205) because of the purpose of the transaction. However Buckley LJ, with whom Goff LJ and WALL ER LJ agreed, said (at 402):


If A Ltd buys from B a chattel or a commodity, like a ship or merchandise, which A Ltd genuinely wants to acquire for its own purposes, and does so having no other purpose in view, the fact that B thereafter employs the proceeds of the sale in buying shares in A Ltd should not, I would suppose, be held to offend against the section; but the position may be different if A Ltd makes the purchase in order to put B in funds to buy shares in A Ltd. If A Ltd buys something from B without regard to its own commercial interests, the sole purpose of the transaction being to put B in funds to acquire shares in A Ltd, this would, in my opinion, clearly contravene the section, even if the price paid was a fair price for what is bought, and a fortiori that would be so if the sale to A Ltd was at an inflated price. The sole purpose would be to enable (ie to assist) B to pay for the shares. If A Ltd buys something from B at a fair price, which A Ltd could readily realise on a resale if it wished to do so, but the purpose, or one of the purposes, of the transaction is to put B in funds to acquire shares of A Ltd, the fact that the price was fair might not, I think, prevent the transaction from contravening the section, if it would otherwise do so, though A Ltd could very probably recover no damages in civil proceedings, for it would have suffered no damage. If the transaction is of a kind which A Ltd could in its own commercial interests legitimately enter into, and the transaction is genuinely entered into by A Ltd in its own commercial interests and not merely as a means of assisting B financially to buy shares of A Ltd, the circumstances that A Ltd enters into the transaction with B, partly with the object of putting B in funds to acquire its own shares or with the knowledge of B's intended use of the proceeds of sale, might, I think, involve no contravention of the section, but I do not wish to express a concluded opinion on that point.

Goff LJ said (at 407-8):


Then was the agreement a breach of s 54, and was it so even if the shares in Maximum were worth £500,000? I have already said that I agree with everything in Buckley LJ's judgment and I repeat this in particular with regard to the construction of s 54. I too would wish to leave open the question whether, when the transaction is of a kind which A Ltd could in its own commercial interests legitimately enter into and the transaction is genuinely entered into by A Ltd in its own commercial interests and not merely as a means of assisting B financially to buy shares of A Ltd, the circumstance that A Ltd enters into the transaction with B partly with the object of putting B in funds to acquire its own shares, or with the knowledge of B's intended use of the proceeds of sale, would involve a contravention of s 54. It is not necessary to decide that problem for the purposes of this case. In my view the section was breached even if the Maximum shares were worth £500,000 because the only, or main, purpose was to put Grosscurth and his associates in possession of funds to buy Belmont's shares from City.

WALL ER LJ said (at 414):


To avoid a contravention of s 54 it is not sufficient, in my view, to show that the company is purchasing an asset which is worth the price being paid. The company must also show that the decision to purchase is made in the commercial interests of the company. If this were so, then the fact that the proceeds are used by the seller for the purchase of shares in the company would not necessarily infringe s 54. That would only happen if the decision was made partly with the intention on the part of the board that the proceeds should be used for the purchase of shares in the company.

It is true that the transaction analysed by Buckley J was 'an exceptional and artificial transaction'' and not an ordinary commercial transaction entered into for its own sake but the passages to which I have referred support the proposition that a genuine commercial transaction entered into by a company will still fall foul of s 205 if the substantial purpose of the transaction, albeit among other purposes, is for the purpose of the acquisition of shares in the company.

In this case although Pivot contends that the capital raising by way of the dividend reinvestment plan and underwriting agreement was a legitimate commercial transaction in which all shareholders could participate equally, I am satisfied that there was also an intention by Pivot to give assistance, which was financial assistance, for the purpose of and in connection with the acquisition of the Citifarm shares. I return to this issue later.

Mr Beaumont submitted that Buckley LJ's observations were obiter and incorrect and that the fact situation before the Court of Appeal was one of fraud. He submitted that in the present case the situation is quite different as shares are allotted for the same price, $25, to every shareholder not just ANZ Securities. However that submission fails to take sufficient account of the fact that one must focus on the purpose for which the financial assistance is given and whether it is in connection with an acquisition of shares. Mr Beaumont also sought to distinguish Belmont Finance on the basis that Buckley LJ was considering a situation of deliberately selling assets or issuing shares at an undervalue and was not dealing with what Mr Beaumont called 'a complete commercial transaction''. I do not consider that Buckley LJ was so restricting his observations. He was addressing, in my view, the situation of an otherwise unimpeachable commercial transaction but one with an overlay of an intention or purpose of giving financial assistance. So much was accepted by Needham J in Saltergate Insurance Co Ltd v Knight [1982] 1 NSWLR 369 where he noted at 378-9 that in Belmont Finance Corp v Williams Furniture Ltd (No 2 ) [1980] 1 All ER 393>:


the English Court of Appeal made it clear that if the purpose of the financial assistance was even partly to facilitate the purchase of its shares, the section was infringed.

His Honour then referred to the passages in the judgments of Goff LJ at 408 and WALL ER LJ at 414 to which I have already referred.

In Independent Steels Pty Ltd v Ryan Fullagar J (with whom Marks J agreed) followed Belmont Finance and said (at 252):


In form at least, what was done by the second deed was to obligate the vendors to 'make themselves available to give information and explanation''. Even if the transaction were to be regarded as in every way a genuine transaction, it is not the law that, merely because the transaction under consideration is genuinely regarded by the parties as a sound commercial transaction negotiated at arm's length and capable of justification on purely commercial grounds, the transaction cannot offend against the section: Belmont Finance Corp v Williams Furniture Ltd (No 2 ) [1980] 1 All ER 393 at 402. Purpose is vital (at 407). It is pertinent to ask, why was it agreed that the company, Independent Steels, would pay money to the vendors of the shares in its holding company's capital if the company's turnover increased after the sale? -- and to ask, what was the dominant intention with which that was agreed? (at 414).

Fullagar J's reference to Belmont Finance at 407 is a reference to Goff LJ's observation that it is too narrow an approach to ask whether the relevant transaction is a bona fide commercial transaction as the court has to consider:


as a matter of the utmost importance what was the purpose of the purchase by the plaintiff company.

More recently, Greig J in Cashmere Pacific Ltd (recs apptd, in liq) v New Zealand Dairy Board [1996] 1 NZLR 218 applied Belmont Finance and said (at 224):


What is clear I think from that case is that the purpose of the transaction is 'of the utmost importance'' (see Goff LJ at 407) and that, although the transaction might be commercially fair and justifiable, if one of the purposes is to put the purchaser in funds to acquire shares it may still amount to a contravention of the section. That I think was approved by the Court of Appeal in Catley v Herbert [1988] 1 NZLR 606 at 615.

The passage in Catley v Herbert [1988] 1 NZLR 606 to which Greig J referred is instructive. The Court of Appeal said referring to Belmont Finance (at 615):


It was there held that the purchase by the company without commercial justification of an asset from an intending purchaser of its shares contravened the section even though the prices were fair: see Buckley LJ at 402, and Goff LJ at 407-8. Both the learned Lords Justices regarded the company's purposes as of prime importance -- it was in order to put the purchaser in funds to buy the shares. The meaning of 'financial'' was not discussed, no doubt because it was unnecessary to do so: assistance of the kind provided was manifestly financial assistance. Mr Dugdale argued that the case therefore establishes only that the section is contravened if the company improves the intending purchaser's liquidity so that he is put in funds to complete the purchase. And that, he submitted is the proper test. We do not agree. No such limitation is to be found in the judgments in the Belmont Finance case. In practical terms, there is no relevant distinction between money and money's worth. To regard the section as dealing with the one and not the other would be to treat it as if it read 'monetary'' assistance, rather than 'financial'' assistance. The latter is a word of much less precise meaning, indicative of value rather than of a particular form in which value may be given. Indeed it is clear from the words of the section itself that it extends beyond purely monetary assistance. Further, we see no difference in principle between a purchase and a sale. If there is no reason for the company in the pursuit of its own commercial interests to sell an asset, and if the only reason is to enable the purchaser to use the asset to buy shares in the company, we think there is the provision of financial assistance and therefore contravention of s 62.

As the New Zealand Court of Appeal pointed out the relevant section proscribes financial assistance not monetary assistance and for the reasons to which I shall refer I am of the opinion that by entering into the underwriting agreement in the form as settled there was financial assistance given by Pivot particularly having regard to the purpose for which the subscription price of $25 was designed and the manner in which it was determined.

Was there financial assistance?

The applicants submit that where a purchaser would not proceed with a transaction unless the company entered into a particular transaction it must follow that the transaction is assistance. The applicants also submit that it would usually follow that the assistance is financial having regard to decisions such as Darvall v North Sydney Brick & Tile Co Ltd and Burton v Palmer . The evidence discloses that ANZ Securities would not have acquired the Citifarm shares without the right to acquire shares to the value of $1.75 million under the dividend reinvestment plan, that is 70,000 shares at a price of $25 per share.

Pivot submits that in the events which occurred, namely the extent of the shortfall in the applications under the dividend reinvestment plan, there has been no financial assistance given to ANZ Securities arising out of its acquisition of shares under the dividend reinvestment plan because of the obligations assumed under the underwriting agreement, which obligations had to be performed. It is said that the fact of the shortfall under the dividend reinvestment plan of 70,081 shares means that no assistance was given but rather that an obligation had to be discharged.

I am satisfied that Pivot gave financial assistance to ANZ Securities for the purpose of and in connection with the acquisition by ANZ Securities of the Citifarm shares by agreeing to allow it to underwrite the dividend reinvestment plan and acquire, irrespective of the shortfall, 70,000 shares in Pivot at $25 per share. It is no answer to say that in the events which occurred, namely a shortfall of 70,081 shares, ANZ Securities would have had to have taken up the shares in any event or that Pivot shareholders were able to take up shares under the dividend reinvestment plan for the same price of $25. Whether or not financial assistance is given is to be determined by reference to the underwriting agreement and its terms. In other words, one must look at what rights and obligations are created by the underwriting agreement and what might flow from such rights and obligations rather than wait and see how the events turn out. This is an important distinction because it pays particular attention to the fact that ANZ Securities is given the right to take up 70,000 shares at $25 per share and it ignores the fact that there may be no shortfall at all. What is important to ANZ Securities is that, come what may, it will obtain 70,000 shares for $25 per share.

The validity of this analysis and conclusion is made good, in my view, when one looks at s 205(2) which includes within the giving of financial assistance 'the giving of a guarantee''. The guarantee may never be called upon and unlike the provision of security (also found in s 205(2)) there is not at the time of the giving of the guarantee any diminution of the assets of the company in the sense that a particular asset is encumbered. If there be any diminution in the resources of a company giving a guarantee it is only a contingent diminution yet, by virtue of s 205(2) such contingent diminution is the giving of financial assistance. In my opinion the obligation of Pivot to allot 70,000 shares at $25 per share to ANZ Securities is to be looked at in the same light. There may be a shortfall under the dividend reinvestment plan more than 70,000 shares, in which case ANZ Securities has obligations to discharge. However that is a contingency yet to be determined. Put shortly the extent of any shortfall under the dividend reinvestment plan is irrelevant to the issue whether financial assistance was given by Pivot entering into the underwriting agreement.

In the circumstances of this case it is not necessary to determine the outer limits of the giving of financial assistance 'in connection with'' an acquisition of shares. A finding that financial assistance has been given 'for the purpose of'' an acquisition of shares will establish a finding that the giving of the assistance was 'in connection with that acquisition''. The relevant connection must be more than a temporal connection. There must be some link or relationship identified or established between the giving of the assistance and the acquisition of the shares which is over and above a temporal coincidence: Darvall v North Sydney Brick & Tile Co Ltd (1989) 16 NSWLR 260 at 293, 295.

The dividend reinvestment plan and the underwriting agreement were specifically tailored to provide an attractive investment vehicle or incentive for the purchaser of the Citifarm shares. Even if it be said that one of the purposes of the dividend reinvestment plan including the minimum subscription by ANZ Securities of 70,000 shares and the fixing of the subscription price of $25 per share was to facilitate the restructure of Pivot's capital for the purpose of unlocking the NTAB of its shares, making franking credits available to shareholders and preventing an outflow of capital in the event of shareholders opting for payment of the dividend rather than reinvesting it, I am satisfied that a substantial purpose of the giving of the financial assistance was to provide an attraction for a purchaser of the Citifarm shares: s 205(3) of the Corporations Law. There was no buyer for the Citifarm shares at the price which Mr Shears wanted and Mr Abernethy from Loftus sought to devise a package which would give a purchaser an overall yield of around 10%. It was an integral part of Mr Abernethy's proposal, communicated to Mr Campbell and accepted by him, that to attract a purchaser of the Citifarm shares and provide an adequate return $25 a share should be fixed as the subscription price for the new shares. In other words, the amount of $25 a share was agreed to by Pivot for the purpose of attracting a purchaser for the Citifarm shares. Pivot submitted that its purpose in entering into the underwriting agreement was part of a normal commercial arrangement which included effecting an underwriting agreement. However, the evidence is compelling that a substantial purpose of fixing the terms in the underwriting agreement as to the entitlement of ANZ Securities to subscribe for a minimum of 70,000 shares and as to the amount of the subscription price of $25 per share was the giving of financial assistance to the purchaser of the Citifarm shares.

The expression 'financial assistance'' has a number of meanings but what is integral to its meaning in the context of s 205 is that the company must do or provide something more than what it is otherwise obliged to do (subject, of course, to the caveat that even this will contravene s 205(1) if it is done for the proscribed purpose or with the proscribed intention). In Burton v Palmer Mahoney JA thought that assistance meant more than 'co-operation'' and said (at 886):


But 'assistance'' may also mean the furnishing of something which is needed or, at the least, which is wanted, in order that the transaction be carried out. I think that, in s 67, (the predecessor of s 129), it has a meaning which is closer to need or want; it does not mean something which is merely co-operation.

In the present case that observation is apposite; were it not for the opportunity to subscribe for a minimum of 70,000 shares at $25 per share there is little doubt that ANZ Securities would not have agreed to acquire the Citifarm shares. The evidence is clear -- the terms of the underwriting agreement were set in order to induce a purchaser to acquire the Citifarm shares.

Mr Beaumont QC, who appeared with Mr Denton for Pivot, submitted that the allotment price was the same price for which Pivot had been issuing shares for the past five years, that is $50, it being remembered that this allotment was to occur after a 1 for 1 bonus issue. However, the allotment price was part of an overall scheme whereby the NTAB of the shares was unlocked and used as a basis for future issues and dividends. It was on this basis that the underwriting agreement was entered into and the minimum entitlement of 70,000 shares was determined. Although the board committee in April 1996 had considered bringing share value closer to the real value of shares it had not considered any component of an underwriting agreement or dividend reinvestment plan in any share restructure. That was Loftus' idea as a result of being asked to look for a purchaser of the Citifarm shares and make the acquisition attractive to an outside purchaser. In the words of Mahoney JA in Burton v Palmer ANZ Securities 'needed'' or 'wanted'' the right to take up 70,000 shares at $25 per share involving an outlay of $1.75 million before it would agree to acquire the Citifarm shares at the asking price. Indeed cl 1(a) of the sale agreement between Citifarm and ANZ Securities was amended to make it a condition that ANZ Securities was not obliged to purchase the Citifarm shares unless Pivot entered into the underwriting agreement with ANZ Securities.

There is no doubt that the figure of $25 a share represented a substantial discount to the NTAB of the shares which would be issued and was seen by Loftus, Pivot and as it turned out ANZ Securities, as being a very attractive price for the shares. This was made clear in the chairman's letter to shareholders which stated that:


The effect of these proposals is to increase the value of your current shareholding from the recent issue price of $50 per share to approximately $230.

There is also no doubt the subscription price was of assistance to ANZ Securities for, without the right to subscribe for 70,000 shares at that price under the underwriting agreement ANZ Securities would not have purchased the Citifarm shares. Mr Campbell was told by Mr Abernethy that to attract a purchaser of the Citifarm shares and give the purchaser an adequate return Pivot would have to offer a package in relation to the shares to be acquired under the dividend reinvestment plan which included a minimum subscription for 70,000 shares and an application price of $25. The subscription price was also, in my opinion, financial assistance because it was represented in money terms in the sense that Pivot was making available a minimum of 70,000 shares at a price which was attractive and financially advantageous to ANZ Securities. It is not a matter, as Mr Hayes QC put it, of giving ANZ Securities $6.5 million, rather it was a matter of fixing a number of shares and an allotment price which would induce or attract ANZ Securities to acquire the Citifarm shares. There may be a consequential benefit in the future to ANZ Securities as a result of acquiring the 70,000 shares at $25 per share which can be measured by reference to the fair value of the shares but the financial assistance is to be determined by reference to the fact that fixing the minimum number of shares to be acquired and their price was such as to attract, and in my view assist, the purchaser and that was the purpose of so fixing that minimum number and price.

Mr Beaumont submitted that no money of the company had been used to finance the purchase. He relied on the passage to which I have already referred in WALL ERsteiner v Moir but as I have already noted I consider that approach too restrictive of the relevant principle. Financial assistance can be given without any movement of money such as where an asset is sold at an undervalue or shares are allotted at an undervalue.

Having regard to the authorities to which I have referred I do not consider that it is necessary to find that there has been a diminution in the resources of a company before finding that that company has given the proscribed assistance. However, if I am wrong in this respect, one can find the relevant diminution in

Pivot's resources in the fact that the NTAB of the shares to be allotted under the underwriting agreement would, after allotment, be substantially more than $25 per share and as shares thereafter were to be issued at a price equal to their NTAB, Pivot was in effect allotting the shares for a lesser amount than it otherwise could have done under the dividend reinvestment plan.

The applicants submitted that by allowing ANZ Securities to subscribe for shares under the underwriting agreement for $25 a share, ANZ Securities obtained a benefit by virtue of the high yield derived and the immediate substantial unrealised capital appreciation and the value of the shares. This may be so but the relevant question to ask is not whether ANZ Securities obtained a benefit from the transaction, but rather whether Pivot gave ANZ Securities financial assistance for the purpose of or in connection with the Citifarm shares. In my opinion not only did ANZ Securities obtain a benefit from the subscription price and the terms of the underwriting agreement; it also received financial assistance from Pivot in that respect; the assistance being a favourable subscription price and a guaranteed acquisition of shares at that price. In the words of the New Zealand Court of Appeal in Catley v Herbert ANZ Securities was given particular value for the price it paid and the guaranteed shares it was to receive.

The applicants submit that it is an integral part of the financial assistance that ANZ Securities is to receive a dividend of 7% calculated on the NTAB shares resulting in a yield on the subscription shares of 33.08% and giving it a substantial unrealised capital profit on the subscription shares also calculated by reference to the yield on the shares. I do not see this as a particular aspect of financial assistance as such. An unrealised capital profit, of itself, is not financial assistance although, as I have already found, a favourable subscription price is. The yield depends upon an actual dividend being declared and paid and until it is declared, an anticipated or proposed dividend cannot, of itself, be financial assistance for the purposes of s 205 in the circumstances of this case. Under article 7 the dividend payable on the investor shares was to be determined by the board from time to time. The relevance, however, of the announced dividend policy of 7% based on the NTAB of the investor shares was that it gave ANZ Securities an insight into the anticipated consequence of the assistance it was obtaining from its entitlement to acquire a minimum of 70,000 shares at a price of $25 per share.

The extent and significance of the assistance given to ANZ Securities can be demonstrated by the fact that the share sale agreement was conditional upon the underwriting agreement being entered into between Pivot and ANZ Securities.

The applicants also submit that ANZ Securities was given financial assistance by Pivot to subscribe for the shares it acquired under the underwriting agreement by the subscription price compared to what was said to be the value of the shares based on NTAB and by the participation of the Citifarm shares and the bonus shares issued in respect of them in a special dividend which could be reinvested in the purchase of investor shares at $25 per share. However, the only aspect of financial assistance I can see in relation to the underwriting agreement was the price for which the shares were to be taken up and the minimum subscription. The situation is analogous to that which was considered in Belmont Finance Corp v Williams Furniture Ltd .

Breach of fiduciary duties

The applicants submitted that the directors breached the fiduciary duties they owed to Pivot by entering into the underwriting agreement with ANZ Securities and thereby providing financial assistance for the purpose of ensuring active farmer control of Pivot by removing the Shears interests as the holders of the Citifarm shares or a vast majority of them and for the purpose of maintaining management control of Pivot. There is no doubt that the motivation of the board was to remove the Shears voting block from the register and to that end Pivot entered into the underwriting agreement for the purpose of providing an incentive to a purchaser of the Citifarm shares. This was not a case of a company or a majority of its shareholders oppressing a minority shareholder. As I have found earlier I do not accept that Pivot's purpose for entering into the underwriting agreement was to maintain management control of Pivot. Mr Campbell said that the board was concerned about having one person with such a large number of votes and by eliminating the large voting block control of Pivot would be returned to farmers. None of the directors gave evidence but I do not consider it appropriate in these proceedings, as presently constituted to consider whether a desire to ensure farmer control of Pivot where the limitations on voting power provided by the articles could be implemented in practice is a breach of the fiduciary duty which the directors owed to Pivot. The initiating application before the court simply seeks an order pursuant to s 205(13)(b) disapproving of the financial assistance given by Pivot to ANZ Securities or Australia and New Zealand Banking Group Ltd. It seeks no orders or relief against Pivot's directors. Points of claims and defence were ordered in the proceeding shortly before the hearing commenced and it was then that the allegation of directors' breach of fiduciary duty emerged. I do not consider it appropriate to make any findings on that issue unless the directors were parties to the proceedings, were separately represented before the court and were given the opportunity to make submissions on the issue.

The applicants contended in their final submissions that the issue of the shares under the dividend reinvestment plan and underwriting agreement was a breach of the fiduciary duty which the directors owed to Pivot in relation to their power to issue its capital. The directors' power to allot shares is contained in article 13 which provides that unissued shares are under the control of the board and gives the board the power to issue unissued shares on such terms and conditions and for such consideration as the board thinks fit. It is a trite proposition of law that the power to issue the unissued capital of a company must be exercised bona fide in the interests of the company and its shareholders: Ord Forrest Pty Ltd v FCT (1974) 130 CLR 124 at 156 ; 2 ALR 403; Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821; Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285 ; 70 ALR 251. These authorities establish that the power to issue shares should not be used to disadvantage one shareholder in the company over another, nor should it be used solely to alter the voting power in the company.

The issue arises as to whether it was a breach of the directors' fiduciary duty to issue the shares under the underwriting agreement for the purposes of ensuring what is described as 'farmer control'' of Pivot. I take this expression to be a reference to the fact that only customers of Pivot could hold ordinary voting shares and that the board has the power to convert the shares of a person who ceased to be a customer into non-voting investor shares. Article 69 limited the number of votes that could be cast in respect of any one holding to no more than five shares. Mr Shears and his interests and ANZ Securities were not being disadvantaged or disenfranchised by the proposal (to which they had agreed) and there is no doubt that the directors were concerned to restore the voting structure to the scheme which article 69 contemplated. The issue of the shares under the dividend reinvestment plan and the underwriting agreement did not change or alter the voting power in Pivot in any way. They were non-voting investor shares and were part and parcel of the restructuring proposal. The purpose of the underwriting agreement was to facilitate the acquisition of Citifarm shares by ANZ Securities, but in so far as that constituted Pivot giving financial assistance for the purpose of or in connection with the acquisition of those shares, it was entitled to do so, so long as it complied with the provisions of s 205 of the Corporations Law. Putting the matter another way, Pivot was entitled to provide the financial assistance for a purpose which was not discriminatory between the shareholders so long as it complied with s 205.

As I have already observed I do not think it appropriate in the proceedings as presently constituted to make any findings on this issue without the directors being joined as parties, separately represented and given the opportunity to make submissions on the issue.

Did the notice to shareholders comply with s 205(10)?

The notice to shareholders was required by s 205(10)(c) to set out:

(a)
particulars of the financial assistance proposed;
(b)
the reasons for the proposal to give that assistance;
(c)
the effect that the giving of the financial assistance would have on the financial position of Pivot.

The financial assistance proposed was constituted by the right given to ANZ Securities under the underwriting agreement to subscribe for no less than 70,000 shares at $25 per share. However, to understand the nature of that assistance it had to be placed in the context of the acquisition by ANZ Securities of the Citifarm shares. There was little issue between the parties as to the manner in which I should approach the documentation sent to shareholders. The applicants submitted that I should look at the documentation and determine the meaning 'ordinary men of business'' would attribute to it when they received it: Alexander v Simpson (1889) 43 Ch D 139 at 147. There was no real dissent from Pivot as to this approach although Pivot emphasised that I should look at the documentation through the eyes of the ordinary man of commerce or the eyes of the ordinary investor not just the eyes of the ordinary man. Both parties relied on the observation of Young J in Devereaux Holdings Pty Ltd v Pelsart Resources NL (No 2 ) (1985) 9 ACLR 956 at 958 in relation to the fiduciary duty of directors to provide shareholders with full and true material in relation to a proposed resolution:


In considering this equitable rule one does not adopt the legalistic approach of a 19th century examiner of titles searching for a base fee nor does one approach the question in what counsel aptly described as a nitpicking way, but one asks what effect will the information provided have on the ordinary shareholder who scans or reads the document quickly, not as a lawyer, but as an ordinary man or woman in commerce or as an ordinary investor. One asks, viewed in such a way, will the information fully and fairly inform and instruct the shareholder about the matter upon which he or she will have to vote?

I adopt that approach in considering the documentation sent to Pivot's shareholders.

Particulars of the financial assistance proposed to be given The chairman's letter

Pivot submitted that the chairman's letter provided shareholders with particulars of the perceived financial assistance but I cannot accept that submission. Mr Campbell agreed that one of the reasons for the introduction of the dividend reinvestment plan was to produce a package attractive enough to an outside investor to buy the Citifarm shares and said he believed that that reason was disclosed to shareholders in the chairman's letter to shareholders dated 16 October 1996 and in the form of the proposed resolution authorising Pivot to enter into the underwriting agreement. However when pressed he said that the reason was not disclosed in words which referred to a material reason for the introduction of the dividend reinvestment plan being to produce a package attractive to a buyer of the Citifarm shares. He relied upon the references to 70,000 shares at the rate of $25 per share and the number of shares held by two shareholders being transferred. But these references are quite inadequate as a disclosure of either the financial assistance proposed to be given, particularly the significance and relevance of the allotment price of $25 per share, or the reason for the dividend reinvestment plan, namely to produce an attractive package to an outside investor to buy the Citifarm shares.

The chairman's letter contains no reference to any particulars of the financial assistance. Although it refers to the entitlement to reinvest the special dividend of $5 at $25 per share there is no reference to the fact that that figure was derived (albeit in conjunction with a proposed dividend) for the purpose of attracting a purchaser (which turned out to be ANZ Securities) to agree to the acquisition of the Citifarm shares. For the purposes of s 205(3) of the Corporations Law it is sufficient to constitute the relevant financial assistance if the relevant purpose, in this case to assist ANZ Securities in the acquisition of the Citifarm shares, was a substantial purpose for the giving of financial assistance. It is true that the chairman's letter refers to ANZ Securities' entitlement to subscribe for a minimum of 70,000 investor shares at $25 per share but this does not, in my view, constitute a particular of the financial assistance proposed to be given to ANZ Securities.

In order to constitute a particular of the financial assistance proposed, the subject-matter relied on as constituting that particular must be identified or propounded in such a way as to enable a shareholder reading the document containing it to understand what is said to be the financial assistance proposed. The chairman's letter does not achieve this objective. Certainly the statement that one of the objectives, presumably of the share restructure, which needed to be satisfied was:


To provide a means by which the 36,428 ordinary shares and 495 investor shares held or controlled by two shareholders can be transferred to an investor shareholding on a fair and equitable basis

does not specify or constitute a particular of the financial assistance which was being given. When one then goes to the later part of the chairman's letter which sets out the proposal to achieve the objectives which needed to be satisfied one looks in vain for what might be said or thought to be the financial assistance. There is no reference in that section of the letter to the shares held or controlled by the two shareholders nor is there any reference to the subject-matter of financial assistance. There is a reference to the entitlement of ANZ Securities to subscribe for a minimum of 70,000 investor shares at $25 per share but the context in which that reference appears is not such as to demonstrate that what is referred to has any connection with the subject of financial assistance.

Indeed, the chairman's letter is elliptical as to the reasons why shareholders' approval is being sought for the proposal. The statement that:


... we have been advised by our solicitors to ensure there is no perception that any incentive is being provided to any individual or group to invest in the company and to ensure all members are fully informed, that the members' approval should be sought

is evasive and, in my view, not candid.

The reason why members' approval was being sought was to ensure that there was no breach of s 205 and the procedure provided by s 205 was complied with. Indeed this statement in the chairman's letter was disingenuous because the fact was that an incentive had been provided to ANZ Securities to invest in Pivot and this was not stated in the chairman's letter with any degree of clarity. If the purpose of seeking the members' approval was to ensure that 'all members are fully informed'' one would have expected there to have been some reference to the reason why the dividend reinvestment plan, underwriting agreement and the subscription price of $25 per share had been structured in the manner they were, namely to offer an attraction to a purchaser of the Citifarm shares. In my view members were not 'fully informed','

The notice

The notice setting out the resolutions is, in my view, similarly deficient. The resolution authorises Pivot to enter into the underwriting agreement with ANZ Securities subject to and conditional upon ANZ Securities having entered into an agreement for the purchase of the Citifarm shares. There is no reference to the identity of the vendors. It may be that most shareholders were well aware of the identity of the proposed vendors but that, in my view, does not excuse Pivot from full disclosure. There was some evidence that Mr Shears did not want his name mentioned in the documentation but I consider full disclosure to the shareholders required such an identification. Also shareholders were not told why the entry by Pivot into the underwriting agreement was conditional upon ANZ Securities having entered into an agreement for the purchase of the Citifarm shares. That condition was integral to the financial assistance given by Pivot. If the Citifarm shares were not sold to ANZ Securities, it was not to be given the benefit of the underwriting agreement which assisted it financially in relation to the acquisition of the Citifarm shares.

The form of the special resolution in relation to the underwriting agreement is ambiguous and misleading in its form because the underwriting agreement does not contain all the provisions referred to in the resolution. Paragraphs 1 and 4 of the special resolution which refer to the bonus issue and the special dividend, have nothing to do with any entitlement of ANZ Securities under the underwriting agreement. In my opinion the provision of the 'particulars'' of the financial assistance required an identification of the fact that ANZ Securities was being given the opportunity to acquire shares at a particular price of $25 which would enable it to obtain such a yield on those shares, having regard to the announced dividend policy, as would give it overall, taken in conjunction with the acquisition of the Citifarm shares, an anticipated commercial yield approximating 10%. The reference in the notice to the agreement by ANZ Securities to acquire the Citifarm shares does not refer to any such considerations. Further, the form of the notice is such that it suggests that by having an entitlement to the 1 for 1 bonus, by underwriting the dividend reinvestment plan, by having an entitlement and requirement to subscribe for a minimum of 70,000 shares and by receiving a special dividend in common with all other shareholders, Pivot 'may be deemed'' to be giving financial assistance to ANZ Securities. The four numbered paragraphs in the notice were comprehensive as to the components of the restructure proposal and identified ANZ Securities' entitlement to subscribe for a minimum of 70,000 investor shares at $25 per share but in so far as they were intended to be a description of the 'particulars'' of the financial assistance they were incomplete, inadequate and inaccurate. Further, the use of the expression 'may be deemed'' was unfortunate because it suggested that the matters referred to come within the scope of the concept of 'financial assistance'' even though they may not in fact constitute financial assistance. (Note the discussion of 'deemed'' by Windeyer J in Hunter Douglas Australia Pty Ltd v Perma Blinds (1970) 122 CLR 49 at 65-6). There is further ambiguity by the use of the phrase 'NOTWITHSTANDING by so doing the company may be deemed to be giving financial assistance ...''. To what does 'by so doing'' refer? Apparently, the company entering into the underwriting agreement. But that then involved a reference to the bonus issue, the underwriting and the entitlement to receive the special dividend. It was not made clear what was the suggested financial assistance. In my view the notice did not set out any proper or adequate particulars of the financial assistance proposed to be given.

The explanatory statement

The explanatory statement does not take the matter any further. As Mr Beaumont pointed out, it does provide particulars of the underwriting and ANZ Securities' rights and obligations under the underwriting agreement and it does set out that ANZ Securities has an entitlement to take up 70,000 investor shares at $25 per share which is a benefit to ANZ Securities over and above the offer to other shareholders. The passages relied upon, in particular, by Mr Beaumont are found in paras 5 and 6. In particular Mr Beaumont referred to the passage in para 6:


Nevertheless, the entitlement of ANZ Securities Ltd or Australia and New Zealand Banking Group Ltd, as its nominee, to take up 70,000 investor shares at $25 per share (a cash inflow to Pivot of $1,750,000) is a benefit over and above the offer to other shareholders to reinvest their special dividend in investor shares at the same rate. Despite that benefit, your directors are of the opinion that the issue of those investor shares to ANZ Securities Ltd or Australia and New Zealand Banking Group Ltd at that price will have no material negative effect upon the financial position of Pivot.

However, the explanatory statement and, in particular, the passages relied on, does not set out any particulars of the actual 'assistance''. In my view any particulars of the financial assistance must, in their terms identify why it is properly described as 'assistance''. Simply saying that ANZ Securities is entitled to acquire 70,000 shares at $25 per share does not indicate or identify the relevant assistance which is rather that ANZ Securities is entitled to acquire 70,000 shares at $25 per share which will give it an attractive purchase price which will result in, at least, potentially an attractive yield over the whole of its acquisition of Pivot's shares, both under the underwriting agreement and from the Shears' interests.

It may be said that all that was required in order to set out 'particulars of the financial assistance proposed to be given'' was to include in the notice specifying the intention to propose the resolution a narration of the proposal which included the financial assistance even though it was not identified as such. However I consider that s 205(10)(c)(i) requires more than such a narration. The reference to ' particulars of the financial assistance proposed to be given'' requires in my view an identification or specification of the financial assistance as such.

Can it be said then that para 5 of the explanatory memorandum included particulars of the financial assistance? The position may well have been that Pivot and its solicitors held the view that it was 'by no means clear'' what was, or constituted, the giving of the financial assistance to ANZ Securities or the ANZ Bank but, in my view, setting out all the transactions and arrangements as was done in para 5 of the explanatory memorandum was insufficient. In my view Pivot was obliged to identify as financial assistance that part of the arrangement with ANZ Securities which Pivot thought at least might be classified as financial assistance. This it did not do.

Paragraph 5 of the explanatory memorandum went close to providing particulars of the financial assistance proposed to be given but in my opinion it did not succeed in doing so. Mr Beaumont submitted that the third and fourth paragraphs in para 5 constituted the particulars of the financial assistance but they are not set out as such. That paragraph sets out briefly the arrangements with ANZ Securities and concludes by stating that there may be a perception that there is an element of financial assistance to ANZ Securities and/or the ANZ Bank 'by Pivot in those arrangements''. But 'those arrangements'' is a reference to everything set out in para 5 and in my view that description obscures the identification of the particulars because it includes matters which would not be part of the assistance such as, for example, the agreement by ANZ Securities to acquire the 36,428 ordinary shares and the 495 investor shares. A proper and adequate identification of the particular of financial assistance proposed to be given would have been a specific reference to the underwriting agreement and ANZ Securities' entitlement to take up a minimum of 70,000 investor shares and a reference to the manner in which, and the purpose for which, the subscription price of $25 per share was determined. In other words the particulars of the financial assistance should not have been obscured or blurred by the addition of non-financial assistance information.

For present purposes I treat the notice and the explanatory memorandum as effectively one document although such assumption is not strictly accurate. If I had been satisfied that the explanatory memorandum adequately set out the relevant particulars and reasons I would have made a declaration of substantial compliance under s 205(11) even though such particulars and reasons were not set out in the notice specifying the intention to propose the resolution.

If I am wrong in my conclusion that no proper or adequate particulars were given of the financial assistance proposed to be given then, for reasons to which I shall refer no particulars were given of the reasons for the proposal to give that assistance.

Particulars of the reasons for the proposal to give the financial assistance

The reason for the proposal was to provide an inducement or attraction to a proposed purchaser of the Citifarm shares, which turned out prior to sending out the documentation for the extraordinary general meeting to be ANZ Securities, to purchase these shares at the price required by the vendors namely $300 per share. The combination of the anticipated yield on the shares acquired under the underwriting agreement with a subscription price of $25 per share and the anticipated yield on the Citifarm shares enabled ANZ Securities to obtain an anticipated attractive yield overall from the Citifarm shares and the underwritten shares. It was an integral part of the proposal to attract a purchaser for the Citifarm shares that the subscription price for the underwritten shares be $25 per share and that the purchaser have the right to acquire a minimum of 70,000 shares at that price. So much was Mr Abernethy's advice and according to Mr Campbell it was accepted. Accordingly, the reasons for the proposal to give the assistance included, at the least, the identity of the vendors, the consideration for the purchase of the Citifarm shares, the discrepancy between the anticipated yield on those shares and what was required as a commercial yield to enable the purchase to succeed, the need to offer an incentive to attract a purchaser of the Citifarm shares and, more particularly, the fact that the board wanted to return Pivot to 'farmer control''. Even if this may be thought to be too extensive a description of the reasons for the proposal, there was an irreducible minimum reason being the fact that Pivot was offering or creating an inducement or attraction for the purchaser of the Citifarm shares.

One searches the documentation sent to shareholders in vain to find any reference to these matters. In so far as any reason is given, or to be inferred, for the proposal, it is to the contrary. The chairman's letter suggested that the approval of the members was being sought to the proposal to ensure there is 'no perception'' that any incentive is being provided to any individual or group to invest in the company. As I observed earlier this statement was evasive and not candid. The fact is that an incentive was being provided to ANZ Securities. The consequence of this was that in order for adequate reasons to be given for the proposal to give financial assistance it was necessary to explain that in order to achieve a sale of the Citifarm shares it was necessary that a potential purchaser obtain an anticipated commercial yield of the order of 10-101/2% fully franked in respect of its investment in the Citifarm shares. It would then be necessary to explain that this was being done by issuing further shares on the basis that there would be a revised dividend policy which, taking into account the allotment price for the new shares of $25 per share, would give an anticipated overall yield of the amount required. The reasons would also have to set out that this proposal was necessary because the board was of the view that it was in the best interests of Pivot as a whole to remove the large voting block represented by the voting power of the Citifarm shares and restore Pivot to farmer control. None of these reasons were advanced in the documentation sent to shareholders.

The notice to shareholders is silent on the subject. There was a reference in the explanatory statement that as Pivot was a non-listed public company without a readily available market in its shares it would be difficult to find 'other investors'' who would be prepared to purchase the Citifarm shares particularly considering the limited voting rights and tradeability attached to investor shares. This statement hints at the fact that the reason for the proposal to give the assistance is that without it ANZ Securities would not purchase the Citifarm shares but that fact is not made explicit. However, on the face of the documentation the reason for the proposal to give the assistance, namely the need to build up the anticipated yield on the Citifarm shares to attract a purchaser of them is not made clear.

The chairman's letter to shareholders referred to the fact that in developing the proposal for the changes to the Pivot share structure a number of objectives needed to be satisfied. One of these objectives was to provide a means by which the Citifarm shares (not identified as such) could be transferred to an investor shareholding 'on a fair and equitable basis''. Although this touches upon the reasons for the proposal to give the financial assistance it can only be seen as such in the light of the evidence placed before the court. In any event to refer to a means of transfer 'on a fair and equitable basis'' is quite disingenuous. Rather the objective was to give the vendor its asking price and to give the purchaser such an overall rate of anticipated return, having regard to the allotment price of shares under the underwriting agreement, as made it attractive and worthwhile to the purchaser to pay that asking price. This statement does not, in my opinion, constitute a particular of the reasons for the proposal to give the financial assistance nor is it expressed as such.

The effect of the financial assistance on Pivot's financial position

The documentation set out what Pivot said was the effect of the giving of the financial assistance on its financial position. The explanatory memorandum said that the issue of the 70,000 investor shares to ANZ Securities would have no material negative effect upon Pivot's financial position. This position is maintained by Pivot whereas the applicants submit that there was an effect constituted by the increase of the amount required for the payment of the dividend from $161,000 in 1996 to between $2,015,271 and $2,072,333 in 1997 and following years. However, at this point of time the financial assistance is only constituted by the allotment or proposed allotment of the 70,000 shares under the underwriting agreement at an allotment price of $25 per share and the commitment by Pivot so to do. The declaration of dividend can only occur in the future and in my opinion until such time as the dividend is declared albeit at the rate proposed of 7% based on NTAB there is no financial assistance constituted by the proposal or intention to declare the dividend at that rate.

However, there is an effect that the giving of the financial assistance would have on the financial position of the company, namely the increased dividend pay out. It may be true that the issue of the 70,000 investor shares to ANZ Securities would have no material negative effect upon Pivot's financial position but s 205(10)(c)(ii) does not require a judgment to be made whether the effect is negative or positive; rather it requires that 'the effect'' on the financial position be set out. On the date of the general meeting it was not possible to predict, if the resolutions were passed, what might be the take up or shortfall under the dividend reinvestment plan so that shareholders should have been informed, at the least, what would be the effect on the financial position of the company if there was no shortfall under the dividend reinvestment plan and ANZ Securities was allotted the 70,000 investor shares to which it was entitled. Even if the increased dividend pay out on these 70,000 shares did not affect Pivot's cash or capital resources in any way it was still incumbent upon Pivot to set out that effect. Notwithstanding the effect that a dividend was yet to be declared in respect of those shares at the proposed rate of 7%, it was still necessary, in my opinion, for the effect of the proposed dividend on the 70,000 shares to be issued under the underwriting agreement to be set out.

I do not accept that there was any other effect on the financial position of the company and if and in so far as there may have been an alteration to the NTAB of the shares as a result of the issue of the 70,000 shares to ANZ Securities, as propounded by Mr Selak, that did not have an effect on Pivot's financial position.

Other matters

The applicants also allege that Pivot did not in the notice of meeting inform shareholders that the investor shares might be listed or that listing of such shares was being considered. However, notwithstanding references to listing from time to time I am satisfied that at the time of the general meeting there was no proposal before the board for listing and although listing had been referred to from time to time there was no proposal for listing developed to such an extent that it was appropriate to inform shareholders that listing was being considered at that time.

The applicants claim, as an independent allegation, that all the shareholders in Pivot may be adversely affected by the underwriting agreement because of what is claimed to be a loss in value of the NTAB of the shares in Pivot and the increased amounts required for dividends. These matters are not relevant for the purposes of compliance with s 205(10)(c) of the Corporations Law but may be relevant for the purposes of determining what order should be made under s 205(13) of the Corporations Law.

Was there substantial compliance with s 205(10)?

However, before turning to the orders which may be made under s 205(13) I have to be satisfied that there has been compliance with s 205(10). I have already found that the notice did not set out particulars of the

financial assistance proposed, the reasons for the proposal or the effect that the giving of the financial assistance would have on Pivot's financial position. However, I have the power pursuant to s 205(11) to declare that the provisions of s 205(10) have been complied with in relation to the proposed giving of financial assistance by Pivot if I am satisfied that those provisions have been substantially complied with.

I am not so satisfied. The documentation given to shareholders was, in my view, evasive, inadequate and incomplete as to the particulars of, and the reasons for, the proposal to give the financial assistance and incomplete as to the effect that the giving of the financial assistance would have on Pivot's position. There was one purpose in giving ANZ Securities the right to acquire 70,000 shares under the underwriting agreement at $25 per share, namely to assist it, and give it an inducement, to purchase the Citifarm shares. If that was not the only purpose it was a substantial purpose. I have found that that was financial assistance given by Pivot. The allotment price of $25 per share was available to all shareholders but the amount was fixed for the purpose of attracting a purchaser to the Citifarm shares. This was not even hinted at in the documentation and I therefore cannot find that there was substantial compliance with s 205(10) in this respect.

In exercising powers under s 205(13) of the Corporations Law:

(a)
I am obliged to have regard to the rights and interests of the members of Pivot in determining what orders to make in relation to the application;
(b)
I am not to approve the giving of the financial assistance unless I am satisfied that:

(i)
Pivot has disclosed all material matters relating to the proposed financial assistance to shareholders;
(ii)
the proposed financial assistance would not after taking into account the financial position of Pivot be likely to prejudice materially the interests of members or creditors of Pivot.

It follows from my findings that as the notice (by reference to which I include the accompanying documentation) to members did not set out particulars of the financial assistance proposed, the reasons for the proposal or the effect that the giving of the financial assistance would have on Pivot's financial position, Pivot did not disclose to members all material matters relating to the proposed financial assistance.

It is therefore not necessary to consider whether the proposed financial assistance would be likely to prejudice materially the interests of shareholders. However, as the matter has been argued before me it is desirable to express an opinion on that matter. Even if Mr Selak is right in opining that there has been a loss in the NTAB of Pivot shares I do not consider that the interests of members have been prejudiced materially by the proposal. If there had otherwise been a substantial compliance with s 205(10) in that all material matters relating to the proposed financial assistance required by that subsection had been disclosed to Pivot's members, I would have been satisfied that the proposal would not be likely to prejudice materially the interests of members of Pivot. I would have approved the giving of the financial assistance on the basis that having regard to the rights and interests of members of Pivot those rights and interests were enhanced by the giving of the financial assistance rather than being materially prejudiced by it. As a result of the giving of the financial assistance value in the company in relation to the NTAB of the shares has been unlocked and exposed. It is speculative as to whether that situation might have arisen without the giving of the financial assistance but the end result of the proposal is that members would receive a better return on their holding of shares and would have a more valuable asset.

In the course of final submissions the applicant relied upon a number of matters which they claimed were material to the proposed financial assistance and which were not disclosed or which were misleading. These matters related to:

(a)
the share sale agreement being conditional and only binding on ANZ Securities if Pivot entered into the underwriting agreement;
(b)
the statement in the chairman's letter that it was an object of the proposal 'to recognise the underlying value of the shares and to equitably distribute the accumulated value of the company among current shareholders'' was false;
(c)
the chairman's statement in his letter that 'the structure in the opinion of the directors is of obvious benefit to all shareholders'' was false as there was nothing in the structure which was of any benefit to ordinary shareholders;
(d)
the statement in the chairman's letter that the company had been advised by its solicitors that to ensure there was no perception at any incentive was being provided to any individual or group to invest in the company and to ensure all members are fully informed that the members' approval should be sought was false.

Pivot objected to these matters being raised as they had not been raised in the points of claim or otherwise particularised. It is fair to say that these matters were effectively raised for the first time in final submissions as matters of non-disclosure and misleading information and had not been the subject of earlier particularisation as such. In the circumstances, and having regard to the conclusions to which I have reached, it is not necessary to deal with these matters except to the extent to which they arise for consideration in the context of determining whether the documentation set out particulars of the financial assistance proposed to be given, the reasons for the proposal and the effect of the giving of the financial assistance. I have considered some of these matters in this context. If they had become relevant independently of their relevance to the content of the documentation for the purposes of compliance with s 205(10)(c) I would not have allowed the respondents to raise issues in final addresses in relation to allegations of non-disclosure and misleading conduct in the manner in which they did.

The form of order

Having regard to the findings I have made I consider the appropriate order to make is that the giving of the financial assistance be disapproved. The applicants submitted a draft declaration which the respondent contends is vague and uncertain and not sufficiently related to the cause of action as pleaded. I am not prepared to make a declaration in that form and I think the appropriate order to make at this time is that the parties have the opportunity to make submissions as to the appropriate form of order to make having regard to these reasons for judgment. These reasons effectively dispose of Pivot's cross-claim and subject to such further submissions as may be made I am disposed to dismiss that cross-claim. I will hear the parties on the issue of costs.

Solicitors for the applicants: Cooper & Wicks .

Solicitors for the respondent: Phillips Fox .