Unity APA Ltd v Humes Ltd (No 2)

[1987] VR 474

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(Judgment by: Beach J)

Between: Unity APA Ltd
And: Humes Ltd (No 2)

Court:

Judge:
Beach J

Subject References:
COMPANIES
Application to inspect company books
Purpose of application
Primary or dominant purpose
Collateral purposes
STATUTE
INTERPRETATION
'a registered company auditor or a duly qualified legal practitioner'
Whether 'or' disjunctive

Legislative References:
Companies (Victoria) Code - s265B

Hearing date: 8-9 December 1986
Judgment date: 11 December 1986

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Judgment by:
Beach J

This is the return of a notice of motion whereby Unity APA Ltd. (Unity APA) seeks an order pursuant to s265B of the Companies (Victoria) Code authorizing persons acting on its behalf to inspect and make copies of or take extracts from certain of the books of Humes Ltd. (Humes).

Unity APA is the single largest shareholder of Humes holding some 36.65 per centum of Humes issued capital. It presently has on foot a takeover offer for Humes. Its PtA statement was registered with the Commissioner for Corporate Affairs on 22 July 1986, and sent to shareholders on 14 August 1986. The offer to shareholders has been extended on a number of occasions and will now close on 5 January 1987.

On 1 December last Humes announced that it had reached agreement with the Smorgon Group of Companies (Smorgon) to acquire the assets and business of Smorgon Steel. The proposed purchase consideration for Smorgon Steel is the issue to Smorgon of 142 million ordinary shares in Humes credited as fully paid up. If the purchase is concluded it will give Smorgon 46 per centum of the expanded share capital of Humes and have the practical effect of diluting Unity APA's shareholding to approximately 19.23 per centum.

The documentation sought to be inspected and copied by Unity APA relates entirely to Humes proposed acquisition of Smorgon Steel. The purpose for which Unity APA seeks access to the documentation is set out in a letter written by its solicitors to Humes' solicitors on 4 December and I quote: -

"Unity APA seeks access to the documents referred to in the Notice of Motion for the purposes of (inter alia) considering:

(a)

its position in relation to possible breaches by Humes directors of their duties to it as a shareholder;

(b)

what course of action it should adopt at the extraordinary general meeting of Humes which is proposed to be held to consider the acquisition of Smorgon Steel."

During the course of the hearing, Unity APA's director, Michael Edward Wayland, gave the following evidence in relation to the matter:

Q. - "Perhaps you would be good enough to tell us in your own words why it is, Mr. Wayland, that your company wishes to have access to certain of the records of Humes?"

A. - "We are suspicious of the events that have led to this proposed transaction, your Honour. There are three essential reasons for that. Firstly, the deal itself, we are concerned as to whether it is commercially reasonable and realistic for the company to embark on a proposal of this magnitude with all of those unanswered questions. In particular, the things that concern us about the transaction is the enormous goodwill component and the capitalization of earnings that have been used in the material that is already circulated. We have questions as to that. Secondly, the next thing that gives us concern is really the circumstances surrounding the events which led up to this announcement, circumstances that I had become aware of through newspaper articles and so on, solicitors working back at night to hurry this transaction through which could only lead me to be suspicious of the motives of the directors in putting this transaction through in such a short space of time."

Q. - "As a third factor does something else spring to your mind? The first one I have noted, four words cover what you have said so far, which I have understood is the price and the motives of the directors?"

A. - "Yes."

Q. - "Is there another that is causing you concern?"

A. - "I think the third thing really is the structure of the proposal, where it effectively hands control to the Smorgon group and whether that is commercially feasible having regard to the circumstances."

S265B was introduced into the Code by s77 of the Companies and Securities Legislation (Miscellaneous Amendment) Act 1985. It states: -

"265B(1)

Where -

(a)

a member of a company applies to the Court for an order authorising a registered company auditor, or a duly qualified legal practitioner, acting on behalf of the member to inspect books of the company; and

(b)

the Court is satisfied that the member is acting in good faith and that the inspection is to be made for a proper purpose, the Court may -

(c)

make an order authorising a registered company auditor, or a duly qualified legal practitioner, acting on behalf of the member, at such time as is specified in the order, to inspect and to make copies of, or take extracts from, the book of the company or such of the books of the company as are specified in the order; and

(d)

make such other order or orders (if any) as it thinks fit including, without limiting the generality of the foregoing, an order relating to the use that may be made of the information disclosed to the member by the registered company auditor or the duly qualified legal practitioner as a result of the inspection.

"(2)

The right of a member of the company to apply for an order under subs(1) is in addition to and not in derogation of any right in relation to the inspection of books of a company that a member of a company has under any other law."

As yet there is little Australian authority dealing with the effect of the section and the interpretation to be given to it. Indeed, I was referred to only one Australian authority during the course of the hearing, that being the as yet unreported decision of GN Williams J of the Queensland Supreme Court in In the matter of Augold NL (unreported, 4 December 1986). I shall make reference to that decision in due course.

There is, however, a considerable body of American authority dealing with similar legislation, and an extensive discussion of the subject in 18A Am. Jur. 2d Corporations para. 348. It is convenient to make reference to certain of the propositions set out in that discussion. In para. 348 appear the following statements: -

"It is well established that a stockholder has a right to inspect the books and records of the corporation. This right has been said to exist independently of statutes securing such a right to stockholders, and such statutes are generally regarded as supplementing, rather than abrogating, the common-law right. "The common-law right of a stockholder to inspect corporate books and records is not, however, an absolute right; it must be exercised at a proper and reasonable time and place, and for a proper purpose."

In para. 351 it is said that statutes providing for inspection by stockholders should be liberally construed in favour of stockholders.

Paragraph 352 contains the statement that the books and property of the corporation really belong to the shareholders, and the reality can not be overthrown by the fiction of law that a corporation is an artificial person or entity apart from its members.

Paragraph 356 deals with practice affecting the shareholders' rights and contains these statements: -

"The fact that there are unfriendly, hostile, or ill feelings between the demanding shareholder and corporate management is not justification for denial of inspection. "... Nor is it an answer to an application by a stockholder to inspect the books of the corporation that it will furnish him extracts or copies from the books, or that it will agree to have them inspected by an expert selected by it and the stockholder, or that the corporation makes complete annual reports."

In that same connection it is later said in para. 369 that an examination of books and records to ascertain the condition of corporate affairs and the propriety of certain actions is a proper purpose even though the one who seeks inspection may be hostile to management. Paragraph 377 states: -

"Inspection of corporate stock lists or registers and records is generally granted as for a proper purpose where it is sought for the purpose of communication with other stockholders in connection with a contemplated merger, takeover or tender offer for shares."

Paragraph 388, under the heading "Deposing Management", reads: -

"Since the management of a corporation acts as the agents or servants of the stockholders, who should be permitted to place their affairs in other hands if they so desire, it has frequently been held that a denial of the right of inspection is not justified by the fact that it may be sought to facilitate a plan to remove the present officers or directors. The fact that a shareholder has an interest in acquiring control of a company does not render his purpose in requesting to examine and copy shareholder lists unreasonable or improper, within the meaning of the statute. An effort to remove board members for alleged involvement in a questionable transaction, even though the transaction occurred before the stockholder became a stockholder may not be said to be an improper purpose."

Paragraph 389 contains the following proposition: -

"The general rule that a stockholder will not be permitted access to the books of the corporation where his purpose is inimical to the corporate interests has generally been held not to preclude an inspection sought for the purpose of obtaining information upon which litigation against the corporation may be founded. And the mere fact that the stockholder seeking an examination of the corporate books is currently engaged in litigation with the corporation has been held not to justify denial of the right of inspection."

However, in para. 383 it is stated: -

"Even if a seemingly proper purpose for inspection is shown, the purpose cannot, to justify enforcement of a shareholder's inspection right, be adverse to the best interests of the corporation. Thus, it has been recognized in a number of cases that the stockholder's common-law right of inspection of corporate books will not be enforced where the applicant is acting from motives hostile or inimical to the corporation, or is seeking to do it injury by means of such inspection. The same rule applies under statutes which make the stockholder's right to inspect books dependent upon the reasonableness of the motives and purposes of the stockholder or upon the inspection being for a proper purpose."

In the Augold Case, Williams J in dealing with the operation of the section said, at p. 17: "The creation of a statutory right to inspect company documents with the leave of the Court should not, in my view, be regarded as affecting the basic rule of company law which has stood for many years that a shareholder ought not ordinarily have recourse to the courts to challenge a managerial decision made by or with the approval of its directors. That principle is one of the underlying presumptions on which the rule in Foss v Harbottle (1843) 2 Hare 461 is based, and it is reflected in many recent judgments dealing with challenges to decisions made by directors (and in the trust situation by trustees, where an analogous rule is applied). Reference need only be made to Butt v Kelson [1952] CH 197 , In re Londonderry's Settlement; Peat v Walsh [1965] CH 918 , and Tierney v King [1983] 2 Qd R 580.

"Mr. Cooper QC for the company emphasized the restraints on disclosure expressed in s265B and s265C, and submitted that an order would ordinarily only be made where the applicant member had some specific and/or personal right which could only be protected by the making of such an order. He instanced the situation where the member was contemplating applying to the Court for relief pursuant to s320, the situation where it was necessary for the member to ascertain the fair market value of shares in order to give effect to provisions in the articles conferring pre-emption rights to share sales, and thirdly, the situation where the member was, on reasonable grounds, contemplating commencing proceedings which would come within the recognized exceptions to the rule in Foss v Harbottle. In so submitting he was largely reflecting what is to be found in the explanatory memorandum to the 1985 amending legislation. Whilst it was recognized that discovery could ordinarily be obtained in proceedings commenced pursuant to s320 (or its predecessor) - see for example Re Australian Marinas (A'asia) Pty Ltd [1975] VR 372 - s265B would enable an application for inspection to be made before such proceedings were commenced; thus it does liberalize significantly the pre-existing law. In such circumstances, consistently with the strictures on disclosure, the Court could well order that the information obtained on inspection only be used for the purposes of determining whether or not proceedings should be commenced, and if so in prosecuting them.

The section would clearly operate in the situations defined by Mr. Cooper, but it is not necessary for me to determine the precise limits on the operation of the section."

I have no quarrel with any of the principles to which I have referred. I consider it is appropriate to apply them in the present case.

It is clear from the history of the relationship between Unity APA and Humes that there is considerable hostility between the parties. That is hardly surprising having regard to the takeover bid presently on foot. But the fact that there is that hostility is of itself no bar to the present application. If Unity APA satisfies me that it is acting in good faith and for a proper purpose a factor of that nature has little relevance. As to whether or not a shareholder is acting in good faith and for a proper purpose are questions of fact to be determined according to the circumstances in each particular case. I turn then to a consideration of those aspects of the matter.

It is not suggested on behalf of Humes that Unity APA is not acting in good faith. What is said on its behalf is that it is not acting for a proper purpose and that its application is premature. In that latter connection it is said that as Humes will be required to call an extraordinary general meeting to approve the takeover of Smorgon Steel and the issue of 142 million shares it will be under a duty to provide shareholders with all relevant information in relation to the matter to enable shareholders to make decisions concerning the proposals. It may well be that when Unity APA receives that information its queries will be satisfied and an application of the type presently under consideration will be unnecessary.

In my opinion that is no answer to Unity APA's application. If a shareholder of a company is otherwise entitled to an order authorizing a registered company auditor or a duly qualified legal practitioner acting on his behalf to inspect the books of the company, it is no answer to say that at some specified or unspecified time in the future the company will provide material to that shareholder which may provide him with the information he seeks. If a shareholder is entitled to such an order relief should not be refused on the footing that the company will select what material it considers the shareholder should have access to and provide it to him. It is for the Court to specify which books of the company are to be made available for inspection not the company.

In the present case it is clear that when the company does give shareholders notice of the meeting it will not supply shareholders with schedules 11 to 15 inclusive to the sale of assets agreement on the ground that the content of those schedules is confidential. Those schedules are part of the material Unity APA wishes to inspect. In my opinion there is no basis therefore for dismissing the present application on the ground that it is premature. To do so would only have the practical effect of causing Unity APA to renew its application following receipt of the notice of meeting and accompanying documentation.

The argument advanced on behalf of Humes in support of its contention that inspection is not being sought for a proper purpose is that to grant the application would provide Unity APA with what its counsel described as "inside knowledge" and place it, and again I quote, "in a position which other shareholders are not". Counsel for Humes further contended that the situation is that one shareholder is seeking to advantage itself against other shareholders by procuring information which is not available generally to enable it to decide what it considers to be in its best interests.

In my opinion the short answer to that proposition is that the Code gives every shareholder the right to apply for an order for inspection. It is no answer to such an application to say that if such an order is made that shareholder will be learning something not known to other shareholders and thus be in a more advantageous position. Indeed, in certain cases such an argument could well be used by a shareholder in support of his application on the footing that the company is withholding information advantageous to shareholders and that if the applicant is given access he can ensure other shareholders become equally well-informed. Indeed, in the present case I apprehend that that is what Unity APA has in mind. If an order is made in its favour and it does discover information concerning the proposed acquisition which it considers should be made available to shareholders generally, I have little doubt it will make application to the Court for an order pursuant to s265B(1)(d) for leave to convey that information to all shareholders prior to the extraordinary general meeting. As to whether or not any such application would be granted would depend on a number of factors, not the least of them being the nature of the information itself and the manner in which it was sought to convey it to shareholders.

Having heard the evidence of the witness Wayland in relation to the matter I am satisfied that although Unity APA may well be seeking an order for inspection with a view to assisting its takeover offer that is not its dominant purpose. In my view its primary or dominant purpose is to ascertain whether or not the directors of Humes have been and are in breach of their duties to the shareholders of Humes in so far as the proposed acquisition of Smorgon Steel is concerned and whether or not it should oppose the proposal. If that is its dominant purpose as I am satisfied it is, in my opinion it is not to the point that an inspection of Humes books relating to the proposal may in some way be of benefit to Unity APA so far as its take over is concerned. If its primary purpose is a valid purpose such a consideration is irrelevant. Support for that view is again to be found in the discussion of the subject in American Jurisprudence. In para. 366 appears the following passage: -

"... if a stated purpose is not unreasonable or improper on its face, a corporation will not be justified in refusing the request for inspection. Furthermore, a single valid purpose is sufficient to satisfy a statutory requirement of a proper purpose, and once a shareholder alleges and shows a proper purpose for inspection of corporate records, any further or secondary purpose in seeking such records is irrelevant if the primary purpose is reasonably related to the status of a stockholder."

In my opinion, the circumstances in the present case are such that it cannot be said that Unity APA's suspicions in regard to the proposed acquisition are fanciful. The aspects of the proposed acquisition highlighted by counsel for Unity APA during the course of his submissions are matters of substance and matters worthy of consideration by all shareholders of the company. Clearly, it is not my function to determine what conclusion should be drawn from them in these proceedings. My function is to determine whether or not Unity APA's purpose in seeking inspection is a proper purpose.

I am also of the opinion that Unity APA's application to the Court cannot be described as simply a challenge to a managerial decision made by the directors of the company of the type referred to by Williams J in the Augold Case. In my view, the decision of the directors of Humes goes far beyond matters of a mere managerial nature. What they propose is a significant restructuring of the company and a major expansion of its activities.

The conclusion I have arrived at is that Unity APA's purpose in seeking inspection, is a proper purpose. It does not follow from that finding, however, that Unity APA is now automatically entitled to the order it seeks. The section provides that if I am so satisfied, I may make such an order. Clearly, therefore, I have a discretion in the matter. The manner in which that discretion will be exercised in a particular case must be determined by the facts relating to that case. In the present case it is said that the material sought to be inspected is highly confidential and that prejudice would be caused to Humes if it was publicized. In my opinion, that is not a sufficient justification for denying Unity APA the relief it seeks: again see the discussion of the matter in 18A Am. Jur. 2d Corporations para. 399.

Courts frequently give parties to litigation access to confidential information in the possession of opposite parties. In such cases, the court makes an order, the effect of which is to preserve the confidentiality of the information in question. There is no reason why such an order cannot be made in the present case. Indeed, s265B(1)(d) contemplates the making of such an order and s265C itself specifically provides a form of protection, in that it forbids disclosure of information by the company auditor or legal practitioner who makes the inspection to persons other than the member of the company on whose application the order was made or an employee or a member or acting member of the commission.

Having considered the facts in this case, I consider it is appropriate to exercise my discretion in Unity APA's favour and I propose to do so. In a moment I shall hear submissions from counsel as to the documentation which should be made available for inspection. Before doing so, I propose to deal with two further aspects of the matter, namely the number and identity of the persons I propose to authorize to make the inspection and the use which Unity APA may make of any information gained by it as a result of the inspection.

S265B provides that the inspection shall be made by a registered company auditor or a duly qualified legal practitioner. On one view of the matter, it could be argued that only one of such persons can be appointed. To so find, would, in my opinion, be to take a far too restricted view of the section. I consider the section means no more than that the person given permission to make the inspection must come from one or other category of persons. It does not mean that one person from each category cannot be appointed at the same time. In other words, the word "or" is merely expressive of the category of persons who can be appointed. It is not used in a disjunctive sense. If it was not so, one could envisage a situation in which a shareholder, having obtained permission to have a solicitor inspect the books of the company, may later be forced to return to the court and seek the appointment of an auditor on the ground that the accounting complexity of the books of account of the company was such that the solicitor was unable to make any worthwhile inspection of them, in the sense that he could not fully understand them. Such a situation would cause an unnecessary inconvenience, not only to the shareholder, but to the company itself. I cannot accept that the legislature intended to achieve such a result.

Accordingly, I propose to authorize the inspection by both a solicitor and an auditor. Unity APA has proposed that its solicitor, Alexander Emile Vrisakis and a member of the firm of accountants handling its affairs, Alan Flanders, be authorized to make the inspection. Objection is taken to their appointment on the ground that they are so closely associated with the affairs of Unity APA, particularly its present takeover offer, that if, when making their inspection, they chance to come across material relevant to the takeover offer, but of no relevance to the proposed acquisition of Smorgon Steel, it will be impossible for them to ignore the material or put it from their minds.

The order I propose to make will restrict the inspection to entries in the books of Humes relating solely to the proposed acquisition of Smorgon Steel. I fail to see that any of that material will relate to the takeover offer.

In American Jurisprudence para. 404 one finds the following statement: -

"The corporation cannot dictate to the stockholder as to whom he shall employ to assist him in inspecting the books; nor can it refuse to submit its books for inspection on the ground that the attorney employed to aid the stockholder is inimical to it."

In my opinion, that is a correct view of the matter. I therefore appoint Alexander Emile Vrisakis, who I find to be a duly qualified legal practitioner and Alan Flanders, who I find to be a registered company auditor, to make the inspection and to take copies of or extracts from entries in those of the books of Humes I shall later identify.

Having regard to the sensitive nature of the material in question, I order that the said Alexander Emile Vrisakis and the said Alan Flanders not disclose the information acquired by them in the course of the inspection to any person other than the following directors of Unity APA - Michael Edward Wayland, Garry Carter, Christopher Waxland and Robert Grading.

I order that, subject to the further order I propose to make in a moment, no use be made of that information except upon the order of the Court. If application is to be made to the Court for permission to use the information so acquired, notice of the information to be used and the use sought to be made of such information, is to be given to the solicitors for Humes not less than 48 hours prior to the date fixed for the hearing of such an application and given to Humes' solicitors in a manner that ensures the information remains confidential to the parties.

In that connection, I order that Unity APA may use such information for the purpose only of obtaining legal advice in relation to the making of such an application and for the preparation of the documentation in support of such an application. I wish to make it clear that the effect of the orders I have made is that Unity APA's solicitor and auditor may convey to the four directors of the company I have named, the information they gain from their inspection. Those directors may then discuss that information with their legal advisers (including Mr Vrisakis) with a view to determining whether or not to make an application to the Court for permission to use the information and may make use of it in connection with the preparation of the documentary material to be submitted to the Court in support of such an application. In that way the information will not go beyond the four directors I have named, Unity APA's legal advisers and Mr. Flanders except upon the further order of the Court.

My present feeling about the books of account which should be made available is that those books of account containing entries dealing with the acquisition of Smorgon Steel be made available. The notice of motion went into great detail concerning the documentation which should be made available. I am prepared to hear submissions concerning the matter, but it would seem to me that a general order of that nature should be sufficient. [Discussion ensued.]

I left open for resolution the question of the books of accounts to which Mr Vrisakis and Mr. Flanders are to be given access for the purpose of the inspection.

The order I make in that regard is that they be given access to those entries in the books of Humes which relate to Humes' proposed acquisition of Smorgon Steel and only those entries.

I order that the said inspection, the making of copies and taking of extracts, commence on Wednesday morning next, 17 December at 9 a.m. at the office of Messrs. Arthur Robinson and Hedderwicks, 535 Bourke Street, Melbourne, and continue thereafter until with the use of reasonable despatch the same are completed.

I further order that in the event that no application is made to the Court by Unity APA for permission to make use of the information within 28 days of the completion of such inspection, all copies of documentation obtained by Mr Vrisakis and Mr. Flanders pursuant to this order for inspection, all extracts taken from documents by Mr Vrisakis and Mr. Flanders pursuant to this order for inspection, and all copies of such copies and extracts in the possession of Unity APA, its legal advisers and auditors be forthwith returned to Messrs. Arthur Robinson and Hedderwicks.

I reserve to the parties liberty to apply generally. In the circumstance I propose to reserve the costs of this notice of motion. I think later developments may well have a bearing on the appropriate order to make in respect of them.

Orders accordingly.

Solicitors for the applicant: Blake and Riggall.

Solicitors for the first respondent: Arthur Robinson and Hedderwicks.

Solicitors for the second respondent: Barker Harty and Co.