Darvall v North Sydney Brick & Tile Co Ltd & Ors
(1989) 15 ACLR 230(1989) 7 ACLC 659
(1989) 16 NSWLR 260
(Judgment by: Kirby P.)
Darvall
vNorth Sydney Brick & Tile Co Ltd & Ors
Judges:
Kirby PMahoney JA
Clarke JA
Judgment date: 23 March 1989
Sydney
Judgment by:
Kirby P.
It is a fundamental principle of company law that the directors of a company owe a fiduciary duty to the company. The rule is one protective of the company and of its shareholders. But it is also protective of the public interest which is served by integrity in the conduct of company officers. It is a rule which has been described as "inflexible". It is one which must be "applied inexorably by the court". See Gibbs J in Consul Development Pty Ltd v DPC Estates Pty Ltd (1974) 132 CLR 373 at 394 applying Dixon J in Birtchnell v Equity Trustees, Executors & Agency Co Ltd (1929) 42 CLR 384 at 408
Where issues properly before them show a breach by a director of this duty, courts should be vigilant to insist upon the thoroughgoing performance of fiduciary obligations by the directors. Necessarily, relatively few cases of corporate misconduct come to the attention of the courts. In this sense, the courts set the standards of acceptable corporate behaviour. They are standards which require that directors act honestly in their dealings with their colleagues and with shareholders. As well, they require candour and full disclosure by directors where there is a risk of conflict between corporate duty and private interest.
The issues raised by the appeal
Compliance with the fiduciary duty of directors is required both by the common law and by statute. This appeal from Hodgson J [see Darvall v North Sydney Brick & Tile Co Ltd (1987) 12 ACLR 537] concerns the legal classification of the conduct of a number of parties engaged in a struggle for the control of a company. In the course of reaching his conclusion, Hodgson J decided that the managing director of the company was almost certainly in breach of his fiduciary duty to the company. This breach had arisen in an arrangement which the managing director made with financiers for the purpose of funding an offer to shareholders for their shares. The offer was one alternative to that which the appellant had offered. Notwithstanding that finding, his Honour concluded that the other directors of the company were ignorant of the private gain which the managing director stood to make out of the arrangement. He thus concluded that the relevant decisions of the directors were made bona fide and in the best interests of the company as a whole. Such decisions were, therefore, immune from disturbance by the court under the general law.
None the less, his Honour concluded that the arrangement was one which contravened ss 129 and 130 of the Companies (NSW) Code (the Code). However, instead of ordering the relief provided for in s 130(3) of the Code, his Honour required the summoning of a meeting of shareholders to vote, by simple majority, upon whether the appellant should be entitled to give a notice which would have the result of avoiding the arrangement under which the managing director secured, contingently, the originally undisclosed private gain. That meeting narrowly rejected the proposal. The managing director cast his substantial vote, in effect, to preserve the arrangement by which he stood to gain. Hodgson J thereupon dismissed the proceedings. He ordered the appellant to pay the costs of the directors and the other parties, save for the separate costs of the managing director who belatedly arranged representation different from that of the other directors. By his own admission, the managing director had kept the other directors in the dark concerning the arrangement which was potentially to his personal advantage.
The appellant has appealed against this conclusion. He contends that it effectively condones the breach of fiduciary duty proved in the evidence and which his Honour had substantially found. The managing director has lodged a cross-appeal against the refusal of his Honour to order the appellant to pay his costs. By that cross-appeal, he has challenged his Honour's decision under the Code and his discretionary decision on costs.
In Advance Bank Australia Ltd v FAI Insurance Ltd (1987) 9 NSWLR 464 at 485 I emphasised that the solution to the charcterisation of the conduct of company directors can only be found by the most detailed scrutiny of the facts, examined in their context. This may be an expensive and dilatory way to deal with disputes of the present kind. Typically, those in charge of the wheels of the economy, turned by corporations, find it difficult to await the painstaking and careful manoeuvring of litigation. That is why in some jurisdictions, panels of persons experienced in corporate law and practice and in takeovers have been established to deal with problems such as that now before the court.
The litigation between the present parties originally brought some of them to the Court of Appeal, challenging an order of Kearney J to which it will later be necessary to refer. See North Sydney Brick & Tile Co Ltd v Darvall (1986) 5 NSWLR 681; see also Darvall v Lanceley (1986) 5 NSWLR 722. It was in that case that I suggested once again the desirability of the intervention of the National Companies and Securities Commission in cases involving interpretation of the Code. In the present appeal the Commission duly appeared and ultimately intervened before this court, exercising its power to do so under s 540 of the Code: cf Adsteam Building Industries Pty Ltd v Queensland Cement & Lime Co Ltd (No 2) [1984] 2 Qd R 366. Counsel for the Commission placed before the court useful submissions concerning the meaning to be ascribed to ss 129 and 130 of the Code. Properly, the submissions of the Commission were confined to matters of general principle. They did not deal with the merits of the particular case.
The Commission had not appeared before Hodgson J. The hearing before his Honour lasted 10 days in March and April 1987. The principal judgment which followed that hearing was delivered on 8 July 1987. This appeal was heard more than two years after the events transpired and which are chiefly in issue. In the meantime, the company had been unable to pursue its economic purposes in respect of the subject matter of the litigation. This fact may itself highlight the need for a more satisfactory means of bringing disputes such as the present to swift, economical and lawful conclusion.
The transcript before Hodgson J ran to more than 15,000 pages. It included the oral testimony of the directors of the company, although not of the appellant nor of officers of the relevant "financier" of the managing director's counter offer. Hodgson J had the advantage of seeing the directors give their evidence. Helpfully, he recorded his impressions about their credibility. In a case concerned with the bonafides of the directors and the purposes for which they had acted, the advantage of assessing the witnesses is of significance. To the extent that the appellant challenged his Honour's conclusions about the legal classification of the "purposes" of the directors it is obviously important for this court, in discharging its function, to take into account the advantage which the trial judge enjoyed. An appellate court ought not to reverse conclusions arrived at by a trial judge, which depend wholly or in part upon the assessment of witnesses, unless it is plain that the judge has failed to use, or has palpably misused, his advantage. See Paterson v Paterson (1953) 89 CLR 212 at 222 Warren v Coombes (1978) 142 CLR 531 at 537. This is so whether or not the trial judge expressly states that his decision is based on the view which he has formed as to the witness' credibility: Brunskill v Sovereign Marine & General Insurance Co Ltd (1985) 59 ALJR 842. Nevertheless, the appeal to this court is, by the statute, an appeal by way of rehearing. Appellate review is a valuable right provided in the administration of justice. It is not an empty charade performed with blinkers worn by the appellate judges because of the earlier decision under appeal. If that decision is "glaringly improbable", the appellate court may, while allowing all proper weight to the advantage typically enjoyed by the trial judge, shoulder the responsibility of reaching a different conclusion. See eg Chambers v Jobling (1986) 7 NSWLR 1 at 6.
Enough has now been said of the general nature of the case before the court. It is necessary at this stage to set out in greater detail the facts from which the legal answers will emerge. It will be necessary to indicate the issues for trial as specified in the pleadings and as refined in the questioning of the oral evidence. It will then be appropriate to consider the two chief legal questions which must be resolved by reference to the facts. These are what may compendiously be described as the "fiduciary duty" point and the "ss 129 and 130 point".
At the trial, the respondents argued that the appellant should be denied relief on the discretionary basis that he did not come to the court with "clean hands". On the appeal, this argument was not pressed. But by notices of contention, the respondents sought to uphold Hodgson J's ultimate order dismissing the suit upon the basis that his Honour should have reached that conclusion by a more direct route. This, it was urged, resulted from a dismissal of the appellant's contentions of breaches of the common law and of the Code. Having found a breach of the Code it will be remembered that Hodgson J reached hiis ultimate conclusion only by relying on the outcome of the meeting which was summoned. He concluded, in effect, that by this the shareholders had sanctioned the arrangement initiated by the managing director in which the latter had a direct and personal (although contingent) advantageous interest.
It will be necessary to consider whether, as Hodgson J concluded, the meeting of the shareholders did in some way ratify the arrangement challenged by the appellant. In this connection, the function of this court in reviewing the course which Hodgson J adopted and the discretionary elements involved in the ultimate conclusion he reached, will need to be addressed.
A valuable property is undervalued
North Sydney Brick & Tile Co Ltd (Norbrik) (the first respondent) is the subject of this appeal. Norbrik was originally established in the 1880s as a partnership of three men, Messrs Lanceley, Magney and Weynton. The descendants of these men still retain the majority of the approximately three million shares in the proprietary company which was later formed.
In 1953 Norbrik acquired 900 acres in the Baulkham Hills area, some 30 kilometres from Sydney. At the time of acquisition, the land was semi rural. As the Sydney metropolis expanded and approached Baulkham Hills, the value of the site for redevelopment increased enormously. Until 1984, however, the land was shown in Norbrik's books as having a value of only $1.5 million.
In 1981, Norbrik's board of directors commenced investigation about options for the development of the land as a business park. They engaged advisers to prepare a report. That report ultimately came to hand in August 1985. It suggested that, with the necessary development approvals and appropriate investment and development, the gross realisation of the land could reach $360 million. If so, a net profit to Norbrik of approximately $180 million could be expected.
Within a month of the receipt of this report, Norbrik's board received a valuation of the land itself. This suggested that the land alone was worth $60.5 million. It was at that meeting that the directors resolved, in principle, to develop part of the land. On 18 September 1985 an interim report was distributed to the shareholders for the year 1985/86. It reported that the use of the Baulkham Hills land was under review by the directors. It canvassed various uses of the land including as a business park. It was suggested that this would prove the best form of development.
The annual report of Norbrik for 1985 was published in November 1985. It reported that the land was valued at $60.65 million.
The last sale of shares of Norbrik had occurred in June 1985. At that time each share was sold at 87 cents. At that price, the shares reflected a valuation of the company of little more than $2.5 million. With such a valuable block of land ripe for development it soon became clear that Norbrik had become a prime target for takeover. It should be said that its attractiveness in this regard arose from the undervaluation of the shares in the company and the failure of the board of directors earlier to take advantage of the potential of the undeveloped but valuable asset which stood in the company's name.
In February 1986 the Norbrik board approved a joint venture for a feasibility study to develop the Baulkham Hills site. It agreed to the establishment of Norwest Estate Development Pty Ltd (Norwest) for that purpose. In March 1986, the half-yearly report of Norbrik recorded that two studies were under way to explore the feasibility of developing the land. In connection with one of those studies, a Local Environment Plan was prepared for submission to the relevant local government authority to secure the requisite approvals for development of the land as a business park. This and other steps necessary to secure such approvals required the public exhibition of the proposal. The die was thus cast for attracting the interests of outside investors, ever alert to the undervaluation of the shares of companies with substantial assets.
The takeover battle begins
One of the shareholders of Norbrik was Mr John Darvall (the appellant). It may be inferred that he was approached by, and agreed to become a member of, a syndicate the promoter of which was Industrial Equity Ltd (IEL). On 6 June 1986, the appellant notified Norbrik by letter of his intention to make a bid to acquire the shares of Norbrik at a price of $10. The letter offered to buy all of the fully paid ordinary shares in the company. These shares had a nominal price of $1 each. The letter referred to the fact that the last sale of shares was at only 87 cents per share. It also referred to the poor trading record of Norbrik.
As a result of the letter, Norbrik's board met. The directors considered the appellant's notice of intended acquisition of the shares. They authorised a circular letter to the shareholders which asserted that the offer of $10 per share represented "less than half" of the net asset backing of each share. This estimate was based upon a balance sheet newly enlarged by the revaluation of the Baulkham Hills land. It valued the tangible assets of Norbrik at nearly $66 million.
Another meeting of the Norbrik board was called on 14 June 1986 to discuss the appellant's offer. There is no doubt that, by seizing the initiative, the appellant had propelled the directors into a greater sense of urgency about the development of the land.
On 19 June 1986 Mr D B Lanceley, the managing director of Norbrik, met Messrs Hunt and Waters of Macquarie Bank Ltd (Macquarie). The purpose was to discuss the preferable means of maximising shareholder returns on the assets of Norbrik. It would have been obvious to Mr Lanceley, his co-directors and the officers of Macquarie that, unless something were done quickly, the offer by the appellant might prove too tempting to a sufficient number of the shareholders of Norbrik. After all, it represented more than a tenfold increase in the value of shares over their last sale. But it also represented an undervaluation of the asset backing of the company, newly reassessed.
As a result of discussions with Macquarie, Mr Lanceley authorised exploration of ways by which shareholders could receive a better offer, by which liquidity could be provided to those shareholders who wished to sell, and by which the current shareholders could retain control of the company, fending off the coming takeover bid by outsiders. The Norbrik board immediately met to consider the Macquarie advice. On 25 June 1986, Mr Lanceley signed an authorisation for Macquarie to act as financial adviser to Norbrik. A further board meeting on 30 June 1986 discussed the growing concern of the directors that the shareholders might be tempted to sell their shares to the appellant if no other offer for them was quickly forthcoming. This opinion was expressed as a result of consultations among a significant number of the shareholders. As a result, on 2 July 1986 a circular letter was sent by Mr Lanceley to all of the company's shareholders. In prominent type it declared that:
Mr Darvall's offer is grossly inadequate since the $29.2 million value which it places on the company compares with the $66.5 million net book value of the company's assets at its last balance date a year ago.
It is not unreasonable to infer that the directors remained concerned that the appellant's bid might none the less succeed. It is one thing to give shareholders information about the true value of their shares. But where an offer is made so greatly in excess of the recent trading value of the shares and is cash in hand, the risk exists that shareholders will seize the bird in hand and not wait for the potential of two in the Baulkham Hills bush.
With this fear in mind, the circular letter from Mr Lanceley also notified shareholders that the board was pursuing a number of actions which should provide a cash alternative for shareholders who wished to sell their shares.
On 17 July 1986, the appellant registered with the Corporate Affairs Commission a statement under Pt A of the Schedule to the Companies (Acquisition of Shares) (NSW) Code. This statement was then dispatched to shareholders. The appellant's bid was now in earnest. Norbrik's board renewed its consultation with Macquarie. On 21 July 1986, Macquarie advised of certain benefits of a legal action to challenge the adequacy of the statement and its compliance with Pt A. One of the benefits of such legal action was suggested to be that further time would be given to Norbrik's board to conclude its strategy.
Earlier proceeding in the court
On 25 July 1986 a summons was issued out of the Supreme Court. By it, Norbrik sought to restrain in the dispatch of the appellant's formal offers for the shares. These proceedings were heard by Kearney J. They concluded on 1 August 1986 when his Honour dismissed the action [see (1986) 10 ACLR 822]. An appeal was lodged. Further time was bought by stay orders. This court expedited the hearing of the appeal. It was concluded on 13 August 1986 with the judgment reported at (1986) 5 NSWLR 681; 10 ACLR 837. The result of that judgment was that the court held that, because the appellant by the articles of Norbrik was entitled to pre-emptive rights in the purchase of the shares, it was not necessary for a Pt A statement to be issued at all. It was therefore held that, by force of the language of the relevant Code, the appellant fell outside the class of persons required to provide a Pt A statement. This purported statement may have been inadequate. The obligation to provide a statement may have been within the "spirit" of the Code. But it was not required by the terms of the legislation. Thus, the default in complying with those terms was irrelevant. Kearney J's orders were confirmed.
Meanwhile, the litigation had exposed, for the first time, chinks in the unity of the directors of Norbrik. On 28 July 1986, one of the directors, Mr Frank Solomon, wrote a letter to Mr Lanceley indicating that he did not approve of the legal action. He claimed that it had been commenced without proper consultation with the board. As will appear, Mr Solomon was to become a critic of the actions of Mr Lanceley in the months to come. Mr Solomon confirmed his reservations about the propriety of the action at a board meeting of Norbrik on 4 August 1986. From the contemporaneous records, it appears that Norbrik was surprised at the loss of the appeal. The surprise was soon thrown off. It commenced a second action in the Supreme Court seeking orders that the appellant dispose of the shares acquired. This action was based upon provisions of Norbrik's articles of association which it is not now necessary to explore. The only relevant consequence of this action was that Cohen J granted a further temporary injunction restraining the appellant from acquiring further shares. Once again, legal action had provided the directors with a breathing space. It was this valuable time which led to the "solution" which was to propel the parties into the present litigation.
A counter bid and a "quid pro quo".
On 14 August 1986, Macquarie sent a facsimile letter to Chase Corporation Ltd (Chase), the fourth respondent to this appeal. Chase was one of a small number of possible financiers approached by Macquarie with a view to joining a joint venture with Norbrik for the development of the land. Macquarie's proposal suggested that the role of Chase would be to raise the development fund and to provide development expertise. It would not be expected itself to provide a capital contribution. To the letter there was then added the suggestion which was to give rise to later problems:
Quid pro quo
Chase make a bid for Norbrik at $13 per share, valuing the company at $39 million and must be prepared to bid up to $15 per share (ie $45 million).
Directors would reject bid on basis that inadequate.
Chase would be made to feel comfortable that substantial number of shareholders would not accept.
On 20 August 1986 the Norbrik board met. It was conscious of the fact that any alternative offer which was to be made would probably have to be finalised by 26 August 1986. That was the date upon which the temporary injunctions granted by Cohen J would expire. A report was given concerning the negotiations with interested parties, including Chase. It was mentioned that Mirvak Pty Ltd, a property developer, had offered $35 million for the outright sale of the land. Because this put an effective value of only $13 per share, the offer was not recommended. Its only value was that it would have provided a solution for shareholders wishing to sell and at a price greater than the appellant was offering. There then appears in the minutes of the board meeting a curious twist. The following is the entry:
Joint venture
There have been serious discussions with many land developers and finance institutions including Chase Corporation Ltd. The Chase proposal seems to offer the best benefits for shareholders. The proposal of heads of agreement paper was discussed in full. At this point D B Lanceley left room so as board could consider the above proposal and vote accordingly. [The rest of the alternatives] were cosidered on their merits but all remaining directors, ie D Harrison, D Magney, F Solomon and P L Magney agreed that the joint venture was the preferred. The motion was moved and seconded.
I say that this entry is curious because there is no indication of why Mr Lanceley should have left the room. Nothing is said in the minutes. Nothing appears in the other contemporary papers. No explanation was apparently given to the co-directors for his taking this course.
What possible reason could the general manager have for leaving the room after such a thorough discussion of alternatives which were critical for the company which he was directing? Normally, the departure of an officer from the room in such circumstances would signify a personal interest in the subject matter of the vote. If there is such a personal interest, it is the obligation of the director candidly to disclose it. It is not enough to refrain from voting. Particularly where (as here) the director has taken an active part in canvassing options, mere withdrawal, without explanation, from the act of voting may be an empty gesture. The duty to act in the best interests of the company as a whole rests heavily on a director at all times. That duty obliges the director to act with fidelity in his relations with the company, its shareholders and his fellow directors. This Mr Lanceley does not appear to have done: cf George A Bond & Co v Bond (1929) 30 SR 15 at 19; Re James [1949] SASR 143 at 145.
What I have said is not a matter of enforcing on directors a requirement of sea green integrity inconvenient to the day-to-day operation of a company's affairs. It derives from the very nature of the position of trust which the director holds in the various relationships which are established by the office of director. The act of Mr Lanceley withdrawing from the room was the first sounding of a bell which was thereafter to ring many times. It warned the co-directors of his unelaborated, unexplained but regularly signalled private interest in the counter bid which was being designed.
A director gets cold feet
One director of Norbrik at least appears to have understood the meaning of that warning bell. Mr Solomon, in an important letter to Mr Lanceley of 21 August 1986 expressed his concern about the turn of events. The letter concluded:
I will strongly object to the company proceeding with the joint venture agreement with the Chase Corporation Ltd without the prior approval of the company's shareholders. In my view it is clear both morally and legally that when responding to a takeover bid the directors of a target company must not engage in any defensive tactics which may have the effect of foreclosing the shareholders' right and opportunity to consider the merits of an offer and to decide its outcome.
It is submitted that in the final outcome our board of directors must demonstrably act in the best interests of the company and its present and future members. A director cannot exercise his powers in order to obtain some private advantage and I am not in any way convinced that a director of our company can at the same time be associated with and materially interested in an offer for the company's shares and/or its assets. (emphasis added)
It is plain that something troubled Mr Solomon to cause him to secure legal advice. There would be no point in Mr Solomon's being difficult for the sake of it. Nor would there be point in his giving a short lesson in company law and directors' obligations to Mr Lanceley for no immediately relevant purpose. The overpowering effect of the last sentences of Mr Solomon's letter are a deep concern that one of the directors was seeking to "obtain some private advantage" and was "associated with and materially interested in an offer" for the company's shares. No other director in these proceedings ever had such a "private advantage" (other than as a shareholder), apart from Mr Lanceley. Mr Solomon's knowledge of that "private advantage" was unsurprising. The letter was written the day after Mr Lanceley had indicated such a "private advantage" by the unusual act of withdrawing from the vote on the joint venture proposal.
On 22 August 1988 a circular letter was sent once again from Norbrik to its shareholders. Again the appellant's offer was described as "grossly inadequate". Further material was provided concerning the proposal of the company to develop the land.
But on the same day a positive step was taken towards the counter bid. A conference was organised, attended by Mr Lanceley, representatives of Macquarie, the solicitors who would prepare the joint venture agreement and Mr Solomon and his solicitor. It was at that meeting that a file note was prepared by Mr Solomon's solicitor (Mr Peter Hopkins). The note was not put together until 30 October 1986. But it was confirmed by Mr Hopkins who gave evidence. His evidence was accepted by Hodgson J. It is clear that, from the start, advising Mr Solomon, he was concerned about the "package" that was emerging involving a joint venture to be initiated by Chase in which one of the directors (Mr Lanceley) was to have a special and personal interest of considerable contingent advantage to himself, personally.
The file note recorded the steps that Macquarie had taken. It added:
As a result of negotiations they had conducted with Chase Corporation Ltd (Chase) that company was prepared to finance a bid by Mr Lanceley at $12 per share provided that the company entered into a joint venture agreement with Chase for the development of the site on the terms set out in the draft joint venture agreement which had been circulated. The terms of that agreement were then discussed in some detail including questions as to the taxation implications and security implications and the seemingly limited obligations of Chase under the agreement.
It was put to Mr Solomon by Mr Hunt and Mr McDonald [of Macquarie] that in order for [Mr Lanceley] to be able to make his bid it was necessary to enter into a binding agreement with [Chase] for the joint venture development of the land before the existing injunctions in relation to the Darvall bid were dissolved (which was expected on the coming Wednesday) and that entering into the proposed joint venture agreement would have to be approved by each of the directors as this was a condition by Chase.
It was put to Mr Solomon that he voted against the proposal, or if he even abstained from voting in favour of the proposal, Chase would not be prepared to proceed, presumably as this would leave the company vulnerable to criticism as a result of the directors not being unanimously in favour of the proposal.
Mr Solomon and Mr Hopkins held out for shareholder ratification of the joint venture. This was criticised as naive because of the urgency presented by the appellant's bid. Mr Hopkins recorded that he said:
[T]he joint venture agreement and the Lanceley bid were obviously interdependent in view of Chase financing Mr Lanceley (a matter which was originally denied) ... [I]t would be difficult to see how the directors could recommend the Chase deed [ sic ] unless they knew the term of the deal with Doug [Lanceley].
Mr Solomon, after further consultation with Mr Hopkins, indicated that he would support the joint venture proposal but only upon certain conditions. These included further information on the contribution of Chase to funding "in view of the fact that Chase seemed to be taking no risk whatsoever and also receiving full remuneration"; and:
Full particulars of the funding by Chase of Doug Lanceley's bid would need to be disclosed to the directors but would be kept confidential. This was necessary to ensure that there was not 'tit-for-tat' element in the deal and so the directors could ascertain whether a better deal could be negotiated with Chase.
As will appear, this requirement was both proper and perceptive. Mr Solomon was criticised by the representatives of Macquarie. He was told that he was not acting in the best interests of the company and its members. He was even told that he would be costing the members, including his own family, dearly by maintaining his position. The Macquarie representatives repeatedly referred to the expiry of Cohen J's order with the prospect that the appellant would gobble up sufficient of the remaining shareholders to secure control of Norbrik and at a gross undervalue.
On 25 August 1986 Chase wrote to Macquarie. It undertook to secure provision of funds of up to $30 million to support Mr Lanceley in a counter bid for shares. As to security, the letter said:
The shares acquired under this facility. No recourse against DL [Mr Lanceley]. DL to do all things necessary to perfect the security and/or ownership of bank/finance company and/or Chase including the calling of shareholders' meetings and voting therein. Security can be released upon full payment by DL.
This meant that Chase would support Mr Lanceley's bid for up to two and a half million shares in Norbrik not owned already by Mr Lanceley and those associated with him. The price would not exceed $13 per share. There would be no recourse against Mr Lanceley personally under this arrangement.
But why should such a benefit be conferred on Mr Lanceley by Chase without a "quid pro quo"? That is where the obligation upon Mr Lanceley to "do all things necessary", referred to in the letter, becomes relevant. By this arrangement, Mr Lanceley was bound to Chase. In consideration for the guarantee without recourse he was to perfect the security in Chase's favour and to take all steps, including by voting, to ensure that this could be done. By these arrangements, on their face, Mr Lanceley, in return for a significant personal benefit in a very large sum, promised to control the exercise of his voting and other rights not in the best interests of Norbrik and its shareholders alone but in the interests of Chase. It was the entry into this agreement, not disclosed to the co-directors and the shareholders that led Hodgson J to his remarks about the "near certain" breach of the fiduciary duty which Mr Lanceley owed to Norbrik, its shareholders and his co-directors. Such duties were not satisfied by the mere formality of Mr Lanceley's removal from the room when a vote took place. But worse was to come.
On 25 August 1986 the second proceeding by Norbrik was listed before Bryson J. It was dismissed by consent. On the same day, and arising out of the meeting on 22 August 1986, Mr Solomon wrote to Mr Lanceley and his fellow directors. He listed a number of concerns which he had. Relevantly, as to the proposed joint venture with Chase he pointed to a number of problems:
I understand this matter has been put to the board on the basis that it is part of a package with Mr Lanceley's proposed bid, presumably in view of the fact that Chase will not provide Mr Lanceley with the necessary financial accommodation to enable his bid to proceed unless it secures the benefits of the joint venture.
This indicated once again Mr Solomon's appreciation of the "package" which was emerging between the Chase joint venture and the Lanceley bid. They were indissoluble. Mr Lanceley might suggest their separation. But Mr Hopkins was later to say in evidence, the link between them was so obvious as scarcely to require detailed proof. Mr Solomon went on to state:
If the board wishes to proceed with the joint venture in my opinion it should do so only on the basis that the matter is decided by the shareholders in a general meeting. The shareholders could be fully informed of the directors' views, Mr Lanceley's involvement with Chase and any other options available to the company.
Mr Solomon mentioned a number of criticisms of the joint venture with Chase. The first of these was that there was no real "sale" of the land at $60 million. It was simply a development agreement under which Chase, with no apparent financial risk and where it was to be separately rewarded for its professional time and expertise, was to receive half of all of the development profits. Why should Chase secure those benefits? Why should the directors recommend such a deal? Why was Mr Lanceley putting it forward? On the face of things, it was to ensure that the shareholders received the benefit of an offer only marginally greater than that being made by the appellant. That margin would be for the better interests of the shareholders, the appellant's offer being at a "gross undervalue". Was this Mr Lanceley's reason? Or was it the, until then, undisclosed arrangement which he had made with Chase? By that arrangement, Mr Lanceley was to use his voting and other powers (not to say his influence and persuasion as managing director) to secure a "package" of interconnected arrangements.
Mr Solomon, it may be inferred, suspected that something was afoot to warrant the proposal by which Chase was to secure such handsome benefits for no real risk. He thus included in his letter of 25 August 1986 the following comment on Mr Lanceley's proposed bid:
If Mr Lanceley's bid is made I presume that it will not be made subject to the stringent requirements of the Takeovers Code. Mr Lanceley has indicated that he will make full disclosure of all relevant information known to him. In my view this should include full details of his financing and Chase's involvement (as it would under Pt A) and full details of his intentions for the company. I would hope the offer terms to be equivalent to those under the Code.
The appellant dispatched his offer on 26 August 1986. On the same day the board of Norbrik met once again. Present were all of the directors, including Mr Lanceley and Mr Solomon. The joint venture agreement with Chase was produced in its final form. There is then recorded in the minutes the following entry:
The agreement was agreed to in principal [ sic ] and letter received from Frank Solomon to board on matters of concern were discussed and it was resolved that all matters of substance were answered and the final draft covered all these matters. Mr Solomon said that he was in agreement with the joint venture.
This somewhat self-serving statement does not disguise the fact that Mr Lanceley did not disqualify himself from participating in the approval of the joint venture with Chase, although it was so closely related to the bid which he was to make. Nor does the record indicate that Mr Lanceley disclosed the precise nature and extent of that relationship. As to the alternative bid, the following entry was made:
D B Lanceley read out his undertaking to the board making a bid for all shares from the shareholders wishing to sell with no limit on minimum number to be acquired (copy of letter attached).
The minutes of the meeting then record that Mr Lanceley left the room "so as the remaining four directors could vote on the venture as well as appoint a new chairman". The minutes then proceed:
It was resolved that D Harrison be elected as chairman. The directors directed the board of Norwest Ltd to enter a joint venture agreement with Chase Corporation Ltd under the terms and conditions as per document marked 'A' and that the agreement be sealed in accordance with the articles of association of Norwest Estate Ltd. This motion was put by D Harrison and seconded by D Magney and the vote was unanimous by the other two directors.
An agreement was entered into by Norbrik-Norwest where Norwest will request Norbrik to sell the land at Baulkham Hills to it (annexure marked 'B'). A letter was approved by all directors to be sent to shareholders to refuse the Darvall/IEL offer (marked 'C'). The directors gave D B Lanceley and D Magney the authority to sign the joint venture agreement on their behalf.
Thereafter the signed agreement between Norbrik and Norwest, on the one hand, and the joint venture agreement between Norwest and Chase were duly executed. Once again Mr Solomon had second thoughts. On 27 August 1986 he wrote again to Mr Lanceley. He stated that, after seeking professional advice on the joint venture agreement, he wished to rescind his agreement to it. He wished the matter to go to a shareholders' general meeting at which Mr Lanceley's involvement with Chase and any other options available to the company could be discussed.
The counter bid is made
On the same day, 27 August 1986, Chase wrote to the Bank of New Zealand. It proposed the term of a facility by that bank to Mr Lanceley organised and guaranteed by Chase. An initial facility of up to $10 million was to be provided. This was to be expanded, if necessary, to $30 million. Significantly, there was to be no recourse against Mr Lanceley personally. Again it might be asked, why should Chase provide such a handsome guarantee to one only of the directors of Norbrik unless, in return, it was securing from that director some benefit to Chase? Was this a benefit secured in connection with Mr Lanceley's office as a director?
The following day, the Bank of New Zealand met with officers of Chase. It approved the loan to Mr Lanceley "to acquire shares in [Norbrik] to frustrate IEL's intentions and to protect Chase's joint venture interest in the Baulkham Hills land". On that day, armed with the non recourse facility from the Bank of New Zealand guaranteed by Chase, Mr Lanceley circulated an offer to purchase shares in Norbrik. He offered $12 per share. In his letter, he made no mention of the fact that his co-director, Mr Solomon, had expressed detailed reasons for not approving of the joint venture agreement with Chase. It may be inferred that a lack of time and a sense of urgency overcame Chase's reservations about proceeding without Mr Solomon's approval. The shareholders were not informed of the reasons why Mr Solomon's signature did not appear on the circular.
On 2 September 1986 the appellant increased his offer for the shares in Norbrik to $12.25 per share. On the following day, Mr Lanceley increased his offer to $12.30 per share. Even at this price, the bidders were valuing the assets of Norbrik at little more than $35 million. As Mr Lanceley had previously pointed out, the assets valuation placed a much higher price on the company.
On 4 September 1986 a meeting of Norbrik's board of directors took place. There were also present representatives of Macquarie and the solicitors preparing the joint venture agreement. The directors noted that the appellant had commenced proceedings against Mr Lanceley. They also noted Mr Solomon's rescission of his approval of the joint venture agreement. That agreement was between Chase and Norwest Estate Ltd. It will be remembered that Norwest was the wholly owned company of Norbrik, established for the sole purpose of developing the Baulkham Hills site. This agreement has been called the "side agreement".
The minutes of the meeting record that Mr Lanceley left the room while the remaining directors discussed the cash offers being made to shareholders by the appellant and Mr Lanceley. The remaining directors agreed that a letter should be circulated, urging the rejection of both bids as inadequate. Such a letter was sent. But it included the statement that the board believed that there were certain benefits in the execution of the joint venture. This statement produced yet another letter from Mr Solomon. This time he demanded to know why the circulated letter to shareholders had not made plain his written and verbal objections to the joint venture agreement. This letter was followed soon after by one from the appellant. It was addressed to the directors. It demanded to know the steps that had been taken to require Mr Lanceley to disclose his method of funding of his counter bid for the shares in Norbrik. Presumably stimulated by this letter, Mr Solomon on 15 September 1986 wrote to his co-directors. Once again, Mr Solomon insisted that there should be full disclosure of Mr Lanceley's bid. He reserved his right to exercise his discretion as the law required in the best interests of the company and of its present and future members.
On 18 September 1986, Mr David Magney was at last propelled by the increasing insistence of Mr Solomon and by the sharp demand of the appellant. He wrote to Mr Lanceley requesting the immediate provision to the board of directors of Norbrik, of details of the funding of his offer for the shares.
Meanwhile the proceedings brought by the appellant came before the Supreme Court. It was ordered that the issues for trial be defined by pleadings. The pleadings were eventually put in order in March and April of 1987. The hearing commenced at the end of March 1987. It will be necessary to refer to the unusual course taken by Hodgson J and its aftermath. As a result of his higher bid, Mr Lanceley acquired an additional 196,537 shares bringing his shareholding to just over 900,000 shares in the company. Mr Darvall's shareholding stood at 63,946 when the matter came before Hodgson J.
The managing director has an undisclosed benefit
What was the benefit which Mr Lanceley stood to gain from the arrangement which he had made with Chase? It was well described by Hodgson J in the following terms:
[The] finance [provided by Chase to Mr Lanceley] was non recourse so far as Mr Lanceley was concerned. It seems clear that this means that whatever happened in relation to the repayment of the loan, Mr Lanceley was not going to be called on to pay any money, except in so far as that money could be obtained from the shares themselves which were being acquired. That means in turn that Mr Lanceley was getting the chance of making a considerable profit, at no risk to himself. The quantum of the potential profit could be considerable. At the date of the hearing, it appears that Mr Lanceley was entitled to about 900,000 shares in the company. As at 25 August, as appears from the letter from Chase agreeing to provide the finance, it appears that he was entitled to no more than about 400,000 shares. It would appear therefore that with the aid of the finance, Mr Lanceley has acquired about 500,000 shares in Norbrik. For every two dollars by which one share in Norbrik should turn out to be worth more than the amount Mr Lanceley has paid for it (namely $12.50 plus whatever interest accrues in the meantime) (and that, of course, could be very considerable), Mr Lanceley will gain $1 million. Of course it is far from certain that Mr Lanceley will be able to make such a profit: his chance of doing so may be 50/50, or perhaps considerably less. However, even a relatively small chance of making $1 million (or $2 million if the shares go up by say $4 a share) at absolutely no risk to oneself is very valuable indeed. And this is precisely what Mr Lanceley was receiving from Chase.
It is little wonder, therefore, that his Honour should reach the conclusion of a "near certainty of a breach of fiduciary duty by Mr Lanceley". He was the managing director of Norbrik. He, better than any of the directors, knew the true value of the company's assets. He was well familiar with the various valuations which I have already outlined. The potential for a very significant profit on the purchase of shares at $12.50 would have been well known to him. He did not disclose the terms of the assistance which he had secured from Chase either to his co-directors or to the shareholders or to the company as a whole. He contented himself with the formality of not participating in some of the critical votes of the board of directors. But he continued to participate vigorously in the conduct of the company's affairs and in the discussion of those affairs in the meetings of the board. Surprising as it may seem, he admitted this lack of disclosure to the court. He said that he had been told by Mr Hunt Macquarie and Mr McDonald, the solicitor acting for Norbrik, that he did not have to disclose the financing arrangements. Each of those men gave evidence. Each denied that they had given such advice to Mr Lanceley. It would have been extraordinary advice. It is extraordinary that any director should believe it, if given. Most extraordinary of all is that it should have been persisted in, notwithstanding the repeated insistence by Mr Solomon concerning Mr Lanceley's duty of candour which was so manifestly his obligation. With Hodgson J, I find it difficult to believe that Mr Lanceley could, for a minute, have thought that he was entitled to secure the no risk opportunity to make very large sums of money out of the joint venture between the company of which he was managing director and Chase, and that in some way such a bonanza was completely independent of his position as a director of Norbrik.
In my opinion, Hodgson J's conclusion about this issue is correct:
I find that notwithstanding his denial, Mr Lanceley was aware of the connection between Chase assisting him and the entry into the joint venture agreement at the time when he spoke in favour of entry into the joint venture agreement at the board meeting of 26 August 1986. I am unable to say whether his present denial is dishonest, or the result of some process of reconstruction. I do not think Mr Lanceley is a generally dishonest person. However in the light of my finding as to his knowledge of the connection between Chase's assistance to him and the joint venture, I must also scrutinise with great care his other assertions concerning his knowledge and intentions at the relevant time.
I also consider that Hodgson J is correct in his assessment about the lack of frankness of Mr Hunter of Macquarie in his dealings with the directors of Norbrik. I consider that his Honour was right to conclude that Mr Hunt must have been aware that the "package" which was being negotiated by Macquarie with Chase involved a very likely breach of Mr Lanceley's fiduciary duty to Norbrik and possibly also a breach of s 129 of the Code. Like his Honour, I consider that the most reliable record of what was occurring at the critical times in the affairs of Norbrik is to be found in the file note and letters prepared by Mr Hopkins, the solicitor for Mr Solomon. These were a model of repeated, proper reminders to Mr Lanceley and his co-directors. They called attention to the duties imposed by the common law and the Code, not to say by the obligations of honour and propriety in dealing with the funds of others that are entrusted to persons in the positions of the directors.
At the trial before Hodgson J, Mr Lanceley was represented, for the most part, by counsel who appeared for Norbrik. They also appeared for all of the other directors except Mr Solomon, who was separately represented. Mr Solomon had resigned as a director of Norbrik on 9 October 1986. The need to consider the desirability of separate representation of directors is obvious in cases of this kind. It arises from the possibility, particularly armed with hindsight and under the microscope of court proceedings, that the company should have advice separate from that of antagonistic directors. See Advance Bank Australia Ltd v FAI Insurances Ltd (1987) 9 NSWLR 464 at 471. Apparently no possibility of potential embarrassment was envisaged in the same counsel appearing for Norbrik as appeared for Mr Lanceley. Given the nature of the attack on Norbrik's actions, as allegedly infected by the improper conduct of Mr Lanceley, this is surprising.
But Mr Lanceley's representative, when he did appear, protested first to Hodgson J and then to this court concerning the unfairness of the criticism of Mr Lanceley having regard to the issues for trial in the proceedings and the conduct of them. In short, it was claimed that it was not relevant to the issue to determine the quality and nature of Mr Lanceley's motivation in voting in the board of Norbrik in favour of the side agreement which made possible the joint venture.
Furthermore, it was contended that the way in which Mr Lanceley had been questioned and, indeed, the questions put to the other directors, indicated that the conclusion of a breach of fiduciary duty on the part of Mr Lanceley was unfair. Finally, it was said that such a conclusion was wrong in fact and law.
In order to consider these complaints, it is critical to turn to the issues for trial as defined in the amended statement of claim of the appellant. In my view that document sufficiently put Norbrik, its directors and Mr Lanceley on notice of the complaint which the appellant was making about the private advantage which Mr Lanceley stood to gain from his position as managing director of Norbrik. Thus, in para 17 of this pleading, the appellant had alleged that the joint venture agreement
- (a)
- was not in the best interests of Norbrik;
- (b)
- was not procured by the directors of Norbrik bona fide in furtherance of the legitimate interests of Norbrik;
- (c)
- was unnecessary for the furtherance of the legitimate interests of Norbrik etc.
In the particulars provided in support of those allegations it was stated:
The plaintiff also says that the [joint venture] agreement was not entered into as an agreement which, considered on its own terms, was in the best interests of Norbrik but as part of a package arrangement between [Mr Lanceley] and Chase. The plaintiff says that under the said arrangement Mr Lanceley agreed to procure the execution of the [joint venture] agreement in return for Chase providing financial accommodation to Mr Lanceley to enable him to make a takeover offer for Norbrik so as to defeat the plaintiff's offer. If necessary, further particulars will be provided after discovery.
In para 18, it was alleged that the directors procured Norbrik to cause Norwest to enter into the joint venture agreement:
In furtherance of their own interests (or in furtherance of the interests of Mr Lanceley or Chase) rather than in the interests of Norbrik as a whole" (emphasis added).
In the particulars supplied in support of this allegation the appellant alleged that:
The joint venture agreement and the side agreement were not entered into as agreements which, considered on their own terms, were in the best interests of Norbrik but as part of the package arrangement between Mr Lanceley and Chase. The plaintiff says that under the said arrangement Mr Lanceley agreed to procure the execution of the joint venture agreement and the side agreement in return for Chase providing financial accommodation to Mr Lanceley to enable him to make a takeover offer for Norbrik so as to defeat the plaintiff's offer.
In para 20 of the pleading it was contended that the directors procured the entry by Norbrik into the side agreement:
In furtherance of their own interests (or in furtherance of the interests of Mr Lanceley or Chase) rather than in the interests of Norbrik as a whole.
It is true that in the amended notice of appeal, the appellant abandoned the challenge to Hodgson J's finding that the directors believed that the joint venture agreement was in the best interests of the company. But this is irrelevant to the issues which he defined for the trial. Those issues clearly raise the motivation of the directors and their purpose in voting for the joint venture as they did. They also clearly raise the suggestion of an improper purpose or an abuse of powers by the directors and specifically by Mr Lanceley in his dealings with Chase. This, it must be remembered, was alleged before discovery was completed. As the facts emerged in the trial, and particularly from the evidence of Mr Solomon and Mr Hopkins, the cutting edge of the appellant's case became more clear. It should have left Mr Lanceley and his successive advisers in no doubt. Indeed the knowledge that Mr Solomon's cautionary correspondence would be disclosed should have alerted them to the possible difference between the respective interests of the company as a whole and the separate interests which Mr Lanceley had chosen to map out for himself by the undisclosed arrangement he had made with Chase.
There is another reason for reaching this conclusion. As will appear, an issue for trial was plainly stated in para 20A of the amended statement of claim. This was the appellant's contention that the directors procured Norbrik to cause Norwest to enter into the joint venture agreement:
For the purpose of putting Mr Lanceley in funds to make a takeover offer for Norbrik in contravention of s 129(1)(a) of the Code.
In the particulars supplied in support of that account reference was made to the fact that Chase was not prepared to provide financial assistance to Mr Lanceley to enable him to make a takeover offer for Norbrik unless Norbrik entered into (or caused Norwest to enter into) the joint venture agreement. Section 129 of the Code takes the court to the "purpose" for which the company has given, or is taken to have given, "financial assistance" in the acquisition of shares. It was therefore pertinent for Hodgson J to consider the "purposes" of the company. That required the consideration, as his Honour found, of the purposes of Mr Lanceley and of the other directors in voting for the side agreement which would enable the joint venture agreement to be concluded between Norwest and Chase. Although in the end, this issue was determined against the appellant, it is plain that the issue was tendered for decision. In these circumstances, Mr Lanceley can scarcely now complain that the judge, examining the "purposes" of the directors, including himself, asked himself relevant questions. Those questions included whether Mr Lanceley's "purpose" was that of acquiring shares in the company.
The appellant has also placed before this court the written submissions which were tendered below. He draws attention to the cross-examination not only of Mr Lanceley but of Mr Harrison, Mr D Magney and Mr P Magney. I do not consider that Hodgson J was precluded from reaching the conclusion which he did concerning Mr Lanceley's actions. It was right that his Honour should point out that the alleged breach on the part of Mr Lanceley of his fiduciary duty to the company was not, in terms, an issue for trial in the proceedings before him. No relief was sought by the appellant upon that ground specifically. Mr Lanceley, both before Hodgson J and before this court, steadfastly declined to acknowledge that he held the shares secured on the basis of the Bank of New Zealand credit line and the Chase guarantee, in trust for all of the shareholders of Norbrik. He was given an opportunity to do so before Hodgson J. He was given the same opportunity before this court. He refused to take either.
Mr Lanceley's counsel insistently repeated that any obligation which he had to Norbrik should be determined in proceedings brought by or on behalf of Norbrik against him. To such proceedings, Mr Lanceley would give answer. He should not, so it was argued, be forced to provide that answer in the present proceedings because the focus of such proceedings was different. Leaving aside the Code, it was concerned not with any breach of fiduciary duty by Mr Lanceley as such. Its concern was, and was only, the classification of the purposes of the directors in voting (in effect) for the joint venture agreement with Chase.
Issues for trial are determined by the pleadings and the way a trial is conducted. Neither the trial judge, nor an appellate court, are at liberty to conduct a roving inquisition, determining, on the run as it were, the issues which arise in a peripheral way only to those posed by the pleadings. Special cases (such as illegality) apart, it is the duty of judges to determine those issues as they are tendered to the court. If other questions arise, they may be drawn to notice. They can then safely be left to later litigation which will specifically target the peripheral questions. Only in this way can procedural fairness be secured of the kind referred to on many occasions both by the High Court of Australia and by this court. See Suttor v Gundowda Pty Ltd (1950) 81 CLR 418 at 438; Coulton v Holcombe (1986) 162 CLR 1 at 7; Water Board v Moustakas (1988) 62 ALJR 209. This much is not in doubt.
But the basic rule of procedural fairness which the foregoing decisions secure is in no way offended in this court (any more than before Hodgson J) by a detailed scrutiny of the purposes which motivated Mr Lanceley, and his co-directors, in voting for the side agreement and thus the joint venture. On the contrary, that was the very essence and one of the main issues for trial. It was presented by the pleadings. It was obviously posed by the correspondence of Mr Solomon necessarily disclosed at the hearing. It was tendered by the way in which the directors, including Mr Lanceley, were cross-examined. It was raised by the submissions of counsel for the appellant. It was necessarily involved in the legal issue posed for decision both under the common law and under the Code. I would reject the contention that there is any unfairness in the course which the trial took, in Hodgson J's observations or in this court's examining Mr Lanceley's conduct. So far as Hodgson J's remarks are concerned, I consider them to have been extremely temperate in the circumstances.
The directors' purposes and best interests of the company
These observations bring me to the centrepiece of the common law basis of the appellant's claim for relief upon which he failed before Hodgson J. This is that the directors of Norbrik, at the meeting of the board of Norbrik on 26 August 1986 and in the steps they took later that day to cause Norwest to enter into the agreement with Chase to establish a joint venture company, had an improper purpose or alternatively abused their directors' powers.
The principles applicable to the scrutiny of the facts, in order to determine whether these complaints are made out, are not in relevant dispute. I would express them thus:
1. The court, whose jurisdiction is invoked is not providing an appeal on the merits from the decision which the law commits, relevantly to the board of directors. Courts properly refrain from assuming the management of corporations and substituting their decisions and assessments for those of the directors. They do so, inter alia, because the directors can be expected to have much greater knowledge and more time and expertise at their disposal to evaluate the best interests of the corporation than judges. See Harlowe's Nominees Pty Ltd v Woodside (Lakes Entrance) Oil Co NL (1967) 121 CLR 483 at 493;; Thomas v H W Thomas Ltd (1984) 2 ACLC 610 (CA NAZ); New South Wales Rugby League Ltd v Wayde [1985] 1 NSWLR 86 at 102, affirmed ; (1985) 59 ALJR 798 at 801.
2. The relevant purpose for the court's superintendence of the decision of the directors, in a case such as the present, is to determine whether they acted in breach of their fiduciary duty as such. Only that conclusion will authorise the intervention of the court in a decision which is otherwise reserved to them. Relevantly, this requires the answer to the question whether the directors' action in causing Norbrik (and Norwest) to enter into the joint venture arrangement with Chase was not carried out bona fide in the interests of the company as a whole but for an improper or collateral purpose.
3. In common with other decision making, directors may have multiple purposes for reaching a particular decision. This is especially so in a collegiate body such as a board of directors. Therefore, a task of characterisation is required of the court. The court must determine whether the complainant has shown that the substantial purpose of the directors for the conduct impugned was improper or collateral to their duties as directors of the company. Mills v Mills (1937) 60 CLR 150 at 185. This task of characterisation has been assisted by the provision of a rule of thumb, suggested by the High Court, for classification of the facts as they emerge in evidence. By that rule, it is necessary for the court to determine whether but for the allegedly improper or collateral purpose, the directors would have performed the act which is impugned. Ngurli Ltd v McCann (1953) 90 CLR 425 at 445; Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285 at 292.
4. In considering whether the actions of directors were bona fide in the best interests of the company as a whole, the court is not obliged to look at the company as in some way disembodied from its members. The phrase "bona fide for the benefit of a company as a whole" is derived from Lord Lindley's comments in Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656 at 671. It tends, by overuse without fresh reflection, to become a "cant expression". See Brennan J in Wayde, supra at 803. In the present as in other contexts, the best interests certainly included the interest of the shareholders as the corporators with a direct stake in takeover offer(s). Cf Wayde, supra, at 96.
5. Honest behaviour on the part of directors is expected. However it is not, in itself, enough to sustain their conduct if their conduct is otherwise determined to have been carried out for an improper or collateral purpose. Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821 at 838 (PC).
6. Similarly, statements by directors about their subjective intentions, or beliefs, are not conclusive of their bona fides or the purposes for which they acted as they did. Advance Bank Australia Ltd v FAI Insurances Ltd (1987) 9 NSWLR 464 at 485 Even though the motives for exercising a fiduciary power are substantially altruistic, if those altruistic motives were actuated by an ulterior or impermissible purpose or were carried out in an improper manner, they will be set aside. Whitehouse, supra at 293. This is so in order to ensure the integrity of the actions of the fiduciary and to require that the fiduciary's decisions are made bona fide and for proper and relevant purposes.
7. Nevertheless, although not conclusive, the court can look at the declared intentions of directors in order to test their assertions (which will often be self protective) against the assessment by the court of what, objectively, was in the best interests of the company at the relevant time. Harlowe's Nominees, supra, at 493; Howard Smith, supra, at 823.
8. Directors may not exercise their powers for the purpose of maintaining themselves in office as directors or for retaining the present control of the corporation in their hands or the hands of those with whom they are associated. Nor may they use their powers specifically to prevent an outsider from succeeding in an offer to take over the company. Piercy v S Mills & Co Ltd [1920] 1 Ch 77; Ngurli, supra.
9. Nevertheless, because human motivation is complex, it is not the law that the happening of a takeover offer by an outsider paralyses the directors of a company from taking action, as directors, lest they later be criticised for acting out of self protection. So long as they act bona fide and in the best interests of the company and its members the law will uphold them. The directors may indeed be activated by the fact that a takeover offer has been made by a stranger. It may propel them into taking steps which, otherwise, they would not have taken or would not have taken so quickly. Winthrop Investments Ltd v Winns Ltd (1979) 4 ACLR 1 at 4 Cayne v Global Natural Resources plc, noted 56 ALJ 600 .
10. It has been suggested that, in exceptional cases where an offer is made which is not in the interests of the company as a whole, directors may be authorised actually to frustrate a takeover offer. See Teck Corporation Ltd v Millar (1972) 33 DLR(3d) 288 noted Howard Smith at 837. See also Cayne and the comments of Mahoney JA in Advance Bank at 493. It is not necessary in this case to determine whether that principle should be accepted, as the transaction which is impugned was a positive alternative to the offer being made by the appellant not simply a frustrating manoeuvre.
Simply an attempt to defeat the takeover?
The primary way in which the appellant argued his case against the actions of the directors in authorising the steps leading to the joint venture was as follows.
He contended that the action of the directors, notwithstanding the protestation of their subjective motivation, was designed to head off the takeover offer which the appellant had made. In these circumstances, however honest their intention might have been, it was the argument of the appellant that their actions were voidable being for that improper purpose. The object was to defeat the appellant's takeover bid. Only this could explain the unseemly haste with which the alternative joint venture was put together, the limited scope of the search for alternatives, the improper use of dilatory litigation to secure time to find an alternative, the unexplored financial arrangements between Mr Lanceley and Chase and the candid admission in the financiers' papers that the object was simply to frustrate the takeover bid by the appellant and his IEL backed syndicate.
Although these arguments have force, I do not accept them. I have no doubt that the directors did have among their objectives the defeat of the appellant's bid. I also have no doubt that it was that bid which propelled the directors into belated action to look for alternatives. Nor do I consider there to be much doubt that the existence of the bid engendered the rather unsatisfactory steps that were then taken to secure alternatives in a very short time. But the critical question remains -- was that the proper classification of what followed? The "but for" test in Mills and Ngurli requires the conclusion that that is the stamp to be placed on the decision of the directors on 26 August 1986 to authorise the joint venture. Hodgson J did not think so. Nor do I. Hodgson J considered that a closer analysis of the reasons of the directors justified a conclusion that they were motivated bona fide and for the purpose of securing for the shareholders an offer for their shares which was higher than that which the appellant had made.
I do not believe that it is possible to dispose of the case in the simple way which the appellant argued. The takeover offer by the appellant was the occasion of the directors' steps culminating in the approval of the joint venture takeover arrangements. Subject to what follows, I believe that it was open to Hodgson J to conclude as he did that the directors' purposes were not substantially or primarily to defeat that takeover offer but instead to assure to the shareholders an opportunity to secure a higher offer for their shares and a choice for the future direction of the use of the previously undervalued land.
The directors' purposes: the evidence
This conclusion necessitates a careful examination of the evidence which the directors gave concerning their subjective purposes and intentions in voting in favour of the steps which would authorise the entry into the joint venture arrangement with Chase.
Here, the appellant faced conclusions reached by Hodgson J which included apparent reliance upon the impression which his Honour had formed about the directors' truth telling as witnesses. Of them, his Honour said:
So far as the other directors are concerned [ie other than Mr Lanceley] I think they were all giving evidence honestly to the best of their ability, subject to one matter. I think that they were conscious of the problems which would be caused to their case by their saying that they voted for the joint venture agreement in order to defeat the plaintiff's bid. I do not think they deliberately gave false evidence having regard to this consideration, although I think that this may have possibly unwittingly coloured their evidence.
Starting from this premise, his Honour reached the conclusion:
[I]f the directors had not believed that the joint venture agreement was in the commercial interests of the company, they would not have entered into it simply to persuade shareholders not to accept the plaintiff's offer. By the same token, as I have already indicated, if the offer had not been made, I do not think they would have entered into the particular joint venture agreement, but rather would have proceeded less hastily. In one sense, then, it was a substantial purpose of the directors to defeat the plaintiff's bid; but as I foreshadowed, I do not consider that to be a fair characterisation of their purpose. I think a fair characterisation of their purpose would rather be in terms of bringing about a situation where shareholders, some of whom wanted ready cash for their shares, would have alternatives, apart from acceptance of the plaintiff's offer.
It will be recalled that Mr Lanceley participated in the meeting of 26 August 1986 by which Norbrik resolved in principle to agree to the joint venture agreement involving Chase. But when the actual agreements and the letter to shareholders came up for discussion, he left the room. It was argued for the respondents that Mr Lanceley was therefore not to be counted in determining the bona fides of the directors. He was to be excluded in judging the "purposes" for which they had resolved to set in train the steps to authorise the joint venture. I regard that argument as unacceptably artificial.
Mr Lanceley was present, as the minutes record, when the "final draft of joint venture discussed in detail and all directors given time to raise all relevant points". He was present when Mr Solomon, who had earlier expressed serious reservations, was persuaded to express agreement with the joint venture. He only left after that agreement was signified and then after reading out his proposal to make a bid for the acquisition of the shares. I do not believe that he can escape involvement in the by then formal ratification of the agreements which followed by the simple expedient of leaving the room. It is important once again to remember the purpose of the court's jurisdiction invoked here. It is, I repeat, not to substitute an ex post decision for that of the directors, on the merits of a particular dealing. It is to assure the integrity of their decision at the time in the exercise of their fiduciary powers.
For reasons which have already been sufficiently expressed, it is my view that Mr Lanceley's purpose in agreeing to the joint venture "in principle" -- and in participating in the persuasion which led his co-directors to that conclusion -- was fatally affected by an undisclosed personal stake which he had in that conclusion. It was a stake which he secured by reason of his office as managing director. The benefit was one which, to the end of this litigation he has not been prepared to indicate, he holds as trustee for the company and its shareholders. While I have no doubt that Mr Lanceley had other motives and purposes, in so far as they are relevant to the decision of the directors on 26 August 1986 I could not conclude that Mr Lanceley's purpose was bona fide and for the best interests of the company as a whole. It is true that his initiative secured higher bids for the shares in Norbrik. But they did so under circumstances in which his own undisclosed opportunity for private gain would undoubtedly have been in his mind, influencing his support for the joint venture. Without securing the joint venture's adoption by the directors, and all of them, he would not gain the most advantageous guarantee of non recourse finance which Macquarie had organised through Chase and Chase had secured from the Bank of New Zealand. Despite vigorous submissions to the contrary, Mr Lanceley's purposes were therefore not to be categorised as bona fide and for the best interests of the company as a whole. That is not, of course, an end of the matter. The search is for the bona fides and purposes of the directors as a whole. The answer is not provided by proof of illicit or wrongful purposes on the part only of one of them. What of the others?
Mr David Magney denied that his purpose was to frustrate the appellant's takeover bid or to facilitate that of Mr Lanceley. He admitted that he did not wish shareholders to accept the appellant's offer. But he said that this was because he was hoping for a larger offer. He gave evidence that he was keen to ensure that the company would be able to participate in the future development of the subject land.
Mr Phillip Magney stated that his reason for supporting the joint venture was that it afforded the company the opportunity to develop the land with a large and reputable business partner. It seems clear that he was influenced by the desire to keep Norbrik under its traditional control. The joint venture would have that consequence. He was not cross-examined to suggest other purposes.
In the light of the evidence of Mr David and Mr Phillip Magney, I do not consider that Hodgson J's conclusion about the bona fides and purposes of their votes can be challenged. They were ignorant, as they said, of the precise terms of Mr Lanceley's arrangement with Chase. It may be that this ignorance amounted to a serious breach of their duty of diligence. But it cannot be elevated into a breach of the duty of good faith to the company.
That leaves the remaining directors, Messrs Harrison and Solomon.
Mr Harrison conceded that he was aware that Chase was providing the finance for Mr Lanceley's bid. His recollection was that he had been told this on 20 August 1986 by Mr Lanceley himself. But he claimed that he did not know the terms of the financial support or, specifically, that it was conditional upon the joint venture's going ahead. He gave evidence that on 26 October 1986, when Mr Solomon's letter suggesting that possibility was raised, Mr Lanceley denied it so that: "As far as I was concerned that is where it stood." He said that Mr Lanceley had gone so far as to assert that the suggested link between Chase's financing of the bid and entering the joint venture was "fanciful". He stated that he could see the two "as being separate". But he admitted that he could not perceive any purpose for Chase to finance Mr Lanceley's bid unless it was tied in with the joint venture which the directors were asked to sanction.
It is necessary to accept, in the light of Hodgson J's determination, that Mr Harrison was genuinely endeavouring to give honest evidence. Like Hodgson J, I would not conclude that he acted mala fide and for a deliberately wrongful purpose whether to defeat the appellant's bid or otherwise to frustrate the best interests of the members of Norbrik. But that is not the question before the court. Directors of corporations cannot immure themselves from a scrutiny of their purposes by asserting that they acted honestly and with good intention for this or that legitimate purpose. The purpose may be scrutinised by a court to see if this assertion should be accepted. The directors cannot, by donning blinkers, ignore the plain facts disclosed to them and then assert that they acted bona fide in the best interests of the company. A more rigorous standard of conduct is required by the law. I do not consider that Mr Harrison's purposes attained that standard, given what he knew.
That leaves Mr Solomon. He changed his mind. As the minutes of the meeting show, he was satisfied that the joint venture should go ahead, despite his earlier reservations. Certainly, he had shown by his earlier letters a consciousness not to be motivated by the desire to maintain his position or to defeat the appellant's offer. His constant theme was that the joint venture agreement should be referred to a meeting of the shareholders. He sought to withdraw his approval of it in the letter sent on the following day, in order to secure consideration at such a meeting. Plainly, he was put under very considerable pressure to go along with the joint venture, including the suggestion that, if he did not, huge losses would be suffered by the shareholders. He constantly complained about the lack of proper notice of meetings and of consultation on the part of Mr Lanceley. He emerges as a person, well advised by Mr Hopkins who, separated from this advice, was less certain about what to do. It is against this background that his action in changing his mind and agreeing to the joint venture is to be judged. It is also to be remembered that Mr Lanceley did not disclose the non recourse finance being provided to him by Chase. On the contrary, he rebuffed Mr Solomon's letter by a suggestion that such a link was "fanciful".
It is reasonable, as Mr Solomon's counsel concedes, that the court should infer that Mr Solomon was aware that Mr Lanceley lacked the resources to fund the offer being made by him. It is also reasonable to infer that Mr Solomon (and Mr Hopkins advising him) were suspicious that Mr Lanceley had an arrangement by which he stood to gain a private advantage, though managing director. But Mr Lanceley repeatedly refused to provide the details which Mr Solomon sought. He denied the suggested link between the support by Chase and the joint venture with that company. Can it therefore be said that Mr Solomon, in voting for the joint venture agreement acted bona fide and for lawful purposes only?
The compilation of his earlier doubts and his change of heart would suggest that he did. On the other hand, a great deal of objective evidence suggests that Mr Solomon's motive and purpose was something less than securing the best interests of the company as a whole. Rather it appears to have been to ensure that he was not to blame for the success of the appellant's bid at a share price which was manifestly inadequate. This is not to conclude that Mr Solomon acted mala fide. All of the evidence suggests the contrary. He remained throughout a sentinel. His letters constantly warned his colleagues about their duties. They repeatedly demanded from Mr Lanceley the candour of disclosure which was not forthcoming for reasons which are now obvious.
In these circumstances I should prefer to judge Mr Solomon's action in acceding to the joint venture by testing it against the assertions that he was repeatedly and constantly making to Mr Lanceley and his co-directors in the weeks leading up to the meeting on 26 August 1986. Those contemporaneous letters, and the file note prepared shortly thereafter by Mr Hopkins, reveal those purposes in an objective way. They were well known to Mr Solomon. In these circumstances, although his action in acceding to the pressure imposed upon him was understandable and honest, that is not enough. I do not believe that the proper classification of his conduct was that it was bona fide and for the best interests of the company as a whole and only for its legitimate purposes. The objective way by which Mr Solomon would have achieved those best interests was by adhering vigilantly to the demands in the letters which went under his name both before and after the meeting of 26 August 1986.
The result of this analysis is that, unlike Hodgson J, I would not conclude that the decision of the directors should be classified as bona fide and in the best interests of the company as a whole. Against the background of the knowledge which at least the majority of them had, that Chase was financing Mr Lanceley's bid, the clear inference and frequent suggestion of a connection between his finance and the execution of the joint venture with Chase, it became the duty of the directors to satisfy themselves that there was nothing in that connection which could vitiate the joint venture. In the light of the facts which Mr Lanceley, Mr Harrison and Mr Solomon, at least, knew, they could not proceed to a decision which was in the best interests of the company and exclusively for proper purposes, without settling once and for all that question. It is true that the directors, except Mr Lanceley, did not have the missing component of the factual mosaic; the precise details of Mr Lanceley's financial arrangements with Chase. But Mr Solomon's letters made it clear that this was a matter which they should have explored and determined if they were to discharge their duties as directors. It is acknowledged that these letters were read. They were discussed by all of the directors. Persons in the position of a fiduciary cannot look away when an issue of integrity is raised. It may be different where by oversight or ignorance a matter is missed. But it was not so here. In these circumstances, I do not believe that the decision to accede to the joint venture agreement can, objectively speaking, be described as having been made bona fide and for the best interests of the company.
It is clear that the directors had multiple motives for the course they adopted. Doubtless, each of them had a slightly different motive. Each, for somewhat different reasons, did not wish the appellant's bid to succeed. That alone would not have avoided a resolution in favour of alternative arrangements which provided a competing bid for the choice by shareholders. But that bid was itself obviously part of a package. The directors failed to find out the terms of that package, although so clearly integral to its acceptability. In such circumstances the law will not sustain their decision.
So concluding, I do not differ in substance from the opinions which Hodgson J expressed, with the advantages he had as a trial judge. In my opinion it is a superficial approach to the proper appellate function of this court to hold that decisions such as Brunskill prevent the court from giving effect to its opinion in a case such as this. My conclusion accepts to the full the subjective honesty of the directors other than Mr Lanceley. But it classifies their conduct as being on that side of the line which attracts the court's intervention. It does so because of the inferences which can be drawn on the basis of the undisputed, or accepted, facts. To sustain the directors' decision in the light of all that had gone before, as being in the best interests of the company as a whole, would be to countenance an unacceptable standard of neglect of directors' obligations, especially where matters had been specifically called to their notice. It would be to ignore the many blunt reminders of their obligation to conduct a thoroughgoing investigation. It would be to sustain a passive conception of the duty of a fiduciary which has no place in company board rooms. Higher standards of vigilance and honesty are required there in dealing with other people's moneys.
The Code s 129
This conclusion would permit me to provide appropriate relief in the present case, subject to the determination of a number of matters raised in the notice of contention filed by Chase. Before turning to the latter, however (and in case my view about the first head of argument in the appeal does not prevail) it is appropriate to turn to the claim based on the Code. Upon the important issues of controversy in this aspect of the appeal I am in substantial agreement with Hodgson J's conclusions. Where I differ from his Honour is in the consequences which I consider should flow from the construction which we both offer of the relevant provisions of the Code.
Section 129 of the Code is (relevantly) in the following terms:
129(1) Except as otherwise expressly provided by this Code, a company shall not--
- (a)
- whether directly or indirectly, give any financial assistance for the purpose of, or in connection with--
- (i)
- the acquisition by any person, whether before, or at the same time as, the giving of financial assistance, of--
- (a)
- shares ... in the company; or
- (b)
- shares or units of shares in a holding company of the company; or
- (ii)
- the proposed acquisition by any person of -- [such shares]
- (b)
- whether directly or indirectly, in any way--
- (i)
- acquire shares ... in the company; or
- (ii)
- purport to acquire ... in a holding company of the company; or
- (c)
- whether directly or indirectly, in any way, lend money on the security of-- [such shares].
(2) A reference in this section to the giving of financial assistance includes a reference to 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.
(3) For the purposes of this section, a company shall be taken to have given financial assistance for the purpose of an acquisition or proposed acquisition referred to in paragraph (1)(a) (in this sub-section referred to as the 'relevant purpose') if--
- (a)
- the company gives the financial assistance for purposes that included the relevant purpose; and
- (b)
- the relevant purpose was a substantial purpose of the giving of the financial assistance.
(4) For the purposes of this section, a company shall be taken to have given financial assistance in connection with an acquisition or proposed acquisition referred to in paragraph (1)(a) if, when the financial assistance was given to a person, the company was aware that the financial assistance would financially assist--
- (a)
- the acquisition by a person of shares ... in the company ...
(5) If a company contravenes sub-section (1) the company is, notwithstanding section 570, not guilty of an offence but each officer of the company who is in default is guilty of an offence.
Penalty: $10,000 or imprisonment for two years, or both.
...
(10) Nothing in sub-section (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 ... 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 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);
- (e)
- not later than the day next following the day when the notice referred to in paragraph (c) is dispatched to members of the company there is lodged with the Commission a copy of that notice and a copy of the statement that accompanied that notice;
- (f)
- the notice referred to in paragraph (c) and a copy of the statement referred to in that paragraph are given to--
- (i)
- all members of the company; ...
- (g)
- ...
- (h)
- within 21 days after the general meeting of the company at which the resolution referred to in paragraph (a) is passed ... a notice--
- (i)
- setting out the terms of the resolution referred to in paragraph (a); and
- (ii)
- stating that any of the persons referred to in sub-section (12) may, within the period referred to in that sub-section, make an application to the Court opposing the giving of the financial assistance,
is published in each State and Territory in which the company is carrying on business, in a daily newspaper circulating generally in that State or Territory;
- (j)
- no application opposing the giving of financial assistance is made within the period referred to in sub-section (12) ...
- (k)
- ...
(11) Where, on application to the Court by a company, the Court is satisfied that the provisions of sub-section (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 the sub-section have been complied with in relation to the proposed giving by the company of financial assistance.
(12) Where a special resolution referred to in paragraph (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 within the period of 21 days after the publication of the notice referred to in paragraph (10)(h) by--
- (a)
- a member of the company;
...
- (f)
- the Commission.
(13) ...
(14) ...
(15) The passing of a special resolution by a company for the giving of financial assistance by the company for the purpose of, or in connection with, an acquisition or proposed acquisition of shares or units of shares in the company, and the approval of the Court of the giving of the financial assistance, do not relieve a director of the company of any duty to the company under section 229 or otherwise, and whether of a fiduciary nature or not, in connection with the giving of the financial assistance.
I have incorporated a number of the provisions of s 129 which are not immediately pertinent to the issue which was before Hodgson J in order to show the context in which the relevant prohibition contained in sub-s (1) appears. The purposes of the subsection include the avoidance of the manipulation of the value of shares by companies and their officers dealing in such shares; the assurance that companies do not themselves provide financial assistance to persons for the purposes of, or in connection with, dealings in its shares and to ensure the full opportunity of the members of the company and the Commission to have notice of derogations from such prohibitions and the opportunity to challenge them in the court.
The origin of the rule prohibiting a company from funding dealings in its own shares can be traced to Trevor v Whitworth (1887) 12 App Cas 409. It was there explained that such purposes are ultimately disadvantageous to a company. This is so because they necessarily lead to a reduction of the company's share capital. It was also mentioned that such a practice could be disastrous in allowing managing directors to buy out "inquisitive and troublesome" critics: ibid at 435.
Because there was no equivalent prohibition in the company law of the United States, the retention of such prohibitions came up for re-examination in the United Kingdom in the inquiry by the Company Law Amendment Committee (the Greene Committee). By its report in 1926, that Committee proposed the maintenance and extension of the prohibition. See Report (Cmnd 2657) 1926, para 30. The Committee of Inquiry into the Australian Financial System (the Campbell Committee) in its 1981 report followed the opinion of the Greene Committee. It too recommended the continuance of the prohibition. (See Report, para 21.93.) Modifications of the law have recently been proposed. See Companies and Securities Law Review Committee, Report, September 1987. However, these do not concern the present case. It falls to be examined under the legislation set out above.
In circumstances of many mergers and takeovers, the provisions of s 129, with their cumbersome procedures, are clearly ripe for revision. However it is the duty of the court to give effect to the prohibitory policy which the section presently contains. The court should adopt that construction of the section which advances its apparent objectives. It should do so for at least three reasons. First, because that is the modern approach adopted by the courts to the function of statutory construction. See eg Kingston v Keprose Pty Ltd (1987) 11 NSWLR 404 at 421 Secondly, because Parliament has, by legislation, required that approach to statutory construction. See Interpretation Act 1987, s 33. Thirdly, because, in the particular context of construing the Code, the Companies and Securities (Interpretation and Miscellaneous Provisions) Act 1980, s 5 A enacts:
In the interpretation of a provision of a relevant Act, a construction that would promote the purpose or object underlying the relevant Act (whether that purpose or object is expressly stated in the relevant Act or not) shall be preferred to a construction that would not promote that purpose or object.
Such a provision does not authorise a court to ignore the plain language of the Act, where that language fails to secure the apparent or stated intention of the lawmaker: R v Bolton; Ex parte Beane (1987) 70 ALR 225 at 229. Nor does it require the court to ignore the many other rules which have been developed as aids to the task of statutory construction. By one such rule, statutes imposing criminal penalties are conventionally given a strict construction. Proof of criminal intent is normally required to establish a breach. But even such legislation must be given a purposive construction. This is because, where Parliament has provided rules, supported by penal sanctions, it is the duty of courts to effect the will of Parliament and no less so because of the serious consequences which attach to the breach. The very provision of such consequences may itself signal the high importance attached by Parliament to ensuring compliance with the law.
The respondents, with one voice, urged that s 129 of the Code should be narrowly and strictly construed. They urged that this should be done out of deference to the normal rule governing the construction of criminal statutes. Apart from the overriding principle which requires the court to endeavour to achieve the imputed purpose of Parliament, there are a number of reasons why I would not favour such an approach to the section. 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. As Lord Denning pointed out in Wallersteiner v Moir [1974] 1 WLR 991 at 1014, financiers have used "sophisticated methods" to get around the legislative prohibition, as originally expressed:
You have only to look at [the] cases ... to see the devices which they use. Circular cheques come in very handy. So do puppet companies. The transactions are extremely complicated, but the end result is clear. 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 see if the company's money has been used to finance the purchase.
Nothing would so clearly reward such "sophisticated methods" and defeat the apparent purpose of Parliament than to adopt the construction urged for the respondents.
There are other reasons for rejecting the respondents' submissions. Under s 129(5) of the Code, the company commits no criminal offence. It is the officers of the company who are liable under the subsection. And by s 572(1) of the Code, it must be proved, in order to secure a conviction, that the officer was "knowingly concerned in or a party to the contravention or failure".
I therefore approach the construction of s 129 with a view to giving the words used their ordinary language and to achieving, so far as those words permit, the apparent purpose of the legislature.
Challenge to the trial judge's construction
Hodgson J held that Chase gave financial assistance to Mr Lanceley. He found that it did so only because Norbrik had entered into the joint venture agreement with it. In other words, his Honour concluded that Norbrik's entry into the joint venture brought about the provision of financial assistance to Mr Lanceley. He further found that two of the directors (Mr D Magney and Mr P Magney) were not aware that Chase was financing Mr Lanceley's bid. He found that Mr Harrison was aware of the provision of finance to Mr Lanceley by Chase but that Mr Harrison believed Mr Lanceley's assertion that the provision of this finance was separate from the joint venture agreement. For the purpose of this argument, I shall assume that these findings are correct. Clearly, Mr Lanceley knew of the assistance he was receiving from Chase. Mr Solomon did not know exactly, because Mr Lanceley did not disclose the precise details to his co-directors. But by his letters, Mr Solomon showed a high degree of suspicion that the two were related. This is unsurprising. Observers other than the directors remarked that they thought the relationship between the financing of the bid and the provision of the joint venture was "obvious".
The first complaint of the respondents relates to Hodgson J's conclusion that, for the purposes of s 129, the undoubted knowledge of Mr Lanceley alone concerning the precise terms of the assistance he was receiving from Chase could be attributed to Norbrik. This finding was challenged upon the basis that at least three members of Norbrik's board were not aware that the entry into the joint venture would bring about the provision by Chase of financial assistance to Mr Lanceley.
I would reject that challenge. Hodgson J's attribution of Mr Lanceley's knowledge to Norbrik was correct. it is clear that in certain circumstances the knowledge of a director can be imputed to a company. See eg Re Hampshire Land Co [1896] 2 Ch 743 at 749; J C Houghton & Co v Nothard Lowe & Wills Ltd [1928] AC 1 . How else, one might ask rhetorically, is the company to secure knowledge except through its officers and especially its managing director?
There are reasons, in the case of other legislative provisions, why the knowledge of a director should not be imputed to the company. Thus, where the company would itself thereby become involved in a criminal offence, there may be reasons for adopting a stricter approach. But that is not the case here. As has already been pointed out, under s 129(5) the company itself is not guilty of a criminal offence for a breach of s 129. The section, so far as criminal liability is concerned, is addressed to the officers and then only if the particular officer is "knowingly concerned". It is therefore appropriate to consider the knowledge of Mr Lanceley as that of Norbrik. There is no reason for not attributing it to the company. The company can elect to affirm or avoid the contract or transaction which is affected by a breach of s 129. It is clear that the legislature contemplated that, in some cases, it would be in the best interests of the company (as distinct from the officers) to secure a determination that s 129 applied to the challenged transaction. Therefore, for the purposes of s 129(4), I would reject the submission that to establish that "the company was aware" of the financial assistance, it is necessary to show that a majority of the board was so aware. Such an interpretation would ignore the obvious purpose of s 129 of the Code. In particular, it would ignore the language of s 129(5).
The respondents challenged other findings by Hodgson J concerning the meaning of s 129. For example, they criticised his Honour's conclusion that s 129(4), with its reference to the company's awareness, provided an exhaustive definition of the words "in connection with" as they appear in s 129(1). It will be remembered that, in the opening subsection of s 129, the prohibition on the giving of financial assistance is expressed in the alternative. It is forbidden whether " for the purpose of the acquisition of shares in the company or " in connection with " such acquisition. The necessity to prove "the purpose" obviously provides a greater burden upon those who invoke s 129 than the undemanding necessity to establish that the financial assistance was given "in connection" with the acquisition of shares in the company. Each of the phrases necessitates proof of a link between the giving of the financial assistance and the acquisition of the shares. It is a link beyond the temporal requirement that the acquisition be "before, or at the same time as" the giving of the financial assistance: see s 129(1)(a)(i).
For their contention that s 129(4) should be construed as an exhaustive definition of the phrase "in connection with", the respondents argued thus. The words "in connection with" are words of the widest association. Yet s 129(1) creates a criminal offence concerning each officer in default. It is unthinkable that such an offence should be created by words of such imprecision without a more specific definition. Hence, the definition is exhaustive in order to provide the requisite precision.
The respondents also argued that the contrast between the course of company legislation in England and in Australia threw light upon the meaning to be given to s 129(4). The phrase "in connection with" appeared in s 54 of the Companies Act 1948 (UK) and in s 67 of the Companies Act 1961 (NSW). In no reported case that could be drawn to the court's notice had there been specific reliance on the phrase "in connection with" as the sole basis for the decision that the section applied. The court decisions showed the width of the expression "for the purpose of", even without invoking the alternative phrase "in connection with". See eg Belmont Finance Corporation v Williams Furniture Ltd (No 2) [1980] 1 All ER 393 at 402 Armour Hick Northern Ltd v Whitehouse [1980] 1 WLR 1520 . See also Companies Act 1985 (UK) s 151(1) and Burton v Palmer, supra, at 887. The realisation of the dangers of imprecision had, so it was submitted, led to two legislative reactions. In England, the phrase "in connection with" was removed from the Companies Act 1980: see s 88(1). The purpose of that deletion was to clarify the legitimacy or illegitimacy of transactions connected with share acquisitions and to "moderate certain over rigorous judicial interpretations of those restrictions": see R D Pennington, Company Law (5th ed) London, 1985, p 411.
In Australia, s 129(4) was inserted in the Code in order to require knowledge on the part of the company of the fact that financial assistance was given in connection with the acquisition of the shares. This, and the requirement of proof that the "purpose" was "a substantial purpose of the giving of the financial assistance", were provisions designed to tighten up and limit the application of the prohibition in s 129(1).
There is some force in these arguments. The Explanatory Memorandum of the Federal Minister for Business and Consumer Affairs, when first introducing the legislation in 1981, which in this State became the Code, referred to s 129(4) as a "definition" of the expression "in connection with". Contemporaneous commentary by the National Companies and Securities Commission also acknowledged that s 67 of the Companies Act 1971 could be seen as unacceptably wide and uncertain. See NCSC Release No 400, 1 December 1981 in CCH Australian Company Law and Practice, para 80-800. Against this background, the respondents argued that s 129(4) secured the NCSC's then objective of introducing "a measure of mens rea as distinct from indicating a more general nexus between the assistance and the acquisition".
On balance, I do not favour the construction urged by the respondents. First, the duty of the court is to give meaning to the language actually used by Parliament. The language in s 129(4) is that a company "shall be taken to have" given financial assistance if certain things are shown. Had it been intended that s 129(4) were to be an exclusive definition of the phrase "in connection with", one might have expected that the drafter would have used the expression "if and only if". Furthermore, the phrase "shall be taken to" is one typically used in legislation to provide a notional definition where the ordinary definition will not suffice. Usually, it extends and does not delimit the word(s) defined. It provides a dictionary, but not an exclusive one.
Secondly, the same approach must be considered in the light of the provision of an extended definition "for the purpose of" in s 129(3). I do not read that subsection as an exclusive definition of "for the purpose of". Yet if the respondents' argument were right, it would necessarily follow that such was the case in sub-s (3) as in sub-s (4).
Thirdly, the course of the legislation in Australia and England represents a two-edged sword for the respondents. Whereas in England the phrase "in connection with" was removed, in Australia it was preserved -- presumably for a purpose. That purpose was, one might infer, to overcome the difficulty presented by the obligation to prove the "purpose" of the company. The necessity to prove a "connection" still requires something more than temporal coincidence. But it allows the court to apply a common sense approach, such as Lord Denning described, supra. The retention of the phrase in our legislation, in the face of the English decision to remove it, suggests to my mind a deliberate decision in Australia to persist with the more stringent obligation affecting the company's officers.
Fourthly, there is the argument that the company's awareness is established if an officer, such as Mr Lanceley, is "aware". I have already expressed my agreement with Hodgson J that the awareness of a single director can be attributed to the company. If this is a correct interpretation of the section, particularly bearing in mind s 129(5), the suggestion that s 129(4) provides an exclusive definition loses much of its force.
I do not consider that it is necessary for me, in the light of the foregoing, to explore the other possibility that financial assistance may be given without the company's being aware of it. Section 129(1) is expressed in objective terms. It contains no such phrase as "knowingly". The section does not create an offence in the company. Only the officers may commit an offence and then only as s 572(1) provides. In such circumstances, there is a strong argument that Parliament did not require awareness in the company in every case -- although, as s 129(4) shows, such awareness is in some circumstances relevant. Likewise the reference to "purpose", and the criminal nature of the provisions, suggests that an awareness of breach is required, at least where it is alleged that the financial assistance was given "for the purpose of" the acquisition of shares. I presently favour Hodgson J's alternative conclusion. But it is not necessary to resolve this controversy. In my opinion, his Honour was right in his conclusion and that s 129(4) was not exhaustive of the definition of "in connection with"; and that, in any case, the knowledge of a single director could be attributed to the company. These conclusions sustain Hodgson J's opinion that, on either construction of s 129(4) the appellant had made out a case that Norbrik had indirectly given financial assistance in connection with the acquisition by Mr Lanceley of shares in Norbrik.
But was it "financial assistance"?
Finally the respondents challenged Hodgson J's conclusion that the benefits which Mr Lanceley derived were "financial assistance" within the meaning of s 129. It is to be noted that the giving of financial assistance has a very wide definition under s 129(2). The various forms of the giving of such assistance are stated as "included" in the prohibited conduct. The definition concludes with the expression "or otherwise". That phrase, and the verb "includes" indicates the very wide ambit to be given to the expression. The reason for such a wide ambit is again explained by Lord Denning's recognition of the expedients adopted in past attempts to circumvent the operation of the section and its equivalents.
This court 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: Burton v Palmer [1980] 2 NSWLR 878 at 881-2 The respondents latched on to the absence of any allegation in the appellant's pleading that the company had suffered loss or damage. They also relied upon the appellant's abandonment of his previous invocation of s 130(4) of the Code. By that provision the court is empowered where, relevantly, the company suffers loss or damage, to make corrective orders expressed in wide terms.
I do not accept the argument of the respondents that Norbrik suffered no diminution in its financial resources by reason of the financial assistance it gave to Mr Lanceley, indirectly, in connection with his acquisition of its shares. It is true that the financial assistance must be shown to be (relevantly) "in connection with the acquisition of ... shares". Accordingly, the respondents argued, Mr Lanceley's acquisition of the shares, being at a price higher than that offered by the appellant, involved no diminution in Norbrik's financial resources. On the contrary, there was an enhancement of those resources, specifically because of Mr Lanceley's bid. It is also true that there was evidence that the joint venture, facilitated by Mr Lanceley's bid, was in some ways financially advantageous to Norbrik.
Whether or not this is so, the court must focus its attention upon the language and purposes of s 129. The section is addressed to the conduct of officers of a company. Its purposes have already been described. It would distort the meaning of "financial assistance", as that expression is widely defined by s 129(2), to categorise the help given by Norbrik to Mr Lanceley to secure the support of Chase and the Bank of New Zealand in his purchase of Norbrik's shares as something other than "financial assistance". Certainly, it was indirect financial assistance. It may not have been given "for the purpose" of the acquisition of the shares or even with the awareness of Norbrik's other directors. But it was Mr Lanceley's key position in Norbrik and his influence in presenting, promoting and securing the joint venture (although not voting upon it) that persuaded Chase, and then the Bank of New Zealand, to afford him the credit line with the remarkable non recourse provision which removed any risk of personal liability by him.
I regard the help given to Mr Lanceley by Norbrik in the purchase of the shares under those conditions as "financial assistance". The mere fact that the shares were then purchased for a better value than the appellant was offering is irrelevant. The section does not address itself specifically to the comparison between two competitors in a takeover situation. It is concerned with the misuse of a company's financial resources. That misuse can occur in actuality and in potentiality. If a cheque is drawn and the company's funds are used, the section obviously applies. But such will rarely be the case. Other means of using the financial resources of the company may be utilised. They will diminish the financial resources of the company, in potentiality. Here, the diminution of the financial resources of Norbrik occurred to the extent that Mr Lanceley diverted from other shareholders to himself benefits which belonged to the company. He had every opportunity to acknowledge, even before this court, that he held such benefits, as a director, in trust for the shareholders. He never acknowledged that trust. He therefore maintained a claim to a personal benefit. That benefit established Norbrik's breach of s 129. For if Norbrik, however unwittingly, had diverted some of its resources from its shareholders to Mr Lanceley in connection with Mr Lanceley's purchase of its shares, it had breached s 129 of the Code. Pro tanto it had diminished its financial resources. The resources which belonged to the shareholders were diverted to Mr Lanceley. The assistance thereby given was given in connection with Mr Lanceley's acquisition of the very shares which he claimed for himself but which were acquired by him using his position as managing director of Norbrik.
For my own part, I am not at all convinced that it is necessary in every case, in order to establish the giving of "financial assistance", that there has been an actual diminution in the company's resources. The wide definition in s 129(2) does not seem to me to require this. But if it be a requirement, as the court has previously held, it is established by the facts of the present case.
Provision of relief under s 130(3)
The appellant claimed that Hodgson J erred in declining to provide relief under s 130(3) of the Code. That section provides:
130(3) The Court may, on the application of a member of a company, a holder of debentures of a company, a trustee for the holders of debentures of a company or a director of a company, by order, authorise the member, holder of debentures, trustee or director to give a notice or notices under subsection (2) in the name of the company.
The sub-section requires consideration of the two preceding sub-sections:
130(1) Except as provided by this section--
- (a)
- the validity of a contract or transaction is not affected by a contravention of paragraph 129(1)(a);
...
130(2) Where a company makes or performs a contract or engages in a transaction, that would, but for subsection (1) be invalid by reason that--
- (a)
- the contract was made or performed, or the transaction that was engaged in, in contravention of section 129; or
- (b)
- the contract or transaction is related to a contract that was made or performed, or to a transaction that was engaged in, in contravention of that section,
the first mentioned contract or transaction is, subject to the following provisions of this section, voidable at the option of the company by notice in writing given to the other party, or by notices in writing given to each of the other parties, to that contract or transaction.
Hodgson J found a breach by Norbrik of s 129(1)(a) of the Code. It was clear that Norbrik would not act to give a notice under s 130(2). Norbrik was in the control of Mr Lanceley and of co-directors who had earlier voted for entering the joint venture. In these circumstances, the appellant sought to give a notice under s 130(2) to render the contract by Norbrik with Norwest, and the related contract between Norwest and Chase for the joint venture, voidable. The appellant qualified to invoke s 130(3). He was a member of Norbrik. He sought to give the notice in the name of Norbrik. The contracts which he impugned were made or performed (as has been held) in contravention of s 129. The contracts themselves had not been avoided by Norbrik as s 130(2) envisages.
In his first judgment, Hodgson J found that the appellant had not shown that the company had been damaged by the transaction. He was therefore not inclined, in the exercise of his discretion, to avoid it. However, because he still had some uncertainties, he required a company meeting to be held under conditions which he specified.
I shall assume that the course which Hodgson J took was authorised by the Code. Support for the power to summon a general meeting of shareholders appears to be found in s 574. The appellant challenged his Honour's authority to summon the meeting. He urged that, having found a breach of the section, his Honour was obliged to consider the relief sought by him under s 130(3) on its merits and on the evidence which had been adduced. I shall assume otherwise.
Section 130(3) does not impose a duty on the court. It provides a discretion to the court. It is a discretion to be exercised judicially. The guiding principle is the consideration by the court, objectively and with the benefit of hindsight, of the best interests of the company. Clearly, s 130(3) is in the nature of a "fail-safe". It is provided to deal with just such a situation as has arisen in the instant case. An officer of a company who is in breach of s 129(1)(a) might effectively control the company through its board of directors. Indeed, he might even have enhanced his control by the very actions which s 129(1) is designed to prohibit. This is why s 130(3) provides for an application by third parties to enliven a discretion in the court, in effect, to deprive the officer concerned of the fruits of the breach of the section. It will be remembered that one of the initial objectives of the predecessors to ss 129 and 130 was to prevent those in control of the finances of a company using that control to perpetuate their position and to enhance their control by the manipulation of the finances of the company to their own advantage. A number of questions therefore arise. They include:
- 1.
- Whether his Honour should have ordered that the vote should be had by special resolution. This is supported by s 129(10) where a personal gain has been made. By s 248 of the Code such a vote requires a two thirds majority. By that majority the appellant would have succeeded and Mr Lanceley would have failed.
- 2.
- Whether, having regard to the vote which was had, his Honour was right to dismiss the suit thereby condoning the demonstrated personal gain and breach of fiduciary duty leaving pursuit of such matters to the future.
- 3.
- Whether for other reasons (eg waiver, intervention of third party rights or that the deal was objectively for the best interests of the company or that the appellant had not shown that the company was damaged) his Honour's decision should be affirmed.
At the trial, Hodgson J rejected the appellant's argument that the vote at the general meeting of shareholders should be by special resolution. He did so on the ground that the purpose of the vote was not to authorise the giving of financial assistance as s 129(10) provides. It was to assist the court in determining whether to exercise its discretion in favour of the appellant to authorise him to give the notice under s 130(2) in the name of the company. Taking this course had the advantage of reasserting the power of the shareholders. It also had the merit of fulfilling the promise which the board had made through Mr Lanceley at the previous annual general meeting, which it had not kept. This was to consult the members in general meeting before committing Norbrik to a particular course in the development of the land.
The National Companies and Securities Commission, intervening, pointed out that the result of his Honour's refusal to require a special majority was, effectively, to permit the general meeting to condone by simple majority the breach of s 129 which his Honour had found. This was so, although, had approval been sought under s 129(10) in advance of obtaining the financial assistance found, it would have required the special majority for which s 129(10) provides. By the requirement of that special majority, the vote would then have been lost. Obviously, the policy of Parliament in providing as s 129 does is to discourage such financial assistance and to condone it only where it enjoys the overwhelming support of the members of the company. The joint venture agreement, with its personal benefits for Mr Lanceley, plainly did not enjoy ovrwhelming support. It barely avoided disapproval by the simple majority of members. I agree with the submission of the Commission that, where the powers of s 574 of the Code are invoked for the purpose of requiring a person to do any act or thing that ought to have been done under the Code, that act or thing should normally be required to be done as closely as possible in the terms that the Code provides. Otherwise, compliance with the will of Parliament is frustrated and departure from the requirement of the Code is too readily condoned.
I acknowledge that his Honour was utilising the general meeting for a limited purpose only. However, by failing to require a special majority in circumstances in which he had found, correctly, that a breach of s 129 had been established, he indicated, in my respectful view, an erroneous exercise of the discretion to use the general meeting in the way he did.
It was erroneous also for another reason. Mr Lanceley participated in the vote. True it is, he was required by his Honour's orders not to vote upon the shares acquired as a result of the offer made with the benefit of the financial assistance. However, that restraint did not remove the offence done by the appearance of Mr Lanceley's voting, in effect, to condone and sustain his breach of s 129 as found by the court. It is offensive to principle that he should be entitled to vote upon a resolution the effect of which was to confirm the financial assistance he had received. Had Mr Lanceley's shares not been counted in the vote, the general meeting of members would have voted in favour of the course authorising the appellant to give the notice under s 130(2) in the name of the company avoiding the contracts.
There are two other considerations which, to my mind, suggest error in the exercise of his Honour's discretion declining to provide the relief under s 130(3) which the appellant claimed. The first is the somewhat unsatisfactory way in which the question was put to the members. It is true that they were provided with the judgments of Hodgson J, a letter from the appellant and an opportunity for debate at the general meeting. It is also true, as counsel for Mr Lanceley pointed out, that the appellant's letter contained the "juicy bits" extracted from the judgments of Hodgson J. However, that letter was sent on 6 August 1987. The meeting took place on 5 November 1987. In order to ensure a proper and responsible consideration of the issue, determined by the criterion of the best interests of the company as a whole, something more was required of the directors than the provision of the undigested judgments of Hodgson J. Moreover, if the vote at the general meeting was to have the ratifying operation which the respondents now assert, it was imperative that the evidence should have disclosed that Mr Lanceley, and all others involved, had made a complete and candid disclosure to the members of the company, of the way in which the joint venture had been financed. Specifically, it was essential that there should have been full and frank disclosure of the financial assistance which Mr Lanceley had secured. Nothing less would afford utility to the vote. This was especially so because, by his Honour's order, it was to be taken by simple and not a special majority. There is no evidence that there was such disclosure by Mr Lanceley (or by Chase or Macquarie) to the members. In these circumstances, against the background of the findings which had earlier properly been made, I consider that Hodgson J erred in ascribing to the vote at the general meeting the significance which he attributed to it.
Finally, there was no separate consideration, once the vote was reported to Hodgson J, of the consequences of it for the question which remained before his Honour, namely the request by the appellant for the exercise of the discretion for which s 130(3) provides. His Honour records that the appellant accepted that it followed from his previous rulings that the claim should be dismissed. Those "previous rulings" were those which explained the limited basis upon which the act of consultation with the members of Norbrik would take place. That consultation could not, in my opinion, control the exercise of the discretion which the appellant had invoked. At most, it was a consideration to be taken into account. As I have shown, it was a consideration that was worthy of comparatively little weight. The vote was vitiated, in part, by its conduct by simple majority (when the Code normally requires a special majority to condone financial assistance to a director). In part, it was vitiated by the participation in the vote of Mr Lanceley's shares, although Mr Lanceley was directly and personally affected by the outcome. In part, it was affected by the inadequate notice to the members by Mr Lanceley of the acts and omissions which, effectively, he was seeking to have condoned by a refusal by the court to allow notice to be given which would avoid the joint venture. None of these considerations appears to have been taken into account by Hodgson J in the exercise of his discretion. He proceeded as if the vote was all. In my opinion that approach was erroneous. It caused his Honour's discretion to miscarry. It requires the setting aside of the order which followed it, by which he dismissed the appellant's suit.
Relief in this court
The foregoing conclusion has been reached by the application of the provisions of ss 129 and 130 of the Code. A similar result would have been reached on my earlier-stated conclusion that Hodgson J had erred in his conclusion that the action of the directors of Norbrik in causing Norbrik to enter into the joint venture agreement with Chase was not carried out bona fide in the interests of the company as a whole but for an improper or collateral purpose. Whether by that route or by the statutory route, it is my conclusion that the appellant was entitled prima facie to have the relief which he sought, namely the setting aside of the joint venture agreement, with the connected financial assistance provided to Mr Lanceley.
It is convenient to deal with the question of relief by reference to the miscarriage of the discretion under s 130(3) of the Code. I take that course because, upon all substantive matters concerning breach of the Code, I am in agreement with Hodgson J. I consider that it was only at the point of the provision of the relief appropriate to the circumstances that his Honour erred. This court is entitled to exercise the discretion under the sub-section if it has before it all of the relevant materials. It has not been suggested that any such materials are missing.
The respondents are able to point to a number of considerations which suggest that the discretion under s 130(3) should not be exercised as the appellant seeks. These include:
- (i)
- the general undesirability of the court's becoming embroiled in commercial decisions in which it has no special expertise;
- (ii)
- the evidence positively given that the joint venture agreement is in the best commercial interests of the company;
- (iii)
- the clear evidence that Mr Lanceley's offer was beneficial to those shareholders who wished to sell their shares and that especially the initial offers of the appellant represented a gross undervalue of those shares;
- (iv)
- the sale of some shares to third parties who acted in good faith without any knowledge of the problems later exposed by this litigation; and
- (v)
- the fact that a majority of shareholders showed that they supported the joint venture agreement.
As against these considerations, there must be weighed those which suggest the desirability of allowing the appellant to utilise the power reserved to persons like him by the Code, presumably for use in circumstances just such as the present. Those considerations include:
- (i)
- the fact that otherwise a breach of s 129 of the Code is condoned including a breach in circumstances which involve a near certainty of a breach of fiduciary duty on the part of the managing director of the company;
- (ii)
- the fact that the joint venture agreement was connected with financial assistance to Mr Lanceley which was not disclosed to the directors nor candidly disclosed by Mr Lanceley to the members of the company and which will be confirmed, if the joint venture agreement is not avoided;
- (iii)
- the fact that the act of consultation with the shareholders was defective in the three ways specified above and cannot be taken to be a ratification and acceptance by the members of the financial assistance negotiated by Mr Lanceley in connection with his offer for the Norbrik shares; and
- (iv)
- the unlikelihood that Norbrik, under its present control, would take proceedings separately from the present litigation against Mr Lanceley in respect of the near certainty of his breach of fiduciary duty to the company and involvement in the breach of s 129 of the Code. As well, the prospect that the appellant would seek to initiate such proceedings or that they would be brought otherwise ought not to be relied upon when the effect of the avoidance of the contract sought by the appellant would be to require the company to start again. The company could then proceed with proposals for the sale of the subject land which involve no breach of fiduciary duty on the part of the directors and no breach by the company of the provisions of s 129 of the Code. The company might even decide to proceed with the joint venture with Chase. But it would then do so upon proper terms and in circumstances in which the directors were fully aware of all of the terms upon which the joint venture was negotiated; the terms were fully disclosed to the members and no secret financial advantage accrued to a director.
The golden thread which runs through the decisions of the courts and the provisions of the Code considered in this appeal is the duty of fidelity to the company's interests on the part of directors. The temptations for the pursuit of personal interests are so great and often so tantalising that the courts can only uphold the high standard of integrity which the law requires on the part of directors by vigilant action in the comparatively small number of cases which come to the court's attention where such action is needed. This is such a case. The common law duties of the directors have been breached. The company has breached s 129 of the Code. For the court then to walk away, ignore the breach and refuse the relief provided under s 130(3) would in my opinion be an abdication of the protective function assigned to the court by Parliament under the subsection. It is a function protective of the members of the company. It is proper, in exercising it, to keep in mind the standard which is set by the decision in the given case, for the fidelity and integrity of directors in the multitude of cases which never come to a court. Upon the evidence in this case, it is appropriate to authorise the appellant to give notice in the name of the company avoiding the agreement between Norbrik and Norwest. It is also appropriate that the court make such further or other orders as may be necessary to restore the parties to the positions which they held before the entering into the agreements between Norbrik and Norwest (on the one hand) and between Norwest and Chase (on the other).
But was there evidence against Chase?
By a notice of contention, Chase argued many of the matters which have been disposed of earlier in these reasons. But there was one additional argument special to Chase. It was that Hodgson J ought to have found that because of s 68 A (1)(3) of the Code, Chase was entitled to assume that, in relation to the dealings it had with Norbrik and Norwest concerning the transactions impeached by the appellant, the directors and/or Mr Lanceley were properly performing, or had performed properly, their respective duties to those companies.
Section 68 A is a provision designed to relieve people dealing with companies from the obligation to satisfy themselves about the propriety of the internal operations of such companies. Relevantly, the section provides:
68A(1) A person having dealings with a company is, subject to sub-section (4), entitled to make, in relation to those dealings, the assumptions referred to in sub-section (3) and, in any proceedings in relation to those dealings, any assertion by the company that the matters that the person is so entitled to assume were not correct shall be disregarded.
Among the relevant assumptions in s 68 A (3) are that the memorandum and articles of the company have been complied with; that the officers have been duly appointed and have authority to exercise the powers customarily exercised and that the directors and principal executive officer "properly perform or performed their duties to the company".
Actual or imputed knowledge disentitles such persons from the statutory presumptions. This appears from s 68 A (4).
68A(4) Notwithstanding sub-section (1) a person is not entitled to make an assumption referred to in sub-section (3) in relation to dealings with a company if--
- (a)
- he has actual knowledge that the matter that, but for this sub-section, he would be entitled to assume is not correct; or
- (b)
- his connection or relationship with the company is such that he ought to know that the matter that, but for this sub-section, he would be entitled to assume is not correct;
and where, by virtue of this sub-section, a person is not entitled to make a particular assumption in relation to dealings with a company, sub-section (1) has no effect in relation to any assertion by the company in relation to the assumption.
The terms of s 68 A (3) do not go so far as to provide that Chase, dealing with Norbrik, was entitled to assume the directors were all, or in the majority, acting for a proper purpose. Still less did the sub-section entitle Chase to assume that s 129 had been complied with. Chase knew that Mr Lanceley, with whom it was dealing intensively, was the managing director of Norbrik. It therefore knew that he owed Norbrik fiduciary duties. It knew that he was securing a very valuable personal advantage in the purchase of Norbrik's shares by the credit line which it had secured for him on non recourse terms with the Bank of New Zealand. It knew that such terms were connected with the joint venture agreement, in the sense that, to secure to Chase upon terms very favourable to it, participation of Norbrik and Norwest in the joint venture agreement, it was necessary to facilitate Mr Lanceley's acquisition of shares. It was imperative to facilitate Mr Lanceley's success in beating off the competing takeover bid by the appellant and the syndicate behind him.
But can it be inferred, eg from its connection or relationship with Norbrik, that Chase knew or ought to have known that there was a breach of s 129 in which Mr Lanceley was involved? One of the exhibits admitted at the trial was a file note recording the conference which was held at the offices of Macquarie on 22 August 1986 to which reference has already been made. The note provides a detailed record of what was said at the meeting and one which Hodgson J accepted as accurate.
The following critical entries appear:
Mr Hunt indicated that Macquarie Bank had been retained to assist the board to obtain a better price for the shares of the members of the company. As a result of negotiations they had conducted with Chase Corporation Ltd (Chase) that company was prepared to finance a bid by Mr Lanceley at $12 per share provided that the company entered into a joint venture agreement with Chase for the development of the site on the terms set out in the draft joint venture agreement which had been circulated. The terms of the agreement were then discussed in some detail including questions as to the taxation implications and security implications and the seemingly limited obligations of Chase under the agreement ...
Mr Solomon indicated that he had no problem in voting for the proposal if it was ratified by a meeting of the shareholders of the company. Mr McDonald [solicitor for Norbrik] and Mr Hunt stated that Chase was not prepared to proceed with the matter if the agreement had to be ratified as they considered it necessary to have a fully binding legal agreement in place before the injunction was dissolved.
Later in the file note there appeared the terms upon which Mr Solomon indicated that he was prepared to support the joint venture proposal. These included his satisfaction about the "contribution of Chase to funding and services in view of the fact that Chase seem to be taking no risk whatsoever and also receiving full remuneration". Mr Solomon said that he would "seek Macquarie Bank's written advice that it was the best deal they were able to obtain from Chase or any other party ...". Another term was "full particulars of the funding by Chase of [Mr] Lanceley's bid would need to be disclosed to the directors but would be kept confidential". Various other terms, proper and wise in retrospect, were laid down by Mr Solomon who was obviously receiving appropriate advice from his solicitor.
To these conditions, Mr Walters and Mr Hunt from Macquarie Bank responded. They said:
[That] this position would be unsatisfactory to Chase and that by taking this stand Mr Solomon was not acting in the interests of the members of the company and was personally denying them the possibility of a higher bid for the shares. Mr Waters said that Mr Solomon would have to live with the fact that he had cost his members $6 million including members of his own family if he maintained this position [Mr Peter Hopkins, Mr Solomon's solicitor] said that it was quite unfair to make this suggestion and that it seemed unrealistic of Chase to not be prepared to negotiate on these terms. Mr Waters said that the negotiations had been long and complex and it was their opinion that Chase would not be prepared to accept this proposal but of course it would have to be put to Chase.
Mr Hunt gave oral evidence before Hodgson J. Under cross-examination he gave the following evidence:
Q.--Chase, of course, would have had no incentive to finance this bid unless it secured the joint venture? A.--That is certainly what I have always surmised.
Q.--And it was perfectly obvious to you, was it not, that Chase's assent to provision of finance was conditional upon it being awarded the joint venture?
A.--It was never put to me on that basis but it was, to me, fairly obvious.
Q.--It was perfectly obvious? A.--Yes.
Q.--It was so obvious it did not need to be stated? A.--Yes.
...
Q.--From the point of view of Chase there was obviously a connection between the two? A.--I believe yes there was a connection between the two.
Q.--And the connection was no joint venture no finance? A.--That is right.
Q.--That was perfectly obvious to you? A.--Never stated to me but it was obvious.
Q.--So obvious it did not have to be stated? A.--That is right.
Q.--May I take it you would never have said to Mr Lanceley that there is no connection between the finance and the joint venture because it was perfectly obvious there was? A.--I would never have made that statement, no.
Q.--Did you ever state to the board of directors that there was no connection between the finance and the joint venture? A.--No I did not.
Mr Hunt is not, of course, an officer of Chase. He could not give evidence of what Chase knew. But from Macquarie's position in relation to Chase, his statements in the contemporaneous record of meeting and his oral evidence in court it is clear that he was in close and regular contact with Chase. What was obvious to him, one might infer, would have been equally obvious to Chase. No joint venture, no finance for Mr Lanceley's bid. I have no hesitation in inferring that Chase, being at once the facilitator of the special benefit to Mr Lanceley alone of the directors, and the beneficiary of the joint venture which was secured by this arrangement was sufficiently on notice of its peculiarities as to deprive it of the claim that it could assume that Mr Lanceley had properly performed his duties to Norbrik and Norwest. Looking at the arrangements between the parties realistically, as I must, I am bound to say that the inference which I would draw is that Chase spiced the bait to Mr Lanceley with a special and private gain to him alone of the directors. And it did so in order to ensure that it would defeat the appellant's bid and procure to itself the benefits of the joint venture.
I can the more comfortably draw such conclusions because, although Chase was a party to the proceedings, the officers involved in the negotiations on behalf of Chase chose to give no evidence before Hodgson J. Chase bore no onus of proof. But so many other indications suggest the conclusion that I have just stated. The executives of Chase could have been expected to throw light on their knowledge, or lack of it, concerning the affairs of Norbrik and Norwest (and their dealings with Mr Lanceley). Accordingly, their failure to offer evidence where otherwise it might have been expected, gives rise to the conclusion that such evidence would not have assisted Chase. Otherwise it surely would have been called. The absence of evidence does not prove the case for the appellant. But it does add to the confidence with which the court can reach conclusions proved otherwise by the facts or by inferences drawn from those facts: see Jones v Dunkel (1958) 101 CLR 298 at 320-1 Holdings Ltd v Banque Commerciale SA (in liq) (15 November 1988, Court of Appeal, unreported) ; 1988 NSWJB 203.
Conclusions and relief
The result of the foregoing analysis is that it is my opinion that the appellant is entitled in the name of the company, to give notice which avoids the agreement between Norbrik and Norwest. Consequential declarations should be made in respect of the agreement between Norwest and Chase. The machinery of carrying into effect these conclusions was not fully explored during argument. It should be discussed between the parties. In default of agreement, matters should be determined by the court.
Mr Lanceley brought a cross-appeal in respect of a special order which Hodgson J made concerning costs after he was separately represented at the trial. It necessarily follows from the conclusions which I have stated, that I would dismiss the cross-appeal. So far as costs generally are concerned, the appellant is entitled to have his costs from the respondents. I would, however, exempt Mr Solomon in this regard as I believe he has repeatedly demonstrated his concern to comply with the high obligations imposed by the law upon company directors. It is unnecessary to refer to any relief which Chase might have against the other respondents. Such relief, although referred to defensively, is not an issue in these proceedings.
The orders which I would propose are:
- 1.
- Appeal allowed.
- 2.
- Orders of Hodgson J of 18 November 1987, dismissing the appellant's claim, set aside.
- 3.
- In lieu thereof, order--
- (a)
- that pursuant to s 130(3) of the Companies (NSW) Code, the appellant be authorised to give a notice avoiding the agreement entered into between the first respondent and the third respondent dated 26 August 1986 under which the first respondent unconditionally undertook to execute a contract for the sale of certain land at Baulkham Hills known as Lot 102 in DP 624844 at Parklea, Shire of Baulkham Hills, Parish of Castle Hill, County of Cumberland, being all of the land in the certificate of title vol 14787 fol 221; and
- (b)
- that the appellant within 28 days bring in short minutes of the other orders and declarations which it seeks, consistent with the reasons for judgment of the court.
- 4.
- That the respondents, other than Frank Solomon, one of the second respondents, pay the appellant's costs of the proceedings in the Equity Division and in this court.
- 5.
- That such of the respondents as so qualify be granted a certificate under the Suitors Fund Act 1951 in respect of the costs of the appeal.
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