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NSW Crest

Supreme Court
New South Wales

Medium Neutral Citation:
Cody v Live Board Holdings Limited [2014] NSWSC 78
Hearing dates:
18 December 2013
Decision date:
17 February 2014
Jurisdiction:
Equity Division - Corporations List
Before:
Brereton J
Decision:

Application for declaration that company had power and authority to make share issue refused.

Catchwords:
CORPORATIONS - share capital - shares - where declaration sought that company had power and authority to make share issue - where shareholders' agreement and company constitution included provisions regulating the issue of shares - whether agreement and constitution complied with - effect of non-compliance - declaration refused
Legislation Cited:
(CTH) Corporations Act 2001, s124(1)(a), s125, s233, s254A(1), s254E
Cases Cited:
MYT Engineering Pty Ltd v Mulcon Pty Ltd (1999) 195 CLR 636
Re Duomatic Ltd [1969] 2 Ch 365
Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285
Category:
Principal judgment
Parties:
Pierce Patrick Cody (first plaintiff)
Finola Anne Burke (second plaintiff)
Richard Charles Ochojski (third plaintiff)
Live Board Holdings Limited (first defendant)
Pier Blue Pty Ltd (second defendant)
Solitair Capital Pty Ltd (third defendant)
Cody Investments Pty Ltd (fourth defendant)
Ross McCreath (fifth defendant)
Ed St John (sixth defendant)
Randal Leeb-Du Toit (seventh defendant)
Avapple Nominees Pty Ltd (eighth defendant)
PJ Inge Executive superannuation Fund Pty Ltd (ninth defendant)
Wilnix Super Pty Ltd (tenth defendant)
Paul Adam Shipley (eleventh defendant)
Catherine May Kenny (twelfth defendant)
Robert Mactier (thirteenth defendant)
Anna Houssels (fourteenth defendant)
Bruce Michael Mann (fifteenth defendant)
Representation:
Counsel:
Mr C R Newlinds SC w B Kremer (plaintiffs)
Ms M Bateman (second defendant)
Solicitors:
Whittens & McKeough (plaintiffs)
Phontos Legal (second defendant)
File Number(s):
2013/ 359378

Judgment

1On 29 August 2013, the board of the first defendant company Live Board Holdings Limited (LBH), which then comprised the plaintiffs Pierce Patrick Cody, Finola Anne Burke and Richard Charles Ochojski, together with Mr Costa Koulis who was and is the sole shareholder in and director of the second defendant Pier Blue Pty Ltd ("Pier Blue"), resolved to proceed with a capital raising, and on 3 September 2013, LBH issued 5,226,550 preference shares to the new shareholders in exchange for funds subscribed, and 3,323,324 ordinary shares to existing shareholders pursuant to anti-dilution provisions ("the 3 September share issue"). In this way, LBH raised approximately $1 million, of which approximately $748,000 remains in its bank account. Mr Koulis, who has since ceased to be a director of LBH, has asserted on a number of occasions that the 3 September share issue was invalid and that the board did not have power to issue those shares, apparently on the basis that provisions of LBH's constitution, and/or a shareholders' agreement between its shareholders dated 12 December 2012, have not been complied with; or that the issue was not bona fide for the purposes of the company as a whole, or was oppressive. As the LBH board currently wishes to issue further shares, to raise additional capital in the order of about $5 million, in order to launch its business of marketing electronic real estate signboards, the remaining directors wish to quell the dispute.

2In those circumstances, by summons filed on 28 November 2013, the plaintiffs claimed a declaration to the effect that, upon the proper construction of the constitution and the shareholders' agreement, the LBH board had power and authority to issue the shares the subject of the 3 September share issue, and has power and authority to issue further shares to raise capital for LBH, including but not limited to such shares as are necessary to raise a further $5 million in capital. By interlocutory process filed on 6 December 2013, Pier Blue and Mr Koulis cross-claimed for declarations that the LBH board did not have power or authority to issue the said shares and that the 3 September share issue was invalid and of no effect; consequential orders that LBH cancel all the shares issued and repay all subscriptions moneys paid in relation to that issue; a further declaration that the conduct of LBH was oppressive, unfairly prejudicial to or unfairly discriminatory against Pier Blue; and orders (pursuant to Corporations Act, s 233) that LBH cancel all the shares issued and repay all subscription moneys paid pursuant to the 3 September share issue. The interlocutory process also claims other relief, but it is not relevant for present purposes.

3On 9 December 2013, the Court by consent fixed the plaintiffs' claim for declaratory relief (but not the claim for a validating order, nor the second defendant's cross-claims) for hearing on 18 December 2013, on the basis that it was said that the issue raised by the claim for a declaration was essentially a question of power depending on construction of the constitution and shareholders' agreement, the determination of which would resolve a significant dispute in the proceedings, though it could not wholly resolve them (particularly as, if the declaration were made, the cross-claim impugning the share issue as oppressive or otherwise voidable in equity, would remain on foot; and if it were not, the plaintiffs foreshadowed seeking an order pursuant to (Cth) Corporations Act 2001, s 254E, validating the 3 September share issue). At that hearing, the plaintiffs ultimately pressed only for the declaration in relation to the 3 September share issue, and not in relation to future capital raising.

The corporate constitution

4LBH adopted its constitution by special resolution on 8 August 2011. By clause 100, the replaceable rules do not apply to the company, except to the extent they are expressly contained in the constitution.

5Clause 3 of the constitution provides that the directors may cause the company to issue and allot securities (defined in the dictionary in clause 98 to mean "a share, an option in relation to a share and any other form or type of security which is capable of being converted into a share"), with such preferred, deferred or other special rights referred to in clause 3.1 "or otherwise" to any person, whether a member or not, in such proportions or numbers (clause 3.2), and for such consideration (clause 3.3), as the directors determine, but not so as to directly or indirectly vary the rights or obligations of an existing class of shares unless clause 6 is satisfied.

6Clause 6 provides as follows:

6. Variation

Unless a class of shares is issued on other terms, its rights and obligations may be and are varied only if the variation is approved:

6.1 in writing by holder of 75% of the shares of that class eligible to vote; or

6.2 by a Class Special Resolution.

7Clause 68.1 provides that the business of the company shall be managed by or under the direction of the directors. Clause 68.2 provides that the directors may exercise all the powers of the company, except any powers that the Act or the constitution reserves to a general meeting. Clause 68.3 provides that for the purposes of clause 68.2, a power is reserved to a general meeting if it is expressly stated that a general meeting may exercise it. Clause 68.4 provides:

Without limiting clause 68.1, the directors may issue shares, borrow money, issue debentures, charge any property or business of the company, give any other security for a debt, liability or obligation of the company or of any other person.

The Shareholders' agreement

8The shareholders' agreement was executed by the company (by Mr Koulis) and three shareholders (Pier Blue, Cody Investments, and Ms Burke) on 13 December 2012. Another three shareholders (Messrs Ochojski, McCreath, and Leeb-Du Toit) executed it on 14 December; another (Solitaire Capital) on 17 December; and the last (Mr St John) on 4 February 2013. Together, these constituted all the shareholders of LBH, both as at the time of execution of the agreement, and as at the time of the 3 September share issue.

9Clause 4.6 (General management) provides, by subclause 4.6(a) that, subject to clause 4.6(b) the board will be responsible for the overall direction and control of the management of the company and the formulation of the policies to be applied in the conduct of the business. Subclause 4.6(b) provides:

A decision in favour on [sic] any of the matters referred to in Schedule C must be made by Shareholders.

10Clause 5.1 (Resolutions requiring approval by special majority or unanimous resolution) provides, by subclause 5.1(a) that, subject to clause 5.1(b), any decision of the board on a matter referred to in schedule B must be made by special majority resolution (defined in clause 1.1 to mean, in the case of a vote or resolution of the directors, a vote or resolution approved by the majority by number of directors (or the director's alternate) present and entitled to vote on the resolution. Subclause 5.1(b) provides:

Notwithstanding Clause 5.1(a), any decision on a matter referred to in Schedule C must be approved by a simple majority of Shareholders.

11The matters referred to in schedule C relevantly include:

(h) any reconstruction of the share capital of the Company;

(i) the issue of any shares or other securities of the Company or the grant of rights over any shares or other securities of the company, including but not limited to the grant of any option to subscribe to new Shares, other than pursuant to this Agreement;

...

12Clause 7 (Funding of Company) makes provision, by clause 7.1, with respect to raising further capital. By subclause 7.1(a), the parties - being all the shareholders, and the company - acknowledged "that the Company may wish to acquire further capital for the achievement of its business objectives and that such funding may (if it takes the form of a [sic] issue of Shares or securities convertible into Shares), dilute the current Shareholdings of the Shareholders". Subclause 7.1(d) provides:

The company will enter into a binding commitment with Bligh Capital (or such other financier as agreed by the Board) appointing it to raise at least $1 million in capital for the company by 1 April 2013 (Initial Fundraising).

13Subclause 7.1(e) provides:

Following the Initial Fundraising, the company will proceed to raise additional capital of at least $5 million in equity or a combination of debt and equity in 2013. The effect of this capital raising on the shareholdings will depend on the amount raised and conditions on which it is made available. Schedule E of this agreement contains a final shareholding model as a guide only, following the Initial Fundraising and subsequent fundraising.

14Clause 11 (Shareholders' meetings) provides:

(a) Each Shareholder is entitled to attend and vote at all Shareholders' meetings of the Company.

(b) A Shareholders' meeting of the Company must be held at least once in each Financial Year unless the Shareholders agree otherwise.

(c) A meeting of Shareholders of the Company may be convened by any Director of the Company or the Secretary of the Company giving to the Shareholders not less than 21 days notice (unless otherwise agreed).

(d) Each notice must set out the nature of the business proposed for discussions and a draft of any proposed motion to be put at the meeting.

(e) The quorum is two Shareholders and, unless the Shareholders all agree in writing (including by e-mail) that a meeting may proceed with a different quorum.

(f) No item of business may be transacted at a meeting of the Shareholders unless a quorum is present when the meeting proceeds to consider it.

(g) Any decision by Shareholders on the matters set out in Schedule C will be by a simple majority decision.

15Clause 18.1 (Conflict with Constitution) provides

Where there is any conflict between the provisions of this Agreement and the Constitution of the Company, the provisions of this Agreement prevail and upon a written request being referred from any party, all parties must cause the Constitution of the Company to be amended in order to remove the conflict.

16Though I expressed some doubt that a shareholders' agreement could control the constitution in this way, all parties appeared to accept that it could and the case proceeded on that basis, presumably on the footing that the shareholders' agreement - which was executed as a deed, was intended to be legally binding and, like the constitution, was a contract between the company and its members - could be enforced by an order that the parties make any requisite amendment to the constitution to give effect to the shareholders' agreement. However, it seems to me that, so far as possible, the shareholders' agreement should be read together with the constitution, so as to be consistent with it.

17On 8 January 2013, Mr Koulis executed a circular resolution of the LBH board which recorded that the directors had resolved and agreed, inter alia, that:

2. The Company intends to raise capital and will engage Bligh Capital, as the corporate advisor on the raising on terms agreed by the Board and attached as Annexure 2. The intention is that this raising be completed by April 2013.

18On 19 April 2013, Mr Koulis signed an acknowledgement that he had agreed (as a director of Pier Blue) to the issue of securities and/or shares to an incoming investor and any resultant reconstruction of the share capital of the company "consistent with the Indicative Term Sheet" attached, and that the Board may finalise the detailed terms of any tranche 1 proposal without further consent of the shareholders provided that the terms were consistent with the Indicative Term Sheet. The Indicative Term Sheet contemplated an issue of redeemable notes, convertible into options to acquire shares. By letter from his then solicitors, Tress Cox, dated 31 July 2013, Mr Koulis purported to withdraw that consent. At the LBH board meeting on 29 August 2013, Mr Koulis expressed disagreement with legal advice obtained by the Chairman that the board had authority from all existing shareholders to proceed with the capital raising and that the shareholders had already accepted the terms of the capital raising in the shareholders' agreement. He dissented from the majority resolution to proceed with the share issue.

The issues

19Ultimately, the bases on which the validity of the 3 September share issue was disputed - apart from the equitable improper purpose [cf Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285; (1987) 70 ALR 251; (1987) 61 ALJR 216; (1987) 11 ACLR 715; (1987) 5 ACLC 421; [1987] HCA 11] and oppression grounds not presently for determination - were two-fold, namely (1) non-compliance with clause 6.1 of the constitution, and (2) non-compliance with clauses 4.6(b) and 5.1(b) of the shareholders' agreement.

20For the defendants, it was submitted that clause 6.1 of the constitution - the effect of which is to require 75% shareholder approval, in writing or at a shareholders meeting, of a direct or indict variation of the rights or obligations of an existing class of shares - remained applicable, and was not superseded by clauses 4.6(b) and 5.1(b) of the shareholders' agreement, as it did not cover the same ground as item (i) of Schedule C to the shareholders' agreement; and that it had not been complied with in respect of the 3 September share issue, which at least indirectly varied the rights of the ordinary shareholders.

21The plaintiffs submitted that in referring to "any" shares, paragraph (i) of Schedule C necessarily included preference shares, and that so read, clause 5.1(b) of the shareholders agreement and clause 6 of the constitution covered the same topics - relevantly, the issuing of shares, including preference shares, with the consequence that, pursuant to clause 18.1 of the shareholders agreement, the former prevailed. While I accept that the reference in item (i) of Schedule C to "any" shares includes preference shares, I do not agree that that supercedes clause 6 of the constitution. The role of clause 5.1(b) is to reserve to shareholders the power, inter alia, to issue shares. Its effect is that the shareholders, rather than the directors, have the power to resolve to issue shares, and to do so by simple majority. However, the role of clause 6 is rather different, namely to protect the interests of the holders of specific classes of shares, when a share issue is contemplated. Its effect, in the light of clause 5.1(b), is that if the shareholders propose to make a share issue which affects class rights, they can do so only with the concurrence of 75% of the class, in accordance with clause 6. Accordingly, clauses 4.6(b) and 5.1(b) of the shareholders' agreement and item (i) of Schedule C do not supplant clause 6 of the constitution. Their effect is to remove from the directors and reserve to shareholders the power to issue shares; but not to remove the prohibition on varying class rights without the approval in writing, or a resolution, of holders of 75% of the shares of the affected class.

22The ordinary shares were an existing class of shares. The rights attached to them would be varied, at least indirectly, by the issue of preference shares which would, at least in some respects, rank ahead of them. Accordingly, the concurrence of 75% of the ordinary shareholders was required.

23In any event, it was uncontroversial that the 3 September share issue involved "the issue of ... shares ... of the company" within paragraph (i) of Schedule C, if not also a "reconstruction of the share capital of the company" within paragraph (h). Clause 11 of the shareholders' agreement provided the procedure for the holding of shareholders' meetings in order to enable decisions on matters set out in Schedule C to be made. There has been no approval by a simple majority of shareholders at a shareholders' meeting, in conformity with clause 4.6(b) and 5.1(b) of the shareholders' agreement (let alone of 75% in conformity with clause 6 of the constitution). The contrary was not suggested.

24However, the plaintiffs contend that clause 7.1(d) of the shareholders' agreement, together with the confirmation of 8 January 2013 and the consent of 19 April 2013, manifests the unanimous agreement and approval of the shareholders for LBH to make the 3 September share issue, dispensing with what would otherwise be the requirement for shareholder approval pursuant to clauses 4.6(b) and 5.1(d) and paragraph (i) of Schedule C of the shareholders' agreement (and presumably also clause 6 of the constitution) [cf Re Duomatic Ltd [1969] 2 Ch 365; MYT Engineering Pty Ltd v Mulcon Pty Ltd (1999) 195 CLR 636, 649 [24]].

25In my judgment, however, clause 7.1(d) does not amount to an agreement to make the 3 September share issue. By clause 7.1(d), the shareholders agreed that the company would enter into a binding commitment with Bligh Capital, or another financier determined by the board, appointing it to raise at least $1 million in capital. However, an agreement to enter into a commitment with a financier or underwriter is not the same as an agreement to issue the shares in question. Moreover, clause 7.1(d) was silent as to the form of the capital raising, and in particular whether it would be loan capital or share capital. Indeed, the possibility that a capital raising might be by way of debt rather than equity is expressly contemplated in subclauses 7.1(a) and (e). Further, the indicative term sheet, to which Mr Koulis at one point consented, contemplated loan capital, though providing that it might be converted into shares. In my view it cannot be said that by clause 7.1(d) the shareholders unanimously assented to the 3 September share issue, in a manner that dispensed with the requirement to comply with clauses 4.6(b) and 5.1(b). Indeed, it cannot be said that they thereby assented to a share issue - as distinct from retaining a financier to raise capital by some means or another - at all.

26It follows that I am unable to accept the plaintiffs' submission that upon the proper construction of the constitution and the shareholders' agreement, the board had power and authority to make the 3 September share issue. It follows that the plaintiffs are not entitled to the relief claimed in paragraph 1(a) of the summons.

27The plaintiffs invoked Corporations Act, s 124(1)(a), which provides that a company has all the powers of a body corporate, including the power to issue shares; s 254A(1), which provides that a company's power to issue shares under s 124 includes the power to issue preference shares; and s 125, which provides that a company's constitution may contain an express restriction or prohibition on the company's exercise of any of its powers, but that "the exercise of a power by the company is not invalid merely because it is contrary to an express restriction or prohibition in the company's constitution". However, the fact that the company is empowered to issue shares, including preference shares, does not mean that there was a valid and effective exercise of those powers in this case, having regard to the provisions of the constitution and the shareholders agreement. To declare in the abstract that there was power to make the 3 September share issue, without adverting to whether the power was exercised validly in the instant case, would be pointless, and potentially mischievous.

28Moreover, the declaration sought, if made, would quell only part of the dispute. Were the plaintiffs to succeed, the declaration would resolve the question of legal power and authority to issue the shares, but would leave open the application to set aside the issue on the ground that it was not made bona fide for the purposes of the company, or was oppressive. In those circumstances, the declaration if made would have the potential to be misleading, given that it would apparently declare the share issue valid, when ultimately its validity would still be subject to the applications to impugn it on equitable grounds. These are additional reasons why it would be inappropriate to make any such declaration as sought by the plaintiffs.

29I will hear the parties as to what if any orders should now be made consequent on that conclusion, and what directions should be made for the further conduct of the matter.

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Decision last updated: 17 February 2014