Supreme Court New South Wales

• Medium Neutral Citation: J & J Computing Services Pty Ltd v AKT Evolution Pty Ltd [2014] NSWSC 1597
• Hearing dates: 11 November 2014
• Decision date: 11 November 2014
• Jurisdiction: Equity Division - Duty List
• Before: Stevenson J

Decision

Application for interlocutory relief dismissed

• Catchwords: CONTRACT - interlocutory application - shareholders agreement - proper construction - whether fourth and fifth defendants are restrained from selling their company shares
• Category: Interlocutory applications
• Parties: J & J Computing Services Pty Ltd (Plaintiff); AKT Evolution Pty Ltd (First Defendant); AKT International Pty Ltd (Second Defendant); Carlo Mastroianni (Third Defendant); CEG Investments Pty Ltd (Fourth Defendant); Mastro Group Pty Ltd (Fifth Defendant)
• Representation: Counsel: J Jobson (Plaintiff); M J Heath (Third, Fourth and Fifth Defendants); Solicitors: Madison Marcus Law Firm (Plaintiff); MWA Lawyers (Third, Fourth and Fifth Defendants)
• File Number(s): SC 2014/318969

EX TEMPORE Judgment (REVISED)

1 This matter comes before me as Duty Judge.

2 The plaintiff, J & J Computing, holds 3 of the 100 issued shares in the first defendant ("the Company"). The other 97 shares in the Company are held by the second defendant as to 58 shares, the fourth defendant as to 36 shares, and the fifth defendant as to three shares.

3 J & J Computing claims that, for various reasons, it is entitled to six shares in the Company. No relief is sought from me today about that contention which, it is agreed, must await final determination of the proceedings.

4 J & J today seeks interlocutory relief to restrain the fourth and fifth defendants from selling their shares in the Company to a third party.

5 J & J's case turns on its contentions as to the proper construction of a Shareholders Agreement ("the Agreement") made between the parties on 22 November 2011.

6 I raised with the parties the possibility of having that question of construction determined, finally, as a separate question. However, I also indicated that I was prepared to deal with the matter immediately. It was agreed I should take that course.

7 Clause 2 of that Agreement sets out the "objectives" of the shareholders in the Company to include:

"(a) to conduct a joint venture in the form of the Company;

(b) to use their respective business skills, know-how and experience to conduct the Business; [and]

...

(f) to do all such things as are incidental or conducive to the attainment of the above objectives."

8 Clause 7 deals with Share Transfers and is in the following terms:

"7.1 Notwithstanding anything contained in the Constitution the right to transfer Shares is subject to the following provisions and restrictions, namely:

(a) A Party must not dispose or transfer the whole or any portion of its Shares within 5 years from the date of this Deed, unless permitted by this agreement;

(b) Any Shareholder wishing to dispose of Shares ("the Transferor") must give written notice ("a Transfer Notice") to the Company that the Shareholder wishes to dispose of such Shares.

(c) The consideration for a share transfer will be the value of the share as agreed between the parties, or failing agreement, as determined by an accountant or valuer(s) or other appropriately qualified expert with at least five years experience in valuing companies and assets of the kind held by the Company to value the Shares, or in the case where a third party (Third Party) has made an offer to purchase the Shares (Third Party Offer) then the consideration agreed to be paid by the Third Party.

(d) As soon as possible after receiving a Transfer Notice the Company must offer the shares referred to in the Transfer Notice for sale in writing to the Shareholders (other than the Transferor) at the Prescribed Price pro rata to their then respective shareholdings. Shareholders have 21 days in which to accept the offer in writing to the Company. No response will deem the offer as rejected.

(e) If the whole of the Shares offered as set out above have been agreed to be purchased or if less than the whole of such Shares have been agreed to be purchased, the members who have accepted the offer are bound to purchase the Shares accepted by them and the Transferor is bound upon payment of the Prescribed Price per Share to transfer those Shares to such Shareholders respectively.

(f) If the offer of Shares made pursuant to Clause 7 does not result in the Shareholders or some or one of them agreeing to purchase all the Shares mentioned in the Transfer Notice the Transferor may at any time within 4 months after receiving the notice transfer those Shares which the Shareholders have not agreed to purchase to any person on a bona fide cash sale of such Shares at any price not less than the Prescribed Price. Written evidence by way of documents and statutory declaration must be provided to the other shareholders.

(g) Prior to any transfer being effected pursuant to this Clause the transferee and the Shareholders (other than the Transferor in the case of the Transferor selling all the Transferor's shares) must enter into an agreement in accordance with Clause 13.12.

(h) A transfer or purported transfer of Shares which contravenes the provisions of this Clause is void.

(i) The Board may decline to register a transfer of Shares on which the Company has a lien but otherwise and subject to this Clause 7 is bound to register a transfer of Shares made in accordance with the provisions of this Clause.

(j) The provisions of Clause 7 do not apply to a transfer for a change of trustee or by a trustee to a beneficiary who is the spouse or child of the person who has Effective Control of the trustee, provided such transfer has the prior written consent of the Board, which will not be unreasonably withheld.

(k) Any change in the Effective Control of any Shareholder is deemed to be the giving of a Transfer Notice by that member to the Company upon the day upon which such change comes to the attention of the Board, and the Prescribed Price in respect of such Shares is the value of the Shares as determined by the Board, the decision of which is conclusive."

9 On 26 September 2014 the fourth and fifth defendants gave notice to the Company that they wished to dispose of their shares in the Company. On the same day, the Company gave J & J "an opportunity" to purchase those shares within 21 days. J & J has not taken up that "opportunity" and on 29 October 2014 (that is after the expiration of the 21 day period) commenced these proceedings.

10 Mr Jobson appears for the plaintiff. His submissions concerning cl 7 of the Agreement are as follows:

"5. The Shareholder's Agreement has no sunset clause but the proper construction of the Agreement is that Clause 7.1(a) is to operate with the first five years of the Deed.

6. A reasonable interpretation of the reasoning behind Clause 7.1(a) is that the joint venture should operate without the change of the joint venturers for the first five years to enable the business to be commenced and operated so as to achieve long term returns to the shareholders as set out in the Objectives.

7. After five years there is a procedure to allow for the disposal or transfer of shares.

8. It is submitted that as set out in Clause 7.1(b) to (g) such provisions come into effect after the period of time as set out in Clause 7.1(a) and it is noted that nowhere else in the Deed is there permission to transfer or dispose of shares prior to five years from the commencement of the Deed." (emphasis in original)

11 I am not able to accept Mr Jobson's submissions.

12 The chapeau to cl 7 makes clear there is a "right" for shareholders to transfer the shares. That right is, presumably, to be found in the Company's Constitution, although that document is not before me.

13 That right is expressed to be subject of the "following provisions and restrictions".

14 Clause 7.1(a) then provides that a party must not dispose of its shares within five years of the date of the Agreement "unless permitted by this agreement".

15 It is common ground, and indeed Mr Jobson asserts, that there is no provision in the Agreement dealing with share transfers other than cl 7 itself. Accordingly, such "permission" as is provided by the Agreement is to be found in the cl 7.1.

16 Clauses 7.1(b) to (g) provide a procedure that the shareholders in the Company must follow if, during the first five years of the Agreement (that is until 22 November 2016), they wish to dispose of their shares. In effect those provisions confer on the remaining shareholders a right of first refusal.

17 I do not accept the submission that the provisions of cll 7.1(b) to (g) only come into effect after the five year period in cl 7.1(a) has expired.

18 Clause 7.1(b) provides that a shareholder who wishes to transfer its shares must give a "Transfer Notice" to the Company.

19 Clause 7.1(c) makes provision for the consideration that must be shown for the shares in the Transfer Notice.

20 Clause 7.1(d) provides the Company, on receipt of a "Transfer Notice" must offer the shares in the Transfer Notice to the other shareholders; in effect a right of first refusal.

21 Clause 7.1(f) then provides that if the other shareholders do not exercise their right of first refusal, the shareholder that gave the notice offer under cl 7.1(b) is entitled to sell its shares "to any person on a bona fide cash" basis. It also provides that that must occur at any time within four months after receiving "the notice". It is not clear to me what "notice" is referred to in that part of the clause. However, that question does not arise before me today.

22 Thus, in my opinion, the permission contemplated by cl 7.1(a) is that referred to in cl 7.1(f).

23 The fourth and fifth defendants have followed the procedure contemplated by cl 7.1. They have given J & J Computing a right of first refusal to purchase their shares in the Company. J & J has not taken up that right.

24 It follows that the fourth and fifth defendants are now free to sell their shares provided they comply with the remaining requirements of the Agreement (that is cll 7.1(f) and 7.1(g)).

25 For those reasons J & J Computing's application for injunctive relief must fail.

26 I make the following orders:

(1) The plaintiff's application for interlocutory relief is dismissed.

(2) The plaintiff is to pay the costs of the third, fourth and fifth defendants' costs of and incidental to the interim application.

(3) I release the third, fourth and fifth defendants from the undertaking provided to the Court on 31 October 2014.

(4) I direct the plaintiff file and serve its Statement of Claim by 24 November 2014.

(5) The proceedings will be listed for directions before the Registrar in Equity on 27 November 2014.

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Decision last updated: 12 November 2014