D G Brims & Sons Pty Ltd, Re [1995] QSC 53 (1995) 16 ACJR 559

~ ~ ~)5·· . · S c_ 9 5 ( O5 S A.- State Reporting Bureau TRANSCRIPT OF PROCEEDINGS (Copyright in this transcript is vested in the Crown. Copies thereof must not ·be made or sold without the written authority of the Director, State Reporting Bu:-eau.) SUPREME COURT OF QUEENSLAND CIVIL JURISDICTION BYRNE J No 655 of 1993 IN THE MATTER OF THE CORPORATIONS LAW IN THE MATTER OF D G BRIMS AND SONS PTY LTD (ACN 009 658 735) BRISBANE .. DATE 05/ 04/95 JUDGMENT 1 REVi2':.:0 CO?IES ISSUED State Reporting Bureau Date J~J u JqS 4th Floor, The Law Courts, George Street, Brisbane, Q. 4000 Telephone: (07) 227 4360. Facsimile: (07) 227 5532 -- 1 of 65 -- 050495 (Byrne J) HIS HONOUR There will be a declaration to the effect that Mr Jolly's determination of a fair price of $22.14 is not binding. The counterclaim is dismissed. The applicants' shares should be purchased. I fix the price at $21.50 per share. 10 I publish my reasons. I will hear submissions as to the forms of order. 2 JUDGMENT 20 30 40 50 60 -- 2 of 65 -- IN THE SUPREME COURT OF QUEENSLAND Brisbane Before Justice Byrne [Re: Brims] No. 655 of 1993 IN THE MATTER of the Corporations Law - and - IN 1llE MATrER of D.G. BRIMS AND SONS PI'Y LTD (A.C.N. 009 658 735) REASONS FOR JUDGMENT - BYRNE J. Judgment delivered: 05/04/1995 CATCHWORDS: CORPORATION - S.260 Corporations Law - whether conduct unfair - whether minority discount appropriate. Counsel: Mr R.N. Chesterman Q.C. and Ms E.M. O'Reilly (for the applicants) Mr C.E.K. Hampson Q.C. and Mrs D.A. Mullins (for the respondents) Solicitors: Feez Ruthning (for the applicants) Lippiatt & Co (for the respondents) Hearing Date(s): 7, 8, 9, 10, 11, 14, 15, 16, 17, 18, 21, 22, 23, 29, 30, November, 2 December 1994, 3 April 1995. -- 3 of 65 -- IN THE SUPREME COURT OF QUEENSLAND Brisbane Before Justice Byrne [Re: Brims] No. 655 of 1993 IN THE MATTER of the Corporations Law - and - IN THE MATTER of D.G. BRIMS AND SONS PrY LTD (A.C.N. 009 658 735) REASONS FOR JUDGMENT - BYRNE J. Judgment delivered : 05/04/1995 This sad case concerns a company which for decades has been a successful manufacturer of timber products. The company is closely held. All but two! of its fewer than 30 shareholders are descendants, or spouses of descendants, of Donald G. Brims. Donald had three sons: Francis, Marcus and William. Francis died without children. Marcus had six children: a son, John, and five daughters. Gloria Price and her sister Ethna are William's only children. 1 Mr de Nooy, who served as a director and accountant for more than 20 years, and his wife. Together they own less than 1% of the shares. -- 4 of 65 -- 2 Compulsory share purchase sought Mrs Price became a shareholder in 1948. She holds 37,792 shares. She controls 29,816 more as her sister's attorney and as the executrix of her parents' estates. Her husband, Ray, became a shareholder in 1968.2 He has 2,528 shares. Pauline Baptist and Michael Price are children of Mr and Mrs Price. Pauline, who holds 2,000 shares, became a shareholder in 1981. Michael became a shareholder in 1985 and now has 2,151 shares. They are the applicants and together they control 31.12% of the 238,684 ordinary issued shares. The other shareholders are respondents. John Brims has 65,118 shares; his son, David, holds 32,377 - between them, slightly more than 40% of the issued capital. The holdings of other respondents are smaller, ranging from 200 to 12,996 shares. The applicants, alleging oppressive or unfair conduct, seek orders for the purchase of their shares. The dissatisfaction occasioning this litigation cannot be assessed without appreciating the importance of the company to the lives of the Price family. Nor can the applicants' complaints be approached without regard to the temperaments and capabilities of members of the extended Brims family. Unfortunately, personal attributes cannot be ignored. But it is convenient to begin with history. Earlier years A feature in a Brisbane newspaper published in 1971 traces the origins of the company to a sawmill in Ingham which Donald established last century. Next came a factory at Mareeba built to satisfy demand for building products. Donald took his sons into his business there. The family came to Brisbane in about 1912. A joinery was built at Milton and soon, says the article, "the Brims enterprise became one of the Australian pioneers of the plywood industry". Plywood was in demand for aircraft construction during the Great 2 When his wife transferred to him the 300 shares needed as his share qualification for appointment to the Board of Directors. -- 5 of 65 -- 3 War. The business prospered and the company was incorporated in 1915 to acquire it. Donald and his sons were the first directors. By then the business included a complementary venture: the manufacture of glues used in timber products. Demand outstripped the capacity of the Milton factory. In 1928 the company purchased a large site at Y eerongpilly used for sawmilling. The mill was converted into a plywood factory. The business was relocated there. The site has been occupied by the company ever since. Plywood products constituted the core of the business throughout the 30s, a decade during which the three brothers maintained their involvement. Francis worked mainly as a mill hand and machine operator. William was the maintenance engineer. Donald retired as Managing Director in 1934 to be succeeded by Marcus 3 who, like his brothers, was then in his 40s. Adhesives continued to be made.4 By late 1937 Donald had died and his three sons were the only, and equal, shareholders in the company. The Second World War was a propitious time for manufacturers of plywood and related adhesives: products needed for aircraft manufacture and repair. In 1944, however, the plywood factory was destroyed by fire. It was decided to rebuild, and the business eventually returned to prosperity. In 1945, William's daughter, Gloria, then in her late teens, started in the office. She worked as a clerk, mainly with the ledgers. Her work brought Resca Glues to her notice, and she learned about the 4-One-Box Company, a firm 3 Marcus's son, John, is now the Managing Director. John's son, David, is the Assistant Managing Director. 4 Another corporation, later restyled as Resca Glues Pty Ltd, was created to conduct that part of the business. -- 6 of 65 -- 4 her father and uncles operated. In the 1940s Ray Price5 was also working at "the mill", as Mrs Price refers to the site. In 1950 he left to join the RAAF. Post-war By 1950 Francis had ceased work, although he remained a director. Francis still held one-third of the company's shares; and by then Marcus and his children between them held another one-third, while William and his children owned the rest. In the 50s, William continued to work full-time. So did Marcus, who was dominant in setting and maintaining directions. In 1950 Marcus and William acquired 50% of the shares in Cabinet Timbers Pty Ltd, the Victorian distributor of the company's products. Francis's withdrawal from active involvement with the factory probably explains6 why he did not take shares in the Victorian distributor. Francis's retirement and ill-health7 for William shifted the burden to others. In 1953 John Brims abandoned tertiary studies in industrial chemistry to work full-time in the business. In the mid-50s the future was reviewed against a background where the long-term supply of raw materials for plywood was not assured. Marcus and John thought that the business should expand. They envisaged manufacturing particle board as well as plywood. Their ideas included installing a mill at Gallangowan and major expenditure at Yeerongpilly 5 Mr Price has a family connection with the business through his father, who began work with the company in 1918 and was working for it 50 years later. 6 Whatever the reason, Francis's continuing occasional association with Yeerongpilly, and the absence of any attempt by Marcus or William to conceal the acquisition, suggest that Francis probably knew that his brothers had taken a substantial holding in the Victorian distributor. In the 50s Francis visited the site. Minutes of meetings of shareholders of Resca Glues show his having attended in 1952 and 1954. Records disclose his attending a director's meeting in 1960. No doubt he had informal discussions with his brothers about the company at times. 7 In 1953 William contracted tuberculosis and was away from work for quite a while. -- 7 of 65 -- 5 to facilitate the particle board venture. These ambitious, perhaps risky. proposals were discussed with William in late 1954, by which time he had returned to work. William was not enthusiastic. Marcus and John, however, were convinced that the viability of the business in the long term depended on transforming its operations. John became a director in 1955 and that year travelled overseas with his father to investigate particle board manufacture. On returning, Marcus and John set about building the mill: a two year project. While they were away. William oversaw operations. Meanwhile Gloria continued with her clerical work in the small office. In 1959 Mr Price recommenced employment. He married Gloria in 1960 shortly after becoming a foreman. The early 60s saw the installation of the particle board manufacturing section: a major undertaking involving considerable expenditure and effort. By early 1963 most of the reconstruction was complete and the company was on the point of producing veneered particle board. Other initiatives were taken. Through insights gained from visits to plants in England and Germany, the directors hoped for increased efficiencies in plywood manufacturing. The impending particle board venture also prompted reconsideration of business opportunities. The company's products were not distributed in Queensland in 1960. In those days the bulk of the plywood was sold to Cabinet Timbers for distribution in Victoria, although there were outlets in other States. The particle board plant was automatic, designed to operate around the clock. To maximise its advantages, the company needed to sell considerably more of the new product than was likely to be achieved through the existing distribution network. John Brims proposed that sales be increased by expanding into Queensland. The share structure of the Queensland distributor has assumed major significance, essentially because Marcus and John became shareholders but William did not. -- 8 of 65 -- 6 A distributor in Queensland The particle board plant posed several problems and there was much discussion among the directors about methods. The Board considered, and rejected, the idea that a new company be created to make the particle board. 8 Discussion of this issue is noted in Board minutes. However, the records do not mention the new sales outlet. Of the people involved in setting up the local distributor - mainly Marcus, the accountant, the solicitor, and John Brims - only John is still alive. Fortunately, his account of the decisions seems reliable. In 1961 the sales performance of Cabinet Timbers was considered satisfactory. Marcus and William still owned 50% of the shares in Cabinet Timbers. The remainder were held equally by the two Victorian directors who ran its operations. The success of Cabinet Timbers was attributed to this corporate structure and the incentives inherent in it for the working directors to conduct the distributorship profitably. When Marcus and John considered establishing a Queensland distributor, they were attracted to the Cabinet Timbers model. It was decided that half the shares in the local distributor would be allotted to those who were to manage it. In September 1961, more than a year before the particle board plant commenced production, the company employed Mr William Massie as a salesman. For the next two years Massie set about selling the company's products locally: initially plywood; from 1963, particle board. Massie had been engaged in the expectation that a company would act as the Queensland distributor. John Brims considered that his friend, Mr Graham Raymond, should join Massie to operate the business. Adopting the Cabinet Timbers model, when Brims 8 The directors decided it would be cheaper to use the company and that doing so would avoid difficulties associated with according "security of tenure" to another manufacturer. -- 9 of 65 -- 7 Plywood Sales Pty Ltd ("BPS")9 was incorporated it had been decided that its working directors would subscribe for 50% of the issued capital. And so Massie and Raymond each took 25% of the shares in BPS. Marcus took 25%. John took the rest - an interest equivalent to William• s shareholding in Cabinet Timbers. The applicants make much of the fact that neither William nor the company received shares in BPS. But this outcome probably accords with attitudes expressed by William to Marcus when decisions about the structure of BPS were being made. There were no secrets about BPS and the evidence. especially that of John Brims, shows that it is highly likely that William knew of the arrangements proposed for BPS. John heard Marcus discuss the Queensland distributor with William; and William, who was not a young or a well man, 10 was reluctant, as John Brims recalls it, "to become involved in new activities". There was no reason why William would not have subscribed for shares had he wished to do so. The most probable explanation for his not acquiring a stake in BPS is that he did not want to do so. Subsequent events - the acquisition of substantial shareholdings in the New South Wales distributor in 1966 and in the new Victorian distributor in 1992 - make it a little surprising that the Board did not formally discuss an acquisition by the company of shares in its Queensland distributor. Yet no attention seems to have been given to that possibility at a Board meeting. The company was not a shareholder in Cabinet Timbers. Perhaps the Cabinet Timbers model was uncritically adopted in that respect. Other explanations are available. 9 Brims Plywood Sales sufficiently desmbed its function at fll"St. The name "Brims Plywood Sales" w~ used to advertise Massie's sales activities at least six months before BPS was incorporated. BPS has since changed its name to Brims Distributors (Qld) Pty Ltd. 10 In 1962 and 1963 William attended regularly. On some days he worked a little. He also went to Board meetings for the company and Resca Glues. -- 10 of 65 -- 8 As a result of discussions with William, who did not want shares in BPS for himself, Marcus may not have seen any attraction in agitating at a Board meeting the idea that the company subscribe for shares. Marcus and John realised that William was hesitant about the new directions and not keen to participate in them. Presumably William agreed to the company's aiding BPS to the extent of guaranteeing its obligations to its bank; but the evidence of John Brims, William's poor health and advancing years, and his omission ever to express a concern about BPS, indicate that William would not have been anxious to commit the company to the ongoing financial support of BPS which a 50% shareholding may have appeared to imply or require. William would not, it seems, have wished the company to make a substantial investment in BPS. 11 Perhaps other factors were influential. The directors did not want the company to distribute its own products. That resolved, the Board may not have turned to consider whether the company should invest in its distributor. Another, and quite likely, explanation is that the directors thought that the company's finances were not strong enough to support the fledgling distributor: something to which, as I have said, the Board might have felt committed had the company subscribed for a major shareholding. 12 11 This suggests that if the company had formally been presented with the opportunity to take a major shareholding, it would have been reluctant to do so in deference to William's attitude. Francis must have known of the shareholdings in Cabinet Timbers. The preferable inference is that he would not have objected to the acquisition by Marcus and John of their interest in BPS had he known of it. 12 In the early 60s the company was at its self-imposed limits financially. The company had a long- standing policy of not borrowing. Major expense had been incurred in installing the particle board manufacturing section. This initiative was funded mainly through retained funds, undrawn dividends and wages. No dividends were declared in the two and a half years ending 30 June 1%0. In the 1961 financial year, dividends were paid from tax-free reserves to shareholders as at 30 June 1940. A dividend of 7% was declared out of profits in the 1%1 year. It was a-edited to shareholders' accounts. A dividend was declared for the 1962 year. Again, it was not paid. Irredeemable debentures were issued to shareholders who applied for them in the 1962 year. No dividend was declared foe 1963. -- 11 of 65 -- 9 Later years The construction of the particle board manufacturing section and the development of Queensland sales coincided with other material events. In 1962 Mrs Price ceased work. She was not to have an involvement with the company for 25 years. In August 1963, a month before BPS was incorporated, her father suffered another bout of tuberculosis and was admitted to hospital. Thereafter he played no significant part in the company. 13 but he remained a director until his death. BPS made progress in selling the veneered particle board, although sales growth in early years was only satisfactory. Despite extended credit terms from the company and financial assistance from BPS's shareholders, 14 in 1965 it was necessary to increase the overdraft facility. Again, the company and BPS's four directors provided a guarantee to BPS' s bank. In 1966 calls of 40 cents per share were made. In 1966 the main distributor of products in the Sydney area suffered a setback with the death of its manager and his son. The manager's daughter offered J E Dutton Pty Ltd ("Dutton") to John and Marcus. As things eventuated, the company bought the shares 15 in Dutton. 16 The shares were acquired with the intention of implementing the Cabinet Timbers model by giving those who were to manage the enterprise an incentive to performance; and this came to pass. But the Cabinet Timbers model did not suggest a role for the company as an investor. No record shows why on this occasion, and for the first time in its more than 13 After leaving hoopital, William visited the factory until the late 60s. He usually discu$ed matters with Marcus, with whom he was mostly on good teems. William saw the building where the sales outlet was headquartered. It carried prominent signs and other indications that BPS was operating inside. BPS operated from Yeerongpilly until 1992. 14 By, for example, not drawing declared dividends. 15 Except for two shares: one each foe Marcus and John. 16 Now Brims Distributors (NSW) Pty Ltd. -- 12 of 65 -- 10 50 year history, the company invested in a distributor. No doubt Marcus made the decision. Explaining why the Cabinet Timbers model was departed from in this respect only three years after it had been implemented in BPS, John Brims says: "Brims NSW came about through the unexpected opportunity to acquire an existing distributor at a reasonable price instead of starting a distributor there 'from scratch'. Also, by mid 1966 the company was financially in a much sounder position (in no small way caused by the additional purchases through [BPS]) to purchase Brims NSW as a going concern." The acquisition shows that by 1966 the company regarded a substantial shareholding in a distributor as an appropriate investment. Yet nothing was done to transfer to the company shares Marcus, William and John held in Cabinet Timbers and BPS. Francis died in 1967 after more than 40 years as a director. His death created a vacancy on the Board which was filled by Allan Brown, 17 who attended to what John Brims describes as "the maintenance side of things". Twenty-seven years after his appointment, Mr Brown remains a director. 18 In early 1968 William Brims made another will. 19 William's declining health persuaded the Board to offer Ray Price additional responsibilities. In March 1968 he was promoted to production manager and appointed as a director. When appointed to the Board, Mr Price was told by Marcus "you'll be representing Gloria". Until then, William had been seen by his immediate family, and by the Board and other shareholders, as representing the interests of his wife and daughters, all of whom held small parcels of shares. After Mr Price 17 Mr Brown had been employed during a pha5e when additional people were brought in. Marcus wanted "relatives" before "outsiders". 18 Mr Brown's son, Robert, who is a full-time employee, is also now a director. 19 Like its 1965 predecesror, the will refers to companies in which William had 111 interest: the company, Resca Glues and Cabinet Timbers. No complaint was made to Mr Prentice, the solicitor who prepared the will, concerning BPS, which confinns an impression emerging from other evidence that William was content not to have shares in BPS. -- 13 of 65 -- 11 joined the Board,20 William did not attend another Board meeting. 1968 also saw the appointment as a director of Mr de Nooy, not long after he was employed as the accountant. As the 60s grew to a close a new office 21 for BPS was established at Yeerongpilly and BPS had substantially increased sales. In 1970 John replaced his father as Managing Director. By this time, William was no longer attending the premises. William died in October 1972. Gloria Price inherited shares in the company and in Cabinet Timbers. In 1973 the Board22 resolved to transfer 7,100 shares in Dutton to the two Sydney directors and 149 shares each to Marcus and John. Marcus and John were then left with 2% of Dutton's issued capital, the working directors held 49%, and the company retained the balance. About seven years had passed since the company had acquired the shares. Shortly after this Board meeting, Mr de Nooy discussed with Mr Price the management and share structures of BPS, Cabinet Timbers and Dutton. The discussion descended to detail. Mr Price already knew much of what Mr de Nooy covered, including that his wife was a shareholder in Cabinet Timbers and that the company was not; and that Marcus, John, Massie and Raymond were the directors of BPS. This conversation assumes significance for two reasons: first because Mr Price knew that he was to represent the interests of his wife on the Board, and by 1973 she had become a substantial shareholder, with shares in her own right as well as those she controlled as executrix of her parents' estates; secondly, because 20 He was not made a director of a distributor. 21 Thereafter its directors met there. From the time the office opened until Ray Price resigned in 1991, more than 160 meetings of directors were held at BPS's new offices. 22 Mr Price attended the meeting. -- 14 of 65 -- 12 Mr Price has pretended that he was not aware before 1989 that the company had not taken shares in BPS. 23 Mr de Nooy wanted to be sure that Mr Price who, as de Nooy saw it, "represented a large minority" understood the structures of the company and its distributors. Cabinet Timbers was discussed first; then Dutton. When attention turned to Queensland Mr Price disclosed that he was aware of the shareholdings, describing BPS as "John and Marcus's company ... or Marcus and John's", as de Nooy recalls his words. Mr de Nooy, who expected that Mr Price would convey any knowledge gained through the discussion to Mrs Price, also mentioned that Marcus and John were entitled to dividends from their holdings in BPS. During the conversation, de Nooy got the impression that Mr Price already "knew most about" the topics broached. Soon after this discussion, Raymond was dismissed from BPS. The Board decided 24 to buy Raymond's 4,000 shares in BPS as an interim measure. Mr Neal Weston took 23 Mr and Mrs Price knew of BPS. Some considerations indicating the extent of their knowledge are mentioned elsewhere. A few others may as well be stated. Mrs Price knew that BPS was the Brisbane-based distributor. She saw a large sign on site advertising BPS. She kept her husband's business cards describing BPS a-. an "associated" company. The 1971 feature article, which Mrs Price read with pride, gave prominence to BPS a-. the "sales distnbutor for Queensland". Mrs Price still has a notebook she received in 1971 which lists BPS among the distributors on the back cover. The 1970 company calendar, which Mrs Price received, also mentioned BPS. Mrs Price may not have drawn the inference that the company did not have shares in BPS, but all she had to do was to a-.k her husband. Mr Price worked on site for 28 years after BPS was established there. He knew that Massie and Raymond had charge of the venture and that it wa-. a distinct organisation. Mr Price knew that Marcus and John attended directors' meetings of BPS with Massie and Raymond. At least from 1968, when he became production manager, he knew that the company received orders from BPS, and that invoices and cheques were exchanged. The tenns of de Nooy's engagement a-. accountant - which included a reference to duties for BPS and Cabinet Timbers - were read out at a Board meeting attended by Mr Price in May 1968. The AGM in 1968, attended by Mr Price, saw Marcus report on construction of a new building intended (the minutes record) "mainly for use by and rented to [BPS]". Mention was also made of a loan to Dutton, which was described at the meeting as a "subsidiary". Financial statements the Board approved before their distribution to shareholders described BPS as an associated company. Importantly, Mr Price knew that his Board made decisions about shareholdings in Dutton and not about Cabinet Timbers. He also knew that, except between Raymond's dismissal and the transfer of shares to Weston in 1976, the company did not make decisions about BPS shares. He must have realised that the company did not receive dividends from BPS. See also the evidence of John Brims at pp. 9-16 of his statement of 10 October 1994. 24 On a motion seconded by Mr Price. -- 15 of 65 -- 13 Raymond's place, the shares were transferred to him, 25 and the company was again without a shareholding in BPS. Otherwise the 70s were relevantly uneventful. The company and its distributors were profitable. There were regular sales meetings at which business26 was discussed with the distributors. John adopted a more participative style of management than had his father, v and the directors made their individual contributions: John as managing director, Ray Price as production manager, Allan Brown as mechanical engineer, and de Nooy as accountant and Secretary. Relations between these men were comfortable. They met at morning and afternoon teas where business and other interests were discussed. Among them, there were no company secrets. Formal Board meetings were held monthly. Informative papers were distributed to the directors in advance of the meetings. Comprehensive minutes were kept. In 1975 BPS changed its name to Brims Distributors Pty Ltd in recognition of the substantial sales of particle board. By 1976 BPS was selling products from sources other than the company. 1978 saw the retirement of one of the Sydney directors, Mr Phillipe. The company purchased his 3,550 shares, leaving it with almost 75% of Dutton's issued capital. This position was maintained until 1982 when some of the shares were sold to Mr Grandi, an employee of Dutton. 28 As the 80s neared, the next generation entered the scene. In 1978 Pauline Price was employed. Robert Brown joined in 1979. David Brims came in 1981. By 1982 these three great-grandchildren of Donald were described as "junior executives" and attended Board 25 The decision to sell to Weston was taken at a meeting Mr Price attended in January 1976. 26 Arrangements with the distributors have always been conducted with scrupulous fairness. Zl Marcus continued on as Chairman for a few years. Management responsibility was assumed by John. 28 Additional shares were transferred to Grandi in 1984 and 1986, which left the company with 63.1 % of the shares, the working directors owning 34.8%, and John and David with the rest. -- 16 of 65 -- 14 meetings as observers. At the 1983 AGM John Brims expressed appreciation of the roles played by Pauline, Robert Brown and David. The company looked to be on the verge of supporting a fourth generation. Troubles Michael Price commenced full-time employment at the end of 1983, aged 17. He had worked at the factory as a boy, doing odd jobs. As a child he thought that his parents intended, and he "accepted without question", that his "future would be at the mill". When he started, he too was given the title "junior executive", which, though it was rather grand for the work he did, was consistent with prevailing practice and with the ambitions the directors had for their children. By 1983 David Brims and Robert Brown worked as assistants to their fathers. Michael began by working with his father. He did not enjoy his relatively unskilled work, preferring administration. He was also keen "to follow in the footsteps of my father, and my grandfather, and my great-grandfather". Michael noticed that David had special opportunities, including accompanying John on overseas business and to office meetings. A sense of grievance grew. Michael thought that David was being groomed by John to succeed him. The reality accorded with his perception. Michael Price presents as dynamic, forthright and aggressive. These attributes might not be inimical to success in business but they, and some insensitivity, were to bring unhappiness to the company. David Brims appears calm, not quite so bright as Michael, cautious and lacking Michael's self-assurance. From Michael's perspective, David would not have seemed an obvious choice to follow John Brims as Managing Director. Michael became resentful. In 1985 Michael heard that Mr de Nooy wanted to retire in a few years and asked to work with him. Mr Price, de Nooy and John were attracted to the idea. In August Michael -- 17 of 65 -- 15 began sharing de Nooy's office and learning about financial administration. de Nooy briefed Michael on the structures of the company and its distributors. Michael enrolled in a part- time accounting course. Michael Price's resentment at the way David was "favoured ... over everyone" predisposed him to find, if it did not nurture an anxiety to discover, other preferential treatment of John's immediate family. There were no secrets from Michael, who had free access to office records. Michael learned that John and David received dividends from BPS. He saw that Robert Brown and David - who had both been employed longer than he had - were better paid than he was. He decided that the benefits associated with the company were not being evenly distributed. And, despite his youth and inexperience, he became critical of management decisions. Shortly after the 1986 financial year ended, Michael began berating his parents with his concerns. He voiced misgivings about the wisdom of management decisions, and he objected that the family was not fairly treated. Arguments ensued. Mr Price regarded his son's objections as implicitly critical of him, the family representative on the Board. Though Mr and Mrs Price may not have grasped the finer points of Michael's concerns,29 they realised that Michael was upset about the favouritism of David. Michael's complaints were not the sole cause of the troubles that lay in store. Other concerns had emerged by 1986. 29 Michael says he complained to his parents about the BPS shareholdings. There are reasons to doubt this apart from my general reservations about the reliability of his evidence. Michael knew the details of the shareholdings in BPS by 1986. However, he does not appear to have made an issue of them at the time, perhaps because he realized that his mother, not the company, held shares in Cabinet Timbers. Neither of his parents recalls a complaint about the BPS holdings in about 1986. No issue was made of the BPS share structure until the 1990 AGM. And the only contemporaneous record of Michael's complaints in 1986 - a solicitor's letter written on 9 October that year - does not mention the distributors let alone a concern about holdings in BPS. If Michael had made an issue of the BPS holdings, his parents would have had trouble in accepting that there was merit in the objections. Mr Price had known about the ownership and control of BPS foe at least 15 years - perhaps since before Michael was born. Mrs Price, although comprehending little of corporate structures, received dividends from the Victorian distributor, not from BPS oc Dutton; and she knew that BPS was the Queensland distributor. -- 18 of 65 -- 16 Pauline had not been entirely happy. Incidents in 1984 and 1985 indicated that she might not remain much longer. Nor was Mr Price completely satisfied. He had a well-paid job and a seat on the Board; but by late 1986 he had been feeling for some time that he was not accorded the recognition his contributions deserved. He was also disappointed that John failed to praise Pauline. Spurred on by Michael, his parents embarked on a course which has led to this case. In September 1986 Mr and Mrs Price sought legal advice about the company and Cabinet Timbers. In October the solicitors wrote a letter of advice which records that Mr and Mrs Price had considered selling their shares. The letter mentioned that "minority shareholders actions in the Supreme Court" might be contemplated to "be used by you in the bargaining process for the sale of the shares" as a "last resort". The letter proposed that the Prices consider "in terms of your dissatisfaction with the company and the way it is run at the present time, what is it exactly that you object to?" The author recorded his understanding that Michael "was concerned that the liquidity of the company had been seriously affected by certain decisions which had been made". In 1986 Mr Price's disaffection was caused, he said, "mainly by treatment of my family": the preference accorded to David and the persistent omission of John to praise him or Pauline. 30 Mrs Price was worried about two things 31 : in her words, "hurts in the family", essentially the "devastating" notion that "everyone wanted to leave" the company; and an apprehension that she was not attending to her responsibilities as a shareholder in her 30 As late as July 1991, when solicitors wrote contending that Mr and Mrs Price bad been unhappy for years, Mr Price was not troubled "about what happened about [BPS] and all that". Apart from a concern that dividends were insufficient - a contention now maintained only in respect of the 1991 year - in July 1991 he was still only worried by the trea1ment of Pauline and Michael, their resignations, and by John's omission to praise him. 31 What has troubled her most about the company's affairs is, she said, that "it bas ended up we are all out of the company except as shareholders, and I really don't know what for". -- 19 of 65 -- 17 capacity as the executrix of her parents' estates. Mr and Mrs Price attended the 1986 AGM on 20 October. It was to be the last uneventful annual meeting for years. Mr Massie retired from BPS towards the end of 1986. He offered his shares to John Brims, to whom the opportunity was presented because of his BPS shareholding. They were purchased by John and David at valuation. At about this time, Michael was given more manual work. The assignment fuelled his dissatisfaction: something he did not disguise. In November de Nooy told Michael that he was not fitting in. He suggested that Michael leave and enrol full-time in an accounting course, which Michael did. Michael attended his last Board meeting on 27 January 1987. That day the Board discussed the poor sales performance of Cabinet Timbers. Its effectiveness as a distributor had declined in the 80s to the point where the Board resolved to examine the feasibility "of establishing our own sales outlet". Accountants were instructed32 to set up a distribution company in Victoria. 50 shares were to be issued to the company; one to John Brims. March 1987 saw a dispute between Ray Price and the factory foreman, Mr Henderson, who is Mr Price's brother-in-law. John discussed the matter with Mr Price who presented him with an ultimatum: either Henderson and his son, who also worked there, leave or else he would go. John Brims invited Mr Price to leave. A few days later, Mr Price asked to return. This was agreed to but with new conditions. He was assigned the purchasing of raw material as his area of responsibility. Mr Henderson was promoted to production manager. Four days after Mr Price recommenced, new solicitors for Mrs Price wrote advising that the proxy which John Brims had held from her for Cabinet Timbers for more than 15 years was revoked. Complaints about Cabinet Timbers followed. The 32 No steps were taken until 1992 to establish the distn"butcr, partly because of what John Brims desm"bes as "the uncertainty caused by the deteriorating relationships ... and Gloria Price's attitude". -- 20 of 65 -- 18 solicitors complained about a lack of information to shareholders and of bonuses paid by Cabinet Timbers to its directors. John Brims was a director of Cabinet Timbers. Pauline had problems with David. By July 1987 she had "had enough" of his "interference" and decided to resign. Troubled by Pauline's decision, her mother met with John. The meeting was unpleasant. During it, Mrs Price spoke of "years of oppression". Pauline could not be persuaded to return. 33 The 1987 AGM was held in October. In the preceding nine months, Michael and Pauline had resigned, Mr Price had gone then returned to different responsibilities, a confrontation had taken place when Pauline's resignation was discussed, and Mrs Price had signalled dissatisfaction concerning Cabinet Timbers. The stage was set for an unusual 1987 AGM. At the AGM, without prior notice, Mrs Price nominated for election as a director. She did so because she felt that her husband was not adequately representing her. She had no knowledge, skills or experience to bring to the Board and realised that. But she hoped that John Brims would listen to her if she became a director. She may also have thought that, as a director, she would gain a greater understanding of the company's affairs than the little she had acquired in discussions with her husband. Her nomination was rejected on Mr de Nooy's advice that she could not "nominate from the floor". General business might have been expected to provoke some discussion, especially as Michael was there. No questions were asked, nor was any criticism voiced. Those things lay in the future. People I should digress to discuss the emotions, capacities, personality traits and attitudes which matter. These things, to varying degrees, have significance for the reliability of 33 Pauline's husband was employed at the factory from about 1985 until August 1992. -- 21 of 65 -- 19 evidence. Some faulty or distorted recollections, for example, seem attributable, at least in part, to the extent to which emotion has intruded. Characteristics such as temperament and outlooks also explain strange conduct: in particular, a striking absence of effective communication where Mr and Mrs Price and John Brims are concerned. The applicants' counsel describe Mrs Price as "an unworldly woman, not educated in business matters, and in them naive". This, so far as it goes, is apt. Mrs Price struggles to understand uncomplicated business matters. She had trouble with straight-forward things her solicitors told her about meeting procedures. She did not comprehend some complaints Michael made. Mrs Price feels rather than thinks, at least about "the mill". The mill is where the families of the descendants of Donald Brims were to be sustained: as she said, it was "part of the family", "a sort of parent", "a second home", or "an extension of home". So many family members had worked there, including both her parents. Her depth of feeling, and the overwhelming disappointment she has experienced through the events of 1986 and 1987, emerged clearly. She is also perplexed. She cannot understand how things have reached the point where the extended family is embroiled in a court case. She has persuaded herself that the fault is John's. Mrs Price's emotions and her belief that John Brims has alienated her family from its rightful association with the enterprise have influenced her recollection. She is not objective. Her poor grasp of business also affects the extent to which I can act on her evidence. 34 Where controversial, her evidence, particularly her testimony, must be approached with scepticism. Mr Price is embarrassed. He appreciates - though early in his cross-examination he tried to deny it - that he was appointed to the Board to "represent Gloria". Michael's complaints related to decisions in which he had joined; and he knows that Michael's agitation 34 So affected is she by these things that I am even hesitant about attributing much weight to what she has recorded in her contemporaneous notes. -- 22 of 65 -- 20 convinced his wife to try to become a director - scarcely a vote of confidence in him. Despite allegations aired in this case of a lack of information, the company's affairs were conducted openly among the directors for the 23 years he was on the Board. From the time of Mr de Nooy's appointment in 1968, useful reports were given regularly to directors as well as annually to shareholders. And Mr Price has never been refused information. He did not alert the Board to his wife's intention to try to become a director. He did not communicate any relevant concern until July 1991. He attended AGMs in 1988, 1989 and 1990 at which questions - some imputing misconduct - were put by his wife and son to John Brims while he sat by in silence. His family's case was opened in Court on the basis that the share structure of BPS is a major complaint; and he heard it said that the applicants knew nothing of that structure until 1990,which is untrue. 35 He was caught out'6 in falsehoods. Mr Price has also persuaded himself that John Brims is responsible for the disaffection which has resulted in these proceedings. He is anxious not to be seen as blameworthy. The evidence of Mr Price needs to be approached with caution for another reason. Michael Price described his father as "a very simple man", adverting to his difficulty in understanding financial management, the intricacies of corporate structures, and the like. Ray Price trained as a mechanic. His interests were machinery and production. He did not always appreciate the ramifications of his knowledge of facts pertaining to the company and its distributors. Michael Price's lingering bitterness appears to have influenced his recollections. His· evidence is often unreliable. Some events he claims to recall are things he now wishes had happened: that John Brims was questioned at the 1987 AGM, and that he stood up to John 35 Mr Price acknowledged that he had assumed foe many years that John and Marcus were shareholders in BPS. The evidence proves that he knew that fact in 1973. According to Mr Henderson, Mr Price already knew of their interests by 1968. 36 As examples, first stating that he did not appreciate that be would be representing his wife when appointed to the Board, wbidl is contradicted by his written statement and by his subsequent testimony; and saying that handwriting of William's on a door had been covered with oil, which it had not. -- 23 of 65 -- 21 before resigning. 37 He told Mr Zacharin, a director of Cabinet Timbers, that he had been "sacked" by John. And he is prone to exaggeration. Michael asserts, for example, that he attended all directors' meetings between December 1985 and February 1987. 12 meetings were held between 3 February 1986 and 27 January 1987. Michael attended 3. Something has already been said of Michael's temperament and attributes. Michael Price was to influence events after he resigned, especially at AGMs in 1988, 38 1989 and 1990. John Brims presents as intelligent, with a good memory. His recollections largely accord with contemporaneous records where they exist. However, he too is not objective about the factors contributing to the litigation. He is convinced that he has acted with probity and fairness. He has no regrets about his stewardship and cannot persuade himself that any act, omission or attitude of his has played a part in the applicants' plight. Such an outlook partly explains why he failed to address the Price family's worries. From his perspective, the applicants are to blame for their predicament: that none of them is an employee any more, that they are without Board representation, and that they are litigants. His attitude has caused me to consider whether reservations should be entertained about his evidence. The perceptions of the doggedly self-satisfied deserve as much scrutiny as the views of those trying to deflect blame. In the result, however, I am satisfied that his evidence is generally reliable. Many of my findings depend on his written statements and testimony. Mr de Nooy's evidence is mostly reliable, although he made a few mistakes: for example, at one stage he attributed questions Michael had put to John at the 1990 AGM to the 1987 meeting, eventually correcting himself. An important part of his evidence concerns 37 Which other testimony and (as to the argument) his letter of resignation persuade me he did not do. 38 Which Michael did not attend. -- 24 of 65 -- 22 the conversation with Ray Price in late 1973. 39 This is so long ago as to make it seem remarkable that Mr de Nooy could remember it; and other considerations give cause for reflection. In his first statement, the conversation is not mentioned. Nor did Mr de Nooy refer to it on an earlier occasion when he might have been expected to remind Ray Price about the discussion had it occurred..«> Mr de Nooy, however, impressed me as a direct and honest person. He was also very interested in his work and anxious to keep his fellow directors informed on issues he thought they needed to understand. It is the kind of conversation Mr de Nooy would have been likely to have initiated at the time decisions were made about shares in Dutton. With the opportunity I have had to assess Mr de Nooy, I consider that he has accurately recounted the essence of his 1973 conversation with Ray Price concerning BPS. 41 David Brims was on guard. He appeared to try to put himself, and others in the same interest, in a favourable light. I am also doubtful about his powers of recall. Mr Allan Brown admits to a poor memory, although he did his best to testify truthfully. Pauline Baptist tried to remember events as best she could. Where she testified specifically to her own recollection, 42 her evidence is acceptable except to the extent it conflicts with the evidence of John Brims. I accept the evidence of Mr Prentice and Mr Moores. Years of conflict Mr Price continued with work, daily meetings with fellow directors, and monthly Board meetings. Curiously, no one asked him why Mrs Price had sought election to the 39 See p.12. 40 When Michael questioned John at the 1990 AGM concerning his interest in BPS. 41 de Nooy's recollection that Mr Price told him that he knew that BPS w~ a company in which Marcus and John had a stake receives support from the evidence of Mr Henderson. 42 As distinct from incorporating by reference in her statement things asserted by others. -- 25 of 65 -- 23 Board - the first unexpected event at an AGM in years. By this time, and probably from early 1987, however, Mr de Noey had sensed that Mr Price "seemed to change", attributing this to the resignations of Michael and Pauline. Before the 1987 AGM Mr Price had told de Noey that he was considering resigning because of the way "his family had been treated" by John. His principal point was that Michael had been dealt with unfairly. de Noey disagreed, saying he would not support accusations that John had behaved unfairly. Mrs Price went to the 1988 AGM having given notice of her intention to nominate for the Board and armed with questions for John Brims. Before general business was reached, the directors were elected. Three43 retired. A resolution for their re-election was carried. That left two vacancies. In succession, David Brims and Robert Brown were elected, which meant that there was no vacancy for Mrs Price. This did not inhibit her from pressing on with the questions. She read out about 15. John, who had not been told of them in advance, 44 answered as best he could. The questions 45 ranged widely, extending to projected capital costs, dividends paid by the company, shareholdings in and dividends received from other companies and the "fair price" of a share. Interrogating John in this way must have seemed odd. Most of the questions related to matters which others present would have assumed were within Mrs Price's means of knowledge: facts she could have discovered by asking her husband or gleaned from annual reports to shareholders. And the detailed answers the questions invited could not realistically have been expected on the spot. But apparently Michael was the Price family tactician; and he was as much interested in embarrassing John Brims as in getting information. Michael had 43 de Nooy, Brown and Ray Price. 44 If Mr Price knew that his wife intended to interrogate John, he gave no warning of it. 45 They had not been prepared by Mrs Price, and she did not understand the purport of many of them. -- 26 of 65 -- 24 acquired a little learning about annual meetings, including that they afforded an opportunity for shareholders to question the Board. A few questions concerned BPS. Mrs Price asked: why does the company not expand its distribution "as in New South Wales and Victoria". This made little sense. Everybody there knew that BPS was the Queensland distributor; and most shareholders would have known that the company did not have shares in Cabinet Timbers. John Brims attempted a response which he cannot recall. 46 No supplementary question was asked on the topic. Asked about rent received, John said that it came from "BPS" and that "they soon will be moving to their own place". Mrs Price also inquired: "what shares are held in associated companies?" John replied, accurately enough, that the company held shares in Dutton. The many questions put received fair responses in the circumstances. Two merit mention. When Mrs Price asked about directors' salaries, John told her to ask her husband. 47 When she inquired about amending the Articles to ensure that all shareholders were "represented", she received the response that she was represented - by her husband. The meeting ended in disharmony. John insisted that the company was being "100% fair" and that Mrs Price was "tearing the company apart". Mrs Price harked back to a time when the company had "started off evenly" - a reference to the shareholding of her grand- father, father and uncles. Unpleasant exchanges followed until the meeting was brought to a close. No one there could have doubted that Mrs Price was disturbed about the company. But no Board member sought her out to ask what was wrong. Remarkably, Mr Price's fellow directors did not press him to explain her conduct, and Mr Price did not raise the topic 46 de Nooy thinks that reference was made to Queensland being "covered". Mrs Price's notes are not easy to follow. 47 This, she testified, would have been an impertinence she would not have allowed herself, which sotmds incredible but could be true: see my remarks on absence of communication. -- 27 of 65 -- 25 either. 48 Things went on as before. Ray Price went about his responsibilities, attending meetings, taking home his Board papers, not asking for information4'J for his wife; and so on. Heads were in the sand. On 31 October 1988 Mrs Price wrote to Cabinet Timbers asking for tax returns. Correspondence about this went on for months. At about this time, John sought Mrs Price's consent to an amendment of the Articles to ease restrictions on share transfers. Eventually she refused. Before replying, Mrs Price wrote to "the directors" complaining about another newspaper article concerning the company. She demanded a "public apology" for the "insult" she felt because the author, a journalist, had mentioned Marcus but not William or Francis. John Brims wrote her a conciliatory response. Mrs Price's third attempt to become a director was rebuffed at the 1989 AGM after a skirmish about proxies. The minutes also record a "heated and unpleasant discussion" 50 48 John Brims testified to just one attempt to engage Ray Price in discussion about Mrs Price's coocerns. (He did not appreciate that Ray had any of his O\\n.) After an AGM, he asked "what's going on?" He did not say what, if any, response he got. 49 Mr Price said he was afraid he would lose his job if he asked questions. This cannot be accepted. Certainly he had no fear of de Nooy, and he realised that de Nooy would have given him any information he sought conceming the company. Mr de Nooy had also told him, Mr Price admitted, that he could look at any document. Noe do I think he believed that his position would be jeopardised by asking questions of John Brims. It is true that Mr Price lost his job in 1987. That was through an ultimatum which had nothing to do with information. Anyhow, when Mr Price asked to return, John allowed him to do so. There were other indications that Mr Price's position would not have been at risk if he had asked questions. Even after the exchange with Mrs Price in July 1987, John was prepared to have Pauline back. And Michael, after tendering his resignation, was allowed to stay until he chose to leave to start his studies. Mr Price did consider that John would not have welcomed his questions, and that may be correct. He was asked to resign as a director after he sought documents in August 1991. But he was not asked to resign because he sought documents. The reason foe that request was a letter of 31 July 1991. And he was not asked to resign his job at all. Reasons for his reticence are, I think, that he is not a good communicator; that he had been a party to the decisions which concerned Michael and was embarrassed to ask; and, as he confessed to Michael, that he did not know what to ask. 50 Michael Price claims that he queried John Brims about his shareholding in BPS at the 1989 AGM. This cannot be acx:epted. The contemporaneous records (the company's minutes and Mrs Price's notes) make no mention of such an event. Nor did John, David or Pauline recall it. de Nooy said he was "pretty certain" that something was said about a conflict of interest in relation to BPS. de Nooy also acknowledged that he had a tendency to get the "four AGMs" (1987 - 1990) "a little mixed up.• But nothing turns on this. The issue was certainly raised at the 1990 AGM. -- 28 of 65 -- 26 in which Michael expressed an absence of confidence in the chairman and in the whole meeting. A motion of no confidence proposed by Michael was defeated, Mr Price abstaining. 51 Mrs Price immediately moved an identical motion, which also failed. After this third unhappy 52 annual meeting, things at Yeerongpilly returned to normal. The directors, including Mr Price, met on 28 October and unanimously resolved to exp~ their confidence in John. John continued to ignore Mrs Price. After the 1989 AGM, Mr de Nooy sent Mrs Price copies of Dutton's balance sheets and annual accounts for a number of years beginning with 1966. In November, John Brims provided information in answer to an inquiry she had made at the Cabinet Timbers AGM in Melbourne. These informative responses typified replies to requests for information. No written request for information by or on behalf of the applicants has ever been declined. Nor has any temperately couched oral request. The 1990 AGM started with another conflict between Michael and John about proxies. When the accounts were discussed, Michael asked about expense items. After an assurance that he would get a prompt response after the meeting, Michael seconded the motion to adopt the accounts. 53 Mrs Price did not nominate for election to the Board. Everylxxiy agreed with Michael's suggestion that the retiring directors be re-elected. Hostilities surfaced with general business. Michael, who had known of the share structure of BPS for about five years, had come to perceive a conflict of interest for John and David arising from their interests in BPS. Through persistent questions to John, Michael argued that an impropriety inhered in John's 51 This neutral stance was the only tangible indication given to John Brims by Mr Price before July 1991 that he did not fully support him. 52 John Brims responded to Michael's provocation with abuse. 53 The infonnation was provided the next day. -- 29 of 65 -- 27 interest in BPS. He began by asserting that John had a conflict of interest because he was a director of, and shareholder in, both BPS and the company. John Brims replied that he had a well-known, long-standing interest in BPS. He said that BPS had been set up "along similar lines to Cabinet Timbers". He spoke of William Brims, saying that William did not put money into BPS. 54 BPS was described as "a private set up ... 11 with "little or no dividends in the early years". The minutes record55: "The chairman advised M Price of his interest in associated companies and explained the historical background as to why those companies were established and developed. Mr M Price also asked the chairman why he had not declared these interests previously. The chairman explained that the companies had been established many years ago during the difficult reconstruction of the company and that these matters had been discussed at regular directors' meetings. It had been assumed that as each director represented Family Group interests that this information would have been long since conveyed. "56 Although the minutes summarise points made, they paint less than the complete picture. They do not reflect the intensity of Michael's questioning. They do not record all the exchanges. 57 Nor do they disclose that John finally got so annoyed by the tirade that he told Michael that BPS was none of his business. It might have been expected that the Board would by now have realised that ignoring Mrs Price was unhelpful. But once again it was back to business as usual. There were no 54 Perhaps Michael is correct in this instance in recalling that John said: "Your grandfather had no money. He didn't want to be part of it." The part of Michael's statement (para.68) which contains this ~on has not been specifically denied by John. Moreover, William did not want to be involved with BPS. William did not fund BPS or guarantee its obligations. 55 Michael's contrary evidence, which included a contention that the relevant paragraph is a fabrication, is unacceptable. 56 Mrs Price took a note of John's observations on Mr Price's role: "has sat in on all discussions over years (and) is fully familiar with all discussion going on". 57 Omitted, for example, was Michael's allegation that all the directors, except his father, were underworked and overpaid. In view of current complaints, omissions from the questioning should be mentioned. Michael did not ask about the profitability of BPS or about the dividends John and David had received from BPS. -- 30 of 65 -- 28 complaints from Ray Price. No requests were made for information. Mr Price did not attempt to explain the conduct of his wife and son. And John Brims, who by 1990 had no time for Michael and little regard for the views or capacities of Mrs Price, and who was sure that there were no genuine grounds for grievance, still just let things lie. 58 Towards the end of 1990 the de Nooys indicated a wish to sell their shares. The sale required the consent of shareholders with 75% of the issued capital. The Price family held more than 25% and their consent was not forthcoming. So the de Nooys asked the directors to fix a fair price in accordance with the Articles. The share sale became another bone of contention. Mr de Nooy wanted to stay on as a director after selling his shares and ceasing employment. Mrs Price had probably been led to understand that only employees would be acceptable as directors. She could not see why Mr de Nooy should remain on the Board once he ceased to be an employee, especially if she was not to be a director. Michael and his mother met with Mr de Nooy and his successor, Mr Moores. As a result of a report of this meeting, John Brims thought that Mrs Price was anxious to sell her shares. On 24 January 1991 he wrote to her saying that "it may be to our mutual benefit to have discussions on a one to one basis prior to making ... important decisions", inviting her to contact him. When Mrs Price telephoned, John spoke of the possibility of the sale of her shares. She said she would revert to him. Her response came about a week later: a letter in which the solicitors who wrote it recorded that they acted for Mrs Price "and others" in relation to the company and other corporations. The letter continued: "It is no secret that our clients are extremely unhappy, and have been for many years, with the way the affairs of these companies are conducted and the way they, as shareholders, are treated. Mrs Price has instructed us that you contacted her this week wanting to discuss the purchase of her shares. Mrs 58 The silence of Mr Price, coupled with the absence of any request for information between AGMs by his family, made it seem that Mrs Price was essentially out to antagonise. Mr de Nooy thought that she "wanted to take revenge . . . foe the fact that her children failed to reach" senior executive positions. Michael's conduct was only consistent with an intention on his part to annoy. -- 31 of 65 -- 29 Price wishes that I be involved in all negotiations and I would be happy to meet with you at a mutually convenient time." John Brims does not like dealing with lawyers. The opportunity to meet with Mrs Price was not taken up. Instead, the company's solicitors replied asking the applicants' solicitors to identify their "clients". Months were to pass before that was done. In about June 1991 the directors set about establishing a price foe the de Nooy parcel in accordance with their understanding of the Articles. Mr de Nooy proposed $20.50 or $20 ex-dividend per share: figures arrived at by reference to anticipated future dividends. de Nooy's report to the Board recorded that the average annual dividend since 1987 had been $1.025 per share. He selected a multiplier of 20. The directors considered the report and adopted it. de Nooy abstained because of his interest. Mr Price also abstained. 59 Nobody asked why he took that unusual step, and Mr Price did not volunteer the information. He had not then decided whether the price fixed by the other directors was fair or not. At their July meeting the directors discussed the downturn in the economy and a decrease in demand for the company's products. The directors were handed draft copies of annual accounts for 1991 and attention was given to the dividend that might be paid. According to the minutes, John Brims "pointed out that in view of the difficult economic situation it was important that serious consideration be given to the dividend to be recommended 11 • On 31 July 1991 Michael agreed to buy some de Nooy shares. The solicitors' letter which conveyed his acceptance said that Michael believed that the price fixed by the Board was well below the true value. That same day the applicants' solicitors responded to the de Nooy offer on behalf of Mr and Mrs Price and Pauline. It was by this letter that Mr Price 59 Acting on legal advice and knowing that the applicants were hoping to sell their shares for more. -- 32 of 65 -- 30 first communicated to the company that he was in the camp of the disaffected. The letter revealed him as one of the solicitors' clients and in a familiar vein went on: "It is no secret that our clients are extremely unhappy and have been for many years, with the way the affairs of the company and companies associated with the company have been conducted and the way they, as shareholders, are treated." The letter finished by saying that the applicants intended to offer their shares foe sale "at their true value" so that "they could sever all relationships with the company". Once Mr Price had disclosed that he was aligning himself with his wife and Michael, he wrote to the company seeking documents. On 20 August he sought financial and other records for inspection. He wanted them, he wrote, to prepare for the 1991 AGM. The signs did not augur well for a calm annual meeting. Mr Price attended the Board meeting on 26 August when the directors, Mr Price abstaining, resolved to recommend to shareholders that no dividend be paid that year. Reasons for that course were contained in the report to shareholders which the Board adopted at this meeting. Predictably, the solicitors' July letter caused the other directors to lose confidence in Mr Price, who had not previously indicated that he endorsed the conduct of his wife and son. A letter from the company's solicitors on 9 September maintained that Mr Price's position on the Board was "untenable" and that he "ought to resign ... immediately". Mr Price would not. There was other correspondence at about this time, much of it directed to the steps required by the Articles for the disposal of the Price family shareholding. In September, John Brims also received a report from Price Waterhouse on the "fair price" for a share. That price, which was equated by the accountants with fair market value, was in the "range $14.20 to $17.30". The AGM took place on 11 November. Michael did not attend. The meeting was finished in half an hour, though not without incident. Mr Price handed out a list of 18 -- 33 of 65 -- answer them immediately. His caution had been prompted by legal advice. Mr Moores was told to attend to the questions. 60 Mr Price would not have been surprised when he failed in his bid for re-election to the Board. Mrs Price did not nominate. With Mr and Mrs Price and Pauline dissenting, the meeting accepted the recommendation that no dividend be declared. One other matter should be mentioned. After Mr Price was not re-elected, the meeting resolved that "the vacancy thereby created be not filled and the number of directors be reduced accordingly". Mr Moores had prepared the motion before the meeting in case Mr Price was not re-elected. 61 After the meeting Mr Price gave John Brims a solicitors' letter alleging oppression of the Price family as minority shareholders. The letter also expressed a willingness to sell for $40 a share. Two days after the AGM, Mr Price was handed a list of new duties and privileges. He thought it demeaning and resigned his job within days. In mid-November the applicants' solicitors were informed that the auditor was to determine a price for the shares. On 11 December Mr Jolly determined the fair price at $22.14 per share. The applicants refused to sell at that price contending that the Articles did not allow for the valuation to be adjusted for oppression. A week later the company's solicitors asked for particulars of the oppression, adding that the company found it curious 60 Next month the company's solicitors provided answers. One question was "what relation, if any, does [BPS} have with [the company} or any of [its} directors? Has [BPS} received any benefit or otherwise from any relationship with [the company}." The answer given was terse: "only relationship is with common shareholding. [BPS} is the distributor for [the company l in Queensland. [BPS] is also currently a tenant ... There are no other arrangements. All transactions are at ~ length on a commercial basis." The response was given in circumstances where John Brims believed, correctly, that the Price family had known for years of his shareholdings in BPS. 61 Mistakenly, Mr Moores advised to resolve to reduce the number of directors to eliminate a vacancy. There was nothing conspiratorial about this initiative. As Mr Moores saw it, the resolution was routine. The resolution was not proposed with the object of denying the applicants Board representation in the future, and the resolution could not lawfully have had such an effect. -- 34 of 65 -- 32 that the applicants should be so secretive about the details of their unhappiness. A response came on 6 January 1992: a four page document with 11 "heads of oppression". By then the applicants had been unhappy for five years and in that time had retained four firms of solicitors, the last of them having acted for two years. Yet the complaints bear little resemblance to those now raised for decision. In 1992 dissatisfaction with the poor sales performance of Cabinet Timbers led the Board to establish its own Victorian distributor. Brims Distributors (Vic) Pty Ltd was incorporated as a wholly-owned subsidiary in October. Since Mr Price failed in his attempt to be re-elected in 1991, the applicants have not proposed anyone to represent them on the Board, nor have they attended an AGM. Complaints The first of the "heads of oppression" relates to the issue and transfer of shares "to entrench certain directors and shareholders, in particular John Brims". The second asserts that excessive benefits were provided to directors; it also complains of inadequate dividends. The third objects to guarantees by the company of the obligations of BPS. The fourth asserts a refusal, especially by John, to allow minority shareholders to participate in management or in company affairs. The fifth alleges that control rests with John "who operates in an autocratic manner and considers the company to be his own". The sixth relates to the transfer in 1973 of shares in Dutton. The seventh concerns a transfer of land to Dutton. The eighth complaint mentions BPS: that the company's "distributing practices ... favoured BPS and (Dutton), companies in which John Brims has a direct interest ... thereby favouring John Brims ... ". The ninth allegation is of a lack of information. The tenth relates to land in London. The eleventh concerns the company's paying the costs of the majority shareholders. -- 35 of 65 -- 33 Most of these allegations were repeated in the statement of claim delivered 19 months later. Only two 62 now remain: no 1991 dividend; and that the company is paying the respondents' costs in defending these proceedings. The rest are not pursued. There are, however, three new complaints. In summary, these are: exclusion from Board representation; that the figures fixed by the Board and the auditor for the sale of the Price family's shares are unreasonably low; and that John and David Brims, not the company, hold shares in the Queensland distributor. Section 260(2) of the Corporations Law6 3 relevantly provides that: "if the Court is of the opinion: (a) that affairs of a company are being conducted in a manner that is oppressive or unfairly prejudicial to, or unfairly discriminatory against, a member or members . . . or in a manner that is contrary to the interests of the members as a whole; or (b) that an act or omission ... by or on behalf of a company ... was ... oppressive or unfairly prejudicial to, or unfairly discriminatory against, a member or members ... or was ... contrary to the interests of the members as a whole; the Court may . . . make such order or orders as it thinks fit, including, but not limited to, one or more of the following: (d) an order for regulating the conduct of affairs of the company in the future; (e) an order for the purchase of the shares of any member by other members; 62 On a generous view, three. Wrapped up in a complaint about the shareholding of John and David Brims in BPS is an allegation of a lack of information, although it is confined to complaints (i) that the company breached statutory requirements in failing to disclooo in annual accotmts the benefits which John and David derived through BPS; and (ii) that John and David Brims were duty-bound to disclose to the company the profits earned and dividends paid by BPS. 63 The predecessor in force during the 80s is materially the same. My conclusions relating to BPS make it unnecessary to consider whether it matters that an even earlier analogue was different in its effect: cf Mathers v Mathers (1993) 16 CPC (3d) 16. -- 36 of 65 -- 34 (k) an order requiring a person to do a specified act or thing." There has been a variety of accusations about BPS. At the 1990 AGM Michael Price made a fuss about conflicts of interest allegedly inherent in the holdings of John Brims and his son of shares and directorships in both the company and BPS. No such complaint was made in the "heads of oppression". There the only allegation concerning BPS was that the company's distributing practices favoured BPS; and nothing has been heard of this baseless suggestion since. BPS was, however, again complained about in August 1993 when the statement of claim advanced charges under the heading "Distribution Companies": a reference to the three distributors in the eastern States. The pleading, which does not mention Cabinet Timbers, truly states that the applicants have not been shareholders in, or directors of, BPS, Dutton or Brims Distributors (Vic) Pty Ltd. It objects that the share and management structures of the three distributors conferred benefits on the respondents: directly through directors' fees and other financial benefits, and (as to BPS and Dutton) indirectly "to the extent that the members of the Brims family are shareholders". Among other things, the references to the wholly-owned Victorian distnbutor show that the applicants do not found this case on the fact that the company is not a shareholder in BPS. The essential complaint is that the applicants have not been shareholders in, or directors of, any of those distributors, including BPS. This complaint, though it is at least congruent with Mrs Price's more than 20 year shareholding in Cabinet Timbers, 64 is also no longer pursued. Different contentions are now raised. 64 Shortly before the application was instituted she sold the shares she inherited from her father. -- 37 of 65 -- 35 Dutton and the Victorian distributor are not concerns any more. The present complaint is that the company does not have the 75% interest of John and David Brims in BPS. This new case is put in two ways. 65 First, it is said to be unfair that Marcus and John, rather than the company, originally took shares in BPS; and unfair that John acquired Massie's 25% stake in 1986. The second case is that after BPS became profitable the company should have determined its arrangements with BPS and appointed as the distnoutor a corporation in which the company held at least a controlling interest. As argued, this alternative contention depends on making good two propositions: that John Brims was duty- bound to disclose the profits generated by BPS; and that the company, acting fairly, once armed with this information, was obliged to put an end to BPS's distributorship and to establish other means of distribution. Only the first basis was mentioned in the opening. Mr Chesterman Q. C. then described the case as it relates to BPS as a "simple one": that, except perhaps for such shares as were "given to the outside working directors 66 ••• , (the company) should have been the shareholder" in BPS. This case is still maintained, although in his closing address, in emphasising the alternative case, Mr Chesterman spoke of the origins of BPS as being "in a sense, irrelevant" .67 Both cases are related to a contention that the acquisition by Marcus and John68 of shares in BPS breached their fiduciary duties as directors of the company. Their duty, it was said, was to obtain for the company the business opportunity presented by the decision to distribute in Queensland. For the company instead to have arranged for the 65 On an indulgent view, the first new case seems open on the pleadings. It is doubtful that the alternative new case has been pleaded. 66 Massie and Raymond. 67 The alternative case was distinctly adverted to on the eleventh day of the hearing. 68 and presumably David. -- 38 of 65 -- 36 local distribution of its products in such a way that its directors took a share of profits which could have been paid to the company is alleged to have been unfairly prejudicial to, or discriminatory against, the applicants, and contrary to the interests of the members as a whole. Much was made of suggested conflicts of duty and interest involving the directors: understandably so. Breach of a director's fiduciary duties will often indicate unfairness of a kind sufficient to sustain an exercise of the Court's remedial jurisdiction under s.260. 69 Rules developed in Chancery having their "'foundation' in that hallowed orison, 'lead us not into temptation'" 70 might be expected to be consistent with commonly accepted notions of fairness. However, the general rule "that no one who has duties of a fiduciary nature to perform is allowed to enter into engagements in which he has or can have a personal interest conflicting with the interests of those he is bound to protect"71 is prophylactic72 and may operate with such strictness 73 as to produce results not always in accord with ordinary conceptions of what is fair. 74 In any event, the question which the legislation makes decisive to the existence of a sufficient justification for intervention in a case such as this is not whether there has been a breach of fiduciary duty. It is whether there has been unfairness of a kind envisaged by the section. 69 Jenkins v. Enterprise Gold Mines NL (1992) 6 ACSR 539, 551-552; Jeffrey G. Macintosh, "The Oppression Remedy: Personal or Derivative?", (1991) 70 The Canadian Bar Review 29, 57. 70 In Re Drexel Burnham Lambert Pension Plan [1995] 1 WLR 32, 39F. 71 Regal (Hastings) Ltd v. Gulliver [1967] 2 AC 134, 137n. 72 R.P. Austin, "Fiduciary Accountability for Business Opportunities", in P.D. Finn (ed.), Equity and Commercial Relationships, (1987) at pp. 177-178. 73 See Webb v. Stanfield [1991] 1 Qd R 593, 596. 74 cf. Chan v. Zacharia (1984) 154 CLR 178, 204-205; In Re Drexel Burnham at 36F, 41; R. Teele, "The Necessary Refoonulation of the Cassie Fiduciary Duty to Avoid a Conflict of Interest or Duties", (1994) 22 Australian Business Law Review 99, 100-101; G. Jones, "Unjust Enrichment and the Fiduciary's Duty ofLoyalty", (1968) 84 The Law Quarterly Review 472, 473-474, 478. -- 39 of 65 -- 37 The decision to establish the distributor as a distinct entity is not said to involve unfairness. Nor is there a complaint about the allotment of a substantial shareholding to those directors responsible for BPS's day to day operations. The applicants accept that the incorporation of a distributor in which the working directors owned a major shareholding was likely to advance the company's interests. Events have proved the wisdom of those decisions. BPS has been a valuable adjunct to the company's operations, its success in adding to sales yielding "nontrivial synergistic gains". 75 The complaint relates exclusively to the shareholding which Marcus and John took. It is not necessary to decide whether the business of BPS was so related to the sphere of the company's then present and likely future interests that the shareholding of Marcus and John in BPS constituted a breach of their fiduciary duties to the company. 76 That is because, quite apart from the understandable reluctance of Marcus and William to involve the company in the venture, 77 all the other shareholders either knew of and acquiesced in the share structure of BPS or would certainly have given their free assent had they known of it. Informed assent is obviously significant. The attitude which uninformed shareholders would have taken to the allotments to Marcus and John had they been told of them seems irrelevant 75 V. Brudney and R. C. Clark in "A New Look at Corporate Opportunities" (1981) 94 Harvard Law Review 998, 1012. 76 See R.P. Meagher, W.M.C. Gurnmow & J.R.F. Lehane, Equity Doctrines and Remedies. 3rd ed. (1992) pp. 140-144; Fletcher Cyclopedia of the Law of Private Corporations (1994 revision) Vol. 3 §861.10-.40 at pp. 284-298; J.C. Shepherd, The Law of Fiduciaries. (1981) Chap. 20. 77 See pp. 7-8. It is irrelevant to an inquiry whether there w~ a breach of fiduciary duty that the company would not have subscn"bed for shares in BPS: Wannan International Limited v. D'£:)'.er, High Court of Australia, FC 95/012, 23 March 1995, p.10; cf. B. Harris, "Fiduciary Duties of Directors under the Companies Act 1993", [1994] The New Zealand Law Journal 242, 243; Michael Begert, "The Corporate Opportunity Doctrine and Outside Business Interests", (1989) 56 The University of Chicago Law Review 827, 833-837. But fairness is what matters, and perhaps it might not have been unfair for Marcus and John to have taken an opportunity which the only disinterested, active member of the Board preferred the company to decline. -- 40 of 65 -- 38 to any inquiry whether the acquisitions breached fiduciary duties. 78 But that attitude surely bears on whether the acquisitions were unfair or else, if unfair, require a remedy under s.260. Francis remained on good terms with his brothers. In the early 60s he visited Yeerongpilly for board meetings and other purposes, although he was happy to let his brothers run the family enterprises. He knew of the shareholding in Cabinet Timbers, 79 and there is no suggestion that he was unhappy about his non-participation in that Victorian distributor. If Francis did not actually know of the share structure of BPS, he would, I think, have been satisfied with the arrangements for the organisation and control of the new Queensland distributor. William knew of the share structure of BPS and gave his informed consent to it. 80 Other than Francis, Marcus, William and John, when BPS was incorporated in 1963 the company's shareholders were Marcus's five daughters, William's wife and two daughters, and Leah Doolan, each of whom held 1,000 shares. 81 Marcus's daughters would have deferred to his judgment. William was accustomed to speaking for his family on company matters. His wife and daughters were content that he do so. 82 His views about BPS were conveyed as his family's attitude. Moreover, William's wife and daughters would unhesitatingly have acted on his point of view had he 78 Usually the consent of all is needed: Gemstone Corporation of Australia Limited v. Grasso (1994) 62 SASR 239; Estate Realties Ltd v, Wignall [1992] 2 NZLR 615, 621; In Re Gee & Co {Woolwidl) Ltd [1975] Ch. 52, 710; D.E. McLay, "Multiple Directorates and Loss of Corporate Opportunity: Bases and Remedies", (1980) 10 Victoria University of Wellington Law Review 429, 432-433. Some Articles of Association admit of sufficient disclosure to the Board: Centofanti v. Eekimotor Pty Ltd 0995) 13 ACLC 315, 316-317, 326. In view of my conclusions, there is no point in examining the company's Articles to ascertain whether the informed consent of Francis and William sufficed. 79 See footnote 6. 80 See pp. 7-8. 81 1,000 shares then represented 2.16% of the issued capital. 82 See p.10. -- 41 of 65 -- 39 bothered to explain what was proposed. In short, if asked, his wife and daughters would have assented to the acquisition by Marcus and John. This leaves Leah Doolan. She was a niece of Donald's wife and, according to John Brims, became like a sister to Margaret Brims, who was Donald's daughter. After the deaths of their parents, Francis, Marcus and William cared for Leah Doolan. She received a weekly allowance which was paid at first from company funds. Eventually, at the auditor's suggestion, 1,000 shares were given to her so that she would receive a measure of support through dividends rather than by gifts. Leah Doolan's shareholding was transferred to John Brims in June 1965 under her will. There is no reason to doubt that she also would have freely consented to the arrangements for BPS had she been made aware of them. All the shareholders other than Marcus and John Brims gave their free and fully informed consent to the allotments or else would have done so had their views been solicited after disclosure to them of the pertinent facts. So even if the allotments could be regarded as unfair on the footing that informed consent was not actually given by all shareholders, still no case for relief under s.260 is made out in respect of them. 83 Massie's 25% interest was offered to John Brims because John had shares in BPS, not because he was a shareholder in or director of the company. The shares David bought from Massie were shares his father directed to him. There was no unfairness in those acquisitions in 1986 by John and David Brims. There remains the newest contention: that the company should have determined its arrangements with BPS after BPS became profitable, 83 It is not necessary to consider whether the delay in attacking the allotments, especially given Mr Price's knowledge of the shareholdings for two decades or more, would have required refusal of a remedy. -- 42 of 65 -- 40 substituting other means of distribution. As this argument84 runs, because the company had no long-term contracts with BPS the chance to distribute its own products85 in Queensland "was not an opportunity that presented itself once only and, not having been taken, was lost forever. It was at all times available. To take it, all that had to be. done was for the company to make use of the knowledge and experience it had gained in the distribution of its product in Queensland and set up a subsidiary company or employ salesman directly. There was no reason to think that the employees of [BPS] would not have joined the new company or the company itself. Once [BPS] lost its business of distributing the company's product, there was no reason for them to stay on and every reason to conclude they could have been persuaded to join the new company. Even if they did not there was an established market for the company's product and a ready- made role for a distributor of the product. " The applicants' case assumes (i) that Weston, on whose management and sales skills BPS has relied since 1986, 86 would have been content to be employed by the company or else to manage a wholly-owned subsidiary trading exclusively in the company's products; and (ii) that such a different business would have been profitable enough to justify terminating the arrangements with BPS. These are not axiomatic propositions, and intuition is no substitute for proof. 84 As an issue was made of it, mention should also be made of non-disclosure of advantages Marcus, John and David Brims derived from BPS. Contrary to law (see s.270(7) Companies Code and s.309 CQnxx:ations Law), for many years the directors' reports did not reveal the contracts with the company which were the source of benefits derived from BPS by Marcus and John and, after 1986, by David Brims; There was nothing sinister about the omission. Various accountants and auditors had taken the mistaken view that the disclosures were not required. And the non-disclosures have no present significance. Ray Price knew of the shareholdings and directorships of Marcus and John; and, at least since 1973, be has realized that dividends were paid in respect of those shareholdings. As to Mrs Price, if, which seems most unlikely, she would have read the disclosures had they been made, she would not have understood them. Such disclosures probably would not have affected Pauline or Michael either. They, like their parents, did not ask about the profitability of BPS nor, until after the hearing began, claim that the company should have detennined the BPS distributorship. 85 The applicants restricted themselves to a case that the company should have taken so much of the business of BPS as involved the distribution of the company's products. 86 In principle, the same contention extends to Massie and Raymond. However, Mr Oiestennan confmed the claim on this aspect to compensation for lost dividends since 1987 (see p. 1207), by which time Massie and Raymond had gone. Anyhow, at least until some time after Michael went to work in de Nooy's office, all the shareholders probably would have been happy for BPS to remain as the Queensland distributor, which is another reason for conf"ming attention to the period after Massie left. -- 43 of 65 -- 41 By 1976 BPS was selling goods other than the company's. The proportion of sales of non-Brims products has gradually increased to 40%. The mark-up on Brims products has often been a deal less than the mark-up on non-Brims goods and a substantial proportion of the gross profit of BPS has been related to non-Brims products for quite a while. However, there was no exploration in the evidence of matters relating to the profitability of a Queensland distributorship which sold only the company's goods: issues such as the extent to which BPS's profits have been attributable to the non-Brims lines; any economies of scale resulting from sales of non-Brims products; or the flow-on effect of any attraction to customers in being able to buy a diverse range of timber and related products from the one outlet. Massie, John Brims and David Brims have first-hand knowledge of BPS and testified. They were not asked about the potential profitability of a business selling only Brims products in the geographical area in which BPS operates. Several accountants also gave evidence: Mr de Nooy, Mr Moores, Mr Calabro and Mr Heffernan. None was invited to express a view about the viability of a distributorship restricted to sales of Brims products. Mr Weston, who knows more about such things than anyone else, did not give evidence. The other distributors also sell non-Brims products. There was no examination of the importance to those enterprises of those sales. Nor is it apparent that Weston would have been happy with the scheme the applicants propound. Massie was not asked questions directed to this issue. No evidence indicates Weston's likely reaction to the proposal. It is not self-evident that those who have conducted BPS's day to day operations would have joined the proposed new distributor or been willing to become company salesmen. -- 44 of 65 -- 42 Directors with no stake in BPS were witnesses: de Nooy87 and Allan Brown. Neither has wanted to change the arrangements with BPS. In particular, Mr de Nooy, who knew about BPS's operations, shareholdings and profits, preferred that the company not distribute its own products in Queensland. He saw no reason to alter arrangements which he regarded as having been advantageous from the company's perspective for a long time. Ray Price, who knew of the volumes of sales to BPS and knew or could easily have learned the mark-up on Brims products, did not testify to facts to support the new case that considerations of fairness should have impelled the adoption of different means of distributing in Queensland. Put shortly, it is not proved that retaining BPS as the Queensland distributor has been unfair to the company or to its shareholders. 88 Board Representation No complaint of absence of Board representation was made by the "heads of oppression" delivered a few weeks after the 1991 AGM. That is, I suppose, because the applicants were then anxious to dispose of their shares and saw no point in continuing with Board representation. The statement of claim, however, does allege that the applicants "are not represented on the Board ... ", and it refers to the circumstances in which Mr Price was not re-elected. The pleading asserts that the respondents "have used and continue to use their position of dominance" to prevent the election of Mr Price as a director in 1991 and to "prevent the Price family from being otherwise represented on the Board". The pleading did not mention Mrs Price's failed attempts to join the Board. That complaint was left until the hearing. 87 de Nooy retired as a director at the 1994 AGM held a week before the hearing began. 88 So is not necessary to consider the respondents' conjecture that termination of BPS's distributorship would have been seen as sharp practice and discouraged people from buying the company's products. -- 45 of 65 -- 43 It was unfair of John Brims to rule against Mrs Price's surprise nomination at the 1987 AGM. This honest mistake was based on erroneous advice given impromptu by Mr de Nooy when Mrs Price nominated from the floor. The error made no difference. Mrs Price has never had sufficient support to secure her election to the Board, and for adequate reasons. 89 There is also an objection to the procedure at the 1988 AGM when no vote was taken on her candidacy. The procedure was not unfair. In any event, Mrs Price would not have been elected whatever the procedure. Mr Price's 1991 nomination was made after the company's solicitors had sought his resignation from the Board. The request was a predictable response to the applicants' solicitors' letter of 31 July, which identified Mr Price as having been "extremely unhappy for many years" and as wanting to sell his shares to "sever all relationship with the company". After those revelations, his failure to secure re-election was almost inevitable. Mr Price himself realized that the letter would result in a major loss of confidence in him. There were three votes in favour of Mr Price's re-election and six against. Only Mr Price's family supported him. John Brims voted against him mainly because Mr Price, by the solicitors' letter, had claimed to be disgruntled for years during which he gave the impression of supporting the Board. Allan Brown voted against Mr Price because he thought that Mr Price had been "disloyal to the company". Mr de Nooy felt that Mr Price could no longer be trusted to discharge his duties as a director. David Brims voted against the nomination because of the solicitors' letter. Robert Brown and John Brims's daughter, Julie, also voted no. 89 What is said at pp. 18-20 gives an insight. It would be needlessly hurtful to Mrs Price for me to elaborate. Despite the large shareholding she controls, it is not unfair that she h~ not been a director. -- 46 of 65 -- 44 The reaction of Mr Price's fellow directors was not unreasonable. The first tangible indication he gave to the Board of dissatisfaction with the conduct of the company's affairs was by the solicitors' letter. The letter was implicitly critical of decisions in which he had participated. It made clear his determination to sever all association with the company. And its claims that he had been extremely unhappy for many years made him appear two-faced. After that letter, the other directors could not have been expected to support his nomination for another term. Mr Price was not re-elected in 1991 because of a justifiable response to his conduct. 9() The failure of Mr Price's bid did not involve unfairness. 91 The applicants object that they remain without Board representation. It is not unfairness that accounts for this situation. Since 1991 the applicants have not sought the appointment of a representative. They can have a director if they want. During Mr Chesterman' s final address, the applicants developed a case that the directors were determined that the applicants would never have Board representation even if they failed to obtain a purchase order.92 The respondents then announced93 that a suitable person nominated by the applicants to represent them would be appointed pending my decision and, if the applicants do not obtain an order for the purchase of their shares, indefinitely. The 90 Generally as to the significance of an applicant's conduct, see In re London School of Electronics Ltd [1986] Ch. 211, 222; Morgan v 45 Fiers Avenue Pty Ltd (1986) 10 ACLR 692, 706. 91 The applicants must have realized that the 31 July letter would almost certainly mean that Mr Price would not be re-elected. If they were then concerned to have Board representation, which the absence of complaint in the "heads of oppression" suggests they were not, it might have been expected that they would have sought the appointment of someone else to represent them. 92 Which the respondents should have anticipated from the statement of claim and the applicants' amended statement of issues. 93 See p. 1259, para. 6 of ex. 110 and ex. 115. -- 47 of 65 -- 45 case that the respondents have used their position to prevent the applicants from being represented on the Board is not made out. 94 No Dividend in 1991 Non-payment of dividends can constitute unfairly prejudicial conduct enlivening the court's remedial jurisdiction. 95 There is a circumstantial case that John Brims was actuated by spite or by a desire to injure the applicants when he proposed that the Board recommend against a dividend in 1991.96 When that happened (i) the company had not failed to declare a dividend for almost 30 years; (ii) the decision roughly coincided with the request to Mr Price to resign from the Board; (iii) John Brims knew that litigation by the applicants was on the cards and must have suspected that they might need money to fund it; (iv) John Brims could ensure that his own overall financial position was not prejudiced by getting BPS to declare an enhanced dividend, which BPS did; (v) the need to fund capital expenditure - the main reason assigned for recommending against the dividend - had existed for several years during which dividends had been paid; and (vi) not two months had passed since the Board, in fixing the fair price of a share by reference to anticipated future dividends, remarked that "based on current ... trading, there is no reason to expect that the Dividend over future years will in general 94 John Brims is unhappy at the prospect of an outsider's joining the Board. Only employees and fonner employees have ever been directors. More than three weeks elapsed from Mr Cltesterman's opening address, when it was said that the company has never suggested to the applicants that they might care to nominate, for example, an accountant or solicitor to represent them, before a willingness to make such an appointment was conveyed. It now appears, however, that the respondents accept that the applicants must have Board representation if they propose someone suitable. 95 In Re Sam Weller & Sons Ltd (1990] Clt. 682; cf Re Bagot Well Pa5toral Co Pty Ltd (1993) 61 SASR 165, 176-177; D.D. Prentice, "The Theory of the Firm: Minority Shareholder Op~ioo ... ", (1988) 8 Oxford Journal of Legal Studies 55, 79; 18A American Jurisprudence 2d §.768 at p. 637; G. Shapira, "Statutory Protection of Minority Shareholders: Towards the Squeeze-Out", in J.H. Farrar (ed), Contemporru:y Issues in Company Law, (1987) pp. 203, 215, 218. 96 In general, even though the central issue is the impact of impugned conduct, improper motive is not irrelevant: Wayde v. New South Wales Rugby League Ltd (1985) 180 CLR 459,470; Prentice op cit p.78; cf Re Sam Weller & Sons Ltd at 690. -- 48 of 65 -- 46 deviate from this trend [of $1 per share], even though this may vary for a particular year". Further, the need for capital expenditure has persisted in subsequent years when dividends have been paid; 97 and within a couple of days of the 1991 AGM Mr Price was given new responsibilities and privileges which he found so demeaning that he resigned as an employee. Yet John Brims, who presents as a truthful person, denied that his object in recommending against a dividend was to deprive the applicants of funds. And there are reasons for supposing that the decision not to declare a dividend reflected a balancing by the general meeting of the assessed needs of the company against the ordinary expectations of shareholders to a reasonable return on invested capital. 98 The company has an old policy of saving rather than borrowing. In May 1927, at a meeting chaired by Donald Brims, the Board resolved "that the company must be kept in black as at present, clear of all outside influence". Apart from an overdraft facility in the early 60s, the company has not borrowed for a long time. Retained earnings and current profits fund modernisation of plant and equipment and expansion. Consistently with the company's determination to "pay its own way", as John Brims summarises its business philosophy, dividend policy has always been conservative. The level of dividends has necessarily reflected the need to finance recurrent and new expenditure from retained funds. Even so, until 1991 the company had rarely failed to pay a dividend since the early 50s. Each year the directors considered the accounts prior to the AGM and discussed the dividend. Typically the Board assessed the requirements for additional capital items as well as for large recurrent expenses. Because of the entrenched opposition to borrowing, 97 The company, however, has decided to defer major capital expenditure until these proceedings finish. 98 cf United States v. Byrum 408 US 125, 140-142, 158-159 (1971). There is no suggestion that any shareholder had a need for money that year. -- 49 of 65 -- 47 anticipated expenditure was always significant in deciding how much the company could afford to distribute in dividends. The directors' report for the year ended 30 June 1989 spoke of difficult times in which sales had been a major problem. The report forecast that the 1990 year would be "less profitable", adding that "the retention of funds to enable the company to maintain its plant modernisation program is therefore essential". For the 1989 year, however, the Board recommended that the dividend be increased by 20% to $1.20 per share, fully franked. In their 1990 report the directors recorded a 35% drop in net trading profits before tax "mainly caused by sharp increases in costs". More than $200,000 had been expended on capital items and substantial expenditure was foreshadowed. This report mentioned a need to replace a dryer and other plant. "Sufficient funds must be retained ... to finance the planned capital expenditure", said the report. Yet a fully franked dividend of $1.00 per share was recommended despite a forecast that the 1991 year would be less profitable. Capital expenditure in the 1991 financial year was more than $930,000, which far exceeded the net profit after tax of less than $550,000. Again the foreseeable future was viewed pessimistically. When the Board met on 22 July 1991 to consider drafts of the annual accounts and directors' report which de Nooy had prepared, John Brims pointed out that "it was important that serious consideration be given to the dividend to be recommended" in view of what the minutes describe as "the difficult economic situation". Mr de Nooy's report mentioned the planned purchase of a new veneer dryer to cost about $1M. 99 de Nooy wrote that "a concerted effort needs to be made to finance such a large capital item and sufficient funds must be retained in the company for this purpose". When he prepared the report, de Nooy was expecting a lower than usual dividend, especially because the need for 99 The need for the new dryer was apparent in the 80s and savings were progressively made to buy it. -- 50 of 65 -- 48 major capital expenditure was becoming pressing. Mr de Nooy gave the directors his calculations of the costs of paying dividends ranging from 50 cents to $1 per share. He was not then envisaging that no dividend would be paid in 1991. Plainly, however, the ciirectors100 were thinking about an unusually low dividend before the 31 July letter arrived. On 26 August they resolved to recommend that no dividend be paid. Although he initially anticipated a smaller than usual dividend, on reconsidering the company's circumstances and the requirements for imminent capital expenditure, Mr de Nooy decided to recommend against a dividend. His assessment was that the company's interests would best be served by not paying a dividend that year. He believed that the company just "could not afford" it. After discussion, all the directors, except perhaps Mr Price, came to that view. Mr de Nooy's understanding of company matters was considerable. And he is not the kind of person to have allowed the 31 July letter to deter him from giving effect to his obvious sense of duty to shareholders. David Brims believed that replacing equipment was such an urgent priority as to justify withholding a dividend, reaching that view after discussion among the directors. Allan Brown also thought it wise to say no to a dividend that year. Two other burdens on company funds were mentioned by John Brims as among his reasons for recommending against a dividend. One was a potential liability arising from these proceedings: the cost the company might incur in having to buy the applicants' shares. The other related to the expense of setting up the new Victorian distributor after termination of the Cabinet Timbers distributorship. 100 There were directors' meetings, formal and informal, at which the 1991 dividend was discussed. At one informal meeting John Brims raised the prospect of not paying a dividend. Ray Price might not have been there; but he admits that he was told by de Nooy weeks before the Board met on 26 August "to think about the dividend we should pay because we want to retain money in the company for buying a new dryer". Mr Price was aware that the dryer was to cost about $1 M. -- 51 of 65 -- 49 The directors' report identified an urgent need to replace four heaters and spoke of the planned purchase of the dryer. It emphasised the "concerted effort" that had to be made to finance these major capital items and continued: "Due to the poor economic conditions in Australia, demand for our products has deteriorated significantly since the 30th June, 1991. The company has consequently reduced production in both the Particleboard and Plymill operations and cut back on employee numbers. This downturn has and is expected to continue to adversely affect profitability and put a severe strain on the company's liquidity in the current financial year. In view of this, and with the need to conserve funds as much as possible for necessary capital expenditure as outlined above, your Directors feel that the best interests of the Company will be served by not declaring a dividend out of the 1990/91 profit and hereby recommend that no dividend be paid." This report was sent to shareholders some weeks before the AGM. It accurately stated the facts, and it recorded the Board's considered judgment. The recommendation was not prompted by any improper motive or extraneous object. Only the applicants voted in favour of a dividend. By then their interests were no longer co-extensive with those of the other shareholders. The applicants had no eye to the company's future. They wanted to go, and soon. Notwithstanding available funds and franking credits, all the other shareholders apparently accepted that the company's interests would best be promoted by sacrificing a dividend to expedite replacement of plant and equipment. The company had needs which the shareholders could reasonably have regarded as sufficiently pressing to justify not taking a dividend. A balancing is called for to determine "whether the detriment occasioned to the [applicants'] interests arising from the acts or conduct of the company ... is justifiable" . 101 In the light of such things as the history of the company, its firm opposition to borrowing, 101 Thomas v. H W Thomas Ltd [1984] 1 NZLR 686, 695, referred to with apparent approval in Wayde at 466 and Re Macro (Ipswich) Ltd [1994] 2 BCLC 354, 404. -- 52 of 65 -- 50 the extent of its needs, the prevailing and expected circumstances, the reasonable expectations of members generally, and the absence of any particular need of the applicants for money, the AGM's decision not to pay a dividend was justifiable. Valuations Valuations by the Board and the auditor of the price at which the applicants' shares might be sold are also challenged. The statement of claim alleges that the 8 July 1991 Board determination of a "fair price" of $20.50 per share and the auditor's valuation of $22.14 are manifestly inadequate. 102 Article 31 requires that a "shareholder desirous of selling ... his shares" must first offer them to other shareholders at the price fixed in accordance with the Article. If not purchased, the shares may be offered to anyone "but not at a price less than that fixed" under Article 31 (i), which provides: "The fair price of shares shall be fixed by the Directors once a year for such year in the month of July or August . . . In the event of any party being dissatisfied with the fair price so fixed the fair price shall be determined by the Company's auditor whose decision shall be final and goodwill shall for the purpose of such determination be taken as of no greater value than the aggregate net profits of the two preceding financial years of the Company less interest for the like period at the rate of six per centum per annum on the actual capital apart from goodwill engaged in the business but in other respects the Company's last balance sheet shall be the basis for determination." The case against the directors' determination begins with an assertion that the price they fixed "was not a fair price ... having regard to all other matters pleaded in the statement of claim": for example, the suggestion that the company should have been a shareholder in BPS. There is no merit in those allegations of unfairness which, if made out, could have 102 The applicants addressed on other allegations: that John Brims (i) had interfered in the auditor's assessment and compromised the auditor's independence; (ii) when he participated in fixing the "fair price", had a conflict of interest because he was then a prospective purchaser; and (iii) with other directors, had tried to coecce the applicants into accepting the auditor's price. Nooe of these assertions was pleaded so it is not necessary to comment on them. As it happens, the complaints are, in summary, without substance. -- 53 of 65 -- 51 impinged on the fair value of the shares in July, 1991. The Board's determination is beyond criticism absent any other ground for challenging it. The applicants do make an additional complaint: the broad allegation that the "totality of evidence" shows that $20.50 per share "was not a fair price" . 103 The directors' determination was strongly influenced by de Nooy's views. In 1991 Mr de Nooy was keen to sell his and his wife's shares. Notwithstanding his personal interest, de Nooy approached the assessment of the price conscientiously. No contrary suggestion was put to him. Nor was it suggested to any director, or said by Mr Price, that the Board did not carry out its task diligently. The directors gave the shareholders written reasons for assessment, adverting to the illiquidity of a shareholding. The report conveyed the Board's view that a valuation under Article 31 should be based on prospective dividends, using the past as a guide as to what the future might hold. The Board multiplied by 20 the average dividend paid in the previous four years. No specific criticism was made of this methodology. The case against the directors' valuation really comes to this: that it is too low when compared with the valuation made by Mr Heffernan, the accountant called for the applicants. Mr Heffernan's evidence was mainly directed to the value of the shares at the end of the 1993 financial year. It is convenient to defer discussion of his valuation as at July 1991 until after consideration of the rival contentions about the 1993 values. The usual methods of valuing a shareholding in a closely held corporation are an assets-based assessment, capitalisation of maintainable earnings, dividends return valuation, and a combination of those approaches. 104 The Board employed a dividends return valuation. 103 Once the auditor made his assessment, the directors' valuation no longer had significance for the applicants' rights under Article 31. The applicants persist with this claim to bolster a case that intervention under s.260 is needed. 104 V. Krishna, "Determining the Value of Company Shares", (1987) 8 The Company Lawyer 66; Re Smeenk and Dexleigh Corp. (1990) 72 DLR (4th) 609, 620-621; J.F. Corkery, "Oppression or Unfairness by Controllers ... ", (1985) 9 The Adelaide Law Review 437, 456-457; S. Sirianos, -- 54 of 65 -- 52 The experts considered both an assets-based valuation and the capitalisation of maintainable earnings method. The value of the shares on the basis of a notional, orderly realisation as at 30 June 1993 is not seriously in contest. After allowing for the tax which would be payable on such a distribution, Mr Heffernan assessed the value of the applicants' shares at $24.56 each. Mr Calabro, the accountant called by the respondents, put the figure at $25.14. As differences between experts go, this is but a little argument. Averaging is justified. $24.85 may fairly be regarded as the value of each of the applicants' shares at the end of the 1993 year, assuming an orderly liquidation. Winding up is not sought, the company will go on, and a valuation consistent with the realities must be considered. Mr Calabro considers it appropriate to capitalise the estimated future maintainable earnings after tax ("FME") to ascertain the worth of the shares. Subject to one qualification, so does Mr Heffernan. Mr Heffernan thinks that if the assets valuation is materially higher than that suggested by capitalising FME, the former should be adopted. 105 He reasons that in such circumstances the company "should be liquidated and the cash returned to the shareholders". If all that the shareholders had at stake was their shareholding, there would be much to be said for this approach. It would accord with self-interest, rationally assessed. But the logic breaks down when the interests of the shareholders of this enterprise are examined. Some have sentiment invested. Others depend on the company for employment. Mr Heffernan acknowledged that an assets-based valuation will often be higher than an "Problems of Share Valuation Under S.260 of the Corporations Law", (1995) 13 Companies & Securities Law Journal 88, 97-103. Many factors can influence the value of shares in a closely-held corporation: cf. Gambotto v. WLP Limited (1995) 13 ACLC 342, 349, 355. 105 The accountants used different valuation dates. Mr Heffernan chose 30 June 1993; Mr Calabro chose 16 August 1993. It is common ground that nothing turns on this. -- 55 of 65 -- 53 earnings-based assessment with private companies. 106 The majority shareholders have no intention of selling the company, which will continue even though its shares are worth more on a liquidation. Mr Calabro's preference for an earnings-based approach is sensible. The accountants agree on a post-tax FME of $559,000. They agree too on an after-tax earnings multiple of approximately 7.81, assuming no adjustment for notional gearing or a minority shareholding discount. 107 On this basis, before adjustments, the applicants' shares are to be valued as follows: Agreed FME Agreed multiple Divided by number of shares Value per share $559,000.00 7.81 $4,367,187.00 238,684 $18.30 The accountants disagree on whether adjustments should be made for surplus cash, surplus buildings and notional gearing. Mr Heffernan would adjust for those things. Mr Calabro would not. In principle, an adjustment should be made where cash holdings are surplus to requirements. The company has accumulated cash reserves of about $1.5M. These moneys are needed for the projected capital expenditures necessary to maintain competitiveness. Once 106 cf. Z. Shishido, "The Fair Value of Minority Stock in Oooely Held Corporatioos", (1993) 62 Fordham Law Review 65, 88-89: "it is entirely possible that the asset value will be higher than the cash flow discounted value. Economically, a corporation whose asset value is higher than its cash flow discounted value should be dissolved. In the real world, though, many corporations with higher asset values are preserved. Some reasons for continuing are: the majority shareholders may love their business (or its perks); the majority shareholders may not like to fire employees (including themselves); or the majority shareholders may be waiting for the minority shareholders to sell their stock. In fact many corporations exist with asset values higher than the cash flow discounted values." 107 The multiple does reflect a discount for lack of marketability, as both accountants agreed it should. -- 56 of 65 -- 54 this case concludes, 108 over the next few years the company proposes to spend more than $2. 75M on plant and equipment, of which $1.2M relates to the veneer dryer. There is, however, no satisfactory basis for concluding that this expenditure will increase efficiency, productivity or earnings to an appreciable extent. In short, the cash is needed soon, and it is not surplus. So, as Mr Calabro said, no adjustment should be made for it. Mr Heffernan suggested an adjustment for two buildings. A shed has been let to a furniture manufacturer at $600 per month. The other building is used for storage. The Board plans to use the storage building for the drying plant and to demolish the shed. So neither building is surplus to requirements; nor will the buildings generate rental income in the longer term. As Mr Calabro said, no adjustment should be made for them in an earnings-based valuation. Mr Heffernan considers that the value of the company would be enhanced were it to operate in a "geared" manner. He assumed a notional level of gearing of 30%, which is about half the level normally undertaken by public companies. Such a borrowing would create surplus cash of $3.lM. Mr Heffernan then treats the notional borrowing as partly payable to shareholders and otherwise as a source of funds available to earn other income. Next, the interest applicable to the borrowing is taken into account. Mr Heffernan thinks that substantial borrowings would be prudent, that the income suffices to pay the interest, and that the assets would provide enough security to attract a reasonable rate of interest. It is unrealistic to expect the long-standing opposition to major borrowing - a practice which is not alleged to be unfair - to change in the foreseeable future. John Brims was horrified at the idea that the company should borrow heavily; and no other shareholder has 108 The directors' report of 24 August 1992 explains that expenditure needed to maintain future viability was deferred because these proceedings seemed imminent. Unfortunately, Mr Heffernan had not read this report or earlier reports discussing the need for capital expenditure when making his initial valuation. He formed his views without an accurate understanding of pertinent facts. -- 57 of 65 -- 55 indicated a wish to change entrenched business practices. Substantial loans would require the personal guarantees of the directors. In all likelihcxxi, the company will continue to fund expenditure from savings. An adjustment to FME that proceeds upon a contrary assumption is inappropriate. Some allowance might be made for the chance that a purchaser of the company's shares or assets might pay a little more because the company has not borrowed and retains a potential to do so. That remote prospect aside, the shares should be valued having regard to the company as it is and will remain, not by reference to an assumed state of affairs which is most unlikely to eventuate under the present owners. I prefer Mr Calabro's opinion that no adjustment should be made for notional gearing. To this point, then, the preferable method of valuation indicates that the value of the applicants' shares as at June 1993 was $18.30 each. Mr Heffernan made an assessment as at 8 July 1991 of the value per share on an earnings basis as in the range $27 .12 - $27. 97. His calculation assumes surplus cash, surplus land and buildings and notional gearing - all inappropriate assumptions. Mr Calabro, who has a sounder understanding of the company's circumstances and plans than Mr Heffernan, 109 considers that the shares were worth slightly more in July 1991 than in 1993. Without discounting for the applicants' minority interest, in Mr Calabro's opinion, in July 1991 a share was worth less than $20. A price somewhat higher than $20 could realistically have been chosen, 110 but Mr Calabro's careful analysis shows that the contention that the prices fixed by the directors and by Mr Jolly were unreasonably low must fail. 111 109 I express a general preference for the evidence of Mr Calabro. 110 See the considerations mentioned later under "Price". 111 Which makes it unnecessary to consider whether the auditor's determination was an "act ... on behalf of the company" within s.260(2). -- 58 of 65 -- 56 Misuse of Company funds Many thousands of dollars of company funds have been spent on lawyers, accountants and valuers in defending these proceedings on behalf of the majority shareholders. This is unfair and infringes the basal principle that "the powers, and the funds, of a company may be used only for the purposes of the company". 112 No doubt a small part of the expenditure was justifiable; for example, in discovery, and in resisting such orders as that the company purchase the shares or pay a dividend for 1991. Expenditure to protect its discrete interests or for other proper purposes of the company may be made from company resources. The essential dispute here, however, is between the shareholders; and company funds should not have been used to defend the majority shareholders. 113 The company was not separately represented. After the case concludes, in accordance with a December 1993 Board resolution, the other respondents were to be asked to pay any costs of representing them beyond those incurred for the company. This inverts the proper approach, which in this case required that the majority shareholders meet the great bulk of the costs of representing all the respondents. This unfair conduct, in which all respondents joined, is discriminatory. Auditor's determination The applicants seek a declaration that Mr Jelly's price of $22.14 is not binding. The respondents counter-claim for a declaration that the applicants had to offer their shares at his valuation. These claims raise the same question: whether Mr Jelly's determination was made in accordance with Article 31(i). 112 Advance Bank Australia Ltd v. FAI Insurances Ltd (1987) 9 NSWLR 464,493, cited approvingly in ANZ Executors & Trustee Company Limited v. Ointex Australia Limited (1991] 2 Qd R 360, 370. 113 Re a Company (No 4502 of 1988) [1992] BCLC 701; Re a Company (No. 1126 of 1992) [1994] 2 BCLC 146; Coombs v. Dynasty Pty Ltd (1994) 14 ACSR 60, 94. The Board acted on legal advice, which is no defence: see Re M. Dalley & Co Pty Ltd (1968) 1 ACLR 489, 492 and footnote 96. -- 59 of 65 -- 57 In September 1991 accountants engaged by John Brims, Price Waterhouse, gave their opinion on the fair value. Mr Jolly's drafts of his decision show that he relied on their opinion. Those accountants began by establishing $28.66 as the maximum price the auditor might fix. Next they considered two methods of valuing the applicants' 31.12% parcel. The first capitalised future maintainable earnings. This basis, said to be applicable where a vendor was unwilling to sell, suggested a "pro-rata value" in the range $22.70 - $24.20. The second method attempted to ascertain a "fair market value" based upon "capitalised dividends". This approach took account of the illiquidity of the shareholding and other considerations pertaining to a minority parcel. On this second basis, the value was assessed as being in the range $14.20 - $17.30. Mainly because Article 31 contemplated willing vendors, Price Waterhouse thought that the "fair price" was between $14.20 and $17.30. Unfortunately, those accountants erred; and their mistakes infected Mr Jolly's valuation. Except in respect of any allowance for goodwill, Article 31 (i) requires that the "company's last balance sheet shall be the basis for determination" by the auditor. The 1991 balance sheet shows net assets of $5,136,317. Price Waterhouse, however, notionally reconstructed the balance sheet by adding on the value of the company's interests in the New South Wales distributor. Further, instead of adopting the prescribed method to allow for any goodwill, Price Waterhouse used double the average of the assets of the company and Dutton in the preceding three years. When Mr Jolly echoed these mistakes in his assessment, he failed to comply with Article 31(i). Although the auditor's determination is "final", the valuation cannot have that character in view of the fundamental nature of the errors. 114 Mr Jolly's decision is not binding. 114 Wickham Properties Pty Ltd v. The Astor Pty Ltd (1991] Q Coov R 54-391; Jones v. Sherwood Computer Services PLC [1992] 1 WLR 277; J Kendall, "Ousting the Jurisdiction", (1993) 109 The Law Quarterly Review 385, 388-389. This was a non-speaking valuation but the evidence reveals that Mr Jolly repeated the errors: cf. Holt v. Cox (1994) 15 ACSR 313, 333. -- 60 of 65 -- 58 Remedies The applicants are entitled to a declaration that Mr Jolly's determination of $22.14 per share is not binding. The respondents' counter-claim seeking a contrary declaration must be dismissed. The next issue concerns the remedy reasonably required to cater for the unfairness proved, viz. the use of company funds to defend against allegations of unfairness which ought not to have been pursued. The expenditure diminished cash reserves and dividends were not affected, so the applicants have not been financially disadvantaged. Replacement of plant has been delayed in any event by the Board's decision to postpone major capital expenditure until the proceedings finish. What the company has lost is interest that would otherwise have been derived through investment. These considerations might be thought to suggest that repayment with interest and an indemnity in respect of liabilities incurred but not yet satisfied should suffice to cure the unfairness. 115 The majority shareholders contend that a buy-out would be out of proportion to the unfairness. Shareholder relations have deteriorated so much that the spectre of the applicants' remaining as shareholders can hold no attraction, except to a majority shareholder anxious to capture the shares at a low price. It is in the interests of everyone associated with the company that the applicants go. If a buy-out is not ordered, the applicants will resort to Article 31. None of the respondents desires to buy, and the applicants must be concerned that no outsider would buy at the price the auditor determines, at least unless the price takes 115 Indeed such an order would overcompensate the company by the small amount incurred for its benefit. However, it would be difficult to ascertain the amount of proper expenditure. Discovery costs could be isolated, but apportioning the costs of representation at the hearing would not be easy. To avoid a share purchase, John Brims is willing to repay what the company has spent and discharge any liability which it has incurred but not yet paid in connection with the proceedings. ,, -- 61 of 65 -- 59 account of the applicants' status as minority shareholders, which they say is impennissible. 116 Article 31 is unlikely to provide a satisfactory solution. 117 Problems are bound to attend a continued shareholding by the Price family. Board representation is one. They can have a representative; and the niceties would be observed. But it is impossible to be sure that the newcomer would participate effectively. The opposition of John Brims to having persons other than employees on the Board is strong, and John Brims seem so affected by the conflict as to have lost perspective where the applicants and their interests are concerned. He saw no unfairness in using company funds to defend the proceedings while refusing the applicants' request for company funds to prosecute the case. And, as he said, he no longer feels a sense of responsibility to the applicants. 118 In February 1992 the majority offered to buy the applicants' shares for $22.14 each. The offer, later withdrawn, recognized that it would be better for all concerned if the shares are purchased. A price which is fair can be fixed. A purchase should be ordered. The Court strives to fix a price which is fair in all the circumstances. The intrinsic worth of the applicants' shares must be the pre-eminent consideration. The parties have suggested other factors. 116 It is not necessary to decide whether Article 31 (i) allows the a~ditor to apply a minority discount. Against allowing a minority discount are that (i) the exercise is to be carried out without regard to the size of the parcel on offer; (ii) the company may have been seen as a qua5i-partnership, which might suggest that the Article pre-supposes a valuation based a proportionate part of the assets: see N.A. Eastaway & H. Booth, Practical Share Valuation, 2nd ed. (1991) at pp.64-65; (iii) a large parcel could convert the acquirer into a majority shareholder, in which event it might well attract a premium for control. One consideration favours the existence of a discretion to discount. Article 31(i) also fixes the minimum price at which the shares may be sold to outsiders. If the auditor cannot discount for a minority shareholding, the prospects of selling to outsiders must be very bleak. 117 cf. Re Dalkeith Investments Pty Ltd (1984) 9 ACLR 247. The applicants prefer not to invoke Article 31. They want an ordered buy-out even if the price I fix is less than might properly be determined by the auditor. 118 The attitude of John Brims is a reaction to prolonged and unjustified attacks on his probity and to persistent, mostly unwarranted, criticism of the Board. -- 62 of 65 -- 60 The applicants argue that regard should be had to the price payable under Article 31. It will, I accept, often be right to take into account such prescriptions when fixing the price on an ordered buy-out. 119 However, unless it establishes a minimum "fair price", Article 31(i) cannot really assist here because the Article envisages that the auditor's professional judgment will intrude. Appreciating this, the applicants do contend that the auditor may not fix a price below the figure yielded by dividing the value of the assets as shown in the last balance sheet by the number of issued shares. The Article does not say that the minimum fair price is to be the net asset backing per share, which had it been intended, could easily have been said. Moreover, such an interpretation could produce odd consequences. Mr Hampson Q.C. gave an illustration. Assume that a valuable, but substantially underinsured, asset is destroyed between the end of the last financial year for which a balance sheet is available and the date of the auditor's determination. Could a determination which ignored the destruction be said to fix a "fair price"? An interpretation producing an unjust result is unlikely to have been intended. 120 The last balance sheet must be the "basis" - foundation, if you like - of the determination. But, in my opinion, Article 31(i) allows the auditor to determine a "fair price" at a figure below the net asset backing per share as disclosed in the last balance sheet. 121 It is preferable to focus on the value of the shares as the evidence reveals it. The respondents' special point is that the applicants are a minority. This is said to justify a discount. The suggestion is supported by Mr Calabro and Mr Heffernan. They agree that, in assessing what a willing but not anxious buyer would pay for the applicants' 119 cf. D.D. Prentice, "Minority Shareholder Oppression: Valuation of Shares", (1986) 102 The Law Quarterly Review 179, 183. 120 cf Jacobsen v. Jamaica Times Lim (1921) 90 UPC 100, 101. 121 On my calculations, $24.46 as at 30 June 1993. , .r -- 63 of 65 -- 61 shares, a 25% discount from the figure indicated by an earnings-based assessment is reasonable to reflect the minority interest on offer. There is a discernible inclination not to discount for the minority interest in deciding the price in a buy-out ordered to relieve against oppressive or unfair conduct. 122 In such circumstances, the purchase is not a market transaction. It is the judicial remedy. In general, therefore, there seems little to commend such an adjustment where a minority parcel compulsorily changes hands because of unfairness. Moreover, the reasons which ordinarily justify the minority discount have at least diminished application where the purchaser is already a shareholder. The discount reflects the risk a stranger runs in becoming a minority shareholder in a closely-held corporation. The lack of marketability of the shares and the associated vulnerability to the majority affect the value of such an investment. 123 The purchasers are not strangers here. They are shareholders. If they buy in proportion to their holdings, "existing shareholders will simply consolidate their positions. They do not become minority shareholders as a result of the purchase - they are already, as individuals, minority shareholders ... ". 124 If they do not buy in proportion to existing holdings, the applicants' shares could confer voting control. If John Brims oought them all, he would have more than 122 Viroi v. Abbey Leisure Ltd [1990] BCLC 342; Re Ma<ion and Intercity Properties Ltd (1987) 38 DLR (4th) 681; Hamilton v. Sartorio [1991] 3 WWR 670,679; C. Vaeth, "Propriety of Applying Minority Discount to Value of Shares Purchased by Corporation or its Shareholders from Minority Shareholders", 13 ALR 5th 840. Contr~t Re Westfair Foods Ltd v. Watt (1992) 94 DLR (4th) 733, 744; Sanford v. Sanford Courier Service Pty Ltd (1986) 10 ACLR 549, 562-563. 123 D.D. Prentice, "The Closely-Held Company and Minority Oppression", (1983) 3 Oxford Journal of Legal Studies 417,418; Meiselman v. Meiselman 307 SE 2d 551,559 (NC 1983). 124 which is a re~on for rejecting a minority discount; Diligenti v. R.W.M.D. Operations Kelowna Ltd (No 2) (1977) 4 BCLR 134, 166 cited in Re M~on and Intercity Properties Ltd at 690-691; cf Vujnovich v. Vujnovich [1988] 2 NZLR 129,149. -- 64 of 65 -- 62 50%, and with his family more than 75%, of the shares. A minority discount is not appropriate to a parcel conferring control. 125 The price in this case should reflect a shareholder's proportionate interest in the company as a going concern without a minority discount. The applicants' shares have advantages not reflected in the $18.30 value indicated by the earnings-based valuation. The absence of gearing and the worth of the assets are possible attractions to a prospective purchaser of the company and also opportunities for the existing shareholders. However, there is no sign of such a purchaser and the chances that the company might in future make substantial borrowings or be voluntarily wound up are slim. Accordingly, allowance for these potentialities does not justify a price near the value on a notional liquidation. The end of hostilities is, however, also a benefit. 126 In all the circumstances, in my opinion, the approximate average of the earnings-based and notional liquidation valuations yields a suitable price. I fix $21.50 per share as the price. 127 125 Laserage Technology Corporation v. Laserage Laboratories Inc 972 F 2d 799, 805 (7th Cir. 1992); Fletcher C_yclopedia Vol 12B § 5906.120 pp.435-436; Re Golden Bread Pty Ltd [1977] Qd R 44,64E. Other reasons have been suggested for not applying a minority discount: see D.D. Prentice, "The Theory of the Finn ... " (1988) 8 Oxford Journal of Legal Studies SS, 83-84; Charles W Murdock, "The Evolution of Effective Remedies for Minority Shareholders and its Impact upon Valuation of Minority Shares", (1990) 65 Notre Dame Law Review 425, 478ff; Note, "Rejecting the Minority Discount", (1989) Duke Law Journal 258; S. Sirianos ~ at 113-114. It is unneces.5ary to consider them. 126 cf. Laserage Technology ibid; Holt v. Cox at 334. 127 No additional payment in the nature of interest is apposite. The applicants rejected an offer to buy at $22.14, and two dividends have been paid since 30 June 1993. -- 65 of 65 --