Connective Services Pty Ltd & Anor v Slea Pty Ltd & Ors [2019] HCATrans 98 (15 May 2019)

Last Updated: 15 May 2019

[2019] HCATrans 098

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
Melbourne No M203 of 2018

B e t w e e n -

CONNECTIVE SERVICES PTY LTD (ACN 107 366 496)

First Appellant

CONNECTIVE OSN PTY LTD (106 761 326)

Second Appellant

and

SLEA PTY LTD (ACN 106 752 434)

First Respondent

MINERVA FINANCIAL GROUP PTY LTD (ACN 124 171 759)

Second Respondent

MILLSAVE HOLDINGS PTY LTD (ACN 115 160 097)

Third Respondent

MARK SEAMUS HARON

Fourth Respondent

KIEFEL CJ
GAGELER J
KEANE J
GORDON J
EDELMAN J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON WEDNESDAY, 15 MAY 2019, AT 9.49 AM

Copyright in the High Court of Australia

____________________

MR D.F. JACKSON, QC: If the Court pleases, I appear with my learned friend, MR D.G. GUIDOLIN, for the appellants. (instructed by Quinn Emanuel Urquhart & Sullivan)

MR J.T. GLEESON, SC: May it please the Court, I appear with MS K.E. FOLEY and MR G.C. KOZMINSKY for the first and second respondents. (instructed by Arnold Bloch Leibler)

KIEFEL CJ: Yes, Mr Jackson.

MR JACKSON: Your Honour, as the Court will have seen, the appeals concern the operation of section 260A(1) of the Corporations Act 2001. Your Honours will have, I think, a copy of our outline of submissions on the matter. The case involves three questions. The first concerns the function to be performed by section 260A(1) in the light of other provisions of the Act. The second is the meaning to be attributed to the words used in section 260A. Your Honours, the first and second overlap, I accept. The third is the question of material prejudice. Your Honours, could I go then to those matters.

The first question raises the issue of two sections - section 260A, which your Honours will see in volume 1 of the materials, the joint book at page 101, whether that provision applies when the conduct – indeed, the only conduct – suggested as being in contravention of it, is the bringing of action by the company to require compliance with the terms of its constitution, the particular terms being preemption clauses of a very common type; namely, requiring that a proposed transfer of shares by an existing shareholder must first be offered to other existing shareholders before the shares can be offered to other persons.

You will see the clause set out as clause 77 of each constitution. It can be seen in a document called “Appellants’ Further Materials” at page 22. Your Honours, I will be coming back to it in a little more detail in just a moment. But could we invite your Honours to note, in addition, the terms of clause 78.2, also on page 22, and clause 79, which you will see towards the end of page 22 also.

Your 260A does not sit alone or in a dominant position, in our submission, in the Corporations Act. Rather, the provisions of that Act refer, importantly for present purposes, to two things. One is that the efficacy of preemption clauses in constitutions appears to be recognised by the Act. The second is that a company is specifically empowered to enforce provisions in its constitution against its members. Your Honours, the background facts can be stated very briefly and I need to take your Honours back to that document I was at just a moment ago in the appellants’ further materials at page 22.

Your Honours will see the two constitutions are the same. One can see that if one looks at clause 77, each clause contains the following elements. A member - and if I could just say that is simply is defined by clause 2.1 to mean “the registered holder of a Share” - who seeks to transfer shares must first offer them to existing shareholders clause - 77.1. The offer to existing shareholders “must be in proportion to the number of Shares” each holds - clause 77.2. As one might expect, the offer or shareholder must convey to the other shareholders the essential terms of the offer - clause 77.3. The offer so made may or may not be accepted, and accepted in whole or in part. If accepted in part, clause 77.4 applies in respect of the remainder subject to the nonacceptance. It requires an offer of the unsold shares to those who had agreed to acquire shares in the first round. The proportions were to be the same as in relation to the earlier acceptances and the terms were to be similar.

If any of the offered shares remained unsold after those two rounds, they might be sold to anyone but on the original terms - clause 77.6. Your Honours, the respondent - Slea, as I understand the relevant pronunciation – has made it clear that it does not propose to comply with the terms of clause 77. You will see that in the core appeal book at page 100, paragraph 77, of the Court of Appeal’s reasoning. If I can go to paragraph 77, which really is the paragraph in which the Court of Appeal, in effect, sums up its reasoning, you will see your Honours, I will not read it out, until one comes to the fourth line:

But Slea has not made the offer. Moreover, on the Connective companies’ case, absent a court order Slea will not make the offer. The commercial consequence is that some action has to be taken to enforce the existing right. The purpose of the proceeding is to compel Slea to make the offer. If Slea is forced to do so, Millsave and Mr Haron will have the option of accepting the offer and, if they do accept, of acquiring the shares. The proceeding seeks to procure that outcome.

The proceedings, as your Honours will see from that paragraph, are proceedings by the companies to require compliance with the terms of their constitutions. Your Honours will see it from that paragraph, yet it is the institution of those proceedings which is said to contravene section 260A and, your Honours, that is the fact relied on.

Could I come then, your Honours to section 260. If one goes to the terms of section 260A, your Honours will see that it provides relevantly that a company may financially assist a person to acquire shares or units of shares in the company if giving the assistance does not materially prejudice the interests of the company or its shareholders. This is a case in which the company is not giving existing shareholders or anyone else on their behalf money to acquire the shares. It may be that if an offer is finally made by Slea, the respondents do not accept the offer in whole or in part, but the way it is suggested that financial assistance is given is because the plaintiffs are the companies rather than the nonSlea shareholders.

If I could take your Honours back to page 101 of the core appeal book at paragraph 77, your Honours will see there that the Court of Appeal’s reasons were, first, because the litigation by the company comes at a cost to the companies; secondly, there is a possibility that the companies will have to pay the costs of Slea and related parties, if I could use it loosely – costs; and thirdly, that the other shareholders - Millsave and Haron - do not have to pay the costs themselves.

Your Honours, could we come then to the contention we make that the contention by Slea as to the operation of section 260A is inconsistent with the other provisions of the Corporations Act. I will need to take your Honours to a number of provisions in that regard. First, your Honours, it is a provision - I understand, about the only one I think in the joint book - but by a combination of section 167A(1)(a) and also 168(1)(a), a company is required to keep a register of members. The register is contained and the details referred to, which you will see in page 89 of volume 1 of the first book, and your Honours will see that section 169 requires in subsection (1) that the details there referred to are to be contained in the register of members. It is made absolutely clear, your Honours, if one goes over the page at 93 and to section 175 that a company – 175(1) I am referring to - may apply to the Court to have its register corrected. So section 175(1) says, amongst other things, that very thing.

Your Honours, one of the most obvious reasons, in our submission, why such an application might be made by the company is that a person has been put on the register as a member when the provisions of the constitution which allow that to happen have not been complied with. Your Honours, it would seem – possible, no doubt – but it would seem a little odd if the power given by section 175 were limited by the terms of the provision relied on by our learned friends. But in addition to the statutory right given by section 175, there is also the relationship established by section 140(1). Your Honours will see that at page 87.

As can be seen from the terms of section 140(1), the terms of the constitution of a company or provisions adopted as replaceable rules have contractual effect, and there are questions of parties and substance. As to parties, they do so, first, as can be seen from 140(1)(a), as between the company and its members; secondly – I am jumping (b) for the moment – as between member and member, and your Honours will see that in paragraph (c); and, thirdly, as between the company and each director - section 140(1)(b). Your Honours, importantly, the concluding words section 140(1) set out the content of the contractual obligation. It is a contractual obligation that each party “agrees to observe and perform the constitution” and applicable replaceable rules “so far as they apply to that person”. The application of them is in paragraphs (a), (b) and (c).

The functions of section 140 were referred to by the Court in Bluebottle UK Ltd v Deputy Commissioner of Taxation [2007] HCA 54; (2007) 232 CLR 598. It is at page 481 of volume 1, the relevant pages, the first being – I am using the pages in the top righthand corner – page 493. You will see paragraph25 which, in effect, sets out the provisions of section 140. You will see also page 498, paragraph 43 elaborates on the matter slightly, and page 505, paragraph 62.

Could we also invite the Court to note that, if one goes back to section 140(2), which your Honours will see at page 88 of the joint book, you will see that section140(2)(c) appears to recognise that a company’s constitution may contain provisions which provide for restrictions on the right to transfer shares held by a member or, indeed, subject to the necessary agreement in writing referred to in the opening words of section 140(2), may be amended to contain provisions of that kind.

But, your Honours, those are not the only provisions dealing with the existence and enforceability of preemption clauses. The provisions of the Act dealing more specifically with transfers of shares make it clear that any transfer of shares is subject to the provisions of the constitution. May I deal with the group of provisions commencing with section 1070A. It is page 112 of that volume. If one looks at section 1070A(1)(b)(i), it provides that a share of a company:

is transferable or transmissible –

but adds the words –

as provided by:

(i) the company’s, or scheme’s, constitution –

Then, your Honours, one sees in a group of provisions going from 1072A to 1072G a number of provisions, some of which are purely statutory provisions, some of which are and have been adopted as replaceable rules. May I go to those, your Honours, and I will be able to do so relatively briefly, I think. Section 1072A is at page 115.

It deals with the death of a member. I should say, your Honours, clause 80 of the constitutions reflects the terms of this provision. Now, the member may have held the shares in the member’s own right - you will see a reference to that in section 1072A(1) - or may have held them jointly - 1072A(5). If held in the member’s own right only, 1072A(1) applies. It means that the company will recognise, and recognise only, the member’s personal representative as entitled to the share held by the dead member.

Your Honours will see then that the person representative, pursuant to section 1072A(2)(a)(ii), may become registered and may transfer the shares to another person. Your Honours, the ability to transfer shares to another person, however, is not limited. The ability to transfer is expressed to be subject to subsection (6), and subsection (6) appears to recognise that I think that may be an error, your Honours. Perhaps it should be (4). I think I said (6); I meant to say subsection (4). Subsection (4) says that the transfer:

is subject to the same rules (for example, about entitlement to transfer and registration of transfers) as apply to transfers generally.

Yours Honours, as I said, provisions equivalent to those of 1072A are in clause 80 of the constitutions in the additional materials at page 23. Could I go then to section 1072B. It is again a replaceable rule. It deals with a person becoming entitled to shares on the bankruptcy of a member. The ability to further transfer the shares is conferred by section 1072B(1)(b), but it is again limited by the provisions of the constitution - subsection (3). The provisions of 1072B are mirrored in clause 81 of the constitutions.

Section 1072C is at pages 119 to 121. It is a part of the statute generally applicable; it is not a provision which, in effect, may or may not be adopted. Your Honours will see that it applies in the circumstances referred to in section 1072C(1). It allows the trustee to transfer the share to a third person section 1072C(3). Specifically it recognises, as your Honours will see from subsection (6), that the constitution might otherwise have preemption clauses. Your Honours, if one goes to section 1072D – your Honours, I am getting close to the end of this section.

GORDON J: Just before you leave 1027C, is not the point made even more starkly by subsection (7), which itself recognises that if it wants to, in effect, override the company’s constitution in respect of preemptive rights, it is the one provision where it needs to do so because of the statutory framework arising from bankruptcy.

MR JACKSON: Yes, your Honour.

GORDON J: So it sits with (6) – (6) and (7) go together.

MR JACKSON: Yes, (6) and (7), your Honour, I agree. If I could go to 1072D, it deals with mental incapacity on the part of a member. It is a replaceable rule. It follows the same structure as the replaceable rules referred to earlier. Could I refer to 1072D(1)(a)(ii) and also to 1072D(3). I think 1072D(3), although perhaps somewhat elusively placed, is at the top of page 124. The equivalent provision in the constitutions is clause 82.

Could I come then, your Honours, to section 1072E. It is not a replaceable rule - I am sorry, it is not a replaceable rule. It deals with the variety of circumstances summarised in 1072E(2) to (7), where a person may be registered as holder of numbers of shares. You will see subsection (8), page 126, your Honours – you will see that that provision – subsection (8) - again requires the same liabilities to apply. Section 1072F, your Honours will see, is a replaceable rule. It contains the power in the directors not to register a transfer if they have not been given information to establish the right of the person – and I am referring to 1072F(2)(c) - “transferring the shares to make the transfer”. The equivalent provision in the constitutions is 78.2(c).

Section 1072G is a replaceable rule and it of course gives a power in the broadest terms, and one of the purposes for which a director’s power might be exercised is, as section 140(1), which indicates to carry out their obligation to the company to ensure that the company’s constitution is performed and observed., and clause 79 in the constitution reflects 1072G.

Your Honours, if I could pause at that point for a moment, the provisions to which we have made reference first demonstrate that the Act recognises that companies’ constitutions may contain preemption clauses, that the company is obliged to comply with and enforce them, and the contention that section 260A(1) should be regarded as rendering provisions to that effect otiose should not be accepted.

EDELMAN J: But does the converse position apply; in other words, that those provisions will never be applicable to a 260A circumstance?

MR JACKSON: Well, your Honour, I suppose one should never say never because

EDELMAN J: Improper purpose, for example, where a company is seeking to enforce a provision of its constitution but doing so for an improper purpose.

MR JACKSON: Your Honour, that may attract other provisions - 180 and around there.

EDELMAN J: Yes.

MR JAC KSON: And it may be possible to demonstrate that the decision to institute proceedings is one that is not made bona fide. But if, at the end of the day – I put it that way because of the burden of proof question - the issue becomes one of, on the evidence, was there material prejudice, the answer would be, no, there is not.

Now, there is I think an area that your Honour is mentioning that may have an application, but it is not in this case, in our observation. Your Honour, what I was going to say was this, that the current language of section 260A is that, subject to the question of material prejudice, a company may financially assist a person to acquire shares in the company. Because of section 260A(3) and, again, subject to the question of material prejudice, a company may do so where the acquisition of shares is to be by transfer.

If our learned friend’s argument is correct, any proceeding in which a company seeks to have it ordered or seeks the consequences that one shareholder do an act as part of a series of steps which may result in transfer of shares to another, or that one shareholder transfer shares to another where the company is paying its lawyers for rendering advice and there is no evidence that the company is involved in some enterprise with the wouldbe acquirers, would breach section 260A. Your Honours, we would submit that such a broad interpretation of financial assistance means that section 260A does not sit well with the other provisions of the Act to which we have referred and leads to the – I do not mean that it should be taken out and thrown away, of course, but in the sense in which its ambit is relied on by the other side, it does not sit well with the other provisions of the Act.

GAGELER J: Mr Jackson, you took us to a number of provisions of the Act dealing with registration. I am not sure what part registration plays in your argument, but in section 260A(1) in the reference to a person acquiring shares, is registration part of acquisition in the case of a transfer?

MR JACKSON: Your Honour, it may depend on the context a little in the sense that a person who had acquired an equitable interest in the shares where the other side would not agree to transfer them would be entitled to claim for specific performance and that would have been part of the acquisition of shares. Your Honour will see subsection (3) and, your Honour, one does need to look at.....that you are not talking anymore about something that says you cannot do it; it is something that says you can do it. You can do it any of these ways unless

GORDON J: Well, “issue” would include registration. To issue a share you would have to register it on the register, would you not? To issue a share, you would have to have it registered on the register.

MR JACKSON: Quite, your Honour, yes, I accept that. I think I took your Honours to the earlier provisions dealing with that. Your Honours, may I go on to the question of material prejudice. The first and second questions overlap; no question about that. The third question on material prejudice is this, that under section 260A, at page 101, a company is permitted to:

financially assist a person to acquire shares (or units of shares) in the company or a holding company of the company only if:

(a) giving the assistance does not materially prejudice:

(i) the interests of the company or its shareholders –

There is a question, perhaps, whether the expression “the interests of the company or its shareholders” is a composite requiring that the terms of section 260A(1) are unsatisfied unless the assistance materially prejudices the interests of both company shareholders. In our submission, that may or may not be ultimately the better view, but in any event each arm, we would submit, is satisfied, if there be two.

The question whether the giving of the financial assistance materially prejudices the interests of the company and its shareholders must involve, in our submission, a comparison between the position of the company and its shareholders, on the one hand, if the financial assistance were not given and, on the other hand, the position in consequence of the giving of the financial assistance.

Your Honours, this is where this is fundamentally a very simple case. If one looks at the position of the company and its shareholders before the giving of the financial assistance contended for, the constitution of each appellant company operated as a contract between the company and each of its shareholders, and between the shareholders as amongst themselves. I have taken your Honours to section 140.

It is clear, we would accept, that the burden of demonstrating absence of material prejudice rests on the party asserting no financial assistance. It is also clear, your Honours, that no additional evidence was adduced by us on the material prejudice issue. But the question had to be resolved in the end on the material before the court. The position before the institution of the proceedings was that each of the shareholders, including Slea, was under an obligation to observe the terms of clause 77. The obligation to observe the terms of the constitution could be enforced by the company; it could be enforced by another shareholder.

Nothing, your Honours, has changed if one is looking to see what material prejudice there was to the company, what material prejudice there was to the other shareholders by the institution of proceedings. The company was simply doing the things that it was perfectly entitled to do and Mr Slea was doing the things he was not entitled to do in terms of the constitution. Your Honours, those are our submissions inchief.

KIEFEL CJ: Yes, Mr Gleeson.

MR GLEESON: Thank you, your Honours. Your Honours, I propose to deal with our submissions in three stages. The first two overlap Mr Jackson’s first and second topics but from a slightly different approach. I wish first to put some submissions generally on construction of section 260A both on its own and in context, and then separately explain why the prohibition was contravened on the facts of the case. Finally I will come to material prejudice, if that is convenient.

Your Honours, in terms of our construction submissions, the first is a matter where the parties are slightly apart. Mr Jackson put it this morning that the statute is no longer talking about you cannot do X anymore, saying something different; you can do X if A, B and C. Our approach to that question is that the Court should read section 260A as containing an implied prohibition, and thus nothing has changed in terms of its nature. Previously, it was an express prohibition. Now it is an implied prohibition.

GORDON J: Is that right, though? I thought it was put in a permissive form in order to overcome debates which had occurred both in the case law and in academic or other articles about the fact that it was seeking to and had an effect on what might be called normal commercial transactions, and that was the reason why it was put in a permissive form rather than the old negative form.

MR GLEESON: Your Honours, it is slightly more general. The various provisions in this section have been put in the permissive form and it is primarily as a matter of plain English. So if, for example, you look at section 257A on page 99, “A company may buy back its own shares if” certain conditions are met. Similarly, on page 97, 256B, “A company may reduce its share capital” if certain conditions are met, and our provision section 260A follows that same structure. So, our primary submission on structure is all of these provisions in an intended more plain English form are saying you cannot do these things unless you satisfy one of the relevant gateways.

KEANE J: So you may do these things in this way, but not otherwise.

MR GLEESON: But not otherwise.

KEANE J: And if you do them otherwise, then you are contravening the statute.

MR GLEESON: You are contravening the statute and that is made clear by section 260D on page 109, and if you contravene the statute you will open up a range of remedies in response to contravention which includes civil remedies at page 133 - section 1317E, by way of declaration.

There will also be civil penalties available under 1317G, on page 138. So a failure to do it in one of the ways permitted is a contravention. And of course that sits in the context of section 140 – sorry, in the context of the general provision, a company has all the powers of an actual person, so a company can otherwise do these things. This is imposing a prohibition if it is not done in a particular way.

Your Honours, that leads us to this proposition, in paragraph 3 of our outline, that what Justice Kirby said in the New South Wales Court of Appeal in Darvall, which is found in volume 2 of the materials, tab 52 at page 588 G to 589 C, as to the way the statute should be approached remains good law on the current statute, but no narrow approach should be taken on the ground of principles governing penal statutes. Indeed, the purpose of the provision which remains that going back to Trevor v Whitworth and Wallersteiner v Moir is such that no narrow view should be taken of the language. Your Honours, that is our first construction proposition. The second

KIEFEL CJ: Does characterising it as an implied prohibition or permissive assist very much when the focus really appears to be on the condition?

MR GLEESON: Probably not, your Honour. That is why I said it is a small point, but it is a starting point. Can I come then to the second point where the parties are at ad idem, that “financial assistance” in section 260A as a term remains a term invoking the concepts or ordinary commerce, which was the approach taken by Lord Hoffman in Charterhouse Investment, and no narrow view should be taken of financial assistance and, importantly, as Lord Hoffman said – and this is found in volume 2, at tab 50, page 428, letter f, it is necessary to examine the commercial realities of the transaction and, in a sense, there is an infinite number of ways in which financial assistance might be given in the world of commerce and no narrow or blinkered view should be taken. So, your Honours, we think that point is largely common ground.

The third construction proposition where we submit the parties may well diverge is this. What has happened in section 260A as part of the plain English exercise and the redrafting, and perhaps taking up what your Honour Justice Gordon put to me about the desire to ensure that ordinary commercial transactions are unimpeded – what has happened really are three critical changes - at least three critical changes from the earlier provision, as a matter of the language used.

The first change is that the inquiry into purpose and connection in the previous provision has now gone. When I say that, your Honours would compare section 260A at page 101 with the provision under the 1981 uniform Acts at page 161, which included as an element of the express prohibition a purpose or connection requirement.

That idea of purpose or connection, of course, goes back to the earliest provisions in Australia and the United Kingdom following the Greene report. So what seems to have happened is that the provision – I will call it provision for the moment – has been simplified in that the focus is on: is the company doing something financially assisting a person to acquire shares or units of shares?

Could I draw attention to the second change, which is making it explicit that it must be financial assistance to a person to acquire. So it must be to the acquirer or the purchaser. That probably is a part of the removal of purpose or connection that is necessary to draw that linkage, but we would immediately hasten to caution that, even though it must be financial assistance to the acquirer, that does not mean it needs to be money paid into the acquirer’s pocket, and it is something which in a financial way operates of assistance to the acquirer in its passage towards acquisition of shares.

Where perhaps it is not clear, where perhaps there may be a difference between the parties, is this. There is no doubt that a simple case of financial assistance before and after 260A is the company directly or indirectly paying part of the purchase price, and some of the cases such as Independent Steels were of that character.

GORDON J: That is because it was not in the interests of the company.

MR GLEESON: Under the former legislation, the reason why Independent Steels was financial assistance was that the purchaser needed to pay a certain amount of money to meet the vendor’s demands and the transaction was structured in a way that part of that money would come not from the purchaser but from the company’s resources by way of a socalled consultancy fee to the vendors, a fee which was really for no services at all. So what the court did was saying, looking at substance over form, looking at commercial reality, what is happening here is that the company’s resources are being used to assist in meeting one of the burdens the purchaser faces, which is the burden of meeting the purchase price.”

One of our core submissions is that the forms of assistance are not limited to assistance in meeting the purchase price. A very obvious example that goes beyond that narrow case is assisting the purchaser with the costs of acquisition. So if one thinks of familiar costs of acquisition, which might be legals, valuer’s costs, stamp duty or due diligence costs, that is, costs directly of the acquisition or costs of necessary preliminaries for the acquisition, they are capable of being caught by section 260A, as it is now worded, as much as they would under the previous provisions through a purpose or connection inquiry.

EDELMAN J: Once one expands out financial assistance beyond purchase price to more remote forms of financial assistance, does there not need to be some form of a limit that might come in through the words “to acquire shares”?

MR GLEESON: Yes, definitely.

EDELMAN J: A remotenesstype limit?

MR GLEESON: Yes, that there is possibly some – there is some outer limit there.

EDELMAN J: That would bring in, would it not, questions of purpose.

MR GLEESON: The answer is potentially, your Honour, depending on – potentially, it could not necessarily be eliminated from the inquiry, because once I embrace it as an inquiry into all the commercial realities of the case

GORDON J: It necessarily involves purpose, does it not, at one level?

MR GLEESON: It may involve that, depending on what your facts are. So, I am not seeking to

GORDON J: To put the matter another way, if you were seeking to test it, one of the mechanisms for testing it would be a reference to purpose.

MR GLEESON: My only caution is that within the inquiry into the commercial realities through this now very simple tight language, it may be an appropriate matter to look at along with others in the case. Now, could I just stick with my examples at the moment of fairly conventional acquisition costs. If the purchaser needs to pay some legal fees, valuer’s fees, stamp duty to acquire the shares and the company pays that on the purchaser’s behalf, that, we submit, would be clearly within the words “financially assist a person to acquire shares”. Why is that? Because they are conventional costs closely associated with the forms of acquisition.

KEANE J: To take your example of paying the due diligence costs, is what you say right, if, in the event, having done the due diligence, the potential acquirer decides not to acquire?

MR GLEESON: The answer is yes, your Honour, for this reason – and this will be our proposition 7 – or proposition 5 that, because the acquisition under subsection (2)(a) can be given before or after the acquisition of units, one looks at the position at the time the contravention is alleged. So, one looks at the facts at that date and says, if these are due diligence costs which are necessary or convenient for this purchaser to go forward with the acquisition and they are to the purchaser’s account and the company says, “No, I will relieve you of that burden by paying those costs thereby allowing your process of acquisition, your proposed acquisition to go forward”, our submission would be that is a completed contravention at that point in time, and there may be cases where the acquisition proceeds or does not proceed. But I am grateful for your Honour’s question because that is central to our argument because that is this case, in a sense, and that is also the authority of the Court of Appeal in the United Kingdom to which we would refer.

Your Honours, could I go to the United Kingdom authority immediately as it is relevant to this point in the argument. In the supplementary book of authorities which the Court should have, at tab 6 we have the decision in Chaston v SWP Group Plc [2002] in the Court of Appeal and the alleged financial assistance in that case which is referred to near the end of paragraph 1 and itemised in paragraph 3 was that the company paid the fees for a due diligence where the company was the party that directly received the due diligence, but the purpose for the due diligence - and this is found on paragraphs 8 and 9 - was the preparation of a report, a longform report which is part of the process of the purchaser obtaining the necessary approvals of its shareholders.

In paragraph 9, in the second sentence, there was a finding of fact that none of the work would have had to have been done were the shareholders of the company not negotiating the sale of their shares to the purchasers. So in other words, it is work being done to assist the purchaser with its process of moving towards the acquisition, and that is held by the Court of Appeal to infringe the UK provision.

I draw attention to the UK provision, which is set out at paragraph 7. It is the 1985 Act which is not identical to section 260A. It does have an express requirement of purpose in subsection (1). That is, the text of the provision has an express requirement of purpose in subsection (1) of section 151, and in section 152 it has some more specific definitions of what is financial assistance. In section 153 it has a specific saving provision, looking for transactions which have mixed purposes.

In terms of the reasoning of the Court of Appeal as to why this was financial assistance, which we submit is helpful in a slightly different statutory context, you will see paragraph 17 on page 38 of the book. Part of the argument which was put and which was ultimately successful was that:

as a matter of commercial reality, the payments provided assistance because, as the judge found, the instructions to D&T were given –

to the accountants:

“to facilitate the progress of the negotiations, and to enable SWP to conclude its due diligence exercise: and, having done so, then to enable it to make up its mind as to whether or not to acquire the shares in DRCH.” The assistance was financial as it involved the payment of money.

So the case as put was analogous to that your Honour Justice Keane put to me. In the main judgment, the critical ruling commences at paragraph 31, and at the end of paragraph 31 there is a proposition that we submit is good law under our statute that, despite various legislative changes:

The general mischief, however, remains the same, namely that the resources of the target company and its subsidiaries should not be used directly or indirectly to assist the purchaser financially to make the acquisition.

In 32, there must be

GORDON J: Sorry, just before you leave that, it is the next bit that I was trying to draw your attention to earlier. It is the link between that and the next line. It is the prejudice which gives it its colour.

MR GLEESON: Yes.

GORDON J: That is, prejudicing the creditors of the target or the group as part of the assessment of the commercial realities.

MR GLEESON: The third of the key changes I am going to come to under section 260A is treating that as the real mischief is to isolate that out as one of the three gateways that have to be satisfactorily entered if there is financial assistance. So one of the key changes with our provision is to simplify in a sense the primary provision and, to the extent one is concerned with this problem of prejudice, move it as a separate inquiry to subsection (2) and make it a generalised inquiry.

One of the difficulties of the earlier statute and the earlier cases was that this question of “is there real prejudice?”, because it was not a separate inquiry, was often addressed through the issues of purpose and connection. The current statute, we submit, has simplified the inquiry and moved it as its own inquiry and made it perfectly general.

Now, could I then go to paragraphs 38 to 40 which are important. In paragraph 38, about halfway down, the judgment states:

As a matter of commercial reality, the fees in question smoothed the path to the acquisition of shares. There was no provision in the agreement for any benefit to be given to the DRC Group.

Paragraph 39, it is a “factsensitive” inquiry. Paragraph 40, which is perhaps the key one:

Here as a commercial matter assistance was clearly given. D&T received payment for their services and both the purchaser and the vendors were relieved of any obligation to pay for this service themselves.

Then there is a submission put similar to some of Mr Jackson’s written submissions that the provision should be restricted to:

assistance given to purchasers, alternatively to assistance given to vendors and purchasers.

But:

There is no reason why assistance which is paid to a subsidiary or associated company or other person nominated by one of the parties to the transaction should not be assistance contrary to the section. This again does not involve straining the language of the section –

It is true the judgment proceeds, as it were, in two stages. Paragraph 40 says this is why it was assistance and paragraph 45 says this is why it was financial. Your Honour the Chief Justice on the special leave raised a question whether the term should be broken down or not into separate elements or looked at as a compendious term. Clearly, it is a compendious term where each element informs the other but we submit there is no error in paying attention separately to each and then bringing them together to see whether it is financial assistance.

What is important in 45 is the judgment says the policy of the section extends beyond assistance given to enable the price for the shares to be paid. There must be a link and the link which the UK section requires is “for the purpose of” which, perhaps, brings me back to the questions of your Honours Justice Edelman and Gordon that in the UK provision where purpose is express

KIEFEL CJ: Did the Court of Appeal break the term down?

MR GLEESON: They proceeded in what I would call a “sequential” fashion, so they start at 40 and deal with assistance and then they – 45 deal with financial and then they look to each of the judges’ reasons and, in a sense, at paragraph 50 they are bringing everything together, the liability to pay the fees was incurred for the purpose of the acquisition.

I did want to draw attention in the other two very short judgments, Lord Justice Buxton and Lord Justice Ward, in a sense, looked at the matter globally. They did not break it down into two steps. Lord Justice Buxton concluded that it was enough that the – this is paragraph 52 the instructions were given to the accountants at least in part to enable the purchaser “to conclude its due diligence”. The next sentence is important:

That exercise was the responsibility of, and in the interests of, SWP; would not have been entered upon except in the context of the purchase; and was accordingly to SWP’s charge. By paying for part of that exercise, DRC therefore plainly gave financial assistance to SWP.

And to similar effect, in perhaps more colloquial language, paragraph 55 of Lord Justice Ward. The purchaser:

was helped by not having to put its hand in its pocket for part of the fees that would otherwise be incurred in the due diligence exercise.

So what, we would submit, one gets from Chaston, which is helpful, under section 260A, are these propositions. Firstly, the forms of assistance to a person to acquire shares can extend beyond the purchase price simpliciter to associated costs of acquisition and of matters necessarily preliminary to the particular acquisition in question. And, secondly, the contravention can be complete at the point of the giving of the financial assistance, irrespective of whether that proposed acquisition selfcompletes.

Now, your Honours, that is the matter that we have dealt with as our third proposition in paragraph 5. As our fourth proposition we would ask the Court to reject the idea that there must be a transaction and, in particular, a transaction between the company and the acquirer as lacking basis in the statutory text. There will need to be financial assistance to the purchaser or prospective purchaser to acquire, but the ways in which that can be done are various. And related to that, one of the questions dealt with in the earlier cases, for instance, Wambo, is how and when is net transfer of value something to be considered at the financial assistance stage? To the extent that matter is before the Court, which it is in part on the written submissions, we submit it is not a necessary separate requirement.

GORDON J: Is that because it is in the material prejudice aspect?

MR GLEESON: Its primary place is in the material prejudice aspect.

GORDON J: Is that your submission?

MR GLEESON: Its primary place is in the material prejudice aspect. What I do not want to exclude is the possibility that there will be cases where it may be relevant in deciding whether you have financial assistance, on your particular facts.

GORDON J: I was going to say, it may be determinative on that issue.

MR GLEESON: So if one has a Charterhouse

GORDON J: Do you accept that?

MR GLEESON: On particular facts, it may be.

GORDON J: It may be determinative

MR GLEESON: So on a Charterhouse set of facts where you have one thing which is said to be financial assistance, namely, surrendering an asset to the vendor, but that is done as one of a sevenstage transaction, with benefits flowing in all sorts of directions, Lord Hoffman’s primary ruling was, “In order to find that there is any financial assistance to the purchaser, I cannot do that unless I know that on a net balance of account the purchaser is getting something out of this complicated transaction” and it is difficult to see it on those types of facts. Lord Hoffman’s analysis would be incorrect under section 260A. It would just be a case where you could not find the financial assistance to the purchaser without knowing the answer to that question.

What we would submit should be rejected is any universal requirement or erection of a legal rule that net transfer of value is an exercise to be done at stage 1.

GORDON J: The reason why sometimes they focus on transaction, is it not, is part of the overall assessment of commercial realities is because the transaction often provides the basis for the commercial reality, and one looks to see where the money flows in order to determine whether there has been a net transfer.

MR GLEESON: In that sense it may be useful and relevant and sometimes decisive. What we are urging against is simply any form of codification that there must always be a transaction or there must always be net transfer of value at stage 1.

GORDON J: Do you step away from the analysis that has been adopted in the past about looking at the commercial realities of the arrangement?

MR GLEESON: No, we embrace that the provision is still

GORDON J: That is, the overall commercial arrangement?

MR GLEESON: It is, but this is the real change, and this was the third element of the change: it is doing it in a much more structured fashion than the earlier provisions. Many of the problems the earlier cases were grappling with are now much more clearly elucidated given the simplification of the primary provision and then the separate structuring of the material prejudice inquiry.

If one takes a case like Wambo, where there is quite some discussion of net transfer of value, your Honours will find that in volume 2 at tab 61. At page 1030, lines 25 to 1031, lines 25, one has the reasons of Chief Justice Gleeson sitting as the trial judge, upheld on appeal, for why there was no financial assistance. Note this case was under section 67 of the Companies Act (NSW), which is the equivalent to the 1929 UK provision, so it is on the very earliest progenitor of the provision.

Your Honours will see from even lines 30 to 35 what happened here was perhaps a simple transaction where the company entered into a deed of covenant where it paid good money in order to buy off a person who would be a competitor into the future. So that is the transaction: the company parts with money and gets the benefit of a covenant.

True it is that that is done in the context that Hartogen is looking to purchase shares. Doing this rearrangement of the assets in the first and primary instance was an improvement in the balance sheet of the company and something which made the company more attractive to anyone who might purchase or hold shares from time to time.

That is the sort of distinction Chief Justice Gleeson drew over on page 1031, perhaps between lines 10 to 15, as to why there was no financial assistance, because the direct and immediate benefit was for the company Wambo and could be tested this way: if Hartogen – that is, the prospective purchaser – sold its shares the next year, the benefits would continue to operate directly for the company and indirectly for the incoming shareholders.

So the only benefit that Hartogen would get from the transaction, his Honour says, was a benefit qua shareholder of Wambo if and while it was a shareholder, but not qua purchaser. So the company was doing something to its resources, rearranging its balance sheet, making itself more attractive to all of its shareholders from time to time, but it was not doing anything qua purchaser to assist the acquisition. Your Honours, that decision was upheld.

GORDON J: Is the fundamental principle there from Chief Justice Gleeson’s perspective if one steps back from it that the company was paying money and, therefore – the test was whether it was getting the benefit of a covenant, that was not the position, and is that not the position here arguably where the company, even on your analysis, is paying money but it is not getting the benefit of any covenant, it has already got the covenant in the constitution.

MR GLEESON: Would your Honour permit me just to defer that to stage 2 – I just – when we come to our facts because I say there is a world of difference. What is happening in Wambo is the company is rearranging its balance sheet. It is paying money away. It is getting the benefit of a covenant. So, it is in a position which it considers to be more attractive to itself and its shareholders from time to time. Chief Justice Gleeson says, well, that is not financial assistance to a purchaser even if you as a purchaser think the company is more attractive.

That, with respect, must be right in order to keep this provision within some bounds because every day of the week the job of a company is to consider the arrangement of its assets and if there is a more preferable way of structuring its assets it should consider that. Of course, that will always be of indirect benefit to the shareholders. Of course, if you are purchaser, you will take that into account.

So, if one is thinking of remoteness, perhaps your Honour Justice Edelman put that to me the extent to which a rearrangement of your assets might be of assistance in the sense of attractive to a purchaser is something beyond the reach of the provision. So, to complete the case I want to draw attention in the appeal judgment at page 1035 between lines 32 to 45. Justice Sheller has accepted a submission of Mr Jackman, in turn, analysing Justice Hoffman in Charterhouse and saying, well, there are two sorts of cases.

The first is if you give the purchaser the financial means to buy the shares, that is a contravention simpliciter, but if you are merely entering into a collateral transaction which does not have that as its main purpose but there is a factual connection, the Court must determine where the net balance of a financial advantage lies. It goes on to say:

Only if the company makes a net transfer of value which reduces the price the purchaser would have had to pay –

but for the transaction:

can it be said that financial assistance has been given.

I draw attention to that. Your Honour Justice Gordon raised that line of reasoning on special leave. We would urge caution upon the Court simply adopting that as the answer to the meaning of section 260A or our case for the reasons I have started to suggest that it is in the context of an earlier provision which had two critical distinguishing features; firstly, an express requirement of purpose or connection and, secondly, no express test of material prejudice. So, that is two reasons to treat this passage with some caution.

The next is – if you focus on the last sentence of that paragraph – as I have already indicated, an obvious case of financial assistance is where the company does something which reduces the price the purchaser would have to pay. We agree: it is not the only case of financial assistance because there can be other situations where the company is doing something which relieves a relevant burden that the purchaser faces in its path to acquisition.

Now, this case did not need to deal with that broader category and we do not read it as an authority ruling that out. So the ultimate ratio is probably 1036, lines 5 to 10, which is, with respect, a different way of saying what Chief Justice Gleeson said on page 1031.

Your Honours, our fifth proposition was the matter I put in answer to a question from your Honour Justice Keane. The sixth proposition is that the provision operates on acquisitions of shares or units of shares. We draw attention to the definition of “units” of shares, which is in volume 1, at page 78. It includes:

right or interest, whether legal or equitable, in the share, debenture or other interest, by whatever term called, and includes an option to acquire such a right or interest –

Your Honour Justice Gageler asked about the relationship between registration and acquisition. There is no relevant definition of “acquisition”. However, we can see from “unit” that when “acquired” is used in section 260A it must be capable of extending to a range of situations earlier than registration. Although, as your Honour Justice Gordon pointed out, it could include registration.

That will be important to the present case because, on the reasons of the Court of Appeal, which we commend, this case can be reduced to this situation. Firstly, there is a dispute as to whether clause 77 has been triggered. Mr Jackson was wrong to submit that Slea’s position was simply it would not observe clause 77. Rather, its position was, for the reasons put out in its defence, the clause had not been triggered. So there is a dispute as to whether any right at all has arisen under clause 77.

KIEFEL CJ: Mr Jackson was simply referring to the findings in the Court of Appeal.

MR GLEESON: It is how that finding should be read.

EDELMAN J: The finding said it was the Connective’s case.

MR GLEESON: Connective’s case, yes – and that is correct. And, equally, it was Slea’s case that the provision had not been triggered and, as we have indicated in our written submissions, of course not before your Honours joined as an issue, whether it has been triggered or not. So that is the first step. There is a dispute whether it has been triggered.

The second step, if your Honours could go back to the constitution which is at page 43 of the appellant’s further materials is that under clause 77 the only person who may receive the offer, assuming the clause has been triggered, is the Member which, in this case, is the third and the fourth respondents. So, this is a provision requiring in certain circumstances an offer of shares from some shareholders to other shareholders and, thus, I observe, it can never be an offer to the company which the company is entitled to take up.

The third step is that if your Honours go to prayer A for relief which is found in the first and second respondent’s materials at page 32, what is sought is an order compelling Slea to offer its shares to the third and fourth respondents under that clause, and the fourth step is that if prayer A, after a contest is made, that will result in the third and fourth respondents acquiring

GORDON J: May acquire, is it not? It does not go any further than that?

MR GLEESON: I agree with your Honour, if the order is made.

GORDON J: Correct.

MR GLEESON: They will acquire at that point.

GORDON J: They may acquire

MR GLEESON: No, sorry, there are two steps here. If the order is made, they will acquire an option over the shares which is a unit of shares.

GORDON J: They have already got that option.

MR GLEESON: There are two aspects to the submission. I will identify them and then come back to the first. There are two forms of acquisition that we say the Court of Appeal has identified. The first form of acquisition is that the making of the order would constitute a unit of shares and the second form of acquisition is that the making of the order giving a compulsory basis to the offer that follows is a necessary preliminary to an acquisition of shares which may then occur. We rely upon both of those stages of acquisition. Firstly, that the order itself is an acquisition of the unit; secondly, the order is a necessary preliminary to an acquisition of shares by the third and fourth respondents.

GORDON J: If one steps back from it just for a moment, Mr Gleeson, and looks at the commercial realities, it is a very odd way of looking at it, is it not?

MR GLEESON: Your Honours, we would submit, the exact opposite. If you look at what happened here, can I just put the commercial realities submission while I note the time, your Honour. Who are the people who want to buy these shares? The third and fourth respondents. At the moment there is an unwilling vendor, Slea, that is fine.

At the moment there is a roadblock Slea denies it is bound to offer to sell its shares. The third and fourth respondents need – they need – they want and need, to get their acquisition going, a compelled offer. At the moment all they have is a disputed claim of right. They need that compelled offer. To get that offer costs money in legal costs. The only person who can get that compelled offer is them. It is not the company. They are the people to whose account, in any real commercial sense, the costs of obtaining the offer run. In commercial reality, they are

GORDON J: But the

MR GLEESON: If I can just finish this submission – in commercial reality, they are the only people who can get the benefit of the offer. They need it for the acquisition and the costs are to their account. They happen to be the majority shareholders in the company and the obvious thing that would normally happen in a case like this is that they would be the plaintiffs in the action and they would wear the costs and the risks of costs.

What they have done is to shift the cost burden to the company where the company takes the risk, and if the company takes the risk, that means Slea indirectly takes part of the risks as a shareholder, and on the evidence before you, the one thing you would have expected – the one thing you would have expected, which is an explanation for why they have shifted this cost burden to the company is missing. And the other thing you would have expected is an indemnity. And there is no evidence of any indemnity for the costs, even though they stand to get all the benefit of the action.

Now, within Trevor v Whitworth, we submit this is pretty close to the heart of the policy of Trevor v Whitworth. They are shareholders who want our shares. There is a necessary step to get our shares, which is the compulsory offer. It has a cost. They have switched the cost from themselves to the company and that prejudices the other shareholders, which is us, and on material prejudice they call no evidence to answer any of those questions.

So our submission would be on commercial reality to the extent it influences any stage of this inquiry. Your Honours would say this is the very thing Trevor v Whitworth were speaking against.

KIEFEL CJ: That might be a convenient time for the morning break. Thank you.

AT 11.18 AM SHORT ADJOURNMENT

UPON RESUMING AT 11.32 AM:

KIEFEL CJ: Yes, Mr Gleeson.

MR GLEESON: Thank you, your Honours. Your Honours, could I resume at paragraph 10 of our outline, with the application of section 260A to the facts of the case. Our first step is straightforward, which is to identify the persons that we say are financially assisted, and that is Millsave and Haron.

KIEFEL CJ: There is a third director - he is not a shareholder, is that right?

MR GLEESON: That is correct, yes.

KIEFEL CJ: And that director would have participated in the decision to bring the proceedings?

MR GLEESON: Well, that is covered by the no evidence matter, your Honour.

KIEFEL CJ: I see.

MR GLEESON: Yes. But to be clear, taking up your Honour’s question, this is not put as a breach of director’s duties case against the two majority shareholders.

KIEFEL CJ: It is not suggested that there was any ulterior purpose in the directors moving the company to bring the proceedings?

MR GLEESON: It is not put that way. What is put is that they were the only people who could directly benefit from prayer A. They are the only people who could receive the offer and move forward with an acquisition.

GORDON J: Yes, but that is merging, is it not, directors and shareholders? We have got a resolution of a company, one assumes, to institute a proceeding.

MR GLEESON: I will just try and put it together, if I can. The first step is that the only people who could benefit from the offer under prayer A were the two majority shareholders as companies. That is the first step. The second step is that there were costs necessarily incurred in obtaining the court order resolving the dispute, and that those costs were costs of acquisition of either units of shares or shares. At the units of shares stage, your Honour Justice Gordon raised the question, well, on their case, they already had an option, so there is no unit being acquired.

An appropriate way to look at that is, even if one took that approach, prior to the proceedings there is a disputed claim of right, and the purpose of the proceedings is to obtain the order which will resolve that dispute and lead to an order, punishable by contempt, requiring an offer, and on any view, that is something the shareholders do not currently have.

KIEFEL CJ: Do you accept, Mr Gleeson, that there is a benefit to companies such as this to maintain the rights of pre-emption and control over who may be the shareholders, to the extent that that allows?

MR GLEESON: There may be a general benefit, but the specific benefit of prayer A can only go to the individual shareholders.

KIEFEL CJ: But as I understand it, Mr Jackson’s argument against you is that the rights given by the constitution, rights of preemption, are quite important to companies such as small companies who wish to control who may be brought in as shareholders as far as they can - and this is as far as they can - and that the statute recognises that. So would you deny that it might be perceived by a company to be in its interests to enforce rights of preemption?

MR GLEESON: The answer is that it is possible, but on our argument that would be the matter relegated to the material prejudice inquiry, for this reason, that on any view

KIEFEL CJ: Yes, I do not have any difficulty with that. I was perhaps taking your argument out of sequence.

MR GLEESON: At the financial assistance stage of the inquiry, we submit there is no tension between section 140 and these provisions because there are two possible plaintiffs in these cases. There is the one we say is the obvious plaintiff, which are the shareholders, and there is the company. The company has standing under 140. If there is some good reason for the company to be the plaintiff, there are still two ways that can comfortably sit with 260A. The first is where the company does not incur any financial exposure in the action, e.g. it takes a full indemnity from those who benefit from it.

KIEFEL CJ: There would still be financial assistance, on your argument though, would there not, even with an indemnity?

MR GLEESON: If it was simply an indemnity, at the end of the day there would still be financial assistance, on our argument. But if it was a case where the costs agreement was entered solely with a third party, with the lawyers, and so the company did not spend a cent on any day of the thing, one might be able to argue/query no financial assistance – not this case obviously. But the second step is, if there is financial assistance by the company, no problem; you simply go then to the material prejudice inquiry at which you ask the very questions your Honour was putting to me. “How did this come about? Show us the directors’ minute. What was the reason why the company felt it appropriate to take on the action plus the costs burden. Did you have any indemnity? If not, why not?”

KIEFEL CJ: Is this an inquiry into the subjective intent of the directors?

MR GLEESON: No, on the material prejudice it would be an objective inquiry into the interests of the company and its shareholders and creditors and how they are affected by the giving of this financial assistance.

KIEFEL CJ: And if it was objectively seen to be in the interests of the company to take these proceedings, the fact that there is a benefit to others, that would not make it material prejudice to the company?

MR GLEESON: It may not, depending on that inquiry into the fact, and so the importance of the way we see the provisions sitting together, the company has standing to sue under section 140 agreed. It is giving financial assistance to the acquisition because it is taking on an acquisition cost. Therefore one goes to material prejudice and says, “Given the onus is on the company, what do you put forward to the court to show there is no material prejudice?” At that stage all of the matters your Honour is putting to me are open for consideration. While I will come to that at the end of our argument, the essential difference I think between Mr Jackson and us, even as he has reformulated it this morning, is he is saying, “If it is a company enforcing a constitution, that can never be material prejudice.”

GORDON J: Can I ask two

MR GLEESON: Whereas – just to complete the answer - we are saying, if it is the company forcing the constitution, there may be material prejudice and you will need to conduct the inquiry and they will bear the onus where we seek an injunction. I am sorry, your Honour.

GORDON J: In Grant’s Case in this Court, it dealt with the right of a company in a sense to bring an action to protect its constitution including preemptive rights. Does that affect the way this argument is put or is your complete answer just because the provision of the – is now in different terms?

MR GLEESON: One answer is that in Grant’s Case, which is at tab 53 of volume 2, this issue was not joined; that is, there was no attempt, as we do, to seek an injunction to restrain it on the ground that the company is providing financial assistance, so there is no inquiry into the question and there is no inquiry, indeed, into how the funding occurred. That is one answer. Another is in Justice Williams on page 29 between point 3 and point 5. When he discusses the nature of the preemptive right, he says:

This is an individual right sufficient to entitle any shareholder to maintain a suit against the company to restrain shares being transferred to nonmembers in breach of it –

and so on. So we would embrace that emphasis that

GORDON J: But this was an action brought by the company. There is not any suggestion in Grant’s Case that the company - in fact, it says to the contrary, does it not, that the company has a right to bring the action. My point is that at this time there was a provision dealing with financial assistance, prohibiting it under the old Companies Act (NSW). There is no suggestion that the mere existence or the institution of the proceeding itself, even under the old provision, constituted financial assistance.

MR GLEESON: Your Honour, our submission goes no further than the issue was not raised in the case.

GORDON J: I am testing your proposition that on the way in which you would put it the mere institution of the proceeding itself, without going to material prejudice - I am just dealing with the institution of the proceeding itself would constitute financial assistance.

MR GLEESON: On the current law - and it would be the same on the old law - our proposition is that it is the mere institution of the proceedings plus the incurring by the company of the costs exposures of those proceedings in relief of the cost burden that would otherwise be faced by the person who needs prayer A. It is those combination of matters, so in

GORDON J: And you say they were not present or not evidently present in Grant’s Case.

MR GLEESON: I am submitting no one in Grant’s Case argued that it was unlawful, and there was therefore no inquiry into any of those questions.

KEANE J: But the plaintiffs in Grant’s Case were the shareholders, were they not? I am looking at page 18 of the judgment, 656 of the book, halfway down the page.

MR GLEESON: That appears to be so, your Honour. I should have picked that up. I can add that on our researches, the only case we found where the company was the plaintiff was Lyle & Scott.

GORDON J: Yes, that is the second one.

MR GLEESON: Yes, and the others we looked at were shareholders.

So our proposition is, it is open to the shareholders to enforce the right. It is their individual right in the sense that Justice Williams says on page 29. Where the company not only brings the action but exposes itself to the financial burden, it is thereby relieving the shareholder of a burden the shareholder would otherwise face, and that is a sufficient step in the process of the acquisition, subject to the questions of remoteness that your Honour Justice Edelman raised with me. One way in fact of testing it

GORDON J: Just before you leave page 29, it is clear though, is it not, that the Court recognises that the company has got an entitlement to bring an action for rectification of the register. In other words, it is the link between this registration and the right under the preemptive right itself.

MR GLEESON: Well, Justice Williams speaks of the member having the right to sue for rectification.

GORDON J: No, “the company may apply to the court for rectification”, in the middle of the page.

MR GLEESON: Your Honour, we do not dispute there are provisions – Mr Jackson has referred to them – where in appropriate circumstances parties can go to the court for rectification. Those parties may be an aggrieved shareholder. In certain cases, they may be the company. The way in which we submit these provisions fit together is simply, as was raised by your Honour Justice Edelman’s question, the mere fact that the company may have an ability to bring such a proceedings does not take it outside section260A. One simply asks, “Is the way in which you are doing it financial assistance to an acquisition?”, and then you go to the material prejudice inquiry. Your Honours, could I draw attention in section 260A

GORDON J: I just want to finish this one aspect before you do that, Mr Gleeson. Does that mean that you suggest that the decision in Lyle is wrong?

MR GLEESON: Well, Lyle did not consider either the question of financial assistance.

GORDON J: No, but this ability of the company itself to bring the action to enforce its constitution - and I referenced the preemptive right – just that bit.

MR GLEESON: The answer to that is no.

GORDON J: Thank you.

EDELMAN J: Without more, a company that just simply sought to bring an action to enforce a preemptive right might not be the financial assistance.

MR GLEESON: That is correct. The necessary “without more” is going to be, as a minimum

EDELMAN J: That is what takes it out of being too remote, or whatever language one wants to us, to constrain the operation of the opening words of 260A.

MR GLEESON: Yes. And the “without more” is going to be, “Have you, as a company, pledged or exposed your resources to the action in a way which is relieving the prospective purchasers, the real beneficiaries of the action, of a burden which in substance is theirs?”

Now, as I put the proposition that way, and we embrace commercial reality, one might be tempered to ask this question: would the company in a case like this have a restitutionary claim or a claim of unjust enrichment against the majority shareholders on the basis that you are the real beneficiaries of the action? That, we submit, would probably be a distraction to the statutory inquiry because it is not an inquiry into strict legal forms; it is an inquiry into whether the company’s resources have been pledged to assist you in the acquisition. Chaston is a good example where, as a matter of strict legal form, the company incurred the debt and there may not have been a legal basis to pass the debt on to the purchaser who benefited. But that was not the statutory inquiry.

EDELMAN J: Were the additional matters of the manner in which the action was brought by the company matters that were directly raised at first instance?

MR GLEESON: At first instance, that was going to be the subject of the material prejudice inquiry and there was going to be a witness, and the witness was not called. Once no evidence was called by the appellants on that inquiry, their material prejudice argument necessarily collapsed, if I can use that, into the general argument, “Enforcing your constitution can never, ever be of material prejudice, even if you are incurring very substantial costs”. That was the legal argument they tendered, “It can never be material prejudice.”

Our response to that was to say, “Well, we have proved the costs. Unsurprisingly, they are substantial”. So we have put a factor in the ring which would suggest there might be material prejudice. “We have done enough to prove something on that topic. The onus is on you. You call nothing. You fail on your onus.” That is the way that collapsed. So all the questions that one would really think would be factually highly relevant

KIEFEL CJ: I am sorry, just so I understand clearly, you are saying no director was called, no resolution was tendered?

MR GLEESON: Nothing was done. That evidence was about to be called and then it was withdrawn.

KIEFEL CJ: I do not suppose they needed to tender a resolution though, unless there was an issue which suggested that there was lacking a resolution to bring the proceedings.

MR GLEESON: Not as an issue about lack of authority. But in a case of material prejudice where you bear the onus, you call nothing, the counterparty proves

KIEFEL CJ: Is this to accept from your point of view then, Mr Gleeson, that there may be cases where it is perfectly within the interests of a company to enforce its rights of pre-emption, but we are missing facts here? Is that what it comes down to?

MR GLEESON: Yes, that is our ultimate case.

EDELMAN J: Was the issue of indemnity raised, not as a matter of evidence, but even as a matter of submission, against the appellants?

MR GLEESON: I am told not, your Honour. So material prejudice was done is a very stark fashion. They say they are calling no evidence. They ran an argument, and we have a bundle to show what was put. If you are enforcing your constitution, that can never be material prejudice. Our side says we can at least prove the costs and we can point to something here which at least calls for inquiry, which is that the person who will benefit directly from prayer A is being relieved of the cost burden, and you have no evidence to show what arrangements you have entered with that person. So that is the way it is joined. Our proposition is as stark as Mr Jackson’s – the material prejudice inquiry, where they bear the onus, they must fail on it absent a tender of relevant evidence.

GORDON J: In that context, and assuming that is the position, is the failure of your clients to bring proceedings for a breach of directors’ duties - which may not actually go to the material prejudice question; it may just go to, in a sense, an allegation of purpose – a factor, given that the way in which courts look to see and treat resolutions of directors as being in the interests of the company, absent some other factor?

MR GLEESON: We would submit not, your Honour, for this reason. Mr Jackson’s first of three questions is what is the function performed by section 260A, if I could answer your Honour’s question by reference to that way of looking at it, which we say the function of 260A is to impose an additional protection beyond the law of directors’ duties, where the capital of the company is exposed to a particular type of threat, and the particular type of threat is the use of the company’s moneys to assist in any way a purchaser towards the acquisition of shares or units of shares in a company. So 260A(1), with the implied prohibition, says because that situation poses a particular threat to the capital base, then leaving directors’ duties aside, you must go through gateway (a), (b) or (c). So whether there has been an action to breach a director’s duties is not to the point.

The obvious purpose of the provision, we would submit, where preemptive rights are involved, is to put the company’s attention squarely focussed on two matters. Firstly, am I not just bringing the action but am I pledging or exposing my financial resources in a way that assists a proposed purchaser? But secondly, if I am, I must simply look at gateways (a), (b) or (c), and the obvious gateway is under section 260B which is to go to the shareholders for a special resolution, and that avoids every problem.

In a case where there is a good reason why the company is the plaintiff and why the company is paying its money, shareholder resolution can be sought and the material placed before the shareholders. That is a perfectly open gateway. If you do not want to go to the shareholders and you are not specifically exempted under (c), you will have to bear the burden on an injunction of a material prejudice inquiry, and that is the way the provision works together.

So it is not about director’s duties; it is about a specific protection against a specific threat, and there is absolutely nothing surprising that preemptive rights cases would come under this constraint. It does not render section 140 or the preemptive rights provisions otiose, as Mr Jackson says. It simply subjects them to a particular constraint where there is this risk to the company’s capital.

Your Honours, I want to draw attention to 260C which is the exemptions on pages 105 to 107 for this purpose. What has happened is that the old law had a very long list of exemptions. You will see that from tab 28, subsections (8) and (9). Those exemptions have been slimmed down to some extent, partly because the general material prejudice gateway has been added. But, importantly, under section 260C(5), attention has been given to various types of financial assistance, including under other provisions of the law, which are exempted, and one does not see in that list, any of the other provisions Mr Jackson has relied upon.

Another interesting aspect of 265C(5) is paragraph (c), which is:

assistance given under a court order.

There are a number of cases – we have given one in the supplementary materials, Rural Press – where scheme of arrangement cases consider 260A, and there is no difficulty in the scheme’s arrangement power operating together with 260A. Paragraph (d) exempts

a discharge on ordinary commercial terms of a liability that the company incurred as a result of a transaction entered into on ordinary commercial terms.

What is interesting is that that is described in the opening words as a type of financial assistance, which is exempted. Your Honours will recall that in cases such as Burton v Palmer, which was the payment of an existing debt, and Belmont, which was the purchase of an asset for good value, the courts were grappling with how that could be saved from the general prohibition. The way that is done under the modern law is that those matters may prima facie be financial assistance but they have a specific exemption. But in any event, there is the material prejudice escape route. So all that leads to the proposition that no narrow view needs to be taken of the opening words of the provision because the relevant exempting work will come through the various gateways.

GAGELER J: Mr Gleeson, could I just ask about 260A(1)(a)(i), referring to “the interests of the company or its shareholders”. There are two questions. “Interests”, I assume, includes financial interests.

MR GLEESON: Yes.

GAGELER J: Two, the shareholders, are they to be considered only collectively, or are they to be considered severally?

MR GLEESON: There could be both, your Honour. In a case where, close to the present, there are only three shareholders and the transaction exposes the company’s resources in a way that we would say effectively shifts the burden from the majority shareholders, where it belongs, partly to the third shareholder, that would be relevant on material prejudice. Why is it that Slea is being asked to pay, indirectly, part of the costs of a necessary step in the acquisition by the other shareholders? That would be a relevant matter to consider on material prejudice.

KIEFEL CJ: But that is not in its position as a shareholder though, is it, it is just in its position as the company having funds and being required to pay them in. You mean it is dissipating something within the connective companies?

MR GLEESON: Yes, I just mean in that sense, that we know that substantial legal costs are going out and we know that what will come back in will either be zero or likely to be less than the amount going out, therefore Slea is likely to lose something.

KIEFEL CJ: Yes, I see.

KEANE J: So its equity is being reduced?

MR GLEESON: Yes. Indeed, if it wins the action, if Slea is correct that preemptive rights have not been triggered, it suffers the most through its equity reduction, because whatever costs it gets back from the other side, it suffers part of in its equity. So they are the sorts of inquiries which are properly conducted, and properly conducted at that next stage of the transaction, if you do not want to go to shareholders for a special resolution.

Your Honours, in our outline, they are the matters that I have variously sought to cover between paragraphs 10 and 15, and particularly in paragraph 15 we suggest that in understanding that this is financial assistance one can look at it either from the perspective of the companies or from the perspective of the majority shareholders.

In one case, the assets are reduced and in the other case the shareholders are relieved of cost burdens they would face if they, being the real and direct beneficiary of prayer A, took on the burdens of the action. That sort of approach of what would the position otherwise have been had the real beneficiary faced the costs is what you have seen in Chaston in the UK Court of Appeal and it is also the approach, we submit, in Independent Steels which was discussed this morning. Could I just go to Independent Steels for one moment which is in volume 2 at tab 54.

On page 697 at lines 27 to 35, Justice Fullagar looked through the form of the transactions to their true nature which was the price being paid for the shares had, in truth, two components and that the consideration of what were described as the “consultancy payments” was really the shares themselves. In effect, the transaction had been restructured so that part of the purchase price was coming from the company’s resources being paid to the vendor under a socalled consultancy agreement.

At line 50 and following there are strong statements about the need to refer substance over form and at 698 at about line 20 there is a reference to Justice Needham in Saltergate:

that if the purpose of the financial assistance . . . is even partly to facilitate the purchase of the shares, the section is infringed.

We would submit that bearing in mind the current language, that proposition remains good and that even if the Court were persuaded that part of the purpose of the appellants in bringing the proceedings and incurring the costs was to obtain the satisfaction of knowing how their constitution operated it would not deprive their actions and the character of financial assistance.

Now, that same view of substance over form is on page 699 at lines 5 to 10. What the Court is doing when it says:

the company assisted the purchaser, who would otherwise have to pay the whole of the price, to purchase the shares –

the Court is looking at the otherwise position, the counterfactual, what is the real substance of the matter and how has that been dealt with in the form of the transaction.

Now, at the foot of the page, Mr Hayne’s argument for the purchaser started with the proposition that there must be something financial which is wanted or needed by the purchaser for the purchase and he argued that was not present here. And that argument seemed to be that the purchaser did not come up with the idea of part of the money being paid by the companies to the vendor as a consultancy fee; rather, that was the vendor’s idea for tax purposes. But Justice Fullagar said that is not the sense in which something wanted or needed is to be understood and:

If the sole or dominant real intention in incurring or creating the critical obligation is to provide from the coffers of the obligated company a part of the money consideration otherwise payable –

for the shares, then there will be financial assistance. Now, we embrace that, provided that the concept of the money consideration is taken as including relevant associated costs of acquisition.

GORDON J: There is really a distinction being drawn, is there not, between the substance and the incidental effect of what is occurring?

MR GLEESON: Very much a distinction between the substance and the form in which it has been expressed. And where we see that equivalent here, your Honour, is that of course in form, the plaintiff is the company, and the majority shareholders are joined as defendants. In form if the Court returns to the process which is in the respondents’ materials at page 21 in form, paragraphs 5 and 6, the third and fourth defendants are being joined and it said “no relief is sought” against them, and they are being joined merely as “necessary and proper” parties.

Now, that is the form and that is embracing the notion which Justice Nettle explained in a case we have given to your Honours’ associates, CGU Insurance v Blakeley [2016] HCA 2; (2016) 259 CLR 339 at 107 to 108, particularly at 108 – that, in form, the third and fourth defendants are not being treated as hostile defendants but as people who simply need to be there in order to ensure that all parties are before the Court to grant the relief.

If one looks at the substance, they being the only parties that can directly benefit from prayer A, they are, in substance, a plaintiff or the plaintiff and as Justice Nettle says in paragraph 108, when this device is used:

The relief which the joined party gets is the relief to which a willing plaintiff would be entitled. The judgment is entered for the joined party as much as for the actual plaintiff.

So while that form has been adopted, the substance of it is that it is a proceeding to obtain relief for the third and fourth respondents, which only they can get in terms of prayer A.

Your Honours, I am up to paragraphs 18 and 19. In terms of paragraph 18, I have made the submission that this case carries the risks identified in Trevor v Whitworth, at pages 435 to 436. At paragraph 19, a submission which has always been a part of Slea’s case is: what would have been the position had the ordinary course been followed and the third and fourth shareholders had been the plaintiffs in the preemptive rights action and the companies gave them the money to pay the legal costs?

We would submit that in that case it would be tolerably clear that the companies’ resources are being deployed in a way which is assisting the acquisition of shares or units of shares. And, in a sense, it makes no difference who are the plaintiffs and the defendants in this action, on our argument. It could be the companies; it could be the majority shareholders. You could rearrange the record in any way. What matters is are the companies being exposed to the costs in relief of the burden which the prospective purchasers would otherwise face?

GAGELER J: Is it essential to your argument that the counterfactual is the prospective purchasers bringing their own action?

MR GLEESON: Well, it is not essential, your Honour. It is one way of viewing it. But the counterfactual is – another way of looking at it is the counterfactual as of today is that there is a roadblock to this acquisition proceeding. The roadblock is there is a disputed claim and, absent some binding resolution that an offer is to be made, the acquisition cannot go forward and that is a counterfactual. And, in a sense, the question then is: what happens in that world? If the company does nothing, there will be no acquisition. Something has to happen to move it forward in the way we indicate.

Your Honours, in terms of our outline, what is at paragraph 20 is material I have partly already covered about how we deal with the other provisions of the Act. Our main submission is they can sit together in the sense that sometimes a company invoking another provision will constitute financial assistance within 260A. If it does, that is unsurprising. The company simply goes for a special resolution or confronts the material prejudice inquiry.

We also make the proposition that of course preemptive rights could be placed in the shareholders’ agreement, as opposed to the constitution, and it would be unlikely that a different result would be reached for section 260A, depending upon where the preemptive rights were found.

Your Honours, paragraph 21is a very brief paragraph. We consider that you can probably resolve this appeal without having to traverse all of the earlier cases and so I do not wish to burden you with unnecessary submission. I would put a general proposition that, as Justice Gordon has indicated, one of the purposes of the amendment was to ensure that this material prejudice question was placed front and centre in the inquiry and transactions which did not cause material prejudice to the company would be allowed to go forward, even if they were financial assistance.

So it is unlikely that under the modern law things which were prohibited before would now be permitted, if I can put it that way. The result of that is that most of the earlier cases will remain correct under the current law. But in many cases that would be rationalised now on the stage that there is no material prejudice.

Your Honours, our alternative submission, very much in the alternative, is that if you regarded net transfer of value or a transaction as necessary elements at the financial assistance stage, you would find them here essentially because the company is paying away money, it is likely never to recover it in full and, to the extent a transaction is needed, the transaction with the company’s lawyers and contingently with Slea is a transaction which assists the purchaser.

Your Honours, can I turn then finally to material prejudice. What is in paragraph 23 is what I have already sought to put. That is the way we would submit the material prejudice inquiry would be conducted and the onus being on the companies they fail, and one would simply expect those sorts of inquiries plus potentially others to be explored by a company who wished to make out no material prejudice.

Could your Honours go to Mr Jackson’s outline this morning which approaches question 3 in a different way. Mr Jackson’s paragraphs 9 to 11 say that on a before and after basis, nothing has changed. We think that is another way of saying if the company is enforcing preemptive rights, there can never be material prejudice. So our general answer remains the same, that that does not grapple with how these provisions work together. But in addition to that, could indicate this. Paragraph 9 says:

Whether giving financial assistance materially prejudices the interests of the company and its shareholders involves a comparison between the position of the company and its shareholders –

if no financial assistance were given, and:

on the other hand, the position in consequence of, the giving of the alleged financial assistance.

Firstly there, “the company and its shareholders”, that should be taken as a short form expression for the matter your Honour Justice Gageler asked me about. It is the interests of the company or its shareholders or ability to pay creditors. Then in paragraph 10 Mr Jackson says all you need to know about the world before the proceedings is the shareholders were obliged to observe the preemptive rights provisions in the constitutions and those provisions could be enforced by either the appellants or the shareholders.

We would add to that in terms of the world before the proceedings, firstly that there was a dispute about the application of the preemptive rights such that there was no authority determination whether an offer was required. So there was a dispute about that matter.

Secondly, the only persons who could directly receive the benefit of the offer under clause 77 were the majority shareholders, not the company, and where, prior to the proceeding, absent some determination then an acquisition would not go forth by this route. If the purchasers were to buy out Slea, they would have to find some other way of paying enough money. After the proceedings – this is paragraph 11 – to say nothing has changed ignores, firstly, the substantial depletion of the financial resources of the company.

GORDON J: Is there evidence of that?

MR GLEESON: There is evidence of the $700,000 or $800,000odd in the legal costs, which is in the trial judge’s judgment at page 35: $525,000 to $755,000, that is for the company’s costs, and then add to that the potential adverse costs order. That is an amount of money which on its face is substantial, irrespective of what might be the overall resources of the companies. That is one thing that has changed.

Secondly, what has changed is that the majority shareholders have received the benefit that they have been relieved of the burden of facing such costs. Thirdly, there is no evidence of any arrangement in any way to protect the company against that shifting of burden. Fourthly, and finally, there must on the facts known be at least questions to be considered about the purpose of the company in taking on the costs burden which really belongs to the majority shareholders – questions calling for explanation and answers. That is just another way of us saying that if the company is enforcing the preemptive rights then, if it is depleting its resources in some way, you will go to material prejudice, and these types of questions need to be answered.

Your Honours, Mr Jackson has drawn our attention to the firstinstance decision in Chaston and he has provided us with a note of what he says its relevance is. We have no objection to your Honours receiving that note or that firstinstance decision. May it please the Court.

KIEFEL CJ: Thank you, Mr Gleeson. Anything in reply, Mr Jackson?

MR JACKSON: Yes, your Honour. Your Honours, may I deal with my learned friend’s last submissions dealing in effect with the submissions we have made in I think paragraphs 9, 10 and 11 of our outline to the Court. If one looks at the preemption provisions, they are not provisions to say that the result of their exercise will be that the shareholders who are adverse or not of the same interest as their interests will end up with those shares. You see a threestage process involved. They may; they may not; they may end up with some of them. A third party altogether with whom they are perfectly happy may end up with some of them.

Your Honour, the simple point we seek to make is that it is not correct to elide on the one hand the possibility that they may become shareholders with the fact that, as asserted by the other side, they will. Other persons have a possible interest in their possible acquisition of the shares. If one is looking to see what is material prejudice it does seem a fairly simple and perhaps elementary starting point to say, well, you look to see what the position would be if the financial assistance will not give it and what the position would be in consequence of its giving.

Your Honours, in that regard, one does need to bear in mind that Slea and Associates are not the only persons who are shareholders in the company. What you have is a situation where each of the shareholders is entitled to say I have got rights over the constitution of a company, the rights entitle me to say to the company, look, this bloke if I could put it that way this bloke wants to ride roughshod over the terms of the constitution. We may be right, we may be wrong in saying that, but that is what we consider the situation is.

Under the terms of the Corporations Act there is a power and a contractual obligation on the part of the company to take steps to have – to put it in the most neutral form, declared what are the rights of the shareholder. Why should individual shareholders have to carry the weighty baby, or so it has been put, of proving that the aggressive shareholder from their point of view is someone who has to do it. Surely, that is one of the obligations of a company and one of the obligations which, in the end, the funds all have to meet.

Your Honours, could I come then to a number of other matters? Your Honours, dealing with a somewhat similar topic, much of our learned friend’s arguments are on what might have been, what might have been if the other shareholders had chosen to do something. But, for the reasons we submitted a few moments ago, in our submission, it is an appropriate case that for other shareholders to say, look, it is up to the company to do what has to be done here. There are statutory rights and rights under the constitution.

Your Honours, could I go then to reliance placed by our learned friend on what was said to be the normal way of dealing with cases where you do not have all shareholders, for example, all possible parties to an action enthusiastic about dealing with them as the CGU Case, your Honours, CGU Limited v Blakeley, and the relevant passages, your Honours, are paragraphs 107 and 109.

Now, it would come as no surprise to your Honours, I think, that if one wants to sue in circumstances where other persons are potential plaintiffs and desirably should be in the action but are not prepared to do so, they can be added as defendants. Then, one goes to see what was said about it in paragraphs 107 and 108. Your Honours, one is rather searching in those paragraphs to find anything to support the notion that the normal process is that you have those persons really as being the plaintiffs.

In cases where you are talking about a company, it would be sometimes they will, sometimes they will not. Very often, you would see the party that would be suing would be the corporation and it joins, as here, the appropriate other parties. Your Honours you will not find, in our submission, anything to support my learned friend’s rather sweeping assertion that the normal appropriate way is to get, as plaintiffs, the people who do not want to be plaintiffs and, on the other hand, to show that they have been offered an indemnity or you offer them an indemnity or something along those lines.

Your Honours, could I come then to the decision of the Court of Appeal in the United Kingdom. We have given your Honours a copy of the decision at first instance by Justice Davis and, your Honours, it is not an entirely anorexic work, if I can put it that way. So what we have sought to do is to summarise in paragraphs 1 to 15 in a note way, it is relevant, and also how the case works out.

Your Honours, I do not think I need really to go through that in detail. Your Honours, we have set out there what we say in short. It is quite a complicated case and, your Honours, we have endeavoured to summarise in paragraphs 11 to 15 the reasons why the Court ought not to follow the decision of the Court of Appeal in Chaston.

The judgment has some oddities in the Court of Appeal. It may simply be a question of style in the somewhat.....way in which the third judgment in the matter is dealt with and the consciousness of the judges in the matter is revealed. When one comes down to it, your Honours will see from the basic facts this was a case where negotiations had been going on for six months beforehand and it is hardly surprising, though it may be unusual, that such a conclusion was arrived at. Your Honours, those are our submissions.

KIEFEL CJ: Thank you, Mr Jackson. The Court reserves its decision in this matter and adjourns to 9.30 am on Friday, 17 May in Melbourne and in Sydney.

AT 12.30 PM THE MATTER WAS ADJOURNED