Worldwide NZ LLC v QPAM Ltd CA122/06 [2006] NZCA 489 (10 November 2006)

Last Updated: 4 February 2014

IN THE COURT OF APPEAL OF NEW ZEALAND

_CA122/06

BETWEEN WORLDWIDE NZ LLC First Appellant

AND JOHN JAMES GOSNEY Second Appellant

AND QPAM LTD

First Respondent

AND JACOBSEN VENUE MANAGEMENT NEW ZEALAND LIMITED

Second Respondent

Hearing: 21 August 2006

Court: Glazebrook, O’Regan and Arnold JJ Counsel: M J Fisher for Appellants

P F A Woodhouse QC and A J Thorn for First Respondent

C P Browne and J Carlyon for Second Respondent

Judgment: 10 November 2006 at 2.pmat 2.00 pm

_{JUDGMENT OF THE COURT}

A The appeals are dismissed.

2. The first appellant must pay to each respondent costs of $6,000 and usual disbursements.

WORLDWIDE NZ LLC AND ANOR V QPAM LTD AND ANOR CA CA122/06 10 November 2006

REASONS OF THE COURT

_{(Given by O’Regan J)}

Introduction

[1] This appeal arises out of a dispute about the operation of pre-emption provisions in documents governing the relationship between the two participants in the entity set up to develop the Vector Arena, a major indoor sporting facility in downtown Auckland. The development is substantially funded by the Auckland City Council (the Council).

[2] The entity is a unit trust called the Quay Park Arena Management Trust (QPAM Trust) which has two classes of units, A units and B units. The trustee of the QPAM Trust is the first respondent, Quay Park Arena Management Limited (QPAM) which has two classes of shares, A shares and B shares. The A shares in QPAM are “stapled” to the A units in the QPAM Trust, and the same applies to the B shares and B units. Prior to the events which precipitated this litigation, the second respondent and interests associated with it (to which we will collectively refer as “Jacobsen”) held the A shares and A units (75% of the total number of shares and units), and the first appellant (Worldwide) held the B shares and B units (the remaining 25%). Jacobsen was entitled to appoint three directors of QPAM, and Worldwide was entitled to appoint one director. Some board matters required agreement of both A and B directors.

[3] In January the ultimate parent company of Worldwide, Worldwide Entertainment Inc (WEI) went into receivership. It is accepted for the purposes of this appeal that this caused a “Change in Control” of Worldwide, triggering in Jacobsen’s favour pre-emption provisions in the trust deed for the QPAM Trust and the constitution of QPAM. Jacobsen gave notice of exercise of its pre-emptive rights

and QPAM now treats Jacobsen as holder of the shares in QPAM and all the units in the QPAM Trust.

The issue

[4] The essential issue in this case is what the effect of the triggering of the pre- emption divisions has on the respective positions of Jacobsen and Worldwide as unit holders in the QPAM Trust and shareholders in QPAM, pending the completion of the pre-emption sales process.

[5] In the High Court, Worldwide sought an injunction requiring the respondents to treat Worldwide as still being the lawful owner of the B units and B shares, and to treat the second appellant, Mr Gosney, as a validly appointed director of QPAM following his appointment by QPAM. Worldwide sought ancillary orders protecting the ongoing position of QPAM and Mr Gosney until the pre-emption process, and the disputes about its operation, are resolved. Williams J refused the injunction: HC AK CIV 2006–404-1827 26 May 2006. Worldwide and Mr Gosney appeal against that refusal, and seek the interim relief which was refused in the High Court.

The parties’ positions

[6] The essential point of difference between the parties relates to the position of Worldwide after the change in control of Worldwide occurred, triggering the pre- emption provisions. The respondents’ position is that as a result of the change in control of Worldwide, Worldwide should now be treated as a party which has unlawfully acquired the B shares and B units in breach of the pre-emption provisions, and should therefore have no status as an ongoing shareholder or unit holder. Worldwide says it should be treated as if it were an unpaid vendor of the shares and units, and have full rights as a holder of shares and units until the sales process is completed. (As the shares and units are stapled, the regime applying to one applies to the other. From now on, we will refer to “units” but our analysis applies to shares in QPAM as well.)

[7] The resolution of this element of the case substantially determines whether the High Court Judge was correct to refuse an injunction in this case. We now direct our attention to that issue, but before doing so provide some context as to the events which led to the dispute, and the relevant provisions of the key documents governing the rights and obligations of the parties. In doing so, we refer only to facts which are relevant to the relatively narrow issues currently before us. The High Court judgment sets out a full narrative of the facts, and reference should be made to that judgment if greater detail is required.

Facts leading to the dispute

[8] It is common ground that when the Federal Court at Florida put WEI into receivership and appointed Michael Goldberg as its receiver, this effected a “Change in Control” of Worldwide within the meaning in the trust deed. The receivership of WEI commenced on 18 January 2006.

[9] Mr Goldberg wanted to appoint Mr Gosney as the B director of QPAM in place of the person appointed by Worldwide before the receivership.

[10] There was a dispute about the process of appointing Mr Gosney and there were difficulties between QPAM and Mr Gosney. Mr Gosney wished to view QPAM’s financial records and there was a dispute about the adequacy of the records provided to him by QPAM and about the extent of QPAM’s obligation to provide them. At this stage, neither QPAM nor Jacobsen had suggested any change in control of Worldwide.

[11] However, in late April 2006, Jacobsen’s solicitors emailed Mr Goldberg invoking Jacobsen’s pre-emptive rights as holder of the A units. They said Jacobsen was prepared to pay a “fair price” for the B units. Jacobsen said it accepted purchase of the B units and, consequently, Worldwide no longer had any rights in respect of the QPAM Trust or QPAM. Mr Gosney’s appointment as director was said to be invalid. On 3 May QPAM emailed Mr Gosney invalidating Mr Gosney’s appointment as director and requiring him to resign formally by 5 May.

[12] Worldwide then commenced the current proceedings. On 11 May, Baragwanath J granted interim orders pending a full hearing of the application for an interlocutory injunction. Those orders were set aside after the High Court hearing before Williams J. Baragwanath J also enjoined Jacobsen from disposing of the B units. There is a dispute as to whether that order continues in force.

[13] The Council gave notice to QPAM that the change in control of Worldwide caused a default by QPAM under the development agreement between the Council and QPAM in relation to the Vector Arena. It reserved its rights in that regard.

The documents

[14] The trust deed of the Trust restricts the transferability of the B units. It provides:

9.2.1 Except as expressly permitted by clause 9.3, no “B” Unit Holder is entitled to:

(a) sell or Dispose of “B” Units in whole or in part;

(b) sell or Dispose of any Relevant Interest in “B” Units; or

(c) create or grant any options or similar rights over “B” Units.

9.2.2 A Change in Control is deemed to be Disposal of “B” Units by the “B” Unit Holder upon the occurrence of which the provisions of clause 10 will apply.

[15] The important point for present purposes is that a change in control is treated as an actual disposal of B units, rather than a triggering of an obligation to offer them to the A unit holder.

[16] Clause 9.3.2 entitles B unit holders to sell or dispose of B units only in accordance with the pre-emption provisions, that is where:

the Disposal is a transfer of “B” Units to “A” Unit Holders in accordance with the Pre-Emptive Rights or to a third party after the “B” Units have been offered to the “A” Unit Holders in accordance with the Pre-Emptive Rights and the “A” Unit Holders have declined to purchase the “B” Units to be acquired by the third party on the same terms and conditions.

[17] Clause 9.5.2 provides that if a B unit holder sells or disposes of its B units to an A unit holder, the B units must be classified as A units. Clause 9.6 provides that QPAM must not register a transfer of the units unless the terms of cl 9 have been complied with.

[18] Central to this case are the pre-emptive rights provisions of the trust deed. In general terms, the holder of the A units is given a right of first refusal over the B units. This is set out in cl 10 of the trust deed which relevantly provides:

10.1 Transfer notice

Any “B” Unit Holder who wishes to sell all or any part of its “B” Units to an identified willing third party purchaser (“Purchaser”) on arms’ length terms must give notice in writing (“Transfer Notice”) to the Trustee.

10.2 Relevant particulars

A Transfer Notice must specify:

10.2.1 the name and address of the Purchaser;

10.2.2 the number of Relevant Units that are the subject of the proposed sale;

10.2.3 the proposed consideration for the sale of the Relevant

Units (“Sale Consideration”)

10.2.4 that the Relevant Units will not on completion of the sale be subject to any Encumbrance.

10.3 Acceptance by “A” Unit Holder

The “A” Unit Holder has a right to acquire all or a part of the Relevant Units from the “B” Unit Holder by giving written notice of its willingness to purchase the Relevant Units to the “B” Unit Holder within 10 Business Days after receipt of the Transfer Notice from the Trustee.

[19] Clause 12.2 provides that where the trust deed conflicts with QPAM’s constitution, the former prevails.

[20] The B shares are subject to the same pre-emption provisions as the B units to which they are “stapled”.

What effect does the deemed disposal have on Worldwide’s position?

[21] Clause 10 contemplates the establishment of the purchase price which the A unit holder must pay by a market mechanism, ie what an actual third party purchaser is prepared to offer. It anticipates that the B unit holder will have reached conditional agreement with the third party before giving the Transfer Notice referred to in cl 10.2. Unless the B unit holder has reached such an agreement with a third party, it will not be able to set in train the pre-emptive provisions. All of this means that the cl 10 mechanism cannot be made to work where a deemed disposal under cl 9.2.2 has already taken place. The terms of the trust deed simply fail to deal with this situation in any workable way.

[22] Counsel for Worldwide, Mr Fisher, sought to characterise a “deemed disposal” as a legal fiction. He submitted that as cl 10 deals with transactions which have not yet occurred, all that a “deemed disposal” under cl 9.2.2 entails is an obligation on Worldwide’s part to issue a transfer notice to Jacobsen, thus triggering the right of first refusal mechanism in cl 10.

[23] We do not accept that submission. It was open to the drafters of cl 9.2.2 to provide that a change in control triggers an obligation to give a transfer notice offering to sell the units, rather than constituting a disposal. Indeed, the former wording would have reflected more common practice. Even that approach would not work in this case, because a transfer notice must specify the price agreed with a third party, when none will have been agreed in the event of a change in control.

[24] In any event, the parties chose to provide that a change in control is treated as a disposal of the B units. The words are clear. That means that upon the appointment of Mr Goldberg as receiver of WEI, Worldwide was deemed to have disposed of the B units in breach of cl 9. It is treated as being in default under the trust deed.

[25] Clause 9.2.2 says the provisions of cl 10 apply when there has been a deemed disposal but, as noted earlier, that cannot be made to work. In order to make cl 10 operable following a deemed disposal, it is necessary to construe it in a manner that

assumes the disposer of the B units is in default of its obligations to offer the A unit holder the chance to purchase the B units. That is to say, we construe cl 10 on the assumption that the pre-receivership Worldwide disposed of the B units (by their being passed to the post-receivership Worldwide) without first offering them to Jacobsen.

[26] The purpose behind the pre-emptive rights provisions is clear: it is to preclude the B unit holder from disposing of its interest to a third party without first giving the A unit holder the opportunity to end the joint venture and buy out the B unit holder’s interest. Jacobsen agreed to a joint venture with the pre-receivership Worldwide, but reserved the right to force Worldwide out if another party stepped into Worldwide’s shoes. If Worldwide under the control of Mr Goldberg were to be regarded as the valid successor to the Worldwide with which Jacobsen entered business, Jacobsen would find itself in a venture with a party with which it did not choose to enter into a joint enterprise.

[27] Mr Fisher said Worldwide should be treated as if it had made a valid offer to Jacobsen under cl 10, which Jacobsen had accepted. He said that would mean Worldwide was in the position of an unpaid vendor of shares analogous with that of the plaintiffs in Musselwhite v C H Musselwhite & Sons Ltd [1962] Ch 964. In that case, the contract for sale of shares provided for the purchase price for the shares to be payable in instalments. It was said that even though the contract had been executed, the vendors were still entitled to vote the shares in whatever way they wished pending payment of the full purchase price. We do not agree that that case is on point in the present situation. In Musselwhite, the vendors were not in default of any obligation. They were simply ordinary unpaid vendors. As we have said, Worldwide’s position is quite different. It has defaulted under the trust deed. It does not enjoy the same rights as a non-defaulting unpaid vendor.

Should an injunction have been granted?

[28] Having reached that view on the positions of the parties, we turn to the matters which must be addressed in injunction cases:

(a) Whether there is a serious question to be tried;

(b) Whether the balance of convenience favours the granting of an injunction; and

(c) Whether the overall justice of the case lies in favour of the applicant for the injunction.

[29] We are cognisant of the fact that the decision of the High Court Judge to refuse an interlocutory injunction was a discretionary decision. That calls for restraint on the part of an appellate court.

(a) Serious question to be tried

[30] Mr Fisher, counsel for Worldwide argued the serious questions to be tried are (1) whether Jacobsen’s invocation of its pre-emptive rights has any effect; (2) whether Worldwide and QPAM are required to fix the sale consideration; (3) whether legal and beneficial title to the B units remains in Worldwide pending the Council’s consent to their transfer to Jacobsen; and (4) whether, pending the valuation of and payment for the shares, Worldwide enjoys rights attaching to them and the right to appoint a B director.

[31] Those are the issues which may arise in Worldwide’s substantive claim. For present purposes, we do not need to decide any points other than those addressed already. That is because, even if there are serious questions to be tried, this case falls to be determined on the balance of convenience, the issue to which we now turn.

(b) Balance of convenience

[32] In the light of our conclusion on the nature of Worldwide’s present position, we are satisfied that the balance of convenience lies with Jacobsen. Worldwide’s legitimate interest is in ensuring a process which entitles it to a fair value for its units as at the date of the deemed disposal, which gives it only a limited legitimate interest in the ongoing operations of QPAM. On the other hand, Jacobsen is the majority

owner of QPAM (and likely the sole owner of QPAM once this litigation is completed) and faces the risk of real detriment if it is required to continue to deal with the post-receivership Worldwide as a co-owner in circumstances where the pre- emption provisions were designed to protect it from that consequence. There are commercial sensitivities in the relationship between QPAM and the Council which could be affected by internal wrangling within QPAM. The consequences for QPAM of a dispute with the Council could be extremely serious.

[33] During the hearing we put it to Mr Fisher that Worldwide appeared to be seeking the making of orders at the interim stage which were essentially the same as the orders it sought in its substantive proceeding. Mr Fisher said that the focus of the proceedings at the present stage is the concern which Worldwide has that even if the result of the operation of cls 9 and 10 of the trust deed is that Jacobsen is entitled to purchase Worldwide’s units, Jacobsen may default in the making of payment.

[34] Counsel for Jacobsen, Mr Browne, accepted that Worldwide had an ongoing interest in the B units in order to protect any lien or similar creditor’s right which it would have in the event of Jacobsen defaulting in the payment of the purchase price. He said that the order made by Baragwanath J prohibiting Jacobsen from disposing of the B units protected Worldwide in that regard. After discussion with the Bench, during which it was pointed out that there was no prohibition on Jacobsen granting a security interest in the B units, Mr Browne undertook to take instructions as to whether an undertaking not to do so could be provided.

[35] Mr Fisher disputed the existence of any impediment on disposal of the units by Jacobsen. He said that the order made by Baragwanath J preventing disposal of the B units had been discharged. There is some dispute about that, but in the light of the undertakings now offered by Jacobsen, we do not need to resolve it.

[36] After the hearing Mr Browne filed a memorandum in which he confirmed that the B shares were not subject to any existing security interest created by Jacobsen, and that Jacobsen undertook not to dispose of or charge the B shares until:

(a) Jacobsen has paid for the shares in an amount fixed by QPAM as trustee, determined by the Court or determined as a result of a process either fixed by the Court or QPAM; or

(b) Jacobsen has paid $4.125m into a trust account to be held as security for its obligation to pay for the shares; or

(c) Further order of the Court.

[37] Jacobsen gave its undertaking in the light of the following intentions:

(a) Once Jacobsen has paid the fixed amount it will be free to deal with the B shares even if Worldwide challenges either the amount paid or the process for fixing the amount; and

(b) If there is delay in determining the consideration to be paid and it becomes commercially necessary for Jacobsen to sell or charge the B shares Jacobsen will deposit money, equal to the cost of Worldwide’s acquisition of its interest, for retention of the shares.

[38] Although the undertaking refers to shares rather than shares and units, we are satisfied it covers both. As noted earlier, the B shares and B units are “stapled”. That means any restriction on disposal or charging of one must apply equally to the other.

[39] Mr Fisher filed a memorandum questioning the adequacy of these undertakings. But we are satisfied for the reasons set out above that, given the terms of the undertakings, the balance of convenience favours Jacobsen. In our view, the undertakings provide reasonable protection for the position of Worldwide pending resolution of the disputes between the parties and completion of the pre-emptive rights process.

(c) Overall justice

[40] We do not need to address this factor directly, because in our view the balance of convenience favours Jacobsen by some margin. In view of that, we are satisfied that the overall justice of this case favours the refusal of the injunction.

Result

[41] We agree with the decision of Williams J to refuse an interlocutory injunction. We therefore dismiss the appeal against that decision.

Other matters

[42] We record that Worldwide’s case in the High Court included an allegation that Jacobsen was estopped from exercising its pre-emptive rights because of its conduct after the appointment of the receiver of WEI. That argument was not pursued in this Court, but Mr Fisher reserved the right to pursue it in the substantive proceeding. Worldwide’s High Court claim also includes a claim under s 174 of the Companies Act 1993, but that was not an issue in this appeal.

[43] Worldwide also appealed against an oral judgment of Williams J dated

15 May 2006 determining the admissibility of affidavits prior to the hearing on the injunction. The Judge excluded the affidavit of Grant Burns and all but two paragraphs of Mr Goldberg’s third affidavit. The contents of those affidavits can be summarised as follows:

(a) Mr Burns is a partner in the firm PricewaterhouseCoopers. He is essentially an expert witness engaged to depose what information a reasonable newly appointed company director could expect to be supplied with;

(b) Mr Goldberg’s third affidavit outlined his personal qualifications and described the circumstances in which he became the Receiver of

WEI, a previous dispute between WEI’s Australian subsidiary and other companies related to Jacobsen, the appointment of Mr Gosney and the signing of confidentiality undertakings to QPAM prior to Jacobsen’s notice of its intention to invoke its pre-emptive rights.

[44] Williams J excluded Mr Burns’ affidavit as it was not in reply to evidence already tendered. It was new material and would only possibly be of relevance at a later date, if Worldwide were ultimately successful. The severed parts of Mr Goldberg’s affidavit were largely irrelevant and also not in reply.

[45] Given our conclusion on the positions of the parties, the relevance of the excluded evidence may be questioned. Mr Burns’ evidence is expert evidence telling the Court what information a reasonable company director might expect to receive. In the light of our conclusion that Worldwide is in default under the trust deed, and consequently that it does not retain the right to appoint a B director, Mr Burns’ evidence cannot have any relevance.

[46] As for Mr Goldberg’s evidence, most of it relates to his conduct as the Receiver of WEI. His conduct, while apparently the subject of criticism in some of the affidavits, is not in issue before us. The only permitted aspects of that evidence in the High Court related to the estoppel claim, which was not pursued on the present appeal, and to Mr Goldberg’s communications with representatives of the Council, which are also irrelevant given our view on the injunction.

[47] The evidence is not therefore relevant to the case before us. In any event, we can see no error in the Judge’s approach and, given the discretionary nature of the decision, see no reason to intervene.

[48] Accordingly, we formally dismiss the appeal against the affidavit admissibility judgment. We record that Mr Browne submitted we did not have jurisdiction to entertain this appeal, relying on Association of Dispensing Opticians of New Zealand Inc v The Opticians Board [2000] 1 NZLR 158 (CA). In the light of our conclusion on the merits, we do not express a view as to whether Mr Browne’s submission as to jurisdiction is correct.

^Costs

[49] We award costs to both QPAM and Jacobsen of $6,000 plus usual disbursements.

Solicitors:

Brookfields, Auckland for Appellants

Stewart Germann Law Office, for First Respondent

Wilson Harle, Auckland for Second Respondent