Leckie v Beverley [2023] NZCA 570 (17 November 2023)

Last Updated: 22 November 2023

IN THE COURT OF APPEAL OF NEW ZEALAND I TE KŌTI PĪRA O AOTEAROA

CA84/2023 [2023] NZCA 570

	BETWEEN	WILLIAM JAMES WATERHOUSE LECKIE First Appellant CHRISTOPHER GORDON LEWIS MORRISON Second Appellant LEWIS TUCKER AND COMPANY LIMITED Third Appellant PHEASANT TAIL HOLDINGS LIMITED Fourth Appellant LEWIS TUCKER FOREST PARTNERS LIMITED Fifth Appellant LEWIS TUCKER FP INVESTMENTS LIMITED Sixth Appellant FOREST PARTNERS GP LIMITED Seventh Appellant LEWIS TUCKER FP MANAGEMENT LIMITED Eighth Appellant
	AND	ANTHONY AND WENDY BEVERLEY First Respondents DRYLANDCARBON GP ONE LIMITED Second Respondent DRYLANDCARBON ONE MANAGEMENT LIMITED Third Respondent DC ONE H1 LIMITED Fourth Respondent

Hearing:	18 July 2023 (further submissions 3 August 2023)
Court:	Gilbert, Lang and Woolford JJ
Counsel:	J B M Smith KC, A S Olney and O C Gascoigne for Appellants M G Colson KC and K J Dobbs for First Respondents No appearance for Second to Fourth Respondents
Judgment:	17 November 2023 at 2 pm

JUDGMENT OF THE COURT

1. The application for leave to adduce further evidence is declined.
2. The appeal is dismissed.

100. The appellants must pay costs to the first respondents for a standard appeal on a band A basis and usual disbursements.

____________________________________________________________________

REASONS OF THE COURT

(Given by Gilbert J)

Introduction

• [1] This is an appeal against a High Court judgment granting the first respondents (the Beverleys) leave pursuant to s 165 of the Companies Act 1993 (the Act) to bring a derivative action in the name of the second to fourth respondents (the derivative plaintiffs) against the appellants (Messrs Leckie and Morrison and their companies).^[1]
• [2] Through the derivative plaintiffs, the Beverleys and Messrs Leckie and Morrison successfully established a carbon afforestation fund using a limited partnership structure to deliver a long-term, cost-effective supply of carbon credits to limited partner corporate investors. The claim is that Messrs Leckie and Morrison breached their fiduciary and other duties to the derivative plaintiffs by making decisions which preferred their own interests, misusing company information and diverting a corporate opportunity in establishing a second carbon afforestation fund for their own benefit.
• [3] Messrs Leckie, Morrison and Beverley were the sole directors and, together with Mrs Beverley, were the ultimate beneficial owners of the derivative plaintiffs:

(a) Drylandcarbon GP One Ltd (the General Partner), the general partner of the Drylandcarbon One Limited Partnership;

(b) Drylandcarbon One Management Ltd (the Manager) which managed the Drylandcarbon One Limited Partnership under a management services agreement (the Management Services Agreement); and

(c) DC One H1 Ltd (H1), a holding company that owned all the shares in the General Partner and the Manager. The shares in H1 are held 50 per cent by the Beverleys, and 50 per cent by Messrs Leckie and Morrison through Pheasant Tail Holdings Ltd (the fourth appellant).

• [4] The benefit of the arrangement to the Beverleys and Messrs Leckie and Morrison was obtained through fees earned by the Manager under the Management Services Agreement and passed back to their interests through H1. The basic structure of the arrangement is depicted in the diagram below:

Beverleys Messrs Leckie and Morrison

(through Pheasant Tail Holdings)

H1

Directors
Mr Beverley
Mr Morrison
Mr Leckie

General Partner Management Services Agreement Manager Limited Partners
Drylandcarbon One Limited Partnership

• [5] After the fund was established, Mr Beverley’s relationship with Messrs Leckie and Morrison quickly deteriorated and eventually broke down completely. They reached a mediated agreement on 20 April 2021 designed to enable them to go their separate ways, but this objective has not yet been achieved. Taking the view that Mr Beverley was in breach of the mediated agreement by failing to resign as a director and appoint a nominee to act in his place, Messrs Leckie and Morrison removed him as a director of both the General Partner and the Manager on 18 May 2021.
• [6] In August 2021, Lewis Tucker and Company Ltd (Lewis Tucker, the third appellant), largely owned by Messrs Leckie and Morrison through Pheasant Tail Holdings,^[2] produced a promotional flyer seeking non-binding commitments from investors for a new carbon afforestation fund to be established in early to mid-2022 when the Drylandcarbon One Limited Partnership was expected to be fully committed. Investors in the Drylandcarbon One Limited Partnership would be given the first right to invest before any unallocated capital would be offered to third parties. The Beverleys say this flyer replicated large sections of the materials that were used to promote the Drylandcarbon One Limited Partnership and its supporting management structure.
• [7] In December 2021, Messrs Leckie and Morrison started making arrangements to transfer all staff employed by the Manager to Lewis Tucker.
• [8] In March 2022, Messrs Leckie and Morrison procured special resolutions by the Drylandcarbon One Limited Partners, freeing affiliates of the General Partner and the Manager (but not H1) from the exclusivity provisions in the Drylandcarbon One Limited Partnership Agreement (the Limited Partnership Agreement) and the Management Services Agreement. Messrs Leckie and Morrison then proceeded to establish a second carbon afforestation fund, forming the Forest Partners Limited Partnership with newly incorporated companies owned by their interests performing the roles of general partner (Forest Partners GP Ltd, the seventh appellant) and manager (Lewis Tucker FP Management Ltd, the eighth appellant). The holding company for these entities is Lewis Tucker Forest Partners Ltd (the fifth appellant).^[3]
• [9] The Beverleys responded by issuing two sets of proceedings in the High Court. In the first, they claim that Messrs Leckie and Morrison have conducted the affairs of H1, the General Partner and the Manager in an oppressive and unfairly discriminatory and prejudicial manner by excluding Mr Beverley from the management of the companies, removing him as a director, and diverting a business opportunity by establishing the second fund. The second is the derivative proceeding the subject of this appeal.
• [10] In addition to the order granting leave under s 165 of the Act to commence the derivative proceeding,^[4] the High Court made an order under s 167 authorising the Beverleys to control the conduct of the proceeding.^[5] The Court also made an order under s 166 that the reasonable costs of the proceeding be met in the first instance by the derivative plaintiffs.^[6]
• [11] The appellants appeal, contending that the High Court erred by not considering the discretionary factors for leave and applying the prudent businessperson test in respect of each of the derivative plaintiffs separately, including whether:

(a) the Beverleys had established a reasonably arguable case that Messrs Leckie and Morrison breached duties owed to each derivative plaintiff by misusing information belonging to that company or which came to them as directors of that company;

(b) the Beverleys had established a reasonably arguable case that Messrs Leckie and Morrison breached duties owed to each derivative plaintiff by diverting a corporate opportunity from that company; and

(c) a prudent businessperson conducting their own affairs would commence proceedings to bring the proposed claims in the name of that company.

• [12] The appellants argue that the High Court erred by assessing the position of the derivative plaintiffs at an abstract level and without analysing the assets owned by each and the particular interest legitimately sought to be protected by each. They contend that the derivative plaintiffs do not have any right to constrain the conduct the subject of the claims. By not paying sufficient attention to the interests of each derivative plaintiff in terms of s 165(2)(d) of the Act, they say the costs were not properly considered by the High Court under s 166. The appellants seek an order setting aside the order granting leave to bring the derivative proceeding.

Background

Drylandcarbon One Limited Partnership

• [13] Following the introduction of the New Zealand Emissions Trading Scheme, Mr Beverley developed a business model using a limited partnership structure for the establishment of a forestry investment portfolio to deliver a long-term cost-effective supply of carbon credits to investors (the Drylandcarbon concept).
• [14] In late 2017, Mr Beverley approached Messrs Leckie and Morrison in their capacity as directors of Lewis Tucker to see whether any of their farming clients might be interested in participating in the Drylandcarbon concept. Lewis Tucker is an investment banking and corporate advisory firm specialising in the New Zealand agriculture, horticulture and forestry sectors. The parties agreed to join forces to pursue the opportunity to establish and manage a carbon afforestation fund.
• [15] A heads of agreement was prepared in August 2018 to provide the foundation for a shareholders agreement following formation of the relevant entities through which the venture would be pursued. The heads of agreement was not signed, nor was any shareholders agreement ever entered into.
• [16] On 28 February 2019, the Beverleys and Messrs Leckie and Morrison formed the three derivative plaintiffs as the key participants in the afforestation fund to serve their respective interests. The constitutions of the General Partner and the Manager authorise the directors to act in the best interests of H1, even though that may not be in the best interests of those subsidiaries.
• [17] The Drylandcarbon One Limited Partnership is a limited liability partnership registered under the Limited Partnerships Act 2008. It was formed on 7 March 2019 by the General Partner entering into the Limited Partnership Agreement with the Limited Partner investors — four major corporates and two minor limited partners, one associated with the Beverleys (DC One H2 Ltd) and the other with Messrs Leckie and Morrison (DC One H3 Ltd). The partnership mandate was to invest capital to establish a large geographically diversified forest portfolio within New Zealand for the primary purpose of generating as many carbon credits as reasonably practicable at a cost that would meet defined investment criteria. A secondary purpose was to generate revenue from other activities such as tree harvest or sale.
• [18] The General Partner has exclusive responsibility for the management and control of the partnership. It was authorised to delegate its authority and powers to the Manager under the Management Services Agreement and did so. The relevant part of the exclusivity provision in the Limited Partnership Agreement reads:

6.4 Exclusivity:

(a) The functions and duties which the General Partner undertakes on behalf of the Partnership are exclusive to the Partnership and the General Partner must:

(i) not perform similar functions and duties for itself or for others; and

(ii) subject to paragraph (b) below, procure that each of its Affiliates do not perform similar functions and duties for itself or for others in relation to a business with a purpose similar to the Mandate,

unless otherwise agreed by Special Resolution of the Partnership

(b) Nothing in this Agreement will prevent an Affiliate of the General Partner from providing similar functions and duties for itself or others in relation to a business with a purpose similar to the Mandate as long as:

...

(ii) approval to establish the entity is otherwise obtained by Special Resolution of the Partnership,

and the relevant Affiliate provides the Limited Partners adequate information regarding the new investment vehicle before any other investors are approached and the Limited Partners are offered an opportunity to invest.

...

• [19] “Affiliate” is defined as meaning “in relation to any person (the first person), a person that Controls the first person, is Controlled by the first person, or is under common Control with the first person”. “Control” means the power, directly or indirectly, to direct the actions of that person or control the composition of its board and management through the ownership of voting securities or otherwise. It also includes beneficial ownership or rights to all or substantially all the income and assets of that person. H1 is an affiliate of the General Partner within this definition.
• [20] A “Special Resolution” is a resolution by Limited Partners who together hold at least 75 per cent of the total committed capital.

Management Services Agreement

• [21] Drylandcarbon GP One Limited Partnership entered into the Management Services Agreement with the Manager. The services included developing and implementing the forest portfolio strategy and investment plans, managing the portfolio and attending to compliance and reporting requirements. These services were provided by the Manager through its own employees and by way of a services agreement between the Manager and Lewis Tucker. The Manager receives a base management fee assessed as a margin on capital deployed and a performance fee calculated as a percentage of distributions (including distributions of carbon credits) made under the Limited Partnership Agreement.
• [22] The Management Services Agreement contains a similar exclusivity provision and employs the same definition of “Affiliate” which would again capture H1:

3.5 Competing engagements:

(a) The services which [the Manager] undertakes for the Partnership are exclusive to the Partnership and [the Manager] must:

(i) not undertake or provide similar services for itself or for others; and

(ii) subject to paragraph (b) below, procure that its Affiliates do not undertake or provide similar services for itself or for others in relation to a business with a purpose similar to the Mandate,

unless otherwise approved by the Partnership following a Special Resolution.

(b) Nothing in this Agreement will prevent the Affiliates of [the Manager] from providing similar services for itself or others in relation to a business with a purpose similar to the Mandate as long as:

...

(ii) approval to establish the entity is otherwise obtained from the Partnership following a Special Resolution.

Breakdown of relationship and mediation agreement

• [23] Mr Beverley’s relationship with Messrs Leckie and Morrison deteriorated to the point where they were no longer able to work together. In April 2021, they reached a mediated agreement designed to enable a separation of their interests in the joint venture arrangement. The Beverleys would put forward a price for their interest in H1 and DC One H2 Ltd. Messrs Leckie and Morrison could accept the price, reject the price or require the Beverleys to buy Pheasant Tail Holdings’ interests at the same price. If the price was not accepted by Messrs Leckie and Morrison and they did not wish to sell, the Beverleys were to actively market their interest and Messrs Leckie and Morrison would support the sale process. The parties would use reasonable endeavours to agree to a form of shareholders agreement which would come into effect once a new investor acquired the Beverleys’ interest. The parties would return to mediation if they could not agree to the form of a shareholders agreement within three weeks, or if the Beverleys were unable to sell their interest by 30 November 2021. Mr Beverley was to resign as a director of both the General Partner and the Manager and appoint an appropriately-qualified nominee to serve on the boards of those companies, with all board decisions required to be unanimous. Mr Beverley was also not to attend meetings of the advisory committee of the Limited Partnership without invitation.
• [24] Messrs Leckie and Morrison were not prepared to acquire the Beverleys’ interests at the price sought and they were not prepared to sell their interests at that price. The draft shareholders agreement has not been agreed to and the Beverleys have not succeeded in selling their interest to a third party. Despite this, the parties have not returned to mediation. In the meantime, Mr Beverley declined to resign as a director of the General Partner and the Manager. This prompted Messrs Leckie and Morrison to remove him as a director of both companies in May 2021.

Forest Partners Limited Partnership

• [25] In December 2021, Messrs Leckie and Morrison made arrangements to transfer all of the Manager’s staff to Lewis Tucker. Mr Colin Jacobs, who was employed by the Manager as its general manager, continues to perform this role but is now employed by Lewis Tucker. The Beverleys claim that the transfer of staff away from the Manager was to enable Lewis Tucker to provide all management services to the Drylandcarbon One Limited Partnership and facilitate its provision of similar management services for the new fund.
• [26] On 1 March 2022, with Messrs Leckie and Morrison’s backing, Mr Jacobs submitted a special resolution to the Limited Partners of the Drylandcarbon One Limited Partnership in terms of cl 6.4(b)(ii) of the Limited Partnership Agreement to the effect that the exclusivity provision in cl 6.4 no longer applied to the General Partner or its affiliates. This resolution was passed.
• [27] On 22 March 2022, Mr Jacobs submitted further special resolutions to the Limited Partners, the first seeking approval in terms of cl 6.4(a) of the Limited Partnership Agreement releasing the General Partner from the exclusivity obligation in cl 6.4(a)(ii) to allow affiliates to perform similar functions in relation to a similar business. However, it was proposed that this release would not apply to the Manager, H1 or any of their subsidiaries. The second special resolution was sought under cl 3.5(a) of the Management Services Agreement releasing the Manager from its obligation to procure that its affiliates do not provide similar services in relation to a business with a similar purpose. The proposed release was specifically not to apply to the General Partner, H1 or any of their subsidiaries. These resolutions were also passed.
• [28] On 4 April 2022, Messrs Leckie and Morrison formed the fifth to eighth appellants for the purposes of establishing a second fund through a new limited partnership called the Forest Partners Limited Partnership. The seventh appellant, Forest Partners GP Ltd, is the general partner. The eighth appellant, Lewis Tucker FP Management Ltd, is the manager. Forest Partners GP Ltd and Lewis Tucker FP Management Ltd are wholly owned by Lewis Tucker Forest Partners Ltd, the fifth appellant. That company is in turn 95 per cent owned by Pheasant Tail Holdings and five per cent by interests associated with Mr Jacobs. The sixth appellant, Lewis Tucker FP Investments Ltd, was incorporated at the same time. It is also 95 per cent owned by Pheasant Tail Holdings and five per cent by Mr Jacobs’ interests.
• [29] Three of the four principal investors in the Drylandcarbon One Limited Partnership are also investors in the Forest Partners Limited Partnership. The fourth was one of the parties targeted as a potential investor when the Drylandcarbon concept was originally marketed in 2018.

The derivative claim

• [30] The derivative claim alleges that Messrs Leckie and Morrison breached their duties as directors of the derivative plaintiffs — the Manager, the General Partner and H1 — in establishing the Forest Partners Limited Partnership and in particular by preferring the interests of Lewis Tucker, diverting the business opportunity and misusing company information. Four causes of action are advanced by the derivative plaintiffs against Messrs Leckie and Morrison:

(a) breach of the duty to act in good faith and in the best interests of the companies under s 131 of the Act;

(b) misuse of company information in breach of s 145 of the Act;

(c) breach of the duty of loyalty and failing to act with due care, diligence and skill in breach of s 137 of the Act; and

(d) breach of fiduciary duty — not to place themselves in a position of conflict, not to profit, and not to prefer their own interests to those of the derivative plaintiffs.

• [31] Two causes of action are pleaded against the other appellants — dishonest assistance and breach of confidence. A seventh cause of action alleges a breach of the Management Services Agreement between Lewis Tucker and the Manager.
• [32] The relief sought by the derivative plaintiffs includes unquantified equitable and common law damages, and an account of profits.

High Court judgment

• [33] Associate Judge Paulsen considered there was an “air of unreality” about the submission that the position of the General Partner, the Manager and H1 must be considered in isolation.^[7] The companies were incorporated with common ownership and control and were intended to act together in establishing a carbon afforestation fund and pursuing any other commercial opportunities that arose from that. The Judge accepted the respondents’ submission that it would be artificial to separate them on the basis of the precise role each was to perform within the overall enterprise. Such an approach would fail to recognise that a derivative action is a procedural device “designed to prevent a wrong going without a remedy” and should be applied flexibly to serve the interests of justice.^[8]
• [34] The Judge rejected the appellants’ submission that the General Partner and the Manager could be eliminated as potential plaintiffs because the parties envisaged that any subsequent afforestation fund would be conducted through different entities and the terms of the Limited Partnership Agreement and the Management Services Agreement specifically precluded them from participating in another fund.^[9] The Judge considered this was a factual issue he was not able to resolve in the context of the leave application.^[10] The Judge took into account that the Limited Partners could pass a special resolution giving the General Partner and the Manager permission to provide services for an alternative fund.^[11] Whether that was a realistic possibility was never tested.^[12] In any event, the Judge noted that a claim for breach of fiduciary duty by diversion of a corporate opportunity can be pursued even where the prospects of the company being able to take up that opportunity are remote or even non-existent.^[13]
• [35] The Judge did not accept it was necessarily the case that any further afforestation fund would not be held through H1. The Judge considered that the provisions of the Limited Partnership Agreement referring to affiliates appeared to contemplate the possibility that H1 might have an interest in a new fund.^[14] The fact that the Drylandcarbon One Limited Partners consented to the creation of the Forest Partners Limited Partnership could not excuse a breach of the directors’ duties because these duties were owed to the derivative plaintiffs, not the Limited Partners.^[15]
• [36] The Judge considered the evidence was “quite overwhelming” that Messrs Leckie and Morrison had utilised information available to them by virtue of their positions as directors of the derivative plaintiffs to establish the Forest Partners Limited Partnership. There were striking similarities between the Drylandcarbon promotional material and the Forest Partners investment flyer. The Judge also considered it was arguable that in establishing the Forest Partners Limited Partnership, Messrs Leckie and Morrison had used other knowledge and information only available to them through their involvement as directors of the derivative plaintiffs. This included the likely investment performance of a new fund and the appetite of potential investors to invest. They also knew of the arrangements regarding governance and control of a new fund which would be acceptable to potential investors.^[16]
• [37] The Judge accepted the force of the Beverleys’ submission that, in proposing the special resolutions by the Limited Partners to release affiliates of the General Partner and the Manager from the exclusivity provisions in the Limited Partnership Agreement and the Management Services Agreement, Messrs Leckie and Morrison were acting in their own interests and not in the best interests of the General Partner or the Manager.^[17]
• [38] Messrs Leckie and Morrison’s submissions in the High Court did not directly engage with the causes of action against the other defendants.^[18] The Judge was satisfied that these claims — dishonest assistance, breach of confidence, and breach of contract — were also arguable.^[19]
• [39] The Judge then addressed the other mandatory considerations in s 165(2) of the Act. It was accepted that the Forest Partners management enterprise has significant value. While Messrs Leckie and Morrison contested Mr Beverley’s assessment that it was worth around $50 million, they accepted that the amount at stake would justify a claim by a plaintiff with a proper interest in pursuing it.^[20] The estimated costs of pursuing the litigation were around $1 million.^[21] The Judge was not persuaded by the submission that the derivative plaintiffs had not suffered a loss, observing that even if that was correct, they would still be left with their claims for an account of profits.^[22]
• [40] The Judge also did not accept the submission for Messrs Leckie and Morrison that there would be no injustice in declining to grant leave to pursue the derivative claims because the Beverleys’ grievances can be adequately addressed in the separate proceedings they have filed seeking relief under s 174 of the Act for allegedly oppressive or unfairly prejudicial conduct arising out of the same circumstances. The Judge agreed with the Beverleys that the derivative proceedings are to enforce the rights of the derivative plaintiffs and hold the directors accountable for breaches of their duties as directors. The two proceedings are directed at different wrongs, involve different respondents and seek different remedies. The Judge considered the derivative action would not be unnecessarily duplicative of the unfair prejudice claim or any other actions the Beverleys might pursue.^[23]
• [41] The Judge was satisfied that a prudent businessperson conducting their own affairs would commence the intended proceeding. The proposed claims were at least arguable, they have very high potential value and the likely costs of pursuing the litigation are proportionate to the amount at stake.^[24] The Judge did not consider Messrs Leckie and Morrison had shown any good reason why it would be unjust or inequitable for the derivative plaintiffs to bear the costs of the proceeding which would be pursued for their benefit.^[25]

Application to adduce further evidence

• [42] The appellants apply to adduce further evidence in support of the appeal, being affidavits from Messrs Matthew Cleland and Cody Houlahan.
• [43] Mr Cleland is an employee of one of the corporate investors in both the Drylandcarbon One Limited Partnership and the Forest Partners Limited Partnership. He was the representative of that investor on the advisory committee of the Drylandcarbon One Limited Partnership from the time it was established. Mr Cleland produces a letter to the advisory committee dated 22 April 2021 signed by Messrs Beverley, Morrison and Leckie advising that Mr Beverley had decided to step back from the business and intended to explore the sale of his interest in the enterprise. This letter was sent in accordance with the arrangements made at the mediation. Mr Cleland also states that he met with Mr Beverley at his request in late 2021. Mr Beverley asked him if the company he worked for would be interested in participating in a new carbon afforestation fund and expressed interest in helping to establish such a fund.
• [44] The appellants say that Mr Cleland’s evidence is inconsistent with the Beverleys’ claims that it was always envisaged that further commercial opportunities would be pursued under the broader Drylandcarbon One umbrella and that the appellants diverted a corporate opportunity belonging to the derivative plaintiffs and breached their duties owed to those companies in establishing a new carbon afforestation fund. The appellants argue that this evidence supports their position that at least after the April 2021 mediation, if not from the outset, Messrs Leckie and Morrison and Mr Beverley were in agreement that they were free to pursue subsequent funds separately from one another and that the Drylandcarbon companies had been established only for the purposes of the Drylandcarbon One Limited Partnership and not for any subsequent funds.
• [45] Mr Houlahan is a solicitor employed by the appellants’ solicitors. He produces email correspondence between Mr Beverley and Messrs Leckie, Morrison and Jacobs in the period from 17 November 2022 to 22 December 2022 in which each raises various concerns about the conduct of the other.
• [46] Mr Houlahan also produces monthly invoices rendered to the derivative plaintiffs by the respondents’ solicitors for February, March, and April 2023, together totalling approximately $89,000 including GST. The appellants contend that these invoices suggest that the total costs of the derivative action will exceed the $1 million estimate provided by Mr Beverley.
• [47] Mr Beverley has filed evidence in response, but his primary position is that the application to adduce further evidence should be declined.
• [48] Rule 45(1) of the Court of Appeal (Civil) Rules 2005 permits this Court to grant leave for the admission of further evidence on appeal. The principles to be applied on such an application are well-established. Further evidence will generally not be admitted on appeal unless it is fresh, credible, and cogent. Evidence is fresh only if it could not, with reasonable diligence, have been adduced at trial. Evidence that is not fresh may be admitted but only in exceptional and compelling circumstances.^[26] Evidence is cogent only if it may have a material bearing on the outcome of the appeal.
• [49] We accept that the evidence is fresh apart from the letter dated 22 April 2021 sent by Messrs Leckie, Morrison and Beverley to the advisory committee following the mediation. That letter adds nothing material and there are no exceptional or compelling circumstances that could justify its admission. Although Messrs Leckie and Morrison obtained an affidavit from Mr Cleland in opposition to the Beverleys’ application to bring a derivative action, we accept that they were not made aware of the meeting he had with Mr Beverley in late 2021 at the time of the hearing. We accept this was not through any lack of diligence on their part. The other evidence relates to events that took place after the hearing in the High Court and is therefore also fresh. The evidence is credible. However, for the reasons summarised below, we consider that none of the evidence could have any material bearing on the outcome of the appeal and it is therefore not cogent.
• [50] In our view, the appellants significantly overstate the importance of the new evidence for present purposes. The central issue on the appeal is whether the Judge was wrong to find that the derivative plaintiffs had a reasonably arguable claim that the appellants misused company information or diverted a corporate opportunity. The Judge was not conducting a mini trial when considering whether leave should be given. He was not able to do more than make a preliminary assessment based on the affidavits filed and without any of the evidence being tested. The Judge’s assessment was appropriately made largely based on the commercial arrangements entered into, the particular responsibilities assumed by the appellants and the uncontroversial documentary evidence as to the key events. Given the preliminary nature of the assessment of whether the claims are sufficiently arguable to warrant pursuit, fresh evidence would need to be of a potent character to justify admission on appeal. None of the proposed evidence comes anywhere close to meeting this threshold.
• [51] The evidence of the meeting between Messrs Beverley and Cleland in late 2021, which took place long after the dispute arose, provides little or no assistance on the question of whether Messrs Leckie and Morrison breached their duties as directors owed to the derivative plaintiffs. The correspondence between the parties in November and December 2022 produced by Mr Houlahan falls into the same category. The evidence as to the costs incurred by the derivative plaintiffs over a three-month period following the issue of the High Court judgment does not undermine the credibility of Mr Beverley’s earlier costs estimate. In summary, we do not consider any of the proposed new evidence can provide any material assistance on the question of whether the Judge was correct to grant leave to bring the derivative action.
• [52] The application for leave to adduce further evidence must accordingly be declined.

Submissions on appeal

• [53] Mr Smith KC, for the appellants, submits that the claims in the derivative action all depend directly or indirectly on the proposition that Messrs Leckie and Morrison, through Lewis Tucker and other entities of theirs, diverted for themselves a corporate opportunity belonging to one or more of the derivative plaintiffs and/or used information belonging to one or more of them. He says the statement of claim does not identify the derivative plaintiff to which the corporate opportunity or the information at issue belonged. He says it cannot be assumed that an act or omission by Mr Leckie or Mr Morrison constituting a breach of duty owed to one of the derivative plaintiffs would necessarily constitute a breach of duty owed to either or both of the other derivative plaintiffs. The Judge was required to consider each of the factors set out in s 165(2) of the Act as they applied to each derivative plaintiff. It follows, in Mr Smith’s submission, that the Judge was wrong when he stated that there was an “air of unreality” about considering the roles of the General Partner, the Manager and H1 “in isolation”, and that it would be “artificial to divide each one from the other on the basis of the precise role they were to perform”.^[27]
• [54] Mr Smith submits that the Judge was also wrong to state there was a factual dispute he could not resolve as to whether the parties agreed that any subsequent afforestation fund would be conducted through the derivative plaintiffs. He says these were special purpose vehicles with no purpose or field of activity outside the Drylandcarbon One Limited Partnership. Mr Beverley’s own evidence supported the evidence of Messrs Leckie and Morrison that the parties envisaged that a new general partner and manager would be incorporated for the purposes of any new fund.
• [55] Mr Smith argues that this error tainted the rest of the judgment. For example, he says the Judge was wrong to state that there was overwhelming evidence that Messrs Leckie and Morrison had utilised information available to them “by virtue of their positions as directors of the [derivative] plaintiffs” to establish the second fund.^[28] Mr Smith submits that the information came to the Beverleys and Messrs Leckie and Morrison through their joint personal efforts prior to the incorporation of the derivative plaintiffs. He says the derivative plaintiffs have no right, interest or entitlement to any of this information and the corporate opportunity does not belong to any of the derivative plaintiffs, but rather to their shareholders. He argues that the essence of Mr Beverley’s grievance is a breach of an alleged understanding he had with Messrs Leckie and Morrison that any subsequent fund would be pursued and owned jointly. He says this grievance should be pursued by the Beverleys directly, not derivatively through the derivative plaintiffs.
• [56] In summary, Mr Smith submits that the dispute does not concern the derivative plaintiffs and should have been left to be determined between the appropriate parties, being the Beverleys and Messrs Leckie and Morrison in the separate proceedings already on foot.
• [57] For similar reasons, Mr Olney, who presented this part of the argument for the appellants, submits that the Judge was wrong to order that the costs of the proceedings should be borne by the derivative plaintiffs in the first instance. In particular, he says the position of each derivative plaintiff differs materially from the others. The General Partner has no assets, employees, or revenue. He says its role is simply as an empty vessel for the liabilities of the partnership and a subsequent fund would be of no benefit to it because it receives no revenue. H1 is merely a holding company and, from late 2019, it was clear there was never going to be agreement by its shareholders to pursue any other activity. The only trading entity with meaningful revenue is the Manager. However, the monthly costs of the litigation are likely to exceed the budgeted monthly base fee payable to the Manager of approximately $20,000. It is therefore questionable how any of the derivative plaintiffs can fund the costs which may not be recoverable if the proceeding proves to be without merit. Further, if H1 is required to bear the costs of the proceedings, Messrs Leckie and Morrison would effectively be required to help fund claims against themselves. Mr Olney submits that they cannot reasonably be required to inject capital to pursue a claim against themselves or provide a guarantee to a third-party funder.
• [58] Mr Colson KC, for the first respondents, supports the Judge’s analysis. He says the Judge correctly applied, in an entirely conventional manner, the settled law relating to derivative actions and directors’ duties. He emphasises that the focus must be on the statutory and fiduciary duties owed by Messrs Leckie and Morrison as directors of the derivative plaintiffs. These claims can only be pursued by the derivative plaintiffs and the s 174 proceedings are not an appropriate vehicle for them. Mr Colson says the question on a claim for diversion of a corporate opportunity is not whether the opportunity belonged to the derivative plaintiffs in a proprietary sense but, rather, whether the opportunity was sufficiently connected to them. It also does not matter that the derivative plaintiffs may have been unable to pursue the opportunity. The authorities are clear that it is no answer to a claim against a director for breaching his or her fiduciary duty by diverting a corporate opportunity without consent that the prospects of the company itself pursuing the opportunity are remote or even non‑existent. Further, he makes the point that whether a corporate opportunity has been diverted is not dependent on the use of confidential information.

Assessment

• [59] Section 165 of the Act relevantly reads:

165 Derivative actions

(1) Subject to subsection (3), the court may, on the application of a shareholder or director of a company, grant leave to that shareholder or director to—

(a) bring proceedings in the name and on behalf of the company or any related company; or

(b) intervene in proceedings to which the company or any related company is a party for the purpose of continuing, defending, or discontinuing the proceedings on behalf of the company or related company, as the case may be.

(2) Without limiting subsection (1), in determining whether to grant leave under that subsection, the court shall have regard to—

(a) the likelihood of the proceedings succeeding:

(b) the costs of the proceedings in relation to the relief likely to be obtained:

(c) any action already taken by the company or related company to obtain relief:

(d) the interests of the company or related company in the proceedings being commenced, continued, defended, or discontinued, as the case may be.

(3) Leave to bring proceedings or intervene in proceedings may be granted under subsection (1), only if the court is satisfied that either—

(a) the company or related company does not intend to bring, diligently continue or defend, or discontinue the proceedings, as the case may be; or

(b) it is in the interests of the company or related company that the conduct of the proceedings should not be left to the directors or to the determination of the shareholders as a whole.

...

(6) Except as provided in this section, a shareholder is not entitled to bring or intervene in any proceedings in the name of, or on behalf of, a company or a related company.

• [60] The primary focus of the appeal is on the criterion in s 165(2)(a), namely the likelihood of the proceedings succeeding. We will therefore commence our analysis by addressing separately the two core elements of the claim on behalf of each derivative plaintiff — diversion of commercial opportunity and misuse of company information.

Diversion of commercial opportunity

• [61] Directors may not pursue for their own benefit business opportunities that are connected with the company’s business unless the company consents.^[29] For the reasons set out below, we agree with the Judge that each of the derivative plaintiffs has a reasonably arguable claim that Messrs Leckie and Morrison acted in breach of their fiduciary and statutory duties in establishing the Forest Partners Limited Partnership and associated management structure for their own benefit and without regard to the best interests of the derivative plaintiffs.
• [62] The business opportunity to establish and manage the second carbon afforestation fund is self-evidently a close match with the business carried on by the derivative plaintiffs. Forest Partner GP Ltd performs the same function for the Forest Partners Limited Partnership as does the General Partner of the Drylandcarbon One Limited Partnership. Lewis Tucker FP Management Ltd performs a role corresponding to that of the Manager in respect of the Drylandcarbon One Limited Partnership. Lewis Tucker Forest Partners Ltd is the holding company, equivalent to H1. Both limited partnerships were formed for the same purpose of generating carbon credits in a cost-effective manner for corporate limited partner investors. There is even considerable overlap in the identity of the limited partners. It is not appropriate to express any concluded view in the context of a leave application, but there appears to be a sufficiently close connection to engage the commercial opportunity doctrine.
• [63] While it may be a contentious factual issue that can only be resolved at trial, it also appears to be arguable on the basis of the evidence filed to date that the parties envisaged the possibility of working together on a second carbon afforestation fund, assuming the first proved to be successful. Demand for a further fund was likely. The inclusion of “One” in the name given to the limited partnership tends to indicate that others might follow to meet this expected demand. The close attention given to the position of affiliates in the exclusivity provisions in the Limited Partnership Agreement and the Management Services Agreement shows it was contemplated that such affiliates might participate in a subsequent fund once all the capital in the existing fund had been fully committed and there was no longer any risk of competition for suitable forestry blocks. Had it not been for the breakdown in the relationship between the Beverleys and Messrs Leckie and Morrison, H1 could have been used to hold the shares in any newly-formed companies to fill the roles of manager and general partner in a subsequent limited partnership and associated fund. There are also other possibilities. In any event, as the Judge noted, it is not necessary for a plaintiff to prove that it could have taken up the commercial opportunity itself.^[30]
• [64] It is plainly arguable that Messrs Leckie and Morrison failed to act in the best interests of the derivative plaintiffs when taking steps to establish the second fund for their own benefit, including by transferring staff to Lewis Tucker and seeking release from the exclusivity restrictions to enable their companies to participate and benefit from a second fund while expressly excluding the derivative plaintiffs from the ambit of the proposed release.
• [65] We were not referred to any documentary evidence showing that the shareholders of the derivative plaintiffs consented to Messrs Leckie and Morrison exploiting this commercial opportunity for their own benefit and to the exclusion of the derivative plaintiffs. The heads of agreement did not address the topic and was never signed. No shareholders agreement was ever agreed or formalised. Nor does the mediation agreement sanction the establishment of a new fund by Messrs Leckie and Morrison for their benefit. While we acknowledge the language of the agreement is cryptic and its proper interpretation may be open to debate, the provision the appellants rely on (at sub-cl iv below) does not appear to go that far:

The parties will use reasonable endeavours to agree a form of shareholders’ agreement (based on the 2019 Buddle Findlay draft) and constitution for [H1] within 3 weeks, with key principles as follows:

i. Anyone with a 50% interest can appoint half of the directors.

ii. Board decisions must be unanimous.

iii. Form of SHA and constitution only in effect once new investor acquires [the Beverleys’] interest.

iv. Specifically, no commitment to a new fund with replacement investor. Buying into current structure.

If the parties are unable to agree a form of shareholders’ agreement within the 3 week period, the parties will return to mediation to agree the definitive form.

• [66] Messrs Leckie and Morrison made it clear in this clause that they were not making any commitment to pursue a new fund with a replacement investor, but the wording does not exclude that prospect. More importantly, it does not constitute authorisation on the part of the Beverleys as 50 per cent shareholders of H1 for Messrs Leckie and Morrison to pursue a second fund for their own benefit, contrary to H1’s best interests, and notwithstanding the fiduciary and other duties owed by the directors to each of the derivative plaintiffs under the “current structure”.
• [67] We do not accept that the General Partner and the Manager cannot pursue this claim because of the respective exclusivity provisions in the Limited Partnership Agreement and the Management Services Agreement. As we have seen, cl 6.4 of the Limited Partnership Agreement was drawn in a manner that expressly contemplates the General Partner being released from the exclusivity obligations by a special resolution of the partnership. Similarly, cl 3.5 of the Management Services Agreement contemplates the Manager being released from its exclusivity obligations by a special resolution of the partnership. It may well be that other corporate vehicles would have been used in practice for any subsequent fund, but the possibility of the General Partner or the Manager doing so was not excluded.

Misuse of company information

• [68] Section 145 of the Act prohibits a director who has information in his or her capacity as a director from disclosing or making use of that information. This prohibition is subject to limited exceptions, including that the information may be disclosed or used for the purposes of the company. The information need not be of a confidential character.
• [69] The statement of claim pleads a long list of categories of company information alleged to have been used by Messrs Leckie and Morrison in developing the marketing materials for the new fund and then shared with their companies in the Forest Partners Limited Partnership structure. As noted, the Judge considered the evidence was quite overwhelming that Messrs Leckie and Morrison utilised information available to them as directors to establish the second fund, including in the production of the Forest Partners investment flyer where the similarities were striking. The Judge was also satisfied it was arguable that Messrs Leckie and Morrison used information only available to them through their involvement as directors of the derivative plaintiffs such as the appetite of potential investors to participate in a new fund, the likely investment performance potential of a new fund, and the arrangements for governance and control that were likely to be acceptable to potential investors. The Judge considered this information would be of considerable value.
• [70] We agree with the Judge that this claim is also arguable. The arguments advanced by Messrs Leckie and Morrison do not persuade us that this claim cannot succeed. We accept that some of the information will have been known to Messrs Leckie and Morrison prior to the formation of the derivative plaintiffs and the establishment of the Drylandcarbon One Limited Partnership. However, other valuable information is likely to have been gained by Messrs Leckie and Morrison as directors of the derivative plaintiffs and used by them in establishing the second fund. This would include information relating to the administration of the fund, the actual performance of the fund from the perspective of both the investors and management, the appetite of investors for a second fund, and the terms that would likely be acceptable to investors.

Costs of the derivative action

• [71] Section 166 of the Act provides that the court shall order that the whole or part of the reasonable costs of bringing derivative proceedings must be met by the company unless the court considers it would be unjust or inequitable for the company to bear those costs.
• [72] There is clearly some overlap between the derivative proceeding and the oppression/unfair prejudice proceeding brought by the Beverleys seeking relief under s 174 of the Act. However, the latter claim is pursued by the Beverleys in their capacity as shareholders. The derivative claims are of a different character and can only be pursued by the derivative plaintiffs. This is because the directors’ duties claimed to have been breached were owed by Messrs Leckie and Morrison solely to the derivative plaintiffs, not to the Beverleys as shareholders. We therefore do not accept the submission that the Judge should have left the dispute to be determined between the shareholders in the context of the s 174 proceeding. That proceeding is not an available means of vindicating breaches of fiduciary and other duties owed by the directors to the companies.
• [73] The derivative claims have high potential value and the expected costs of pursuing them are not disproportionate to the amounts realistically in issue. We consider that a prudent businessperson acting in their own interest would pursue the claims. It is helpful to consider the likely response if, for example, an independent director of any one or more of the derivative plaintiffs (if there had been one) had chosen to exploit the opportunity to establish a second fund using company information. It seems unlikely that the Beverleys and Messrs Leckie and Morrison would have been content to stand by, allow that to happen, and not cause the derivative plaintiffs to pursue claims against the independent director for breach of fiduciary and other duties owed to the relevant company or companies.
• [74] The claims are pursued for the benefit of the derivative plaintiffs and therefore, on the face of it, it does not appear to be unjust or inequitable for the companies to meet the reasonable costs of the proceedings, at least in the first instance. We do not consider that Messrs Leckie and Morrison can displace the normal statutory costs presumption by pointing to their own substantial shareholding in the derivative plaintiffs as meaning that they will effectively be partly funding the claims against themselves.^[31]
• [75] In terms of the Judge’s order, the liability of the derivative plaintiffs to meet the costs is joint and several. The fact that the General Partner may not have assets or income available to meet the costs does not mean a prudent businessperson in its position would not pursue the claims. In practical terms, leaving aside the possibility of assistance being available from an external funder, the General Partner has the benefit of funding from the Manager and H1 derived from income available under the Management Services Agreement.
• [76] The Beverleys and their solicitors owe fiduciary duties to the derivative plaintiffs to act properly and in the best interests of the companies in pursuing the derivative proceedings. Only the reasonable costs of pursuing the proceedings come within the scope of the order. The ultimate incidence of costs will of course be determined later. The appellants have not persuaded us that it would be unjust or inequitable for the derivative plaintiffs to meet the costs in the meantime.

Result

• [77] The application for leave to adduce further evidence is declined.
• [78] The appeal is dismissed.
• [79] The appellants must pay costs to the first respondents for a standard appeal on a band A basis and usual disbursements.

Solicitors:
Mallett Partners, Wellington for Appellants
Bell Gully, Wellington for First Respondents

---

^[1] Beverley v Drylandcarbon GP One Ltd [2022] NZHC 3606 [High Court judgment].

^[2] This company is 95 per cent owned by Messrs Leckie and Morrison through Pheasant Tail Holdings and five per cent by Mr Colin Jacobs, who was formerly employed by the Manager as its general manager but is now performing this role as an employee of Lewis Tucker, and Ms Jacobs.

^[3] The shareholding of these companies is effectively the same as that of Lewis Tucker and Company Ltd discussed above.

^[4] High Court judgment, above n 1, at [113(a)].

^[5] At [113(b)].

^[6] At [113(c)].

^[7] At [54].

^[8] At [54] quoting Universal Project Management Ltd v Fort Gilkicker Ltd [2013] EWHC 348, [2013] Ch 551 at [24].

^[9] At [55]–[56].

^[10] At [56].

^[11] At [57].

^[12] At [58].

^[13] At [59] and [61] quoting Kawhia Offshore Services Ltd v Rutherford HC Hamilton CP61‑99, 24 April 2022 at [25].

^[14] At [71].

^[15] At [72].

^[16] At [76].

^[17] At [83].

^[18] At [84].

^[19] At [84]–[87].

^[20] At [91].

^[21] At [89].

^[22] At [92].

^[23] At [96]–[102].

^[24] At [103].

^[25] At [112].

^[26] Rae v International Insurance Brokers (Nelson Marlborough) Ltd [1998] 3 NZLR 190 (CA) at 192–193; approved in Paper Reclaim Ltd v Aotearoa International Ltd (Further Evidence) (No 1) [2006] NZSC 59, [2007] 2 NZLR 1 at [6], n 1.

^[27] High Court judgment, above n 1, at [54].

^[28] At [76].

^[29] He v Chen [2014] NZCA 153, [2014] NZCCLR 18 at [35] citing Peter Watts “Liability for Profiting” in Peter Watts, Neil Campbell and Christopher Hare Company Law in New Zealand (1st ed, LexisNexis, Wellington, 2011) 495 at 14.1.2.

^[30] Holden v Architectural Finishes Ltd (1996) 7 NZCLC 260,976 (HC) at 261,028.

^[31] A similar argument was rejected by Winkelmann J in Presley v CallPlus Ltd [2007] NZHC 1277; [2008] NZCCLR 37 (HC) at [67].