Dromgool v S N Dromgool Limited [2012] NZHC 2552 (3 October 2012)

Last Updated: 18 October 2012

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV 2011-404-3986 [2012] NZHC 2552

BETWEEN PAUL JOSEPH DROMGOOL Plaintiff

AND S N DROMGOOL LIMITED First Defendant

AND NOEL EDWARD DROMGOOL Second Defendant

AND ANNE MAREE ERNESTA THOMPSON Third Defendant

AND PETER ANTHONY DROMGOOL Fourth Defendant

Hearing: 24 February 2012

Counsel: N Woods for Plaintiff

G M Litchfield for First and Second Defendants

S C Dench for Third and Fourth Defendants

Judgment: 3 October 2012

_{JUDGMENT OF PETERS J}

This judgment was delivered by Justice Peters on 3 October 2012 at 12 pm pursuant to r 11.5 of the High Court Rules

Registrar/Deputy Registrar

Date: ...................................

Solicitors: Rice Craig, Papakura: [e-mail] Franklin Law, Pukekohe: [e-mail] Styants Law, Papakura: [e-mail]

_{Counsel: S C Dench, Auckland:} [e-mail]

DROMGOOL V S N DROMGOOL LIMITED HC AK CIV 2011-404-3986 [3 October 2012]

[1] The issue in this case is whether pre-emptive right provisions in the constitution of the First Defendant (“the company”) have been triggered.

[2] This issue did not arise on the pleadings when the case was to be heard but arose from the terms of an agreement the parties reached on the day of the hearing. Since then, the Third and Fourth Defendants (“Anne” and “Peter” respectively) have been joined as parties to the proceedings. The parties are content that the matter should be determined on the basis of their written submissions and without the need for a further hearing.

Background

[3] The Plaintiff, Second Defendant (“Paul” and “Noel” respectively), Anne and Peter are siblings and are, or have been, shareholders in the First Defendant (“the company”). Their parents, both deceased, established the company. The share capital of the company comprises 300 voting shares and 8,700 non voting shares. Following distribution of their parents’ estates, Noel owned the voting shares and

5,700 non voting shares, and Paul, Peter and Anne each owned 1,000 non voting shares. At all material times Noel has been the sole director of the company.

Issues

[4] In the agreement referred to in [2] above, Paul and Noel agreed that the “the bona fides, effect, outcome and exercise” of options to purchase granted by Anne and Peter to Noel dated 13 December 2010 (“options”), would be referred to the Court to be determined. Since then, the issues have been defined as:

(a) Did and/or does Noel, Peter, or Anne’s actions trigger clause 11 of

the Constitution in relation to the transfer of shares?

(b) If triggered, then must the Company and Noel (as Director) give notice of transfer and otherwise effect the mechanism contained in clause 11 of the Constitution?

(c) If Noel and/or the Company are required to do so or deemed to do so (per curiam Lyle & Scott Limited v Scott’s Trustees) then what relief should be ordered?

Constitution

[5] The company’s constitution (“constitution”) confers pre-emptive rights on shareholders. The constitution provides that a shareholder who desires to sell or transfer some or all of their shares is required to give notice to that effect to the company (“transfer notice”). The constitution then contains provisions establishing a mechanism by which other shareholders may purchase at least their pro rata proportion of the offered shares.

[6] The relevant provisions of the constitution are:

Objects of clause

11.1 (1) Clauses 11.1 to 11.11 govern the sale of shares by and between shareholders of the company

(2) Clauses 11.1 to 11.11 must be given a fair, large, and liberal interpretation so as to best attain the following objects and purposes -

(a) If any shareholder, manager, protection attorney, or trustee in bankruptcy, or personal representative of any shareholder, desires to sell or to transfer any of the shares which are held by him or her, then he or she must first offer them for sale to the existing shareholders in accordance with clauses 11.1 to

11.11, and

...

Notice of desire to sell

11.2 (1) Except where the transfer is made pursuant to clauses 11.10 or 11.11, every shareholder, manager, protection attorney, trustee in bankruptcy, or personal representative of a shareholder, who desires to sell or to transfer any shares of the shareholder (“the proposing transferor”) must give notice in writing to the company that he or she desires to transfer the shares.

(2) The transfer notice –

(a) Must specify the sum which he or she considers to be the value of the shares; and

(b) Must (subject as is hereinafter provided) constitute the company his or her agent for the sale of shares to any other shareholders of the company (or to any other person nominated by the board) at the sum so

fixed or (at the option of the purchaser) at the fair value to be fixed in accordance with clause 11.4.

[7] Paul’s case is, first, that each of Anne and Peter “desires to sell or transfer” their shares and that therefore they are bound to give a transfer notice. The second part of his case goes to the relief it is appropriate to order.

Desire to sell or transfer

[8] Addressing the first part of Paul’s case, whether a shareholder desires to sell or transfer shares they hold, is a question of fact.

[9] Paul’s case is that Anne and Peter’s desire to sell or transfer their shares is

evidenced by:

(a) notices of transfer which Anne and Peter gave to the company on

12 October 2010; and/or

(b) their grant of the options; and/or

(c) their continued intention to sell or transfer which, Paul submits, appears in affidavits that each of Anne and Peter swore on

6 November 2011.

[10] The first matter on which Paul relies is that Anne and Peter gave transfer notices to the company dated 12 October 2010. Each offered all of their shares for sale and specified $41.50 per share as the purchase price. Each of Anne and Peter clearly desired to sell or transfer their shares at the time they gave this notice.

[11] The company circulated the transfer notices but Anne and Peter then sought to revoke their transfer notices by letter to the company dated 22 October 2010. Anne and Peter made that request because they had become concerned that they might be at risk of being assessed for gift duty if they sold at the specified price. It was and is common ground that each share was worth substantially more than

$41.50. By resolution dated 29 October 2010, the board, that is Noel, resolved to

allow the revocation. Paul purported to accept the offer at about the same time as that resolution was passed, but has advised the Court that he does not seek any relief in respect of that acceptance. Paul’s submission, which I accept, is merely that the giving of the transfer notice is evidence of a desire to sell or transfer.

[12] The second matter on which Paul relies is the grant of the options.

[13] The circumstances in which Anne, Peter and Noel entered into the options are as follows.

[14] Noel’s solicitors sent a draft of the option to Anne and Peter’s solicitors on

12 November 2010:

Further to our telephone conversation of 10 November 2010 we have, as you know, confirmed to Rice Craig on behalf of Paul Dromgool that the transfer notices as issued by your clients have been revoked by resolution of Noel Dromgool as sole director.

We now enclose a form of option and loan agreement for your consideration. The option is expressed to be for an option fee of $1.00 with provision for a loan to be provided by our client, which is to be offset against the purchase price for the shares should our client exercise the option. There is provision for adjustment should there be more shares available than the pro rata share to which our client would be entitled under the constitution of the company.

We had considered whether to have the option separate from the loan agreement and that is a possibility if you see any merit in keeping the two documents separate. By including them in the one document we think that the overall economic relationships between the parties are clearly set out but we are happy to separate the documents if that is what you prefer.

...

[15] The options were then executed, one by each of Anne and Peter as grantors and Noel as grantee. The options are in identical terms. The recitals and first two clauses are relevant and read as follows:

BACKGROUND

1. The Grantor holds 1,000 non voting shares (Shares) in S N Dromgool Limited (Company).
   

B. The Grantor wishes to grant to the Grantee an option to acquire the

Shares.

C. The parties have agreed on the terms of the option as set out in this deed.

COVENANTS

1. In consideration of the payment of $1.00 by the Grantee to the Grantor (receipt of which is acknowledged) and in consideration of the other terms of this deed, the Granter hereby grants to the Grantee the option to acquire the Shares at a price of $41.50 per Share on the terms set out in this deed.

2. The option may be exercised by the Grantee giving notice to the Grantor of the Grantee’s wish to exercise the option at any time on or after 1 October 2011 provided that the Grantee can satisfy the Grantor that there will be no gift duty or similar impost imposed on the transaction, or if any such give duty or impost is payable, the Grantee agrees to meet the cost of any such gift duty or impost.

[16] At the time the parties entered into the options, it was anticipated but not certain that gift duty would be abolished with effect from 1 October 2011 and so it transpired.

[17] The options also provide that:

(a) the grantor will issue a transfer notice to the company on receipt of notice from Noel exercising the option;

(b) that Noel is to acquire as many shares as may be available to him under the constitution;

(c) settlement shall be in accordance with the constitution; and

(d) pending the exercise of the option, Noel will lend the grantor $41,500 interest free, and Noel is not to require repayment of the loan other than to require that the sum be applied towards the purchase price of the shares, and subject to $6,225 being repaid if any other shareholder (presumably Paul) should acquire any of the grantor’s shares.

[18] The grantor also appoints Noel their attorney and agent for the purposes of exercising voting rights, if any, attached to their shares and “generally to exercise rights in relation to the shares as if [Noel] were the owner thereof”, including the

giving of a transfer notice. The terms of the option prohibit Noel from disposing of, mortgaging or otherwise encumbering the shares.

[19] The parties themselves seem to have understood that Anne and Peter had agreed to transfer their shares, as appears from the following.

[20] By letter dated 21 December 2010, Noel’s solicitors advised Paul’s solicitors

as follows:

We have been dealing with Styants Law in relation to the position of Peter Dromgool and Anne Thompson. They have taken the position that they always regarded the shares in S N Dromgool Limited as belonging to our client ... Our client has now negotiated an arrangement with them for him to obtain an option to acquire the shares in the future should he so wish. Any exercise of the option would be on the basis the pre-emptive rights in the company constitution would be adhered to. Those negotiations follow on from the previous proposals to acquire shares which were put on hold, as a result of your client raising issues concerning potential gift duty. ...

To all intents and purposes, our client can deal with the company affairs and any issues arising from the shares on the basis that there is only your client to consider as a minority shareholder. ...

[21] In her affidavit of 6 November 2011, Anne refers to the transaction in the following terms:

44. The reason for revoking our share transfer notices was that there could be undesired consequences if Paul Dromgool made an issue of re-assessment with the Inland Revenue Department. Our solicitors advised us that the best way for Noel Junior to obtain control of the shares and for Peter and I to receive the expected monies was to enter into an option arrangement. Under the option arrangement Noel Junior would pay the equivalent sale fee and he could exercise the option at any time based on his assessment of the gift duty risk. This proposal was acceptable to both Peter and I. Annexed hereto and marked “E” are copies of the documents recording the option relating to our shares in the Company.

45. I emphasise that Noel Junior had no influence over me when he offered to buy my shares. I offered my shares to Paul but he declined. Noel Junior made a counter-offer and I accepted. It was a straight-forward business deal.

[22] I consider the option to be evidence of Anne and Peter’s desire to sell or transfer their shares. I accept that, by cl 2 of the option, Noel could not give notice of his wish to purchase until 1 October 2011, and only then if he were able to satisfy

the grantor that there would be no gift duty or similar impost imposed on the transaction or, if there were any such gift duty or impost payable, that Noel agreed to meet the cost of any such duty or impost. In my view, however, those matters do not preclude the drawing of an inference that Anne and Peter desired to sell or transfer their shares. With respect, they would not have granted the option if they had not desired to sell or transfer.

[23] Counsel for Anne and Peter submitted that the terms of cl 11.2 of the constitution do not require them to give a transfer notice until Noel seeks to exercise the options, and the terms of the options provide for the giving of such a notice. I do not accept that submission. The obligation is to give notice if there is a desire to sell or transfer.

[24] Counsel for Paul submitted that the case is on all fours with Lyle & Scott Limited v Scott’s Trustees,[1] a submission which counsel for Noel and for Anne and Peter rejected.

[25] In Lyle & Scott Limited, shareholders entered into contracts to sell shares to a third party purchaser. The contract provided for the purchaser to pay the price per share, in return for the shareholder agreeing to deliver up their share certificates, an executed form of proxy in favour of the purchaser, and agreeing to execute transfers of the shares when called upon to do so. The constitution required that any shareholder “desirous of transferring” their shares inform the secretary of the company in writing of the number of ordinary shares he desired to transfer. The company sought a declaration that the shareholders were bound to implement the terms of the relevant article and sought an order requiring the shareholders to give notice forthwith.

[26] Their Lordships granted the relief sought. The following passage is material to the issue I have to decide:[2]

_...

But I do not think it necessary to express a final opinion upon it, for, as I have said, the question is ... whether it demonstrates with sufficient clearness that Scott’s trustees are persons desirous of transferring their ordinary shares. It appears to me that there is no room for doubt that that is just what they are. Here I can proceed on their admissions. For, since it is the admitted fact that they entered into the agreement for sale of their shares and have received and retain the price, it follows that, whether or not they have yet done all that they ought as vendors to do, they hold the shares as trustee for the purchaser. They are bound to do everything that in them lies to perfect the title of the purchaser. ... In my opinion, it is not open to a shareholder, who had agreed to do a certain thing and is bound to do it, to deny that he is desirous of doing it. I wish to make it quite clear, for it goes to the root of the matter, that I regard Scott’s trustees as desirous of transferring their ordinary shares unless and until their agreement with Mr. Fraser has been abrogated. Of this at least one acid test would be the return by them of the price they have received.

...

[27] Counsel for the other parties sought to distinguish the case on the basis that the shareholders in Lyle & Scott Limited became bound to sell upon their acceptance of the purchaser’s offer to buy, whereas Anne and Peter had bound themselves to sell once cl 2 of the option is satisfied. I do not consider that that difference constitutes a sufficient basis to distinguish the case.

[28] Given the view that I have reached, it is unnecessary for me to consider the other evidence relied on by Paul, as referred to in [9](c) above.

Relief

[29] I turn now to second aspect of Paul’s case, namely the matter of relief.

[30] Paul submits that the Court must see done what Noel, Anne and Peter ought to have done. Paul seeks orders that will have the effect of requiring Anne and Peter to offer him the opportunity to purchase at least his pro rata entitlement of their shares at $41.50 per share. Paul submits that there would be no prejudice to Anne or Peter in making such an order, given their willingness to sell their shares to Noel at that price. Paul also submits that an order to this effect might be made under s 174(2) Companies Act 1993. With respect, I do not consider that s 174 could have any application in a case such as the present, which is concerned with the

enforcement of the constitution as between shareholders. Section 174 is concerned with the conduct of the affairs of the company or acts of the company.

[31] Counsel for the other parties oppose the making of any order that would require Anne and Peter to fix a price of $41.50 per share.

[32] I am satisfied that the appropriate remedy is to require compliance with the constitution. Accordingly, I propose to make an order requiring Anne and Peter to give notice in accordance with cl 11.2 of the constitution, such notice to comply with cl 11.2(2) of the constitution.

[33] It follows that Anne and Peter must specify in their transfer notice the sum which they consider to be the value of the shares (see cl 11.2(2)(a) of the constitution). An order that Anne and Peter specify a particular price would conflict with cl 11.2(2)(a). I add that the shareholders in Lyle & Scott Limited were ordered to give notice in accordance with the company’s articles of association, with the

price to be fixed in the manner prescribed by the articles.[3]

Result

[34] I make a declaration that each of the Third and Fourth Defendants desires to sell or transfer their shares within the meaning of cl 11.2(1) of the constitution of the First Defendant.

[35] I order that each of the Third and Fourth Defendants give notice to the First

Defendant in accordance with cl 11.2(1) and (2) of the said constitution.

[36] I add that the parties may, of course, agree to resolve this matter without implementing the order I have made. However, in the absence of such agreement, the Third and Fourth Defendants are to give the said notice by 1 November 2012, or

_{by such other date as the parties may agree.}

[37] The parties may be able to agree the matter of costs, particularly as they have each had a measure of success. They may, however, make submissions if they require the Court to resolve the matter.

..................................................................

M Peters J

---

[1] _{Lyle & Scott Limited v Scott’s Trustees [1959] AC 763 (HL).}

[2] At 774.

[3] At pg 775.