Cochrane v Totara Properties Whangarei Ltd [2012] NZHC 3265 (5 December 2012)

Last Updated: 19 December 2012

IN THE HIGH COURT OF NEW ZEALAND WHANGAREI REGISTRY

CIV-2012-488-177 [2012] NZHC 3265

BETWEEN GRANT ALEXANDER COCHRANE, NOEL BRENT COCHRANE AND LARRY PETER COCHRANE Plaintiffs

AND TOTARA PROPERTIES WHANGAREI LTD

First Defendant

AND ALEXANDER REGINALD COCHRANE Second Defendant

AND ALEXANDER REGINALD COCHRANE, MAQ TRUSTEES 2011 LIMITED &

MAC TRUSTEE SERVICES LIMITED AS TRUSTEES OF THE SNOW COCHRANE NO 1 TRUST AND MAREE JOYCE COCHRANE, MAQ TRUSTEES

2011 LIMITED & SHAREE MILDRED COCHRANE as trustees of the Maree Cochrane No 1 Trust

Third Defendants

Hearing: 22 November 2012

Counsel: J A Browne for plaintiffs

G Swanepoel for defendant

Judgment: 5 December 2012

JUDGMENT OF LANG J

_{[on determination of preliminary question]}

This judgment was delivered by me on 5 December 2012 4 pm, pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

_{Date...............}

GRANT ALEXANDER COCHRANE, NOEL BRENT COCHRANE AND LARRY PETER COCHRANE V TOTARA PROPERTIES WHANGAREI LTD HC WHA CIV-2012-488-177 [5 December 2012]

[1] The plaintiffs and defendants are all shareholders in the first defendant, Totara Properties Whangarei Ltd (“the company”). They are also members of, or entities connected with, the Cochrane family. The senior member of the family is the second defendant, Mr Anthony Cochrane (“Mr Cochrane”).

[2] The shareholding and constitution of the company are structured so as to give Mr Cochrane complete control over the manner in which the company conducts its business. Mr Cochrane has interpreted this as including the power to cause the company to declare dividends in favour of himself, to the exclusion of the remaining shareholders in the company. This is one of the reasons why the plaintiffs have issued this proceeding. They allege Mr Cochrane has exercised his powers under the

constitution in a manner that is unfairly prejudicial to them.[1]

[3] The Court has now been asked to determine, as a preliminary question, whether the company’s constitution permits the company to pay a dividend to Mr Cochrane and not to the remaining shareholders.

Background

[4] Although the company was originally incorporated in 1972, it elected to adopt a constitution in 1997 when it was re-registered under the Companies Act 1993 (“the Act”). As a consequence, the company’s shareholders and directors now have the powers, rights, duties and obligations vested in or imposed upon them by the Act, except to the extent that those powers, rights, duties and obligations are negated or modified by the company’s constitution.[2]

[5] In many respects the provisions in the company’s constitution mirror those contained in the Act. It also contains significant modifications of the powers, rights, duties and obligations prescribed by the Act. The most important of these are contained in cls 2.2, 2.3 and 2.4 of the company’s constitution.

_{[6] Clause 2.2 creates two distinct classes of shares in the company. It provides:}

Class of Shares

2.2 The shares of the Company shall be divided into the following classes: Class A consisting of 1 share and Class B consisting of 100 shares. Both classes of shares shall enjoy the rights and be subject to the limitations conferred or imposed by the Constitution of the Company save and except as to voting powers thereof in which respect; Class A share shall entitle the holder to 300 votes at all meetings of the Company or on any resolution requiring shareholder vote. Class B shares shall entitle the holder or holders thereof to one vote per share at all meetings of the Company or on any resolution requiring shareholder vote.

[7] At all times material to this proceeding, Mr Cochrane held the only Class A

share on issue. Each of the plaintiffs owns 20 per cent of the Class B shares.

[8] Clauses 2.3 and 2.4 of the constitution effectively provide for Mr Cochrane, as the holder of the only Class A share, to have exclusive powers of governance in respect of the company’s affairs. They provide:

2.3 So long as Alexander Reginald Cochrane shall hold not less than one share in the capital of the Company the said Alexander Reginald Cochrane shall hold office as a permanent director until his voluntary retirement and shall not be subject to removal and he shall have the right at any time and from time to time to appoint any other person who holds not less than one share in the capital of the Company to be a permanent director of the Company in his stead and to remove any such director appointed by him and to reappoint himself or to appoint any other person who holds not less than one share in the capital of the Company to be a director in place of any person so removed. Every such appointment or removal shall be in writing under the hand of the said Alexander Reginald Cochrane or his authorised agent and every such appointment shall be accompanied by the consent in writing of the person appointed to act.

2.4 While the said Alexander Reginald Cochrane or his appointee shall hold office as a permanent director the full government and control of the Company shall be vested in him or his appointee and he or his appointee (as the case may be) may exercise all the powers and authorities and discretions vested in the directors generally and notwithstanding that he or his appointee may be the sole director holding office he or his appointee may exercise all the powers of the Company which are not by statute required to be exercised by the Company in a general meeting and any minute entered in the minute book of the Company’s proceedings signed by the said Alexander Reginald Cochrane or his appointee (as the case may be) shall in any matter not expressly required by statute to be done by the Company in a generally [sic] meeting have the effect of a resolution of the Company and all other directors for the time being of the Company shall be under the control of the said Alexander Reginald Cochrane or his appointee (as the case may be) whose opinion shall prevail in the event of any difference of opinion and they shall be bound to conform to his directions in regard to the Company’s business and accordingly all clauses of these articles shall be read subject to this clause.

[9] As counsel pointed out during argument, this type of shareholding structure is not particularly unusual in the rural sector. It found favour in the past with farmers who were anxious to control the amount of income tax they were required to pay. More importantly, it also ensured that, upon the farmer’s death, death duties did not ravage the principal or only family asset. The structure provided a convenient means by which the farmer could divest himself of the ownership of land, whilst at the same time ensuring he retained absolute control over the farming operations carried out on the land.

[10] In Holt v Holt, McMullin J explained the utility of such structures in the following passage: [3]

During the 1960s and 1970s the incidence of estate duty in New Zealand became a matter of concern to farmers and their advisers. The imposition of such on an estate in which almost the only assets were the farm property and the live and deadstock on it could be quite devastating, particularly where the widow and children intended to carry on the deceased’s farming enterprise. Livestock values also posed problems. Farmers and their advisers set out to devise ways and means of overcoming or minimising the burden which estate duty held for them tin the face of rising land values. The reported New Zealand cases furnish illustrations of the various schemes that were adopted and the ingenuity of their architects. They included the use of trusts and farming companies which had as their object the pegging of the value of the estate to ensure that any increase in the capital value of the land did not accrue to the estate and so attract duty. And, by vesting the farm property in a farm-owning company rather than in the individual farmer, the farmer’s liability to income tax could be regulated, such tax then being paid on only so much of the profits as were declared to be dividends.

[11] The remaining provisions in the company’s constitution largely mirror the powers, duties, rights and obligations vested in or imposed on shareholders and directors by the Act. The most important of these for present purposes are cls 4.1 and 4.2, which are worded identically to ss 36(1) and (2) of the Act. Clauses 4.1 and

4.2 provide:

4. SHARE CAPITAL AND VARIATION OF RIGHTS Rights and Powers attaching to shares

4.1 (1) Subject to subclause (2), a share confers on the holder –

(a) The right to one vote on a poll at a meeting of the company on any resolution, including any resolution to –

(i) Appoint or remove a director or auditor: (ii) Adopt a constitution:

(iii) Alter a constitution:

(iv) Approve a major transaction:

(v) Approve an amalgamation under section 221 [Approval of amalgamation proposal]:

(vi) Put the company into liquidation.

(b) Subject to part 8 and clauses 18.4 and 18.5, the right to an equal share in dividends authorised by the board.

_...

(2) Subject to clause 18.2 [Dividends payable pari passu], the rights specified in subclause (1) may be negated, altered, or added to by this constitution, whether in part 2 or elsewhere, or in accordance wit the terms on which the share is issued under clauses 14.3 [Issue of other shares] or 14.4 [Shareholder approval for issue of new shares].

[12] Also important for present purposes are cls 18.1 and 18.2 of the constitution. These mirror the wording used in ss 52(1) and 53(2) of the Act respectively, and provide:

18. DISTRIBUTIONS TO SHAREHOLDERS Solvency Test

18.1 (1) The board may (if it is satisfied on reasonable grounds that the company will, immediately after the distribution, satisfy the solvency test) subject to clause 8.2 [Dividends payable pari passu] and subject to any restrictions in this constitution, authorise a distribution by the company at a time, and of an amount, and to any shareholders it thinks fit.

...

Dividends payable pari passu

18.2 (1) A dividend is a distribution other than a distribution to which clause 5.2 [Acquisition of company’s own shares] or clause 6.1 [Financial assistance] applies.

(2) The board must not authorise a dividend –

(a) In respect of some but not all the shares in a class; or

(b) That is of a greater value per share in respect of some shares of a class than it is in respect of other shares of that class – unless the amount of the dividend in respect of a share of that class is I proportion to the amount paid to the company in satisfaction of the liability of the shareholder under this constitution or under the terms of issue of the share.

...

[13] Against that brief background it is necessary to consider the argument for Mr

Cochrane.

The argument for Mr Cochrane

[14] Mr Cochrane relies upon the combined effect of cls 2.3, 2.4 and 18.1 of the constitution. He points out that, by virtue of cl 2.3, he is a permanent director of the company. He is therefore entitled to exercise the powers that cl 2.4 vests in the permanent director. These include the ability to exercise all of the powers that would ordinarily be exercisable by the company’s board of directors. He may also exercise all of the powers that would ordinarily be exercisable by the company, other than those that the company is required by statute to exercise in a general meeting. Furthermore, cl 2.4 makes all other directors effectively subordinate to Mr Cochrane, because it provides for his opinion to prevail in the event of any difference of opinion between the directors.

[15] Clause 18.1(1) provides the board of directors with the power to authorise distributions to shareholders. As a consequence, cl 2.4 gives Mr Cochrane the power to exercise the power to authorise distributions to shareholders.

[16] Mr Cochrane acknowledges that the power under cl 18.1(1) to authorise the payment of a dividend “to any shareholders [he] thinks fit” is not unfettered. It is subject to three restrictions. First, he may only exercise the power if he is satisfied that the company will satisfy the solvency test immediately after the distribution. He points out, however, that the solvency of the company has never been an issue, so this restriction has no practical relevance for present purposes. The plaintiffs accept that this is the case.

[17] Secondly, the power to authorise a dividend is expressly subject to cl 18.2. That clause prohibits the board from authorising a dividend in respect of some, but not all, the shares in a class. Mr Cochrane contends he has never contravened this clause, because in authorising dividends he has never treated shares within the same class differently. He has authorised the payment of dividends to the only person holding a Class A share, and has likewise treated all Class B shares equally by excluding them from receiving a dividend. The plaintiffs accept Mr Cochrane’a argument on this point also.

[18] Thirdly, cl 18.1(1) is expressly “subject to any restrictions in [the] constitution”. Mr Cochrane maintains there is nothing in the company’s constitution that restricts him from authorising a distribution in favour of himself as the sole shareholder of Class A shares, and to the exclusion of those who hold Class B shares. As a consequence, he contends that the power to authorise distributions under cl

18.1(1) entitles him to authorise the payment of a dividend to himself as the owner of the only Class A share.

[19] The plaintiffs do not accept Mr Cochrane’s argument on this point.

Decision

[20] I consider the starting point in this context to be cl 4.1(1)(b) of the constitution.[4] It provides that “a share confers on the holder...subject to Part 8 and clauses 18.4 and 18.5, the right to an equal share in dividends authorised by the board.”

[21] Although cl 4.1(1)(b) is subject to part 8 and cls 18.4 and 18.5 of the constitution, that fact is irrelevant for present purposes. Part 8 of the constitution contains provisions requiring the company to suspend the right to receive dividends when a shareholder has defaulted in paying any call or paying any instalment of a call on due date. That has never been the position here. Similarly, cls 18.4 and 18.5

_{deal with factual situations that do not exist in the present case. For that reason,}

cl 4.2(2)(b) applies prima facie to all the shares in the company. Every share has the right to share equally in dividends authorised by Mr Cochrane.

[22] The right to share equally in dividends has been described as arising out of a presumption that all the shares of a company carry the same rights and obligations. It is also clear, however, that the rights attaching to shares can be negated or modified by the company’s constitution, or by the specific terms on which shares are issued.[5]

This is reflected in cl 4.1(2) of the company’s constitution, which mirrors s 36(2) of

the Act. Clause 4.1(2) provides:

(2) Subject to clause 18.2 [Dividends payable pari passu], the rights specified in subclause (1) may be negated, altered, or added to by this constitution, whether in part 2 or elsewhere, or in accordance with the terms on which the share is issued under clauses 14.3 [Issue of other shares] or

14.4 [Shareholder approval for issue of new shares].

[23] The issue, therefore, is whether the company’s constitution contains a provision that negates or modifies the right under cl 4.1(1)(b) of all shares to share equally in authorised distributions. Mr Cochrane contends that cls 2.3 and 2.4 of the constitution[6] have this effect. He argues that the extensive powers vested in him under these clauses permit him to cause the company to pay dividends in a manner that negates or modifies the right otherwise attaching to all shares to share equally in

dividends.

[24] I consider the wording of cl 2.2 to be determinative of this point. Although the first sentence in cl 2.2 creates two classes of shares, the second sentence makes it clear that the only distinction between the two classes relates to the voting power attaching to the shares in each class. For ease of reference, I set out the clause again:

Class of Shares

2.2 The shares of the Company shall be divided into the following classes: Class A consisting of 1 share and Class B consisting of 100 shares. Both classes of shares shall enjoy the rights and be subject to the limitations conferred or imposed by the Constitution of the Company save and except as to voting powers thereof in which respect; Class A share shall entitle the holder to 300 votes at all meetings of the Company or on any resolution requiring shareholder vote. Class B shares shall entitle the holder or holders

thereof to one vote per share at all meetings of the Company or on any resolution requiring shareholder vote.

[25] Read as a whole, I consider the meaning of cl 2.2 to be plain. It expressly preserves the rights attaching to all shares other than the voting right that attaches to the single Class A share. Ordinarily each share would be entitled to a single vote at meetings of the company.[7] That remains the case in respect of Class B shares. Clause 2.2 modifies that right in relation to the Class A share, however, by providing that it shall have 300 votes. The company’s constitution has therefore negated or

modified the voting rights attaching to the Class A share, but has not modified or negated the other rights attaching to all the shares in the company. Rather, it has expressly preserved those rights. As a consequence, the right of all shares under cl

4.1(1)(b) to share equally in authorised distributions remains intact.

[26] Moreover, the company is not permitted to unilaterally suspend or modify that right. Clause 4.4 of the constitution, which is worded identically to s 177 of the Act, prohibits the company from taking any action that affects the rights attached to shares unless that action has been approved by a special resolution of each interest group. The company could therefore only exclude the Class B shares from sharing equally in dividends if the holders of those shares passed a special resolution approving that course of action. Alternatively, cl 18.2(3) provides that a shareholder may waive his or her entitlement to dividends by giving notice in writing to that effect to the company.

[27] Preservation of the right to share equally in dividends amounts, in my view, to a restriction on the power of the board, and hence Mr Cochrane, to authorise distributions by the company to its shareholders under cl 18.1(1). It restricts that power because a distribution can only be authorised if all of the shares in the company share equally in it. Although Mr Cochrane has wide powers of governance under cls 2.4 and 2.5 of the constitution, he must nevertheless exercise those powers in a manner authorised by the constitution. It follows that he must

_{exercise those powers subject to the restriction imposed by cl 4.1(1)(b).}

[28] It would have been a relatively straightforward matter for those who drafted

the company’s constitution to have inserted a provision modifying or negating cl

4.1(1)(b). That could have been achieved by providing for the Class A share to have preferential rights in relation to the payment of dividends as well as in respect of voting. The absence of any express provision in the constitution to that effect, however, means that the preliminary question must be determined in favour of the plaintiffs.

Result

[29] The answer to the preliminary question is therefore that the constitution of the company prevents it from paying a dividend in respect of the Class A share, unless the Class B shares share equally in the dividend.

Costs

[30] The plaintiffs have succeeded on the preliminary question, and are entitled to costs as a result. The first and second defendants shall therefore be jointly and severally liable to pay a single award of costs and disbursements to the plaintiffs. Costs are to be calculated on a Category 2B basis. If counsel cannot reach

_{agreement regarding disbursements, they are to be fixed by the Registrar.}

Lang J

Solicitors:

Henderson Reeves Connell Rishworth, Whangarei

Swan Law, Whangarei

---

[1] _{In terms of s 174 of the Companies Act 1993.}

[2] Companies Act 1993, s 28.

[3] Holt v Holt [1987] 1 NZLR 85 (CA) at 91.

[4] At [11].

[5] Grantham and Ricket Company and Securities Law Commentary and Materials (Brookers, Wellington, 2002) at [19.1.2].

[6] Set out at [8].

[7] Clause 4.1(1)(a) of the constitution and s 36(1)(a) of the Act.