Insurego Ltd v Harris [2013] NZHC 104 (7 February 2013)

High Court of New Zealand

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Insurego Ltd v Harris [2013] NZHC 104 (7 February 2013)

Last Updated: 18 February 2013

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV 2012-404-003789 [2013] NZHC 104

BETWEEN INSUREGO LIMITED First Plaintiff

AND PACIFIC TRUSTEES & NOMINEES LIMITED

Second Plaintiff

AND PETER ALLAN HARRIS First Defendant

AND ALISTAIR LEIGHTON HUTCHISON Second Defendant

Hearing: 4 February 2013

Appearances: A R Gilchrist for the Plaintiffs

R E Harrison QC for the Defendants

Judgment: 7 February 2013

JUDGMENT OF ASSOCIATE JUDGE CHRISTIANSEN

This judgment was delivered by me on

07.02.13 at 4:30pm, pursuant to

Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Date...............

Solicitors/Counsel:

A Gilchrist, Auckland – [e-mail] / [e-mail]

R Harrison, Auckland – [e-mail] / [e-mail]

INSUREGO LIMITED V PETER ALLAN HARRIS HC AK CIV 2010-404-003789 [7 February 2013]

Background

[1] The plaintiffs between them owned 32 per cent (8 million shares) of the share capital of CBL Insurance Limited (CBL). Of those shares 2,500,000 were sold in October 2007 for $500,000 equating to a price of 20 cents per share. The plaintiffs were interests in the control of Mr Thomas, a lawyer.

[2] The defendants each controlled interests which also owned 32 per cent of the share capital of CBL. The interests of the defendants and of Mr Thomas acquired their shares in CBL in 1996. Then, its business constituted primarily the provision of bonds to the building and construction industry. Since, its range of insurance and bonding business expanded significantly but that notwithstanding, as at 2007 it remained a relatively small insurer underwriting financial risk. It took on the risk, that if capital eroded through any losses, then it would be for the shareholders to put in further capital.

[3] In the latter part of 2007 and into 2008 a number of issues affected the relationship between Mr Thomas and the defendants. Mr Thomas expressed a desire to exit CBL.

[4] It appears that by August 2008 an agreement was reached for the payment of

23 cents each for those shares retained by the plaintiffs. As Mr Harris deposed the share price was reached with little argument. It appears at that time that Mr Thomas accepted (indeed the defendants say he proposed) that 23 cents was fair value on the basis of the 2007 published and audited accounts and taking into account also the factoring in of a number of off balance sheet items including potential liability in the face of threatened litigation.

[5] The agreement for the sale of the plaintiffs remaining 5,500,000 shares was settled on 23 December 2008 when a total price of $1,265,000 was paid by interests of the defendants.

[6] The plaintiffs proceeding is brought because it is claimed the defendants interests paid too little for those shares transferred on 23 December 2008. It is claimed the shares were worth 72 cents each and therefore the plaintiffs have sustained losses totalling $2,695,000 in the outcome.

[7] The defendants are sued in their capacities as directors of CBL at the time of sale, and because the agreements for sale and purchase identified the defendants as well as their purchasing entities as purchasers of the plaintiffs’ shares.

[8] At the core of the plaintiffs’ claim is the pleading that “both defendants were intricately aware of the financial position of CBL, and, as directors of CBL, had information as to the financial position of CBL, which was material to an assessment of fair value of the shares at that time. Both were involved in the company’s operations and had access to information in their roles in the company that would otherwise not be available to them, and which was material to the fair value of the shares”. Mr Thomas pleads that neither the plaintiffs nor he had such information, or access to that information.

[9] Mr Thomas says he became aware of publicity which indicated that CBL had made a profit of $2.8m during the 2008 year. He says this was not known to him or the plaintiffs, “but would have been known to the defendants” at the time the sale of shares was completed on a 23 cent value basis. It is to be inferred from this that because of that profit the share value must have been more than 23 cents per share.

[10] Mr Thomas then commissioned a valuation of the shares as at December

2008. That valuation indicates a fair value of the shares at 72 cents.

[11] The plaintiffs claim relies in large part upon ss 126 and 149 of the Companies Act 1993. Section 126 provides an explanation of the meaning of a director of a company. For our purposes director is a person who whether for himself or another exercises power or takes part in decisions made on behalf of a company. In that sense a person may be deemed to be a director even though Companies Office records may not record their appointment as such. There is no issue in this case but that the plaintiffs were entities in the control or under the direction of Mr Thomas.

Likewise the defendants had control of those entities of theirs which purchased a 32 per cent shareholding in CBL in 1996.

[12] Company Office records show that Mr Harris was appointed a director of

CBL on 13 December 2006. Mr Hutchison’s appointment was noted as occurring on

24 December 2008 i.e. just one day after the sale of the plaintiffs’ shares was settled.

[13] Much of the focus of affidavits filed for and against the plaintiffs claim is upon the extent or otherwise of the involvement of Messrs Thomas Harris and Hutchison in the running and control of CBL.

The plaintiffs’ case

[14] It is that the defendants had information in their capacity as directors or employees of CBL possession of which would not otherwise have been available to them, and which was material to the assessment of the value of the shares.

[15] They rely on s 149 of the Companies Act 1993 which provides:

Restrictions on share dealing by directors

1. If a director of a company has information in his or her capacity as a director or employee of the company, or a related company, being information that would not otherwise be available to him or her, but which is information material to an assessment of the value of shares, or other securities issues by the company or the related company, the director may acquire or dispose of those shares or securities only if:-

(a) In the case of an acquisition, the consideration given for the acquisition is not less than the fair value of the shares or securities; or

(b) ...

2. For the purposes of subsection (1), the fair value of shares or securities is to be determined on the basis of all information known to the director or publicly available at the time:-

3. ...

4. Where a director acquires shares or securities in contravention of subsection (1)(a), the director is liable to the person from whom the shares or securities were acquired for the amount by which the fair

value of the shares or securities exceeds the amount paid by the director.

5. ...

[16] There is no dispute that Mr Harris was a director of CBL at the relevant time. The Companies Register discloses this. Mr Hutchison claims he was not a director at the time of the share sale transaction, he not formally being appointed until the day after that transaction was settled.

[17] The plaintiffs’ evidence discloses that both defendants attended CBL board meetings. Mr Hutchison acknowledges he was copied in on the negotiations for the purchase of the plaintiffs’ shares; he negotiated the terms of the agreement; and by letter dated 14 November 2002 he requested Mr Thomas to file the CBL annual return. The minutes of a meeting held at the offices of CBL on 22 June 2004 record that Mr Harris and Mr Hutchison consented to act as directors although there was agreement that that consent be held unfiled pending agreement on the ongoing structure of CBL business. CBL’s financial statements for the year ended 31

December 2005 noted that CBL had current account advances with Mr Hutchison as well as with Mr Harris and Mr Thomas. Mr Hutchison appears to have taken an active part in proposals for a restructuring of CBL’s affairs about that time. On 13

September 2006 Mr Hutchison wrote on CBL’s behalf to a firm of solicitors and signed that letter as Director of Finance. The minutes of a board meeting dated 11

October 2007 indicated Mr Hutchison’s appointment as a director was to be

confirmed at an upcoming AGM.

[18] As to the defence position that Mr Thomas too would be a deemed director and therefore was in as good a position as anyone else to assess fair value, the plaintiffs say Mr Thomas ceased management involvement with CBL from 2007; and that he only attended board meetings until December 2007 but not thereafter. Mr Thomas says that what occurred throughout 2008 was unknown to him but was known to the defendants; and the only information he had during 2008 was the draft management accounts provided for sale negotiation purposes in July 2008 and the negative statements made by Mr Hutchison regarding CBL’s business at that time.

[19] The plaintiffs say Mr Thomas had no way of knowing with any degree of certainty what commitments Mr Harris was making on behalf of CBL and the risks that CBL was taking on; and, Mr Gilchrist submits, at the time of settlement the directors were “intricately aware of the position of CBL, and had information as to the financial position that was material to an assessment of fair value. Both directors were involved in the companies’ operations, whereas the plaintiffs did not have access to such information. The defendants do not appear to deny that they had access to information. They just claim (erroneously) that so too did Mr Thomas”.

[20] The plaintiffs say that the defendants would have known CBL made a profit of $2.8M during the 2008 year. Also CBL declared dividends of $1.08M for the

2008 year. The plaintiff did not receive any dividends in 2008 or for the 2008 tax year.

[21] Mr Thomas says he left the CBL premises in August 2007. Mr Thomas produced a copy of board papers received for the December 2007 board meeting – the last he attended. It provided a number of graphs showing business done/expenditure incurred compared with budget expectations during the period January – October 2007. It contained a summary of profit and loss for the period ended October 2007. It showed a significant increase in income and that profit was significantly in excess of projections – information that was clearly available to Mr Thomas at the time he negotiated the share price.

[22] Mr Gilchrist submits that the requirements of s 149 are absolute. He says the Court of Appeal in Thexton [1] rejected claims that s 149 should not apply where both parties to the transaction were aware of the material information. The Court of Appeal held that the value of the information has to be objectively determined in all the circumstances. It follows that an assessment of fair value is to be determined on the basis of all information known to the director (or publicly available) at the time.

[23] Therefore, Mr Gilchrist submits that it has been established that the directors had access to information which was not available to the plaintiffs and therefore the

_{plaintiffs have not received fair value for the shares sold and that position would not}

change even if the purchasers had disclosed the information available to the directors at the time – although there is no claim that information known to the directors was given to the plaintiffs or to Mr Thomas.

[24] As to ‘fair value’ the plaintiffs’ evidence in an affidavit from Mr Anderson an expert showed the fair value of CBL at 31 December 2008 was $18.1M or .72c per share. The defendants have produced no evidence to dispute this evidence. Mr Harris said the value at .23c per share was assessed from the 2007 published audited accounts. The plaintiffs say the defendants had subsequent accounts and that the plaintiffs did not have access to the 2008 accounts.

[25] In response to the defendants claim that they did not acquire the plaintiffs shares Mr Gilchrist notes it is apparent from the agreements that both defendants are described as purchasers. Also reference is made to a memorandum from the defendants’ lawyers to the plaintiffs dated 11 December 2008 wherein it is recorded:

Restraint of Trade, Peter Harrison and Alistair Hutchison are on the restraint as they are purchasers under the agreement, as required by you. They are not on the share transfer, as they will not be the shareholder.

Discussion

[26] The plaintiffs apply for summary judgment. This is available to them if there is no reasonably arguable defence to their claim. Onus of proof of an absence of a defence remains on the plaintiffs throughout.

[27] Summary judgment is not usually available where there are conflicts of evidence on the affidavits. Of course, a Judge is not bound to accept uncritically as raising a dispute of fact claims which are equivocal or lacking in precision, or are inconsistent with undisputed contemporary documents. Likewise a judge need not accept statements made by deponents which are inherently improbably.

[28] If a Court is to grant judgment upon a summary judgment application the Court must be confident, sure, convinced or persuaded that there is no real doubt or uncertainty with the plaintiffs’ claim.

[29] In this case the plaintiffs’ claim has been confined entirely to its two pleaded written agreements for sale and purchase of shares in CBL. But, there was also a third agreement entered into concurrently called the Settlement Agreement. Together the three agreements, fully documented in writing, record commercial transactions negotiated at arms-length between knowledgeable and experienced businessmen.

[30] As Mr Harrison comments the plaintiffs pleaded claim has not alleged unfair or oppressive conduct on the part of the defendants, and does not seek to sue for misrepresentation or breach of fiduciary duty. Rather the plaintiffs claim was filed in July 2012, more than three and a half years after the parties’ agreements were concluded, and about two years after the plaintiffs claim to have discovered a reason for pursuing their claim.

[31] The defendants contend it was always contemplated the shares would not be acquired by either of them personally, but instead by newly-formed shareholder companies of CBL with which the defendants financial interests were associated. The defendants have at no time owned shares in CBL.

[32] Neither Mr Thomas nor Mr Anderson mentioned the Settlement Agreement or its relationship with the share purchase transactions. The plaintiffs assert the Settlement Agreement is irrelevant to matters in issue. In the context of summary judgment application this position of the plaintiffs is not so clear. A review of all three agreements suggests there was much more than the matter of share valuations involved in resolving all issues between the parties. The evidence suggests that there were debts owing as between the various entities within CBL and that there were potential liabilities not limited to those of just CBL itself.

[33] The plaintiffs place much reliance upon Mr Anderson’s valuation assessment. But, as the assessment clearly states it is “Indicative”. In a reply affidavit Mr Anderson indicated that none of the other consideration elements that he was unaware of and might otherwise have considered in the assessment he made was likely to impact on the approach he adopted. But, as Mr Anderson appears to concede he relied upon information received by Mr Thomas about whether certain litigation risks were truly matters to be concerned with.

[34] Of concern to the Court is the pleading that the defendants had information about the financial position of CBL which was at the time of the agreements settlement, material to an assessment of fair value of the shares. The plaintiffs’ evidence suggests there was such evidence but does not say what form that would take. Mr Gilchrist suggested such information might include performance reports. The plaintiffs arguments suggest there would be something in this to indicate what an appropriate share value was, as opposed to that calculated (indeed the defendants say proposed by Mr Thomas) on the basis of the 2007 accounts which became available in mid 2008. What appears to be missing is any reference to new information which suggests price agreed was incorrect.

[35] I agree with Mr Harrison that the precise identification of the offending information possessed by the defendants who are alleged to have engaged in share dealing contrary to s 149 may be critical. Without it the defendants will be in some difficulty addressing the question whether it was information “not otherwise available to Mr Thomas”, nor able to dispute its materiality to an assessment of the fair value of shares.

[36] If s 149 is to apply the plaintiffs must show the share agreement was one related to restrictions on share dealings by directors; that in substance and effect it involved an acquisition of shares by a director of the company in question; that the director possessed information in his capacity as a director which was information that would not otherwise be available to him and was material to an assessment of the value of the shares; and that the overall consideration given was less than the fair value of the shares.

[37] In respect of each of these elements the plaintiffs face some difficulties at this time.

[38] The defendants contend that the overall transaction agreed to (including the Settlement Agreement) cannot properly be categorised as a “share dealing by directors”, within the contemplation of s 149. They say that the transaction agreed to and implemented was a sale and buy out of shares as between the shareholders, with associated restraints, indemnities and ‘wash-ups” of outstanding accounts between

all parties involved in the overall CBL enterprise. Mr Gilchrist submits the Settlement Agreement is irrelevant because it dealt with issues quite discreet from the sale of shares. However that position appears to overlook Mr Thomas’ desire to extricate himself from the business; to resolve issues that may have adversely affected the interests of his entities and that he indeed did remove himself from active management by the end of 2007 – factors which may support the defendants claims that a price was to be struck on the basis of the 2007 Accounts, and not the

2008 Accounts (that Mr Anderson used for his assessment) which would unlikely to have been available until 2009.

[39] It is clear that neither Mr Harrison nor Mr Hutchison personally acquired their shares in question. Arguably they were named as purchasers for the purpose of enforcing contractual covenants. The share sale transaction appears to be part of an overall transaction comprising a number of parts. There may be risks in assuming what information was possessed if the Court is to accept the plaintiffs’ contention that such information albeit undetailed or specified, did exist. Mr Harrison submits that regard ought to be given to the substance of the overall transaction before drawing conclusions regarding the “consideration given”.

[40] The plaintiffs place significant reliance upon Mr Anderson’s indicative valuation assessment. But it is clear that Mr Anderson has made a number of tentative and arguably contestable assumptions in reaching the value he has. Although the defendants have not yet instructed an expert to examine Mr Anderson’s report there is good reason to accept the Court should not accept Mr Anderson’s report uncritically.

[41] In his assessment summary Mr Anderson noted that he had not been able to completely assess the risk profile of the business or to obtain a full understanding of the relevant accounting and business policies that existed at the time of the transaction and that therefore his report should be read in that context. Also he conceded that his lack of access to all of the relevant information that is normally reviewed as part of this type of valuation exercise is a significant limitation. He conceded that his valuation conclusion should be considered with this limitation in

mind and would be subject to change if further companies’ specific information

became available.

[42] Another and obvious limitation with Mr Anderson’s report concerns its reliance on the 2008 Audited Accounts. The defendants contend there was agreement with Mr Thomas that the figure would be fixed on the 2007 Accounts. As earlier noted there appears to be evidence available to support this contention. If there was such agreement then s 149 notwithstanding, there may be a case for the defendants to argue a defence of estoppel.

Considerations

[43] It is clear from the authority in Thexton that s 149 was enacted to address the insider trading abuse and the opportunistic acquisitions and dispositions of shares engaged in by directors seeking to take advantage of their “insider information”. It is a provision which has obvious application in relation to public or large companies where, as Mr Harrison submits, there will be categories of material information in the public domain and is capable of being “otherwise available to” the director whose conduct is called into question. Section 149 may not so comfortably operate in the domain of small or closely held private companies where shareholders were also directors. Section 149 creates a form of strict liability. Therefore it will operate even if a plaintiff is also claimed to have possessed the “private material information in question”. But, insider information abuse cases are not usually about transactions where all parties are involved in a share buyout by one shareholder in a closely held private company of other shareholders particularly where that involves an exchange of obligations and other benefits. A Court should be wary of drawing adverse conclusions based on assumptions about ‘knowledge’ until a full factual enquiry has been undertaken.

[44] The plaintiffs point to the fact that the two agreements for sale and purchase of shares identify the defendants as purchasers along with the companies of theirs to whom the shares were to be transferred. But, by ignoring the Settlement Agreement the plaintiffs appear to suggest that the share purchase price for the share parcel in question was the sole consideration for the transaction. The Court is wary about

ignoring the significance of the Settlement Agreement in the overall transaction. Clearly all three agreements were entered into at the same time. Each recited that it was contemporaneous with and “interdependent on the contemporaneous settlement of” the others.

[45] The sell down by Mr Thomas of the plaintiffs’ shares had begun more than a year earlier. From that time negotiations continued, in the outcome of which the balance of shares was sold. It was an event that unfolded over a period of time but seemed directed from the beginning to management of Mr Thomas’ exit from CBL’s business entirely.

[46] Although Mr Thomas rejects some allegations in this regard as being incorrect or incomplete and misleading, he is without much detail at all in his opposition if any to claims that all three agreements were integrated in the buyout process.

[47] The defendants say they were contracting parties to the agreements for sale and purchase of shares as effective guarantors of their entity companies. Quite clearly they did not personally acquire any shares and it was always accepted the shares in question would be purchased by corporate entities of theirs. In these circumstances it may be arguable that neither of the defendants should be treated as having acquired the shares when they did not do so in a formal sense.

[48] Also Mr Hutchison’s position is a little different from that Mr Harris because he lacked at the material time the status of a “director” of CBL. The plaintiffs contend Mr Hutchison qualified as a “director” in the terms of the extended definitions on s 126.

[49] Mr Thomas confirmed he held the status as director in CBL because of those entities of his which held shares in the company. Why then should not Mr Hutchison also. Mr Harrison submits that the evidence of the scope of Mr Hutchison’s involvement in the affairs of CBL is disputed as is his status as a director. Mr Harrison submits that this is a matter incapable of resolution upon a summary judgment application. The Court’s view, and having regard to the evidence

previously identified, is that there appears little issue with claims ascribing the status of director of CBL to Mr Hutchison.

[50] Mr Thomas does not provide detail about that information the plaintiffs say the defendants themselves possessed at the time a share value was agreed. Mr Gilchrist asks how could Mr Thomas explain what the information is when he does not know what it is. His position is that it exists otherwise the shares would not be three times the value he was paid.

[51] The plaintiffs focus on Mr Thomas withdrawal from participation in the affairs of CBL to support an argument that there must have existed that information which justified a share value increase. But, as Mr Harrison submits, there is a factual dispute over the timing of Mr Thomas withdrawal from involvement, and equally as to the nature and extent of each defendant’s personal knowledge of any (unidentified) information material to an assessment of the value of the shares at any material times. Mr Thomas says that in 2010 as a result of publicity there is an indication that CBL had made a profit of $2.8M during the 2008 year. Mr Thomas suggests that the profit would have been known to the defendants but this assumes that any dividends declared by CBL for the 2008 financial year had been declared or even in contemplation as at 23 December 2008. But, that cannot be assumed. In any event it was clear by the parties’ agreement that the plaintiffs were not receiving any dividends for the 2008 financial year.

[52] The evidence suggests that the price of .23cents per share was rapidly and mutually agreed around July 2008; and that it was the number of other matters relating to indemnities and additional payments which delayed an overall settlement until December 2008. It is the defendants’ position that the material time for consideration of s 149 issues in relation to information allegedly possessed by the defendants was July 2008 based on the 2007 Audited Accounts rather than as at December 2008 as the plaintiffs contend. It appears to be a matter requiring consideration of oral evidence in due course.

[53] At this time the Court has concerns about Mr Anderson’s valuation

assessment. That assessment has considerable significance in the outcome of the

parties’ dispute. Presently the Court considers it has limitations in supporting a claim of a sale of shares at other than fair value. In question is the quality of instructions provided by Mr Thomas about factors which may or may not provide a significant limitation on the quality of approach taken. Mr Anderson’s reference to standards and methodologies adopted while at the time recognising the existence of alternative valuation methodologies could be significant. As Mr Harrison submits there are numerous other features of the approach adopted by Mr Anderson that may be open to question. Beside issues about the fair value of shares will ultimately be a matter for a trial Court, not an expert witness.

[54] Also Mr Anderson’s assessment was based on company accounts that clearly were not in existence at the time the parties agreed their share price.

Conclusions

[55] The plaintiffs’ claims are contested both factually and legally. In the former respect there are many factual issues which are not resolvable on the affidavit evidence before the Court or because quite clearly further evidence is required before acceptable conclusions could be made in relation to same.

[56] Also the Court is concerned about the usefulness in particular of s 149 of the Act in circumstances of the kind appearing in this case. It is unlikely s 149 was conceived for use in a multi-faceted agreement designed to resolve issues between shareholders where each of those might by reference to s 126 be considered to be directors of the company affected. Whilst a determination of the facts will ultimately assist in that enquiry it is presently no means clear that the defendants role within CBL was of a kind for which s 149 was, in the circumstances intended, to apply.

[57] Too many questions are left unanswered regarding the usefulness of the valuation evidence provided by the plaintiffs and which is promoted as of considerable significance in support of the plaintiffs’ claims.

Judgment

[58] The application for summary judgment is dismissed.

Costs

[59] Usually it is the Court’s practice to reserve costs when summary judgment applications have not succeeded because of concerns by the Court that there are significant issues of factual conflict which will require resolution in the outcome of which the merits of the case will be determined. This is not and invariably will that needs to be assessed on a case by case basis. In this case the Court is concerned about:

(a) For shortfall in evidence available to prove claims of the existence of privately held information.

(b) A reliance on assumption for proof of facts.

(c) There is evidence that the parties agreed to fix the sale price on the basis of the 2007 Accounts, and not the 2008 Accounts which provided the basis of the plaintiffs’ experts’ assessment.

[60] A lot of time, effort and cost is utilised in advancing a summary judgment application to a hearing. Usually the Court is content to fix costs once the case merits have been determined. On the other hand it may sometimes be appropriate to fix costs in the determination of a summary judgment hearing when the Court is of the view that when all evidence is filed or at latest when all submissions are to hand, the application for summary judgment was very unlikely to succeed.

[61] However in this case a significant factual enquiry is still needed. Only in that outcome should costs be fixed. Accordingly in this case costs are to be reserved

_{until resolution of the proceeding.}

Associate Judge Christiansen

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[1] [2002] 1 NZLR 780 (CA).