AIVITA HEALTHY NZ LTD v UNIPHARM MANUFACTURING CO. LTD [2023] NZCA 540

AIVITA HEALTHY NZ LTD v UNIPHARM MANUFACTURING CO. LTD [2023] NZCA 540 [1 November2023]IN THE COURT OF APPEAL OF NEW ZEALANDI TE KŌTI PĪRA O AOTEAROACA502/2022[2023] NZCA 540BETWEEN AIVITA HEALTHY NEW ZEALANDLIMITEDAppellantAND UNIPHARM MANUFACTURING CO.LIMITEDFirst RespondentANC NZ LIMITEDSecond RespondentQINGFENG CHENThird RespondentHearing: 17 July 2023Court: Gilbert, Lang and Woolford JJCounsel: S O McAnally and A Ho for AppellantG P Blanchard KC, C Jiang and P K J Roycroft for RespondentsJudgment: 1 November 2023 at 2 pmJUDGMENT OF THE COURTA The appeal is dismissed.B The cross-appeal is dismissed.C The appellant must pay costs to the respondents for a standard appeal on aband A basis and usual disbursements. We certify for second counsel.____________________________________________________________________REASONS OF THE COURT(Given by Gilbert J)[1] This appeal arises out of a dispute between shareholders. There arethree issues. The first is whether pre-emptive rights provisions in a draft constitutionthat was never formally adopted were nevertheless incorporated by reference in theshareholders agreement. If so, the second issue is whether the pre-emptive rights wereexercised in time following a change in control of one of the shareholders giving riseto the deemed service of a transfer notice. The High Court answered both of thesequestions in the affirmative and made an order for specific performance of thepre-emptive rights provisions.1 If the appeal succeeds on either of these questions, athird issue will be whether the affairs of the company were conducted in an oppressiveor unfairly prejudicial manner such that relief should be granted to the respondentsunder s 174 of the Companies Act 1993 (the Act). The High Court considered that itwas unnecessary to determine this issue in light of its order for specific performance.[2] The appellant, Aivita Healthy New Zealand Ltd (Aivita), and the second andthird respondents, ANC NZ Ltd (ANC) and Mr Chen, are shareholders in the firstrespondent, Unipharm Manufacturing Co. Ltd (Unipharm). They entered into ashareholders agreement which provides that the pre-emptive rights in the constitutionof the company shall apply with all necessary modifications in various circumstances,including where there is a change in the control of any shareholder. The constitutionis defined in the shareholders agreement as meaning the constitution of Unipharm atthat time. However, no constitution was ever formally adopted.[3] Following a change of control in Aivita to a party associated with a competitorof Unipharm, the respondents commenced proceedings against Aivita seeking specificperformance of the pre-emptive rights provisions in the shareholders agreement and,in the alternative, for relief pursuant to s 174 of the Act. Edwards J made an order forspecific performance requiring Aivita to offer its shares in Unipharm to the othershareholders at a price to be determined by an arbitrator in accordance with therelevant clauses in the shareholders agreement and the draft constitution. The Judgedismissed the alternative claim under s 174.21 Aivita Health New Zealand Ltd v Unipharm Healthy Manufacturing Co Ltd [2022] NZHC 2198[High Court judgment] at [100] and [111(b)].2 At [111(c)].[4] Aivita appeals against the order for specific performance, contending:(a) the draft constitution did not form part of the shareholders agreementand therefore there are no pre-emptive rights; and(b) even if the pre-emptive rights provisions did apply, the time withinwhich the other shareholders could require Aivita to sell its shares tothem expired before any step was taken to exercise those rights.[5] The respondents resist the appeal. However, in the event the appeal is allowed,they cross-appeal seeking relief under s 174 of the Act.Background[6] The following brief summary of the relevant background is uncontentious andis largely drawn from the High Court judgment.[7] Unipharm was incorporated on 20 September 2016 as a joint venture companyto purchase the assets of Evergreen Life (NZ) Ltd (Evergreen) with the intention ofmanufacturing pharmaceutical and health supplements for the New Zealand andChinese markets. At the time of its incorporation, Unipharm's shares were held asfollows:(a) 60 per cent by Yibo Weng on trust for Chinan Xie, the sole director andshareholder of ANC;(b) 20 per cent by Mr Chen; and(c) 20 per cent by Aivita.[8] On 21 October 2016, Unipharm's lawyers sent the parties a draft shareholdersagreement and a draft constitution. It is plain on the face of the documents that theywere intended to work together. The draft constitution provided for typicalpre-emptive rights that would normally be expected to apply on any proposed sale ortransfer of shares by a shareholder in a closely held joint venture company such asthis. These provisions contain reasonably standard machinery including the giving ofa transfer notice, providing a process for determining a fair price in the absence ofagreement and setting the time for the other shareholders to exercise their right topurchase at that price. These general provisions in the constitution were to be subjectto specific provisions in section 4 of the shareholders agreement which is headed"Disposal of Shares".[9] Clause 4.1 of the shareholders agreement provides for drag-along rightsenabling a shareholder to compel the other shareholders to facilitate the sale to a thirdparty of all the company's shares or the company's business. Where these rights apply,they trump the pre-emptive rights set out in the constitution and the shareholders aredeemed to waive all such rights:4. Disposal of Shares4.1 Drag-Along RightsThe following rights set out in clause 4.1 apply in priority to thepre-emptive rights on transfer set out in the Constitution.The Shareholders agree that, to the extent the rights in clause 4.1apply, the Shareholders are deemed to waive all pre-emptive rightsunder the Constitution.(a) If at any time a Shareholder or Shareholders (in this clauseand in clause 4.2 "Disposing Holder") wishes to dispose of alltheir Shares to an independent third party ("Third Party"),then the Disposing Holder may provide each remainingShareholder ("Remaining Holders") with a written noticesetting out the material terms (including price, the identity ofthe proposed transferee and the proposed completion datetogether with full disclosure of any collateral benefits orancillary arrangements) ("the Drag Notice") of the proposedtransaction prior to implementing that transaction.(b) Subject to clause 4.1(d), the Drag Notice issued by thetransferor under clause [4.1] will require the RemainingHolders to sell their Shares to the Third Party at the same timeand on the same terms (including price per Share) as theDisposing Holder. The Remaining Holders acknowledge thatif they default in selling their Shares then the DisposingHolder shall be appointed as attorney for the defaulting partyand shall be entitled to do all such things necessary andexecute such documents on behalf of the Remaining Holdersto facilitate the transfers of their Shares and give effect to thisclause.(c) If a Shareholder wishes to exit the Company (in this clausethe "Exiting Holder"), it shall have the right (but not theobligation) to require the Remaining Shareholders to approveby special resolution the sale by the Company of the Business.The Exiting Holder shall provide the Remaining Shareholderswith a written notice setting out the material terms (includingprice, the identity of the proposed transferee and the proposedcompletion date together with full disclosure of any collateralbenefits or ancillary arrangements) ("the Sale Notice") of theproposed transaction. Upon receipt of the Sale Notice, theRemaining Shareholders shall take all steps to approve thesale of the Business and the subsequent liquidation of theCompany.(d) The parties will use their respective best endeavours to effectthe procedures set out in subclauses (a), (b) and (c) andprocure that any Director appointed by them will use theirbest endeavours to ensure that the clause is given full effectto.[10] Clause 4.2 was drafted so as to bring into play the general pre-emptive rightsprovisions in the constitution where a corporate shareholder is liquidated, dissolved,or removed from the Companies Register, or where there is a change in the control ofthat shareholder. This was achieved by deeming that a transfer notice has been givenimmediately prior to the relevant occurrence and applying the pre-emptive rightsprovisions in the constitution with all necessary modifications:4.2 Dissolution/change of a ShareholderA Shareholder ("Transferor") is deemed to have given a notice to theBoard offering all of the Shares held by that Shareholder for sale tothe other Shareholders ("Transfer Notice") immediately prior to:(a) the dissolution, liquidation, removal from the CompaniesRegister, winding up (or any similar occurrence) of thatShareholder; and/or(b) a change in the control of any Shareholder,and the pre-emptive rights for provisions in the First Schedule of theConstitution shall apply (with all necessary modifications).3[11] Clause 1.1 of the shareholders agreement defines "Constitution" to mean"at any time, the constitution of [Unipharm] at that time".3 The reference to the First Schedule of the Constitution is an obvious drafting error; there is noFirst Schedule.[12] The shareholders agreement was signed by the shareholders on 3 June 2017,but no constitution was ever adopted, apparently through oversight.[13] The purchase of Evergreen settled in January 2017 and Unipharm commencedtrading at that time. The company encountered financial difficulties within only a fewmonths. By October 2017, the secured creditor, ASB Bank, was threatening to appointreceivers if its loan facility was not reduced. The relationship between theshareholders deteriorated to the point where Aivita commenced proceedings againstthe respondents on 17 May 2019. In its third amended statement of claim, it advancedthree causes of action, the first in debt, the second seeking an order pursuant to s 91 ofthe Act rectifying the register to reflect what it contended was the correct shareholdingposition, and the third for relief under s 174 of the Act.[14] On 24 June 2019, about a month after Aivita filed its proceeding, Aivita'sshareholders transferred their shares to a third party associated with one of Unipharm'scompetitors. The other shareholders did not become aware of this transfer until later.[15] Aivita's proceeding was heard together with the separate proceeding filed bythe respondents in March 2021 seeking specific performance of their allegedpre-emptive rights following the change of control of Aivita or, alternatively, reliefunder s 174 of the Act for alleged oppressive and unfairly prejudicial conduct.The Judge dismissed Aivita's claims and there is no appeal from that part of thejudgment.Was the draft constitution incorporated in the shareholders agreement?High Court judgment[16] The Judge was satisfied that the parties could enforce the pre-emptive rights inthe draft constitution by contract. This was because:4(a) these provisions were specifically incorporated by reference in cl 4.2 ofthe shareholders agreement;4 High Court judgment, above n 1, at [67]–[68].(b) the Judge found as a fact that each of the shareholders agreed to theseprovisions;(c) the fact that the constitution was not formally adopted by a shareholdersresolution appeared to be a matter of oversight; and(d) all parties acted as if they were bound by these terms, including Aivita:(i) Drafts of the constitution and shareholders agreement wereprepared by lawyers and circulated together to all shareholdersand directors. All parties received copies of both documents.(ii) Aivita's sole director agreed in her evidence that the constitutionwas valid and binding.(iii) Aivita pleaded in its first and second amended statements ofclaim that the constitution was agreed by all parties.(iv) Aivita itself initially pursued a claim alleging a breach of thepre-emptive rights provisions in the constitution as part of itsclaim under s 174 of the Act.Submissions[17] Mr McAnally, for Aivita, submits that whether the relevant provisions in thedraft constitution were incorporated in the shareholders agreement is not a question ofinterpretation but, rather, turns on whether the assent of the parties to the shareholdersagreement also included unreserved assent to the additional terms found in the draftconstitution. He relies on this Court's decision in Nalder & Biddle (Nelson) Ltd vC & F Fishing Ltd for this proposition.5 He says there must be unequivocal evidencethat when entering into the shareholders agreement, Aivita also agreed to be bound bythe pre-emptive rights provisions now sought to be enforced. Mr McAnally says thereis no direct evidence that it did so. The sole director and shareholder of ANC candidly5 Nalder & Biddle (Nelson) Ltd v C & F Fishing Ltd [2007] 1 NZLR 721 (CA).acknowledged that he did not turn his mind to the draft constitution. There wasdiscussion about the terms of the shareholders agreement but no discussion about theconstitution. In summary, Mr McAnally says there was no unequivocal evidence ofacceptance. Rather, the evidence was consistent with the parties having forgottenabout the constitution when they signed the shareholders agreement more than sevenmonths after the documents were sent to them.[18] Mr McAnally submits that if the parties did not turn their minds to the matter,the pre-emptive rights provisions in the constitution could not have been agreed toother than by implication. It was not contended at trial that those provisions be impliedinto the shareholders agreement. This means that they can only have beenincorporated as express terms of the shareholders agreement. He submits that all thatcan be said to have been unequivocally agreed is that if Unipharm did adopt aconstitution, the parties would be bound by the pre-emptive rights provisionscontained in it. That never happened.[19] As to the evidence relied on by the Judge, Mr McAnally submits that little tono weight can be given to the evidence of Aivita's director at the trial because she wasno longer a director of Aivita and its earlier claims seeking to enforce the pre-emptiverights provisions were made some two years after the shareholders agreement wassigned. He submits that what occurred at that time, when the parties were in dispute,can shed little light on what they agreed when the shareholders agreement was signed.[20] Mr Blanchard KC, for the respondents, submits that Nalder & Biddle is not onpoint. The Court in that case was considering an oral agreement and the question waswhether what was offered and accepted included terms referred to in earlier writtendocuments. Mr Blanchard contends that the issue here is simply whether the relevantterms of the draft constitution were incorporated by express reference into theshareholders agreement. If so, the parties are bound, having affixed their signature tothe shareholders agreement irrespective of whether they read it. Clause 4.2 of theshareholders agreement refers to the pre-emptive provisions in the "Constitution".The only document fitting this description was the draft constitution sent to the partieswith the shareholders agreement.[21] While there are obvious errors in the drafting of cl 4.2 of the shareholdersagreement, Mr Blanchard submits that it is objectively clear that it is meant to refer tothe pre-emptive rights provisions in clauses 5.1 to 5.6 of the constitution.These provisions are also referred to in clauses 4.1 and 4.3 of the shareholdersagreement. Background recital C of the agreement also contemplates that the partieswill be bound by the terms of the constitution because it provides that the provisionsin the shareholders agreement will prevail over those in the constitution in the eventof any conflict between these provisions.[22] In any case, even if the test is whether the parties unequivocally manifested anintention that these provisions form part of the shareholders agreement, Mr Blanchardsubmits there is clear evidence of this. Aivita's sole director at the time accepted incross-examination that she believed that the constitution was binding. Aivita pleadedin its first amended statement of claim that the parties agreed to the constitution:11. The Shareholders Agreement refers to a Constitution for Unipharm.At the time the Initial Shareholders entered into the ShareholdersAgreement, the shareholders had drafted a Constitution for Unipharm.The draft was agreed to by all shareholders but was never formallyadopted by the company.To similar effect, Aivita pleaded in its second amended statement of claim dated23 July 2021:16. When the Initial Shareholders entered into the ShareholdersAgreement, the Initial Shareholders had the draft Constitution forUnipharm prepared by [its solicitors]. The draft was orally agreed toby the Initial Shareholders after 21 October 2016 [when it was sent tothe Initial Shareholders] and before 31 January 2017 [when Unipharmsettled the purchase of Evergreen's business] but was never formallyadopted by Unipharm. [23] Prior to June 2022, Aivita relied on the constitution to pursue its own claim forbreach of these same pre-emptive rights provisions and filed supporting affidavitevidence that these provisions were binding and had been breached. Even in itsoriginal statement of claim dated 17 May 2019, Aivita pleaded a "breach of theCompany Constitution". It was not until Aivita filed its third amended statement ofclaim dated 10 June 2022, one month before the trial, that reliance on the constitutionwas dropped.[24] Mr Blanchard also drew our attention to evidence given in the proceedings onbehalf of ANC confirming that the rights of pre-emption in the constitution wereregarded as binding. As to the suggestion made on behalf of Aivita that the partiesmay well have forgotten about the constitution when they signed the shareholdersagreement, Mr Blanchard responds that this is entirely speculative and is inconsistentwith the documentary and oral evidence referred to. The change in Aivita's positiononly came about following the transfer of control to a third party which had not beeninvolved when the shareholders agreement was signed in June 2019.Assessment[25] We agree with Mr Blanchard that this Court's decision in Nalder & Biddle doesnot assist. That case was concerned with whether terms set out in earlier writtendocuments formed part of an oral agreement. The Court readily accepted that an oralcontract may refer to and incorporate written documents, but the critical issue in thatcase was to ascertain whether these formed part of what was offered and accepted.6The Court observed that the inquiry as to what were in fact the agreed terms wasseparate to the inquiry as to the objective construction of the meaning of those terms.7In the present case, the question of what was offered and accepted can be determinedby looking at the shareholders agreement itself. The reference in cl 4.2 of theshareholders agreement to the pre-emptive rights provisions in the constitution issufficient to incorporate those provisions into the shareholders agreement.8 It does notmatter whether any shareholder read it or turned their mind to it before signing theagreement.9 The issue for the Court is to determine objectively what the parties mustbe taken to have intended that clause to mean. This must be determined by applyingthe familiar approach to contractual interpretation confirmed by the Supreme Court inFirm PI 1 Ltd v Zurich Australian Insurance Ltd:106 At [30].7 At [45].8 BBX Financial Solutions Pty Ltd v Wallace [2011] NZCA 667 at [46] citing Smith v South WalesSwitchgear Co Ltd [1978] 1 WLR 165 (HL) at 171 per Lord Fraser and 177 per Lord Keith.9 BBX Financial Solutions Pty Ltd v Wallace, above n 8, at [47] quoting L'Estrange v Graucob[1934] 2 KB 394 (CA) at 403. See also Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA52, (2004) 219 CLR 165 at [54]–[59] cited with approval in BBX Financial Solutions Pty Ltd vWallace, above n 8, at [48].10 Firm PI 1 Ltd v Zurich Australian Insurance Ltd [2014] NZSC 147, [2015] 1 NZLR 432 at [60]per McGrath, Glazebrook and Arnold JJ quoting Investors Compensation Scheme Ltd v WestBromwich Building Society [1998] 1 WLR 896 (HL) at 912 per Lord Hoffmann.[T]he proper approach is an objective one, the aim being to ascertain"the meaning which the document would convey to a reasonable personhaving all the background knowledge which would reasonably have beenavailable to the parties in the situation in which they were at the time of thecontract".[26] A party's subjective understanding of the meaning of an agreement is notadmissible if it was not communicated to the other party prior to the agreement beingentered into.11 Evidence of subsequent conduct, potentially including non-mutualconduct, can be relevant to the objective determination of the proper interpretation ofthe agreement.12 But self-serving statements made after a dispute has arisen are veryunlikely to assist.13[27] We do not consider the extrinsic evidence provides material assistance otherthan the evidence that the shareholders agreement and the constitution were drafted atthe same time by the solicitors who were instructed to prepare these documents andthey were sent together to the shareholders for signing. The shareholders agreementcontains numerous cross-references to the constitution and these documents wereplainly intended to work together. The other extrinsic evidence relied on, includingthat given by the former sole director of Aivita, is inadmissible to the extent it does nomore than confirm their subjective understanding of the agreement after it was enteredinto. To the extent there is evidence of mutual post-contract conduct, including thatboth parties sought to rely on the pre-emptive rights provisions in the constitution atvarious times, the probative value of this evidence to the interpretation exercise islimited because this conduct was self-serving and occurred after the parties had falleninto dispute.[28] Importantly, cl 4.2 of the shareholders agreement provides rights beyond thoseset out in the constitution and must be given effect. The operative part of the clauseautomatically triggers the deemed service on Unipharm's board of a transfer notice bya shareholder upon the happening of any of the specified events, including theliquidation or a change in control of that shareholder. It can be seen that these specified11 Bathurst Resources Ltd v L & M Coal Holdings Ltd [2021] NZSC 85, [2021] 1 NZLR 696 at [68]per Winkelmann CJ and Ellen France J and [232] per Glazebrook, O'Regan and Williams JJ.12 At [89] per Winkelmann CJ and Ellen France J and [232] per Glazebrook, O'Regan andWilliams JJ.13 At [90] per Winkelmann CJ and Ellen France J and [232] per Glazebrook, O'Regan andWilliams JJ.events trigger the operation of the clause, and this is not expressly dependent on therebeing a formally adopted constitution. The concluding words of the clause (wherereference is made to the constitution) merely provide the machinery for a response tosuch a deemed service of a transfer notice by engaging the pre-emptive rightsprovisions contained in the constitution.[29] Aivita submits that the parties must be taken to have intended that cl 4.2 wouldoperate only in circumstances where Unipharm had formally adopted a constitution.Aivita's interpretation would not only knock out the machinery, but it would alsodeprive cl 4.2 of having any effect unless a constitution was formally adopted.It seems most unlikely that the parties, as shareholders in a closely held joint venturecompany such as this, would have intended to provide pre-emptive rights for thetransfer of shares by one of the other shareholders following its liquidation or removalfrom the Companies Register for example, but only if a constitution was formallyadopted. We are unable to discern any commercial or other reason why this mighthave been intended. Further, if that were the intention, one would expect this wouldhave been made clear by stating that the clause applies only in that circumstance.The clause has not been drafted in that way and contains no such restriction.[30] We agree with the Judge that on the plain meaning of the clause, a shareholderwas deemed to have given notice to the board offering its shares to the othershareholders immediately prior to the happening of any of the specified events,including a change in the control of that shareholder. It is also clear that the partiesmust be taken to have intended that the machinery provisions in the constitution wouldapply enabling a response to such a deemed service of a transfer notice. At the timethe shareholders agreement was entered into, the only "Constitution" was theconstitution drafted contemporaneously with the shareholders agreement. By signingthe shareholders agreement, the parties must be taken to have intended the referencein cl 4.2 to be to the pre-emptive rights provisions in section 5 of this constitution(discussed below) or the equivalent provisions in any subsequent constitution.[31] In summary, we agree with the Judge's conclusion on this issue. This groundof appeal fails.Had the time for exercise of the pre-emptive rights expired?Pre-emptive rights provisions[32] The pre-emptive rights provisions are contained in section 5 of the constitution.Clause 5.1 provides that every change in the ownership of shares in the capital of thecompany shall be subject to the limitations and restrictions set out. Clause 5.2provides that no share in the capital of the company shall be sold or transferred by anyshareholder unless and until the rights of pre-emption have been exhausted.Transfer notices and the ascertainment of fair price are dealt with in cl 5.3.A shareholder wanting to sell or transfer shares is required to give notice in writing tothe directors of their desire to sell or transfer. Any such notice is irrevocable and shallbe deemed to appoint the directors as agent to sell the shares to any shareholder orshareholders of the company at a price to be agreed between the party giving the noticeand the directors or, failing agreement within 28 days of the directors receiving thenotice, at a fair price to be determined by an independent expert nominated by thechairperson of the Auckland District Law Society. Because of its central importanceto this ground of appeal, we set out cl 5.3 in full:5.3 Transfer notice and fair priceEvery shareholder including the personal representative of a deceasedshareholder or the assignee of the property of a bankrupt shareholder wantingto sell or transfer any share or shares shall give notice in writing to thedirectors of the desire to sell or transfer such share or shares. If such noticeincludes several shares it shall not operate as if it were a separate notice inrespect of each such share, and the proposing transferor shall be under noobligation to sell or transfer some only of the shares specified in such notice.Such notice shall be irrevocable and shall be deemed to appoint the directorsthe proposing transferor's agent to sell such shares in one or more lots to anyshareholder or shareholders of the Company (including the directors or any ofthem) at a price to be agreed upon between the party giving such notice andthe directors or, failing agreement between them within 28 days of thedirectors receiving such notice, at a fair price to be determined on theapplication of either party by a person to be nominated by the chairperson forthe time being of the Auckland District Law Society. Such person, whennominated, and in certifying the sum which in that person's opinion is the fairprice for the share, shall be considered to be acting as an expert and not as anarbitrator and accordingly the Arbitration Act 1908 and any subsequentmodifications or re-enactment thereof shall not apply.[33] Once the price has been agreed or determined, cl 5.4 provides for the shares tobe offered to the other shareholders and sets out the time for acceptance:5.4 Offer to shareholders and consequent saleUpon the price for such shares being agreed on or determined as aforesaid(as the case may be), the directors shall forthwith give notice to each of theshareholders (other than the person wanting to sell or transfer such shares)stating the number and price of such shares and inviting each of theshareholders to whom the notice is given to state in writing within 21 daysfrom the date of the notice whether such shareholder is willing to purchaseany and, if so, what maximum number of such shares. At the expiration of21 days from the date of the notice the directors shall apportion such sharesamongst the shareholders (if more than one) who have expressed a desire topurchase the same and as far as may be pro rata according to the number ofshares already held by them respectively, or if there be only one suchshareholder, the whole of such shares shall be sold to that shareholder,provided however, that no shareholder shall be obliged to take more than themaximum number of shares stated in that shareholder's response to suchnotice. Upon such apportionment being made or such one shareholdernotifying such shareholder's willingness to purchase, as the case may be, theparty wanting to sell or transfer such share or shares shall be bound, uponpayment of the said price, to transfer such share or shares to the respectiveshareholders or shareholder who have or has agreed to purchase the same and,in default thereof, the directors may receive and give a good discharge for thepurchase money on behalf of the party wanting to sell and enter the name ofthe purchasers or purchaser in the share register as holder of such share orshares so sold.[34] Where the shares offered are not taken up by the other shareholders, the partywanting to sell may sell the shares to a third party for the same (or higher) price:5.5 Sale of shares not taken by shareholdersIn the event of all of such shares not being sold under the preceding sub-clausewithin 60 days of the directors receiving notice under clause 18 hereof, theparty wanting to sell or transfer shall be at liberty within a further period of30 days to sell the shares not so sold, but not a portion only, to persons whoare not shareholders, provided however, that such party shall not sell them fora price less than the price at which the same have been offered for sale to theshareholders as aforesaid, but every such sale shall nevertheless be subject tothe provisions of clause 16 hereof.[35] The reference to "clause 18" is an obvious drafting error because there is noclause 18 in the constitution. It is common ground that this was intended to be areference to cl 5.3 which is the eighteenth clause in the constitution. Similarly, thereference to "clause 16" is also a drafting error because that provision relates to theremoval of Unipharm from the Companies Register where it has ceased to carry onbusiness and has discharged all its liabilities. This is an intended reference to cl 5.1:5. TRANSFER OF SHARES5.1 Freedom to transfer is qualifiedEvery change in the ownership of shares in the capital of the Company shallbe subject to the limitations and restrictions hereinafter provided.High Court judgment[36] The Judge was concerned that a deemed transfer notice meant there was noobligation on a shareholder to give actual notice of a change in control. She consideredthis would create difficulty because the other shareholders would be unlikely tobecome aware of this change in control unless they received actual notice of thatchange.14 It could be difficult to establish the date they received actual notice and thiscould lead to parallel processes with different timeframes for the sale of shares todifferent shareholders depending on when they became aware of the change of control.The parties cannot have intended this.15 Under cl 5.3, time starts running when anactual notice is given. The Judge considered there was no good reason why an actualnotice would be given in relation to a transfer or sale of shares but a deemed notice tobe given in relation to a change in control of a shareholder. The need for certaintyapplied in both situations.16[37] Given this difficulty, the Judge considered the parties did not intend cl 4.2 ofthe shareholders agreement to relieve a shareholder from the obligation to give actualnotice under cl 5.3 of the constitution.17 The requirement to give an actual notice"ensures certainty and clarity in the timeframes that apply and when rights of offer andacceptance must be exercised".18 The Judge concluded that Aivita was required toserve an actual notice under cl 5.3 of the constitution and time did not begin runninguntil such notice was given.19 No actual notice having been served, time had notstarted to run.20 It followed that the pre-emptive rights had not been lost.2114 High Court judgment, above n 1, at [76].15 At [77].16 At [78].17 At [79].18 At [82].19 At [83].20 At [83].21 At [84].Submissions[38] Mr McAnally submits that the Judge erred in concluding that an actual transfernotice needed to be served by the relevant shareholder in the event of a change ofcontrol or other triggering event under cl 4.2 of the shareholders agreement. He arguesthe words of cl 4.2 are clear and unambiguous and deems the change of control inAivita to be a "Transfer Notice". He submits that there are good reasons why theparties would have agreed to deem a transfer notice to have been given immediatelyprior to the specified events, including liquidation or removal of a shareholdingcompany from the Companies Register.[39] Mr McAnally says that a transfer notice was deemed to have been given on24 June 2019. The other directors knew of the change of control on 1 August 2019.They were then able to invoke the process under cl 5.3 of the constitution. He contendsthey had 60 days from that date to take action, but they failed to do so. He submitsthe respondents should not be permitted to do so now.[40] Mr Blanchard supports the Judge's analysis and conclusion. However, if thisis not accepted, he argues in the alternative that the deemed notice applies only tocl 5.3, not cl 5.5 of the constitution. On this basis, the deemed notice would triggerthe 28-day period for the parties to reach agreement on the price or have it determined.However, in order to trigger the 60-day period under cl 5.5, actual written notice isrequired. The necessary modification is limited to replacing the words "notice underclause [5.3] hereof" in cl 5.5 with "notice of a change of control". The commencementwords in cl 5.5 would therefore be modified as shown in italics as follows:In the event of all such shares not being sold under the preceding sub-clausewithin 60 days of the directors receiving notice of a change of control Assessment[41] The starting point is that cl 4.2 expressly requires application of thepre-emptive rights provisions in the constitution with all necessary modifications.The question is what modifications are necessary to make these provisions work incircumstances where a transfer notice is deemed to have been given. We considerthere is a more direct route than the one favoured by the Judge, but we arrive at thesame result.[42] We agree with Mr McAnally that a transfer notice having been deemed to havebeen served, there is no obligation on that party to serve an actual transfer notice aswould normally be required under cl 5.3 of the constitution if that party was wantingto sell some or all of its shares. Not only is it unnecessary to require a shareholder toserve an actual notice when notice is already deemed to have been given, it could alsobe impractical to do so. For example, where a shareholder is a company and isremoved from the Companies Register, it no longer exists and cannot do anything.Clause 4.2 of the shareholders agreement safeguards the other shareholders in thiscircumstance by providing that the relevant shareholder is deemed to have given anotice to the directors immediately prior to being removed from the Register andceasing to exist.[43] It is doubtful whether any material modification is necessary to make thisprovision work in the context of a deemed service of a transfer notice. The 28-dayperiod allowed for the relevant shareholder and the directors to attempt to reachagreement on the price in terms of cl 5.3 only commences when all directors becomeaware of the triggering circumstance and have therefore received notice of it.This date will be provable as a matter of fact. The directors cannot be expected toagree a price for shares deemed to have been offered for sale until they have receivednotice of this.[44] Assuming Mr McAnally is correct that the directors became aware of thechange of control on 1 August 2019, the 28-day period in cl 5.3 commenced to run onthat date. This period was allowed for the relevant shareholder and the directors toendeavour to reach agreement on the price. If agreement was not reached, the nextstep was for either party to seek the nomination of an independent expert to determinethe price. Neither party has taken that step but there is no stipulated time for doing so.For ease of reference, we set out the relevant part of cl 5.3: at a price to be agreed upon between the party giving such notice and thedirectors or, failing agreement between them within 28 days of the directorsreceiving such notice, at a fair price to be determined on the application ofeither party by a person to be nominated [45] It is only after the price has been agreed or determined that notice is to be givento the other shareholders offering the shares for sale under cl 5.4. Because the pricehas not been agreed or determined, this step has not yet been taken and the 21-dayperiod for the other shareholders to exercise their right to purchase at that price hasnot commenced to run. Again, for ease of reference, we set out the relevant part ofthis clause:Upon the price for such shares being agreed on or determined as aforesaid(as the case may be), the directors shall forthwith give notice to each of theshareholders (other than the person wanting to sell or transfer such shares)stating the number and price of such shares and inviting each of theshareholders to whom the notice is given to state in writing within 21 daysfrom the date of the notice whether such shareholder is willing to purchaseany and, if so, what maximum number of such shares.[46] For these reasons, we conclude that the respondents have not lost theirpre-emptive rights. The price has not yet been determined. Either party can apply fora determination. Once the price has been determined, the respondents must be given21 days' notice under cl 5.4 to exercise their right to purchase the shares.The pre-emptive right of purchase will not be lost until that period has expired.We therefore conclude that the Judge was correct to make an order for specificperformance. The next step is for the price to be determined by an independent expertin accordance with cl 5.3 of the constitution.[47] On our interpretation, cl 5.5 does not apply in the present circumstances.This is not a case of a shareholder wishing to sell its shares to a third party havingfreed itself from the pre-emptive rights provisions such that those rights "have beenexhausted" in terms of cl 5.2. Instead, in terms of cl 4.2 of the shareholders agreement,there remains an irrevocable offer by Aivita to sell its shares to the other shareholders.The price of the shares has not been fixed and, as discussed above, the proceduremandated by cl 5.4 of the constitution has not yet been implemented. In particular, nooffer has been made to the shareholders to purchase the shares at a specified price.We do not consider that cl 5.5 operates to extinguish an offer which has not yet beenmade or terminate the rights of the other shareholders to buy the shares. According toits own terms, cl 5.5 is not triggered unless and until the shares are not sold undercl 5.4. The 60-day period in cl 5.5 cannot have been intended to defeat the operationof cl 5.4 by extinguishing the pre-emptive rights prior to any offer being made to theother shareholders or prior to the 21-day period allowed for acceptance of such anoffer. This is reinforced by the restriction in cl 5.5 that the shareholder may only sellshares "not so sold" for a price "[not] less than the price at which the same have beenoffered for sale to the shareholders as aforesaid". This restriction underscores thatcl 5.5 was not intended to take effect until the price has been determined, the shareshave been offered for sale to the shareholders at that price, and the shareholders havenot taken up their right to purchase at that price.[48] We agree with the Judge's conclusion on this issue, albeit for slightly differentreasons. This ground of appeal also failsCross-appeal[49] The cross-appeal was pursued only in the event the appeal succeeded and theorder requiring Aivita to offer its shares for sale to the other shareholders is set aside.The appeal having failed, we do not need to consider the cross-appeal. It can also bedismissed.Result[50] The appeal is dismissed.[51] The cross-appeal is dismissed.[52] The appellant must pay costs to the respondents for a standard appeal on aband A basis and usual disbursements. We certify for second counsel.Solicitors:Crimson Legal, Auckland for AppellantTompkins Wake, Auckland for Respondents