WILLIAM JAMES WATERHOUSE LECKIE v ANTHONY AND WENDY BEVERLEY [2023] NZCA 570

WILLIAM JAMES WATERHOUSE LECKIE v ANTHONY AND WENDY BEVERLEY [2023] NZCA 570 [17November 2023]IN THE COURT OF APPEAL OF NEW ZEALANDI TE KŌTI PĪRA O AOTEAROACA84/2023[2023] NZCA 570BETWEEN WILLIAM JAMES WATERHOUSELECKIEFirst AppellantCHRISTOPHER GORDON LEWISMORRISONSecond AppellantLEWIS TUCKER AND COMPANYLIMITEDThird AppellantPHEASANT TAIL HOLDINGS LIMITEDFourth AppellantLEWIS TUCKER FOREST PARTNERSLIMITEDFifth AppellantLEWIS TUCKER FP INVESTMENTSLIMITEDSixth AppellantFOREST PARTNERS GP LIMITEDSeventh AppellantLEWIS TUCKER FP MANAGEMENTLIMITEDEighth AppellantAND ANTHONY AND WENDY BEVERLEYFirst RespondentsDRYLANDCARBON GP ONE LIMITEDSecond RespondentDRYLANDCARBON ONEMANAGEMENT LIMITEDThird RespondentDC ONE H1 LIMITEDFourth RespondentHearing: 18 July 2023 (further submissions 3 August 2023)Court: Gilbert, Lang and Woolford JJCounsel: J B M Smith KC, A S Olney and O C Gascoigne for AppellantsM G Colson KC and K J Dobbs for First RespondentsNo appearance for Second to Fourth RespondentsJudgment: 17 November 2023 at 2 pmJUDGMENT OF THE COURTA The application for leave to adduce further evidence is declined.B The appeal is dismissed.C The appellants must pay costs to the first respondents for a standard appealon a band A basis and usual disbursements.____________________________________________________________________REASONS OF THE COURT(Given by Gilbert J)Introduction[1] This is an appeal against a High Court judgment granting the first respondents(the Beverleys) leave pursuant to s 165 of the Companies Act 1993 (the Act) to bringa derivative action in the name of the second to fourth respondents (the derivativeplaintiffs) against the appellants (Messrs Leckie and Morrison and their companies).1[2] Through the derivative plaintiffs, the Beverleys and Messrs Leckie andMorrison successfully established a carbon afforestation fund using a limitedpartnership structure to deliver a long-term, cost-effective supply of carbon credits tolimited partner corporate investors. The claim is that Messrs Leckie and Morrison1 Beverley v Drylandcarbon GP One Ltd [2022] NZHC 3606 [High Court judgment].breached their fiduciary and other duties to the derivative plaintiffs by makingdecisions which preferred their own interests, misusing company information anddiverting a corporate opportunity in establishing a second carbon afforestation fundfor their own benefit.[3] Messrs Leckie, Morrison and Beverley were the sole directors and, togetherwith Mrs Beverley, were the ultimate beneficial owners of the derivative plaintiffs:(a) Drylandcarbon GP One Ltd (the General Partner), the general partnerof the Drylandcarbon One Limited Partnership;(b) Drylandcarbon One Management Ltd (the Manager) which managedthe Drylandcarbon One Limited Partnership under a managementservices agreement (the Management Services Agreement); and(c) DC One H1 Ltd (H1), a holding company that owned all the shares inthe General Partner and the Manager. The shares in H1 are held50 per cent by the Beverleys, and 50 per cent by Messrs Leckie andMorrison through Pheasant Tail Holdings Ltd (the fourth appellant).[4] The benefit of the arrangement to the Beverleys and Messrs Leckie andMorrison was obtained through fees earned by the Manager under the ManagementServices Agreement and passed back to their interests through H1. The basic structureof the arrangement is depicted in the diagram below:Beverleys Messrs Leckie and Morrison(through Pheasant Tail Holdings)H1DirectorsMr BeverleyMr MorrisonMr LeckieGeneral Partner Management Services Agreement ManagerLimited PartnersDrylandcarbon One Limited Partnership[5] After the fund was established, Mr Beverley's relationship with Messrs Leckieand Morrison quickly deteriorated and eventually broke down completely.They reached a mediated agreement on 20 April 2021 designed to enable them to gotheir separate ways, but this objective has not yet been achieved. Taking the view thatMr Beverley was in breach of the mediated agreement by failing to resign as a directorand appoint a nominee to act in his place, Messrs Leckie and Morrison removed himas a director of both the General Partner and the Manager on 18 May 2021.[6] In August 2021, Lewis Tucker and Company Ltd (Lewis Tucker, the thirdappellant), largely owned by Messrs Leckie and Morrison through Pheasant TailHoldings,2 produced a promotional flyer seeking non-binding commitments frominvestors for a new carbon afforestation fund to be established in early to mid-2022when the Drylandcarbon One Limited Partnership was expected to be fully committed.Investors in the Drylandcarbon One Limited Partnership would be given the first rightto invest before any unallocated capital would be offered to third parties.The Beverleys say this flyer replicated large sections of the materials that were usedto promote the Drylandcarbon One Limited Partnership and its supportingmanagement structure.[7] In December 2021, Messrs Leckie and Morrison started making arrangementsto transfer all staff employed by the Manager to Lewis Tucker.[8] In March 2022, Messrs Leckie and Morrison procured special resolutions bythe Drylandcarbon One Limited Partners, freeing affiliates of the General Partner andthe Manager (but not H1) from the exclusivity provisions in the Drylandcarbon OneLimited Partnership Agreement (the Limited Partnership Agreement) and theManagement Services Agreement. Messrs Leckie and Morrison then proceeded toestablish a second carbon afforestation fund, forming the Forest Partners LimitedPartnership with newly incorporated companies owned by their interests performingthe roles of general partner (Forest Partners GP Ltd, the seventh appellant) and2 This company is 95 per cent owned by Messrs Leckie and Morrison through Pheasant TailHoldings and five per cent by Mr Colin Jacobs, who was formerly employed by the Manager asits general manager but is now performing this role as an employee of Lewis Tucker, andMs Jacobs.manager (Lewis Tucker FP Management Ltd, the eighth appellant). The holdingcompany for these entities is Lewis Tucker Forest Partners Ltd (the fifth appellant).3[9] The Beverleys responded by issuing two sets of proceedings in the High Court.In the first, they claim that Messrs Leckie and Morrison have conducted the affairs ofH1, the General Partner and the Manager in an oppressive and unfairly discriminatoryand prejudicial manner by excluding Mr Beverley from the management of thecompanies, removing him as a director, and diverting a business opportunity byestablishing the second fund. The second is the derivative proceeding the subject ofthis appeal.[10] In addition to the order granting leave under s 165 of the Act to commence thederivative proceeding,4 the High Court made an order under s 167 authorisingthe Beverleys to control the conduct of the proceeding.5 The Court also made an orderunder s 166 that the reasonable costs of the proceeding be met in the first instance bythe derivative plaintiffs.6[11] The appellants appeal, contending that the High Court erred by not consideringthe discretionary factors for leave and applying the prudent businessperson test inrespect of each of the derivative plaintiffs separately, including whether:(a) the Beverleys had established a reasonably arguable case thatMessrs Leckie and Morrison breached duties owed to each derivativeplaintiff by misusing information belonging to that company or whichcame to them as directors of that company;(b) the Beverleys had established a reasonably arguable case thatMessrs Leckie and Morrison breached duties owed to each derivativeplaintiff by diverting a corporate opportunity from that company; and3 The shareholding of these companies is effectively the same as that of Lewis Tucker and CompanyLtd discussed above.4 High Court judgment, above n 1, at [113(a)].5 At [113(b)].6 At [113(c)].(c) a prudent businessperson conducting their own affairs wouldcommence proceedings to bring the proposed claims in the name of thatcompany.[12] The appellants argue that the High Court erred by assessing the position of thederivative plaintiffs at an abstract level and without analysing the assets owned byeach and the particular interest legitimately sought to be protected by each.They contend that the derivative plaintiffs do not have any right to constrain theconduct the subject of the claims. By not paying sufficient attention to the interests ofeach derivative plaintiff in terms of s 165(2)(d) of the Act, they say the costs were notproperly considered by the High Court under s 166. The appellants seek an ordersetting aside the order granting leave to bring the derivative proceeding.BackgroundDrylandcarbon One Limited Partnership[13] Following the introduction of the New Zealand Emissions Trading Scheme,Mr Beverley developed a business model using a limited partnership structure for theestablishment of a forestry investment portfolio to deliver a long-term cost-effectivesupply of carbon credits to investors (the Drylandcarbon concept).[14] In late 2017, Mr Beverley approached Messrs Leckie and Morrison in theircapacity as directors of Lewis Tucker to see whether any of their farming clients mightbe interested in participating in the Drylandcarbon concept. Lewis Tucker is aninvestment banking and corporate advisory firm specialising in the New Zealandagriculture, horticulture and forestry sectors. The parties agreed to join forces topursue the opportunity to establish and manage a carbon afforestation fund.[15] A heads of agreement was prepared in August 2018 to provide the foundationfor a shareholders agreement following formation of the relevant entities throughwhich the venture would be pursued. The heads of agreement was not signed, nor wasany shareholders agreement ever entered into.[16] On 28 February 2019, the Beverleys and Messrs Leckie and Morrison formedthe three derivative plaintiffs as the key participants in the afforestation fund to servetheir respective interests. The constitutions of the General Partner and the Managerauthorise the directors to act in the best interests of H1, even though that may not bein the best interests of those subsidiaries.[17] The Drylandcarbon One Limited Partnership is a limited liability partnershipregistered under the Limited Partnerships Act 2008. It was formed on 7 March 2019by the General Partner entering into the Limited Partnership Agreement with theLimited Partner investors — four major corporates and two minor limited partners,one associated with the Beverleys (DC One H2 Ltd) and the other with Messrs Leckieand Morrison (DC One H3 Ltd). The partnership mandate was to invest capital toestablish a large geographically diversified forest portfolio within New Zealand forthe primary purpose of generating as many carbon credits as reasonably practicable ata cost that would meet defined investment criteria. A secondary purpose was togenerate revenue from other activities such as tree harvest or sale.[18] The General Partner has exclusive responsibility for the management andcontrol of the partnership. It was authorised to delegate its authority and powers tothe Manager under the Management Services Agreement and did so. The relevant partof the exclusivity provision in the Limited Partnership Agreement reads:6.4 Exclusivity:(a) The functions and duties which the General Partnerundertakes on behalf of the Partnership are exclusive to thePartnership and the General Partner must:(i) not perform similar functions and duties for itself orfor others; and(ii) subject to paragraph (b) below, procure that each ofits Affiliates do not perform similar functions andduties for itself or for others in relation to a businesswith a purpose similar to the Mandate,unless otherwise agreed by Special Resolution of the Partnership(b) Nothing in this Agreement will prevent an Affiliate of theGeneral Partner from providing similar functions and dutiesfor itself or others in relation to a business with a purposesimilar to the Mandate as long as:(ii) approval to establish the entity is otherwise obtainedby Special Resolution of the Partnership,and the relevant Affiliate provides the Limited Partnersadequate information regarding the new investment vehiclebefore any other investors are approached and the LimitedPartners are offered an opportunity to invest.[19] "Affiliate" is defined as meaning "in relation to any person (the first person),a person that Controls the first person, is Controlled by the first person, or is undercommon Control with the first person". "Control" means the power, directly orindirectly, to direct the actions of that person or control the composition of its boardand management through the ownership of voting securities or otherwise. It alsoincludes beneficial ownership or rights to all or substantially all the income and assetsof that person. H1 is an affiliate of the General Partner within this definition.[20] A "Special Resolution" is a resolution by Limited Partners who together holdat least 75 per cent of the total committed capital.Management Services Agreement[21] Drylandcarbon GP One Limited Partnership entered into the ManagementServices Agreement with the Manager. The services included developing andimplementing the forest portfolio strategy and investment plans, managing theportfolio and attending to compliance and reporting requirements. These serviceswere provided by the Manager through its own employees and by way of a servicesagreement between the Manager and Lewis Tucker. The Manager receives a basemanagement fee assessed as a margin on capital deployed and a performance feecalculated as a percentage of distributions (including distributions of carbon credits)made under the Limited Partnership Agreement.[22] The Management Services Agreement contains a similar exclusivity provisionand employs the same definition of "Affiliate" which would again capture H1:3.5 Competing engagements:(a) The services which [the Manager] undertakes for thePartnership are exclusive to the Partnership and[the Manager] must:(i) not undertake or provide similar services for itself orfor others; and(ii) subject to paragraph (b) below, procure that itsAffiliates do not undertake or provide similar servicesfor itself or for others in relation to a business with apurpose similar to the Mandate,unless otherwise approved by the Partnership following aSpecial Resolution.(b) Nothing in this Agreement will prevent the Affiliates of[the Manager] from providing similar services for itself orothers in relation to a business with a purpose similar to theMandate as long as:(ii) approval to establish the entity is otherwise obtainedfrom the Partnership following a Special Resolution.Breakdown of relationship and mediation agreement[23] Mr Beverley's relationship with Messrs Leckie and Morrison deteriorated tothe point where they were no longer able to work together. In April 2021, they reacheda mediated agreement designed to enable a separation of their interests in the jointventure arrangement. The Beverleys would put forward a price for their interest in H1and DC One H2 Ltd. Messrs Leckie and Morrison could accept the price, reject theprice or require the Beverleys to buy Pheasant Tail Holdings' interests at the sameprice. If the price was not accepted by Messrs Leckie and Morrison and they did notwish to sell, the Beverleys were to actively market their interest and Messrs Leckieand Morrison would support the sale process. The parties would use reasonableendeavours to agree to a form of shareholders agreement which would come into effectonce a new investor acquired the Beverleys' interest. The parties would return tomediation if they could not agree to the form of a shareholders agreement within threeweeks, or if the Beverleys were unable to sell their interest by 30 November 2021.Mr Beverley was to resign as a director of both the General Partner and the Managerand appoint an appropriately-qualified nominee to serve on the boards of thosecompanies, with all board decisions required to be unanimous. Mr Beverley was alsonot to attend meetings of the advisory committee of the Limited Partnership withoutinvitation.[24] Messrs Leckie and Morrison were not prepared to acquire the Beverleys'interests at the price sought and they were not prepared to sell their interests at thatprice. The draft shareholders agreement has not been agreed to and the Beverleys havenot succeeded in selling their interest to a third party. Despite this, the parties havenot returned to mediation. In the meantime, Mr Beverley declined to resign as adirector of the General Partner and the Manager. This prompted Messrs Leckie andMorrison to remove him as a director of both companies in May 2021.Forest Partners Limited Partnership[25] In December 2021, Messrs Leckie and Morrison made arrangements to transferall of the Manager's staff to Lewis Tucker. Mr Colin Jacobs, who was employed bythe Manager as its general manager, continues to perform this role but is nowemployed by Lewis Tucker. The Beverleys claim that the transfer of staff away fromthe Manager was to enable Lewis Tucker to provide all management services to theDrylandcarbon One Limited Partnership and facilitate its provision of similarmanagement services for the new fund.[26] On 1 March 2022, with Messrs Leckie and Morrison's backing, Mr Jacobssubmitted a special resolution to the Limited Partners of the Drylandcarbon OneLimited Partnership in terms of cl 6.4(b)(ii) of the Limited Partnership Agreement tothe effect that the exclusivity provision in cl 6.4 no longer applied to the GeneralPartner or its affiliates. This resolution was passed.[27] On 22 March 2022, Mr Jacobs submitted further special resolutions to theLimited Partners, the first seeking approval in terms of cl 6.4(a) of the LimitedPartnership Agreement releasing the General Partner from the exclusivity obligationin cl 6.4(a)(ii) to allow affiliates to perform similar functions in relation to a similarbusiness. However, it was proposed that this release would not apply to the Manager,H1 or any of their subsidiaries. The second special resolution was sought undercl 3.5(a) of the Management Services Agreement releasing the Manager from itsobligation to procure that its affiliates do not provide similar services in relation to abusiness with a similar purpose. The proposed release was specifically not to apply tothe General Partner, H1 or any of their subsidiaries. These resolutions were alsopassed.[28] On 4 April 2022, Messrs Leckie and Morrison formed the fifth to eighthappellants for the purposes of establishing a second fund through a new limitedpartnership called the Forest Partners Limited Partnership. The seventh appellant,Forest Partners GP Ltd, is the general partner. The eighth appellant, Lewis Tucker FPManagement Ltd, is the manager. Forest Partners GP Ltd and Lewis Tucker FPManagement Ltd are wholly owned by Lewis Tucker Forest Partners Ltd, the fifthappellant. That company is in turn 95 per cent owned by Pheasant Tail Holdings andfive per cent by interests associated with Mr Jacobs. The sixth appellant, Lewis TuckerFP Investments Ltd, was incorporated at the same time. It is also 95 per cent ownedby Pheasant Tail Holdings and five per cent by Mr Jacobs' interests.[29] Three of the four principal investors in the Drylandcarbon One LimitedPartnership are also investors in the Forest Partners Limited Partnership. The fourthwas one of the parties targeted as a potential investor when the Drylandcarbon conceptwas originally marketed in 2018.The derivative claim[30] The derivative claim alleges that Messrs Leckie and Morrison breached theirduties as directors of the derivative plaintiffs — the Manager, the General Partner andH1 — in establishing the Forest Partners Limited Partnership and in particular bypreferring the interests of Lewis Tucker, diverting the business opportunity andmisusing company information. Four causes of action are advanced by the derivativeplaintiffs against Messrs Leckie and Morrison:(a) breach of the duty to act in good faith and in the best interests of thecompanies under s 131 of the Act;(b) misuse of company information in breach of s 145 of the Act;(c) breach of the duty of loyalty and failing to act with due care, diligenceand skill in breach of s 137 of the Act; and(d) breach of fiduciary duty — not to place themselves in a position ofconflict, not to profit, and not to prefer their own interests to those ofthe derivative plaintiffs.[31] Two causes of action are pleaded against the other appellants — dishonestassistance and breach of confidence. A seventh cause of action alleges a breach of theManagement Services Agreement between Lewis Tucker and the Manager.[32] The relief sought by the derivative plaintiffs includes unquantified equitableand common law damages, and an account of profits.High Court judgment[33] Associate Judge Paulsen considered there was an "air of unreality" about thesubmission that the position of the General Partner, the Manager and H1 must beconsidered in isolation.7 The companies were incorporated with common ownershipand control and were intended to act together in establishing a carbon afforestationfund and pursuing any other commercial opportunities that arose from that. The Judgeaccepted the respondents' submission that it would be artificial to separate them on thebasis of the precise role each was to perform within the overall enterprise. Such anapproach would fail to recognise that a derivative action is a procedural device"designed to prevent a wrong going without a remedy" and should be applied flexiblyto serve the interests of justice.8[34] The Judge rejected the appellants' submission that the General Partner and theManager could be eliminated as potential plaintiffs because the parties envisaged thatany subsequent afforestation fund would be conducted through different entities andthe terms of the Limited Partnership Agreement and the Management ServicesAgreement specifically precluded them from participating in another fund.9 The Judge7 At [54].8 At [54] quoting Universal Project Management Ltd v Fort Gilkicker Ltd [2013] EWHC 348,[2013] Ch 551 at [24].9 At [55]–[56].considered this was a factual issue he was not able to resolve in the context of the leaveapplication.10 The Judge took into account that the Limited Partners could pass aspecial resolution giving the General Partner and the Manager permission to provideservices for an alternative fund.11 Whether that was a realistic possibility was nevertested.12 In any event, the Judge noted that a claim for breach of fiduciary duty bydiversion of a corporate opportunity can be pursued even where the prospects of thecompany being able to take up that opportunity are remote or even non-existent.13[35] The Judge did not accept it was necessarily the case that any furtherafforestation fund would not be held through H1. The Judge considered that theprovisions of the Limited Partnership Agreement referring to affiliates appeared tocontemplate the possibility that H1 might have an interest in a new fund.14 The factthat the Drylandcarbon One Limited Partners consented to the creation of theForest Partners Limited Partnership could not excuse a breach of the directors' dutiesbecause these duties were owed to the derivative plaintiffs, not the Limited Partners.15[36] The Judge considered the evidence was "quite overwhelming" thatMessrs Leckie and Morrison had utilised information available to them by virtue oftheir positions as directors of the derivative plaintiffs to establish the Forest PartnersLimited Partnership. There were striking similarities between the Drylandcarbonpromotional material and the Forest Partners investment flyer. The Judge alsoconsidered it was arguable that in establishing the Forest Partners Limited Partnership,Messrs Leckie and Morrison had used other knowledge and information only availableto them through their involvement as directors of the derivative plaintiffs.This included the likely investment performance of a new fund and the appetite ofpotential investors to invest. They also knew of the arrangements regardinggovernance and control of a new fund which would be acceptable to potentialinvestors.1610 At [56].11 At [57].12 At [58].13 At [59] and [61] quoting Kawhia Offshore Services Ltd v Rutherford HC Hamilton CP61-99, 24April 2022 at [25].14 At [71].15 At [72].16 At [76].[37] The Judge accepted the force of the Beverleys' submission that, in proposingthe special resolutions by the Limited Partners to release affiliates of theGeneral Partner and the Manager from the exclusivity provisions in theLimited Partnership Agreement and the Management Services Agreement,Messrs Leckie and Morrison were acting in their own interests and not in the bestinterests of the General Partner or the Manager.17[38] Messrs Leckie and Morrison's submissions in the High Court did not directlyengage with the causes of action against the other defendants.18 The Judge wassatisfied that these claims — dishonest assistance, breach of confidence, and breachof contract — were also arguable.19[39] The Judge then addressed the other mandatory considerations in s 165(2) ofthe Act. It was accepted that the Forest Partners management enterprise has significantvalue. While Messrs Leckie and Morrison contested Mr Beverley's assessment that itwas worth around $50 million, they accepted that the amount at stake would justify aclaim by a plaintiff with a proper interest in pursuing it.20 The estimated costs ofpursuing the litigation were around $1 million.21 The Judge was not persuaded by thesubmission that the derivative plaintiffs had not suffered a loss, observing that even ifthat was correct, they would still be left with their claims for an account of profits.22[40] The Judge also did not accept the submission for Messrs Leckie and Morrisonthat there would be no injustice in declining to grant leave to pursue the derivativeclaims because the Beverleys' grievances can be adequately addressed in the separateproceedings they have filed seeking relief under s 174 of the Act for allegedlyoppressive or unfairly prejudicial conduct arising out of the same circumstances.The Judge agreed with the Beverleys that the derivative proceedings are to enforce therights of the derivative plaintiffs and hold the directors accountable for breaches oftheir duties as directors. The two proceedings are directed at different wrongs, involvedifferent respondents and seek different remedies. The Judge considered the17 At [83].18 At [84].19 At [84]–[87].20 At [91].21 At [89].22 At [92].derivative action would not be unnecessarily duplicative of the unfair prejudice claimor any other actions the Beverleys might pursue.23[41] The Judge was satisfied that a prudent businessperson conducting their ownaffairs would commence the intended proceeding. The proposed claims were at leastarguable, they have very high potential value and the likely costs of pursuing thelitigation are proportionate to the amount at stake.24 The Judge did not considerMessrs Leckie and Morrison had shown any good reason why it would be unjust orinequitable for the derivative plaintiffs to bear the costs of the proceeding which wouldbe pursued for their benefit.25Application to adduce further evidence[42] The appellants apply to adduce further evidence in support of the appeal, beingaffidavits from Messrs Matthew Cleland and Cody Houlahan.[43] Mr Cleland is an employee of one of the corporate investors in both theDrylandcarbon One Limited Partnership and the Forest Partners Limited Partnership.He was the representative of that investor on the advisory committee of theDrylandcarbon One Limited Partnership from the time it was established. Mr Clelandproduces a letter to the advisory committee dated 22 April 2021 signed byMessrs Beverley, Morrison and Leckie advising that Mr Beverley had decided to stepback from the business and intended to explore the sale of his interest in the enterprise.This letter was sent in accordance with the arrangements made at the mediation.Mr Cleland also states that he met with Mr Beverley at his request in late 2021.Mr Beverley asked him if the company he worked for would be interested inparticipating in a new carbon afforestation fund and expressed interest in helping toestablish such a fund.[44] The appellants say that Mr Cleland's evidence is inconsistent with theBeverleys' claims that it was always envisaged that further commercial opportunitieswould be pursued under the broader Drylandcarbon One umbrella and that the23 At [96]–[102].24 At [103].25 At [112].appellants diverted a corporate opportunity belonging to the derivative plaintiffs andbreached their duties owed to those companies in establishing a new carbonafforestation fund. The appellants argue that this evidence supports their position thatat least after the April 2021 mediation, if not from the outset, Messrs Leckie andMorrison and Mr Beverley were in agreement that they were free to pursue subsequentfunds separately from one another and that the Drylandcarbon companies had beenestablished only for the purposes of the Drylandcarbon One Limited Partnership andnot for any subsequent funds.[45] Mr Houlahan is a solicitor employed by the appellants' solicitors. He producesemail correspondence between Mr Beverley and Messrs Leckie, Morrison and Jacobsin the period from 17 November 2022 to 22 December 2022 in which each raisesvarious concerns about the conduct of the other.[46] Mr Houlahan also produces monthly invoices rendered to the derivativeplaintiffs by the respondents' solicitors for February, March, and April 2023, togethertotalling approximately $89,000 including GST. The appellants contend that theseinvoices suggest that the total costs of the derivative action will exceed the $1 millionestimate provided by Mr Beverley.[47] Mr Beverley has filed evidence in response, but his primary position is that theapplication to adduce further evidence should be declined.[48] Rule 45(1) of the Court of Appeal (Civil) Rules 2005 permits this Court togrant leave for the admission of further evidence on appeal. The principles to beapplied on such an application are well-established. Further evidence will generallynot be admitted on appeal unless it is fresh, credible, and cogent. Evidence is freshonly if it could not, with reasonable diligence, have been adduced at trial.Evidence that is not fresh may be admitted but only in exceptional and compellingcircumstances.26 Evidence is cogent only if it may have a material bearing on theoutcome of the appeal.26 Rae v International Insurance Brokers (Nelson Marlborough) Ltd [1998] 3 NZLR 190 (CA) at192–193; approved in Paper Reclaim Ltd v Aotearoa International Ltd (Further Evidence) (No 1)[2006] NZSC 59, [2007] 2 NZLR 1 at [6], n 1.[49] We accept that the evidence is fresh apart from the letter dated 22 April 2021sent by Messrs Leckie, Morrison and Beverley to the advisory committee followingthe mediation. That letter adds nothing material and there are no exceptional orcompelling circumstances that could justify its admission. Although Messrs Leckieand Morrison obtained an affidavit from Mr Cleland in opposition to the Beverleys'application to bring a derivative action, we accept that they were not made aware ofthe meeting he had with Mr Beverley in late 2021 at the time of the hearing. We acceptthis was not through any lack of diligence on their part. The other evidence relates toevents that took place after the hearing in the High Court and is therefore also fresh.The evidence is credible. However, for the reasons summarised below, we considerthat none of the evidence could have any material bearing on the outcome of the appealand it is therefore not cogent.[50] In our view, the appellants significantly overstate the importance of the newevidence for present purposes. The central issue on the appeal is whether the Judgewas wrong to find that the derivative plaintiffs had a reasonably arguable claim thatthe appellants misused company information or diverted a corporate opportunity.The Judge was not conducting a mini trial when considering whether leave should begiven. He was not able to do more than make a preliminary assessment based on theaffidavits filed and without any of the evidence being tested. The Judge's assessmentwas appropriately made largely based on the commercial arrangements entered into,the particular responsibilities assumed by the appellants and the uncontroversialdocumentary evidence as to the key events. Given the preliminary nature of theassessment of whether the claims are sufficiently arguable to warrant pursuit, freshevidence would need to be of a potent character to justify admission on appeal. Noneof the proposed evidence comes anywhere close to meeting this threshold.[51] The evidence of the meeting between Messrs Beverley and Cleland inlate 2021, which took place long after the dispute arose, provides little or no assistanceon the question of whether Messrs Leckie and Morrison breached their duties asdirectors owed to the derivative plaintiffs. The correspondence between the parties inNovember and December 2022 produced by Mr Houlahan falls into the same category.The evidence as to the costs incurred by the derivative plaintiffs over a three-monthperiod following the issue of the High Court judgment does not undermine thecredibility of Mr Beverley's earlier costs estimate. In summary, we do not considerany of the proposed new evidence can provide any material assistance on the questionof whether the Judge was correct to grant leave to bring the derivative action.[52] The application for leave to adduce further evidence must accordingly bedeclined.Submissions on appeal[53] Mr Smith KC, for the appellants, submits that the claims in the derivativeaction all depend directly or indirectly on the proposition that Messrs Leckie andMorrison, through Lewis Tucker and other entities of theirs, diverted for themselves acorporate opportunity belonging to one or more of the derivative plaintiffs and/or usedinformation belonging to one or more of them. He says the statement of claim doesnot identify the derivative plaintiff to which the corporate opportunity or theinformation at issue belonged. He says it cannot be assumed that an act or omissionby Mr Leckie or Mr Morrison constituting a breach of duty owed to one of thederivative plaintiffs would necessarily constitute a breach of duty owed to either orboth of the other derivative plaintiffs. The Judge was required to consider each of thefactors set out in s 165(2) of the Act as they applied to each derivative plaintiff.It follows, in Mr Smith's submission, that the Judge was wrong when he stated thatthere was an "air of unreality" about considering the roles of the General Partner, theManager and H1 "in isolation", and that it would be "artificial to divide each one fromthe other on the basis of the precise role they were to perform".27[54] Mr Smith submits that the Judge was also wrong to state there was a factualdispute he could not resolve as to whether the parties agreed that any subsequentafforestation fund would be conducted through the derivative plaintiffs. He says thesewere special purpose vehicles with no purpose or field of activity outside theDrylandcarbon One Limited Partnership. Mr Beverley's own evidence supported theevidence of Messrs Leckie and Morrison that the parties envisaged that a new generalpartner and manager would be incorporated for the purposes of any new fund.27 High Court judgment, above n 1, at [54].[55] Mr Smith argues that this error tainted the rest of the judgment. For example,he says the Judge was wrong to state that there was overwhelming evidence thatMessrs Leckie and Morrison had utilised information available to them "by virtue oftheir positions as directors of the [derivative] plaintiffs" to establish the second fund.28Mr Smith submits that the information came to the Beverleys and Messrs Leckie andMorrison through their joint personal efforts prior to the incorporation of the derivativeplaintiffs. He says the derivative plaintiffs have no right, interest or entitlement to anyof this information and the corporate opportunity does not belong to any of thederivative plaintiffs, but rather to their shareholders. He argues that the essence ofMr Beverley's grievance is a breach of an alleged understanding he had withMessrs Leckie and Morrison that any subsequent fund would be pursued and ownedjointly. He says this grievance should be pursued by the Beverleys directly, notderivatively through the derivative plaintiffs.[56] In summary, Mr Smith submits that the dispute does not concern the derivativeplaintiffs and should have been left to be determined between the appropriate parties,being the Beverleys and Messrs Leckie and Morrison in the separate proceedingsalready on foot.[57] For similar reasons, Mr Olney, who presented this part of the argument for theappellants, submits that the Judge was wrong to order that the costs of the proceedingsshould be borne by the derivative plaintiffs in the first instance. In particular, he saysthe position of each derivative plaintiff differs materially from the others.The General Partner has no assets, employees, or revenue. He says its role is simplyas an empty vessel for the liabilities of the partnership and a subsequent fund wouldbe of no benefit to it because it receives no revenue. H1 is merely a holding companyand, from late 2019, it was clear there was never going to be agreement by itsshareholders to pursue any other activity. The only trading entity with meaningfulrevenue is the Manager. However, the monthly costs of the litigation are likely toexceed the budgeted monthly base fee payable to the Manager of approximately$20,000. It is therefore questionable how any of the derivative plaintiffs can fund thecosts which may not be recoverable if the proceeding proves to be without merit.28 At [76].Further, if H1 is required to bear the costs of the proceedings, Messrs Leckie andMorrison would effectively be required to help fund claims against themselves. MrOlney submits that they cannot reasonably be required to inject capital to pursue aclaim against themselves or provide a guarantee to a third-party funder.[58] Mr Colson KC, for the first respondents, supports the Judge's analysis. He saysthe Judge correctly applied, in an entirely conventional manner, the settled law relatingto derivative actions and directors' duties. He emphasises that the focus must be onthe statutory and fiduciary duties owed by Messrs Leckie and Morrison as directors ofthe derivative plaintiffs. These claims can only be pursued by the derivative plaintiffsand the s 174 proceedings are not an appropriate vehicle for them. Mr Colson saysthe question on a claim for diversion of a corporate opportunity is not whether theopportunity belonged to the derivative plaintiffs in a proprietary sense but, rather,whether the opportunity was sufficiently connected to them. It also does not matterthat the derivative plaintiffs may have been unable to pursue the opportunity.The authorities are clear that it is no answer to a claim against a director for breachinghis or her fiduciary duty by diverting a corporate opportunity without consent that theprospects of the company itself pursuing the opportunity are remote or evennon-existent. Further, he makes the point that whether a corporate opportunity hasbeen diverted is not dependent on the use of confidential information.Assessment[59] Section 165 of the Act relevantly reads:165 Derivative actions(1) Subject to subsection (3), the court may, on the application of ashareholder or director of a company, grant leave to that shareholderor director to—(a) bring proceedings in the name and on behalf of the companyor any related company; or(b) intervene in proceedings to which the company or any relatedcompany is a party for the purpose of continuing, defending,or discontinuing the proceedings on behalf of the company orrelated company, as the case may be.(2) Without limiting subsection (1), in determining whether to grant leaveunder that subsection, the court shall have regard to—(a) the likelihood of the proceedings succeeding:(b) the costs of the proceedings in relation to the relief likely tobe obtained:(c) any action already taken by the company or related companyto obtain relief:(d) the interests of the company or related company in theproceedings being commenced, continued, defended, ordiscontinued, as the case may be.(3) Leave to bring proceedings or intervene in proceedings may begranted under subsection (1), only if the court is satisfied that either—(a) the company or related company does not intend to bring,diligently continue or defend, or discontinue the proceedings,as the case may be; or(b) it is in the interests of the company or related company thatthe conduct of the proceedings should not be left to thedirectors or to the determination of the shareholders as awhole.(6) Except as provided in this section, a shareholder is not entitled to bringor intervene in any proceedings in the name of, or on behalf of, acompany or a related company.[60] The primary focus of the appeal is on the criterion in s 165(2)(a), namely thelikelihood of the proceedings succeeding. We will therefore commence our analysisby addressing separately the two core elements of the claim on behalf of eachderivative plaintiff — diversion of commercial opportunity and misuse of companyinformation.Diversion of commercial opportunity[61] Directors may not pursue for their own benefit business opportunities that areconnected with the company's business unless the company consents.29 For thereasons set out below, we agree with the Judge that each of the derivative plaintiffshas a reasonably arguable claim that Messrs Leckie and Morrison acted in breach oftheir fiduciary and statutory duties in establishing the Forest Partners Limited29 He v Chen [2014] NZCA 153, [2014] NZCCLR 18 at [35] citing Peter Watts "Liability forProfiting" in Peter Watts, Neil Campbell and Christopher Hare Company Law in New Zealand(1st ed, LexisNexis, Wellington, 2011) 495 at 14.1.2.Partnership and associated management structure for their own benefit and withoutregard to the best interests of the derivative plaintiffs.[62] The business opportunity to establish and manage the second carbonafforestation fund is self-evidently a close match with the business carried on by thederivative plaintiffs. Forest Partner GP Ltd performs the same function for the ForestPartners Limited Partnership as does the General Partner of the Drylandcarbon OneLimited Partnership. Lewis Tucker FP Management Ltd performs a rolecorresponding to that of the Manager in respect of the Drylandcarbon One LimitedPartnership. Lewis Tucker Forest Partners Ltd is the holding company, equivalent toH1. Both limited partnerships were formed for the same purpose of generating carboncredits in a cost-effective manner for corporate limited partner investors. There is evenconsiderable overlap in the identity of the limited partners. It is not appropriate toexpress any concluded view in the context of a leave application, but there appears tobe a sufficiently close connection to engage the commercial opportunity doctrine.[63] While it may be a contentious factual issue that can only be resolved at trial, italso appears to be arguable on the basis of the evidence filed to date that the partiesenvisaged the possibility of working together on a second carbon afforestation fund,assuming the first proved to be successful. Demand for a further fund was likely.The inclusion of "One" in the name given to the limited partnership tends to indicatethat others might follow to meet this expected demand. The close attention given tothe position of affiliates in the exclusivity provisions in the Limited PartnershipAgreement and the Management Services Agreement shows it was contemplated thatsuch affiliates might participate in a subsequent fund once all the capital in the existingfund had been fully committed and there was no longer any risk of competition forsuitable forestry blocks. Had it not been for the breakdown in the relationship betweenthe Beverleys and Messrs Leckie and Morrison, H1 could have been used to hold theshares in any newly-formed companies to fill the roles of manager and general partnerin a subsequent limited partnership and associated fund. There are also otherpossibilities. In any event, as the Judge noted, it is not necessary for a plaintiff toprove that it could have taken up the commercial opportunity itself.3030 Holden v Architectural Finishes Ltd (1996) 7 NZCLC 260,976 (HC) at 261,028.[64] It is plainly arguable that Messrs Leckie and Morrison failed to act in the bestinterests of the derivative plaintiffs when taking steps to establish the second fund fortheir own benefit, including by transferring staff to Lewis Tucker and seeking releasefrom the exclusivity restrictions to enable their companies to participate and benefitfrom a second fund while expressly excluding the derivative plaintiffs from the ambitof the proposed release.[65] We were not referred to any documentary evidence showing that theshareholders of the derivative plaintiffs consented to Messrs Leckie and Morrisonexploiting this commercial opportunity for their own benefit and to the exclusion ofthe derivative plaintiffs. The heads of agreement did not address the topic and wasnever signed. No shareholders agreement was ever agreed or formalised. Nor doesthe mediation agreement sanction the establishment of a new fund by Messrs Leckieand Morrison for their benefit. While we acknowledge the language of the agreementis cryptic and its proper interpretation may be open to debate, the provision theappellants rely on (at sub-cl iv below) does not appear to go that far:The parties will use reasonable endeavours to agree a form of shareholders'agreement (based on the 2019 Buddle Findlay draft) and constitution for [H1]within 3 weeks, with key principles as follows:i. Anyone with a 50% interest can appoint half of the directors.ii. Board decisions must be unanimous.iii. Form of SHA and constitution only in effect once newinvestor acquires [the Beverleys'] interest.iv. Specifically, no commitment to a new fund with replacementinvestor. Buying into current structure.If the parties are unable to agree a form of shareholders' agreement within the3 week period, the parties will return to mediation to agree the definitive form.[66] Messrs Leckie and Morrison made it clear in this clause that they were notmaking any commitment to pursue a new fund with a replacement investor, but thewording does not exclude that prospect. More importantly, it does not constituteauthorisation on the part of the Beverleys as 50 per cent shareholders of H1 forMessrs Leckie and Morrison to pursue a second fund for their own benefit, contraryto H1's best interests, and notwithstanding the fiduciary and other duties owed by thedirectors to each of the derivative plaintiffs under the "current structure".[67] We do not accept that the General Partner and the Manager cannot pursue thisclaim because of the respective exclusivity provisions in the Limited PartnershipAgreement and the Management Services Agreement. As we have seen, cl 6.4 of theLimited Partnership Agreement was drawn in a manner that expressly contemplatesthe General Partner being released from the exclusivity obligations by a specialresolution of the partnership. Similarly, cl 3.5 of the Management Services Agreementcontemplates the Manager being released from its exclusivity obligations by a specialresolution of the partnership. It may well be that other corporate vehicles would havebeen used in practice for any subsequent fund, but the possibility of the GeneralPartner or the Manager doing so was not excluded.Misuse of company information[68] Section 145 of the Act prohibits a director who has information in his or hercapacity as a director from disclosing or making use of that information. Thisprohibition is subject to limited exceptions, including that the information may bedisclosed or used for the purposes of the company. The information need not be of aconfidential character.[69] The statement of claim pleads a long list of categories of company informationalleged to have been used by Messrs Leckie and Morrison in developing the marketingmaterials for the new fund and then shared with their companies in the Forest PartnersLimited Partnership structure. As noted, the Judge considered the evidence was quiteoverwhelming that Messrs Leckie and Morrison utilised information available to themas directors to establish the second fund, including in the production of theForest Partners investment flyer where the similarities were striking. The Judge wasalso satisfied it was arguable that Messrs Leckie and Morrison used information onlyavailable to them through their involvement as directors of the derivative plaintiffssuch as the appetite of potential investors to participate in a new fund, the likelyinvestment performance potential of a new fund, and the arrangements for governanceand control that were likely to be acceptable to potential investors. The Judgeconsidered this information would be of considerable value.[70] We agree with the Judge that this claim is also arguable. The argumentsadvanced by Messrs Leckie and Morrison do not persuade us that this claim cannotsucceed. We accept that some of the information will have been known toMessrs Leckie and Morrison prior to the formation of the derivative plaintiffs and theestablishment of the Drylandcarbon One Limited Partnership. However, othervaluable information is likely to have been gained by Messrs Leckie and Morrison asdirectors of the derivative plaintiffs and used by them in establishing the second fund.This would include information relating to the administration of the fund, the actualperformance of the fund from the perspective of both the investors and management,the appetite of investors for a second fund, and the terms that would likely beacceptable to investors.Costs of the derivative action[71] Section 166 of the Act provides that the court shall order that the whole or partof the reasonable costs of bringing derivative proceedings must be met by the companyunless the court considers it would be unjust or inequitable for the company to bearthose costs.[72] There is clearly some overlap between the derivative proceeding and theoppression/unfair prejudice proceeding brought by the Beverleys seeking relief unders 174 of the Act. However, the latter claim is pursued by the Beverleys in their capacityas shareholders. The derivative claims are of a different character and can only bepursued by the derivative plaintiffs. This is because the directors' duties claimed tohave been breached were owed by Messrs Leckie and Morrison solely to the derivativeplaintiffs, not to the Beverleys as shareholders. We therefore do not accept thesubmission that the Judge should have left the dispute to be determined between theshareholders in the context of the s 174 proceeding. That proceeding is not anavailable means of vindicating breaches of fiduciary and other duties owed by thedirectors to the companies.[73] The derivative claims have high potential value and the expected costs ofpursuing them are not disproportionate to the amounts realistically in issue.We consider that a prudent businessperson acting in their own interest would pursuethe claims. It is helpful to consider the likely response if, for example, an independentdirector of any one or more of the derivative plaintiffs (if there had been one) hadchosen to exploit the opportunity to establish a second fund using companyinformation. It seems unlikely that the Beverleys and Messrs Leckie and Morrisonwould have been content to stand by, allow that to happen, and not cause the derivativeplaintiffs to pursue claims against the independent director for breach of fiduciary andother duties owed to the relevant company or companies.[74] The claims are pursued for the benefit of the derivative plaintiffs and therefore,on the face of it, it does not appear to be unjust or inequitable for the companies tomeet the reasonable costs of the proceedings, at least in the first instance. We do notconsider that Messrs Leckie and Morrison can displace the normal statutory costspresumption by pointing to their own substantial shareholding in the derivativeplaintiffs as meaning that they will effectively be partly funding the claims againstthemselves.31[75] In terms of the Judge's order, the liability of the derivative plaintiffs to meetthe costs is joint and several. The fact that the General Partner may not have assets orincome available to meet the costs does not mean a prudent businessperson in itsposition would not pursue the claims. In practical terms, leaving aside the possibilityof assistance being available from an external funder, the General Partner has thebenefit of funding from the Manager and H1 derived from income available under theManagement Services Agreement.[76] The Beverleys and their solicitors owe fiduciary duties to the derivativeplaintiffs to act properly and in the best interests of the companies in pursuing thederivative proceedings. Only the reasonable costs of pursuing the proceedings comewithin the scope of the order. The ultimate incidence of costs will of course bedetermined later. The appellants have not persuaded us that it would be unjust orinequitable for the derivative plaintiffs to meet the costs in the meantime.Result[77] The application for leave to adduce further evidence is declined.[78] The appeal is dismissed.31 A similar argument was rejected by Winkelmann J in Presley v CallPlus Ltd [2008] NZCCLR 37(HC) at [67].[79] The appellants must pay costs to the first respondents for a standard appeal ona band A basis and usual disbursements.Solicitors:Mallett Partners, Wellington for AppellantsBell Gully, Wellington for First Respondents