FONG & ANOR V WONG & ANOR HC AK CIV-2008-404-005547

FONG & ANOR V WONG & ANOR HC AK CIV-2008-404-005547 4 December 2008IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY CIV-2008-404-005547BETWEEN NEVILLE FONG AND JUNE CHONG Plaintiffs AND CHRISTOPHER SHANE WONG AND ANGELA KIM FONG Defendants Hearing: 18 November 2008 Appearances: P Ahern and N Farrands for Plaintiffs A Grant and A Dickson for Defendants Judgment: 4 December 2008 at 1:30 pmJUDGMENT OF ASHER JThis judgment was delivered by me on 4 December 2008 at 1:30 pm pursuant to Rule 540(4) of the High Court Rules .. Registrar/Deputy Registrar .. DateSolicitors: Morrison Kent, PO Box 222 Auckland Glaister Ennor, PO Box 63, Auckland Copy: A Grant, Barrister, PO Box 2185 Shortland Street, AucklandTable of ContentsParagraph NumberIntroduction [1]Outline of facts [3]Principles to be applied in an application for summary judgment[16]Section 149 of the Companies Act 1993 [19]Was there a failure to pay fair value in breach of s 149? [33]Consequences if there is a breach of s 149 [43]Conclusion on s 149 and meaning of "fair value" [46]Other matters relating to fair value [47]Other possible defences [50]Result [51]Introduction[1] The plaintiffs, Neville Fong and June Chong, seek summary judgment against the defendants, Christopher Wong and Angela Fong, in the form of an order that the defendants specifically perform their obligations under a deed of dissolution of partnership. [2] The key issue is whether the defendants should receive for their shares in a company a "fair market value" involving a discount for their minority shareholding, or rather whether the value of the shares should be calculated on the basis of their "fair value", without a discount.Outline of facts[3] Mr Fong, the first-named plaintiff, is the father of the second-named defendant, Angela Wong (called Angela Fong in the statement of claim but Mrs Wong hereafter). Mrs Wong is in turn married to Mr Wong, the first-named defendant. Ms Chong is Mr Fong's sister and the second-named plaintiff. Mr Fong and Ms Chong are trustees of a trust called the Hobson Trust. Mr Chong appears to have made all the decisions and to have been the active trustee for the Hobson Trust. The Wongs are the trustees of another trust, the Cobblestone Trust. [4] In 2005 Mr Wong with the support of Mrs Wong wished to acquire certain businesses. They turned to Mrs Wong's father, Mr Fong, for finance to assist them in this venture. Ultimately a company was formed, Pavé Capital Limited, of which the Hobson Trust owned 68 per cent of the shares and the Cobblestone Trust 32 per cent of the shares. Mr Fong and Mr Wong are the two directors of Pavé Capital. [5] The Cobblestone Trust's only asset was its shareholding in Pavé Capital. Mr and Mrs Wong had few resources. To enable the Cobblestone Trust to meet its obligations to contribute capital as a 32 per cent shareholder in Pavé Capital,Mr Fong arranged for the Hobson Trust to lend monies to the Cobblestone Trust ("the loan"). [6] During the period between 2005 and 2007 Pavé Capital acquired three businesses. Mr Wong was the driving force behind these acquisitions, identifying the businesses and organising the purchases. Mr Fong through the Hobson Trust arranged the funding for the acquisition of these businesses. [7] The three businesses acquired by Pavé Capital appear to have been successful and Pavé Capital was profitable. Unfortunately in about September 2007 differences arose between Mr Fong and the Wongs. It seems that Mr Wong had a different idea as to how to grow the company to that of Mr Fong. This difference led to a breakdown in the family and business relationship. [8] There then followed months of negotiations through the rest of 2007 as the parties sought to find a way to dissolve their relationship. From January 2008 the negotiations involved the parties' lawyers. [9] The outcome of this lengthy negotiation was that the parties' lawyers drafted and the parties signed a document called a "Deed of dissolution in respect of shareholders of Pavé Capital Limited" ("the deed"). The parties were Mr Fong and Ms Chong as trustees of the Hobson Trust, the Wongs as trustees of the Cobblestone Trust, Mr Fong in his personal capacity, Mr Wong in his personal capacity, and Pavé Capital. Under the deed the Cobblestone Trust was to sell its shares in Pavé Capital to the Hobson Trust. Pavé Capital was to sell its shares in a subsidiary, Pavé Consumer Brands Limited, to the Cobblestone Trust. The Cobblestone Trust was to repay to the Hobson Trust the principal and interest accrued on the loan made to it. As at March 2008 the outstanding principal and interest on the loan amounted to $536,521. The value of the shares in Pavé Capital and Pavé Consumer Brands was to be determined by Eric Lucas of PricewaterhouseCoopers ("PWC"). [10] Paragraph 9 of the deed provides:The Shares shall be valued at their fair market value, and be subject to any cost normalisations as determined by the Valuer. The valuations of theShares shall be based upon the financial accounts of the Company and the Subsidiaries as at 31 March 2008. [emphasis added]Paragraph 14 of the deed provides that within ten days of receiving the valuer's valuation of the shares, any party would be entitled to request the valuer to reconsider any aspect of the valuation. [11] Thus the deed involved a settlement requiring three calculations. First, the determination of the value of the shares in Pavé Capital which the Hobson Trust was to purchase from the Cobblestone Trust. Second, the determination of the value of the shares in Pavé Consumer Brands which the Cobblestone Trust was to purchase from Pavé Capital. Third, the determination of the amount the Cobblestone Trust was to repay to the Hobson Trust under the outstanding loan. [12] Eric Lucas of PWC duly completed the valuation. It provided for the value of the Cobblestone Trust's 32 per cent shareholding in Pavé Capital to be discounted by 30 per cent due to the minority nature of the interest. The value of Pavé Capital's 75 per cent shareholding in Pavé Consumer Brands was also discounted due to the minority nature of the interest, but at the lower rate of 10 per cent. [13] The Wongs objected to the discount given to the value of the Cobblestone Trust's shares in Pavé Capital and sought reconsideration in terms of paragraph 14 of the deed. PWC issued the final valuation on 4 July 2008 without change. [14] The Wongs are not satisfied with PWC's final valuation of the Cobblestone Trust's shares in Pavé Capital. They consider the discount made for the Cobblestone Trust's minority shareholding in Pavé Capital to be unfair. As a consequence there has been no settlement of the sale and purchase of the shares under the deed. The purchase of the shares in Pavé Consumer Brands and the value of those shares has not been impugned, or indeed discussed in submissions. [15] The plaintiffs' application for summary judgment seeks orders requiring the defendants to "perform their obligations under the deed of dissolution". If so ordered, this would involve the Cobblestone Trust paying the price for the shares inPavé Capital as determined by the PWC valuation, which the defendants assert does not amount to a fair value.Principles to be applied in an application for summary judgment[16] The principles to be applied to a summary judgment application are well settled and were not subject to any competing submissions. Rule 136 of the High Court Rules provides:136 Judgment where there is no defence or where no cause of action can succeed(1) The Court may give judgment against a defendant if the plaintiff satisfies the Court that the defendant has no defence to a claim in the statement of claim or to a particular part of any such claim. (2) The Court may give judgment against a plaintiff if the defendant satisfies the Court that none of the causes of action in the plaintiff's statement of claim can succeed.[17] It was said in Pemberton v Chappell [1987] 1 NZLR 1 (CA) at 3:In this context the words "no defence" have reference to the absence of any real question to be tried. That notion has been expressed in a variety of ways, as for example, no bona fide defence, no reasonable ground of defence, no fairly arguable defence.[18] The principles were conveniently summarised in the recent Court of Appeal decision in Krukziener v Hanover Finance Ltd [2008] NZCA 187 at [26]:[26] The principles are well settled. The question on a summary judgment application is whether the defendant has no defence to the claim; that is, that there is no real question to be tried: Pemberton v Chappell [1987] 1 NZLR 1 at 3 (CA). The Court must be left without any real doubt or uncertainty. The onus is on the plaintiff, but where its evidence is sufficient to show there is no defence, the defendant will have to respond if the application is to be defeated: MacLean v Stewart (1997) 11 PRNZ 66 (CA). The Court will not normally resolve material conflicts of evidence or assess the credibility of deponents. But it need not accept uncritically evidence that is inherently lacking in credibility, as for example where the evidence is inconsistent with undisputed contemporary documents or other statements by the same deponent, or is inherently improbable: Eng Mee Yong v Letchumanan [1980] AC 331 at 341 (PC). In the end the Court's assessment of the evidence is a matter of judgment. The Court may take a robust and realistic approach where the facts warrant it: Bilbie Dymock Corp Ltd v Patel (1987) 1 PRNZ 84 (CA).I propose following this approach.Section 149 of the Companies Act 1993[19] Mr Grant for the defendants submitted that s 149 of the Companies Act 1993 requires the Hobson Trust to acquire the Pavé Capital shares from the Cobblestone Trust at not less than a "fair value". He submitted that given various authorities referred to later, a "fair value" could not include a minority discount. Mr Ahern for the plaintiffs submitted that s 149 did not apply and did not require a departure from the words of the deed. [20] Section 149 of the Companies Act 1993 provides:149 Restrictions on share dealing by directors(1) If a director of a company has information in his or her capacity as a director or employee of the company or a related company, being information that would not otherwise be available to him or her, but which is information material to an assessment of the value of shares or other securities issued by the company or a related company, the director may acquire or dispose of those shares or securities only if,— (a) In the case of an acquisition, the consideration given for the acquisition is not less than the fair value of the shares or securities; or (b) In the case of a disposition, the consideration received for the disposition is not more than the fair value of the shares or securities. (2) For the purposes of subsection (1) of this section, the fair value of shares or securities is to be determined on the basis of all information known to the director or publicly available at the time. (4) Where a director acquires shares or securities in contravention of subsection (1)(a) of this section, the director is liable to the person from whom the shares or securities were acquired for the amount by which the fair value of the shares or securities exceeds the amount paid by the director. [21] At first sight Mr Grant's submission might appear surprising. It is suggested that the plain wording of an agreement negotiated at arm's length and whichprovides for a certain method of valuation can be put to one side because of the provisions of s 149. [22] The effect of s 149 was considered in Thexton v Thexton [2002] 1 NZLR 780 (CA). Mr Thexton Snr worked for a business run by his son, Mr Thexton Jnr. Mr Thexton Snr retired, owning a minority percentage of shares. He agreed to sell his shares to Mr Thexton Jnr at an agreed price of $250,000. After Mr Thexton Snr's death his widow issued proceedings claiming that the purchase price did not reflect the fair value of the shares. The High Court held that s 149 required the shares to be transferred for $790,000, their fair value, rather than the lower price of $250,000 which they had earlier agreed: Thexton v Thexton [2001] 1 NZLR 237 (HC). [23] The High Court's decision was upheld by the Court of Appeal. The Court observed that s 149(1) has two elements. The first is that the director had information in his or her capacity as a director that would not otherwise be available to him or her but which was material to the assessment of the value of the shares. If the answer is yes, the second element is the requirement that those shares may be acquired or disposed of only if the consideration given or received is not less than or not more than the fair value of the shares: at [13]. The Court of Appeal went on to hold at [16]:The third conclusion which follows from the two-stage analysis of s 149(1) is that, if the question at the first stage is answered Yes, the consequence is that the director may only buy or sell at fair value (or above fair value if buying and below fair value if selling). Neither disclosure to the other party nor the agreement of the other party can avoid that consequence.[emphasis added]The Court made it clear that even if the parties both had access to the same confidential information, s 149 still applied: at [14]. [24] The conclusion of the High Court and Court of Appeal in Thexton v Thextonwas reached after a consideration of the report of the New Zealand Law CommissionCompany Law (NZLC PP5 1987), which led to the enactment of s 149. That report made it clear that a director in possession of material price-sensitive information has two options: to abstain from trading or to ensure that the person with whom he or sheis dealing receives fair value: at para 542. The Court of Appeal pointed out that this approach avoids any arguments about the extent of the disclosure of confidential information, and whether it is understood: at para 20. [25] Four matters must be established before the application of s 149 is triggered: a) The person acquiring or disposing must be a director of the company in which the shares are held. b) He or she must have information in his or her capacity as a director or employee of the company or a related company. c) That information would not otherwise be available to him or her but for the directorship. d) The information must be material to an assessment of the value of the shares or other securities issued by the company or a related company. [26] Mr Fong is the active trustee of the purchaser trust. Mr Fong is undoubtedly a director of Pavé Capital. The shares he is purchasing are in Pavé Capital. In his capacity as a director he had information about Pavé Capital. The affidavits indicate that he had knowledge of the day-to-day running of Pavé Capital, and was very familiar with the assets of the company and its prospects. He knew and understood all its activities. That information would not have been available to him but for his directorship of Pavé Capital and his resulting involvement in the company's affairs. That information is on its face material to an assessment of the value of the shares in Pavé Capital. Thus, it is arguable that the four elements of s 149 are established. [27] Mr Ahern for the plaintiffs accepted that Mr Fong was a director of Pavé Capital, but submitted that the purchase is really taking place in Mr Fong's capacity as a shareholder. However, s 149(1) does not on its face exempt directors who are also shareholders, and there is no policy reason to limit the application of s 149 to purchases by directors who are not shareholders. Shareholders have varying degrees of knowledge of a company's affairs. It is common for the directors in smallcompanies to be shareholders, and it would drastically limit the application of the section to restrict it to only those directors who are not already shareholders. [28] Mr Ahern also submitted that s 149 did not apply as Mr Fong as a director was not acquiring the shares personally but in his capacity as trustee for the Hobson Trust. However, I see no reason why s 149 should not apply simply because a purchasing director will hold the purchased shares on trust. The section does not on its face provide such an exemption. To read in such an exemption would be to provide a way for directors to get around s 149, defeating the clear intention behind the section which is to prevent the exploitation of insider knowledge. Section 149 does refer to the director having information "in his or her capacity as a director", but there is no such "capacity" qualification in relation to the prohibition on "the director" acquiring or disposing of the shares. If a director acquiring or disposing is enough, that will be so whether or not the director is doing so in a trustee or beneficial capacity. The fact that the named purchaser is a director is sufficient to bring the situation within the words of s 149. [29] Nor does the fact that Mr Fong was only one of two purchasers of the shares affect its application. The prohibition on trading applies even if one of the joint purchasers is not a director. To conclude otherwise would be to leave a loophole by which directors could avoid the application of s 149. Mr Fong is a director, and his involvement means that s 149 applies. [30] Mr Ahern also submitted that it cannot have been envisaged that s 149 would apply to a transaction between two people with the same knowledge and information. However, s 149 makes no mention of the state of knowledge of the party claiming the benefit of the section, and such an interpretation would require the implication of a substantial qualification of its plain words. The issue was dealt with specifically in Thexton v Thexton at [14], where it was stated that it does not matter whether the other party has access to the information, except where it is publicly available in which event it would not be confidential. In this case the information was on its face confidential and not publicly available. This is sufficient for the purposes of the section, and the subjective knowledge of the party claiming the benefit of the section is irrelevant.[31] Mr Ahern emphasised the Cobblestone Trust's acceptance of "fair market value" as a contractual term. However, the reasoning and result in Thexton v Thexton means that even an express agreement between the parties as to the mode of valuation or value must be put to one side. The situation was even more extreme inThexton v Thexton where the value had actually been fixed by agreement between the parties at a certain price. That agreement was put to one side when s 149 was applied. It is clear that an express term as to value in an agreement must make way for the application of a fair value in terms of s 149. [32] I conclude, therefore, that it is arguable that s 149 applies and that the plaintiffs' purchase of the Pavé Capital shares from the defendants had to be at a "fair value".Was there a failure to pay fair value in breach of s 149?[33] It is necessary now to consider whether it is arguable that the approach of PWC in accordance with the deed and the resulting valuation amounted to a failure to provide for the payment of "fair value" in breach of s 149. "Fair value" is assessed on an objective basis: Thexton v Thexton at [10]. The Court of Appeal discussed the meaning of "fair value" with reference to the statement of Salmon J at [66] in the High Court at [10] in the Court of Appeal decision:The Act does not define "fair value". Nonetheless, subsection (2) suggests it as an objective concept. The information to be relied upon in determining that fair value is information that is known to the director and information that is publicly available.[34] The application of s 149 does not automatically result in a certain valuation formula being applied to ascertain fairness. Rather, "fair value" has to be assessed objectively, on a case by case basis, after an examination of all the relevant circumstances. Those circumstances can include oppressive behaviour by a majority shareholder. [35] In its engagement letter of 28 April 2008 PWC defined "fair market value" as:The price that would be negotiated in an open and unrestricted market between a knowledgeable, willing but not anxious buyer, and a knowledgeable, willing but not anxious seller, both acting at arms-length.PWC assumed that for the purposes of establishing "fair market value" a discount for the Cobblestone Trust's minority interest was appropriate. PWC's interpretation of the term "fair market value" was not challenged by Mr Grant in his submissions for the defendants. Rather, he submitted that despite the words in the deed, s 149 required that a "fair value" was the only test for valuing the shares. [36] It is general practice to incorporate a discount in the value of a minority shareholding when determining a "fair market value" for shares. The discount reflects the shareholder's lack of control over the affairs of the company, which makes the shares less valuable to an arm's-length purchaser on the open market. The application of such a discount was described as a "general practice" by the Court of Appeal in M Yovich & Sons Ltd v Yovich (2001) 9 NZCLC 262,490 at [40]. [37] But it may not be fair to apply a minority shareholder discount where the shares are to be purchased by a prejudiced shareholder in a small private company. This derives from the fact that it has long been recognised that some small private companies are in the nature of what the courts have described as quasi-partnerships. Lord Wilberforce in Ebrahimi v Westbourne Galleries Limited [1973] AC 360 (HL) observed at 379 that three elements characterise such quasi-partnership companies. They are, first, an association formed on the basis of a personal relationship involving mutual confidence; secondly, an agreement or understanding that all or some of the shareholders shall participate in the conduct of the business; and, thirdly, restrictions on share transfers. This description was recognised in Re Bird Precision Bellows Limited [1984] 3 All ER 444 at 449, affirmed by the Court of Appeal in [1985] 3 All ER 523. [38] In such cases there will be a difference between the "fair value" of the shares and the "fair market value" of the shares. As was observed by Lord Hoffmann inO'Neill v Phillips [1999] 2 All ER 961 at 975, a fair value in such circumstances will ordinarily be a value "representing an equivalent proportion of the total issue share capital, that is, without a discount for its being a minority holding".[39] The Court of Appeal in M Yovich & Sons Ltd v Yovich recognised the unique position of minority shareholders in quasi-partnership companies in the context of a High Court valuation of shares arising from a court-ordered purchase of shares. The Court held that to apply a discount to a proportionate value of a minority shareholding of a prejudiced minority shareholder would reduce the price for a parcel of shares, unfairly exploiting the weakness in the minority shareholder's position: at [56]. [40] Pavé Capital has the features of a quasi-partnership company as described by Lord Wilberforce in Ebrahimi v Westbourne Galleries. The company was born of an association based on a personal relationship of mutual confidence, Mr Fong and Mr Wong were to participate in running the company, and there were restrictions on share transfers. [41] Thus if the Cobblestone Trust as minority shareholder can show that it was prejudiced because of its minority position, "fair value" may be interpreted to mean that there should be no discount for a minority shareholding. However, the cases deciding that "fair value" does not include a discount for a minority shareholding have been decided in the context of oppression to the minority shareholder. The affidavits of the Wongs assert that pressure was applied by Mr Fong arising from his position as the controller of a majority of the shares, which may put the Wongs in the category of prejudiced shareholders. Such a proposition is certainly arguable. However, it is a matter of fact that cannot be determined in this application for summary judgment. [42] I conclude that there is an arguable defence that given that s 149 may apply, a "fair value" may not include a discount for the minority shareholding. As the deed provides for a valuation "fair market value", which has been interpreted as involving a discount for the minority shareholding, it is arguable that the purchase of the shares provided for in the deed is a breach of s 149.Consequences if there is a breach of s 149[43] Mr Grant submitted that because of the breach of s 149, the deed was an illegal contract under the Illegal Contracts Act 1970. However, s 5 of the Illegal Contracts Act provides that a contract lawfully entered into shall not become unenforceable by any party by reason of the fact that its performance is in breach of any enactment, unless the enactment expressly so provides or its object clearly so requires. In this case the deed could have been entered into lawfully, and it is arguable that the possible breach of s 149 in the course of performance of an aspect of it, namely payment for the transfer of the Pavé Capital shares, does not make the deed an illegal contract. Such an interpretation is supported by the rights of action given to the purchaser under s 149(4) and (5), which presuppose the settlement of the contract after the sale of the shares, and the ongoing existence of the contract. [44] However, it is arguable that a director cannot seek specific performance of an agreement which involves a breach of s 149. A court would not in its discretion to order specific performance direct a party to do something that was unlawful. Further, the Cobblestone Trust may be in a position to seek an injunction against the plaintiffs to prevent them acting in breach of s 149. On either approach the plaintiffs' claim would fail. [45] Further, s 149(4) provides:(4) Where a director acquires shares or securities in contravention of subsection (1)(a) of this section, the director is liable to the person from whom the shares or securities were acquired for the amount by which the fair value of the shares or securities exceeds the amount paid by the director.This gives the Wongs as trustees of the Cobblestone Trust a potential set-off as a defence against the plaintiffs' claim.Conclusion on s 149 and meaning of "fair value"[46] For the purposes of this application for summary judgment I conclude that s 149 applies to the sale of the Pavé Capital shares by the Cobblestone Trust to the Hobson Trust. As a consequence the defendants have an arguable defence that the"fair value" payable for the shares cannot include a discount for a minority shareholding because of the quasi-partnership nature of the company and the pressures that it is claimed led up to the execution of the agreement. If that defence were established, it would be seriously arguable that no order for specific performance as is sought by the Hobson Trust should be made or other relief be given.Other matters relating to fair value[47] There were submissions of the Wongs on what the parties "thought" the agreement meant. Mr Grant argued that Mr Wong thought that "fair market value" meant that there would be no discounting for a minority shareholding. I note that such a submission as to a contracting party's intention is not acceptable on ordinary contract interpretation principles. [48] In any event the parties' intentions are irrelevant where s 149 must be applied. Application of the section does not turn on any question of mistake or error on the part of the vendor of the shares, but rather on the simple question of whether the value is a fair value, considered objectively. The history of dealing may be relevant to the question of whether the valuation was "fair", but it is impossible properly to consider such a history in this summary judgment application. [49] In the course of submissions possible defences based on "fair market value" actually meaning "fair value" in the context of the agreement were touched on. However, such an interpretation, and any submission relating to rectification, were not fully argued and would involve an extensive analysis of the facts leading up to the agreement. It is not necessary to resolve these issues.Other possible defences[50] Mr Grant for the defendants raised other possible defences based on unconscionable bargain, duress and mistake. Given that I have found that there is an arguable defence based on s 149 and the meaning of "fair value" it is not necessary to consider or resolve these submissions and I do not do so.Result[51] The application for summary judgment is refused. [52] Costs are reserved... Asher J