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You are here: BAILII >> Databases >> High Court of Ireland Decisions >> Walls v. Walls Holding Ltd. [2004] IEHC 355 (5 November 2004) URL: http://www.bailii.org/ie/cases/IEHC/2004/355.html Cite as: [2004] IEHC 355 |
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Neutral Citation No: [2004] IEHC 355
Record No. 604 COS/2003
BETWEEN/
Applicant
Respondent
MR. JUSTICE SMYTH DELIVERED HIS JUDGMENT, AS FOLLOWS, ON FRIDAY, 5TH NOVEMBER 2004
In these proceedings, the Applicant seeks, by means and declarations referred to in the originating Notice of motion dated 18th December 2003, to prevent the Respondent from acquiring his shares in walls Properties Limited ('Properties') and Thornhill Properties Limited ('Thornhill') pursuant to the provisions of section 204(1) of the companies Act 1963.
The Facts
Properties, Thornhill and the Respondent ('Holdings') are all private companies and have common shareholders who are all members of the walls family. The Applicant holds ten ordinary shares in each of the Properties and Thornhill (amounting to 10% in Thornhill and just beneath 10% in Properties of the issued shares). The Applicant also holds 20 cumulative preference (or voting shares) in Holdings amounting to 10% of the issued shares.
The Applicant submitted that throughout the events that preceded this litigation Holdings was not an independent third party bidder. In this regard, it is to be noted that the controlling shareholder in Holdings is Liam Vincent Walls ('Liam'), who holds 106 (53%) of the voting shares. Michael Paul Walls ('Paul') holds 29 (14.5%) of the voting shares in holdings. It was submitted that Liam and Paul were the principal architects of the offer and this was not seriously disputed.
Together, they were the sole directors of Properties and Thornhill and Paul was, and is, the manager of both. In addition to controlling Holdings in general meeting, they are both executive directors with Liam as the chief executive officer and secretary of Holdings (and its group companies). Paul, though a managing director of Properties, is paid, for this executive position in Properties, by Holdings.
In both Properties and Thornhill, Paul holds 20 (20%) ordinary shares and in both these companies Liam holds 16 (16%) shares in each. In each of these companies, the children of Paul hold between them a further ten shares and the children of Liam hold between a further six shares. From the foregoing, it is clear that the principal architects of the offer, together with their near relatives, are the major shareholders of the transferee companies and (in addition to their positions as executive directors and the principal shareholders of Holdings) it was submitted by the Applicant they had a clear interest in the offer. I am satisfied and find as a fact, on the affidavit evidence, that there was no undue influence or coercion, on those who swore affidavits, exercised by either Paul or Liam and as a matter of probability on none of their children.
The evidence establishes that prior to the making of any offer to acquire the Applicant's shares on 7th October 2003, a meeting took place on 26th September 2003 between Michael Paul walls and the Applicant. I am satisfied that at that meeting the Applicant was informed that it was intended to make an offer, that an EGM would be held to consider it and that it was intended to process the offer in a short interval of time, as it was apprehended that an adverse tax regime might be introduced in the following Budget. At this meeting on 26th September the Applicant was given sight of a memorandum which was prepared by Michael Paul walls, which is referable to residential lands at Balgriffan, county Dublin. This document was not disclosed, though its existence was referred to, until a fifth affidavit was sworn on 12th may 2004, several months after the case was originally listed for hearing. The document, when exhibited, was referred to as having been "generated as a negotiating tool only". The memorandum refers to the then pre offer position and clearly indicates that PJW (Holdings) had "residual valuations producing circa 40K per residential site and WP (Properties) with a market valuation at 55/60K per site – is unlikely to produce a solution". The memorandum records an alternative proposal upon which the writer notes:
"The proposal has drawbacks for some individual shareholders but it is clearly in their overall interest and therefore I am prepared to fully support the proposal if it is acceptable to PJW (Holdings).
The writer goes on to record some of the benefits he perceives from a proposal made for an arrangement without attempting "to differentiate between the Holding company and Construction, but use only PJW:
"PJW opportunity to revalue acquired, assets upwards to strengthen balance sheet if required at some time. Can be presented as 'steal' using market valuations ...
There is no evidence of an independent share valuation having been sought or obtained prior to the making of an offer by the transferee company; and while there is an abundance of affidavits referring to property valuation, there is no disclosure to the Applicant or to the court of property "valuations" said to exist in the memorandum of 26th September 2003. It is no function of the court to engage in a consideration of the value attributed to the properties -- it is concerned with the fairness in the eyes of the majority of the offer. The price per share or share valuation is part of the offer, underlying the share valuation will be a valuation of the assets. However, the first and only independent
share valuation presented to the court is post the offer and its rejection by the Applicant, and obtained by the Applicant after the issue of proceedings.
There was some "without prejudice" correspondence in late September 2003, before the offer (whence these proceedings sprung) of 7th October was made. Briefly, the terms of the offer were:
1. It was open for acceptance until 500pm on 17th October 2003 (some ten days after the date of the covering letter).
2. In respect of Properties, each share was valued at €18,818.18, valuing the total issued shares capital at €20,550,000 .
3. In respect of Thornhill, €1.00 per share, valuing the total issued share capital at €100.
4. With regard to Properties, all shares were to be transferred upon purchase, but the purchase consideration was to be paid in six instalments commencing on 7th December 2003, with a final payment being made on 30th November 2009.
5. The offer was expressed as being conditional until valid acceptances were received from 80% of the transferees by 17th October 2003.
The concerned, besides the terms of the offer, also received (a) notice of the EGM of Holdings to be held on 16th October 2003 for the purpose of passing resolutions for the acquisition of the shares in Properties and Thornhill, (b) a consent to the short notice in respect of the EGM and a proxy form, and (c) written offers from Holdings to purchase shares in Properties and Thornhill.
I am satisfied and find as a fact that the offer documentation consisted not only the consideration the shareholders would be receiving, but also advised them of the importance of the transaction and that if they had any doubt they should seek independent legal advice. Furthermore, the Applicant received a copy of a letter dated 7th October 2003, addressed to Michael Paul walls by Beauchamps solicitors, who state that they had "been retained to advise each of the shareholders" in Properties and Thornhill on the proposed share sales. while criticism was made on the Applicant's behalf at the hearing that rights of pre-emption were referred to (paragraph (11) but no reference was made to the Articles of Association and the letter does not itself explain the purpose of the transaction and no reference is made to any valuation advice either as to (a) assets or (b) shares, I am satisfied that risks were expressly referred to and in particular that the deferred payments were not secured. The Applicant avers that he pleaded with Paul on several different occasions to be allowed to communicate with the retained solicitor for the shareholders so as to receive further information but was denied access. It is not entirely clear as to whether or who inhibited the access -- suffice it to say that if as averred the Applicant considered the advice was not "independent advice", he was entitled to (and the entitlement to obtain independent advice was drawn to his attention) seek his own independent legal or other advice. In fact, the Applicant did consult his own solicitors who, within the extended time for acceptance of the offer, wrote to Messrs Beauchamps by letter dated 15th October 2003, from which it is clear that the Applicant "will not be accepting the offers". The following day the Applicant did attend the EGM of Holdings (of which the minutes are exhibited), at which the shareholders (inter alia) were advised that the offer "allowed Holdings the potential to strengthen their balance sheet by acquiring Properties' assets potentially below market value". The meeting was also informed by Paul that he "had a series of valuations of the constituent parts of the company and, quite frankly, the totals do not come up to €44.2m". There is no disclosure of how many valuations were obtained, from whom obtained, on what information the valuations obtained were based and by whom sought and for what purpose or how such or any such could or could not (as the case may be) affect the valuation of the shares or the respective date(s) of the series of valuations. Without any apparent critical analysis of the statement made to the meeting, not less than four-fifths of the shareholders (to wit 88.9%) cast their vote. This vote was cast after "a wide ranging discussion during which the Applicant voiced his objections to the proposition insofar as he believed that in switching the properties from a company which paid dividends to a company which had not a history of doing so, he believed that his relative position was thus being eroded".
Notwithstanding the acceptance of the requisite majority to pass the resolution at the meeting of 16th October 2003, a further meeting or meetings took place between the Applicant and Liam, Pat Veale (Director of Holdings) and Shaun Greene (Financial controller of Holdings) to discuss the offer. On 28th October 2003, the Board of Directors extended the time for acceptance of the offer to 10th November 2003. Notices pursuant to Section 204 were served on 19th November 2003, allowing the Applicant until 19th December 2003 to accept the offer.
Neither the Applicant nor any of the other shareholders sought copies of any valuations prepared by the Respondent or otherwise referred to at the meeting of 16th October 2003, in advance of these proceedings.
Notwithstanding an extension of the period of time within which the offer could be accepted by the Applicant, he declined to do so. His refusal to accept the offer and his continued resistance to permit the acquisition of his shares (which he viewed and views as expropriation) in both Properties and Thornhill is grounded on the following principal reasons:
A. The offer to purchase the shares (in both companies) is at a substantial undervalue. It is not merely averred that the offer could have been more advantageous to shareholders, but that the entire shareholding of both companies was under valued by €15,108,425 (per the Carr valuation).
B. The payment by instalments of the purchase price was unfair in that the entire shareholding of each transferor shareholder was to be transferred on the payment of the first six instalments, leaving the transferor unsecured until the final payment was due at the end of 2009, some six years from the date of the offer. As a result, not only were the transferors unsecured for the duration of this period, but also capital gains tax was to be paid on the entire purchase consideration on transfer.
C. The offer process given to shareholders was fundamentally and materially unfair in terms of the information (in particular with regard to valuation of the shares and the assets which formed the core assets of Properties and Thornhill) which was not given to shareholders, the time limits imposed on them for accepting the offer and the advice which was provided by thesolicitors in relation to it.
D. The scheme of which the offer formed part was dependent upon each shareholder accepting the offer. The Articles of Association of Properties (but not of Thornhill) contained pre-emption provisions (which were triggered by the acceptance of the offer by each shareholder but which could only be waived in full if all of the shareholders waived their rights of pre-emption). Mr. Cush Sc, for the Applicant, contended that the attempt to "expropriate" the Applicant's shares was made in contravention of the contract of pre-emption and raised the following issues:
(i) whether, in the light of the contract of pre-emption the Respondent has the necessary 80% of the necessary shares to come within section 204 of the companies Act 2004.
(ii) whether, the contended disregard of the Applicant's contractual rights renders the offer unfair.
Section 204 of the companies Act 1963 provides:
" …. where a scheme, contract or offer involving the acquisition by one company ... of the beneficial ownership of all the shares ... in the capital of another company ... has become binding or been approved or accepted in respect of not less than four-fifths in value of the shares affected not later than the date four months after publication generally to the holders of the shares ... the transferee company may at any time before the expiration of the period of six months next following such publication give notice in the prescribed manner to any dissenting shareholder that it desires to acquire the
beneficial ownership of his shares, and when such notice is given the transferee company shall, unless on an application made by the dissenting shareholder within one month from the date on which the notice was given the court thinks fit to order otherwise 6e entitled and bound to acquire the beneficial ownership of those shares on the terms on which under the scheme, contract or offer has become binding or been approved or accepted is to be acquired by the transferee company."
It is common case that the provisions of the section are applicable and its time provisions complied with. The Applicant urges the court "to think fit and order otherwise" than sanction the action taken as a result of the not less than 80% of the shareholders accepting the offer of the transferee company. Section 204 does not require for its applicability that the holders of four-fifths majority of the countable shares be independent of or disinterested in the transferee company. If they have such an interest, that merely is a factor to be taken into account by a court in exercising its discretion under the section (see in the matter of Fitzwilton plc [2000] 2 ILRM 263).
The Law and Legal submissions
It is common case that the authorities show that the test as to whether "the court thinks fit to order otherwise" is a discretion which is dependent on whether or not the offer is unfair. It is likewise accepted that it is generally true that the onus of proving unfairness rests with the Applicant, but the Applicant submitted that in the context of this particular case the onus may be reversed, and relied on the case of In Re Bugle Press Ltd [1961] 1 Ch. 270). The Applicant, relying on this authority, pointed to the following elements of alleged unfairness:
- sale at undervalue
- unsecured instalments
- failure to provide adequate information/ breach of fiduciary duty
- inadequate time for acceptance
- inadequate advice
- breach of rights of pre-emption
In Re Hoare and Company Ltd [1933] 150 LT 374, Maughan J considered section 155 of the English Companies Act 1929, which, save as to the percentage majority, is in broad accord with our section 204.
It was decided in that case that if the percentage of shareholders, provided by statute, in the transferor company approve a scheme involving the transfer of the company's shares to a transferee company, prima facie, the offer must be taken to be a fair one, and the court will not "order otherwise" unless it is a affirmatively established that, notwithstanding the views of a very large majority of shareholders, the scheme is unfair. In Hoare's case, the Applicant contended that the offer was not fair particularly because the income of the shares would be reduced. The order sought was refused notwithstanding it being noted that if cash is to be paid at a future date, it should bear interest. The restraint to be exercised by the court in respecting the views of the majority of the shareholders was expressed by Evershed LJ in Re Press Caps Limited [1949] Ch. 434 at 45, thus:
"Prima facie then we should take the offer as fair for, to borrow the language of Maughan J, the court ought not to set up its own view of the fairness of the scheme in opposition to so very large a majority of the shareholders who are concerned.
Mindful of these general guidelines, it is nonetheless necessary to consider the separate elements of alleged unfairness.
Prior to considering the submissions of the parties on this issue, it is of prime importance to note the following:
(i) what is involved is a transfer of shares, not a transfer of land.
(ii) Prior to a completion or acceptance of the offer, the Applicant has/had a 9.09% shareholding in Properties and a 10% shareholding in Holdings.
(iii) If the scheme is completed, the Applicant will cease to hold any shares in Properties, but his shareholding in percentage terms in Holdings will increase from 10% to 11.10%. In short, not only does the Applicant receive his appropriate percentage benefit in cash like other shareholders, but in his case there is an increase in his percentage shareholding in the transferee company. This is in marked contrast to an outright acquisition of shares for cash only.
There is considerable controversy in the affidavits concerning the valuation of the lands and property. The question of value is obviously one about which opinions may differ. The assets underlying the value of the shares are of a mixed development of hotel, apartments, office block cum business park (my description). The offer, when put, advanced a number of reasons for having the interlinked elements under the control of the transferee company. Likewise, the necessity for the management of loans, costs of and ability to avoid disintegration of the elements of the development and the order in which developments were to be carried out were all part of the reasons given with the offer, and price only cannot be the sole basis for determining whether the offer as a whole is to be viewed as unfair. while understanding the argument based on valuations, it seems to me improbable that the majority of the shareholders accepted the combined worth of Properties and Thornhill at €20,550,100 if their combined net worth was in fact €35,568,425. Even if it was "a steal" (ie, extremely good value) and if the acquisition was ...
" . potentially below market value. As can be seen, this represents a truly win situation for Holdings ...
I am unable to accept the valuation figures as so definitive as not to leave great scope for differences and while mindful that the only valuation of shares exhibited is that produced by the Applicant long after these proceedings issued, I cannot conclude, as invited by Mr. Cush to do, that the offer is at a gross undervalue. An ex post facto valuation of shares, if it had been sought and obtained to justify the terms of the offer, could not displace the respect (not uncritical acceptance) of the views taken by the majority of the offer "package" as a whole. The fact that the majority may have relied on the views expressed by Paul and/or Liam, to whom they were related and who were not financial analysts, does not detract from the reasonable probability that they might have considered Paul and Liam to have a-detailed intimate knowledge of the business and what its assets and shares were worth. while the record of Deloitte & Touch, dated 25th may 2004, of the stated valuation approach adopted by Holdings in valuing the ordinary shares in Properties as of September 2003 smacks of ex post facto reasoning, I cannot ignore such evidence. In the context of such evidence, I do not accept that the Applicant has shown that the offer is obviously and convincingly unfair.
In my judgment, the submission of the Respondent is correct, i.e., that the proper approach in assessing the alleged unfairness in valuation is that articulated by Vaisey J in Re Sussex Brick Co. [1961] Ch. 289 at 291, wherein he states:
"A scheme must be obviously unfair patently unfair, unfair to the meanest intelligence. It cannot be said that no scheme can be effective to bind a dissenting shareholder unless it complies to the extent of 100 percent, with the highest possible of standard of fairness, equity and reason."
Vaisey J went on to state as follows:
"It must be affirmatively established that, notwithstanding the view of the majority, the scheme is unfair, and that is a different thing from saying that it must be established that the scheme is not a very fair or not a fair one: a scheme has to be shown affirmatively, patently, obviously and convincingly to be unfair."
These comments were adopted by Plowman J in Re Grierson Oldham & Adams [1968] ch. 17, and can be considered in the context of inadequacy of price at page 38 of that report.
In my judgment, the instant case is to be distinguished from In Re Bugle Press (earlier referred to) relied upon by the Applicant. In that case, the minority shareholders filed evidence to show that the offer was below the value of his shares. The transferee company filed no evidence to support the valuation on to show the nature of the instructions given to the valuers or to give details of the information on which it was based. Buckley J, in the High court, held that in the circumstances the onus of showing that the price (note not the offer) was a fair one was on the transferee company and, as they had not discharged the onus, the minority shareholder was entitled to the declaration sought. Buckley J noted that the percentage majority must not be a mere screen, it should be an independent majority exercising some form of independent choice on the question of whether or not the offer should be accepted. The Court of Appeal affirmed the decision at first instance, holding that the minority shareholder had shown that there were special circumstances why the court should, in the exercise of its discretion conferred by section 209 of the English companies Act 1948, "order otherwise" than to sanction the offer. Although the transferee company was in law distinct from its only two shareholders, in substance it was the same as the majority shareholding in the transferor company. In such circumstances, it was held that unless good reasons in the interests of the company were shown making expropriation of the minority interest desirable, the court should "order otherwise".
Harman LJ, in the Court of Appeal, described the procedure in Bugle Press in the following terms (at p.288 of the report):
" . the transferee company was nothing but a little but built round his two co-shareholders, and the so-called scheme was made by themselves as directors of that company with themselves as shareholders and the whole thing, therefore, is seen to be a hollow sham."
In my judgment, the instant case is clearly distinguishable from Bugle -- there is no element of sham nor was the outcome of the offer a foregone conclusion. The fact that an outcome might be more probable than not does not mean that it is a foregone conclusion. The onus of proof shifted from the dissentient shareholder in the Bugle case because of its peculiar findings of fact that there was an element of sham.
The Applicant submits that he was given no reason or explanation as to why the offer required the transfer of the shares on completion but payment of the purchase sum over a period of time and why no payments were scheduled for 2004. Altogether from the evidence referred to earlier in this judgment and the matters referred to at paragraph (27) of the affidavit sworn on 22nd February 2004 by Michael Paul walls, it seems to me that the transfer or abstraction of the entire sum of the offer from Holdings could be seriously disruptive of a complex of developments which were/are intended to "feed off" (my expression) each other, and one in particular was to be completed in December 2004; ie, the hotel. I do not accept the contention that the acceptors of the offer were unaware that capital gains tax liability would be payable "up front" or that there was no element of risk in accepting deferred payments without security. It is possible that a more fulsome explanation could have been given at the meetings and time in the context of the offer. In this context, the judgment of Mcwilliam J in McCormack -v- Cameo Investments [1978] ILRM 191 is in point. Therein he stated:
"I consider it unsatisfactory that they and I do not understand the full implications of the scheme and that a full and simple statement, elucidating the ramifications of the group or groups of companies involved and the purpose and effect of the scheme, has not been made, but I am only concerned with the scheme as it stands and the provisions of the statute enabling it to be put through, and the statutory provisions being complied with, the onus is on the applicants to establish that it is unfair to them.In Re Hoare.& Co. 1933] 150 LT 374; Grierson Oldham & Adams Ltd I Ch. 17)."
The Applicant submits that the absence of key information, such as valuation information, was or is particularly unfair because it expressly recommended by Paul as the managing Director of Properties. I formed the view that although Paul may have been the predominant voice and principal party behind the offer and indeed may have had an overbearing personality, his was not the largest shareholding and professionally qualified persons, not members of the walls family, ie, Mr. Veale and Mr. O'Neill), were involved in assisting the Applicant to understand the offer and to provide information for that purpose. It is in this context that Mr. Cush invited the court to adopt the views of McWilliam J in Securities Trust -v- Associated Properties Limited (unreported 19th November 1980). while those proceedings were for the purpose of the cancellation (under the provisions of
Section 60 of the Companies Act 1963) of a special resolution, McWilliam J observed as follows:
"I do not know what is the reason for the provisions of section 204 of the 1963 Act or why it should be thought desirable that minority shareholders may be compulsorily bought out, but I am of opinion, that on a compulsory purchase of this nature, the people whose shares are being compulsorily purchased are entitled to be given full particulars of the transaction, its purpose, the method of carrying it out and its consequences. The purpose of the transaction and its consequences have not been disclosed and the method of carrying it out not disclosed to the persons concerned.
I have not been addressed on the duty of directors towards their own members or their position as agents or otherwise vis-à-vis the shareholders on such a transaction but, although a director is not a trustee for the shareholders, directors are to some extent in a fiduciary position and I am of opinion that, on a transaction such as this, the shareholders are entitled to be given reasonably full particulars about the matters I have just mentioned . (emphasis added)
It is to be noted the case is not a decision on section 204 and the quoted passage may be considered as obiter. Furthermore, the purpose and consequences of the transaction in the instant case I find as a fact have been disclosed. Accordingly, the instant case is clearly distinguishable from that considered by McWilliam J. The correct approach to the decision in Securities Trust Limited is, I believe, that expressed by Keane C3 in his authorial capacity in [his] Company law (3rd Ed - Butterworths) at p.451, para. 32.30:
"It does not appear, however, that any of the earlier authorities were cited and it may be that the decision should be regarded as confined to the facts of the particular case."
Both parties to the present litigation referred to in Re Evertite Locknuts [1945] 2 Ch. 220 to advance their case. In that case, a shareholder contended that he was entitled to relief pursuant to the English equivalent of Section 204(1) on the basis that certain information had not been provided to him. Vaisey J stated:
"That grievance or complaint is obviously one which he cannot urge against the respondents to the present summons, No are not the transferor company under the section, but the transferee company.
In that case, counsel for the applicant asserted (p.221 of the report) that the applicant had asked the directors of the transferor company, but they had refused to give him certain information, in particular as to the value of the patent rights. In the instant case there was no request that led to any refusal. In Evertite, Vaisey J, having noted that the information which had been given to the applicant was "a little meagre", continued (at p.224) as follows:
"The difficulty I feel is that, if once it is conceded that a scheme of this kind can be upset merely for the reason that a shareholder is not given all the information which he might require and might expect from the directors of the transferor company, there would be no limit to the inquiry which would have to be set on foot as to the extent to which his demands for disclosure ought to be conceded. It is, of course, possible that the present applicant has some grievance against the directors of Evertite Locknuts (1938) Ltd., but I am quite satisfied in my own mind that I should be going much further than Maughan J was prepared to go In Re Hoare & Co. Ltd if I said that it was not necessary or a dissentient shareholder, making an application under the Act, to establish unfairness, but that it would suffice if he merely said that he regarded himself as, or was in fact, unprovided with all the materials on which he could come to a just conclusion in regard to the acceptance or rejection of the offer."
Mindful of the difference in the percentage shareholding of the Applicant in the instant case and the almost miniscule stake of the dissident in Evertite, the overall conclusion of Vaisey J in Evertite (at p.224/5) is nonetheless apposite:
" . it seems to me that if I were to accede to this present application, the whole matter would be left in a condition of quite intolerable uncertainty, and that it cannot be right that one shareholder, owning one-seven hundredths part of the shares affected, should be entitled to stand out against the decision of the 699/700ths of the share capital merely because he has, as he thinks been left somewhat in the ark in regard to the material facts."
Leaving percentages aside, the underlying ratio seems to be one of principle and should be applied and I do apply it in this case.
whatever view may be taken as to the documentation that accompanied the offer, it was clearly stated that independent legal advice could be taken. Even if access to Beauchamps was denied, by the Applicant being dissuaded to do so or being fobbed off or otherwise, the Applicant did in fact seek advice, his solicitors articulated his concerns, and this heading of complaint I find to be unsustainable.
The Articles of Association (the Articles) of properties deals with the transfer of shares in
Article 7. The statutory footing afforded to the Articles arises under section 25(1) of the Companies Act 1963, which provides:
"subject to the provisions of this Act, the memorandum and articles shall, when registered, bind the company and the members thereof to the same extent as if they respectively had been signed and sealed by each member, and contained covenants by each member to observe all of the provisions of the memorandum and articles."
In the event, therefore, of a conflict between the Act and the Articles, the Act prevails. The submissions of the Applicant in this regard were
(i) The essence of the right of pre-emption is to prevent the transfer of any share to a person who is not a member without first offering the share or shares to existing members.
(ii) Article 7(b) obliges a member proposing to transfer any shares to serve notice upon the company whereupon the company is constituted as the proposed transferor for the purposes of sale. The company is thereafter obliged to find a purchasing member within 42 days of the notice by first offering the shares to existing members "as nearly as may be in their respective holdings of shares in the company" (7(g)).
(iii) Article 7(j) provides:
"if any member at any time attempts to deal with or dispose of any shares in the company otherwise than in accordance with the provisions of this Article, such members shall be deemed immediately prior to such attempt to have served the company with a Transfer Notice in respect of all shares registered in the name of such member and the provisions of this Article shall thereupon apply to such shares and such Transfer Notice shall have been deemed to have been served on the date on which the Directors shall receive actual notice of such attempt."
(iv) From the foregoing it is argued that Holdings was not a member of Properties, and thus in accepting the offer the shareholders in Properties, other than the Applicant, clearly triggered the pre-emption Articles and Properties should thereupon have acted in accordance with Article 7(j). Properties did not and has not made any attempt to do so. In order to protect his rights, the Applicant issued a plenary summons on 17th November 2003, and therefore is to be expressly taken as not having waived his pre-emption rights. Accordingly, in relation to any transfer from the accepting members of Properties, Holdings can take no greater interest than the transferors are entitled to pass. Thus, the argument continues on behalf of the Applicant, that if the Applicant's rights are enforced (as per Article 7(g)), in which the Applicant has a right to be offered not only shares in proportion to his own shareholding but also additional shares which have not been taken up by other members, who in this instance have in any event waived their rights of pre-emption), the net effect would be that Holdings would not have reached four-fifths of the shares by value as required by section 204. Therefore, Holdings was not entitled to issue the notice under section 204(1) or any interest it may have in being registered as a member is defeasible by virtue of the Applicant's rights.
In support of the foregoing submissions, the Applicant relied on the decision of Kenny J in Lee and Company (Dublin) Limited -v- Egan (wholesale) Limited (27th April 1978, High Court - unreported). The facts of that case are not simply clearly distinguishable, but radically and fundamentally different to the instant case. In that case the majority shareholder of a private limited company was minded to retire from business and without any reference to any shareholders purported to enter into an agreement to sell the assets and liabilities of the Defendant in toto -- the sale to take place by means of a transfer of all the shares. None of the parties to or who took part in negotiations remembered the Articles of Association of the Defendant company, that it gave other members the right to acquire the shares which the majority shareholder undoubtedly agreed to sell to a total outsider of the company. Section 204 was simply not engaged in Lee's case; the nature of the relief sought and the order contemplated by Kenny J deal with a completely different factual and statutory situation than that which is involved in the instant case.
Before considering the submissions of the Respondent, it is of importance to note, at a minimum, for they figured in a subsidiary argument for the Respondents,
Article 7(a) and (b) in the Articles of Properties:
"7(a) A share may be transferred by a member or any person entitled to transfer to any member selected by the transferor: but save as aforesaid, and save as provided by paragraphs (f), (h) or (k) hereof, no share shall be transferred to a person who is not a member so long as any member or any person selected by the Directors as one to whom it is desirable in the interest o the company to admit to membership is willing to purchase the same at the fair value.
(b) Except where the transfer is made pursuant to paragraphs (f), (h) or (k) hereof, the person proposing to transfer any share (hereinafter called the 'proposing transferor') shall give notice in writing (hereinafter called a 'transfer notice') to the company that he desires to transfer the same. such notices shall specify the sum he fixes as the fair value and shall constitute the company his agent for the sale of the share to any member o the company or person selected as aforesaid to purchase the share (hereinafter called the 'purchasing member') at the price so fixed." (emphasis added).
Not only was no such like provision contained in the Articles of Association of Egan (wholesale) Ltd, but pre-emption rights refinements aside, the Articles are sufficiently wide in the instant case to embrace Holdings.
The Respondent's substantive submissions on this issue of pre-emption rights is that in any conflict between the provisions of the Act and the Articles, the Act prevails. Consequently, the provisions of Section 204 must take precedence over the pre-emption rights contained in Article 7(a) or any part of Article 7 of the Articles or any other Article. The purpose of section 204 is the creation of a statutory power to acquire the shares of a dissenting shareholder. The efficacy of section 204 would be undermined if a minority shareholder entitled to rely upon a pre-emption clause in the Articles to acquire a sufficient shareholding so as to render impossible approval or acceptance in respect of not less than 80 per cent in value of shares affected, as required by the section. It would mean that every offer to acquire the shares of a company could be endlessly frustrated and could give rise to a limitless series of internal offers as between the shareholders, which is impossible to reconcile with the operation of an acquisition envisaged by section 204.
Mr. Murray, for the Respondent, relied on the decision of the Supreme Court in Duggan –v-Stoneworth Investments Ltd [2000] 1 IR 563 at p.569, per Murphy J, wherein referring to the plaintiff's written submissions to the court it was noted in that context that the court's discretion in the context of section 204 is a discretion in dealing with the right of a transferee company to acquire shares of the dissenting shareholder:
"The right to such acquisition shall not arise where the court thinks fit to order otherwise."
I am satisfied that a Respondent is correct in submitting that it is the court that can prevent the acquisition under Section 204 of the shares of a dissenting shareholder, not the dissenting shareholder through reliance on the Articles.
I am satisfied that the acceptances which operate to trigger section 204 are acceptances in respect of the beneficial interest in the shares. Once the acceptances in respect of the beneficial interests are to hand, the legal interest of the dissenting shareholder is acquired pursuant to sub-section (4) of Section 204. In this way, the standard pre-emption rights do not intrude into the process to which section 2004 applies.
In my judgment, the submissions of the Respondents are to be preferred to those of the Applicant as being correct in law. In the conclusion, I do not consider the offer to have been unfair and I refuse the relief sought.
END OF JUDGMENT
Approved
T.C. Smyth
10/11/2004
