My Bird Pty Ltd v Grainco Queensland Co-Operative Association Ltd & Ors [1997] FCA 145

IN THE FEDERAL COURT OF AUSTRALIA

QUEENSLAND DISTRICT REGISTRY GENERAL DIVISION No QG 24 of 1997 BETWEEN MY BIRD PTY LTD ACN 069 661 034 Applicant AND GRAINCO QUEENSLAND CO-OPERATIVE ASSOCIATION LIMITED ARBN 053 288 707 First Respondent AND AUSFARMERS PTY LTD ACN 052 348 973 Second Respondent AND OUR BIRD HOLDINGS PTY LTD ACN 075 523 698 Third Respondent AND RIDLEY AGRIPRODUCTS PTY LTD ACN 006 544 145 Fourth Respondent JUDGE MAKING ORDER: Cooper J WHERE MADE: Brisbane DATE OF ORDER: 6 March 1997 MINUTES OF ORDER THE COURT ORDERS THAT: 1. The application for interlocutory relief is dismissed. 2. The costs of and incidental to the application are reserved to the judge hearing the trial of these proceedings. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA

QUEENSLAND DISTRICT REGISTRY GENERAL DIVISION No QG 24 of 1997 BETWEEN MY BIRD PTY LTD ACN 069 661 034 Applicant AND GRAINCO QUEENSLAND CO-OPERATIVE ASSOCIATION LIMITED ARBN 053 288 707 First Respondent AND AUSFARMERS PTY LTD ACN 052 348 973 Second Respondent AND OUR BIRD HOLDINGS PTY LTD ACN 075 523 698 Third Respondent AND RIDLEY AGRIPRODUCTS PTY LTD ACN 006 544 145 Fourth Respondent CORAM: Cooper J PLACE: Brisbane DATE: 6 March 1997 REASONS FOR JUDGMENT This is an application by the applicant for an interlocutory injunction restraining the respondents from completing a share sale and purchase and for consequential interlocutory relief. Background Facts By a joint venture agreement dated 3 August 1995 the first respondent (Grainco) and the second respondent (Ausfarmers) agreed with the applicant to establish a birdseed marketing business. Ausfarmers is a subsidiary of Grainco. In consequence of the joint venture agreement a company Our Bird Pty Ltd ("Our Bird") was incorporated on 4 August 1995 and shortly thereafter acquired by Ausfarmers and the applicant. Each company acquired one-half of the issued share capital of Our Bird. The directors of Our Bird were four in number; two appointed by the applicant and two by Ausfarmers. On 9 October 1996 Grainco and Ausfarmers gave the applicant notice of Ausfarmers' intention to transfer its shareholding to another wholly owned group company, Our Bird Holdings Pty Ltd ("Holdings"), as part of a review of Grainco's corporate structure. On 26 November 1996 Mr Robert Hedges ("Hedges") of Grainco told Mr Thomas O'Brien of the applicant that Grainco had given an option to Ridley Corporation to acquire the fifty percent shareholding in Our Bird held by Ausfarmers. Ridley Corporation is a competitor of Our Bird in the sale of birdseed. By letter dated 16 December 1996 Grainco, in response to a letter from Mr O'Brien, "confirmed" that an option had been given to Ridley Corporation to purchase Ausfarmers' shareholding in Holdings. According to Mr O'Brien this was not what Hedges had stated on 26 November 1996 the substance of which is set out above. On 7 February 1997 a transfer of 125,000 shares in Our Bird, registered in the name of Ausfarmers, to Holdings was registered by the directors of Our Bird over the protest of the nominee directors of the applicant. On 25 February 1997 Grainco gave notice by letter to the applicant that an option had been given to the fourth respondent (Ridley) by Ausfarmers to purchase its shareholding in Holdings and that the option had been exercised. The transfer of Ausfarmers' interest in Holdings to Ridley, the letter said, would take place on 28 February 1997. On 26 February 1997 the applicant filed an application seeking a declaration that any sale by Ausfarmers of its shares in Holdings to Ridley breached the joint venture agreement and was in breach of the fiduciary duties owed by Grainco and Ausfarmers to the applicant. The application also sought an injunction restraining Grainco, Ausfarmers and Holdings from selling to Ridley any share in Ausfarmers, Holdings or Our Bird. In the alternative, the applicant alleges that an acquisition of shares in Holdings by Ridley would contravene s 50 of the Trade Practices Act 1974 (Cth) and it seeks divestiture orders of all of Holdings' shares in Our Bird or all of Ridley's shareholding in Holdings. On 27 February 1997 interim injunctive relief was granted by me on an ex parte basis and the application for interlocutory relief was adjourned until 4 March 1997. The application for interlocutory relief The sale of the shares in Holdings is part of a wider commercial transaction between Grainco and Ridley Corporation. The other elements of the transaction are of no concern to the applicant. In order to avoid confidentiality problems it was agreed by all parties that the application would proceed on the basis that if the interlocutory injunction was granted the risk which Grainco and Ausfarmers faced was that they would lose the benefit of the sale of the shares in Holdings to Ridley and also payment of $204,000 being the face value of a debt due by Our Bird to Grainco which was to be assigned to Ridley and paid for at full value as part of the share sale transaction. On this basis no further details of the commercial arrangements between Grainco, Ausfarmers and Ridley or Ridley Corporation were disclosed. It was conceded by counsel for Grainco, Ausfarmers and Holdings, and the solicitor for Ridley, for the purpose of this application only, that there was a serious question to be tried as to whether the dealings between the respondents breached the joint venture agreement and any fiduciary duties owed by Grainco and Ausfarmers to the applicant. Accordingly, the application falls to be determined on the basis of the balance of convenience and other discretionary considerations, in particular, delay. Counsel on behalf of the applicant submitted that I should infer that Ridley intends to use its position in Holdings to cause it to appoint two new directors to the board of directors of Our Bird and thence to paralyse the operations of Our Bird. The power to achieve that outcome follows from the equal representation at board level in Our Bird without there being any provision for breaking a deadlock of the board. This inference should be more readily drawn, it was submitted, because Ridley had not filed material explaining its intentions in seeking to acquire a position in Our Bird, its competitor. The respondents on the other hand submitted that I should not lightly infer that Ridley intended to commit an unlawful act, when a lawful explanation was open as a matter of inference. It was further submitted by counsel for the applicant that the likelihood of a breach of s 50 of the Trade Practices Act 1974 (Cth) by Ridley was a matter which ought to weigh in favour of granting an injunction in the public interest. Finally, it was submitted by counsel for the applicant that damages was an inadequate remedy to the applicant if the transfers proceeded because Our Bird was a new and expanding business and the valuation of that business was fraught with uncertainty. Counsel for Grainco, Ausfarmers and Holdings submitted that damages were an adequate remedy and that the balance of convenience was against an injunction. It was submitted that the applicant was a company with a recorded paid capital of $2.00 whose undertaking as to damages was not shown to have any value. This submission was maintained notwithstanding the tender of a return of allotment of shares in the applicant dated 26 June 1996. The allotment related to 94,998 shares of $1.00. Of these, 40,000 shares were issued to the Streeter Family Trust and 54,998 were issued to the O'Brien Discretionary Trust. Of these shares 64,998 were issued for cash and the balance for a consideration other than cash. It was submitted by counsel for Grainco, Ausfarmers and Holdings that there was no evidence as to what had occurred to the paid up capital of the applicant subsequent to the allotment and what the present financial situation of the applicant was. Counsel also submitted that the demonstrable financial position of Our Bird was such that it had incurred a loss in its first year of trading, that it was indebted to Grainco in an amount of $204,000, and, if the assignment of the debt to Ridley for full face value did not occur, that there was no obvious likelihood of the debt being repaid by Our Bird to Grainco in the foreseeable future. In response to these submissions counsel for the applicant submitted the evidence of Mr O'Brien was that Our Bird had turned in a net profit for the months of January and February 1997 and that Mr O'Brien expected business to improve dramatically in the short to medium term with increases in its profitability. When this occurred, he submitted, the indebtedness to Grainco would be retired. The present indebtedness of Our Bird to Grainco, he submitted, was always contemplated by the joint venture agreement and nothing adverse to the applicant should be drawn from that fact. The evidence of Mr Hedges as to the financial dealings between the joint venturers in paragraph 5, 7, 9 and 12 of his affidavit has not been disputed. Rather, Mr O'Brien sought to explain why the projected profits were not earned and justify the dependence of Our Bird on Grainco because it was contemplated by the joint venture agreement that such would be the situation. What is not explained by Mr O'Brien is why the applicant did not provide additional funds over and above the initial capital contributions provided for in clause 6.2 of the joint venture agreement on a dollar for dollar basis with Ausfarmers as required by clause 6.15 of the joint venture agreement. Nor is it explained how Our Bird is to continue to trade without the financial support of Grainco and provision of facilities in terms of clause 7 and 10.1 of the joint venture agreement. There is no obligation on Grainco or Holdings under the joint venture agreement to provide further advances to cover operating costs. The failure of the applicant on the material before the Court to make any further financial contribution to Our Bird beyond the initial capital contribution in 1995 reflects on the present financial worth of the applicant and its ability to satisfy any award of damages in favour of Grainco or Ausfarmers if they succeed in the proceedings and establish loss and damage consequent upon the granting of interlocutory injunctive relief. That is a matter which I take into account against the grant of an injunction. The fear that Ridley will paralyse the operation of Our Bird is based upon nothing more than the fact that Ridley is a major competitor of Our Bird, and on Mr O'Brien's evidence, is losing market share to Our Bird. There is no material to indicate that Ridley is doing anything more than making a strategic investment in a competitor. The important factor which has not been addressed is that the acquisition of shares by Ridley in Holdings does not terminate the joint venture agreement. Accordingly, the applicant would continue to enjoy all of the rights which it presently holds under the joint venture agreement and Holdings would remain bound to discharge such fiduciary duties as bind it by virtue of the joint venture agreement. Further, any new nominees to the board of directors of Our Bird would come under the same fiduciary duties as bind the present nominees of Holdings on the board. If an injunction was granted, Holdings would still have the right under clause 13.3 of the joint venture agreement to put in train a winding up of the business of the joint venture. As counsel for the applicant acknowledges, neither the pre-emptive rights under clause 6.14 of the joint venture agreement nor the dispute discussion provisions under clause 13.1 requires Holdings to sell its shareholding in Our Bird to the applicant. At best, these provisions prevent Holdings from selling the shares in Our Bird, or in a company in a position to control the shares in Our Bird, to a stranger, without first giving the applicant the opportunity to exercise the rights of pre-emption contained in clause 6.14. It is, in my view, no sufficient answer to say that clause 13.1 requires Holdings to discuss and negotiate with a view to a buy out of its shares in Our Bird by the applicant. If Holdings is unwilling to sell the shares to the applicant on the terms of clause 6.14 for whatever reason that is the end of the matter and the applicant cannot force Holdings under the joint venture agreement to do so. If the sale of the shares in Holdings to Ridley is completed, the applicant is in the same position as it presently is to enforce compliance by its joint venturer - Holdings - and its nominee directors, with their fiduciary duties. There is no basis to hold at this time that those fiduciary duties necessarily will be breached nor that its right to enforce compliance with those fiduciary duties would be rendered nugatory. Assuming success by the applicant after trial of the action, if it proves up damage consequent upon the breach of the joint venture agreement by Grainco and Ausfarmers, that damage is recoverable from those entities. There is no suggestion that they would not be good for the damages. For there to be such damage caused to the applicant, the applicant argues that the damage would be the loss of its investment in Our Bird consequent upon the paralysis of the management in Our Bird. Such damage is predicated on a breach by Holdings and the nominee directors of their fiduciary duties to the applicant and Our Bird. Should that occur those entities would be liable in damages for the loss caused. That there may be some complexity in assessing damages does not of itself require the granting of an injunction. It is simply one factor to put in the balance. That the applicant took no action to prevent the sale to Ridley until 26 February 1997 is explained by Mr O'Brien on the basis that he believed he could prevent any transfer of shares in Our Bird at the board level. In that he was proved incorrect. I would not regard the delay as a discretionary bar. Rather, that contractual rights have been carried into effect to the point of completion after disclosure in late 1996 to the applicant of a possible disposition of a beneficial interest in Our Bird to Ridley without proceedings being instituted is a factor weighing against the grant of an injunction. It is not a factor I would give great weight to having regard to the statements to Grainco in November 1996 by Mr O'Brien that he treated the granting of the option as illegal and a breach of the joint venture agreement. Such a statement put Grainco and Ausfarmers on notice that the applicant disputed their entitlement to proceed in the manner which they had disclosed to the applicant. In my view, there is no evidence that Ridley intends by its control of Holdings to cause the directors nominated by Holdings to the board of directors of Our Bird to act in such a way as would prevent Our Bird from competing against Ridley in any market for the supply of birdseed. Against the fear of Mr O'Brien that this will occur is the power to the Australian Competition and Consumer Commission to seek urgent injunctive relief if there is any credible evidence that Ridley is acting in such a manner. Additionally, should a breach of s 50 of the Trade Practices Act 1974 (Cth) be proved, divestiture is available as a remedy. In the present case, the availability of such remedies is sufficient protection of the public interest to satisfy me that the claim by the applicant of a breach of s 50 of the Trade Practices Act 1974 (Cth) ought not of itself weigh in favour of the grant of an injunction. I do not accept that the only rational explanation of the shares in Holdings being acquired by Ridley is to paralyse the management of Our Bird to prevent it from competing with Ridley or Ridley Corporation. On balance the risk of substantial damage to Grainco and Ausfarmers in the event of the sale not proceeding, and a not fanciful concern that the applicant if it fails in the action would not be able to satisfy a judgment for damages flowing from the loss of the sale, outweighs any perceived risk to the applicant flowing from deadlock in the management of Our Bird if Ridley acquires control of Holdings. In the events which have occurred the risk of deadlock in the management of Our Bird remains a possibility whether or not an injunction issues. If a deadlock should occur whether or not an interlocutory injunction was granted the applicant will be left with such rights as it has in equity or under the Corporations Law. Irrespective of whether an injunction issues, Holdings as a joint venturer is entitled to exercise its rights under the joint venture agreement consistently with the discharge of its fiduciary duties as a joint venturer. There is thus no evident prejudice in refusing an injunction. Absent a right under the joint venture agreement to compel Holdings to sell its shares to the applicant, completion of the sale does not deny the applicant the beneficial enjoyment of a right certain to obtain the shares from Holdings. At best an injunction denies Ridley pending determination of the proceedings, the power through Holdings to nominate directors to the board of directors of Our Bird. That of itself is not of sufficient weight in my view to swing the balance of convenience in favour of granting the interlocutory injunctive relief sought. The applicant retains rights and remedies to protect it from an abuse of the exercise of that power by Holdings or the abuse of the nominee directors of their position and power in the management of the business of Our Bird. Result The application for interlocutory injunctive relief is dismissed. The costs of and incidental to the application are reserved to the judge hearing the trial of these proceedings. I certify that this and the preceding nine (9) pages are a true copy of the reasons for judgment of his Honour Justice Cooper. Date: 6 March 1997 Associate Counsel for the Applicant: P L O'Shea Solicitors for the Applicant: Hede Byrne & Hall Counsel for the First, Second and Third Respondents : D A Savage Solicitors for the First, Second and Third Respondents: Minter Ellison Solicitor for the Fourth Respondent: Mr T L'Estrange, Allen Allen & Hemsley Date of Hearing: 4 March 1997 Place of Hearing: Brisbane Date of Judgment: 6 March 1997