FEDERAL COURT OF AUSTRALIA Were Securities Limited v Red Sheriff Limited [2004] FCA 42 WERE SECURITIES LIMITED V RED SHERIFF LIMITED & ANOR N 94 OF 2004 STONE J 2 FEBRUARY 2004 SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N 94 OF 2004 BETWEEN: WERE SECURITIES LIMITED PLAINTIFF AND: RED SHERIFF LIMITED FIRST DEFENDANT RBC GLOBAL SERVICES AUSTRALIA NOMINEES PTY LIMITED SECOND DEFENDANT JUDGE: STONE J DATE OF ORDER: 30 JANUARY 2004 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. Upon Were Securities Limited, by its counsel, giving the usual undertaking as to damages, the first defendant be restrained until further order from holding any meeting of its Board to consider or vote upon any of the matters referred to in the affidavit of Richard John Flitcroft of 30 January 2004 at paragraph 17 at any time prior to Friday 6 February 2004; 2. The matter be stood over until 9.30 am on Thursday 5 February 2004; 3. Either party has liberty to apply on 24 hours notice; 4. Costs to be reserved. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N 94 OF 2004 BETWEEN: WERE SECURITIES LIMITED PLAINTIFF AND: RED SHERIFF LIMITED (ACN 081 796 287) FIRST DEFENDANT RBC GLOBAL SERVICES AUSTRALIA NOMINEES PTY LIMITED (ACN 097 125 123) SECOND DEFENDANT JUDGE: STONE J DATE: 2 FEBRUARY 2004 PLACE: SYDNEY REASONS FOR JUDGMENT 1 On 30 January 2004 the plaintiff in this matter, Were Securities Limited ('WSL'), made an urgent application for interlocutory relief. It sought an order that the first defendant be restrained from holding a meeting of its Board of Directors at any time prior to 6 February 2004 to consider or vote upon certain matters that had been notified to WSL on 29 January 2004. Given the urgency of the matter, and being convinced that there was both a serious question to be tried and that the balance of convenience lay with WSL, I made orders without delaying to give reasons. It is appropriate that I now give these brief reasons for making those orders. A serious question 2 WSL, through its custodian the second defendant, is a shareholder in the first defendant. Although named as a party, no orders are sought against the second defendant and no appearance was entered for it. The issue was the construction of certain provisions of a Shareholders Agreement made between the first defendant and its various shareholders including WSL. The following account of the background to this matter draws largely on the uncontested evidence of WSL's solicitor, Richard John Flitcroft, in his affidavit sworn on 30 January 2004. 3 On or about 22 December 2003 certain shareholders in the first defendant, individually and collectively referred to in the Shareholders Agreement as 'DEP IV', entered into a sale and purchase agreement by which DEP IV agreed to sell its shares to a third party, NetRatings Inc ('NR'). Clause 10.18(a) of the Shareholders Agreement provides that if DEP IV sells or transfers any of its shares, no rights (including certain pre-emptive rights contained in the Shareholders Agreement) arise in any other party in respect of that sale so long as DEP IV complies with clause 10.18. In the circumstances, cl 10.18(b) requires, amongst other things, that DEP IV procure NR to offer to acquire the shares of other shareholders in the first defendant. NR has made such offers, including an offer to WSL, and there is now a dispute between the parties as to whether the terms of the offer to WSL comply with the provisions of the Shareholders Agreement. 4 Pursuant to clauses 10.2 and 10.11 of the Shareholders Agreement, shareholders must not accept the offers made by NR without first offering to sell their shares to the other shareholders. Because NR acquired the DEP IV shares those other shareholders now include NR. WSL has not made an offer to other shareholders because it has not yet decided whether to accept NR's offer or whether to challenge NR's offers and the offers made by other shareholders on the basis of an alleged breach of the Shareholders Agreement. 5 On 29 January 2004 at 1.34 pm WSL received an email giving notice of the first defendant's intention to hold a Board meeting on 30 January 2004 at 9.00 am. Subsequently the first defendant agreed to delay the commencement of the meeting until 3 pm so that the plaintiff's claim for interlocutory relief could be heard during normal court hours. The business of the meeting was to consider, inter alia, resolutions approving the transfer of shares to NR pursuant to its acceptance of offers made by other shareholders. For reasons that are clear from the discussion of the balance of convenience at [10] below, WSL wished to prevent that meeting being held before Friday 6 February and, in support of its claim for injunctive relief, relied on its rights under a number of clauses of the Shareholders Agreement. 6 Relevantly the Shareholders Agreement provides: '3.10 Notice of Meetings (a) At least 5 Business Days notice will be given to all Directors of any meeting of the Board. (b) The notice of meeting will be accompanied by an agenda and, unless all Directors agree otherwise, the meeting may only pass resolutions on those matters the general nature of which is referred to in such an agenda and in respect of which the agenda notifies that a resolution is intended to be passed. (c) For the avoidance of doubt, it is agreed that if any Director requires further clarification of, or information with respect to, any agenda item not less than 48 hours before the scheduled time for the meeting, that requirement must be reasonably met by the Company not later than 24 hours before that meeting, or the meeting will be adjourned until the same time proposed for the meeting but on the second Business Day after that clarification or information is provided to the requesting Director. Any information provided under this paragraph must be copied to all other Directors. 3.13 WSL Observer WSL will be entitled to: (a) appoint an observer to attend and speak at any meeting of the Board, it being acknowledged that the observer will not be entitled to vote on any resolution of the Board; and (b) receive notice of meetings, agendas and other board papers or notifications received by the Directors including, without limitation, in accordance with clauses 3.10, 4.4 and 6.2, unless and until a Traffion Event of Default occurs, which results in more than half of the Traffion Securities being bought back under clause 13.9.' No party raised any issue concerning the proviso to clause 3.13. 7 WSL claimed that the first defendant was in breach of the Shareholders Agreement in giving less than the five days notice required under clause 3.10. WSL submitted that, in addition to the first defendant's obligation to give the directors five days notice, it had an independent right to be notified under clause 3.13(b). 8 Counsel for the first defendant submitted that the right to five days notice was given to the directors and they were entitled to waive that right and had done so in writing. WSL, it was submitted, was entitled to be given only such notice as the directors were given and if the directors agreed to less than five days' notice then WSL was sufficiently notified by having the same period of notice as the directors. 9 The first defendant's submission does not take account of the obvious difficulty raised by the fact that the directors are not party to the Shareholders Agreement. A right to waive an entitlement presupposes an entitlement. The claim that the directors have an entitlement arising under the Shareholders Agreement does not take account of privity of contract and the limits to the right of a stranger to the contract, even where the contract intends to confer a benefit on that stranger. Much was made of the potential for such a construction to frustrate the governance of the company. This may or may not be an issue; I made no finding on that point. For the purposes of interlocutory relief however, it was necessary only for me only to be satisfied that the matter raises a serious question. On the material before me and particularly having regard to the provisions of the Shareholders Agreement I was so satisfied. Balance of convenience 10 On the question of balance of convenience, WSL submitted that its right to have an observer attend and speak at a meeting of the Board would be significantly diminished if it did not have the five days' notice contemplated by the Shareholders Agreement. Counsel pointed to the complexity of the issues it had to consider in deciding whether to accept NR's offer, including whether proceedings should be commenced in relation to the sale of DEP IV's shares. It submitted that it was not in a position to give proper consideration to its position or to prepare an appropriate submission to the Board in less than the time allegedly allowed under the Shareholders Agreement. 11 On its side the first defendant was not able to point to any significant disadvantage that would flow from the Board meeting having to be postponed. In my view the balance of convenience suggested that the orders sought by the plaintiff should be made. 12 Accordingly I ordered that upon WSL, by its counsel giving the usual undertaking as to damages, the first defendant be restrained until further order from holding any meeting of its Board to consider or vote upon any of the matters referred to in the affidavit of Richard John Flitcroft of 30 January 2004 at paragraph 17 at any time prior to Friday 6 February 2004. The matter is to be stood over to 6 February 2004 and costs are reserved. I certify that the preceding twelve (12) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Stone. Associate: Dated: 2 February 2004 Counsel for the Plaintiff: Mr R McHugh Solicitor for the Plaintiff: Corrs Chambers Westgarth Counsel for the First Defendant: Ms K Richardson Solicitor for the First Defendant: Gilbert & Tobin Date of Hearing: 30 January 2004 Date of Judgment: 2 February 2004