FEDERAL COURT OF AUSTRALIA Landrigan (Trustee) v Suters Holdings Pty Limited [2017] FCA 1455 File number: NSD 1273 of 2017 Judge: FARRELL J Date of judgment: 6 December 2017 Catchwords: PRACTICE AND PROCEDURE – application for preliminary discovery – whether prospective applicants have sufficient information to decide whether to commence proceedings – whether prospective applicants have made reasonable enquiries – application granted in part PRACTICE AND PROCEDURE – application for security for costs by prospective respondents – where no evidence that prospective applicants may not be able to meet adverse costs order – application dismissed Legislation: Competition and Consumer Act 2010 (Cth), Sch 2, Australian Consumer Law, ss 18, 236 Corporations Act 2001 (Cth) ss 232, 233, 254G Federal Court Rules 2011 (Cth) rr 7.23, 7.29 Cases cited: Apache Northwest Pty Ltd v Newcrest Mining Ltd (2009) 182 FCR 124; FCAFC 29 Bonham v Iluka Resources Ltd [2017] FCAFC 95 Contour Building and Construction Pty Ltd v Kerr [2008] NSWSC 883 Pfizer Ireland Pharmaceuticals v Samsung Bioepis AU Pty Ltd [2017] FCAFC 193 St George Bank Ltd v Rabo Australia Ltd (2004) 211 ALR 147; FCA 1360 Date of hearing: 20 October 2017 Registry: New South Wales Division: General Division National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Category: Catchwords Number of paragraphs: 43 Counsel for the Prospective Applicants: Mr B Katekar and Ms K Petch Solicitor for the Prospective Applicants: Inside Eagles Counsel for the Prospective Respondents: Mr R D Marshall SC and Mr E A Walker Solicitor for the Prospective Respondents: O'Hearn Lawyers ORDERS NSD 1273 of 2017 BETWEEN: STUART LANDRIGAN AS TRUSTEE FOR THE LANDRIGAN FAMILY TRUST First Prospective Applicant ACE CONCEPTS PTY LTD AS TRUSTEE FOR THE ACEVSKI FAMILY TRUST ACN 106 968 638 Second Prospective Applicant CHRIS ACEVSKI Third Prospective Applicant AND: SUTERS HOLDINGS PTY LTD ACN 114 591 016 First Prospective Respondent ACN 003 842 835, FORMERLY SUTERS ARCHITECTS NO 1 PTY LIMITED AND ALSO FORMERLY KNOWN AS SUTERS ARCHITECTS PTY LIMITED ACN 003 842 635 Second Prospective Respondent DWP AUSTRALIA PTY LIMITED ACN 169 328 018 Third Prospective Respondent JUDGE: FARRELL J DATE OF ORDER: 30 NOVEMBER 2017 THE COURT ORDERS THAT: 1. The prospective respondents must, by 14 December 2017 or such other date as the Court may order, give discovery to the prospective applicants in respect of documents in the categories described in paragraphs c) (substituting 2012 for 2010), d), h) and j) of Schedule 2 to the amended originating application filed on 23 October 2017. 2. The prospective respondents are to make the documents discovered by them pursuant to Order 1 available electronically for inspection by the solicitors for the prospective applicants from the time a list of documents is filed and served pursuant to r 7.25 of the Federal Court Rules 2011(Cth). 3. The prospective respondents' application for security for costs is refused. 4. If substantive proceedings are commenced by the prospective applicants by 4 pm on 16 February 2018 or such other date as the Court may order, all costs of providing discovery and of this application will be costs in the substantive proceedings. 5. If substantive proceedings are not commenced by the prospective applicants by 4 pm on 16 February 2018 or such other date as the Court may order, the matter will be listed on a date to be fixed for argument on all questions as to costs. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT FARRELL J: Introduction 1 The prospective applicants seek orders for discovery under r 7.23 of the Federal Court Rules 2011 (Cth). 2 The prospective respondents seek orders under r 7.29 claiming $80,400 by way of security costs and expenses of giving any preliminary discovery and production ordered by the Court and that the prospective applicants pay the prospective respondents costs and expenses of complying with the Court's orders. Rules 7.23 and 7.29 3 Rule 7.23 provides as follows: 7.23 Discovery from prospective respondent (1) A prospective applicant may apply to the Court for an order under subrule (2) if the prospective applicant: (a) reasonably believes that the prospective applicant may have the right to obtain relief in the Court from a prospective respondent whose description has been ascertained; and (b) after making reasonable inquiries, does not have sufficient information to decide whether to start a proceeding in the Court to obtain that relief; and (c) reasonably believes that: (i) the prospective respondent has or is likely to have or has had or is likely to have had in the prospective respondent's control documents directly relevant to the question whether the prospective applicant has a right to obtain the relief; and (ii) inspection of the documents by the prospective applicant would assist in making the decision. (2) If the Court is satisfied about matters mentioned in subrule (1), the Court may order the prospective respondent to give discovery to the prospective applicant of the documents of the kind mentioned in subparagraph (1)(c)(i). 4 Rule 7.29 provides as follows: 7.29 Costs A person against whom an order is sought or made under this Division may apply to the Court for an order that: (a) the prospective applicant give security for the person's costs and expenses including: (i) the costs of giving discovery and production; and (ii) the costs of complying with an order made under this Division; and (b) the prospective applicant pay the person's costs and expenses. Note: Part 40 deals with costs and Division 40.2 deals with taxation of costs. Brief background 5 Each of Stuart Landrigan and Chris Acevski were employees of Suters Architects No. 1 Pty Ltd, an architectural business based in Newcastle, from May 1996 and resigned in November 2011. Suters Architects was a wholly owned subsidiary of Suters Holdings Pty Ltd (the Company). The prospective applicants held shares in the Company from 2005 until late 2016. They received dividends until 2011. 6 In or about December 2010, the Mr Landrigan and Mr Acevski signed a document entitled "Shareholders Agreement for the operations of Suters Holdings Pty Ltd ACN 114 591 016" (2010 Shareholders Agreement). That agreement contained mechanisms for a shareholder who wished to dispose of their shares to offer them to existing shareholders and employees or for the Company to buy back shares (relevantly) in the event of a default. It was an event of default for a shareholder to cease to be an employee. The valuation methodology included in calculation of a multiple of the average of profits earned in the preceding three years as well as reference to the Company's net tangible assets. 7 Suters Architects traded profitably following the implementation of the Commonwealth Government's stimulus package in response to the global financial crisis directed at funding the construction of school halls throughout Australia. There was a high level of gross income in the financial year ended 30 June 2010, but the work tailed off in 2011 and was not recurring. 8 On 26 July 2011, Mr Bruce Hatchman presented a paper to the Company's board on the topic of valuing the shares in the Company and ownership succession planning. Mr Hatchman is a chartered accountant. He became a director of the Company on 1 July 2011 and its Chairman on 27 November 2012. 9 Around 30 April 2013, Suters Architects changed its branding to "dwp Suters". On 1 July 2014, the business of Suters Architects was transferred to, dwp Australia Pty Ltd. It is accepted that this was an intragroup transfer and dwp Australia was a wholly owned subsidiary of the Company at that time, not an entity owned by a Bangkok based design firm, "dwp". 10 On 5 April 2017, a report appeared in the Australian Financial Review which stated in part (as written): Design firm Suters has been acquired by Bangkok-based DWP and will take on the branding and identity of its new south-east Asian parent. The transaction will see Suters shareholders own one third of the combined entity that has an annual revenue of $50 million and DWP shareholders owning the rest. Terms of the deal – which consummates an alliance that four years ago led the Local firm to practise under the brand name dwp/suters – were not disclosed. Prospective applicants 11 The prospective applicants once held 3,700 of 52,000 ordinary shares in the Company. They say that: (1) They believe that they may have a right to relief against the respondents for oppression (under ss 232 and 233 of the Corporations Act 2001 (Cth)) and/or misleading or deceptive conduct (under ss 18 and 236 of the Australian Consumer Law, being Sch 2 of the Competition and Consumer Act 2010 (Cth)). They say that the Company took steps to implement a succession plan that unfairly discriminated against them as former employee shareholders; the purpose of the succession plan was to force out non-employee shareholders for less than the true value of their shares by changing valuation methodology, withholding dividend payments, purporting to create a class of shares with preferred rights (to be issued to some existing employees) and attempting to create an inferior class of shares (into which the ordinary shares of some former employee shareholders would be converted). (2) In summary, the conduct they rely on to make out oppression includes: (a) Attempting, at the 2012 Annual General Meeting of the Company, to change the valuation methodology for the sale of shares from that set out in the 2010 Shareholders Agreement. (b) The fact that there was no proposal to compensate the prospective applicants for the prejudice resulting from the changed valuation methodology and the purported change to the valuation methodology made it unattractive for existing shareholders or employees to purchase their shares in accordance with the valuation methodology set out in the 2010 Shareholders Agreement. (c) The prospective applicants were not offered A Class redeemable preference shares which conferred the right to receive a special dividend (in an aggregate amount of $327,000) designed to compensate some but not all shareholders who had acquired their shares for more than $175. (d) The Company purported to convert the prospective applicants' ordinary shares to B Class redeemable preference shares which would be subordinated to the payment of dividends on the A Class redeemable preference shares. The B Class redeemable preference shares would be redeemed for dividends totalling $114 per share but there was no timetable for those payments. The Company purported to convert 8.7% of the ordinary shares to B Class redeemable preference shares. Although approximately 19.8% of the ordinary shares were held by former employees, the conversion applied to only some of the former employee shareholders, including the prospective applicants. This had the effect of "destroying the market" for the prospective applicants' shares, leading the prospective applicants and other shareholders to believe that the prospective applicants' shares were less valuable than other shares. (e) Withholding dividends on shares from 2011. The prospective applicants say that this had the effect of driving the price of their shares down to a level at which the Company could purchase their shares cheaply while inflating cash reserves used to pay employee bonuses and making dividend payments to some employees on their A Class redeemable preference shares to an aggregate amount of $327,000. (f) Controlling the sale of the prospective applicants' shares and causing them to wait between March 2012 and May 2016, the period between when, they say, they first asked the Company to exercise the default mechanism in clause 15 of the 2010 Shareholders Agreement and the time at which the Company issued default notices. In the intervening period, the share price dropped from $198 per share to $86.10 share having regard to the fact that the valuation methodology under the 2010 Shareholders Agreement takes into account a multiple of average profits over the prior three years. This was unfairly discriminatory and amounted to a bad faith exercise of the discretion conferred under the 2010 Shareholders Agreement. (3) In summary, the conduct the prospective applicants rely on to make out misleading or deceptive conduct includes: (a) Between October 2012 and November 2015, the Company falsely represented to the potential market for the prospective applicants' shares (including existing shareholders) that the 2010 Shareholders Agreement had been amended, varying the shareholders' rights and creating new classes of shares. It represented that it had created a new class of B Class redeemable preference shares and it would convert ordinary shares held by former employees (including the prospective applicants) who had been unable to sell their shares into the new class of shares; and (b) In the same period, the Company falsely told the prospective applicants that their shares had been converted to B Class redeemable preference shares and, by extension, their shares no longer carried the rights of ordinary shares. (4) They require more information to decide whether to start the proceeding. Their focus is on the fact that, if they were entitled to damages of (say) $100 per share in relation to their shareholding in the Company, their overall damages claim may be for $360,000. This is, to them, a substantial amount of money, but they may expose themselves to a similar level of risk of liability for costs if they proceed, having regard to the complexities of prosecuting claims of the kind they propose. They envisage that the proceedings would be "staunchly defended". (5) While they concede that they have a substantial amount of information, they do not have sufficient information to assess the strength of the claim nor the amount of damages to which they might be entitled. They acknowledge that there may be an adequate explanation for the Company's conduct towards them but no such explanation has been given and they are not in a position to assess that without access to further information, such as board papers and internal working documents. They do not know how the merger between the Company and dwp was structured so that they do not know whether the Company or dwp Australia would be in a position to meet an award of damages. They do not know what their shares would be worth had they not been "forced out" in late 2016. Prospective respondents 12 At the hearing of the application, Mr Marshall SC, senior counsel for the prospective respondents indicated that the prospective respondents concede that there was no provision in the 2010 Shareholders Agreement which permitted amendments to it. Accordingly, unless there was unanimous consent of shareholders, it could not be amended. None of the prospective applicants consented to the amendments purportedly made in 2012 or those subsequently proposed. Further, they now admit that s 254G(3) of the Corporations Act prohibits the conversion of issued ordinary shares to redeemable preference shares. 13 The prospective respondents concede (properly in my view) that r 7.23(1)(a) is satisfied. They take issue with the prospective applicants' contention that they do not have sufficient information on the basis of which to make a decision and cavil with whether the prospective applicants' enquiries were reasonable. Documents sought 14 The documents which the prospective applicant sought under the amended originating application filed on 23 October 2017 are (as written and set out in schedule 2 of that application): a) Bruce Hatchman's board paper referred to in the 2011 CEO Report by then CEO Robert Macindoe in which Macindoe said, "I'm pleased Bruce is made on board paper considered a review of Suters Share Valuation as an important step in sustaining Suters Ownership Succession plans." b) Copies of any reports, memoranda, emails or advice provided by Bruce Hatchman regarding share valuation and succession planning documents pertaining to: i. Bruce Hatchman's board paper as referred to in the 2011 CEO Report above; and ii. Suters Ownership Succession plans. c) All Board Papers, Board minutes and shareholder minutes, Board resolutions, shareholder resolutions, and/or all General Meeting resolutions between 2010 to date relating to the Suters/DWP Arrangements (see 'j' below). d) Any letters, reports, emails, memoranda, notes or other documents provided by Lawler Partners (now PKF) to Suters Holdings Pty Ltd, Suters Architects Pty Ltd, Suters Architects No.1 Pty Ltd or DWP Australia Pty Ltd regarding 'succession planning', (as phrased by Bruce Hatchman) or valuations (or revaluations) methodologies or modelling between 2010 to date. e) Not used f) Not used g) Copies of any business sale agreements of any transfer of assets or shares within the group comprising and including Suters Holdings Pty Ltd, Suters Architects Pty Ltd and/or DWP Australia Pty Ltd ACN 169 328 018 (DWP Australia) for 2016 and 2017. h) Copies of financial statements and reports in relation to Suters Holdings Pty Limited, Suters Architects Pty Ltd and/or DWP Australia Pty Ltd ACN 169 328 018 (DWP Australia) or its associated entities. i) The minutes of the Annual General Meeting in 2016 of Suters Holdings. j) All documents held within the group recording the terms of any sale, financial transaction, merger, acquisition or co-operation in or about May 2013 and April 2017 or otherwise referred to in the articles appearing in the Australian Financial Review dated 5 April 2017 titled "Architecture firm Suters throws lot in with Bangkok-based DWP to focus on Asia" and in Architecture & Design on 6 April 2017 titled "Suters and DWP arrangement moves from alliance to acquisition" (the Suters/DWP Australia Arrangements), including but not limited to: i. The documents recording the terms of the sale of shares, sale of business or sale of assets of the Suters Holdings or its associated entities as acquired by DWP Australia or DWP Australia's associated entities, any merger of the Suters Holdings or its associated entities (including Suters Architects) with DWP Australia or DWP Australia's associated entities; and ii. any joint venture agreements, intellectual property licenses, term(s) sheets, letter of intent, heads of agreement or memoranda of understanding between DWP Australia or its associated entities and or its associated entities. k) Not used l) Not used 15 Mr Hatchman swore an affidavit dated 27 September 2017 and it was read. Exhibit BH-A was tendered. Exhibit BH-B was not tendered but it was served on the prospective applicants. Exhibit BH-B contained documents which responded to paragraphs a) (Mr Hatchman's 26 July 2011 board paper) and d) (valuations undertaken in 2012, 2014 and 2016). Mr Katekar, counsel for the prospective applicants indicated that the prospective applicants no longer relied on paragraph i). 16 By the end of the hearing, six categories of documents remained in contention, being those referred to in paragraphs b), c), d), g), h) and j) of the amended originating application (on the basis that i) was not required if discovery in category j) is permitted); paragraph j) was narrowed as it had previously required documents "relating to" rather than "recording the terms of" the relevant transactions. 17 Mr Hatchman admits that the Company holds documents which respond to paragraphs (a), (d), (g), (h) and (i). Some of those documents have already been provided to the prospective applicants in exhibit BH-B. At the conclusion of the hearing, Mr Marshall informed the Court that the Company can readily obtain the documents referred to in j). Mr Hatchman says that it will be a significant task to obtain the documents referred to in c). Should preliminary discovery be ordered? 18 Although I was taken to other cases to emphasise various points, in my view those matters were encompassed in the generally accepted summary of the principles relevant to determining an application for preliminary discovery stated by Hely J in St George Bank Ltd v Rabo Australia Ltd (2004) 211 ALR 147; FCA 1360 (St George v Rabo) at [26]: (a) the rule is to be beneficially construed, given the fullest scope that its language will reasonably allow, with the proper brake on any excesses lying in the discretion of the court, exercised in the particular circumstances of each case: Paxus Services Ltd v People Bank Pty Ltd (1990) 99 ALR 728 at 733; 20 IPR 79 at 85; Minister for Health and Aged Care v Harrington Associates Ltd [1999] FCA 549; BC9902167 at [27]; (b) each of the elements prescribed in subparas (a), (b) and (c) of the rule must be established: Hooper v Kirella Pty Ltd (1999) 96 FCR 1 at 11 [38]; 167 ALR 385 at 367; 47 IPR 21 at 30. Preliminary discovery cannot itself be used to remedy deficiencies in the satisfaction of the conditions themselves: Airservices Australia v Transfield Pty Ltd (1999) 92 FCR 200 at 202–3 [5]; 164 ALR 330 at 332 ; (c) the test for determining whether the applicant has "reasonable cause to believe", as required by subpara (a), is an objective one: Hooper at FCR 11–12 [39]; ALR 367; IPR 30; Malouf v Malouf [1999] FCA 710; BC9902833 at [16]; Quanta Software International Pty Ltd v Computer Management Services Pty Ltd (2000) 175 ALR 536 at 541–2 [24]; 49 IPR 25 at 31; Alphapharm Pty Ltd v Eli Lilly Australia Pty Ltd [1996] FCA 391; BC9602085 at 23. Further, the words "or may have" cannot be ignored. The applicant does not have to make out a prima facie case: Quanta Software at ALR 541–2 [24]; IPR 31; Paxus Services at ALR 733; IPR 85; (d) belief requires more than mere assertion and more than suspicion or conjecture. Belief is an inclination of the mind towards assenting to, rather than rejecting a proposition. Thus it is not sufficient to point to a mere possibility. The evidence must incline the mind towards the matter or fact in question. If there is no reasonable cause to believe that one of the necessary elements of a potential cause of action exists, that would dispose of the application insofar as it is based on that cause of action: John Holland Services Pty Ltd v Terranora Group Management Pty Ltd [2004] FCA 679; BC200403021 at [13], [14], [17] and [73]; (e) while uncertainty as to only one element of a cause of action might be compatible with the "reasonable cause to believe" required by subpara (a), uncertainty as to a number of such elements may be sufficient to undermine the reasonableness of the cause to believe: Glowatzky v Insultech Group Pty Ltd (1997) 39 IPR 215; (f) the question posed by subpara (b) of the rule is not whether the applicant has sufficient information to decide if a cause of action is available against the prospective respondent. The question is whether the applicant has sufficient information to make a decision whether to commence proceedings in the court: Quanta Software at ALR 543 [33]–[34]; IPR 32–3, Alphapharm at 24–6. Accordingly, an applicant for preliminary discovery may be entitled to discovery in order to determine what defences are available to the respondent and the possible strength of those defences, or to determine the extent of the respondent's breach and the likely quantum of any damages award: CGU Insurance Ltd v Malaysia International Shipping Corp Berhad (2001) 187 ALR 279 at 285 [21]; Quanta Software at ALR 543 [33]–[34]; IPR 32–3, Alphapharm at 24–6, Airservices Australia at FCR 202–3 [5]; ALR 332; (g) whether an applicant has "sufficient information" for the purposes of subpara (b) also requires an objective assessment to be made: Minister for Health at [44]; Alphapharm at 23–4, Hooper at FCR 12 [40]; ALR 367; IPR 31. The subparagraph contemplates that the applicant is lacking a piece (or pieces) of information reasonably necessary to decide whether to commence proceedings; (h) it is no answer to an application under the rule to say that the proceeding is in the nature of a "fishing expedition": Paxus Services at ALR 733 ; IPR 85. Indeed O 15A r 6 "expressly contemplates" what once might have been castigated as "fishing": Bailey v Beagle Management Pty Ltd (2001) 105 FCR 136 at 143 [27]; 182 ALR 264 at 270–1; 20 IPR 79 at 85. As Burchett J commented in Paxus Services, the rule is (at ALR 733; IPR 85): … designed to enable an applicant, in a situation where his proof can rise no higher than the level the rule describes, to ascertain whether he has a case against the prospective respondent … [Emphasis in the original]. 19 For completeness, I note that on 29 November 2017, the Full Court handed down its decision in Pfizer Ireland Pharmaceuticals v Samsung Bioepis AU Pty Ltd [2017] FCAFC 193 (Pfizer Ireland v Samsung Bioepis), a case which deals primarily with the proper interpretation of r 7.23(1)(a). The Full Court found that the reasonable belief required to satisfy r 7.23(1)(a) is that there may be a right to obtain relief, not a reasonable belief that the prospective applicant does have a right to obtain relief. To the extent that St George v Rabo at [26(d)] might be taken to suggest that the belief required is that the prospective applicant does have a right to obtain relief, it needs to be read in in the context of [26(c)]. No doubt was otherwise cast on Hely J's statement of principles, although it must be accepted that that statement of principles is a guide and not a substitute for the words of the rule: see Pfizer Ireland v Samsung Bioepis at [178] per Nicholas J and Apache Northwest Pty Ltd v Newcrest Mining Ltd (2009) 182 FCR 124; FCAFC 29 at [63] per Flick J. 20 Pursuant to paragraphs (1)(a) and (1)(c) of r 7.23, it must be the prospective applicant who holds the reasonable beliefs that it may have the right to obtain relief and that the prospective respondent has or is likely to have in its control documents directly relevant to whether it has such a right, while under paragraph (1)(b), it must objectively be the case that, after making reasonable inquiries, the prospective applicant does not have sufficient information to decide whether to start proceedings to obtain that relief. Affidavits of Mr Landrigan and Mr Acevski, affirmed on 25 July 2017, were read and exhibit SL1 was tendered. Mr Landrigan and Mr Acevski (who is also a director of Ace Concepts Pty Ltd) depose to the matters contemplated by r 7.23. 21 In light of the prospective respondents' proper concession that r 7.23(1)(a) is satisfied, the questions which fall for determination relate to paragraphs (1)(b) and (c) of r 7.23 and the exercise of the Court's discretion under r 7.23(2). Do the prospective applicants have sufficient information to decide whether to start a proceeding? 22 In written submissions, Mr Marshall submitted, that having regard to the way the prospective applicants frame their case, the question for the Court is how the documents which the prospective applicants seek to discover would assist them to determine the likely quantum of any award of damages and thereby decide whether to commence proceedings with the three relevant times at which it would be necessary to value their shares being in 2012, in 2016 and now. He submitted that in the absence of any evidence from a forensic accountant explaining what financial records are required for him or her to provide an opinion on the value of the prospective applicant's shares at those three relevant times, only paragraph h) has any apparent relevance. While the Company's accounts for 2016 are to hand, no accounts have yet been prepared for 2017. However, in the absence of any expert guidance, the breadth of the material claimed seems simply to cast a wide net to gather material to bolster the prospective applicants' case, the case theory for which is already well developed. 23 I do not accept that this is a fair characterisation of the prospective applicants' case. Further, I do not accept that, at this stage, it is necessary for the prospective applicants to be in a position to rely on expert evidence as to the extent of the information required. 24 In concluding his opening submissions at the hearing, Mr Katekar summarised his position with respect to the questions on which his clients seek answers pursuant to paragraphs b) and c) of schedule 2 to the amended originating application, which he described as the "nub of the claim". Those matters were: (1) Whether the Company through its directors knew in 2012 and onwards that the resolutions passed at the annual general meeting in 2012 (seeking to amend the 2010 Shareholders Agreement) were invalid, as they eventually agreed in November 2015. (2) On a related matter, whether the board knew that the conversion of ordinary shares to B class redeemable preference shares in 2013 was invalid, as they eventually agreed in November 2015. (3) Was the conversion of the prospective applicants' shares to B Class redeemable preference shares done to prevent them from having any potential interest in the dwp merged entity? (4) Did the board know or appreciate that the only means of removing the prospective applicants as shareholders under the 2010 Shareholders Agreement was to issue a default notice? (5) Did the Company deliberately decide not to issue a default notice until 2016 (see [6] above) for the purpose of the prospective applicants receiving about half of what their shares were worth in 2011 when they left the Company, thereby unfairly discriminating against them? (6) Was the default mechanism triggered in 2016 to clear the way for the merger with dwp to go ahead without the applicants getting an interest in it? 25 In oral submissions, and in particular, in light of the remarks made by Mr Katekar at the conclusion of his opening submissions, Mr Marshall submitted that the prospective applicants have enough material to make a decision whether to bring proceedings and that the discovery they now seek is designed to perfect their case. He relied on three documents: (1) An open letter dated 4 March 2016 in which the prospective applicants' lawyers set out to the lawyers for the prospective respondents the basis of their causes of action for oppression and misleading or deceptive conduct. They claimed that the Company should buy back their shares for $175 per ordinary share and $1 for each C class share amounting to $297,840 for Mr Acevski and $350,400 for Mr Landrigan. The letter concluded: The way forward 18. If this matter cannot be satisfactorily resolved now, Mr Acevski and Mr Landrigan intend to commence proceedings. 19. Such proceedings will bring out into the open Suters Holdings' decisions to cease paying dividends, its transfer of the business to dwp Australia Pty Ltd, and how that could possibly have been achieved without a special resolution of shareholders, as required by the 2010 Shareholders Agreement. We anticipate these matters will only make the case stronger. 20. If that step is taken, substantial costs will be incurred by all parties. Mr Acevski and Mr Landrigan would prefer to resolve this sensibly now, but are understandably losing patience. We propose that the parties meet to discuss these issues (our clients intend to bring counsel). … Mr Marshall described this as a "confident letter" suggesting that the prospective applicants had already made a decision to commence proceedings and relied on the decision of Barrett J in Contour Building and Construction Pty Ltd v Kerr [2008] NSWSC 883 at [5]. Mr Marshall nonetheless conceded that the test in r 7.23(1)(b) is an objective one as to whether a reasonable person in the prospective applicants' position has enough information to decide whether to commence proceedings. (2) An undated document referred to in exhibit SL1 to Mr Landrigan's affidavit, which was sent to shareholders and appears to have been generated some time during or after mid-2012 and is headed "Sustainable Structures for Ownership Transition Summary Report to Shareholders". Mr Marshall said that that document demonstrates "there was no hiding away from it. There was an attempt to favour some shareholders over others – and it did line up with employment." He submits that whether or not the Company's board knew at that time that amendment of the 2010 Shareholders Agreement required unanimous consent or that the Corporations Act would not permit conversion of the existing ordinary shares to redeemable preference shares has no bearing on whether the conduct was oppressive. (3) A letter dated 26 May 2017 from the prospective applicants' lawyers to the lawyers for the prospective respondents which indicates some knowledge of the commercial transaction between the Company and dwp because, at paragraph 12 it refers to the Company obtaining "one third of the combined entity, with an annual revenue of $50 million". He submitted that this information should "dispense with the concern one might have about capacity". (4) Share valuations performed by accountants now known as PKF set out at page 66 of BH-B which are said to have been performed in accordance with the methodology under the 2010 Shareholders Agreement. 26 It is true that the prospective applicants' case theory is well developed. The Court was taken through the documentation which the prospective applicants have in SL1. They also now have access to Mr Hatchman's board paper of 26 July 2011 (sought in a) and b)) and the valuations prepared in 2012, 2014 and 2016 (sought in d)). That is a substantial quantity of information. 27 Except for the documents contained in BH-B, the documents which the prospective applicants hold are those which were made available to shareholders generally during the period in which the prospective applicants held shares. The documents the prospective applicants seek are generally those which were generated for use by the Board or explain transactions to which they were not privy. 28 The prospective applicants seek to establish both whether the prospective respondents have an adequate explanation for the Company's conduct and the strength of that defence. They also seek to determine the likely quantum of damages to assess whether they should commence an action having regard to the apparently fine balance in the quantum of damages and the cost of bringing oppression actions. Those aims are consistent with Hely J's explanation of the application of relevant principles in St George v Rabo at [24](f), recently reaffirmed by the Full Court in Bonham v Iluka Resources Ltd [2017] FCAFC 95 at [64]. 29 Despite the "confident" tone of the prospective applicants' lawyers' letter of 4 March 2016 and the statement in it that the prospective respondents "intend" to commence proceedings if the dispute is not satisfactorily resolved (statements made 19 months before the hearing on this application). I accept that this is a case in which the likely quantum of damages is a real issue in the decision whether to commence proceedings. 30 There is some force to Mr Marshall's submission that the irregularities in the process adopted by the Company in implementing "option 4" set out in the document headed "Sustainable Structures for Ownership Transition Summary Report to Shareholders" apparently issued in mid-2012 leaves the Company with no obvious defence, whatever the directors' motivation in doing so. "Option 4" was implemented by purporting to amend the 2010 Shareholders Agreement without unanimous consent at the Annual General Meeting in 2012, and by purporting to reclassify issued ordinary shares as B Class redeemable preference shares contrary to s 254G(3). On that basis, the prospective applicants do not, objectively, require discovery of documents referred to in paragraph b) to decide whether or not to commence proceedings against the Company in relation to the period from 2012 to October 2014, when the purported conversion to B Class redeemable preference shares occurred. 31 Nonetheless, that is not a complete answer in relation to the relationship between the Company and dwp and its impact on the Company's conduct. The "dwp Suters" trading name was adopted in April 2013. Proximately to the dwp merger announced in April 2017, in late 2016, the prospective applicants' shares were acquired from them. This was done after the Company admitted that its actions in purporting to amend the 2010 Shareholders Agreement were invalid (in November 2015). I note that the letter of 26 May 2017 referred to in Mr Marshall's submissions indicates some confusion about the transaction undertaken in April 2017. Paragraph 12 of that letter states that: The commercial transaction between Suters Holdings and DWP relating to the acquisition by shareholders of Suters Holdings of one third of the combined entity, with an annual revenue of $50 million, was subsequently completed. [Emphasis added]. 32 After obtaining instructions during the hearing, Mr Marshall explained hearing that dwp Australia (the operating subsidiary of the Company from 2014 onwards) was transferred to an intermediate holding company (which also owns six or seven architecture businesses globally) and that the Company now holds one third of that combined enterprise. While Mr Marshall's explanation advances understanding of the structure as it now exists and possibly the capacity of the Company to satisfy a judgment, it does not explain the impact of the development of the relationship between the Company and dwp. I therefore consider that discovery in categories c) (for the period from 2012) and j) would be appropriate as it may be relevant to any defences that the Company may have in relation to claims of unfair discrimination over the period and the quantum of damages that the prospective applicants may claim. 33 Paragraph d) is directly relevant to valuation. While it may have been substantially satisfied by the documents contained in exhibit BH-B, I accept that materials generated by the accountants now known as PKF may have relevance. 34 Paragraph g) provides no assistance to the prospective applicants in deciding whether or not to bring proceedings. At the hearing, counsel for the prospective applicants accepted that Suters Architects sold its business and transferred its employees to dwp Australia in 2014, at a time when both entities wholly owned subsidiaries of the Company. 35 Insofar as the prospective applicants' claims may require valuation of ordinary shares in the Company to establish quantum of loss and that is directly relevant to the decision whether or not to commence proceedings, it would be appropriate to order discovery of documents referred to in paragraph h), albeit that accounts for the 2017 year may not exist yet. 36 Paragraph i) was not pressed. Have the prospective applicants made reasonable enquiries? 37 SL1 and BH-A contain correspondence between the parties' lawyers over a period from 9 December 2015. That correspondence discloses a range of possible claims including, at one point, a claim against Mr Hatchman and the then chief executive officer of the Company in relation to statements made concerning the prospective applicants' refusal to sign a revised Shareholders Agreement in 2015. Having said that, the requests are generally centred on the issues which form the basis of the possible claims for relief identified by the prospective applicants in this proceeding. 38 Mr Marshall has suggested that the enquiries were not reasonable because the prospective applicants did not propose a new "Specified Purpose" for a confidentiality deed originally proposed by the prospective respondents in their letter of 23 December 2015. That purpose was "considering whether to give a transfer notice to the directors of the Provider in accordance with clause 9.2 of the Shareholders Agreement between the shareholders of the Provider … dated 1 December 2010". Mr Marshall relies on the fact that, by an email dated 28 January 2016, the prospective respondents' lawyers stated that "[m]y client will consider an alternative Specified Purpose should your clients wish to propose one", but the prospective applicants' never did. 39 Having regard to the course of correspondence, I am satisfied that the prospective applicants have made reasonable enquiries. While the request by the prospective respondents for an appropriate confidentiality arrangement was not unreasonable, it was not reasonable to seek a plainly inappropriate "Specified Purpose". It was open to either party to suggest appropriate wording. That issue is not determinative. Mr Katekar contends, and I accept, that after the correspondence in January 2016, the prospective applicants sought to negotiate categories which resulted in a narrowing of the documents sought. It is plain that the prospective applicants laboured under a number of factual uncertainties. With the likely cost of bringing proceedings of the kind contemplated being so finely balanced against the likely reward to the prospective applicants, the response of the prospective respondents was inadequate. This is particularly so in light of the acknowledgment (ultimately given in November 2015) of error in relation to the purported amendments to the 2010 Shareholders Agreement and the purported conversion of the prospective applicants' shares. Is r 7.23(1)(c) satisfied? 40 For foregoing reasons, I am satisfied that the answer to this question is yes. Security for costs 41 Mr Hatchman's affidavit sets out details of the basis on which he estimated the amount which the prospective respondents claim for security for costs. He did not set out any basis for belief that the respective applicants, who are two individuals resident in New South Wales and a company controlled by one of them, would not be able to meet an award of cost for that amount. 42 The application for security for costs should be refused. Disposition 43 I am satisfied that preliminary discovery in accordance with these reasons should be ordered. I certify that the preceding forty-three (43) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Farrell. Associate: Dated: 6 December 2017