Supreme Court New South Wales Medium Neutral Citation: O'Connor v O'Connor [2021] NSWSC 1056 Hearing dates: 2, 3, 4, 5 and 9 August 2021 Decision date: 24 August 2021 Jurisdiction: Equity - Commercial List Before: Hammerschlag J Decision: Summons dismissed Catchwords: EQUITY – Fiduciary duties – Whether by oral agreement the defendant shareholder and director of a company agreed to transfer to each of the plaintiffs an 8.33% shareholding in the company – Where plaintiffs allege that by virtue of their being (or being entitled to be) shareholders the defendant had a fiduciary duty to inform them of a proposal by a third party to purchase all of the shares in the company for a very substantial sum of money prior to the parties executing a Deed of Settlement and Mutual Release under which the plaintiffs sold whatever interest they had in the company to the defendant – HELD – Oral agreement alleged not established – Fiduciary duty not established Cases Cited: Briginshaw v Briginshaw (1938) 60 CLR 336 Brunninghausen v Glavanics (1999) 46 NSWLR 538 Coleman v Myers [1977] 2 NZLR 225 Helton v Allen (1940) 63 CLR 691 Jones v Dunkel (1959) 101 CLR 298 Rejfek v McElroy (1965) 112 CLR 517 Watson v Foxman (1995) 49 NSWLR 315 Category: Principal judgment Parties: Morgan Benedict O'Connor – First Plaintiff Michael Stack – Second Plaintiff John Joseph O'Connor – Defendant Representation: Counsel: B. DeBuse with I. Chatterjee – Plaintiffs D. Studdy SC with T. Boyle – Defendant Solicitor: Coleman Greig – Plaintiffs Webb Henderson – Defendant File Number(s): 2019/236226 JUDGMENT INTRODUCTION AND SYNOPSIS 1. HIS HONOUR: Diona Pty Limited (Diona or the Company), at all material times, provided earth-moving services for the construction of infrastructure. It was founded by the defendant, John Joseph O'Connor (John), in 1980, together with his then wife Margaret. John immigrated to this country from Ireland in 1972. Diona was successful. 2. The first plaintiff is Morgan Benedict O'Connor (Morgan), John's younger brother. He immigrated to this country from Ireland in 1993 and worked for Diona. He was appointed a director and remained so until 2000. He was re-appointed on 9 January 2006. He was removed on 1 August 2013. 3. The second plaintiff is Michael Stack (Michael), who came to this country from Ireland in 1995. He worked for Diona as an excavator operator. He went back to Ireland temporarily, but returned to Australia in 1998 and carried on working for Diona. He was appointed a director in 2005. He was removed as a director on 30 July 2013. 4. I have used the parties' first names. No disrespect is intended. 5. Morgan and Michael each say that in 2005 he entered into an oral agreement with John (who held 75% of the shares in Diona – the remainder being held by Margaret) that John would transfer to him an 8.33% shareholding in Diona, for $150,000. Each paid his money but was never issued with any shares in Diona or entered into its share register. 6. John has a different version of the agreement. He denies that he agreed to transfer to them shares in the company. He says he agreed to transfer to them an 8.33% share in Diona's "plant and equipment". Additionally, he says, he agreed with each of them that if, after ten years, they were still working with Diona and had made a contribution to building up its business, he would, at that time, consider making them full shareholders. 7. There are, of course, conceptual and jurisprudential difficulties with the idea of a shareholding in a specific underlying asset of a company. 8. Over some eight years, various attempts were made to document the oral agreement but it was never formalised. Most of the drafts reflect lawyers' attempts to implement the concept of such a shareholding. 9. In 2013, relations became strained between the plaintiffs and John, not least of all, it seems to me, because of the intervention of John's son David O'Connor (David), who had become General Manager of Diona. 10. A dispute arose as to what had been agreed. Things came to a head in board meetings in March and April 2013. An impasse was reached which led, amongst others, to the removal of Morgan and Michael as directors of Diona. 11. On 6 November 2014, Michael commenced proceedings in this Court seeking, principally, a declaration that he and John had, in or about December 2005, entered into a binding agreement under which he was entitled to acquire shares representing 1/12th or 8.33% of the ordinary share capital of Diona (the Diona Proceedings). 12. In late 2014, Diona (represented by John and David) was approached by Calibre Group Limited (Calibre), a listed company, which describes itself as a diversified, multinational provider of engineering, project delivery, and asset management services to the resources and infrastructure markets. Calibre expressed interest in acquiring 100% of the shares in Diona. 13. On 27 May 2015, Calibre made a non-binding indicative offer for the Diona shares based on an enterprise valuation of $81.2 million. The purchase price offered was a combination of cash, shares in Calibre, and a "work-out" component payable over time. 14. John did not disclose the Calibre proposal to Morgan or Michael. 15. From early 2015, John, Morgan, and Michael (and their respective corporate entities) had discussions with a view to resolving various disputes which had arisen between them. 16. On 29 July 2015, they settled their disputes by entering into a Deed of Settlement and Mutual Release (the Settlement Deed), which provided for Diona to pay Morgan and Michael sums of money and under which they released John and Diona from all claims. 17. On 28 October 2015, Calibre bought all of John and Margaret's shares in Diona. The arrangements included an agreement under which John became a consultant to Calibre for a period. 18. Morgan and Michael claim that: 1. John owed them a fiduciary duty to disclose to them the existence of the Calibre offer, which duty he breached; 2. John held as their trustee their respective 8.33% shareholdings in Diona which he had agreed to transfer to them, and he committed a breach of trust by buying those shareholdings from them under the Settlement Deed at an undervalue; and 3. they are entitled to equitable compensation. 1. John does not plead the Settlement Deed in bar to their claim. 2. On 4 March 2020, the Court ordered that liability be tried first. 3. The plaintiffs have not established the agreement for which they contend, namely, one for the immediate transfer (on payment of $150,000) of a full shareholding interest in Diona. The fiduciary duty they assert is, however, based entirely on the establishment of that agreement, as is their claim based on the sale of their interest to John at an undervalue. 4. They did not contend for, but rather expressly eschewed, any assertion or possibility of a different agreement as well as any proposition that an agreement for the transfer of less than a full shareholding interest was capable of founding a fiduciary duty on John to disclose the Calibre offer. 5. I find that John agreed to transfer to them, upon payment, what he described as a share in Diona's property, plant, and equipment, and that after a period of ten years he would procure the issue to them of a full shareholding. If I had been called upon to do so, it is highly likely that I would have found, in the circumstances of this case, that even though they were at the time not full shareholders, John nevertheless had a fiduciary duty to disclose the Calibre offer to Morgan and Michael. But the case was not fought on this basis. 6. So to have found would, of course, have said nothing of the quantum, if any, of any equitable compensation to which they might be entitled as a consequence of John's breach. THE HISTORY Events Leading Up to the Oral Agreement 1. In 1989, John and Patricia Doherty, friends of John and Margaret, bought 50% of the shares in Diona. They remained shareholders until 2005, when they sold their shares to John and Margaret (as recounted below). I shall refer to John Doherty as Doherty. 2. John operated a company called Metro Excavations and Plant Hire Pty Limited (Metro) and Doherty operated a company called JJ & PD Doherty Excavations Pty Limited. These entities acquired plant and machinery and leased it to Diona. 3. Morgan says that John suggested that he too should acquire equipment through a company and lease it to Diona. Morgan says he identified an opportunity to acquire plant to be leased to Diona and that as a result, on 20 May 1997, he and John incorporated OC Excavations Pty Limited (OCE). Morgan says that he introduced John to his accountant, Donald de Boer (de Boer), who also became Diona's accountant. Morgan and John were its directors. The shares were held by them, David, and Morgan's wife, Martina. 4. Michael followed a similar course. In 1998, he incorporated his own company, STO Pty Limited (STO), which also bought equipment and leased it to Diona. STO also invoiced Diona for the services provided by Michael. 5. In 2004, Diona was retained with respect to a sewer project in Rouse Hill, NSW. The project required some large equipment. John apparently suggested to Morgan and Michael that they set up a new company and purchase equipment and lease it to Diona because this would reduce Diona's exposure and debts. There is a dispute as to whether John told them that Doherty would not sign any more guarantees for Diona. It is not necessary to resolve this. 6. In about 2004, John, Morgan, and Michael incorporated Detailed Rock Sawing Pty Limited (DRS) for this purpose. They were equal shareholders. Sometime later, DRS and Diona bought a property at 24 Boundary Road, Oakville, NSW. 7. In 2005, John and Doherty discussed dissolving their partnership and, on 25 October 2005, Doherty (having acquired Margaret's share) sold the shares to John for $452,520. Certain properties were also transferred to Doherty. For the purposes of the transaction, a balance sheet as at 31 March 2005 was struck. It showed "Property, Plant & Equipment" at $1,963,620. 8. John says, and there is documentary evidence to support this, that he agreed with Doherty that Doherty would take one piece of equipment worth $100,000, and that he took the view that the market value of another piece of equipment included in the figure was worth $60,000 less than what had been attributed to it. The result was that the value of the equipment in Diona was actually worth $1,803,620. It will readily be appreciated that $150,000 is almost exactly 1/12th of this amount. It is also clear from the balance sheet and the share sale agreement with Doherty, that the price paid for his shares in Diona did not include any goodwill component. The Oral Agreement 1. Morgan says that prior to Doherty leaving (on 25 October 2005), he and John had a conversation to the following effect: John: Morgan, the Doc [Doherty] is not willing to provide any further security and he has indicated that he wants out of Diona, this is your opportunity to get involved at a more formal level and become a director and shareholder of Diona. You will need to buy in, can you pay $150,000[?] This is Mike's and your chance. I really don't want to be doing it on my own. I need others to give me a hand. Morgan: John, yes I can, I will do that. 1. At about the same time, Michael says that John said to him words to the effect: Do you want to buy into Diona? and on a later occasion said: The buy-in would be $150,000 each for both of you. I will work out what it will be in value. I think maybe 1/8th or 1/12th…You both will also need to be company directors and sign guarantees for Diona. As we discussed, this is to make it easier for Diona to obtain loans with more than one director. It is easier for Diona to price work with more than one director. to which Michael says he agreed. 1. John disputes these versions. His account of his conversations with Morgan and Michael is as follows: John: Are you interested in buying an interest in the plant and equipment of Diona as an investment into the future. Morgan: I am interested. Michael: I am interested but what about the hassles you had in settling with John Doherty? John: John Doherty and I had different goals. Mine was to allow Diona to continue past my tenure and into the future. John's was to cash out as he was approaching retirement. Going forward, you will be entitled to a percentage of whatever plant and equipment Diona buys for however long you stay. If we fall out, you will still get that. There is no goodwill going with this. It is not a shareholding. It has taken me 25 years to build Diona and obtain its accreditations with all the government bodies. If in 10 years you are both working with Diona, are as committed as I am, and are helping to build up the business, I may consider granting you a shareholding. How much can you afford? Morgan and Michael: $150,000. The de Boer Letter 1. On 26 September 2007, de Boer wrote to John and Margaret (the de Boer letter), which reads as follows: Dear John and Margaret Diona Pty Ltd – Company Secretarial Matters As you are aware for some time we have been working on company secretarial matters in relation to shareholders of the company. Instructions were given to introduce Michael Stack and Morgan O'Connor as shareholders of the company. The original proposition of issuing "C" class shares has been abandoned in favour of issuing shares of equal entitlements to Michael and Morgan. Michael Callanan has now prepared a revised shareholders agreement and this is enclosed for your approval. In relation to the proposed introduction of Michael and Morgan as shareholders the following is contemplated. 1. The company to adopt a revised constitution (this is prepared and is enclosed and simply requires John to execute as director). 2. Conversion of the existing 4 ordinary shares, (3 held by John O'Connor and 1 held by Margaret O'Connor) into "A" class shares. 3. Allotment of further "A" class shares to increase the share capital to 10,000 "A" class shares. (This requires 7,497 additional "A" class shares to be issued to John and 2,499 "A" class shares to Margaret). 4. The revised constitution allows for "B" class shares and the rights attaching to "B" class shares overtake the interests of the "A" class shares in the unlikely event of the insolvency of the original "A" class shareholders. We suggest the issue of 10,000 "B" class shares to Margaret. 5. Once the above conversion and allotments are made a total of 1,668 "A" class shares will be transferred from John to Michael and Morgan for the consideration of $300,000 (Michael 834 "A" class shares and Morgan 834 "A" class shares). 6. The shareholders will execute the shareholders agreement. The documents giving effect to the conversion and allotment of shares are enclosed. I await your instructions that all is in order before preparing the relevant documents for Morgan and Michael. Please let me know if you have any queries. Yours sincerely … Donald de Boer 1. Neither party called de Boer. Michael Callanan (Callanan) was a partner in the Sydney law firm Ellison Tillyard Callanan. Neither party called Callanan either. 2. The "revised shareholders agreement" referred to in the letter is not in evidence, and neither is a pre-revision version of it. 3. David had apparently been pressing for the affairs of Diona to be more formally regulated and had apparently suggested to John that the 2005 arrangement be formally documented. John says he told David what the agreement was so that he could instruct lawyers. The 2008 Draft Shareholders Agreement 1. On 4 August 2008, Callanan sent David an amended draft Shareholders Agreement. The significant aspects of it are that it contemplated that John and Margaret would each hold A Class shares, representing 41.67% of Diona, and each of Morgan and Michael would hold B Class shares respectively representing 8.33% of Diona. 2. The recitals provided: Recitals A. The Company is or will be incorporated to provide the services of earthmoving excavations, drainage and pipework (hereinafter defined). B. Each of John O'Connor, Margaret O'Connor, Michael Stack and Morgan O'Connor own Shares in the Company. C. The parties are entering into this agreement to record the terms and conditions on which they have agreed to fund the Company and to regulate their participation in the Company. 1. It appears from its formatting that it introduced the following definition of "share value": Share value means: during the period from the date hereof up to but excluding the tenth anniversary of the date hereof the Pro Rata Entitlement of the value of the property, plant machinery and equipment of the Company at book value then recorded in the financial statement of the Company only; and after the tenth anniversary of the date hereof the Pro Rata Entitlement of the total value of the Company then recorded in the financial statements of the Company; 1. It also introduced the following new clause 9: 9 Executive Shareholders 9.1 The holders of "B" Class shares are executives of the Company; 9.2 In the event that such shareholders cease to be employed by the Company then such shareholders representatives on the Board shall resign and their shares shall be transferred to John and Margaret O'Connor or as they direct in writing for the Share Value as at the date of termination of such employment and the provisions of clauses 13 and 14 and 15 shall not apply to such transfer. 1. Clause 13 concerned disposal of shares, and cls 14 and 15 were provisions colloquially known as "Drag Along" and "Tag Along". 2. As will be readily observed, this agreement seeks to implement the concept of a shareholding in Diona's property, plant, and equipment for ten years by creating a class of shares to be valued by reference to those assets for ten years and thereafter on the total value of the company. This idea of a shareholding in only property, plant and equipment can also be expressed as a shareholding in the company's assets, excluding goodwill. The Doyle Drafts 1. Time passed. 2. At some point, it seems in 2010, David consulted Jim Doyle (Doyle) of Doyles Construction Lawyers. He apparently instructed Doyle with the latest drafts by Callanan of the Shareholders Agreement, as well as Diona's Constitution. 3. John and David attended a conference with Doyle on 25 June 2010. In a letter to David on 1 July 2010 Doyle wrote: SHARE VALUE We note your instructions that the verbal agreement between John, Morgan and Michael was framed in terms of the shares being valued on the asset value of Diona only for the first 10 years after which they would be valued on the full value of Diona. We have suggested that only ordinary shares be issued in Diona. In order to give effect to the verbal agreement we have therefore amended clause 11.13 to provide that John may at any time buy back the shares of another shareholder and if the buy back occurs within the first 10 years of execution of the shareholders agreement then the value of those shares shall be current asset only value at the time of the buyback [sic] but that if the buy back occurs later than 10 years after execution of the agreement the shares shall be valued on the full company value. We have provided that the 10 years would run from 9 January 2010 being 10 years after Morgan and Michael became directors of Diona. Please confirm this approach is correct. 1. Doyle provided a re-drafted Shareholders Agreement. It introduced the following new definition of Share Value: Share Value means the value of the shares from time to time as determined in accordance with clause 17.17; 1. It introduced the following new cl 11.12: 11.12 Interaction with Tag Along and Drag Along Notwithstanding anything to the contrary in this agreement: (a) if John O'Connor receives a bona fide third party offer of the type contemplated by clause 14.1 or clause 15.1; and (b) has offered his Shares for sale in accordance with this clause 11; and (c) not all of the Shares held by John O'Connor are acquired by other Shareholders in accordance with this clause 11, then: (1) John O'Connor may sell all of his Shares to the third party purchaser and the third party may (but is not obliged to) exercise the Drag Along Option; and (2) any other Shareholder may exercise the Tag Along Option; and (3) if John O'Connor does sell his Shares to the third party, any obligation of the Shareholder to sell Shares allocated to a Shareholder under clause 11.4 and the obligation of that Shareholder to purchase those Shares, will lapse. 1. It also included cl 11.13, which gave John the right to buy the shares of any other shareholder determined in accordance with cl 17.17, on the basis that on or before 9 January 2016, the value of the shares shall be the Asset Value only, and after 9 January 2016 the value of the shares shall be the Share Value. 2. It introduced the following new cl 17.17: 17.17 Asset Value and Share Value The Asset Value is the value of shares attributable to the value of assets of the Company less the liabilities of the Company. The Share Value is the value of the shares in the Company as determined by an Independent Expert. 1. As will be appreciated, this proposed Shareholders Agreement too, reflects an attempt to implement the concept of a shareholding only in property, plant and equipment for ten years which then becomes a full shareholding. 2. On 2 September 2010, Doyle wrote to David confirming instructions that Diona had agreed to issue shares representing 8.33% of the total number of shares to each of Morgan and Michael. The letter enclosed formal documents to effect this and recorded that the directors meeting to issue new shares would be done in conjunction with other documents at the signing of the Shareholders Agreement. 3. In a subsequent letter dated 14 October 2010, Doyle suggested further changes. David did not respond until 4 January 2011. Apparently, he had been encountering significant health problems. 4. Doyle also arranged for taxation advice to be obtained. Tax advice was given by JMA Legal on 31 January 2011. The advice appears to have been based on the version of the Shareholders Agreement provided by Doyle to David on 1 July 2010. The Thomsons Lawyers Drafts 1. In early to mid-2011, David, on behalf of Diona, retained yet another set of advisors – accountants Crowe Horwath – who advised in relation to the Shareholders Agreement and associated documents. He also retained PKF, chartered accountants and business advisors, to carry out an accounting systems review. As well, he instructed (through Crowe Horwath) yet another firm of solicitors, Thomsons Lawyers (Thomsons). 2. On 20 June 2011, Thomsons produced yet another draft Shareholders Agreement. It contemplated the formation of a new holding company and all parties having the same class of ordinary shares. It provided for Morgan and Michael to subscribe for shares in the new holding company. It also contained restraint covenants by Morgan and Michael. Perhaps appropriately, a new entity was incorporated with the name Elusive Holdings Pty Limited. 3. On 4 July 2011, in an email to David, Raelene Berryman of Crowe Horwath suggested that the shares to be issued to Morgan and Michael be converting preference shares (CPS). She said, relevantly: I have today resolved some of the tax matters with the tax team who have agreed that it will be necessary for the holding entity to be in place for at least 45 days prior to the issue of new shares in Diona Pty Ltd. They have suggested that the "shares" we issue be converting preference shares. This will mean that in 2016 they convert to ordinary shares but that there is no deemed disposal to Stack/O'Connor. Under the current proposal of issuing dividend class shares then, in 2016 issuing ordinary shares, may result in a deemed disposal for CGT with a potential taxable gain accruing to Stack/O'Connor. 1. On 2 May 2012, Thomsons produced a new constitution for Diona, which made provision for the issue of CPS in the capital of Diona. 2. The terms of issue of the CPS were contained in a schedule to the proposed constitution. They included the following: 2. RIGHTS ATTACHED TO CPS (a) Each CPS is issued as fully paid, but with zero value. (b) A CPS does not confer on the CPS Holder any right or entitlement to: (i) dividends or other distributions declared or made by the Company; (ii) bonus issues of Shares; and (iii) any offer to allot Shares to Shareholders of the Company. (c) In the event of a winding up of the Company, a CPS confers on the CPS Holder the same right to participate in the distribution of the assets of the Company (both capital and surplus) on a winding up, on an As Converted Basis, as are conferred on Ordinary Shareholders, subject only to any amounts unpaid on the CPS. (d) In the event of a reduction of capital, a CPS confers on the CPS Holder the same right to participate in the distribution of capital, on an As Converted Basis, as are conferred on Ordinary Shareholders, subject only to any amounts unpaid on the CPS. … 4. RESTRICTIONS ON DISPOSAL OF CPS A CPS Holder must not Dispose of any CPS which are registered in its name, except as permitted under the Shareholders Agreement. 5. CONVERSION OF CPS (a) Subject to paragraph 5(b) of this Schedule, all CPS which are registered in the name of a CPS Holder will convert into fully paid Ordinary Shares on a one for one basis on 30 June 2016, provided that the CPS Holder continues to be employed by the Company for the entire period from the date of issue of the CPS up to and including 30 June 2016. … 6. REDEMPTION If a CPS Holder ceases to be employed by the Company at any time from the date of issue of the CPS up to and including 30 June 2016, the Board may in its absolute discretion redeem all CPS held by that CPS Holder: (a) at the value specified in paragraph 2(a) of this Schedule; and (b) with effect from the date that the CPS Holder ceases to be employed by the Company, and then cancel all CPS held by that CPS Holder and all share certificates for those CPS. 1. This structure represents yet another attempt to implement the shareholding concept discussed earlier. The PKF Report 1. In mid-2012, Steve Viski (Viski), a "Senior Manager – Enterprise Advisors" at PKF carried out an accounts payable and receivables review for Diona, apparently at the behest of David. Viski produced various reports. In one of them, completed in June 2012, he extracted information from the accounting records of Diona, which showed that all of the shares were owned by Margaret and John and that the payments of $150,000 made by Morgan and Michael in 2005 had been classified as "loans" (and had seemingly been repaid – at least in part). 2. After referring to the fact that only Margaret and John were shown as shareholders, Viski, apparently a close friend of David's, wrote, relevantly, that: It is noted that this differs considerably from what was advised during the interview process conducted at Diona, whereby the shareholding of the Diona should be as follows[:] Shareholder name Number of Shares Shareholding Percentage Margaret O'Connor 2,500 25.00% John Joseph O'Connor 5,834 58.34% Morgan O'Connor 833 8.33% Michael Stack 833 8.33% Total 10,000 100% As can be seen from the above, both MO & MS are to have acquired an 8.33% shareholding from John Joseph O'Connor when the initial $150,000 (each) was injected into Diona. However, it does not appear that the relevant documentation, nor accounting transactions have been arranged to effect this shareholding transaction. From the interview process conducted, it was advised that in or around October 2005, John Joseph O'Connor agreed to transfer 8.33% of his shareholding in Diona to each of Morgan O'Connor and Michael Stack. This agreement was made verbally between the relevant parties. However, as mentioned previously this agreement does not appear to have been effected. In light of the agreement between JJO and both MO & MS not being documented, it is believed confusion between the accountant at Diona and those parties involved resulted in the relevant changes to the shareholding not being made. This would also explain the reason as to why the $150,000 initially injected into Diona by MO & MS were incorrectly allocated to their respective loan accounts (or that of their associated companies). To further complicate the matter, it appears that Dividends have been paid by Diona since 2005. This causes additional complexities, as should the above transactions been intended to process, and as such be effected, with all such documentation and lodgements made to the relevant authorities (i.e. ASIC etc), it is arguable that both MO & MS were entitled to the portion of the dividends declared or paid during the period from October 2005 to present. 1. I have re-produced this substantial passage because of the importance placed on it by the plaintiffs in argument. The 2013 Meetings 1. On 25 February 2013, David emailed John, Morgan, and Michael. 2. A board meeting was held on 1 March 2013 at which John, Morgan, Michael, and David were present. The minutes (which David sent to Morgan and Michael the following day requesting them to review them to ensure they were accurate) reveal a degree of tension, in particular between David on the one hand and Morgan and Michael on the other. The minutes record, amongst others, that David was looking for commitments from "the entering shareholders" regarding consistency of time devoted to the business and prioritising Diona's success over conflicting interests of their own companies. The minutes record the following with respect to the Shareholders Agreement: DOC reviewed key points of the document particularly noting: - 2.3 Conditions Precedent date would be revised to 30/06/2012 - 6.4 Board meetings would be held between 2 and 12 times per year - 6.8 John O'Connor has the deciding vote on all decisions made at board level - 6.10 Directors insurance currently already in place - 13.1 Quarterly accounts would be submitted to all directors no later than 20 days after the end of each quarter - Schedule 1 Explanation of how Converting Preference Shares (CPS) work, including diagrams (diagrams attached to minutes). DOC also explained that there was a lot of detailed information in the shareholder agreement and the constitution that MS and MOC would need to get advice on immediately to ensure they would have any comments and queries submitted in writing by the due date. An additional clause is currently being added to include provisions for insurance on MS and MOC shares in the event of death and/or total permanent disability. Payment of this insurance policy may need to be in the names of MS and MOC but the intention would be that Diona will in some way cover this cost. This will be discussed further when more information becomes available. 1. Clearly, David was trying to introduce an increased level of formality and Morgan and Michael were unhappy with changes to working arrangements. The Shareholders Agreement and Constitution to which the minutes refer appear to be the Thomsons version, which had Morgan and Michael subscribing for CPS (which would convert into fully paid ordinary shares on 9 January 2016) and which provided that if a CPS holder ceased to be employed by Diona before that date, the board could redeem them for zero value. Morgan and Michael were dissatisfied with these minutes as being an accurate recording of the discussion, although they never identify the precise respects in which they say they were inaccurate. 2. On 19 April 2013, a solicitor, Peter Stewart (Stewart), of Coleman Greig Lawyers, wrote on behalf of Morgan to John and Margaret in relation to the proposed Shareholders Agreement and Constitution, seeking clarification. He recorded that the proposed arrangements varied significantly from Morgan's understanding. 3. Another board meeting was held on 26 April 2013. From the beginning, there was tension. Michael had bought a handheld tape recorded and he wanted to record the meeting, he says, because he was dissatisfied with the minutes from the last meeting. John refused. The effect of his evidence was that he told those present to calm down and that recording the meeting was unnecessary. 4. The minutes record that: Changes made to item 3 of the agenda as per MOC request. MS also had some concerns with the minutes but did not wish to address them with the board. 1. A significant part of the minutes is devoted to the proposed Shareholders Agreement, with which it may be inferred Morgan and Michael were dissatisfied. The minutes contain the following recording: JOC reiterated the deal was as follows: MOC and MS purchased 8. 33% of plant value of the business for $150,000 in 2006. This value was based on the agreed value of plant in the business on the departure of John Doherty from the [sic] Diona. JOC agreed that if MOC, MS and JOC could all work harmoniously together; and actively participate in the business to grow and increase its goodwill that after a period of ten years, they would be entitled to 8.33% of the goodwill as well. JOC asked if this was MOC and MS understanding of the proposed arrangements. MS and MOC confirmed this was their understanding. JOC also noted that MOC and MS had essentially received their plant share in Diona for next to nothing given that he paid for the deposit on their share in a property in Oakville bought jointly in Diona and Detailed Rock Sawing (the deposit paid on MS and MOC behalf was $130,000 each). JOC believed that MS must have thought that his purchase in Diona's plant share was a very good deal as he, at a later date, asked if he could purchase a larger share at the same rate. MS confirmed this discussion had taken place. JOC had also received some advice on the current agreement and had been made aware that there was a significant tax concern for MOC and MS which he was not previously aware of. MS and MOC could face significant capital gains tax which may make the agreement commercially unviable for MS and MOC. MOC confirm [sic] he had received similar advice which was to do with how the current agreement created a nil initial value for the shares when they converted to full shares. 1. Morgan and Michael challenge the accuracy of these minutes. They deny that John reiterated the deal as recorded and that they confirmed their understanding of it. They deny that there was any discussion to the effect recorded. The Crowe Horwath Restructuring Proposal 1. Following on the meeting, Crowe Horwath came up with two alternative options in May 2013. Option 1 was for Diona to issue shares to Morgan and Michael. Option 2 was to introduce an equity-based scheme. Both options appear to have been structured for taxation considerations. 2. The shares contemplated by Option 1 would have voting rights, dividend rights, and capital rights entitlements from 2016. Prior to that, their capital and dividend rights would exclude goodwill and pre-2006 profits. Option 2 would be implemented by way of a contract (including a services agreement) which would give Morgan and Michael a right to receive cash amounts based on equity equivalents. No shares would be issued, removing a "taxing point" up front or in 2016. Option 2 would entitle Morgan and Michael to receive a payment if and when Diona paid a dividend to shareholders after January 2016 equal to 8.33% of the total dividend paid. They would, however, be entitled to receive a payment representing 8.33% of sale proceeds on the ultimate sale of Diona. 3. A meeting to discuss the so-called corporate structure and incentives plan took place on 10 May 2013. John, David, and Michael were present, together with Michael's accountant, Peter Sullivan, and three members of Crowe Horwath. At some point, Michael apparently expressed a preference for Option 2, however neither of these options was implemented. 4. These structures are yet another attempt to implement the concept discussed earlier. Subsequent Correspondence 1. Lawyers became more involved, with the usual consequences. 2. On 12 July 2013, Stewart, on behalf of Morgan, wrote to Stuart Clout of Colin Biggers & Paisley, who were acting as solicitors for Diona, John, and Margaret, relevantly: For clarity, I set out my understanding of the background to the current situation between our respective clients and my client's ongoing concerns. 1. In 2006 John O'Connor offered my client shares in Diona Pty Ltd ("Diona"), valued by agreement between the parties at $150,000. The offer was not a "conditional" offer as suggested in the draft Deed of Release forwarded under cover of your letter of 26 June 2013. At the same time my client was appointed as a director of Diona. 2. My client paid Diona $150,000 and was under the impression that shares would be issued to him. 3. In 2009 a document was issued entitled Shareholders Agreement ("Original Shareholders Agreement") setting out terms relating to shares equal to 8.33% of the issued shares in the capital of Diona, which my client took to be the shares to which he was already entitled pursuant to the original offer. 4. Some 4 years later my client received correspondence from David O'Connor indicated that the board of Diona now wanted to get "the shareholder agreement process underway". A draft shareholders agreement ("New Shareholders Agreement") and Constitution for Diona was circulated. These documents did not reflect the terms of the Original Shareholders Agreement. 5. The terms of the New Shareholders Agreement differ significantly from those of the Old Shareholders Agreement and its acceptance would have significantly diluted my client's rights under the original offer. Further, the New Shareholders Agreement documents what is now generally known as Option 1, which has been discredited as being unnecessarily burdensome on both Diona and my client from a tax perspective. 6. In relation to Option 2, my client did express the view at a recent meeting with your client, that Option 2 was preferable to Option 1, having regard to the tax implications of the Option 1. 7. Option 2 in its present form leaves my client vulnerable to having his role as a non executive director terminated, to the resultant automatic termination of the Service Agreement and to a Loyalty Payment based only on the value of plant (pre 2016) and assets (post 2016), with no regard to the value of goodwill associated with Diona. 8. In its present form Option 2 is not acceptable to my client. If the documentation can be amended to provide my client with certainty in relation to an ongoing 8.33% interest in the profits of Diona and in the sale price of Diona or of the business of Diona (including goodwill) should the company or business be sold, and with no link between the holding of the directorship and the term of the Service Agreement, my client would be willing to give further consideration to this option. 9. My client reserves his rights with respect to the original offer but confirms that, provided Option 2 can be amended to address his stated concerns, he would be willing to enter into a deed of release substantially in the form submitted by your office. 1. After an exchange of correspondence, solicitors Hunt & Hunt, on behalf of Michael, wrote to the solicitors then acting for Diona (and John and Margaret) on 30 July 2013. I have included the full text of the letter because of its central importance in the resolution of this dispute: Dear Sirs … We are concerned that your letter dated 26 July 2013 and previous correspondence are making assertions concerning an "election" which has not taken place in the legal sense in which you may be intending it. We note as follows: 1. Our client has always been anxious to resolve the outstanding matters which arose in late 2005, early 2006 with respect to the issuing of equity in Diona Pty Limited as proposed by Mr John O'Connor. 2. At no stage has our client stepped back from the agreement which he made with Mr O'Connor at that time. Indeed Mr Stack has been ready, willing and able to proceed at all times but has been waiting for the appropriate documents to be made available. 3. As you are aware, the agreement was that Mr John O'Connor would arrange for Mr Michael Stack to be issued 8.33% of the equity in Diona Pty Limited on terms which included: (a) Mr Stack not having entitlement to goodwill in Diona Pty Limited until 1 January 2016; (b) Mr Stack would have an interest in all the assets of Diona Pty Ltd (excluding goodwill) purchased and held by the company up to and including 31 December 2015 and thereafter would leave a full interest in all assets of the company including goodwill; (c) in consideration for this grant of equity in Diona Pty Ltd, Mr Stack paid to Mr John O'Connor the sum of $150,000.00; (d) In addition to the payment referred to in 3(c), Mr Stack has acted in good faith to carry out the terms of his agreement with Mr O'Connor to advance the interests of Diona Pty Ltd in that he has: (1) provided personal guarantees (up to $15 million) in relation to leases of equipment for Diona Pty Limited; (2) served as a director of Diona Pty Limited and accepted his responsibility for the actions of Diona Pty Limited; (3) worked outside Sydney at the request of Diona Pty Limited and this included working on the Gold Coast in the construction of a pipeline (for approximately 3 years), attendance in Victoria in 2011 for an extended period and attendances in Northern New South Wales at Lismore for an extended period up to and including 2012. Mr Stack returned to Sydney in 2013. 4. At all times Mr Stack has acted on the basis of the agreement with Mr O'Connor in relation to the agreed issue of shares in Diona Pty Limited. 5. As you are aware, Crowe Horwath put forward a second proposal for consideration but our client did not elect to take up this proposal in lieu of the agreement which he has with Mr John O'Connor, but simply indicated that he would consider the second proposal when draft documents were issued for consideration. 6. After consideration of the draft documents provided to date involving the second proposal, Mr Stack has decided to proceed to final documentation of the original agreement which he has in place with Mr O'Connor. Recent tax advice indicates that if the shares were issued effective from 2006, then there should be little or no capital gains tax implications due to the payment for the shares approximating to the value of those shares. Our client has received tax advice from Minter Ellison, Lawyers. 7. Whilst Mr Stack appreciates the work that has been done in preparing the supply agreement, but its terms are different to the agreement which exists between Mr O'Connor and Mr Stack. Mr Stack now requests preparation of the documentation to enable the terms of the agreement with Mr O'Connor to be put into writing. We await receipt of these documents. Our client wishes to assure Mr O'Connor of his good faith in progressing this matter and looks forward to an opportunity to have a further meeting with appropriate representatives of Diona Pty Limited if this is required to finalise the written terms of the existing agreement. We look forward to receiving the draft documents for further consideration as soon as possible. 1. On 30 July 2013, John and Margaret, as the sole registered shareholders in Diona, removed Michael as a director. The Metro Proceedings 1. In August 2007, David's company DOC Civil Pty Limited (DOC), Metro, and OCE had together bought a property at 322 Annangrove Road, Rouse Hill as tenants-in-common. On 6 June 2014, Metro and OCE commenced proceedings in this Court against DOC seeking orders for the appointment to the property of trustees for sale. The Diona Proceedings 1. On 6 November 2014, Michael commenced the Diona Proceedings in this Court. As set out above, he claimed, principally, a declaration that he and John had, in or about December 2005, entered into a binding agreement under which he was entitled to acquire shares representing 1/12th or 8.33% of the ordinary share capital of Diona. The DRS Proceedings 1. On 20 February 2015, Diona and John commenced proceedings in this Court to which DRS was the only defendant, seeking the appointment of trustees for sale of the land situated at 24 Boundary Road, Oakville, NSW which had been acquired in April 2007. The Introduction of Calibre 1. In November 2014, an organisation called Mainsheet Advisors, acting on behalf of Calibre, was in contact with David in connection with the proposed acquisition of Diona by Calibre. 2. On 27 May 2015, Calibre made a non-binding indicative offer to acquire 100% of the shares in Diona and its subsidiaries, on the basis of an indicative enterprise valuation of $81.2 million. The offer consisted of a $34.4 million cash component (subject to adjustments) and Calibre shares priced at a value of $14.7 million, plus an earn-out component to be paid in September 2016 and 2017. 3. Negotiations in relation to the offer then took place. Calibre increased its offer. In substance, a deal was agreed by 20 July 2015. The up-front payment was increased to $45 million and the terms of the earn-out were changed so as to have a cap of $90 million, based on performance. 4. None of this was disclosed to Michael or Morgan. The Settlement Deed 1. On 29 July 2015, the Settlement Deed was entered into. The parties to it are: Diona, John, Metro, DOC, OCE, Morgan, DRS, Michael, and STO. 2. The Settlement Deed is not without its imperfections. The disputes which it settled included Morgan and Michael's allegations that they each held 1/12th of the shares in Diona, the Diona Proceedings, the DRS Proceedings, and the Metro Proceedings. 3. John paid Morgan $350,000 for his share in DRS and Michael $370,000 for his. 4. Diona paid Morgan a further $1.38 million in full and final settlement of the Diona Proceedings (to which he was in fact not a party). Diona paid Michael a further $1.68 million. 5. The Settlement Deed provided: 8. Release and bar to proceedings 8.1 Each Party and, where applicable, their nominated entity, will forever release and discharge each other in respect of the DRS Proceedings, the Diona Proceedings, the Metro Proceedings, and any Claim that they might have been able to bring, make or claim against each other or otherwise concerning or incidental to or in connection with or arising out of the Disputes and/or the Proceedings and/or any subject matters of this Deed, whether directly or indirectly. The Calibre Deal 1. On 31 July 2015, Calibre provided a revised non-binding offer which reflected the negotiations that had taken place. 2. The sale was finally formalised by an agreement entered into on 28 October 2015. Purchase price comprised a completion payment of $50,587,490 plus a capped earn-out amount of $45,000,000, with a capped purchase price of $90,000,000. 3. On settlement, John and Margaret received (after adjustments) $41,100,490 for their shares. The Court was not taken to any details of the work-out payments received by them. 4. If, in equity, Morgan and Michael each held 8.33% of the shares on issue in Diona, a proportional share of just the initial cash payment received by John from Calibre would appear to be significantly more than what they received under the Settlement Deed. Although the plaintiffs did not properly establish it, I would have been prepared to infer that this would represent a significant undervalue of such a shareholding. THE HEARING 1. The hearing, which took five days, was heard remotely because of the current COVID-19 pandemic. 2. The Court Book runs to well over 3000 pages. I had the benefit of written openings and comprehensive written closing submissions. I have had regard to all of the arguments but have not restated them. DISPOSITION The Parties' Positions 1. As mentioned earlier, the plaintiffs frame their case based on one narrow foundational proposition, namely that by the agreement, John bound himself to transfer to each of them, on $150,000, an equity interest consisting of ordinary shares in the share capital of Diona. In their Statement of Claim, the plaintiffs allege that additional consideration given by them was becoming directors and giving guarantees and indemnities to third parties to secure loans and other financial accommodation for Diona. 2. In paragraphs 19(a) and (b) of his Amended Defence, John pleads that the agreement was that each plaintiff: 1. would pay $150,000 to acquire 8.33% of the value of Diona's plant and equipment; and 2. if he actively worked and participated in Diona's business and contributed to a growth in the business for a period of ten years then his investment in Diona's plant and equipment may convert to an 8.33% shareholding in Diona; or 3. otherwise he would not be entitled to any part of the value of the goodwill of Diona. 1. The plaintiffs place heavy reliance on the decision of the New South Wales Court of Appeal in Brunninghausen v Glavanics (1999) 46 NSWLR 538 (Brunninghausen), which held that a fiduciary duty arose and was breached where a sole effective director and majority shareholder in a private company took advantage of his special knowledge of a proposed sale of the company business to acquire the shares of the only other shareholder, at a gross undervalue, without disclosing the negotiations for sale. 2. At 549, Handley JA (with whom Priestley and Stein JJA agreed) referred to the general principle that a director's fiduciary duties are owed to the company and not to shareholders. However, the Court recognised and went on to find that a fiduciary duty arose, and was imposed by law, on the particular facts of the case, which where that: * the defendant was the sole effective director; * there was only one other shareholder; * the parties had a close family association (they were married to sisters and their mother-in-law had intervened to secure a family reconciliation); and * the defendant's position conferred on him the exclusive advantage or opportunity to receive offers to purchase the company's business from third parties. 1. The Court referred to instances where the existence of some fiduciary duties owed by directors to shareholders has been recognised, such as where the directors seek further capital from their shareholders by a prospectus, the duty owed by directors to shareholders to treat them equally, including where they exercise a power to issue new shares, the duty on directors to shareholders not to mislead them in the context where a takeover offer for the company is made, and the duty to advise shareholders and disclose material facts when they propose resolution for adoption by a general meeting: see Brunninghausen at 550-553 [59]-[63], [69], [73]-[75]. 2. At 555 [89]-[92], the Court adopted with approval the reasoning of Mahon J in Coleman v Myers [1977] 2 NZLR 225 that in any transaction involving sale of shares between director and shareholder, the director is the repository of confidence and trust vested in him by the shareholder, or by his legal status, in relation to the existence of information affecting the true value of the shares. 3. It may well be that in limiting their case as they did, the plaintiffs took the view that unless they were shareholders in the conventional sense, such a duty would not be imposed. Have the Plaintiffs Proved the Agreement for Which They Contend? 1. I turn now to the question of whether the plaintiffs have established the agreement for which they contend, the onus of which rests on them. 2. Where a party seeks to rely upon spoken words as a foundation for a cause of action the conversation must be proved to the reasonable satisfaction of the Court. This means that the Court must feel an actual persuasion of its occurrence or its existence. In the absence of some reliable contemporaneous record or other satisfactory corroboration, a party may face serious difficulties of proof. Such reasonable satisfaction is not a state of mind that is obtained or established independently of the nature and consequences of the fact or facts to be proved. The seriousness of an allegation made, inherent unlikelihood of an occurrence of a given description, or the gravity of the consequences flowing from a particular finding are considerations which must affect the answer to the question of whether the issue has been proved to the reasonable satisfaction of the Court. Reasonable satisfaction should not be produced by inexact proofs, indefinite testimony, or indirect inferences: see Briginshaw v Briginshaw (1938) 60 CLR 336 at 362; Helton v Allen (1940) 63 CLR 691 at 712; Rejfek v McElroy (1965) 112 CLR 517 at 521; Watson v Foxman (1995) 49 NSWLR 315 at 319. 3. The sensation of feeling an actual persuasion, after a contest, that an event has happened or that something exists is one which is well known and recognised by experienced trial judges for what it is. 4. Morgan, Michael, and John all gave evidence and were cross-examined at some length. They are all intelligent and articulate people. 5. There is no contemporaneous written record of the 2005 conversations. 6. I do not feel an actual persuasion that John said words which Morgan and Michael attribute to him. To the contrary, I have a feeling of actual persuasion that John promised them a "share" in Diona's property, plant and equipment. I prefer John's evidence on this issue. He had a concept in mind which may have had legal difficulties, but he is not a lawyer. He says, and I believe him, that he thought that what he had in mind could be expressed in plain English. As one might expect, especially with the passage of time, his evidence was not without blemish, but overall I found him to be a plausible witness. 7. I have a feeling of actual persuasion that he promised them a full shareholding after ten years, if they were still with Diona. I am, however, not persuaded that he caveated this last promise in terms that it was solely up to him after the ten years. The ten year period would make no logical sense if it was always up to him. The prospect of a full shareholding was plainly an incentive, the value of which would have been entirely undermined if it was always up to him. None of the drafts prepared contemplate this discretionary element and neither do the minutes of the 26 April 2013 meeting. 8. Morgan and Michael's evidence was plainly coloured by resentment that John had kept the Calibre approach from them and had bought their interest in Diona, knowing of the Calibre approach while they knew nothing of it, coupled with the massive sum of money for which John sold Diona. In the case of Michael, his resentment was no doubt heightened by the fact that, as he said in evidence, he could not afford to prosecute the Diona proceedings which he had commenced on 6 November 2014. 9. I accept John's evidence that he calculated the 8.33% or 1/12th interest on the basis that $150,000 was that percentage of the value of Diona's plant and equipment which had been ascertained for the purpose of the Doherty transaction. It is supported by the objective material. He did not pay Doherty any goodwill, and he is too shrewd an operator to have sold an immediate full equity share (including the value of underlying goodwill) in an already successful business for the value of plant only. 10. The driving force behind formalisation of the agreement was David. John says, and I believe him, that he gave David detailed instructions of what he had in mind. 11. The first draft, in evidence, of a proposed Shareholders Agreement (prepared by Callanan) embodied the concept of two classes of shares, the B Class shares which would be allotted to Morgan and Michael were, if they ceased to be employed by Diona, to be transferred to John and Margaret at a proportion of the value of the property, plant, machinery, and equipment of Diona until the expiry of ten years and thereafter at a proportion of full value. This is plainly an attempt to reconcile John's idea with a workable contractual arrangement consistent with the law of corporations. 12. David's email to Doyle on 9 June 2010 records that Morgan and Michael's shares would entitle them to the stated percentage of the company's asset value only and that the difference between the company's total value and the asset only value (the goodwill of the company) would not be made available to them before ten years. 13. Doyle's letter of 1 July 2010 records the same idea but suggests the issue of only ordinary shares with provisions giving John the right to buy back the shares of any other shareholder at the defined Asset Value for ten years, and thereafter at Share Value. This is another attempt to implement the same concept and is consistent with John's evidence. 14. The next attempt at a Shareholders Agreement was by Thomsons. It, in conjunction with a new constitution, sought to introduce CPS which would be held by Morgan and Michael, which could not be disposed of except as permitted by the Shareholders Agreement and could be acquired at zero value until their conversion ten years later. This is another attempt to implement the concept and is consistent with John's evidence. 15. The plaintiffs placed emphasis on the de Boer letter and the PKF report by Viski in 2012. 16. As to the de Boer letter, the plaintiffs rely, in particular, on de Boer's statement that the original proposition of issuing C Class shares had been abandoned in favour of issuing shares of equal entitlements to Michael and Morgan. This does not support the plaintiffs as to what was agreed in 2005. Indeed, it undermines it. They do not rely on any subsequent agreement. In addition, de Boer refers to the fact that Callanan had prepared a revised Shareholders Agreement which was enclosed. That agreement was not identified with any precision but on 4 August 2008 Callanan sent a version which plainly did not contemplate Morgan and Michael being on an equal footing with John and Margaret. 17. The plaintiffs made a Jones v Dunkel submission [1] that the defendant should have been expected to call de Boer and did not do so, and it should be inferred that his evidence would not have assisted the defendant. The difficulties with this are, firstly, that de Boer was also Michael's accountant so that it cannot be said that he was in the defendant's camp and that he, as opposed to they, should have called him, secondly, that the de Boer letter does not assist the plaintiffs in any event, and thirdly, even if such an inference were to be drawn it does not assist the plaintiffs in establishing the agreement for which they contend. The plaintiffs made a similar submission with respect to the defendant's failure to call Callanan. Again, I am not satisfied that it could be said that Callanan would be in anyone's camp and the inference would not assist the plaintiffs in establishing their agreement. In any event, Callanan's draft Shareholders Agreements in evidence favour the defendant, rather than the plaintiffs. I do not think, on the state of the evidence which the plaintiffs intended to lead, the defendant could reasonably be expected to have called either de Boer or Callanan. 18. The plaintiffs rely in particular on the reference in the PKF report to an interview process in which the report says PKF was advised that Morgan and Michael would have 8.33% of the shares. The report came about following accounting anomalies with respect to the money paid by Morgan and Michael in 2005. The report does not reveal who gave the advice. The evidence does not establish that John was the source of the advice or that he even adopted it. The report does not deal with the question as to what rights would attach to the shares, and insofar as it is said to be a basis for an inference that the original agreement was for an unconditional shareholding, it is contradicted by each of the earlier draft Shareholders Agreements. It is inconsistent with the position he took of the 26 April 2013 meeting. 19. More importantly, and perhaps critically, it is undermined by the plaintiffs' own position as conveyed by their respective solicitors' letters on 12 July and 30 July 2013 with which I deal below. 20. The minutes for the board meeting held on 26 April 2013 purportedly record John's version of the deal. It is to be observed that the minutes record that after ten years Morgan and Michael would be entitled to 8.33% of the goodwill as well – no mention is made of any discretion on John's part. Both Morgan and Michael denied that there was any discussion to the effect recorded. This was, in effect, an assertion that the minutes were falsified, an assertion for which I do not consider there is any reasonable foundation, not least of all because the minutes are consistent with what the plaintiffs' solicitors, especially those acting for Michael, themselves, substantially contemporaneously, wrote. 21. The next attempt to give effect to the arrangement were the two options proposed by Crowe Horwath, this time driven, apparently largely, by taxation considerations. Significantly, the shares to be issued under Option 1 would only have voting, dividend and capital rights entitlements from 2016, that is, after ten years from the original agreement, and they would not be entitled to payment of any dividend equivalents under Option 2 until after ten years, consistent with John's asserted position. Under Option 2, however, if Diona was sold, they would receive a share of the proceeds. The Crowe Horwath recommendation does not make it clear whether this would be only after ten years. Michael apparently expressed a preference for Option 2 but neither option went ahead. 22. Then, on 12 July 2013, Stewart, on behalf of Morgan, wrote to John's lawyer. In paragraph 3 of his letter, he referred to the original Shareholders Agreement in 2009. It is clear that this is a reference to the Callanan version. He wrote that the shares the subject of that proposed agreement were taken by Morgan, "to be the shares to which he was already entitled pursuant to the original offer". It will be remembered that the shares contemplated by that draft were B Class shares, which for ten years would be ascribed a value based on property, plant, machinery and equipment only. 23. Morgan was driven to give evidence that his lawyer made a mistake in writing this because the shares contemplated by that agreement, not being full equity shares, were not the shares he says he took as being those to which he was already entitled pursuant to the original offer. I do not accept this evidence. No rational explanation for the error emerged. The letter was plainly written on instructions. Moreover, on the theory that there was an error, the letter went on to compound it when it said that the terms of the "new Shareholders Agreement" differed significantly from those of the "old Shareholders Agreement" (the letter seems to use the defined term "original Shareholders Agreement in paragraph 3 as a reference to the "old Shareholders Agreement" in paragraph 5) and that the acceptance of the new Shareholders Agreement would have significantly diluted Morgan's rights under the initial offer. 24. Then, on 30 July 2013, Michael's solicitor wrote to John's solicitor saying, particularly relevantly: 3. As you are aware, the agreement was that Mr John O'Connor would arrange for Mr Michael Stack to be issued 8.33% of the equity in Diona Pty Limited on terms which included: (a) Mr Stack not having entitlement to goodwill in Diona Pty Limited until 1 January 2016; (b) Mr Stack would have an interest in all the assets of Diona Pty Ltd (excluding goodwill) purchased and held by the company up to and including 31 December 2015 and thereafter would leave a full interest in all assets of the company including goodwill; (c) in consideration for this grant of equity in Diona Pty Ltd, Mr Stack paid to Mr John O'Connor the sum of $150,000.00; 1. Michael gave evidence that he was the source of these contents. There is no rational explanation for them other than that they were written on instructions. The letter is destructive of Michael's case and substantially corroborative of John's. 2. It is also to be remembered that an agreement on the same terms is alleged to have been contemporaneously or substantially contemporaneously made by John with both Morgan and Michael. Their solicitors' letters are consistent with one another, and inconsistent with the agreement Morgan and Michael now (seven years after the letters and eighteen after the event) assert. 3. The plaintiffs have fallen well short of discharging the onus resting upon them to establish the agreement for which they contend and the proceedings must be dismissed. AN ALTERNATIVE BASIS 1. Leaving aside the precise nature of the interest in Diona which Morgan and Michael acquired for payment of their money and the other commitments they gave, the facts of this case bear a striking resemblance to those in Brunninghausen, in that: * by the time of the Calibre approach, both Michael and Morgan had been removed as directors, leaving John and David as the only directors; * John was the controlling shareholder of Diona and it appears that Margaret played no active role; * John had a close family relationship with Morgan and a close personal relationship with Michael which had extended over many years; * John's position conferred on him the exclusive advantage or opportunity to receive the Calibre offer and take the benefit of it; * his legal status made him the repository of information affecting the true value of Diona; * Morgan and Michael had been removed as directors; and * it is not in issue that Morgan and Michael were not told of the Calibre offer. 1. I do not consider that Brunninghausen is authority for the proposition that a director and shareholder in John's position can have no fiduciary duty to persons in the position of Morgan and Michael, simply because their interest, at the time of the Calibre approach, in Diona was not as full and equal shareholders. Whether such a duty is present depends on whether the law will impose it because of the specific facts. 2. Morgan and Michael may not have had a right to an immediate full shareholding in Diona, but they did have a clear and discernible interest in Diona. Their interest was in Diona's enterprise so far as it consisted of property, plant, and equipment, coupled with the opportunity after ten years to become full shareholders. 3. The agreement could have been implemented in one of a number of equally effective ways. Equity would have had no difficulty in moulding an order to recognise and give effect to their interests. 4. The value of their interest and opportunity was undoubtedly related to the underlying value of Diona, even if restricted for ten years to the value of its property, plant, and equipment. Additionally, they had the prospect (John referred to it as a carrot in front of their noses) [2] of becoming full shareholders. By the time of the Settlement Deed, this was barely six months away. 5. John had information about Calibre and he knew that Morgan and Michael did not have it. Michael and Morgan were in a special position of vulnerability to John. Knowledge of the Calibre approach may have given them a powerful seat at the negotiating table. 6. I consider that there are powerful considerations to support the conclusion that he owed them a fiduciary duty and breached it, even though they were not, and were not yet entitled to be, full shareholders. 7. I emphasise that this would say nothing of the value of their interest or whether they sold it for less than it was worth. CONCLUSION 1. The Summons is dismissed. 2. I provisionally order that the plaintiffs are to pay the defendant's costs of the proceedings. This order will solidify seven days after delivery of this judgment unless a party notifies my Associate and the other parties in writing that some other order is sought, identifies the terms of the order sought, and provides brief grounds for it. If such notice is received, I will make directions for the determination of any issues as to costs. 3. The exhibits are to be returned. Endnotes 1. Jones v Dunkel (1959) 101 CLR 298. 2. See transcript p. 194. DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 24 August 2021