46 NSWLR 538 Reported Decision : 32 ACSR 294 (1999) 17 ACLC 1247 New South Wales Court of Appeal CITATION : Brunninghausen v Glavanics [1999] NSWCA 199 FILE NUMBER(S) : CA 40111/96; 40049/97 HEARING DATE(S) : 8 September 1998 9 September 1998 JUDGMENT DATE : 23 June 1999 Max Bernard Jules Brunninghausen & Anor PARTIES : v Michael Glavanics JUDGMENT OF : Priestley JA at 1; Handley JA at 3; Stein JA at 124 LOWER COURT JURISDICTION : Supreme Court - Equity Division LOWER COURT FILE NUMBER(S) : EQ 1868/91 LOWER COURT JUDICIAL OFFICER : Bryson J COUNSEL : P J Brereton/D Ash (Appellant) B A Coles QC/P J Hayes (Respondent) SOLICITORS : Stephen J Wawn & Associates (Appellant) Hughes & Co (Respondent) CATCHWORDS : CORPORATIONS LAW - Directors' duties - whether sole effective director owed fiduciary duty to another shareholder - application of rule in Percival v Wright; EQUITY - fiduciary duty - whether director owed fiduciary duty to shareholder in purchase of shares ACTS CITED : Fair Trading Act 1987 Masters v Cameron (1954) 91 CLR 353, 360-4 Baulkham Hills Private Hospital Pty Ltd v G R Securities Pty Ltd (1986) 40 NSWLR 622, 628 Salomon v Salomon & Co [1897] AC 22 Foss v Harbottle (1843) 2 Hare 461 Prudential Assurance Co Ltd v Newnham Industries Ltd [No 2] [1982] Ch 204 CA, 223-4 Gould v Vaggelas (1985) 157 CLR 215, 220, 245, 253 Percival v Wright [1902] 2 Ch 421 Allen v Hyatt (1914) 30 TLR 444 Winthrop Investments Ltd v Winns Ltd [1975] 2 NSWLR 666, 680 Goodwin v Agassiz (1933) 186 NE 659, 661 Allen v Hyatt (1914) 32 TLR 444 Nocton v Ashburton [1914] AC 932, 955-6 Galloway v Halle Concerts Society (1915) 2 Ch 233 Ngurli Ltd v McCann (1953) 90 CLR 425 Mills v Mills (1938) 60 CLR 150, 185 Howard Smith Ltd v Ampol Ltd [1974] AC 821 Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285, 289-90 Richard Brady Franks Ltd v Price (1937) 58 CLR 112, 143 Provident International Corporation v International Leasing Corporation Ltd (1969) 89 WN (PT 1) (NSW) 370, 377 Stein v Blake [1998] 1 All ER 724 CA, 727 CASES CITED: Gething v Kilner [1972] 1 WLR 337 Bulfin v Bebarfalds Ltd (1938) 38 SR (NSW) 423 Peel v London & NW Railway Co [1907] 1 Ch 5 CA Tiessen v Henderson [1899] 1 Ch 861 Peters' American Delicacy Co Ltd v Heath (1939) 61 CLR 457, 486 Re El Sombrero Ltd [1958] Ch 900 Hooker Investments Pty Ltd v Bearing Bros Halkerstone and Partners Securities Ltd (1986) 10 ACLR 462, 463 Cook v Deeks [1916] 1 AC 554 Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134 Hospital Products v United States Surgical Corporation (1984) 156 CLR 41, 69 Glandon Pty Ltd v Strata Consolidated Pty Ltd (1993) 11 ACSR 543 CA, 547, 557 Coleman v Myers [1977] 2 NZLR 225, 276-80 Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218 Re Westbourne Galleries Ltd [1973] AC 360 Chan v Zacharia (1984) 154 CLR 178, 198-9 Re Forest of Dean Coal Mining Company (1878) 10 ChD 450, 452 Strong v Repide (1909) 213 US 419 Bailey v Vaughan 359 SE 2nd 599 (1987) Van Schaack Holdings Ltd v Van Schaack 867 P 2nd 892 (1994) Briess v Wooley [1954] AC 333 Jones v Dumbrell [1981] VR 199 DECISION : Orders made THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40111/96 CA 40049/97 EQ 1868/91 PRIESTLEY JA HANDLEY JA STEIN JA 23 June 1999 MAX BERNARD JULES BRUNNINGHAUSEN & ANOR v MICHAEL GLAVANICS CORPORATIONS LAW - Directors' duties - whether sole effective director owed fiduciary duty to other shareholder - application of rule in Percival v Wright EQUITY - fiduciary duty - whether director owed fiduciary duty to shareholder in purchase of shares The appellant was the sole effective director and majority shareholder in a company in which the respondent was the other director and shareholder. Relations between the two men, who were brothers-in-law, were originally cordial. They later soured and there was no longer any trust between them. The respondent's retention of his directorship was a formality which brought him no information or insight into the company's affairs. As a result of family pressure, the two men began negotiations in late 1987 to resolve their differences. Whilst these negotiations were proceeding, the appellant received an offer from a third party to buy the assets of the company and he had extensive negotiations to this end without informing the respondent. The respondent agreed to sell his shares to the appellant for a price well below the equivalent price paid by the third party for the assets. The trial Judge held that a fiduciary duty was owed by the appellant as a director to the respondent as a shareholder, and that the appellant's failure to disclose the existence of the other negotiations was a breach of that duty. The Judge ordered an inquiry to be conducted before himself to determine the amount of compensation to be paid and in a second judgment peremptorily awarded $300,000 compensation to the respondent. HELD , dismissing the appeal from the judgment of 15 February 1996: (1) The decision in Percival v Wright [1902] 2 Ch 421 that a director's fiduciary duties are owed only to the company and that no fiduciary duty is owed to shareholders to inform them of relevant negotiations is not binding on the Court. Coleman v Myers [1977] 2 NZLR 225; Winthrop Investments Ltd v Winns Ltd [1975] 2 NSWLR 666, 680; and Glandon Pty Ltd v Strata Consolidated Pty Ltd (1993) 11 ACSR 543 considered. (2) Whilst the general principle that a director's fiduciary duties are owed to the company and not to the shareholders is correct, the nature of the transaction may give rise to a fiduciary duty owed by the directors to the shareholders. Galloway v Hallé Concerts Society (1915) 2 Ch 233; Ngurli Ltd v McCann (1953) 90 CLR 425, 439-40, Howard Smith Ltd v Ampol Ltd [1974] AC 821, 835, 837-8; Richard Brady Franks Ltd v Price (1937) 58 CLR 112, 143; Stein v Blake [1998] 1 All ER 724 CA, 727; Gething v Kilner [1972] 1 WLR 337, 341-2; Bulfin v Bebarfalds Ltd (1938) 38 SR (NSW) 423, 432, 438, 440, 443; Cook v Deeks [1916] 1 AC 554, 562-3; and Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134, 153 considered. (3) A fiduciary duty may be owed by the directors to shareholders where there are negotiations for a takeover or for a sale of the company's undertaking which requires the directors to loyally promote the joint interest of the shareholders and themselves. Coleman v Myers [1977] 2 NZLR 225, 276-80; Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218, 1229, 1270; Glandon Pty Ltd v Strata Consolidated Pty Ltd (1993) 11 ACSR 543 CA, 547, 557; Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41, 72, 96-7, 107; and Chan v Zacharia (1984) 154 CLR 178, 198-9 applied. Strong v Repide (1909) 213 US 419, 432; Goodwin v Agassiz (1933) 186 NE 659, 661; Bailey v Vaughan 359 SE 2nd 599 (1987), 603, 605; and Van Schaack Holdings Ltd v Van Schaack 867 P 2nd 892 (1994), 898 considered. (4) In the circumstances of this case the appellant as director did owe a fiduciary duty to the respondent as shareholder which had been breached by his non-disclosure of the negotiations for the sale of the company's assets before the purchase of the respondent's shares. HELD , allowing the appeal from the judgment of 18 December 1996: No inquiry as provided for in the judgment of 15 February had been held and the appellant had been denied the opportunity to call evidence and to answer the respondent's statement of issues. ORDERS CA 40111/96 (1) Order 1 of the orders appealed from made on 15 February 1996 varied by deleting the direction that until further order the inquiry be conducted before Mr Justice Bryson. (2) Appeal otherwise dismissed with costs. CA 40049/97 (1) Leave to appeal granted. (2) Appeal allowed with costs. (3) Order of 18 December 1996 set aside. (4) In lieu thereof remit the proceedings to the Equity Division to conduct the inquiry pursuant to the orders of 15 February 1996 according to law. (5) Order that the plaintiff pay the defendant's costs of the proceedings in the Equity Division on 6 and 18 December 1996. (6) Costs in this Court to be set off. THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40111/96 CA 40049/97 EQ 1868/91 PRIESTLEY JA HANDLEY JA STEIN JA 23 June 1999 MAX BERNARD JULES BRUNNINGHAUSEN & ANOR v MICHAEL GLAVANICS JUDGMENT 1 PRIESTLEY JA: I agree with the reasoning and conclusions of Handley JA in these appeals. The only comment I wish to make concerns the proposition that mere silence by a party with superior knowledge is not a misrepresentation. I think the citation by Handley JA from Spencer Bower and Turner "Actionable Misrepresentation", 3rd ed, demonstrates the emptiness of this proposition. A case of "mere" silence is very hard to imagine. What happens in fact in the decision of litigation in which the proposition is invoked is that the court considers whether, in all the circumstances of the case, the conduct of the impugned party should be considered as having misled the other party. 2 In my opinion the orders proposed by Handley JA should be made. 3 HANDLEY JA: Max Brunninghausen (the defendant) has appealed from two decisions of Bryson J in the Equity Division. In the first, delivered on 15 February 1996, the Judge upheld the claim of Mr Glavanics (the plaintiff) that the defendant, the sole effective director and majority shareholder in Skima Imports Pty Ltd (the company), owed him a fiduciary duty which had been breached in the sale of his shares to the defendant and his wife. He ordered an inquiry to be conducted before himself to determine the amount of such compensation. In the second judgment, delivered on 18 December 1996, he awarded $300,000 compensation for this breach of fiduciary duty. 4 The plaintiff pleaded claims for fraud, misleading and deceptive conduct contrary to the Fair Trading Act, and negligence, but these were dismissed and have not been pursued. The defendant filed a cross-claim alleging breaches of the plaintiff's fiduciary duty to the company during 1983 and 1984, but this too was dismissed and not pursued. Judgment of 15 February 1996 5 Bryson J made comprehensive findings in his first judgment as to the history of the company, the relationship between the two men whose wives were sisters and their dealings culminating in the sale of the plaintiff's shares. Some of those findings were challenged by the defendant, but most were accepted by both parties. The summary which follows is based on his Honour's findings. 6 In 1976 the defendant formed the company to operate an importing business for ski equipment. The plaintiff, who spoke German, assisted the defendant, who did not, and he was rewarded with the issue, without cost to himself, of 1,000 fully paid $1 shares in the company. The defendant held the other 5,000 issued shares. The parties were the only directors. In 1977 the plaintiff formed Skima Sportswear Pty Ltd to import ski wear, principally clothing, holding 4,750 of its issued shares, the defendant being issued with 250 shares without cost to himself. 7 Relations between the brothers-in-law became strained during 1982 and deteriorated further in 1983. The plaintiff's company was required to change its name pursuant to an agreement made in 1977, and it moved out of the accommodation it had been sharing with the company. The plaintiff's company began to compete with the company and for two years there was no contact between the two men. The plaintiff remained a shareholder and director of the company and the defendant remained a shareholder in the plaintiff's company. 8 Limited contact and business dealings between the parties were resumed in 1986 and 1987 when the plaintiff's company purchased stock from the company. However after 1983 the plaintiff and defendant each conducted their companies for their own benefit. Although the plaintiff remained a director of the company, this was a mere formality which brought him no information or insight into its affairs, and there were no meetings of its directors or shareholders. He did not receive accounts for the company for any period after 31 March 1983. 9 The events of 1983 brought to an end the personal trust and confidential relationship between the two men. The plaintiff's company owed a significant sum to the company, at least $28,000, but the defendant claimed that the debt was $48,000, and there were other disputed claims and cross-claims between them. In August 1987 Mrs Lloyd, their mother-in-law, became concerned at the continuing differences between her sons-in-law. It was her view, which she made known in the family circle, that her sons-in-law should resolve their differences and restore harmony in the family. Both heard of this and both were influenced by respect for her wishes. 10 In September the plaintiff telephoned the defendant, referred to the family disquiet, and sought a meeting. This was an awkward time for the defendant because of his involvement in a forthcoming trade show. Some time later, when the plaintiff and his buyer were at the company's warehouse to discuss the purchase of stock for the 1988 season, the plaintiff told the defendant that he was taking his family to Austria in December and wanted everything finished as soon as possible. He said that some of his stock purchases could be put against the money that would come to him from a debt and share deal. 11 There was another brief discussion at the beginning of October, at which no conclusion was reached. The defendant referred to the need to resolve matters saying that the problems should not be left to their respective sons, then small boys, to sort out in years to come. The Judge accepted the plaintiff's evidence that on this occasion he said "you know Max that I am happy to sell you my shares, and resign as a director of Skima Imports as long as I can get a fair price". 12 At some time, probably early in November, the defendant said to the plaintiff "don't expect me to pay $250,000 for your shares because that sort of money is just not there". The defendant perceived that he was under family pressure, and pressure from the plaintiff, to resolve the outstanding matters. He himself wished to get matters resolved and without too much further delay such as might occur if either or both of them went overseas. 13 On 13 November, before the parties could take their discussion any further, the defendant received a totally unexpected approach from a Mr Gardner who wished to purchase the company's business. Mr Gardner assured the defendant that he was serious and followed up his approach with a telephone call on 16 or 17 November when the defendant said he was prepared to listen, and a meeting was arranged for about a week later. 14 On 18 November the defendant discussed the situation with Mr Abbott and Mr France, chartered accountants he retained for accountancy work and financial advice. He told them that he did not think the plaintiff's shares were worth more than $125,000 and referred to the approach he had received for the purchase of the business. He said he did not see why he should have to buy the shares at all or pay the plaintiff anything, but he was strongly advised to bring the matter to an early conclusion. The defendant decided to seek an overall settlement before the plaintiff went overseas in December, and gave instructions for legal documentation to be prepared. 15 The meeting with Mr Gardner took place on 23 or 24 November, Mr Abbott also being present. The defendant asked for a confidentiality agreement which Mr Gardner agreed to give. Mr Abbott told Mr Gardner that the company had an annual turnover of $5 million. A day or two later Mr Gardner and his colleague, Mr Austen, signed a confidentiality agreement and Mr Abbott then gave them copies of the company's profit and loss statements. Price was not discussed. 16 On Sunday 6 December, the day being chosen to guard against employees learning of the negotiations, Messrs Gardner and Austen inspected the company's warehouse in Waterloo. The defendant and Mr Abbott were in attendance and extensive disclosures were made. At some point Mr Austen established that any sale would be conditional on the approval of overseas suppliers in Austria, Italy and the United States. Before Messrs Gardner and Austen left they told the defendant and Mr Abbott that they would be in touch in the next few days. The evidence does not establish when this happened, but a meeting later was arranged for early on Wednesday 9 December. 17 There were then further developments in the negotiations between the plaintiff and the defendant. On Monday 7 December the defendant had a lengthy meeting with Mr Abbott and Mr France and decided on the opening offer he was prepared to make. The approach by Messrs Gardner and Austen was also discussed. The following day the defendant met his advisers again in a meeting which lasted all day and they discussed the possible sale of the business and the situation with the plaintiff. The defendant telephoned the plaintiff from this meeting and after a short conversation asked him to speak to Mr Abbott. The terms of the conversation between the two men were in dispute, but the Judge accepted the plaintiff's evidence that he told the defendant "I will sell my shares to you and I will resign as a director. I won't look at any balance sheets as long as you give me a fair price for my shares". 18 Mr Abbott offered the plaintiff forgiveness of the debt, $15,000 of stock, and $20,000 cash for his shares in the company. The plaintiff responded by stating that he required between $150,000 and $170,000 for his shares to be satisfied partly by the release of the debt, partly in cash, and partly in stock. Discussions followed which at first were inconclusive. Then in the afternoon Mr Abbott telephoned the plaintiff and made an offer of $30,000 in cash, $15,000 in stock with the disputed debt to be released in return for his shares. After some discussion the plaintiff accepted the offer and it was agreed that there would be a meeting on Friday 11 December to sign documents. The plaintiff said that he would agree for the sake of family harmony. 19 Early the next day, Wednesday 9 December, the defendant and Mr Abbott met at the latter's office with Messrs Gardner and Austen. The Judge found, although this finding is challenged, that by this time the defendant had given lengthy consideration to the sale price and had received full assistance from his advisers. 20 Mr Austen opened the negotiations by offering to buy the plant and equipment at written-down cost, debtors as agreed, land at current valuation, and the goodwill for $1,500,000, conditional on approvals from the overseas suppliers. The negotiations which followed related only to goodwill, and within a short time the parties had agreed on a figure of $2,150,000. The defendant then gave instructions to his solicitor for heads of agreement to be prepared and a draft was forwarded to the solicitor for the purchasers the following day. 21 Negotiations followed between the solicitors but heads of agreement were never signed, although a deposit of $100,000 was paid to the defendant's solicitor. Soon afterwards Messrs Gardner and Austen, and the defendant proceeded to Europe to obtain the approval of the overseas suppliers. These negotiations were protracted and a sale agreement could not be entered into until 26 February 1988. The draft heads of agreement contemplated a sale of the company's assets and of the shares in two other companies controlled by the defendant. The agreement of 26 February provided for a sale of the assets of all three companies. 22 In the meantime, the transaction between the plaintiff and the defendant agreed to on 8 December was completed. Following the discussions that day, the defendant's solicitor prepared a deed of sale of the plaintiff's shares which covered some of the other matters agreed to. This was executed on 11 December and settled forthwith. The plaintiff transferred his shares in the company to the defendant and his wife for $30,000, and the defendant transferred his shares in two of the plaintiff's companies to the plaintiff's wife, and some general releases were given. The Judge held that the deed of sale was not a simple recording in formal language of the arrangements agreed to on 8 December. 23 He made the following important findings as to the nature of the relationship between the two men: "There was no actual dependence on information and advice, as Mr Brunninghausen gave none and was not prepared to, and Mr Glavanics did not ask for any or expect any. He would not have got any if he had asked. In practical terms Mr Glavanics was negotiating in the dark on the basis only of the external appearance of the business and general knowledge from years earlier, and Mr Brunninghausen knew this. There was no relationship of confidence, and indeed all trust had been broken years before and succeeded by hostility at the worst, wariness at the best". 24 He considered that Mrs Lloyd's wish that a resolution should be achieved and family harmony restored had only a slight influence on the defendant's duties. The Judge treated the plaintiff's references to a fair price for his shares as idle talk akin to puffery. The defendant's approach to the negotiations with the plaintiff and the advice he received were not based on any attempt to value the company, or the plaintiff's interest in it, and the actual negotiations did not address this issue. 25 The Judge rejected a submission for the defendant that his resumption of negotiations with the plaintiff on 8 December was not affected by the interest being shown by Messrs Gardner and Austen in the purchase of the business saying that this was grossly improbable. Mr Brereton sought the reversal of this finding, but the circumstantial evidence and the probabilities strongly support it, and the challenge must be rejected. 26 The evidence did not reveal when the meeting held early on Wednesday morning was arranged, but this must have been no later than the Tuesday afternoon and may have been earlier. Mr Abbott's time sheets record the substantial times he spent with the defendant on his affairs on the Monday and Tuesday. A great deal of this time was taken up discussing the possible sale of the business. 27 Mr Brereton also submitted that a binding contract had been made with the plaintiff on 8 December for the sale of his shares. The existence of a contract made that day was said to be significant because it would have terminated any possible fiduciary duty before negotiations on price had been commenced with Messrs Gardner and Austen when it was not known whether such negotiations would be successful. 28 The negotiations with the plaintiff on the Tuesday were conducted by Mr Abbott by telephone. The substance of the conversations were not in dispute although there were some differences. Mr Abbott's account in his affidavit contained more detail including the agreement about stock. According to him there was to be a transfer of $15,000 worth of the company's consignment stock held by the plaintiff's company with arrangements to cover any shortfall or excess. The final conversation took place during the afternoon (AB 490). The plaintiff and Mr Abbott agreed to meet at his office on the following Friday to sign documents and complete the transaction. The plaintiff said in cross-examination that as far as he was concerned at that point he regarded himself as having a deal. (490) 29 Mr Abbott's account of the conversation about the stock was: "The current stock of Skima which you have on consignment you keep the agreed value of $15,000 which will be credited as stock sold. If the stock is less than $15,000 then you are to take extra stock from Skima to make the stock up to $15,000. If you're holding stock worth more than $15,000 you are to pay Max the excess". (52-3) 30 In earlier conversations that day Mr Abbott had said that the stock would be transferred at cost. (51, 52) It had also been agreed earlier that day that all outstanding debts between the two men would be written off. (52) When consensus was achieved, Mr Abbott said "we will need to put this into writing" and the plaintiff agreed. 31 An 8-page agreement was prepared which was executed and exchanged on Friday 11 December. Clause 1 (b) dealing with the stock differs from the terms of the oral agreement but the differences may only reflect poor drafting. The oral agreement provided for the plaintiff's company to keep the consignment stock at cost up to the agreed value, whereas the formal agreement only conferred an authority to sell the stock and retain the proceeds, presumably the retail value, against the agreed figure of $15,000. 32 The agreement introduced the defendant's wife as a co-purchaser of the shares and as a co-releasor and co-releasee. It contained a general release by the plaintiff's company of the defendant and his wife but not the company, and a release by the defendant and his wife of the plaintiff and his company, but no such release by the company. Again this is likely to reflect poor drafting rather than a deliberate departure from what had been agreed. 33 The plaintiff and Mr Abbott agreed that "we will need to put this into writing". Reference to a formal contract that the parties contemplate or agree will be brought into existence and signed does not necessarily prevent their oral bargain from being binding in the meantime. See Masters v Cameron (1954) 91 CLR 353, 360-4. In my judgment this case is not within either of the three classes identified in Masters v Cameron, but is within a fourth class referred to by McClelland J in Baulkham Hills Private Hospital Pty Ltd v G R Securities Pty Ltd (1986) 40 NSWLR 622, 628 where he said: "There is in reality a fourth class of case additional to the three mentioned in Masters v Cameron as recognised by Knox CJ, Rich J and Dixon J in Sinclair, Scott & Co v Naughton (1929) 43 CLR 310 at 317 namely '… one in which the parties were content to be bound immediately and exclusively by the terms which they had agreed upon whilst expecting to make a further contract in substitution for the first contract, containing, by consent, additional terms'. Their Honours refer to the speech of Lord Loreburn in Love and Stewart v S Instone & Co (1917) 33 TLR 475 at 476 where his Lordship said that: 'it was quite lawful to make a bargain containing certain terms which one was content with, dealing with what one regarded as essentials, and at the same time to say that one would have a formal document drawn up with the full expectation that one would by consent insert in it a number of further terms. If that were the intention of the parties, then a bargain had been made, nonetheless that both parties felt quite sure that the formal document would comprise more than was contained in the preliminary bargain'." 34 The transaction was a simple one. A minority shareholder had agreed to sell his shares to the majority shareholder who neither needed, nor could reasonably require the vendor to give a restrictive covenant or any warranties about the company. All outstanding debts on both sides were to be released, a cash payment made, and stock to an agreed value provided. 35 In some circumstances the agreement for the provision of stock might have prevented the oral bargain from being enforceable until the stock had been identified and its value agreed, but the company's consignment stock held by the plaintiff's company made this unnecessary. In effect the company allowed the plaintiff's company a credit for $15,000 in its account which it was free to appropriate to particular debits but would otherwise extinguish the earliest items. 36 The introduction of the defendant's wife as a party was not adverse to the plaintiff's interests, and the defendant would have been entitled under the oral bargain to direct the transfer of some or all of the plaintiff's shares in her favour. The two companies gave cross-releases in favour of the plaintiff in one case, and the defendant and his wife in the other, but neither company released the other despite the oral bargain. This does not demonstrate that the oral bargain was not binding, but only its imperfect translation into the written agreement. 37 There was nothing in either the agreed terms or the subject matter of the oral bargain which evidenced an express or implied understanding between the parties that it should not be binding. In my judgment the oral bargain which the plaintiff said at the time was a deal was legally binding. The Judge continued: "What the Court acts on in equitable claims is the substance of matters, and the substance is that the two transactions were contemporary. The passage of time should be measured with a calendar and not with a stop watch. Even though Mr Gardner and Mr Austen had not come to figures on 8 December, the interest which they had shown had every appearance of being clear and strong and the emergence of some proposal was in every way likely … in the eye of reality the two transactions were contemporaneous and the entire separation between them which Mr Brunninghausen claimed to perceive did not exist". 38 Although agreement on price was reached with Messrs Gardner and Austen on 9 December, there was no binding agreement for the sale of the business until 26 February. The transaction was a complex one and agreement had to be reached on issues such as the terms of warranties to be given by the defendants' companies, the extent of any restrictive covenant to be given by the defendant and the price for the land, stock and debtors. The effective negotiations were contemporaneous but there was a substantial interval between the contract with the plaintiff, whether it was made on 8 or 11 December on the one hand, and that with Messrs Gardner and Austen through their company made on 28 February. 39 In my opinion therefore if the defendant owed a fiduciary duty to the plaintiff the question of breach must be determined by reference to the facts as they existed when the oral contract was made on the afternoon of 8 December. However the Judge's findings in the passage quoted above establish that by that time the negotiations with Gardner and Austen had radically transformed the situation. The defendant's approach in the morning, and the speed with which the negotiations with the plaintiff were concluded that day, present a stark contrast with the absence of progress until then since the plaintiff's approach in September. If the defendant had a fiduciary duty to the plaintiff he could not contract to purchase his shares that day without disclosing the existence of the other negotiations. 40 A director occupies a fiduciary position in the company and owes fiduciary duties to it. The general principle established for well over 100 years is that a director's fiduciary duties in relation to the company's affairs are owed to the company. This reflects the distinction between the company and its members established in Salomon v Salomon & Co [1897] AC 22. It is reinforced by the rule in Foss v Harbottle (1843) 2 Hare 461 which denies shareholders standing to sue directors and others for wrongs done to the company. The breach of a fiduciary duty owed by a director to the company attracts an accounting, or an award of compensation or damages in favour of the company alone, the losses of individual shareholders being derivative not personal. See Prudential Assurance Co Ltd v Newman Industries Ltd [No 2] [1982] Ch 204 CA, 223-4; Gould v Vaggelas (1985) 157 CLR 215, 220, 245, 253; Stein v Blake [1998] 1 All ER 724 CA. 41 If fiduciary duties owed by directors to their companies were also owed to the shareholders, directors would be liable to harassing actions brought by minority shareholders. Since in that event each shareholder would have a personal right, directors would also be exposed to a multiplicity of actions. There are therefore good reasons behind the established rule that in general a director's fiduciary duties are owed only to the company. 42 The general rule was applied in Percival v Wright [1902] 2 Ch 421 where Swinfen-Eady J held that directors who purchased shares in their company owed no fiduciary duty to their vendors to disclose the existence of takeover negotiations then in progress. He referred to the principle that directors must act bona fide in the interests of the company and continued at 425-6: "It is urged that the directors hold a fiduciary position as trustees for the individual shareholders and that, where negotiations for sale of the undertaking are on foot, they are in the position of trustees for sale. The plaintiffs admitted that this fiduciary position did not stand in the way of any dealing between a director and a shareholder before the question of sale of the undertaking had arisen, but contended that as soon as that question arose the position was altered … it was strenuously argued that, though incorporation affected the relations of the shareholders to the external world, the company thereby becoming a distinct entity, the position of the shareholders inter se was not affected, and was the same as that of partners or shareholders in an unincorporated company. I am unable to adopt that view. I am therefore of opinion that the purchasing directors were under no obligation to disclose to their vendor shareholders the negotiations which ultimately proved abortive. The contrary view would place directors in a most invidious position, as they could not buy or sell shares without disclosing negotiations, a premature disclosure of which might well be against the best interests of the company". 43 This decision was soon distinguished by the Privy Council in Allen v Hyatt (1914) 30 TLR 444, where the directors took options from shareholders for the purpose of takeover negotiations and in doing so held themselves out to the shareholders as acting as their agents. However it has not been overruled in Britain or repudiated in Australia or elsewhere in the Commonwealth except by Mahon J at first instance in Coleman v Myers [1977] 2 NZLR 225. 44 The case for the defendant before the Judge on the duty issue was that Percival v Wright decided that directors as such owe no fiduciary duty to shareholders and this case did not fall within any exception. 45 The Judge reviewed the history of the rule in Percival v Wright. He held that the comments of Samuels JA in Winthrop Investments Ltd v Winns Ltd [1975] 2 NSWLR 666, 680, and the decision of this Court in Glandon Pty Ltd v Strata Consolidated Pty Ltd (1993) 11 ACSR 543 prevented him from accepting a submission from Mr Coles QC that the relationship of shareholder and director, as such and without more, is a fiduciary one where a director is purchasing shares from a shareholder. However the Judge thought that the merits of the general rule were "greatly diminished" where there are very few members and directors, their relationships are not impersonal but close, and directors deal directly for the purchase or sale of shares. 46 He held that the plaintiff's case was not as strong as that which succeeded in Coleman v Myers [1977] 2 NZLR 225 CA. There was no conscious dependence by the plaintiff on information and advice from the defendant, and there was no relationship of confidence. However he held that one factor had "quite extraordinary significance" namely the plaintiff's "entire dependence on [the defendant] for information and advice about the transforming circumstance that negotiations were in hand directed to selling the entire undertaking …". 47 This advantage did not come to the defendant by chance but through his position as the sole effective director of the company. The Judge held that any proposition that a fiduciary duty was owed by the defendant as director only to the company as a whole and not to a particular shareholder "is almost an absurdity" where the general body of shareholders included only one other person. 48 He rejected as unfounded a submission that the defendant was entitled to withhold information about the other negotiations because the plaintiff might have attempted to block a sale. The submission lacked reality for any number of reasons. The existence of the negotiations could have been disclosed without disclosing the identity of the would-be purchasers and, as the Judge said, the defendant could have postponed his negotiations with the plaintiff until after the meeting on Wednesday 9 December. 49 Some of the Judge's conclusions come close to a finding of unconscionable dealing or equitable fraud in the nature of a catching bargain with the plaintiff, but no such case was pleaded or litigated, and is irrelevant when considering whether there was a fiduciary duty. 50 The Judge adopted the reasoning of Rugg CJ of the Supreme Judicial Court of Massachusetts in Goodwin v Agassiz (1933) 186 NE 659, 661: "… circumstances may exist requiring that transactions between a director and a stockholder as to stock in the corporation be set aside. The knowledge naturally in the possession of a director as to the condition of the corporation places upon him a peculiar obligation to observe every requirement of fair dealing when directly buying or selling its stock. … directors cannot rightly be allowed to indulge with impunity in practices which do violence to prevailing standards of upright businessmen. Therefore where a director personally seeks a stockholder for the purpose of buying his shares without making disclosure of material facts within his peculiar knowledge and not within reach of the stockholder, the transaction will be closely scrutinised and relief may be granted in appropriate instances". 51 On this basis the Judge held that the facts gave rise to a fiduciary duty. He went on to hold that the plaintiff was in no position to complain of any prejudice suffered through lack of information which he might have obtained by seeing the company's balance sheets and profit and loss accounts or having an accountant inspect the company's records. However the pending negotiations for the sale of the business would not have been revealed by any examination of the company's accounting records and the Judge found that the defendant's only breach of duty was his failure to disclose these negotiations. 52 He held that the plaintiff was entitled to an award of equitable compensation in respect of one sixth of the advantage which accrued to the defendant as a result of the purchase by Messrs Gardner and Austen of the company's business, being the amount appropriated to goodwill. "[T]heir interest in acquiring the business cannot have enhanced the value of the other assets, which were sold at objective valuations. There is no reason for giving [the plaintiff] an equitable remedy for any loss he may have suffered in miscalculating what he should sell his shares for in any [other] respect". He ordered that an inquiry to ascertain the amount of equitable compensation be held before himself. 53 The Judge said that the plaintiff's case was not as strong as that in Coleman v Myers [1977] 2 NZLR 225 and this is clearly correct. In that case the other family shareholders had trust and confidence in the directors (ibid 325, 331, 371), an attitude which the directors invited and encouraged (ibid 331) and then exploited. There was no relationship of actual trust and confidence in this case and no such relationship was invited by the defendant. In Allen v Hyatt (1914) 32 TLR 444 the directors had, by their conduct, placed themselves in a fiduciary relationship with the shareholders akin to that owed by agents to their principals. Nothing like that occurred in this case. 54 If a fiduciary duty exists here it must arise from the bare facts of the relationship. These include the position of the defendant as the sole effective director, the existence of only one other shareholder, their close family association, the intervention of the mother-in-law to secure a family reconciliation, and the exclusive advantage or opportunity which the defendant's position conferred on him to receive any offers to purchase the company's business from third parties. 55 Any fiduciary duty arising from these facts must be one imposed by law. The defendant did nothing which could be construed as a voluntary assumption of such a duty. The Judge held that the relationship between the parties did not create a comprehensive fiduciary duty but one which was limited to the disclosure of the unexpected offer by third parties to purchase the entire business. The existence of such a duty was denied in Percival v Wright and that case cannot be distinguished from the present. We can only hold that the defendant owed the fiduciary duty found by the Judge if we decline to follow Percival v Wright. 56 The decision is not binding on this Court and the comments in Winthrop Investments Ltd v Winns Ltd (1975) 2 NSWLR 666, 680 and the decision in Glandon Pty Ltd v Strata Consolidated Pty Ltd (1993) 11 ACSR 543, which is distinguishable, do not prevent us from re-examining the decision. It has not been followed in Australia in circumstances comparable with the present. 57 The general principle that a director's fiduciary duties are owed to the company and not to shareholders is undoubtedly correct, and its validity is undiminished. The question is whether the principle applies in a case, such as the present, where the transaction did not concern the company, but only another shareholder. 58 Any statement that the defendant owed a duty to the company in relation to his dealings with the plaintiff over his shares is meaningless. Such a duty would lack all practical content. The company could not suffer any loss from the breach of such a duty, and had no interest in its loyal and disinterested performance. Where a director's fiduciary duties are owed to the company this prevents the recognition of concurrent and identical duties to its shareholders covering the same subject matter. However this should not preclude the recognition of a fiduciary duty to shareholders in relation to dealings in their shares where this would not compete with any duty owed to the company. 59 The courts have recognised the existence of some fiduciary duties owed by directors to shareholders. In Nocton v Ashburton [1914] AC 932, 955-6 Viscount Haldane envisaged the possibility that directors seeking further capital from their shareholders by a prospectus might owe a fiduciary duty to the shareholders. In Galloway v Hallé Concerts Society (1915) 2 Ch 233 (referred to by Professor Finn in his "Fiduciary Obligations" 1977 pp 56-7) Sargant J restrained directors from enforcing a call on two members who had been slow payers when no corresponding call was made on the others. He said at 239: "… it is entirely improper for the directors to make a call on some members of a class of shareholders who stand in the same relation in the company as the other members of the class without making a similar call on all the other members of that class". 60 As Professor Finn pointed out this decision recognised a duty owed by directors to shareholders to treat them equally. 61 The power of the directors to call up unpaid capital on issued shares is fiduciary and must be exercised bona fide for the benefit of the company as a whole. However, as has been seen, the directors in exercising this power also have a duty to shareholders. 62 A similar situation exists in relation to the power of directors to issue new shares. In Ngurli Ltd v McCann (1953) 90 CLR 425 Williams ACJ, Fullagar and Kitto JJ said at 439-40: "The powers entrusted to the directors by the Articles of Association to be exercised on behalf of the company are fiduciary powers. … we are concerned with the exercise … of [the] fiduciary power … to issue new shares. The boundary between the proper and improper use of such a power is discussed … in Mills v Mills (1938) 60 CLR 150. The power must be used bona fide for the purpose for which it was conferred, that is to say to raise sufficient capital for the benefit of the company as a whole. It must not be used under the cloak of such a purpose for the real purpose of benefiting some shareholders or their friends at the expense of other shareholders or so that some shareholders or their friends will wrest control of the company from the other shareholders". 63 Earlier Dixon J had said in Mills v Mills (1938) 60 CLR 150, 185 in relation to such a power: "Directors of a company are fiduciary agents, and a power conferred upon them cannot be exercised in order to obtain some private advantage …". 64 In Ngurli Ltd v McCann the High Court upheld a finding that the director "was intent only upon advancing his own interests and left the interest of the McCanns completely out of account. He was not thinking of what would benefit the corporators as a whole. He was thinking only of what would benefit himself". It rejected an argument (441) that this was a wrong done only to the company and that individual shareholders could not complain, and held (447) that "the plaintiffs have a clear right to sue in their own names to remedy the breach of [duty]". 65 In Howard Smith Ltd v Ampol Ltd [1974] AC 821 the Privy Council considered the limits on the exercise of this fiduciary power by directors. Lord Wilberforce said at 835: "To define in advance exact limits beyond which directors must not pass is, in their Lordships view, impossible. This clearly cannot be done by enumeration, since the variety of situations facing directors … cannot be anticipated. No more, in their Lordships' view, can this be done by the use of a phrase - such as bona fide in their interests of the company as a whole, or for some corporate purpose. Such phrases … at best served, negatively, to exclude from the area of validity cases where the directors are acting sectionally or partially i.e. improperly favouring one section of the shareholders against another. Of such cases it has been said: 'the question which arises is sometimes not a question of the interests of the company at all, but a question of what is fair as between different classes of shareholders. Where such a case arises some other test than that of the interests of the company must be applied …' ( Mills v Mills 60 CLR 150, 164 per Latham CJ)". 66 Later he said at 837-8: "So far as authority goes, an issue of shares purely for the purpose of creating voting power has repeatedly been condemned … it must be unconstitutional for directors to use their fiduciary powers over the shares in the company purely for the purpose of destroying an existing majority, or creating a new majority which did not previously exist. To do so is to interfere with that element of the company's constitution which is separate from and set against their powers … the right to dispose of shares at a given price is essentially an individual right to be exercised on individual decision and on which a majority, in the absence of oppression or similar impropriety, is entitled to prevail. Directors are of course entitled to offer advice, and bound to supply information, relevant to the making of such a decision, but to use their fiduciary power solely for the purpose of shifting the power to decide to whom and at what price shares are to be sold cannot be related to any purpose for which the power over the share capital was conferred upon them". 67 See also Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285, 289-90. 68 The reality in most but perhaps not all of the cases dealing with the validity of an issue of shares is that the company as such was not concerned with the identity of its shareholders, or with the location of voting control, and had no interest in challenging the issue. The only persons with an interest in doing this were shareholders who have standing to sue "in their own names", as the High Court held in Ngurli Ltd v McCann, to set aside the issue. Compare Winthrop Ltd v Winns Ltd [1975] 2 NSWLR 666 CA. 69 Although this may not have been explicitly recognised, the result is that directors in issuing shares have a fiduciary duty not only to the company, but also to shareholders. The point was made clearly by Dixon J in Richard Brady Franks Ltd v Price (1937) 58 CLR 112, 143 which involved the directors' fiduciary power to issue debentures. He said: "Those impeaching the transaction must sustain the burden of proving that the directors acted in their own interests and were not in fact exercising their powers in supposed furtherance of any purpose or advantage of the company. In considering such a question, it is important to ascertain what are the purposes for which powers are given and to remember that the fiduciary duty of the directors is to the company and the shareholders". (emphasis supplied) 70 This statement from such a source cannot be dismissed as a mere dictum or Homerian lapse. It was cited and applied by Helsham J in Provident International Corporation v International Leasing Corporation Ltd (1969) 89 WN (PT 1) (NSW) 370, 377 referred to by Finn op cit at p 67. 71 The statement by Lord Wilberforce in Howard Smith Ltd v Ampol Ltd above at 838 relating to the position of directors facing a hostile takeover bid points in the same direction. He said "directors are of course entitled to offer advice, and bound to supply information relevant to the making of such a decision". The cases being considered by Dixon J and Lord Wilberforce did not involve a sale of shares to directors, but these dicta deny the validity of the universal principle which formed the substratum of Percival v Wright. The decisions earlier referred to also establish that there is no general principle that a director's fiduciary duties are owed only to the company. This is supported by the recent dictum of Millett LJ in Stein v Blake [1998] 1 All ER 724 CA, 727: "It is plain … that the plaintiff was asserting a personal claim arising from a breach of fiduciary duty owed to him personally and resulting in loss suffered by him personally. I have no doubt that circumstances may exist in which such a duty arises". 72 The decision of Bryson J in this case was cited to the Court of Appeal in that case. 73 Another relevant authority is Gething v Kilner [1972] 1 WLR 337 where minority shareholders sought to restrain an agreed takeover of the company because of allegedly misleading advice given by the directors to the shareholders. Brightman J said at 341-2: "I accept that the directors of an offeree company have a duty towards their own shareholders, which in my view clearly includes a duty not to mislead. I also accept that a shareholder in an offeree company may be prejudiced if his co-shareholders are misled into accepting the offer … It therefore seems to me that a minority could complain if they were wrongfully subjected to [the] power of compulsory purchase as a result of a breach of duty on the part of the board of the offeree company". 74 This statement and the dictum of Lord Wilberforce recognise a duty owed by directors to shareholders in relation to the sale of their shares to third parties. Is it to be said that the directors have no such duty if they are the purchasers? 75 Another body of authority establishes that directors proposing resolutions for adoption by a general meeting owe a duty to the shareholders to advise and disclose material facts. The authorities were usefully collected in Bulfin v Bebarfalds Ltd (1938) 38 SR (NSW) 423. At 432 Long Innes J said referring to Peel v London & NW Railway Co [1907] 1 Ch 5 CA: "Fletcher Moulton LJ said (at 16) 'I unhesitatingly say that if he (the director) thinks there is any danger of the corporation taking a step which in his view would be injurious … it is his duty to put his knowledge at the service of the individual corporators, and also to give them the advice which that knowledge leads him to think is best for the prosperity of the corporation'. Here I emphasise the word knowledge. Buckley LJ said (21) 'the point here decided is that directors bona fide acting in the interests of the corporation, and not to serve their own interests, are entitled and bound to inform and guide the corporators in matters affecting the corporate interests'. The duty to take care to make a sufficient statement of the material facts is particularly insistent where the individual interests of the directors purporting to discharge that duty are adverse, as in the present case, to those of the corporators whom they are advising". 76 After his review of the authorities, Long Innes J said at 440: "… when directors are advising or urging a particular action or course of conduct upon the members, or a particular class of members of the company, the authorities … establish, in my opinion, that they are under a duty to make a full disclosure of all facts within their knowledge which are material to enable the members, or class of members, to determine upon their action". 77 At 443 he referred to the decision of Stirling J in Tiessen v Henderson [1899] 1 Ch 861 and continued: "It … appears from the judgment of Stirling J that he was of opinion that there was, at a general meeting of the company, a fiduciary relation existing between the directors and the company, and that such statements only would be made by the directors when recommending a proposal to the company in general meeting as they bona fide thought it their duty to make, and assumed that they would not keep back anything material, and suggested that if any material facts were kept back the agreement might be set aside …". 78 This decision was approved by Latham CJ in Peters' American Delicacy Co Ltd v Heath (1939) 61 CLR 457, 486 where he said: "The circular is attacked on the ground of inaccuracies and omissions: see Bulfin v Bebarfalds Ltd where the duty of directors to make proper and accurate disclosures to shareholders is fully stated". 79 Later at 491 he said: "Errors of understanding, of judgment, or of knowledge not induced by improper means by persons who are subject to a duty in relation to the shareholders … do not afford grounds for setting aside resolutions passed by the meeting". 80 See also Winthrop Investments Ltd v Winns Ltd [1975] 2 NSWLR 666 CA. This fiduciary duty is owed to shareholders who have personal rights to enforce it. It is akin to the duty of directors to inform shareholders of relevant information relating to a takeover referred to by Lord Wilberforce. 81 The powers of directors to issue shares, make calls, and grant debentures considered in those cases were conferred by the Articles. The cases might have been decided on the terms of the Articles or implications therein but were decided on broader grounds. In Bulfin v Bebarfalds Ltd ibid 438, Long Innes J said: "Mr Weston … contended that of the above cases four … were merely decisions upon certain statutory or contractual obligations. This suggested difference between those cases and the present does not exist in regard to [others]; nor can I see any reason on principle why a breach of a duty existing or imposed by common or general law should have any less or different consequences from those ensuing upon a breach of a duty imposed by statute or contract". 82 There is another group of cases dealing with commercial opportunities which come to the notice of directors by virtue of their office. It is only necessary to refer to Cook v Deeks [1916] 1 AC 554 and Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134. In the first of these directors holding three quarters of the issued shares in a construction company, with a successful record with the Canadian Pacific Railway, diverted a new contract to a company owned by them and voted to authorise this at a general meeting. Lord Buckmaster said at 562-3: "… they intentionally concealed all circumstances relating to their negotiations until a point had been reached when the whole arrangement had been concluded in their own favour … This means that while entrusted with the conduct of the affairs of the company they deliberately designed to exclude, and use their influence and position to exclude, the company whose interest it was their first duty to protect … men who assume the complete control of the company's business must remember that they are not at liberty to sacrifice the interests which they are bound to protect, and, while ostensibly acting for the company, divert in their own favour business which should properly belong to the company they represent … the defendants … were guilty of a distinct breach of duty in the course they took to secure the contract, and … they cannot retain the benefit of such contract for themselves, but must be regarded as holding it on behalf of the company". 83 In the second case a company and its subsidiary had common directors. The subsidiary needed additional share capital but the parent company could only afford to subscribe part of what was required. The directors took up the balance themselves and sold the shares at a profit. The House of Lords held that they were bound to account to the parent company for those profits. Lord Macmillan said ibid 153: "The plaintiff company has to establish two things: (i) That what the directors did was so related to the affairs of the company that it can properly be said to have been done in the course of their management and in utilisation of their opportunities and special knowledge as directors; and (ii) That what they did resulted in a profit to themselves". 84 In the first the directors could and should have used their knowledge for the benefit of their company, but they used it for their own benefit. In the second the company could not take advantage of the opportunity and the directors did so, but as fiduciaries they were accountable for the profit. 85 In the present case the special knowledge acquired by the defendant in the course of his management of the company was of an opportunity for an advantageous sale of its undertaking. This was an opportunity available only to the company, although the transaction might have been structured as a sale of all its shares. 86 If the defendant had caused the company to sell its undertaking and had not purchased the plaintiff's shares, the benefit of the sale would have accrued to the shareholders pro rata. Any attempt by the defendant to secure an additional personal profit would have been a fraud on the minority. Any attempt to dilute the plaintiff's shareholding by a substantial fresh issue in favour of the defendant or his friends would have been invalid under Ngurli Ltd v McCann, and any attempt to intercept the gain by altering the rights attached either to his shares or those of the plaintiff would also have been invalid. Yet it is said on the authority of Percival v Wright that the defendant is entitled to take advantage of his special knowledge to acquire the plaintiff's shares at a gross under-value without disclosing that knowledge. Such a result appears anomalous. 87 Some of the traditional fiduciary relationships, such as partners, principal and agent, solicitor and client, and priest and penitent are created by the more or less free choice of the parties. Subject to contractual restraints, the person to whom fiduciary duties are owed in these relationships is free to terminate them at any time. Other relationships, such as guardian and ward, parent and child, and trustee and beneficiary arise by operation of law or from the acts of others. The parties in these relationships to whom fiduciary duties are owed did not enter into those relationships voluntarily and are not free to terminate them. In Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41, 69 Gibbs CJ said: "An actual relation of confidence - the fact that one person subjectively trusted another - is neither necessary for nor conclusive of the existence of a fiduciary relationship; … a trustee will stand in a fiduciary relationship to a beneficiary notwithstanding that the latter at no time reposed confidence in him …". 88 See also Glandon Pty Ltd v Strata Consolidated Pty Ltd (1993) 11 ACSR 543 CA, 547, 557. 89 In Coleman v Myers [1977] 2 NZLR 225, 276-80 Mahon J considered the fiduciary relationship imposed by law on promoters in relation to their company. He referred to Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218 where a contract between promoters and their company was set aside because it had not been made with an independent board. Lord Penzance said at 1229: "… the company never had an opportunity of exercising, through independent directors, a fair and independent judgment upon the subject of this purchase; and … this result was bought about by the conduct and contrivance of the vendors themselves. … Placed in this position of unfair advantage over the company which they were about to create they were, as it seems to me, bound according to the principles constantly acted upon in the Courts of Equity, if they wished to make a valid contract of sale to the company, to nominate independent directors and fully disclose the material facts. The obligation rests upon them to show they have not made use of the position which they occupied to benefit themselves…". (emphasis supplied) 90 At 1270 Lord Blackburn said: "What I shall do is to enquire what, on the evidence, appears to have been done in this case, and then to confine myself to saying whether, … it appears that an unreasonable use has been made of that confidence which the company did not indeed place in the promoters, for the company did not then exist, but which the legislature did place in them for the company when it gave the promoters power to create it". 91 Mahon J continued at 277-8: "… in any transaction involving sale of shares between director and shareholder, the director is the repository of confidence and trust necessarily vested in him by the shareholder, or by his legal status, in relation to the existence of information affecting the true value of those shares …. when [a] director has, by reason of his office, knowledge of an impending advantage to the company which would appreciate the value of the shares … he is in possession of information which the shareholder is legally precluded from acquiring in the absence of the consent of the Board. … where the director … makes an offer founded upon corporate information as to the value of shares which, by law, is placed outside the knowledge of the owner … there is … by reason of the statutory disability of the shareholder to compel disclosure of the relevant facts, a necessary confidence reposed in the director, by virtue of his status, in relation to his advantageous possession of material information … it seems an untenable argument to suggest that the shareholders on an offer to buy their shares are not perforce constrained to repose a special confidence in the directors that they will not be persuaded into a disadvantageous contract by non disclosure of material facts. In my opinion therefore there is inherent in the process of negotiation for sale a fiduciary duty owing by the director to disclose to the purchaser any fact, of which he knows the shareholder to be ignorant, which might reasonably and objectively control or influence the judgment of the shareholder in forming his decision in relation to the offer". (emphasis supplied) 92 I find this reasoning compelling and it is supported by the other decisions, earlier referred to, in which duties of directors to disclose material facts to shareholders have been recognised. To the same effect is the statement by Mahoney JA in Glandon Pty Ltd v Strata Consolidated Pty Ltd ibid at 547: "… a director purchasing the shares of a shareholder is in a position of advantage and … that advantage is of a special kind which, in appropriate circumstances, may give rise to fiduciary obligations". 93 Although Re Westbourne Galleries Ltd [1973] AC 360 is not directly in point, the House of Lords recognised that equitable obligations between shareholders and directors can by-pass the legal distinction between a company and its shareholders. Lord Wilberforce said at 379: "a … limited company is more than a mere legal entity, with a personality in law of its own: … there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals, with rights, expectations and obligations inter se which are not necessarily submerged in the company structure … The 'just and equitable' provision does not … entitle one party to disregard the obligation he assumes by entering a company, nor the court to dispense him from it. It does, as equity always does, enable the court to subject the exercise of legal rights to equitable considerations; considerations, that is, of a personal character arising between one individual and another, which may make it unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way". 94 The considerations emerging from this examination must be tested against the decisions of the High Court which have analysed the nature of fiduciary relationships. In Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 72 Gibbs CJ approved the statement of this Court that a fiduciary relationship exists where the facts of the case establish that in a particular matter a person has undertaken to act in the interests of another and not in his own. He added that a fiduciary may retain that character although he is entitled to have regard to his own interest in particular matters (ibid 68-9). Mason J at 96-7 said: "The critical feature of these relationships is that the fiduciary undertakes or agrees to act for or on behalf of or in the interests of another person in the exercise of a power or discretion which will affect the interests of that other person in a legal or practical sense. The relationship … is therefore one which gives the fiduciary a special opportunity to exercise the power or discretion to the detriment of that other person who is accordingly vulnerable to abuse by the fiduciary of his position. … It is partly because the fiduciary's exercise of the power or discretion can adversely affect the interests of the person to whom the duty is owed and because the latter is at the mercy of the former that the fiduciary comes under a duty to exercise his power or discretion in the interests of the person to whom it is owed". (emphasis supplied) 95 At 107 Mason J held that a fiduciary is liable to account for a profit or benefit if it was obtained inter alia "by reason of the fiduciary position or by reason of a fiduciary taking advantage of opportunity or knowledge which he derived in consequence of his occupation of the fiduciary position". 96 Earlier in Chan v Zacharia (1984) 154 CLR 178 at 198-9 Deane J had identified two themes which governed the liability of a fiduciary to account. The first need not be considered in this case. He continued: "The second … requires the fiduciary to account for any benefit or gain obtained or received by reason of or by use of his fiduciary position or of opportunity or knowledge resulting from it: the objective is to preclude the fiduciary from actually misusing his position for his personal advantage. … A person who is under a fiduciary obligation must account to the person to whom the obligation is owed for any benefit or gain … which was obtained or received by use or by reason of his fiduciary position or of opportunity or knowledge resulting from it". (emphasis supplied) 97 Shareholders elect or appoint directors to manage the company for the benefit of themselves and the other members. This obvious fact was recognised by Jessel MR in Re Forest of Dean Coal Mining Company (1878) 10 Ch D 450, 452 in a passage cited with approval in Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134, 147, 155. Persons who become shareholders after the company has been formed accept, at least for the time being, the existing directors and the Articles providing for their appointment and removal. The plaintiff did not bargain for his shares and the division of powers between the directors and the shareholders in the company was not the product of negotiations with the defendant. The plaintiff's continuing directorship was an empty shell which the Judge rightly disregarded. He was effectively a disenfranchised, minority shareholder, locked into the company. Any attempt to insist on his rights as a director would have led to his removal, if necessary by a court ordered meeting of members with a quorum of one. See Re El Sombrero Ltd [1958] Ch 900. The company had never been an incorporated partnership in any sense and his removal as a director would not have created a basis for winding-up on the just and equitable ground. 98 The plaintiff therefore was almost totally powerless. He had no legal right as a shareholder to inspect the company's books of account or financial records. He was entitled to copies of the annual accounts but realistically chose not to exercise it. Those alone would not provide any real guide to the value of his shares. He had no effective right to be informed of the negotiations for the sale of the company's business. 99 The defendant, as the sole effective director, occupied a position of advantage in relation to the plaintiff. He could, if he saw fit, disclose information about the pending negotiations for the sale of the business but could not be compelled to do so. This gave him the capacity to affect the interests of the plaintiff "in a practical sense", and in the context of the negotiations with him "a special opportunity" to exercise that capacity to the detriment of the plaintiff who was "at the mercy" of the defendant and "vulnerable to abuse" by the defendant "of his position". Hospital Products ibid per Mason J at 96-7. 100 After 1983 the defendant did not undertake in any factual sense to act in the interests of the plaintiff, or in the joint interests of the plaintiff and himself. However he continued to occupy an office with the advantages referred to. In my judgment it is open to this Court to hold that the office of director in a proprietary company is, at least for some purposes, a fiduciary one in relation to the shareholders. See generally Finn "Fiduciary Obligations" 1977 Chs 2, 4. Fiduciary duties are imposed on the holders of such offices by operation of law. As Professor Finn said in "Equity, Fiduciaries and Trusts" Youdan 1989 pp 34-5: "But whether or not a real trust and confidence is there … the law simply prescribes that, in general, one party is entitled to expect that the other will act in his or their joint interests in those matters falling within the ambit of the [fiduciary] relationship … against the background of the relationship, its nature and its purpose [the law] asks for what purpose one party has acquired rights, powers and duties in the relationship: to promote his own interests, the joint interest, or the interest of the other party alone. Insofar as it is either of the latter two, the relationship will be fiduciary to that extent". (emphasis supplied) 101 Thus the question is not whether there is an expectation in fact, but whether the vulnerable party is "entitled to expect" a particular standard of conduct. Professor Finn continued at 47: "… the expectation may be a judicially prescribed one because the law itself ordains it to be that other's entitlement. This may be so … because that party should, given the actual circumstances of the relationship, be accorded that entitlement irrespective of whether he has adverted to the matter …". 102 In the present case there was a factual basis for some expectation on the part of the plaintiff. Mrs Lloyd had made known to both men her strong wish that they should settle their business differences so that harmony might be restored in the family. When the plaintiff accepted the defendant's last offer through Mr Abbott he said "I'll agree to that for the sake of family harmony" (42, 490) and this was neither challenged nor denied. 103 The plaintiff had no idea of the real value of his shares to the defendant while the latter continued to operate the company, and made no attempt to find out. He would have had no reason to be unhappy if the company had continued to operate the business because he could not compare the true value of his shares with the value he received. In that event the transaction would probably have restored harmony in the family. 104 The sale to Gardner and Austen was bound to come to the plaintiff's notice. When it did its terms would demonstrate in a moment the gross disparity in price and the quick profit the defendant made from his purchase of the plaintiff's shares. The plaintiff's knowledge that in layman's terms he had been cheated by his brother-in-law was bound to destroy family harmony forever, even if it did not lead to litigation. In my view, although this finding is not necessary in this case, the family relationship, and the initiative taken by Mrs Lloyd, created a situation in which the plaintiff was "entitled to expect" that he would not be cheated by non-disclosure of negotiations such as those held with Messrs Gardner and Austen. 105 The sale of the plaintiff's shares to the defendant required a reconciliation of their competing interests in the transaction. A sale to outsiders in which both participated involved no such conflict. It would have enabled both plaintiff and defendant to receive full value for their shares without any conflict of interest necessarily arising between them. 106 A fiduciary duty owed by directors to the shareholders where there are negotiations for a takeover or an acquisition of the company's undertaking would require the directors to loyally promote the joint interests of all shareholders. A conflict could only arise if they sought to prefer their personal interests to the joint interest. That is the very conduct which would be proscribed by the duty. 107 In my judgment the decision of a single Judge in Percival v Wright should not stand in the way of the recognition of such a duty at this time. The decision was criticised in the United Kingdom by the Cohen Committee in 1945 and by the Jenkins Committee in 1962. See Gower, "Modern Company Law", 4th ed 1979 p 574. Professor Loss "The Fiduciary Concept as Applied to Trading by Corporate Insiders in the United States" (1970) 33 Mod Law Review 34, 40-1 said of Percival v Wright that it had had a remarkable career for a lower court decision and that "this elevation of the corporate ghost (the persona ficta) over the flesh - and - blood owners of the company [was] a monument to the ability of lawyers to hypnotise themselves with their own creations". 108 The decision was criticised by Professor Finn (Fiduciary Obligations 1977 p 11). It was rejected in Coleman v Myers by Mahon J, although merely distinguished by the Court of Appeal. Young J said in Hooker Investments Pty Ltd v Bearing Bros Halkerstone and Partners Securities Ltd (1986) 10 ACLR 462, 463 that it "has virtually been discarded by more modern thinking". 109 In Glandon Pty Ltd v Strata Consolidated Pty Ltd [No 3] (4 June 1990 unrep) Young J reviewed at length the relevant decisions, including those in the United States and Canada, and the opinions of text writers, and offered a synthesis in accordance with the decision of the Court of Appeal in Coleman v Myers. He then held that the directors owed no fiduciary duty to the shareholders on the facts in that case, which did not involve a takeover or sale of the company's undertaking, and his decision was upheld without comment from this Court on his synthesis. See Glandon Pty Ltd v Strata Consolidated Pty Ltd (1993) 11 ACSR 543. 110 The general law decisions in the United States point in the same direction. In Strong v Repide (1909) 213 US 419 the Supreme Court held that "the special facts" of the case took it outside any general rule that directors did not owe a fiduciary duty to the shareholders when purchasing their shares. The special facts relied on were that the director (ibid 432): "… was the chief negotiator for the sale of all the lands, and was acting substantially as the agent of the shareholders of his company by reason of his ownership of … shares … in the corporation and by the acquiescence of all the other shareholders, and the negotiations were for the sale of the whole of the property of the company. By reason of such ownership and agency, and his participation as such owner and agent in the negotiations then going on, no none knew as well as he the exact condition of such negotiations". 111 I have already referred to the Massachusetts decision in Goodwin v Agassiz (above). In Bailey v Vaughan 359 SE 2nd 599 (1987) the Supreme Court of Appeals of West Virginia reviewed the US decisions and in an opinion delivered by Miller J at 603, 605 said: "… there is presently no majority rule that enables a director to utilise insider information which points to substantial under valuation of the corporate shares … to purchase shares from an uninformed shareholder without any liability … we are drawn to the conclusion that a director who solicits a shareholder to purchase his stock and fails to disclose information not known to the shareholder that bears upon the potential increase in value of the shares, shall be liable to the shareholder either to have the sale rescinded or to respond in damages … The fact that there was no firm offer made by One Valley Bankcorp before the defendant purchased the plaintiff's shares is not dispositive of the case". 112 The decisions were again reviewed by the Supreme Court of Colorado in En Banc in Van Schaack Holdings Ltd v Van Schaack 867 P 2nd 892 (1994) where the Court held that the special facts doctrine traceable from Strong v Repide (above) was applicable. Rovira CJ, delivering the opinion of the Court, said at 898: "Holding corporate 'insiders' to a duty to fully disclose all material facts and circumstances surrounding or affecting the value of shares is warranted … because much of the information bearing on the value of a closed corporation's stock is not publicly available and because no market exists in which the shares of such a corporation can be valued through the interplay of market forces. As a result of this unique aspect of closed corporations, there arises the 'necessity of preventing a corporate insider from utilising his position to take unfair advantage of the uninformed minority shareholders' and the imposition of a duty of disclosure is warranted as 'an attempt to provide some degree of equalisation of bargaining position in order that the minority may exercise an informed judgment in such transactions'." 113 In my opinion therefore the appeal from the first judgment of Bryson J fails. I would only add the following comments. 114 The Judge confined the award of compensation to a share in the sale price for the company's goodwill. This may not have been correct. A minority shareholding in a going concern company carries no entitlement to a proportionate share in the value of its surplus assets. Such an entitlement only arises in a practical sense on a full takeover or on a sale of the company's undertaking. However there was no cross-appeal on this question and I need say no more about it. 115 The other matter concerned a possible basis for liability in deceit which was not pleaded or litigated. The defendant made two representations during the extended negotiations with the plaintiff which were true when made but had become false to his knowledge prior to the agreement for sale made on 8 December. The first in October was that he did not wish to leave the unresolved dispute to his son. This may well have imported a representation that he intended to operate the company's business until he died or retired and left it to his son. The other, early in November, was "don't expect me to pay $250,000 for your shares because that sort of money is just not there". 116 Representations made during negotiations are treated as continuing while the negotiations continue. Briess v Wooley [1954] AC 333. If they become false to the knowledge of the representor before being acted on and were an inducing cause of the contract they may ground a cause of action in deceit. See Jones v Dumbrell [1981] VR 199. Although mere silence by a party with superior knowledge is not a misrepresentation, in the language of Spencer Bower and Turner "Actionable Misrepresentation" 3rd ed 1973 p 106: " … the law … has again and again cast a powerful searchlight over the entire res gestae of any case to see whether anything is to be found … to prevent this right of reticence from operation … Thus Lord Eldon LC, after laying down the general principle, … is careful to add: 'but a very little is sufficient to affect the application of this principle. If a word, if a single word, is dropped which tends to mislead the vendor, the principle will not be allowed to operate' Turner v Harvey (1821) Jac 169, 178 (37 ER 814, 818)". Appeal from judgment of 18 December 1996 117 After the judgment of 15 February 1996, under which he was entitled to an inquiry before the Judge, the plaintiff did nothing until 6 June that year when he filed what was in substance a motion to proceed under SCR Pt 49 r 2. On the return of this motion on 11 June, the Judge directed that each party file within 28 days and serve a statement of the nature of his case with respect to the amount of equitable compensation, such statement to include reference to evidence taken at the hearing and now relied on. Each party was to file a statement in answer to the opponent's statement within a further 21 days with liberty to obtain an appointment for further hearing of the inquiry on two days' notice. 118 Between July and November 1996, by arrangement between the parties, time for compliance with those directions was extended. On 4 December his Honour's directions not having been complied with by either party at that stage, the plaintiff's solicitor arranged for the matter to be relisted before the Judge on 6 December. It appeared that the Judge was shortly to proceed on extended leave. On 5 December the defendant' statement was served and the plaintiff's was filed the same day but not served until the following day. 119 On 6 December the defendant sought directions for the service of evidence in the inquiry. The Judge declined to make those directions and said that he would determine the inquiry on the material presently available despite the protests of the defendant. The matter was listed for judgment on 18 December. Prior to his Honour delivering judgment, the defendant moved for further directions and provided submissions in support of that application. It was declined by his Honour. 120 In his written judgment the Judge said that there was no point in giving more directions and that the delay until December before coming forward with a proposal for another lengthy programme of preparation was only nominally a participation in the process and was in substance a refusal to be involved in it on a reasonable basis. He assessed the plaintiff's equitable compensation at $300,000 based on one sixth of the goodwill figure and entered judgment for that amount. 121 I am regretfully driven to accept Mr Brereton's submission for the defendant that no inquiry, properly so called, was held, and that the defendant was denied the opportunity to call evidence and to respond to the plaintiff's statement as envisaged by the directions of 11 June 1996. Although one may agree that the delay since February was unacceptable, this was due in the first instance to the plaintiff alone and thereafter until 4 December it was consensual. The defendant was not relevantly in breach of his Honour's procedural directions, these occurring with the consent of the plaintiff. Nothing had occurred which entitled his Honour to proceed on a peremptory basis to assess the compensation payable by the defendant in the circumstances and in the manner which he did. 122 The judgment of 18 December 1996 was interlocutory. See Spencer Bower & Ors "Res Judicata" 1996 p 72. Strictly therefore the defendant needed leave to appeal but sensibly this was not opposed. 123 In my opinion the following orders should be made: CA 40111/96 (1) Order 1 of the orders appealed from made on 15 February 1996 varied by deleting the direction that until further order the inquiry be conducted before Mr Justice Bryson. (2) Appeal otherwise dismissed with costs. CA 40049/97 (1) Leave to appeal granted. (2) Appeal allowed with costs. (3) Order of 18 December 1996 set aside. (4) In lieu thereof remit the proceedings to the Equity Division to conduct the inquiry pursuant to the orders of 15 February 1996 according to law. (5) Order that the plaintiff pay the defendant's costs of the proceedings in the Equity Division on 6 and 18 December 1996. (6) Costs in this Court to be set off. 124 STEIN JA: I agree with Handley JA. 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