New South Wales Court of Appeal CITATION : ABERDEEN ASSET MANAGEMENT LTD v CHALLENGER WEALTHLINK MANAGEMENT LTD & ORS [2002] NSWCA 245 FILE NUMBER(S) : CA 40983/01 HEARING DATE(S) : 15 July 2002 16 July 2002 JUDGMENT DATE : 29 July 2002 Aberdeen Asset Manaagement Ltd - Appellant PARTIES : Challenger Wealthlink Management Ltd - First Respondent Challenger Life Limited - Second Respondent Challenger International Limited - Third Respondent JUDGMENT OF : Mason P at 1; Sheller JA at 2; Heydon JA at 39 LOWER COURT JURISDICTION : Supreme Court - Equity Division LOWER COURT 50132/99 FILE NUMBER(S) : LOWER COURT Foster AJ JUDICIAL OFFICER : COUNSEL : A J Myers QC/T D Castle - Appellant B W Walker SC/I M Jackman - Respondents SOLICITORS : Atanaskovic Hartnell - Appellant Mallesons Stephen Jaques - Respondents CATCHWORDS : INTERPRETATION - construction of clause in agreement - share placements - "opportunity to participate" - "same or equivalent terms and conditions" - industry practice - breach of clause - nominal damages LEGISLATION CITED : N/A Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 CASES CITED: Prenn v Simmonds [1971] 1 WLR 1381 River Wear Commissioners v Adamson (1877) App Cas 743 DECISION : Appeal dismissed with costs IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40983/01 ED 50132/99 MASON P SHELLER JA HEYDON JA ABERDEEN ASSET MANAGEMENT LIMITED v CHALLENGER WEALTHLINK MANAGEMENT LIMITED & ORS The appeal was from a decision of Foster AJ on 14 November 2001 in which his Honour dismissed the appellant's claim against each respondent. The dispute between the parties arose from the interpretation of a clause in a Consultancy Agreement (the Agreement). By clause 6.8 of the Agreement the first respondent agreed and undertook to the appellant that it would advise the appellant of any proposed issue of shares by the third respondent (the holding company of the first respondent) "by way of private placement to any third party for the purposes of raising additional capital" and the appellant or its nominee would be provided with an "opportunity to participate in such placement on the same or equivalent terms and conditions as that offered to the third party". The appeal was limited to an analysis of two placements – one in 1998 and one in 1999 – to determine whether they involved a breach of clause 6.8. The appellants were not offered the opportunity to participate in the 1998 placement. However, the evidence made it clear that the particular investor issued the shares would not have been interested in the placement if shares had also been offered to the appellant. With regard to the 1999 placement, the evidence established that the opportunity to participate had been proffered to the appellant and rejected by it. The appellant argued that it was entitled to be offered in any proposed private placement of shares the same number of shares as any other third party to which an offer was made. The trial Judge rejected this interpretation of the clause. His Honour emphasised that it was clearly not the intention of the parties that by the clause the appellant would have a right of first refusal. The possibility of such a right had been discussed and abandoned during negotiations. The appellant's counsel conceded that if the construction of the clause that they advanced was not accepted, the appellant was entitled to no more than nominal damages for breach. However, if its construction was accepted, the appellant relied on a claim for common law damages for breach of contract. HELD (per Sheller JA, Mason P and Heydon JA concurring) 1. If clause 6.8 is truly ambiguous and capable of more than one construction, it is appropriate for the Court to take account of the first respondent's rejection, during negotiations, of a term that the appellant have a right of first refusal: see Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 at 352-3; Prenn v Simmonds [1971] 1 WLR 1381. 2. It is appropriate, in interpreting clause 6.8, to take into account ordinary market practice, particularly as the appellant and its officers concerned with the drafting of the Agreement were experienced share traders. If, as the appellant submitted, the clause must be read to require the reading into it of words such as "and in the same number" it could not operate in the context of industry practice. 3. The trial Judge's conclusion that the opportunity to participate was restricted to obtaining, in the event of a favourable exercise of discretion by the issuer, a part of the particular placement was accepted by the Court. Clause 6.8 did not envisage an issue of shares to the appellant additional to the total of those to be provided in the placement. 4. The trial Judge's conclusion that a placement of unsecured notes was not a placement which could be regulated by clause 6.8 was confirmed by the Court. Only placements of shares could fall within the purview of the clause. 5. On the construction of the clause adopted by the trial Judge and affirmed by the Court, there was a breach of contract. The claim for breach could only sustained for the 1998 placement where the first respondent had failed to advise the appellant of the proposed issue and failed to ensure that the appellant was provided with an opportunity to participate. On the evidence it was established that the 1998 placement would not have proceeded with the particular investor involved if shares had also been offered to the appellant, and that the appellant would not have had an interest in acquiring the shares were it not for the fact that the particular investors was involved. As such, the appellant was only entitled to nominal damages for the breach of contract. However such relief was not asked for at the trial or on appeal. Cases cited: Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 Prenn v Simmonds [1971] 1 WLR 1381 River Wear Commissioners v Adamson (1877) App Cas 743 ORDER Appeal dismissed with costs. ********** IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40983/01 ED 50132/99 MASON P SHELLER JA HEYDON JA Monday, 29 July 2002 ABERDEEN ASSET MANAGEMENT LIMITED v CHALLENGER WEALTHLINK MANAGEMENT LIMITED & ORS Judgment 1 MASON P: I agree with Sheller JA. 2 SHELLER JA Introduction On 28 May 1998 a Consultancy Agreement (the Agreement) was entered into between EquitiLink Australia Ltd (to which I will refer as EAL), Challenger Wealthlink Management Ltd (Challenger), Challenger Life Limited (Challenger Life) and Challenger Superannuation Pty Limited (Challenger Super). The Agreement provided for Challenger to purchase from EAL the right to manage certain retail funds. EAL was to retire as the manager of those funds and appoint Challenger as manager in its place. Challenger would have full responsibility for the management of the funds, including their general administration and marketing. The Agreement provided that EAL would act as consultant to carry out certain investment management services. By cl 4 of the Agreement, in return for EAL agreeing to act as consultant and providing the Consultancy Services, Challenger agreed to procure the issue to EAL, or its nominee, by way of private placement, of 1,250,000 shares in CIL on the 15 June 1998. 3 Clause 6 of the Agreement was headed "Challenger Undertakings". There followed sub-clauses including 6.8 which provided as follows: "Issue of Shares by Private Placement. Challenger agrees and undertakes to EquitiLink that it will advise EquitiLink of any proposed issue of shares by Challenger International Ltd by way of private placement to any third party for the purposes of raising additional capital and EquitiLink or its nominee will be provided with an opportunity to participate in such placement on the same or equivalent terms and conditions as offered to that third party. 4 Challenger International Limited (CIL) is a publicly listed company and the holding company for companies referred to as the Challenger Group. Challenger and Challenger Life are its wholly owned subsidiaries. Challenger Super is an associate of Challenger and the trustee of the Equitilink Capital Growth ADF for which EAL provides investment management services. 5 William Edward Baker Ireland (Mr Ireland) was the managing director of CIL and a director of Challenger and Challenger Life. Laurence Stephen Freedman (Mr Freedman) and Brian Michael Sherman (Mr Sherman) were directors of EAL and joint managing directors of the EquitiLink Group. Barry Sechos (Mr Sechos) was a director of EAL and General Counsel for the Group. Ouria Sananikone (Mrs Sananikone) was a director of EAL and chief executive officer of the Group. 6 In 1998 CIL, as part of a proposed placement of 8,500,000 shares, issued 7,800,000 shares of which a parcel of 1,000,000 was issued to EAL. 7 In 1999 EAL, which later changed its name to Aberdeen Asset Management Limited, began proceedings in the Equity Division Commercial List of the Supreme Court against Challenger, Challenger Life and CIL. According to its amended summons filed on 11 May 2001, pursuant to leave granted by Foster AJ on 9 May 2001, EAL claimed against Challenger specific performance of obligations under cl 6.8 of the Consultancy Agreement, by advising EAL of all issues of shares by CIL by way of private placement which had occurred since 28 May 1998 and of which it had not advised EAL, and by doing all such things as might be necessary to provide EAL with an opportunity to participate in each such placement on the same or equivalent terms or conditions. In the alternative, EAL claimed damages and/or equitable compensation. Against Challenger Life, EAL claimed a declaration that Challenger Life had unconditionally and irrevocably guaranteed to EAL the due and punctual performance by Challenger of all of its obligations under the Agreement and was liable to indemnify EAL for the loss it had suffered by reason of Challenger's breach of its obligations under cl 6.8. Against CIL, EAL claimed an order that it do all such things as might be necessary on its part to effect any placement of the subject of the first order sought. EAL also sought a declaration that the conversion of any Year 2003 convertible notes issued by CIL to Consolidated Press Holdings Group (CPH) constituted a private placement within the meaning of cl 6.8. 8 The proceedings were heard by Foster AJ. On 14 November 2001 his Honour dismissed EAL's action against each defendant and ordered EAL to pay their costs. This appeal is from that decision. The appeal is limited to placements described in EAL's written submissions as the "CPH/Cavalane transaction" announced on 21 December 1998 and the placement in September 1999 of 7,700.000 shares. The respondents were the defendants below. CPH/Cavalane Transaction 9 The "CPH/Cavalane transaction" consisted of the CPH transaction of 21 December 1998 and the Cavalane transaction of 15 March 1999. CPH and Cavalane were referred to as the "Packer interests". There was no dispute that in so far as they involved the issue of shares, each of the transactions was a private placement for the purpose of raising additional capital within the meaning of cl 6.8. The following description of the transaction is taken from Foster AJ's reasons for judgment. 10 On 21 December 1998 CIL announced to the Australian Stock Exchange a placement of 5,000,000 shares at $2.50 each to CPH. On 15 March 1999 CIL issued 3,000,000 shares to Cavalane Holdings Pty Ltd (Cavalane), a subsidiary of the Consolidated Press Group (CPHG), at $2.50 each and 6 million Year 2003 convertible notes to Cavalane at $3.50 each. In his Honour's opinion, although the convertible notes were subsequently converted into shares, no additional capital was raised by that event. The capital was raised by the issue of the convertible notes which, of their very nature, were not shares. Accordingly, EAL's claim to participate in the placement under cl 6.8 failed in respect of the convertible notes. 11 Foster AJ said: "32. The evidence establishes that during 1998, as part of Mr Ireland's plan for the expansion of the businesses of the Challenger Group, he was seeking to strengthen the position of Challenger Life Limited, which had been operating in the Group only since late 1997. He considered that its profile in the life insurance industry would be improved 'if a shareholder was introduced onto its register with an established reputation in insurance or finance industry.' To this end he commenced negotiations with the St George Bank and the ANZ Bank in relation to one or the other acquiring a substantial shareholding in Challenger Life. I am satisfied that he advised Mr Freedman and also Mr Sherman, of his endeavours in this regard. This information did not evoke any suggestion from them that EAL might seek to invest in Challenger Life. However, no concluded agreement was reached with either of the banks. 33. In late 1998 Mr Ireland initiated discussions with Mr Jacob, a director of CPH. He offered CPH the opportunity to purchase half of the share capital of Challenger Life. This offer was not accepted but Mr Jacob gave Mr Ireland to understand that CPH would be interested in investing in CIL. Mr Ireland considered that if CPH became a substantial shareholder in CIL then the funds so obtained could be provided to Challenger Life and that 'this would be another way of strengthening its credibility in the market'. Additionally, it is clear that Mr Ireland and the other directors of CIL could foresee great benefit to the group should 'the Packer interests' acquired a 'cornerstone' interest in CIL. This would have a beneficial effect upon the standing of CIL and its subsidiaries in the market place. This proved to be correct, in so far as, when the market was made aware of the CPH share placement, the price of CIL shares rose considerably. 34. Negotiations were successful and resulted in the above referred to placements. An announcement was made by letter from CIL to the Australian Stock Exchange on 21 December 1998, in which it was indicated that the securities to be issued to Cavalane were subject to approval at an Extraordinary General Meeting of CIL shareholders to take place early in February 1999. It was further indicated that the monies raised 'totalling in excess of $40,000,000' would be 'deployed as new capital in the wholly owned subsidiary, Challenger Life Limited' and that 'this capital injection and the participation of a powerful shareholder 'CPHG' greatly strengthens the competitive position of Challenger Life'. Mr Ireland sent a copy of this letter, on the same day, to Messrs Freedman and Sherman. Both of them were overseas at the time but Mr Sechos received the communication and passed the information on to them. He also spoke to Ms Sananikone, then holidaying at Aspen in the USA. The evidence as to the contents of this conversation is somewhat confused. However, I am satisfied that there was reference to the increase in the value of EAL's then shareholding in CIL, as a result of the announcement and some reference to the desirability of obtaining more CIL shares if possible. It is clear that there was no reference to any suggested entitlement under clause 6.8 of the agreement, notwithstanding that Mr Sechos had drafted the clause in the form which had been ultimately accepted. 35. I am satisfied that, sometime in January, Mr Sechos was directed on behalf of EAL to enquire whether it could take up any of the shares in the December issue. The enquiry was made but elicited a response that there were no shares available. Again, there was no claim made of any entitlement to further shares based upon clause 6.8. 36. The Extraordinary General Meeting referred to in the announcement was in fact held on 11 February 1999. EAL had been given notice of the meeting, which indicated that resolutions would be sought approving the issue to CPH or its nominee of up to a maximum of 3,000,000 ordinary shares in the capital of the company at $2.50 per share and also to ratify the previous issue of 5,000,000 shares to CPH on 21 December 1998 at $2.50 per share. Approval was also to be sought for the issue to CPH of the convertible notes. Additionally ratification was sought of the issue on 3 August 1998 of 1,250,000 ordinary shares to EAL at $2.30 per share, which issue had been made pursuant to the agreement of 28 May 1998. I am satisfied that EAL voted in favour of these resolutions. 37. It is the claim of Messrs Sechos, Freedman and Sherman that they did not claim any entitlement on behalf of EAL in respect of these share issues to CPH and Cavalane because they had simply forgotten the existence of clause 6.8. They asserted that this absence of recollection persisted until about mid August 1999 when Mr Sechos, having consulted the agreement for the purpose of dealing with a dispute with Challenger, as to its level of performance under the agreement, came upon clause 6.8 and realised its potential for the making of claims in respect of share placements which had been made by CIL and in respect of which no opportunity to participate had been accorded to EAL. 38. The discovery led to either Mr Sechos or Mr Freedman, shortly thereafter, raising the matter towards the end of a meeting with Mr Ireland, the purpose of which had been to discuss problems that had arisen in the implementation of the agreement. The claim was made that EAL was entitled to the Consolidated Press issue and should have been given an opportunity to participate in the 'Consolidated Press and Cavalane placements'. I am satisfied that Mr Ireland was taken aback by this assertion and that he responded to the effect that the deal had involved not only a share placement but also the issuing of convertible notes as debt financing, that EAL's shares in Challenger had been acquired at a low price, that a profit in the order of $60,000,000 had been made in respect of those shares as a result of the addition of CPH to the Challenger register. He also said that the previous placement to EAL had resulted in a fall in the price of CIL shares. 39. There is a dispute as to the contents of this conversation. I prefer the evidence of Mr Ireland to that of Messrs Sechos, Freedman and Sherman. Although Mr Ireland was cross-examined vigorously on this and other matters and submissions made as to his lack of credibility, I formed the view that he was basically a reliable witness who, at times, was confused but who was endeavouring to give truthful evidence. 40. The claim made at the August meeting was followed up in a letter from Mr Sechos, on behalf of EAL, to Mr Ireland dated 20 August 1999, which dealt with a number of matters in dispute between the companies and which, under the heading 'Further Private Placements', made reference to clause 6.8 and noted that EAL had never been advised of any private placements in CIL since 28 May 1998. Nor had opportunity been provided to participate in such placements. The letter concluded by stating that EAL had been made aware 'through ASX announcements and press reports' that CIL had made a number of such private placements. It alleged a continuing breach of the clause which it described as 'fundamental'. It sought that EAL provide offers to subscribe 'for shares on the same terms and conditions as each private placement' claiming that 'the longer such offers remain outstanding, the larger our potential losses'. A letter in similar terms was forwarded on 31 August 1999. There was no reply to these letters, although the last letter threatened proceedings for breach of contract." 12 Foster AJ had difficulty in determining what significance should be attributed to Mr Ireland's failure to reply to these letters but said that he was not prepared to contribute much significance to it. He accepted Mr Ireland's denial that he knew he had made a great mistake in respect of cl 6.8 and Mr Ireland's evidence that at the time of these placements he had a hazy concept of the agreement as providing some potential to EAL and did not think it had any application to the CPH/Cavalane placements. 13 On the other hand, his Honour rejected the assertions of Messrs Sechos, Freedman and Sherman that they had forgotten about cl 6.8 until "its fortuitous rediscovery by Mr Sechos in August 1999". He concluded that at the very least, they had at all relevant times a recollection of cl 6.8 equivalent to Mr Ireland's recollection "namely that it provided an opportunity to EAL to participate in some circumstances in private placements of shares by CIL." His Honour was satisfied that, whilst having a recollection of that sort, they were not at the time sufficiently interested in the acquisition of further shares in CIL to apply their minds to any rights they might have had under the clause. They had a significant shareholding in CIL and did not seek to add to it. 14 The respondents accept that Challenger did not advise EAL of the proposed CPH/Cavalane issue of shares. To that extent, taking account of the nature of the issue which was conceded, Challenger was in breach of cl 6.8. The September 1999 placement 15 In September 1999 CIL proposed to issue 7,700,000 shares in its capital, 4,000,000 at $8.45 per share and 3,700,000 at $8.50 per share, the latter issue being for domestic as opposed to international placement. The difference was explained by the following statement, in the announcement to the Australian Stock Exchange of 6 September 1999: "The placement comprises two tranches, an international tranche through Burdett Buckeridge Young at $8.45 ex dividend cum bonus and a domestic tranche through Macquarie Equity Capital Markets at $8.50 cum dividend and cum bonus." Foster AJ said: "On the morning of 3 September 1999 Mr Ireland telephoned Mr Freedman and offered him 100,000 shares in the domestic placement. Mr Freedman told him that the offer should be put in writing. This request was followed-up by a letter from Mr Sechos to Mr Ireland in which 'notice in writing of the proposed placements in accordance with clauses 6.8 and 9.3 of the Consultancy Agreement' was sought. It was also indicated that the 'nominal amount of 100,000 shares' was not an appropriate 'opportunity to participate in such placement on same or equivalent terms and conditions as offered to relevant third party' pursuant to clause 6.8. The letter concluded: 'We note that we will require reasonable time to consider the offer once received in accordance with the notice provisions contained in the agreement.' Mr Ireland responded with another letter on the same day, which set out the terms and conditions of the issue and noted that the offer to the plaintiff was ' above the entitlement to others '. It seems that this situation changed. It is, however, clear that the ' terms and conditions ' which related to price, dividends/bonus, time of acceptance and date of settlement were applicable to all shares on issue. 76. I am satisfied that, as he said, Mr Ireland attempted to contact Mr Sherman by telephone during the day to discuss the proposed allotment and the reasons for the plaintiff's refusal to participate in it. The calls were not returned. I have already referred to the reasons advanced by the plaintiff, primarily through Mr Sechos, for its refusal to accept the offer and its alleged views of its entitlement under clause 6.8. The September placement followed hard upon the assertion by the plaintiff in August that there had been a failure on the part of the defendants to comply with clause 6.8 in relation to the CPH and Cavalane issues and its request to be provided with details of all other private placements made since the date of the agreement. It is quite plain, in my view, that after August 1999 the plaintiff had determined upon a course of suing for its alleged entitlements and that this intention coloured its responses in respect of the September placement and the later Deutsche Life Limited placement in March 2000." The meaning of clause 6.8 16 Foster AJ concluded that the phrase "an opportunity to participate in such placement" in cl 6.8 provided EAL with a chance to have a favourable exercise of discretion as to the issue of shares in a proposed placement that carried no assurance that shares would be issued to it in any number or at all. His Honour reasoned to this conclusion in the following way: "The submission is made on behalf of the plaintiff that the clause is 'clear and unambiguous'. I do not find it to be so. Nor did Messrs Sechos, Freedman and Sherman, when giving their understanding of its operation in their evidence. Mr Freedman (at T176-179) was questioned in cross-examination as to the perceived entitlement of EAL under the clause in respect of an issue of 7,000,000 shares in September 1999… Mr Ireland offered EAL, pursuant to the clause, a placement of 100,000 shares. This offer was rejected on the basis that it did not conform with clause 6.8. Mr Freedman expressed the view that the fact that the amount offered was larger than offered to any other party was irrelevant and that, under the clause, EAL should have been offered the entire placement of 7,000,000. The following passage occurs in his cross-examination (T178): 'Q. That means that so far as your reasoning you are now supposedly remembering was concerned, EquitiLink was to be given, before anybody else, an opportunity to take all of the shares on offer, is that right? A. Yes Q. There is no difference you can now describe to his Honour between such an understanding of the deal and a right of first refusal, is there? A. No Q. Yet, you knew beyond any possibility of doubt, that a right of first refusal had been rejected during the negotiations in which you were involved, didn't you? A. Yes. Q. It follows then that you could not have on 3 September 1999 believed that you had the right of first refusal which had been rejected, isn't that correct? A. Possibly, yes. Q. From which it also follows that a view you took that the offer was invalid unless it gave you the opportunity before anybody else to take all 7 million, could not possibly have been a proper ground for insisting upon further compliance with 6.8, do you agree? A. Well, if they had offered us 3 and a half million and someone else 3 and a half million, then we would have been, I believe, okay on clause 6.8. Q. To make it quite clear, what was in your mind the day you refused was that you had been offered something better than any other third party had been offered, and you rejected it because you hadn't been offered the whole lot? A. Yes. Q. Isn't that right? A. Yes. Q. You took the risk that your view or understanding of clause 6.8's meaning and operation justified that stance, isn't that right? A. Yes.' 51. Mr Sherman was questioned about the same subject. I find his evidence (at T350-354) confusing but it would appear that, in his view, the clause provided EAL with virtually a right of first refusal in respect of any proposed private share placement by CIL. 52. Mr Sechos, when asked concerning his view of EAL's entitlement, under clause 6.8, in respect of the 'proposed allotments to Mr Packer's companies' stated that: 'We should have been offered the same amount.' 53. More specifically, when his attention was directed to the time of 'Mr Packer's issues' he was asked the following questions and gave the following answers (T272): Q. At that time, if you had clause 6.8 consciously to the forefront of your mind, would you have taken the position on the executive committee that this was an event that entitled EquitiLink to half the amount being issued or to the same amount as was being issued to Mr Packer? A. If at that time Challenger had offered an amount to CPH which they had accepted, then I would – I would think or my belief is that we were entitled to the same amount so if it was eight million shares they agreed to take at that point, then they would need to come to us and offer us eight million shares. That is my view of 6.8. 54. In later evidence Mr Sechos appeared to espouse the view that clause 6.8 conferred on EAL an entitlement to an amount of shares at least equal to the amount being offered to any third party. As the letter of offer from Mr Ireland in respect of the September 1999 placement … contained an indication that the 100,000 shares being offered to EAL was in fact more than was being offered to others, he was questioned as to why the offer had been rejected. He gave the following evidence (T295): 'Q. If you are getting more than the others, that is all you can ever hope for under clause 6.8, isn't it? A. All we can hope for under clause 6.8 -- Q. Is at least as much? A. Same terms and conditions. Q. And on your interpretation which involves quantum, at least as much as any other third party, isn't that right? A. Correct, yes.' 55. After some further cross-examination relating to the terms and conditions of the offer, Mr Sechos was asked the following questions and gave the following answers: 'Q. And I suggest to you that that meant that so far as compliance with clause 6.8 was concerned, on 3 September, so far as you understood it, you were being offered more shares than anyone else, on the same terms and conditions as applied generally, correct? A. Yes. Q. What more did you want, under 6.8? What more did you want as a director and lawyer? A. I would have gone back for more details. Q. What details did you need apart from price, parcel, time of payment? A. Who was placing the shares, how it was being placed. Q. I am sorry? A. Who was placing shares, how it was being placed, to whom the offers were being made. Q. Why were you entitled under clause 6.8 to know the identity of any other allottee potential or actual? A. That's my view of the words 'on the same terms and conditions'. Q. So 'on the same terms and conditions', it was interpreted by you back on 3 September to mean that there was a right to require prior disclosure of the other people that Challenger was treating with, is that what you mean? A. Yes. Q. You don't truly hold that view, do you? A. In relation to my letter of 3 September, I think more -- Q. You had better just answer my question. You don't truly hold that view, do you? A. I do hold that view. Q. What is it about those words 'on the same terms and conditions' out of which you extract a right in EquitiLink, presumably not possessed by anybody else, to know the details of other people with whom Challenger was treating? A. To have the full information in relation to the offers being made at the time and the placements being made at the time.' 56. Mr Sechos also stated that, in his view, under clause 6.8, EAL would have been entitled to be provided with information as to the identity of a broker dealing with the share placements and also the identity of the people 'that a broker rings up'. He said that these were matters he had in mind when he 'wrote the clause'. 57. The evidence cited above was given by Mr Sechos in the course of lengthy passage of cross-examination relating to his refusal of the CIL offer of 3 September 1999. I was not impressed with the evidence he gave, nor the manner of its giving. It had the appearance of being manufactured on the run in order to defend a position which was becoming increasingly untenable. 58. In counsels' final written submission, it was claimed on behalf of the plaintiff that, as a matter of construction, it had an entitlement under the clause, as expressed in the following paragraphs: 'What the provision simply requires is that if an opportunity is offered to another party EquitiLink be offered an equal opportunity. What that opportunity is, is a matter only within the control of the defendants' camp. Thus, if the defendants only wish to issue 1 million shares, and comply with their obligation under clause 6.8 they must first offer the third party 500,000 and EquitiLink 500,000. If, however, they go ahead and offer the third party 1 million shares, they must also offer EquitiLink 1 million which will, if EquitiLink avails itself of the opportunity, result in the issue of 2 million shares ….. Thus, one of the two outcomes must follow for clause 6.8 to be satisfied: (a) EquitiLink is entitled to subscribe for half of any shares proposed to be issued – this could be achieved by cutting back the amount of shares proposed to be allotted to other parties; or (b) If Challenger International proceeds to issue shares to any third party, it must offer EquitiLink the opportunity to subscribe for the same number of shares as it had issued to those third parties. That is, it must double the size of the share issue to ensure that a position of equality is obtained as to number of shares in the event that Equitilink choose to accept the opportunity offered to it.' 59. No other construction was suggested on behalf of the plaintiff. Accordingly, it must be accepted that, on the plaintiff's case, had it, hypothetically, been aware of the clause at the time of the proposed CPH and Cavalane issues, it would have asserted its rights in these terms, with the result that it would have either demanded one half of the proposed placements or, alternatively, if the Packer interests were not prepared to accommodate those situation, then, placements to it of equal size at the same share price. 60. I find myself quite unable to accept this construction of clause 6.8. Nor, am I satisfied that it was, indeed, the construction that Mr Sechos had in mind when the clause was drafted in response to Mr Ireland's clear rejection of the original clause, which had provided a right of first refusal. I am satisfied that, if Mr Sechos had truly considered that in drafting and winning acceptance by the defendants of clause 6.8, he had achieved such a significant entitlement for EAL in relation to future share placements by CIL, he could not conceivably have forgotten about the clause until he chanced to stumble upon it, in August 1999. 61. Moreover, I am satisfied that, had the proposed clause provided EAL with the suggested entitlements to participate in share issues, it would have been rejected out of hand by CIL, as basically being unworkable and not far removed in its operation from the rejected draft. 62. In my view the clause, when read in context with the previous draft clause and the wording of Mr Ireland's rejection of it, has the appearance of seeking to do no more than put into formal and more precise language, what had been expressed by Mr Ireland. It would have been perceived as providing a mechanism for giving effect to Mr Ireland's then benevolent intentions in relation to EAL as a loyal shareholder in CIL. 63. It is useful to approach the construction of the clause by considering, first, what it does convey. In the first place, it was clearly not intended to provide for EAL's having a right of first refusal. This had been expressly rejected in negotiations and that fact is admissible as an aid in interpretation ( Codelfa Construction Pty Limited v State Rail Authority of NSW (1982) 149 CLR 337 at 352-352). Secondly, the clause makes no reference to the number of shares in respect of which the relevant opportunity is to be provided. The words 'on the same or equivalent terms and conditions as offered to that third party' contain no reference to the number of shares contained in the offer. The construction urged by the plaintiff would, in my view, require the reading into these words of the words such as 'and in the same number'. In my opinion this would effect a radical change in the meaning and operation of the clause, in circumstances where there is no warrant for the taking of such a step. Moreover, if those words, or words to similar effect, had been included, I am quite confident that they would have been rejected on behalf of CIL. They would have had the effect of seriously limiting its control, as a public listed company, over its own share placements, particularly in relation to the making of strategic placements such as the CPH and Cavalane issues. 64. I agree with the submission on behalf of the defendants that it is proper to take into account, in the construction of the clause, as part of the matrix in which it is to operate, the usual market practice, established by the evidence, that, in respect to placements made by publicly listed companied in Australia: '(a) the timing of placements and the total number of shares placed are determined at the discretion of the issuing company; (b) all participants in each placement are normally treated equally with respect to the price of the shares offered in the placement and any conditions associated with the offer; and (c) the number of shares offered to each investor in each placement can differ significantly, and is determined at the discretion of the issuer company or their stockbroker, subject to statutory requirements.' 65. It is also relevant to consider that CIL was not a party to the agreement, that it was a publicly listed company subject to Stock Exchange listing rules in respect of its share issues, and that the first defendant Challenger Wealthlink, the contracting party, was a wholly owned subsidiary of CIL and, consequently, was in no position to control its decisions. It could not, for instance, require that CIL permit it to provide market sensitive information in relation to any proposed placement of shares by CIL, in circumstances where it would have been improper, or even illegal, to do so. 66. I am of the view that, construing the clause as part of a commercial document, the words 'proposed issue of shares…by way of private placement to any third party' should be read as conveying a composite concept and that, consistently with the definition section of the agreement, 'any third party' should be read as singular or plural, depending upon the situation to which the clause, from time to time, might apply. I consider it quite artificial to try to confine, as a matter of construction, the 'proposed issue of shares' to the point of time when the shares were, in fact, about to be issued. In my view the words can be properly be translated, by way of interpretation, as amounting to 'any proposal for the issue of shares…by way of private placement to any third party or parties'. 67. I have already expressed my view as to the proper construction of the words 'raising additional capital', as relating only to the obtaining of money from the sale of shares. 68. The clause is, of course, divided into two parts. Under the first part the first defendant has the active obligation of advising the plaintiff of the proposed issue. Despite the wording of clause 9.3 of the agreement, I would entertain some doubt whether such advice is required to be given in writing. Nothing turns on that in the present case. The second part, couched in the passive voice, requires that EAL or its nominee be 'provided with an opportunity to participate in such placement'. Certainly the wording is not as definite as that appearing in clause 4(a) of the agreement where the first defendant undertook 'to procure the issue to EquitiLink Limited' of 1,250,000 shares in CIL. However, in my view, and despite the fact that only CIL could provide the relevant opportunity to participate, the first defendant would be in breach of an obligation imposed on it by the clause if the relevant opportunity was not provided. It is, therefore, most important to determine what the phrase 'provided with an opportunity to participate in such placement' means in the context of the agreement and its surrounding circumstances. 69. I have already indicated that, in my opinion, sufficient ambiguity exists in the wording of the clause for the construer to call in aid background information. I have already set out facts relating to the practice of the finance and securities industry which can reasonably be taken into account. I should add, even without this assistance, I am satisfied that I would come to the same view as to the meaning of the words in the context of the clause. I am satisfied that, in construing these words, regard must be had to the undoubted discretion of CIL to determine the number of shares that it will issue to any applicant and whether, indeed, it will issue any shares at all. Such discretion must be exercised in the interests of the company. Where shareholder approval is necessary, it cannot control the way in which the shareholders vote. Similarly, it would be most unusual for a discretion to issue shares to be exercised in such a way as to bring the company into conflict with the listing rules of the Stock Exchange. These matter have been canvassed in the evidence and I need not refer to them further. In my view, the submission made on behalf of the defendants as to the meaning of these words is correct. Namely that 'an opportunity to participate in such placement' means no more than a chance to have a favourable exercise of discretion as to the issue of shares in the proposed placement. The words carry no assurance that shares will be issued in any number, or indeed at all. 70. I should add that, in my opinion, the clause contemplates only one placement of shares whether it be to one party or spread among several. The opportunity to participate is restricted to obtaining, in the event of a favourable exercise of discretion by the issuer, a part of that particular placement. The clause does not envisage any entitlement in EAL to seek an issue of shares to it, which are not included in the number proposed to be issued in the placement. It could not, in reliance on the clause, seek an issue of shares to it, which would be additional to the total of those to be provided in the placement." Grounds of Appeal 17 EAL's amended notice of appeal contained 32 grounds. EAL's written submissions of 14 February 2002 contained 121 paragraphs and extended over 44 pages. So far as I can see the submissions were not cross-referenced to the grounds of appeal and do not refer to those grounds. I do not propose to either. 18 Mr Myers QC, who appeared for EAL, started his address by saying that the appeal concerned the meaning and effect of cl 6.8 of the Agreement. Counsel acknowledged that, if EAL's construction of cl 6.8 was not accepted, EAL was entitled to no more than nominal damages. If EAL's construction was accepted EAL abandoned any claim to specific performance and relied entirely on a claim for common law damages for breach of contract. Moreover EAL abandoned any attack upon the trial judge's credit based findings of fact. 19 EAL's submission to this Court was, as described by Foster AJ in paragraph 71 of his reasons for judgment, that EAL was entitled to be offered in any proposed issue of shares the same number of shares as any other third party to which an offer was made. Thus when CIL proposed to issue the 5,000,000 shares, which were in fact issued to CPH, EAL should have been offered 2,500,000 shares. Since the whole of the 5,000,000 shares was issued to CPH, EAL was entitled to claim that the same number should have been issued to it. EAL claimed common law damages for CIL's failure, in breach of the Agreement, to issue shares to EAL the equivalent in number of the CPH/Cavalane share and convertible note issue on conversion and the September 1999 share issue. 20 EAL submitted that as a matter of construction cl 6.8 obliged Challenger to notify of a proposed issue of shares and to provide an opportunity to participate in the placement on the same terms and conditions as offered to any third party. The proposal to issue did not determine what EAL was entitled to under the second part. Under the second part EAL was entitled to whatever was offered to a third party. Mr Myers submitted that, unless the terms and conditions, referred to in cl 6.8 "as offered to the third party", included a term and condition that the same number be offered to EAL, the clause was of no value to EAL and could be written out of the Agreement. 21 I do not find this submission particularly persuasive. As Foster AJ found Mr Sechos drafted cl 6.8. He, Mr Freedman and perhaps Mr Sherman, had, his Honour said, at all relevant times a recollection of cl 6.8 equivalent at least to Mr Ireland's recollection namely, that it provided an opportunity to EAL to participate in some circumstances in private placements of shares by CIL. These findings are not now challenged. I do not accept that EAL did not regard cl 6.8, construed as Foster AJ held it should be, as being illusory or of no value. 22 In the course of his reasons Foster AJ said that it was clearly not intended by the parties that EAL should have a right of first refusal. That had been rejected in negotiations between the parties about the terms of the Agreement before it was entered into. Mr Ireland had rejected a clause to the effect that any issue of shares by CIL by way of private placement to any third party for the purposes of raising additional capital would first be offered to EAL "on the same terms and conditions as offered to that third party". That was the proposed form put forward by Mr Sechos. In that draft form of the Agreement the expression on the "same terms and conditions as offered to that third party" did not mean "and in the same number". The proposal was that the whole of any proposed issue be first offered to EAL. Yet, by quite different language, EAL argues that EAL was to be first offered half of any issue of shares for private placement for the purposes of raising additional capital. 23 Foster AJ referred to Codelfa Construction Pty Ltd v State Rail Authority of NSW at 352-3. At 353, after posing the question of whether it was right to place on the words of the contract a meaning which the parties had united in rejecting, Mason J said: "It is possible that evidence of mutual intention, if amounting to concurrence, is receivable so as to negative an inference sought to be drawn from the surrounding circumstances." 24 If cl 6.8 is truly ambiguous and capable of more than one construction, one such being that urged by EAL, I think it is appropriate to take account of Challenger's rejection of a term that EAL have a right of first refusal. In Prenn v Simmonds [1971] 1 WLR 1381, after referring to Lord Blackburn's well known judgment in River Wear Commissioners v Adamson (1877) 2 App Cas 743 at 763, Lord Wilberforce said at 1384: "We must, as he said, inquire beyond the language and see what the circumstances were with reference to which the words were used, and the object, appearing from those circumstances, which the person using them had in view." 25 EAL was compelled to argue that the phrase in cl 6.8, "on the same or equivalent terms and conditions as offered to that third party", had been extended to encompass a term and condition that the same number of shares offered to the third party be offered to EAL. 26 A statement by Craig Gillen Carter, a stockbroker employed by Macquarie Equities Limited (MEL), was tendered at trial on behalf of the respondents and admitted without objection. Although Mr Carter was cross-examined by EAL's counsel his statement of the practice adopted for effecting the Challenger placement in September 1999 was not challenged. The practice was first to seek expressions of interest in taking up part of the placement from large institutional investors. This enabled a determination to be made as to whether there was general support for the placement. On that depended whether MEL would proceed with the placement. 27 Once a decision was made the institutional sales desk was informed of the placement. That was referred to as "going live" or "going wide". Once a placement "goes live" the dealers on the institutional sales desk are instructed to contact the institutional clients they consider likely to be interested in the placement and "invite them to participate in the placement". In accordance with MEL's general practice "each institution so contacted would have been asked to indicate how many shares they wished to acquire by submitting a binding bid and would have been required to provide [MEL] with a response within a short period [normally within a few hours]. Institutions are not usually offered a fixed number of shares and are not provided with any assurance that they will be allocated any particular quantity of shares." After responses are received from the institutions a determination is made how the placement shares will be allocated between the various institutional investors which have elected to participate. "Ordinarily, as a matter of industry practice, the number of shares ultimately offered to each institution in such a placement is a matter for the underwriter's… discretion." 28 EAL and those of its officers concerned with the drafting of the Agreement were experienced share traders. The language of cl 6.8 fits with the industry practice Mr Carter described. It can readily be understood as requiring that EAL be treated, in the case of any proposed issue of shares by way of private placement for the purposes of raising additional capital, as an institution which has expressed interest in taking up part of the placement. If the placement "goes live" cl 6.8 required the underwriter to invite EAL to participate in the placement. It was a matter then for EAL to decide whether it would submit a binding bid and, if so, for how many shares. If EAL submitted a binding bid for a parcel of shares it remained a matter for the underwriter to determine the number of shares which would be offered to EAL. So to read cl 6.8, as Foster AJ did, accords with the unchallenged evidence of industry practice and does no damage to the language of the clause. 29 It is interesting to note that in the course of his cross examination Mr Carter was asked the meaning of the word "slush" before a surname in a list of the institutions allocated shares and the number of shares allocated under the placement which was annexed to his statement. Mr Carter said: "… 'slush' refers to whatever you do, no matter how wide you go, there is always a client that will ring up after the event and say 'You didn't offer me. I have been dealing with you for 45 years and you didn't offer me.' We keep some back for those kinds of things." This supports what I regard as the obvious conclusion – that an entitlement to be regarded, pursuant to cl 6.8, as an institution interested in any placement of CIL shares was a valuable right. 30 If, as EAL submits, cl 6.8 must be read to require as Foster AJ said the reading into these words of words such as "and in the same number" it could not operate in the context of industry practice. It would require Challenger to arrange that, at latest when the placement "went live", EAL be offered one half of the shares to be placed, on the same and equivalent terms and conditions as other parties. At that stage, other parties were being given no more than an opportunity to make a binding bid. However on this construction EAL could accept the offer and bind the offeror to it. In his submissions somewhat reluctantly, and one understands the reluctance, Mr Myers accepted that EAL's construction of cl 6.8 would mean that EAL either accepted the offer as made, to take up the number of shares offered, or rejected it. 31 An offer in this sense is described in the American Restatement (2d) Contracts para 24 as, "the manifestation of willingness to enter into a bargain, so made as to justify another person in understanding that his assent to that bargain is invited and will conclude it." See Carter and Harland, Contract Law in Australia 4th ed (2002) at para 207. If EAL stated that it was prepared to take up only a lesser number than offered that could only be regarded as a rejection of CIL's offer. Presumably CIL could reject a binding bid by EAL for the lesser number. Counsel's reluctance to accept this proposition is no doubt influenced by the fact that it would be quite foreign to the ordinary practice for making institutional share placements. 32 I agree with Foster AJ that the opportunity to participate is restricted to obtaining, in the event of a favourable exercise of discretion by the issuer, a part of the particular placement. Clause 6.8 does not envisage an issue of shares to EAL additional to the total of those to be provided in the placement. Breach of contract 33 However, even on the construction of cl 6.8 preferred by Foster AJ with which, in substance, I agree, there was a breach of contract. EAL acknowledged that if this were so it was entitled to no more than nominal damages. EAL's claim correctly understood was a claim for the loss of an opportunity to participate. That claim could not extend to the September 1999 placement of 7,000,000 shares where the opportunity to participate was proffered to EAL and rejected by it. It could arise in the case of the CPH/Cavalane transaction where in breach of contract Challenger had failed to advise EAL of the proposed issue and failed to ensure that EAL was provided with an opportunity to participate. So far as the placement of unsecured notes was concerned, I agree with Foster AJ's conclusion that this was not an issue of shares and therefore as a matter of language not caught by cl 6.8. But I can see no reason why when the offer of 5,000,000 shares was made to CPH an offer of say 100,000 shares could not, in a way acceptable to all parties, have been made to EAL to satisfy the obligation under cl 6.8. However this was not explored at all during the hearing, in the evidence or in the submissions. Accordingly, in light of the concessions made about nominal damages, which seem to me to be correct, the matter need not be further pursued. Damages 34 We heard a lively debate about how damages should be quantified if EAL's construction argument were accepted. EAL proffered a straightforward approach to the assessment of damages, namely a calculation based on a comparison between the placement price and the market price of CIL shares at the date of placement. This approach however passed over the trial Judge's findings that if CPH had been informed that the placement was to be of 10,000,000 shares, of which it received only half, the placement would not have been of interest and accordingly, in terms of placement practice as it has been described, the matter would not have proceeded for want of institutional interest. 35 Even accepting EAL's interpretation of cl 6.8 it is not correct to treat that clause as constituting a binding agreement by CIL to sell half the shares in a proposed placement to EAL before any interest in the proposed placement is shown by institutions. EAL is entitled to an opportunity to participate. In the case of the CPH placement if CPH had shown no interest in the placement EAL would have lost no opportunity to participate. There is no evidence to suggest otherwise. His Honour found that the opportunity would not have arisen and accordingly EAL lost nothing. 36 So far as the September 1999 placement is concerned, on his Honour's finding that EAL had no interest in taking CIL shares up at that time, no causal link could be seen between the breach of contract and any damage to EAL. Notice of Contention 37 The respondents filed a notice of contention which it is unnecessary to consider. Orders 38 By failing to advise EAL of the proposed CPH/Cavalane issue of shares Challenger was in breach of its contractual obligation under cl 6.8 of the Agreement. In this appeal EAL did not advance any case for damages other than that, based on its argument about the construction of cl 6.8, that EAL was entitled to participate in those share issues in the same number of shares as were issued to CPL and Cavalane. That claim failed. No other method was suggested for calculating damages. EAL conceded that if the construction argument failed EAL was entitled to no more than nominal damages. However such relief was not asked for either at the trial or on the appeal. Accordingly the appropriate course is to dismiss EAL's appeal and order it to pay the respondent's costs. 39 In my opinion the appeal should be dismissed with costs. 40 HEYDON JA; I agree with Sheller JA. ********** 41 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. 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