FEDERAL COURT OF AUSTRALIA

Great Australian Operations Pty Limited (receivers and managers appointed) v CopperChem Limited [2012] FCA 391

FEDERAL COURT OF AUSTRALIA

Great Australian Operations Pty Limited (receivers and managers appointed) v CopperChem Limited [2012] FCA 391

CORRIGENDUM

1.    The word “negative” should be inserted before “$5,615,519” in paragraph 150.

Associate:

Dated:    27 April 2012

THE COURT ORDERS THAT:

1.    The proceeding be dismissed.

2.    The plaintiff pay the costs of the second defendant as agreed or assessed.

3.    The plaintiff pay the costs of the first defendant as agreed or assessed.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

Introduction

1    Prior to 23 September 2009, CopperChem Limited (CopperChem) was in need of working capital for the operation of its business of a copper processing plant in North West Queensland.

2    Under a suite of agreements entered into on 23 September 2009, Washington H Soul Pattinson and Company Limited (WHSP) agreed to subscribe share and loan capital to CopperChem in an amount of $24.2 million.

3    On 23 September 2009, shortly before the agreements were entered into, CopperChem passed a resolution for its re-capitalisation which provided, in particular, for the issue to WHSP of 72 million Class B Converting Shares (the Resolution).

4    The Resolution recorded the terms and conditions on which those shares were issued to WHSP (the Terms and Conditions). They included conversion rights which were, in essence, a dilution mechanism under which the shareholding of Great Australian Operations Pty Limited (GAO) in the capital of CopperChem could be diluted by reference to the amount by which the Actual EBITDA (ie earnings before interest, taxes, depreciation and amortisation) of the CopperChem Group fell below the Base EBITDA.

5    The Base EBITDA was defined in the Terms and Conditions as the amount of $28,204,076. That amount was the forecast EBITDA for CopperChem for the financial year ending 30 June 2011.

6    The Actual EBITDA was defined in the Terms and Conditions to mean the Actual EBITDA for the CopperChem Group as disclosed in the Audited Accounts for the CopperChem Group for the financial year ending 30 June 2011. The term CopperChem Group appeared in the Resolution even though CopperChem did not have any subsidiaries.

7    When the Resolution was passed, GAO was the sole shareholder in CopperChem. GAO held 72 million ordinary shares in the capital of CopperChem. The 72 million Class B Converting shares issued to WHSP carried the same rights as the ordinary shares, save for the conversion rights, so that upon the subscription by WHSP each of GAO and WHSP held 50% of the issued capital of CopperChem.

8    The effect of the conversion rights was that GAO’s 50% shareholding was at risk of dilution in the event that the Actual EBITDA of the CopperChem Group, as defined in the Terms and Conditions, fell below the figure of $28,204,076.

9    In the financial year ending 30 June 2011, the financial performance of CopperChem fell well below the forecast but, unsurprisingly, the EBITDA of WHSP (which had a different financial year ending date) amounted to many hundreds of millions of dollars.

10    Also, during the relevant financial year, when CopperChem was in need of a further injection of capital, WHSP subscribed $3 million in return for a subscription of a further 7,200,000 Class B Converting shares. As a result of this subscription, which was the subject of a resolution dated 30 September 2010 and a further subscription agreement of 1 October 2010, WHSP increased its shareholding to approximately 52% of CopperChem.

11    Thus, as at the relevant date for the determination of the Actual EBITDA of the CopperChem Group, WHSP was a holding company of CopperChem and a Related Body Corporate of CopperChem within the meaning of s 50 of the Corporations Act 2001 (Cth).

12    Coincidentally, the term Related Body Corporate was defined in the Share Subscription Agreement dated 23 September 2009 (the First Subscription Agreement) to have the meaning given to it in s 50 of the Corporations Act.

13    GAO relies upon the definition of Related Body Corporate in the First Subscription Agreement to contend that the CopperChem Group, which is defined in the Resolution to mean CopperChem and each Related Body Corporate of CopperChem, means WHSP so that the Actual EBITDA by reference to which the dilution mechanism operates is to be calculated by reference to WHSP’s EBITDA. On that approach, the dilution mechanism would not be triggered in spite of the failure of CopperChem to achieve its forecast EBITDA.

14    GAO contends that there is no ambiguity in the meaning of the term Related Body Corporate in the First Subscription Agreement. So that, in its submission, there is no scope for resorting to surrounding circumstances to construe the meaning of CopperChem Group in the Terms and Conditions which form part of the Resolution.

15    However, Mr Hutley SC, who appears for WHSP, points out that although there are a number of definitions set out in the Resolution, the term “Related Body Corporate” is not one of them. Also, he points to the terms of the First Subscription Agreement which appear to invite attention to the context when construing a particular defined term when it is used in the Resolution.

16    Mr Hutley submits that the construction for which GAO contends is absurd. He relies upon the structure of the entire suite of agreements entered into on 23 September 2009 to construe the terms “Actual EBITDA”, “Audited Accounts”, “Base EBITDA” and “CopperChem Group” which are the critical definitions in the Resolution.

17    The approach to construction put forward by Mr Hutley is in conformity with the principles of construction stated by the High Court: see Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 at [40].

18    It requires detailed consideration of the Resolution and the terms of the suite of agreements entered into on 23 September 2009. There can be no doubt that the whole of these documents reveal the circumstances known to the parties to the transaction and the object it was intended to achieve: International Air Transport Association v Ansett Australia Holdings Ltd (2008) 234 CLR 151 at [8].

19    WHSP contends that upon the proper construction of the Resolution, as well as the resolution of CopperChem passed on 30 September 2010 (the Second Resolution), the phrase “Actual EBITDA” means the consolidated EBITDA of the CopperChem business, that is to say CopperChem and any subsidiaries it may have.

20    Against the possibility that I do not accept WHSP’s submissions as to the proper construction of the Resolution, WHSP seeks an order for rectification of the Terms and Conditions to give effect to what WHSP contends was the common intention of the parties, as manifested in their actions or conduct.

21    WHSP abandoned a further alternative answer to the construction case put forward by GAO, namely a defence of estoppel.

22    The evidence on which WHSP relied in its cross-claim for rectification consisted largely of the negotiations between the parties culminating in the passing of the two resolutions and the suite of agreements. Much of the evidence on this issue is not relevant to the question of construction.

23    Since I have come to the view that WHSP’s construction is correct, I do not propose to set out the evidence going to the rectification claim in the detail to which I was taken at the hearing. However, I will refer to the most salient parts of the documentary record.

24    The negotiations were conducted on behalf of CopperChem and GAO by Mr Stephen Becher Wolfe. He was the principal of GAO and, prior to the subscription by WHSP, GAO was the sole shareholder of CopperChem so that Mr Wolfe is the relevant mind for each of those companies. His credit was attacked by Mr Hutley.

25    Mr Wolfe conducted the negotiations with Mr David James Scammell, an executive of Pitt Capital Partners Ltd (Pitt), a corporate advisory firm which is a wholly owned subsidiary of WHSP.

26    Mr Scammell liaised with Mr Wolfe and with Mr Peter Raymond Robinson, an executive director of WHSP. Mr Scammell took instructions from Mr Robinson and took each party’s position to the other. The effect of the evidence of each of Mr Wolfe, Mr Scammell and Mr Robinson was that Mr Scammell was a broker in the negotiations, with Pitt being entitled to a success fee from CopperChem for raising funds from WHSP.

27    When the parties agreed on the commercial terms, Mr Scammell instructed a solicitor, Mr David Paul Selig to act for WHSP in preparing the documentation. CopperChem engaged its own solicitor, Mr Peter Rawling. In his evidence before me, Mr Selig freely admitted that he made a mistake in adopting the Corporations Act definition of Related Body Corporate in the suite of agreements.

The Resolution

28    The Resolution was a document that was signed by GAO as the sole shareholder of CopperChem. It commenced with a description of the proposed re-capitalisation of CopperChem under a proposal from WHSP for the subscription of $21 million in order to acquire 72 million Class B Converting Shares, and a loan of $3,200,000 from WHSP to CopperChem.

29    The loan was to be secured by a fixed and floating charge over the assets of CopperChem and a mortgage over the shares held by GAO in CopperChem.

30    The Resolution then went on to deal with the issue of the Class B Converting Shares. It annexed and adopted the Terms and Conditions and contained a determination by GAO as the sole shareholder, that in consideration for WHSP making the subscription and the Loan, CopperChem issue and allot 72 million Class B Converting Shares to WHSP.

31    The basis on which those shares were to be issued was stated to be that:-

    the subscription price for each share would be $AUD 0.291667;

    the only rights that the holder of the Class B Converting shares would have in addition to the rights of an ordinary shareholder would be the conversion rights stated in the Terms and Conditions.

32    The Conversion Rights were set out in paragraph 1 of the Terms and Conditions. They consisted of the right to convert all, but not some, of the Class B Converting Shares to ordinary shares on a sliding scale depending upon the extent to which the Actual EBITDA fell below the Base EBITDA.

33    Where the Actual EBITDA was 20% below the Base EBITDA, the conversion rate was slightly in excess of 1.2. The conversion rate increased incrementally as the Actual EBITDA fell. Thus, the further the Actual EBITDA fell below the amount of $28,204,076, the greater the dilution of GAO’s shareholding interest in CopperChem.

34    The basis for determining the Actual EBITDA for the period ending 30 June 2011 was set out in paragraph 2 of the Terms and Conditions. It was to be determined from the Audited Accounts for that period, subject to a number of conditions. One of those was that the Auditor must certify that the Actual EBITDA has not been achieved by an extraordinary event or circumstance.

35    Clause 8 of the Terms and Conditions set out a number of definitions. The key definitions were as follows:-

Actual EBITDA means the actual EBITDA for the CopperChem Group, as disclosed in the Audited Accounts, in respect of the period from and including 1 July 2010 to 30 June 2011.

Audited Accounts means the balance sheet, the profit and loss and sources and applications of funds statement for the CopperChem Group, for the Company individually, as well as on a consolidated basis, prepared by the Auditor and otherwise in accordance with prevailing Accounting Standards at the time of preparation.

Auditor means a duly qualified and experienced auditor of the Company.

Base EBITDA means an EBITDA for the CopperChem Group in respect of the period from and including 1 July, 2010 to 30 June, 2011 equal to $28,204,076.00

CopperChem Group means the Company and each Related Body Corporate of the Company, following the subscription of Class B Converting Share by the Class B Converting Share Holder.

The term “Company” was defined elsewhere in the Resolution to mean CopperChem.

The RPS Resolution

36    Contemporaneously with the passing of the Resolution, CopperChem passed a further resolution in relation to the issue of Class A Redeemable Preference Shares to WHSP (the RPS Resolution). As with the Resolution itself, the RPS Resolution was a determination by GAO as the sole shareholder of CopperChem.

37    The RPS Resolution followed the format of the Resolution. It consisted of a determination by GAO that in consideration for WHSP subscribing for the shares and making the loan of $3.2 million, CopperChem would issue 100 Class A Redeemable Preference Shares to WHSP. The basis on which those shares were to be issued was that:-

    WHSP would be entitled to receive a cumulative preferential dividend of $32,000 per share (ie $3.2 million) or a lower Reset amount calculated by reference to the amount by which the Actual EBITDA exceeded the Base EBITDA;

    A dividend would not be payable until the Loan had first been repaid to WHSP.

38    The effect of the terms and conditions on which the Class A Redeemable Preference Shares were issued was that the dividend entitlement was reset on a sliding scale by reference to the amount by which the Actual EBITDA exceeded the Base EBITDA of $28,204,076. If the Actual EBITDA exceeded $33,842,071, there would be no dividend entitlement.

The First Subscription Agreement

39    The First Subscription Agreement was made on 23 September 2009 between WHSP and CopperChem. It recited that WHSP had agreed with CopperChem to subscribe for the Subscription Shares which were defined as the 72 million Class B Converting Shares and that CopperChem had agreed to issue the subscription shares and the 100 Class A Redeemable Preference Shares to WHSP on the terms of the agreement.

40    Clause 1.1 provided for a large number of definitions to apply. The defined terms included “Agreed Budget” which was the forecast budget of CopperChem attached to the First Subscription Agreement. The budget identified the figure of $28,204,076 as the forecast for the year ending 30 June 2011.

41    I do not propose to set out all of the definitions. It is important to note, as I mentioned earlier, that “Related Body Corporate” was defined in the First Subscription Agreement but not in the Resolution.

42    Also, the term “Audited Accounts” was defined in the First Subscription Agreement in terms which differed from the definition in the Resolution. In the Agreement the term meant the audited financial statements for CopperChem for the period ending 30 June 2009 whereas in the Resolution it meant the Audited Accounts for the CopperChem Group for the period ending 30 June 2011.

43    Moreover, some of the definitions in the Resolution, in particular the critical definitions set out in 35 above were not included in the First Subscription Agreement.

44    The First Subscription Agreement contained a definition of “Shareholders Agreement” which was defined to mean:-

“… a shareholders agreement dated on or about the date of this Agreement, that is to be entered into by each of the Company’s shareholders…”

45    The Shareholders Agreement was therefore one of the suite of agreements which was part of the context against which the Resolution is to be construed.

46    Clause 1.2 of the First Subscription Agreement was headed “Interpretation”. It commenced with the words:-

“In this Agreement, unless the context requires otherwise…”

47    Clause 1.2(j) provides that:-

“a reference to this Agreement includes each annexure, exhibit and a schedule to this Agreement”.

48    The annexures included the Resolution and the RPS Resolution.

49    Clause 2.1 provided for WHSP to subscribe for and pay the First Call on the Subscription Shares and for CopperChem to allot and issue those shares. Provision was made in cl 2.2 for the payment of subsequent calls on the $21 million subscription price.

50    Clause 3.1 specified certain conditions precedent to the obligations of the parties to subscribe for, make payment for and allot the Subscription Shares. The conditions precedent included completion of the Audited Accounts, that is to say, the accounts of CopperChem for the preceding financial year, and the passing by GAO (as sole shareholder of CopperChem) of the Resolution and the RPS Resolution.

51    The obligations of WHSP to subscribe for the Subscription Shares and of CopperChem to allot them were set out in cl 4 in a way which conforms with the principles stated by Gzell J in Platinum Investments Management Ltd v Chief Commissioner of State Revenue (No 2) [2010] NSWSC 1 at [48]ff.

52    WHSP’s obligations included an obligation to execute an application for the Subscription Shares in the form set out in Schedule 1 to the First Subscription Agreement.

53    There were a number of warranties set out in cl 5. One of them was that the corporate structure of CopperChem was, as at the Subscription Date, accurately set out in Schedule 2, and that CopperChem had no subsidiaries.

54    Schedule 2 described the corporate structure of CopperChem as having on issue 72 million fully paid ordinary shares, being a wholly owned subsidiary of GAO with no subsidiaries.

The Shareholders Agreement

55    The Shareholders Agreement was dated 23 September 2009 and was made between WHSP and GAO. It recited that WHSP and GAO were the only holders of shares in the issued capital of CopperChem. It also recited that CopperChem had been established for the development and operation of the Business, which was a defined term to which I will refer.

56    The Shareholders Agreement went on to recite that WHSP and GAO wished to record the terms of their agreement as to certain matters relating to their ownership and control of their respective shareholdings and the operation of CopperChem and the Business.

57    Clause 1.1 contained a lengthy set of defined terms with the definitions to apply unless the context required otherwise.

58    The term “Business” was defined to mean the business specified in Item 1 of Schedule 1 carried on by CopperChem. Schedule 1 described the Business as involving the processing of copper oxide into copper sulphate. It stated that the Business included mining and exploration for copper sulphide to provide feedstock for CopperChem’s processing plant which was located a short distance from its mining tenements in the Cloncurry/Mount Isa region of North West Queensland.

59    Another relevant definition is “Loan Agreement” which was defined to mean a loan agreement dated on or about the date of the Shareholders Agreement and made between WHSP as lender, CopperChem as borrower and GAO as guarantor. That document is therefore part of the relevant context for interpreting the Resolution.

60    The definition of “Related Body Corporate” appears yet again in the Shareholders Agreement in the same terms as above.

61    Clause 3 of the Shareholders Agreement is of some significance because it provided for the possibility of CopperChem obtaining additional funding from WHSP and GAO. Relevantly, the clause provides for the possibility that additional funding may be raised by way of subscription by WHSP and GAO for new shares in CopperChem otherwise than in proportion to their existing shareholding.

62    The Shareholders Agreement also made provision, in particular in cls 4 and 7, for the way in which control of CopperChem was to be exercised by WHSP and GAO. Each was entitled to appoint one Director, and they were to jointly agree on the appointment of an independent director: see cl 4. This provision avoided the possibility of deadlock at board level.

63    The manner in which control could be exercised at the shareholder level was dealt with by listing a large number of matters relating to the conduct of the affairs of CopperChem as special matters which required the approval of the shareholders in a Special Resolution: see cl 7. The effect of this was that neither of WHSP nor GAO could obtain effective shareholder control unless it held 75% of the issued shares of CopperChem.

The Loan Agreement

64    The Loan Agreement was also dated 23 September 2009. It was made between WHSP as lender, CopperChem as borrower and GAO as guarantor.

65    Recital A to the Loan Agreement stated that WHSP had agreed to advance the amount of $3,200,000 to CopperChem to be applied for the “Approved Purpose”. That term was defined to mean the expansion or re-configuration of the current plant and equipment used by CopperChem and for other stated activities of CopperChem as well as for general working capital.

66    The extensive list of definitions in the Loan Agreement included a repetition of the term “Related Body Corporate”.

The Second Resolution

67    The Second Resolution was passed by CopperChem on 30 September 2010. It set out the background including the First Subscription Agreement and the proposal by WHSP to subscribe $3 million for a further 7,200,000 Class B Converting Shares.

68    The Second Resolution stated that in consideration for WHSP making the subscription (ie, $3 million), CopperChem resolved to issue and allot 7,200,000 Class B Converting Shares to WHSP on the basis that:-

    the subscription price for each such share would be $0.416667;

    the only right of the holder of the Class B Converting Shares additional to those of an ordinary shareholder would be as described in paragraph 1 of “the Terms”. This was a reference to the diluting mechanism contained in the Terms and Conditions referred to in the Resolution.

The Second Subscription Agreement

69    The Second Subscription Agreement was dated 1 October 2010 and was made between WHSP and CopperChem. It referred in the recital to WHSP’s subscription for 72 million shares under the First Subscription Agreement and that WHSP had agreed with CopperChem to increase its shareholding by subscribing $3 million for a further 7,200,000 Class B Converting Shares.

70    The terms of the Second Subscription Agreement were similar to those of the First Subscription Agreement. Notably, many of the definitions from the First Subscription Agreement, including the definition of Related Body Corporate, were incorporated by reference into the Second Subscription Agreement.

71    Also, many of the clauses from the First Subscription Agreement were incorporated by reference into the Second Subscription Agreement.

The facts

72    In early to mid 2009, CopperChem required capital for, inter alia, an expansion and reconfiguration of its copper sulphate plant and construction of a copper concentrate circuit.

73    In around early August 2009 Mr Scammell and Mr Wolfe discussed the possibility of a private share placement by CopperChem.

74    On the same day, 11 August 2009, Mr Wolfe forwarded to Mr Scammell a financial model for CopperChem which contained a projection of EBITDA for that company for the year ending 30 June 2011. The projected figure was $28,204,076. This was the figure that appeared in the budget annexed to the First Subscription Agreement and it became the “Base EBITDA” that is central to the determination of this proceeding.

75    On 27 August 2009, Mr Scammell emailed to Mr Wolfe a PowerPoint presentation of a possible deal structure for an investment by WHSP in CopperChem. The presentation recorded that:-

“If company misses forecasts, Becher Holdings/GAO equity is diluted by WHSP”.

76    Mr Wolfe conceded in cross-examination that he understood that what was being proposed was that if CopperChem did not meet its forecast, GAO’s shareholding would be diluted because WHSP’s shareholding in CopperChem was being purchased for $21 million (or $24.2 million depending upon how the loan was characterised).

77    Mr Wolfe also understood that WHSP’s investment was being made on the basis of CopperChem’s projected return. He came to understand that if the cash flow was not achieved, there would be a proportionate watering down of GAO’s interest in CopperChem to ensure that the value of WHSP’s investment would be maintained.

78    On 28 August 2009 (or perhaps slightly later) Mr Scammell telephoned Mr Wolfe to inform him that WHSP’s Investment Committee had approved, in principle, WHSP’s investment.

79    Also on 28 August 2009, Mr Wolfe emailed his father, Mr Peter Wolfe, who was a director of CopperChem at that time, and a director of GAO, in relation to the proposed transaction. Mr Wolfe Senior also had a substantial financial investment in CopperChem. In the email to his father, Mr Wolfe set out the details of the deal he had negotiated with WHSP. The email included the following:-

“If forecasts are not met then Becher/GAO risks being diluted by $3.2m of shares… yes this is the sting in the tail.”

80    On 3 September 2009, Mr Wolfe met with or spoke to Mr Scammell. At that meeting (or perhaps an earlier meeting) Mr Scammell explained the terms of the proposed transaction which then included options to protect WHSP’s investment in the event that CopperChem’s forecast EBITDA targets were not met. Mr Wolfe agreed that he came to a consensus with Mr Scammell at that time.

81    Mr Scammell emailed the WHSP Board on 4 September 2009 stating that the deal structure provided for significant downside protection for WHSP if EBITDA forecasts for “FY11” were missed by more than 20%. The email also stated:-

“Stephen Wolfe agreed to this because of his confidence around the numbers”.

82    Mr Wolfe accepted in cross-examination that he agreed to the progressive dilution of GAO’s interest because he was confident that the CopperChem business would achieve its forecasts so that the dilution mechanism would not be engaged.

83    On 4 September 2009 Mr Scammell emailed a further PowerPoint presentation setting out the detail of the adjustment mechanism. It stated that the options (by which the dilution mechanism was then to be achieved) would vest when triggered by underperformance of CopperChem for the financial year ending 30 June 2011. It set out the number of shares that would vest in WHSP in the event of underperformance for that year.

84    The PowerPoint presentation also addressed the possibility of over-performance by CopperChem, this being dealt with by an option agreement over redeemable preference shares. The option would confer on GAO the right to earn up to 50% of the “RPS dividend pool”.

85    Mr Scammell informed Mr Wolfe by email on 4 September 2009 that the WHSP board had agreed “in principle” to the proposed investment in CopperChem. The email stated that:-

“Obviously, the investment is subject to finalisation of legal documentation and will require final sign-off.”

86    Mr Wolfe agreed in cross-examination that the approval in principle was an approval of the transaction proposed in the PowerPoint presentation attached to Mr Scammell’s email of 4 September 2009.

87    On the same day, 4 September 2009, Mr Wolfe sent an email to his father which included the following statement:-

“As advised there is a significant sting in the tail if we underperform forecast in FY11 by more than 20% but copper market price is approx US$500 per mt over numbers used in the forecast…”

88    Between 8 and 15 September 2009, Mr Scammell communicated with Mr Selig who was retained by WHSP to draft the documentation.

89    On 15 September 2009, Mr Selig emailed Mr Wolfe and Mr Rawling, who was engaged by CopperChem, attaching a draft Shareholders Agreement and a draft Subscription Agreement. Mr Selig stated that, in addition to those documents, he had been instructed to draft:-

    an Over Performance Deed, under which WHSP would be obliged to transfer RPSs to GAO in the event of certain performance criteria being satisfied; and

    an Under Performance Deed under which GAO would be obliged to transfer shares in CopperChem to WHSP in the event of certain under performance criteria being met.

90    On 17 September 2009, Mr Selig sent an email to Mr Rawling attaching a number of draft documents including a draft Under Performance Deed and a draft Over Performance Deed. The draft Under Performance Deed stated in Recital A that GAO and WHSP had agreed that upon failure “by the Company” to achieve “Base EBITDA”, GAO would transfer certain shares to WHSP.

91    Notably, “the Company” was defined to mean CopperChem and Base EBITDA was defined to mean the EBITDA for the CopperChem Group, with that term being defined by reference to the definition of Related Body Corporate.

92    On 18 September 2009, Mr Wolfe sent an email to Mr Scammell stating that his understanding of the intent of the Under Performance Deed was:-

“… to ensure that WHSP end up with at least $21m worth of shares down the track and therefore the scale slides on reduced EBITDA outcomes.”

93    Mr Wolfe also sent an email to his father on 18 September 2009 explaining the concept behind the transaction in similar terms to those of the “understanding” conveyed to Mr Scammell. He included the “clawback schedule” which was virtually identical to the dilution mechanism in the Terms and Conditions of the Resolution. Mr Wolfe went on to say:-

“It looks quite severe at the extreme but the position is that if CopperChem misses its EBITDA target but (sic) those amounts then the shares really aren’t worth much in any event.”

94    On 21 September 2009, Mr Rawling sent an email to Mr Selig, with copies to Mr Scammell and Mr Wolfe, proposing that, for capital gains tax reasons, the Under Performance Deed be replaced by the dilution mechanism that was ultimately contained in the Resolution and the First Subscription Agreement.

95    Mr Rawling stated in a letter attached to his email of 21 September 2009:-

“The difference of approach retains both the substance and the form of the required price adjustment, while not exposing GAO to the CGT risk. It achieve (sic) the same result for WHSP.”

96    The transaction documents in the form in which they were executed by the parties were circulated on 22 September 2009.

97    As previously mentioned, the Resolution was passed on 23 September 2009 and the transaction documents were executed on the same date, shortly after the Resolution was passed.

98    Also, as previously mentioned, the Second Resolution and the Second Subscription Agreement were signed on 30 September 2010 and 1 October 2010 respectively.

The proper construction of the Resolution

99    Recent decisions of the High Court have emphasised the rule that evidence of surrounding circumstances is not admissible to contradict the language of the contract when it has a plain meaning: Royal Botanical Gardens and Domain Trust v South Sydney City Council (2002) 240 CLR 45 at [39]; Western Export Services Inc v Jireh International Pty Limited (2011) 282 ALR 604 at [2] – [4] (application for special leave to appeal per Gummow, Heydon and Bell JJ, query whether this constitutes a binding precedent, see O’Brien, D, Special Leave to Appeal (2nd Ed, Supreme Court of Queensland Library, 2007) at pp 46-50); see also Andrews v ANZ Banking Group Ltd [2011] FCA 1376 at [142].

100    Those observations do not seem to have departed from the principle that an objective construction of a contract:-

“… requires consideration not only of the text, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction”. Toll (FCGT) Pty Ltd v Alphapharm Pty Limited (2004) 219 CLR 165 at [40]; see also Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 at [22].

101    The present case does not raise any debate above the use that may be made of surrounding circumstances because, in my view, there is ambiguity in the meaning of the language contained in the Terms and Conditions, in particular as to the meaning of the phrase “actual EBITDA for the CopperChem Group”, read in its full context.

102    In construing that phrase, it is necessary to have regard not only to the full text of the Resolution, including the Terms and Conditions, but also to the language of the suite of documents executed on 23 September 2009 because they form part of the contractual setting in which the Resolution was signed. Indeed, on the view taken by GAO, the First Subscription Agreement is the entire contract and does not admit of resort to other evidence.

103    I accept, as was submitted on behalf of GAO, that the court has no power to remake or amend a contract for the purpose of avoiding a result which may be considered unjust. But what the approach taken by GAO ignores is that if the language is open to two constructions, the construction that will be preferred is that which will avoid consequences which appear to be “capricious, unreasonable, inconvenient or unjust”: Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 109 per Gibbs J.

104    Also, as Gibbs J pointed out in the passage to which I have referred, commercial contracts should be construed fairly and broadly, rather than in a narrow or pedantic way. This too was overlooked in the approached urged on me by GAO.

105    What GAO’s approach also fails to take into account is the observation made by Fullager J in Halford v Price [1960] 105 CLR 23 at 33. His Honour said:-

“Neither in the case of a statute nor in the case of a contract or any other instrument is there any rule of law or construction which requires us to apply a definition where to do so would be at variance with a context or with a general intent to be gathered from the whole of the instrument.”

106    More recently, Gleeson CJ, Gummow CJ and Hayne JJ in Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181 at [43] quoted, with approval, the observation by Lord Diplock in Antaios Compania Naviera SA v Salen Rederierna AB [1985] AC 191 at 201:-

“If detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must yield to business commonsense.”

107    The short answer to the construction for which GAO contends is that it is based upon a literal reading of a definition in the First Subscription Agreement entirely shorn of any consideration of the context in which the composite phrase is used. GAO’s submission must be rejected upon a proper consideration of the language of the Terms and Conditions in its full context. This appears from the language of the Terms and Conditions and the suite of documents as a whole.

108    It is unnecessary in carrying out the process of construction to have regard to the detailed factual history of the transaction even though in my opinion, some of that evidence may be considered in light of the ambiguity in the critical phrase. Nevertheless, against the possibility that there may be some question as to the extent to which I can have regard to it, I will confine my consideration of that evidence to the question of rectification.

109    The critical phrase in the Terms and Conditions is not “each Related Body Corporate” in the definition of CopperChem Group. Rather, the critical phrase is “the actual EBITDA for the CopperChem Group as disclosed in the Audited Accounts” for the year ending 30 June 2011.

110    That takes the reader of the Terms and Conditions to the definition of “Audited Accounts” which means the financial statements for the CopperChem Group, for CopperChem individually and on a consolidated basis prepared by the Auditor in accordance with prevailing accounting standards.

111    I reject the submission made by Senior Counsel for GAO that this requires the preparation of three sets of accounts, namely, the accounts of the CopperChem Group including all holding company accounts, a set of accounts for CopperChem individually, and another set prepared on a consolidated basis.

112    In my opinion, the proper construction of that phrase is that the Audited Accounts which form the basis for the calculation of Actual EBITDA are the accounts of CopperChem and of any subsidiaries. That is to say, what was required were accounts prepared by the Auditor of CopperChem as the parent company of the CopperChem Group. There are at least seven reasons why this is so.

113    First, the dilution mechanism contained in the Terms and Conditions was triggered if the Actual EBITDA was less than the Base EBITDA by a figure of 20% or more. The Base EBITDA was the amount of $28,204,076 which was referred to in the First Subscription Agreement as the Agreed Budget of CopperChem.

114    This was the object of the exercise as revealed by a consideration of the Terms and Conditions in their full context. It would be contrary to commonsense to suggest that the exercise of determining whether the dilution mechanism was to be triggered was to be carried out by reference to the accounts of a parent company of CopperChem. Of necessity, any such parent company accounts would bring to account the performance of a company which would be likely to carry on an entirely different business.

115    Indeed, that is revealed by the events which happened and which, according to GAO, require the dilution mechanism to be measured by reference to the accounts of WHSP.

116    Second, the Actual EBITDA was to be determined by the Auditor who was defined to be CopperChem’s auditor. Parent company accounts of a Related Body Corporate, read in the sense in which GAO wishes it to be read, would require CopperChem’s auditor to prepare accounts for a company of which it was not likely to be the auditor. Such accounts were to be prepared in accordance with accounting standards. One asks, rhetorically, how could CopperChem’s auditor express an unqualified opinion as to the truth and fairness of such accounts.

117    Third, even if the term “Related Body Corporate” in the definition of “CopperChem Group” in the Terms and Conditions attracts the definition stated in the First Subscription Agreement, the definition must be read in its context. So much is stated expressly in the opening words of cl 1.2 of the First Subscription Agreement and in cl 1.2(j).

118    Fourth, the meaning of the Actual EBITDA of the CopperChem Group cannot be determined in isolation from the meaning of the RPS Resolution. That Resolution formed part of the contract between the parties and to ignore it would be to disregard an important part of the overall agreement.

119    The RPS Resolution provided for WHSP’s cumulative preference dividend to be reset to a lower figure in the event that Actual EBITDA exceeded the Base EBITDA of $28,204,076 (ie, CopperChem’s forecast EBITDA) by 50% or more.

120    Plainly, the object of this was to provide an incentive to Mr Wolfe as the CEO of CopperChem and the principal of GAO, which stood to benefit, to improve the performance of CopperChem so as to exceed the Base EBITDA forecast for CopperChem itself.

121    When looked at in 2009, at the time of the relevant agreement, it required a comparison to be carried out nearly two years later, but it was to be measured by reference to the EBITDA of the CopperChem business, that is to say CopperChem and any subsidiaries.

122    Fifth, cl 3 of the Shareholders Agreement, dealing with additional funding, and cl 10 of that Agreement, dealing with pre-emptive rights, contemplated the possibility that one or other of the shareholders of CopperChem would increase its shareholding beyond 50%.

123    If that were to occur, the shareholder with more than 50% would be a Related Body Corporate within the meaning of s 50 of the Corporations Act. But apart from the definition of Related Body Corporate in the First Subscription Agreement and the other documents, there is nothing in the suite of Agreements (or the Resolution) to suggest that the dilution mechanism was to be determined by reference to the EBITDA of GAO or WHSP.

124    Sixth, the effect of the Second Resolution and the Second Subscription Agreement was that on, or shortly after 30 September 2010, WHSP became the holder of approximately 52% of CopperChem and was therefore a Related Body Corporate. But the Terms and Conditions setting out the dilution mechanism were incorporated by reference into the Second Subscription Agreement without alteration.

125    If the construction put forward by GAO is correct, by its own action in providing further capital to CopperChem by way of a further share issue, WHSP denied itself the benefit of the dilution mechanism and conferred on GAO the benefit of the reset dividend entitlement for the preference shares without reference to the performance of CopperChem. I do not see how that proposition can be correct.

126    Seventh, I do not see that it is contrary to the principles stated by the High Court to have regard to the fact that both GAO (through Mr Wolfe) and WHSP were aware, at the time when the original transaction was documented, that WHSP was a substantial public company with EBITDA in the hundreds of millions of dollars. No reasonable person in the position of those parties could have understood that the Actual EBITDA of the CopperChem Group in the financial year ending 30 June 2011 would be determined by reference to the EBITDA of WHSP. Nor could a reasonable person in the position of the parties have had such an understanding when WHSP entered into the Second Subscription Agreement on 1 October 2010.

127    In short, the Resolution and the suite of Agreements entered into in 2009 reveal that WHSP, a substantial public company, invested $24.2 million in CopperChem which was in need of working capital. WHSP was issued with shares which carried conversion rights that had the effect of diluting GAO’s shareholding interest in CopperChem if CopperChem’s forecast EBITDA was not met. Yet GAO contends that the question of whether the forecast was met is to be determined by reference to the financial performance of the Company that invested its capital in CopperChem. That contention is contrary to the commercial rationale for the transaction revealed by a fair reading of the documents.

Rectification

128    It follows from my view as to the proper construction of the Resolution that the issue of rectification does not arise. However, in case I am wrong on the construction question, I will address the claim for rectification very briefly.

129    The principles upon which an order for rectification will be made are well established. As Street J said in Australasian Performing Right Association Ltd v Austarama Television Pty Ltd [1972] 2 NSWLR 467 at 473, the true principle involves finding an identical corresponding contractual intention on each side manifested by some act or conduct from which it can be seen that the contractual intention of each party met and satisfied that of the other.

130    The purpose of the remedy is to make the written agreement conform with the true agreement of the parties where the writing, by common mistake fails to express the agreement accurately; what is critical is for the Court to determine the common contractual intention that is communicated from one side to the other and for there to be disconformity between the common intention and the instrument that records the agreement: Maralinga Pty Limited v Major Enterprises Pty Limited (1973) 128 CLR 336 at 349-350 per Mason J.

131    The statements of the principles in the decision of the New South Wales Court of Appeal in Commissioner of Stamp Duties (NSW) v Carlenka Pty Ltd (1995) 41 NSWLR 329 are to similar effect: see at 331 per Mahoney AP and at 345 per McLelland AJA.

132    Clear and convincing proof is required that at the time of execution of the instrument it does not accurately express the common intention of the parties as to the effect of the transaction: Carlenka at 331, 345; see also Fitzwood Pty Ltd v Unique Goal Pty Ltd (in liq) [2002] FCAFC 285 at [172] per Lee, Hill and Drummond JJ.

133    The fact that the agreement was reduced to writing though a process of negotiation between solicitors is a factor which may tend against a conclusion that the parties have recorded their common intention incorrectly. However, sometimes experienced solicitors make mistakes so that the involvement of solicitors in the preparation of the documents is no more than a reason for caution in making the factual findings necessary to enliven the power to order rectification: Franklins Pty Ltd v Metcash Trading Ltd (2009) 76 NSWLR 603 at [460].

134    The common intention of the parties must be more than a common commitment to a general concept; the party seeking rectification must demonstrate that the parties held a common intention that a particular term be a term of the agreement and that the document does not accurately record it: GPI Leisure Corp Pty Ltd v Herdsman Investments Pty Ltd (No 4) (1990) 9 BPR 17,461 at 17,465-6.

135    The factual matters to which I have referred above make it plain that the dilution mechanism was communicated between Mr Wolfe and Mr Scammell and that Mr Scammell, acting in effect as an intermediary between the parties, communicated the terms of the mechanism to Mr Robinson.

136    What emerges from the factual narrative is that shortly after the outset of the negotiations Mr Wolfe and Mr Scammell conducted their negotiations upon the basis of Mr Wolfe’s projected EBITDA of CopperChem for the relevant year of $28,204,076. Moreover, the negotiations between Mr Wolfe and Mr Scammell were conducted on the basis that if CopperChem failed to meet that forecast, GAO’s shareholding in CopperChem would be diluted.

137    Importantly, the communications between Mr Wolfe and Mr Scammell recognised that the purpose of the dilution mechanism was to ensure that WHSP should end up with a shareholding in CopperChem worth $21 million (or $24.2 million) being the purchase price for the Class B Converting Shares. Thus if the forecast EBITDA was not met, there would be a proportionate dilution of GAO’s shareholding. They recognised that, so long as CopperChem remained unlisted, this was a valid way of valuing the company’s shares.

138    When the parties reached commercial agreement in principle on 4 September 2009, they set out in a communication the number of shares that would vest in WHSP in the event of underperformance of CopperChem for the year ending 30 June 2011.

139    The precise number of shares to be transferred to WHSP under the dilution mechanism were recorded in the Under Performance Deed. The relevant minds for the purposes of rectification, namely Mr Wolfe, Mr Scammell and Mr Robinson, agreed to this formula. It was clear enough that the formula was predicated upon the EBITDA of CopperChem, and any subsidiaries through which it might conduct its business, for the financial year ending 30 June 2011.

140    The formula stated in the Under Performance Deed was the genesis of the dilution mechanism contained in the Resolution and the First Subscription Agreement.

141    It is clear in my view that the communicated common intention of the parties was that the dilution mechanism was to be triggered by the failure of CopperChem (and any subsidiaries) to achieve the Base EBITDA of $28,204,076 for the relevant year and that the dilution was to be effected in accordance with the sliding scale set out initially in the Under Performance Deed and reiterated in the final form of the documents executed by the parties.

142    If the executed documents are inconsistent with this, they should be rectified by the insertion of a term to the effect of that stated in the Cross-Claim.

143    In coming to this view, I reject a number of aspects of Mr Wolfe’s oral evidence. In particular, the effect of his oral evidence was that the dilution mechanism was imposed on GAO and CopperChem by Mr Scammell as a quid pro quo for WHSP not being in a position to control CopperChem.

144    The conversation to which Mr Wolfe deposed was not contained in his affidavit. Nor was it referred to in contemporaneous reports to his father. Moreover, it is inconsistent with contemporaneous documents which demonstrate Mr Wolfe’s acceptance of the dilution mechanism as a measure of the value of WHSP’s investment, irrespective of control.

145    Also, Mr Wolfe’s view of control was that once WHSP obtained a 50.1% shareholding, it had “control” and the dilution mechanism was no longer applicable. This is inconsistent with the terms of the Shareholders Agreement which put in place provisions to ensure that no party had effective control unless it obtained a 75% shareholding. Indeed, the terms of the Shareholders Agreement demonstrate that control of CopperChem was irrelevant to the operation of the dilution mechanism.

146    Mr Wolfe is a former merchant banker and was, until recently, the CEO of CopperChem. He is an experienced businessman. His attempt to suggest that the Actual EBITDA of the CopperChem Group was to be calculated by reference to that of WHSP was an opportunistic attempt to capitalise on an obvious drafting slip.

147    The construction he put forward in evidence and the matters which he relied upon to support his approach were such that no experienced businessman could maintain. Not only was he shown to be propounding propositions that were contrary to his own contemporaneous written account of the essential features of the transaction but also contrary to commercial common sense. In particular, he recognised in the documents that it was the performance of CopperChem itself, that is to say, the CopperChem business which underlay the operation of the dilution mechanism. No experienced businessman could seriously suggest otherwise.

148    In seeking to defend propositions that seemed to me to be indefensible, Mr Wolfe gave answers which were in my opinion far fetched. For example, he refused to accept in cross-examination that it was silly to suggest that the incentive provided for under the terms of the RPSs was affected by the performance of WHSP.

149    By contrast, I accept the evidence given by WHSP’s witnesses, Mr Scammell, Mr Robinson and Mr Selig. I find each of them to be reliable witnesses who gave their evidence fairly and honestly.

Conclusion and Orders

150    The proceedings were brought by GAO as a derivative action seeking a grant of leave under s 237 of the Corporations Act to commence proceedings on behalf of CopperChem to set aside an Expert Determination made under the First Subscription Agreement that CopperChem’s Actual EBITDA for the 12 month period ending 30 June 2011 was $5,615,519.

151    The question of whether leaved should be granted under s 237, and in particular the question of whether the Expert Determination was liable to be set aside, turned upon the answer to the question of construction which I have determined adversely to GAO.

152    It follows that the proceeding should be dismissed and that GAO should pay WHSP’s costs.

153    CopperChem was the first respondent in the proceeding but it submitted to the orders of the Court, save as to costs. CopperChem incurred costs by reason of its joinder and there is no reason why GAO should not be ordered to pay CopperChem’s costs as agreed or as assessed.

Associate:

Dated:    19 April 2012