FEDERAL COURT OF AUSTRALIA

BPESAM IV M Limited v DRA Global Limited [2020] FCA 738

ORDERS

THE COURT DECLARES:

1.    By representing to shareholders that the financial position and performance of the first respondent for the year ended 31 December 2018 was as set out in financial statements that the first respondent lodged with the Australian Securities and Investments Commission on 30 April 2019, the first, sixth and seventh respondents engaged in conduct that was misleading or deceptive or likely to mislead or deceive, contrary to section 1041H of the Corporations Act 2001 (Cth) (the Act) and s 12DA of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act).

2.    That the resolution referred to as ‘Resolution 12’ in the first respondent’s Notice of 2019 Annual General Meeting dated 7 May 2019 and passed at the first respondent’s Annual General Meeting held on 31 May 2019 (Resolution 12), was and is now, invalid.

3.    That in the events that have happened the discretionary power to waive the condition precedent in clause 3.2(b) of the share buy-back agreements between the first respondent and shareholders of the first respondent has not been enlivened.

THE COURT ORDERS

4.    An injunction restraining the respondents, whether by themselves, their servants or agents or howsoever otherwise, from giving effect to, or taking any step in reliance on, Resolution 12.

5.    An injunction restraining the first respondent, acting through or by the second to fifth respondents, whether by themselves, their servants or agents or howsoever otherwise, from waiving the condition precedent set out in clause 3.2(b) of the share buy-back agreements between the first respondent (on the first part) and selected shareholders of the first respondent who have entered into such a share buy-back agreement (on the second part), and from taking any steps to implement or give effect to any purported waiver of the condition precedent.

6.    Subject to Order 7, the respondents pay the costs of the applicants to be assessed if not agreed.

7.    Any party seeking an order differing from Order 7 file submissions not exceeding 3 pages within 5 days.

8.    Any party wishing to respond to a party referred to in Order 7 respond by filing submissions not exceeding 3 pages within a further 5 days.

9.    Unless the Court otherwise orders, costs be determined on the papers.

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

REASONS FOR JUDGMENT

MCKERRACHER J:

INTRODUCTION

1    This urgent final proceeding has been brought by the applicants who hold 35% of the issued shares in an unlisted public company, to restrain the company acting upon a resolution supporting a share buy-back (SBB) agreement. The restraint is based on two main premises. First, it is said that the financial information that was provided to shareholders prior to their approval of the necessary resolution to permit the SBB scheme to proceed was substantially inaccurate. Secondly, it says that the conditions precedent to the SBB agreements were inappropriately waived by some of the respondent directors. The company in question is the first respondent, DRA Global Ltd (ACN 622 581 935). The second to eighth respondents are directors of DRA. The second to fifth respondents are independent non-executive directors. The sixth respondent is a non-executive director and the seventh and eighth respondents are executive directors who also hold shares in DRA.

2    No suggestion is raised in the proceedings that the company has not been generally successful. No suggestion is raised that the directors have acted improperly or negligently. They appear to have acted on advice and appear to have acted in what they regarded as being the best interests of DRA. Resolution of the dispute turns on questions of law as applied to the facts, properly found.

3    The parties in a short timeframe have marshalled thousands of pages of evidence and submissions, which these reasons can only address in relatively abbreviated form. The urgency of the situation arises as the decision needs to be given within a matter of days before expiry of a time limit in the SBB agreements on Sunday 31 May 2020. There is no suggestion that there has been delay in pursuing the proceedings, nor would such a suggestion be appropriate.

4    For reasons set out below, I consider that the relief sought should be granted.

THE APPLICATION

5    By an amended originating application, the applicants seek declaratory and injunctive relief restraining the respondents from acting on or giving effect to a resolution passed at the 2019 annual general meeting (2019 AGM) of DRA approving the execution of the SBB agreements (together the SBB scheme). That resolution is known as Resolution 12. The AGM was held on 31 May 2019. At an urgent hearing held on 30 April 2020, undertakings were given in lieu of interlocutory injunctive relief. At this final hearing, the applicants also seek injunctions restraining the individual respondents from waiving the condition precedent to the SBB agreements and thereby, it is said, participating in DRA’s breach of the Corporations Act 2001 (Cth), specifically, s 259A and s 256D(1) and, in turn, themselves breaching s 259F(2) and s 256D(3) respectively. In specific terms, the relief sought by the applicants is as follows:

1.    A declaration that, by representing to shareholders that the financial position and performance of [DRA] for the year ended 31 December 2018 was as set out in financial statements that [DRA] lodged with the Australian Securities and Investments Commission on 30 April 2019, the first, sixth and seventh respondents engaged in conduct that was misleading or deceptive or likely to mislead or deceive, contrary to section 1041H of the [Act] and s 12DA of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act).

2.    A declaration that the resolution referred to as “Resolution 12” in [DRA’s] Notice of 2019 [AGM] dated 7 May 2019 and passed at [DRA’s] [AGM] held on 31 May 2019 (Resolution 12), was, or is now, invalid.

2A.    Further or in the alternative to paragraph 2 above, a declaration that in the events that have happened the discretionary power to waive the condition precedent in clause 3.2(b) of the share buy-back agreements between [DRA] and shareholders of [DRA] has not been enlivened.

3.    An injunction, pursuant to section 1324(1) of the [Act], section 12GD(1) of the ASIC Act or otherwise, restraining the respondents, whether by themselves, their servants or agents or howsoever otherwise, from giving effect to, or taking any step in reliance on, Resolution 12.

4.    Further or in the alternative to paragraph 3 above, aAn injunction, pursuant to section 1324(1) of the [Act], section 12GD(1) of the ASIC Act or otherwise, restraining [DRA], acting through or by the second to fifth respondents, whether by themselves, their servants or agents or howsoever otherwise, from waiving the condition precedent set out in clause 3.2(b) of the share buy-back agreements between [DRA] (on the first part) and selected shareholders of [DRA] who have entered into such a share buy-back agreement (on the second part), and from taking any steps to implement or give effect to any purported waiver of the condition precedent giving effect to, or taking any step in reliance on, Resolution 12.

5.    Costs.

6.    Such further or other order as the Court considers appropriate.

(Emphasis indicates amendments made by the applicants to the relief.)

THE EVIDENCE

6    The evidence in support of the application and in opposition to it was as follows.

7    There are three affidavits from Mr Paul Salomon, a Private Equity Executive. He is an advisor to the applicants as an employee of Stockdale Street (Pty) Limited. Mr Salomon has held that role since 2011 and gives the primary evidence on behalf of the applicants. He was formerly a director of DRA, from 16 July 2018 to 11 March 2020 and is currently an alternate director. As with other participants in this proceeding, he is working from his home in South Africa, where he resides due to the ongoing COVID-19 pandemic. Mr Salomon is a Chartered Accountant in Australia with a Batchelor of Business Science (Honours) from the University of Cape Town and has held various roles in corporate finance and private equity businesses.

8    For DRA, evidence on affidavit was given by Mr Andrew Naude, its CEO. Mr Naude is also the seventh respondent in the proceeding and is associated with one of the major beneficiaries under the SBB scheme. I make that point, not to doubt his credibility, but simply to point out that amongst the substantial volume of evidence and submissions which have been advanced for the respondents, it is reasonable to assume for the purposes of this urgent hearing that Mr Naude and his advisors have advanced the majority of sensible arguments which could properly be advanced in relation to the case which others in his position would be likely to advance. Mr Naude holds a Batchelor of Commerce and an Honours in Commerce from the University of Natal. He is a qualified Chartered Accountant in Australia, but also in New Zealand and South Africa. He is a Certified Practising Accountant in Australia, has completed an Advanced Management Programme at Harvard Business School and is a graduate member of the Australian Institute of Company Directors. Before joining DRA in 2013, he was a manager of KPMG Financial Services Advisory Group from 1999 to 2001, senior manager at KPMG Corporate Finance from 2001 to 2007, corporate finance executive of Tlotlisa Securities from 2007 to 2008, managing director of Moore Stephens Corporate Finance from 2008 to 2011 and managing director of BDO Corporate Finance from 2011 to 2013. He has also served on the boards of two South African companies.

9    Numerous objections were taken to the content of the affidavits of Messrs Salomon and Naude. Sensibly, the parties agreed to file the objections and the responses and to read the evidence, subject to any rulings on the objections.

10    Given the urgency of the matter, I intend to approach the evidence contained in the affidavits by accepting the common ground, which simply knits together the background and events which are not controversial and accepting the affidavits for the purpose of introducing into evidence the thousands of pages of documents which they supply. There is substantial material in the affidavits for all parties, which expresses a great deal of opinion, summary, hearsay and submission evidence. I do not, other than where I have expressly indicated, take into account any content to which objection is taken and I have confined the receipt of the affidavit evidence to the purpose indicated at the commencement of this paragraph.

11    The respondents took exception to both the lack of independence of Mr Salomon and an asserted lack of expertise. The applicants similarly pointed to the fact that Mr Naude had a substantial indirect personal benefit at stake and that no other respondent has given evidence on affidavit, nor has any attempt been made to adduce evidence from any third parties which might be affected by the relief sought by the applicants. As far as I am concerned, all these matters were incidental. Like most commercial disputes, the bulk of the story is on the papers and the questions for determination in this application are, essentially, questions of law on which I was ably assisted by counsel for all parties.

12    Having canvassed that explanation as to the manner in which I have treated the affidavit evidence, I move to consider the background and the key arguments.

BACKGROUND

13    DRA is a diversified global engineering, project delivery and operations management group. It is an unlisted Australian public company, headquartered in Perth, Western Australia.

14    Mr Naude explains that over the years DRA has had high levels of management ownership. This has been a contributing factor, he says, to DRA’s success. Mr Naude joined DRA Group Holdings (Pty) Ltd (DRAGH) in April 2013. DRAGH is a company incorporated in South Africa, which was acquired by Minnovo Global Limited, now known as DRA Global Limited, in July 2018. Although DRAGH and DRA Global are occasionally referred in these reasons separately, they have been described for most purposes together as DRA.

15    From 2016 to mid-2019, Mr Naude served as DRA’s chief financial officer and strategy director. As such, he was accountable for DRA’s group financial and commercial activities, including mergers and acquisitions, strategic investments and group-corporate service functions. As the Chief Executive and Managing Director of DRA now, he is accountable for the management of DRA’s group business activities. Until 2016, all of DRA’s shares were held by employees or former employees of the DRA Group. From time to time, prior to 2018, when DRA became a public company, the DRA Group Holding Share Purchase Trust facilitated the purchase of shares by management personnel and employees of DRAGH by way of funded Share Schemes. This was done as a means of promoting share ownership amongst the senior management team so as to align the interests of DRAGH’s management with its shareholders. The shares acquired under the Share Schemes ranked pari passu with other DRAGH shares. This arrangement is entirely conventional.

16    The Share Schemes entail the Trust offering funding to management personnel and employees (Share Scheme participants), which was used to acquire shares from those shareholders who had left DRAGH and wished to sell their shares on a willing-buyer, willing-seller basis. This arrangement gave rise to a series of loans (Shareholder Loans) from the Trust and other DRAGH group companies to the Share Scheme participants. Typically, the Share Scheme participants were required to pay a portion of the acquisition price in cash. The terms of the Shareholder Loans were such that any benefit (by way of dividend or otherwise) received by the holder in respect of the underlying DRAGH shares would first be applied in full to service the loan, firstly, to settle current and accrued interest and then to repay the principal. The only repayment requirements were that, as long as the loan was outstanding, any dividends declared on the shares would need to service the loan and, if the holder sold their shares, they would have to first apply the sale proceeds in discharge of the loan. DRAGH had no other recourse to the loan holders. According to Mr Naude, a total of 11 such Share Schemes have been implemented to date.

17    By 2015, a substantial number, (about 60%), of DRAGH shares were held by individuals who had either left DRAGH or whose retirement was imminent. To address this issue and facilitate an international growth strategy, DRAGH engaged with various investors to negotiate an investment that would facilitate a share purchase from those shareholders who had exited or who planned to exit DRAGH, that would realign the interests of DRAGH and its management and facilitate expansion of DRAGH outside South Africa.

18    On 13 July 2015, the applicants (known together in this transaction as Stockdale) submitted a non-binding expression of interest to subscribe for 30 million shares in DRAGH.

19    Following a due diligence process, DRAGH and Stockdale entered into a Transaction Umbrella Agreement and a Subscription Agreement under which:

(a)    Stockdale agreed to subscribe for 30 million shares in DRAGH at a subscription price of R30 per share (‘R’ being shorthand for the South African Rand);

(b)    DRAGH agreed to lend up to R300 million of the subscription funds to the Trust;

(c)    the Trust would make an offer to shareholders to purchase up to 10 million shares in DRAGH at a purchase price of R30 per share (being the same price as Stockdale's subscription price) to facilitate an exit or liquidity event for shareholders; and

(d)    DRAGH agreed that, within six months of the Subscription Closing Date (as defined in the Transaction Umbrella Agreement), the Trust would offer the 10 million DRAGH shares acquired by it for sale to members of the DRAGH group's management on a 80-90% funded basis to realign the interests of senior management with those of shareholders (Share Scheme 10).

(Stockdale Transaction)

20    The underlying documents are in evidence. Anticipating implementation of the Stockdale Transaction, the DRAGH Board resolved to convert all existing Shareholder Loans into a standard set of loan terms and issued a circular to directors in 2016 disclosing that it was a condition of the Stockdale Transaction that DRAGH implement Share Scheme 10. Shareholders approved the Stockdale Transaction in May 2016 and Stockdale acquired the shares. From this time onwards and as a result of this transaction, the applicants have continued to hold a 35% interest in DRA. In March 2017, DRAGH invited selected key management personnel to acquire DRAGH shares at a price of R30 per share on a 90% funded basis, in accordance with Share Scheme 10. The remaining 10% was to be borne by Share Scheme participants in the form of cash or a pledge of fully paid up shares. Consistent with the Share Schemes outlined above (at [16]), the Shareholder Loans were limited recourse, unsecured loans, with the only repayment being that any benefit by way of dividend or otherwise received by the holders in respect of the underlying shares first be applied in full to service the debt, firstly to settle current and accrued interest and then to repay the principal.

21    In March 2016, the DRAGH board developed a strategy to externalise its business from South Africa with the intention of creating future growth by transferring the DRAGH business into a new, non-South African holding company that could be publicly listed in North America or Australia. To facilitate this strategy, on 26 June 2017 DRAGH made a non-binding expression of interest to the shareholders of Minnovo, a privately held Australian company, to acquire 100% of its issued share capital and to consolidate each company’s businesses under an international holding company. This strategy was known as Project Wave.

22    Minnovo executed and returned an expression of interest and the DRAGH board agreed that the proposed merger with Minnovo should proceed subject to diligence and an international growth platform was to be developed through an Initial Public Offering (IPO) on the Australian Stock Exchange (ASX).

23    On the implementation of a revised scheme (the Minnovo Scheme) in July 2018, DRAGH and Minnovo each became subsidiaries of Minnovo Global Limited, which was renamed DRA. Mr Naude explains that as noted in the transaction documentation, the final step in the Project Wave transaction was for DRA to implement a SBB scheme to eliminate the Shareholder Loans. On 23 August 2018, a majority of the directors of DRA signed a resolution to undertake an SBB scheme at a price of R74.25 per buy-back share, being the same price as the scheme consideration under the Minnovo Scheme. Professional advisors made it clear that the SBB scheme was a necessary pre-listing step. As the evidence unfolded, I did not understand ‘necessary’ to mean an essential legal requirement, but an important commercial imperative for reasons which I will explain.

24    An SBB scheme requires approval of the members of a company at a general meeting. On 10 October 2018, DRA issued a notice of general meeting to be held on 9 November 2018 to consider and, if thought fit, approve the proposed SBB at a price of R74.25 per buy-back share. DRA entered into SBB agreements with each eligible shareholder between October and November 2018. However, after these initial steps towards obtaining shareholder approval for the SBB, by letter dated and circulated on 7 November 2018, DRA advised shareholders that the board had decided to cancel the general meeting scheduled for 9 November 2018 to consider the SBB scheme resolution.

25    This cancellation becomes important to the issue of materiality discussed below. In DRA’s letter to shareholders of 7 November 2018, it explained that the board decided to cancel the general meeting because:

(a)    the board formed the view, in light of material transactions that it was considering at the time, that it was unable to comply with the requirements of s 257D of the Act, which requires disclosure of all information known to DRA that is material to the decision how to vote on the resolution; and

(b)    the applicants (together as Stockdale) communicated that they would not vote in favour of the resolution as they considered that the proposed SBB scheme afforded participants the ability to realise value for a portion of their shares ahead of other shareholders at a time when, in their view, there was limited visibility as to the timing or success of the intended public listing.

26    This acknowledgement in (b) becomes important when considering the applicants’ attitude to Resolution 12 in its final form.

27    By letter dated 12 November 2018, the DRA board addressed a number of queries raised by shareholders related to the proposed SBB scheme, including queries regarding the cancellation of the general meeting scheduled for 9 November 2018. In early March 2019, DRA’s chairman resigned and in his place, Mr Cliff Lawrenson was appointed as an independent director. He was elected chairman of DRA. On 28 March 2019, members of the DRA board met in Johannesburg and agreed that Mr Lawrenson should undertake a review of the proposed SBB scheme from an independent perspective, obtain updated advice and make a final recommendation to the board as to the necessity of concluding the SBB scheme. On 30 March 2019, Mr Leon Uys, a non-executive director of DRA (and the sixth respondent in this proceeding), provided Mr Lawrenson with information concerning the review of the proposed SBB scheme. By letter dated 3 April 2019, SENET Pty Ltd, which holds about 10.5% of DRA’s issued share capital, requested that the board provide a firm commitment and undertaking to deal with the SBB scheme as soon as possible, well ahead of the formal IPO process and, in any event, by no later than DRA’s 2019 AGM.

28    On the same day, advices were received from Azure Capital and Pallidus Capital to the DRA board that retaining the Shareholder Loans would increase the execution risk in relation to DRA’s proposed IPO and that the loans should be extinguished to ensure that the outcome of an IPO was optimised.

29    Acting on this advice, the chair recommended that DRA implement the SBB scheme and Mr Lawrenson instructed Mr Naude to prepare a note for the board with this recommendation. The applicants’ nominee directors at the time, Mr Salomon and Mr Peter Maw, engaged directly with Mr Naude about renegotiating the terms of the SBB agreements, such that Stockdale and its principals, the applicants, would be willing to approve the SBB scheme. Mr Maw, on behalf of the applicants, proposed changes to the SBB agreements and new proposed conditions. In response, Mr Uys confirmed that based on DRA's approved strategy, previous shareholder communications and historical transaction documents, DRA would proceed with an IPO; the question was now only a matter of timing.

30    There is a conflict as to what communication was exchanged around this time concerning a disagreement as to the practicality of a condition precedent which was proposed on behalf of the applicants, which predicated the implementation of the SBB scheme on DRA Global raising at least AUD$100 million on IPO and a further commitment that the sellers of the shares would escrow post-IPO. In the absence of cross-examination at this urgent hearing, it is now not possible or appropriate to reach any conclusions as to what took place in these conversations or various others on which there are conflicting accounts on the affidavit evidence.

31    On 19 May 2019, DRA circulated a 2019 AGM notice of meeting (NOM), the contents of which will be examined in detail below. On 31 May 2019, DRA held the 2019 AGM in Perth, with a video-link to South Africa. Mr Naude attended in Johannesburg. A PowerPoint was presentation provided to shareholders and is included in the exhibit to Mr Naude’s affidavit. Mr Naude made a presentation on DRA’s financial performance, focussing attention on the ‘underlying EBITDA’ (Earnings Before Interest, Taxes, Depreciation and Amortisation) rather than the profit and loss statements. Resolution 12, which will be referred to below, was passed by the DRA shareholders, with the following results: 88.4% voting in favour, including the applicants; 11.6% voting against; 0.43% abstaining and 23.51% being excluded. A 75% majority was required to pass Resolution 12.

32    Resolution 12 authorised SBB agreements in relation to 83 eligible shareholders in total. Of the 83 eligible shareholders, three elected to settle their loans in full and six immaterial loan holders indicated they did not wish to sell their shares. There were 75 concluded SBB agreements. By value, the acceptance rate was approximately 99.5%, with the terms of the agreements being largely identical.

33    The SBB agreements provided for the SBB scheme to proceed in two tranches, Tranche 1 being DRA acquiring 10 shares at R74.25 per share from each shareholder, thereby partially discharging the relevant Shareholder Loan (Tranche 1 Consideration) and Tranche 2 involving DRA acquiring sufficient remaining shares from the shareholder in order to discharge the balance of the Shareholder Loan at the same price.

34    Following the 2019 AGM, DRA acquired and cancelled the shares bought back from shareholders under Tranche 1 of each of the 75 SBB agreements, being 750 shares in total and partially discharged each of the relevant Shareholder Loans. Tranche 1 commenced in July 2019 and was concluded in April 2020. The design of Tranche 1 to include only a small number of shares was essentially to satisfy the Australian Securities and Investment Commission (ASIC) timing requirements.

35    Completing Tranche 2 under the SBB agreements and discharging the balance of the Shareholder Loans has been an outstanding board matter since November 2019. The original deadline for listing imposed on DRA by the South African Reserve Bank (SARB), was 9 January 2020 or such other date as SARB allowed, but in any event no later than 31 May 2020, as reflected in cl 3.2(b) of the SBB agreements. The SBB agreements also provide for the completion of the sale and purchase of the Tranche 2 shares being conditional upon public listing being achieved by 31 May 2020, per cl 3.2(b) of the SBB agreements, unless that condition is waived under cl 3.3 of the SBB agreements. Clause 3.2(b) of the SBB agreements contains the relevant condition precedent that has already been alluded to in these reasons and applies only in relation to Tranche 2 of the SBB scheme. In August 2019, DRA approached SARB for an extension of the time limit for the proposed listing of DRA on the ASX and the secondary listing on the Johannesburg Stock Exchange (JSE). DRA requested that it have until 30 June 2021 to achieve the listing. The extension was granted. The reasons for seeking the extension included the need to attend to reconstituting the DRA board and re-issuing the Initial 2018 Financial Statements which are the focus of attention in these proceedings.

36    In September 2019, Mr Peter Mansell was appointed as the new chairman of DRA. He identified the SBB scheme and the Shareholder Loans as an issue that needed to be resolved with some urgency. There have been board meetings since that time addressing the issue. There have also been numerous communications, written and oral.

37    On 28 April 2020, DRA’s independent non-executive directors (the second, third, fourth and fifth respondents) met and agreed that they were in favour of waiving the condition precedent at cl 3.2(b) of the SBB agreements. The minutes of this meeting will be examined in some detail as the applicants contend that a number of conditions upon which the authority to waive is predicated have not been satisfied.

38    Almost a year before, on around 30 April 2019, DRA had lodged with ASIC the Initial 2018 Financial Statements for the year ended 31 December 2018. Amongst other things, the Initial 2018 Financial Statements reported an operating profit of approximately AUD$25,451,479 in respect of DRA’s fiscal year ended 31 December 2018. It also distributed at that time to its shareholders a copy of the Initial 2018 Financial Statements. This preceded the NOM which was issued on about 7 May 2019. Amongst other things, that NOM included the following:

(a)    a statement on p 2 confirming that DRA’s 2018 annual financial statement had been sent to shareholders electronically;

(b)    a list of ‘the items of business’ stated on p 5, which commenced with the following Item of Business as number 1:

‘DISCUSSION OF FINANCIAL STATEMENTS AND REPORT … [T]o receive and consider the Financial Report, Directors’ Report and Auditor’s Report for the financial year ended 31 December 2018’;

(c)    the following statement on p 9 appeared as part of the ‘Explanatory Notes’ in respect of item of business number 1:

ITEM 1    DISCUSSION OF FINANCIAL STATEMENTS AND REPORTS

Section 317 of the [Act] requires [DRA’s] Financial Report, Directors’ Report for the last financial year ended 31 December 2018 and Auditor’s Report to be laid before [DRA’s] [AGM].

In accordance with the [Act] Shareholders will have a reasonable opportunity to ask questions or make comments on [DRA’s] Financial Report, Directors’ Report and Auditor’s Report for the financial year ended 31 December 2018.

[DRA’s] auditor, BDO, will be present at the Meeting and Shareholders will have an opportunity to ask the auditor questions in relation to the conduct of the audit, the Auditor’s Report, [DRA’s] accounting policies and the independence of the auditor.

The auditor will also respond to any written questions provided these are submitted to [DRA] no later than five Business Days prior to the [AGM].

There is no requirement under the [Act] or [DRA’s] Constitution for Shareholders to approve [DRA’s] Financial Report, Directors’ Report and Auditor’s Report.

A copy of [DRA’s] 2018 Group Annual Financial Statements, which includes [DRA’s] Financial Report, Directors’ Report and Auditor’s Report has been sent to all Shareholders electronically.

39    The NOM also included the following Item of Business on p 7 as business item number 13 which provided for the consideration of and a vote on Resolution 12:

The terms of the agreement between DRA and the shareholders participating in the SBB scheme referred to in the text of Resolution 12 was said to be ‘Appendix C’ to the NOM. The terms of the agreement as recorded in the pro forma agreement, entitled ‘Share Buy-Back Agreement’, was actually Appendix D, rather than Appendix C. Among other things, the SBB agreement included the following conditions precedent to completion of the sale and purchase of the Tranche 2 shares at cl 3.2:

3.2 Tranche 2 Conditions

Completion of the sale and purchase of the Tranche 2 Shares is conditional on:

(a)    any necessary approvals or resolutions that may be required including:

(i)    a resolution approving the [SBB scheme] and the terms of this Agreement being passed and remaining valid in accordance with section 257D of the [Act] (and the Company having complied in all material respects with the requirements necessary in order for such resolutions to be validly passed); and

(ii)    to the extent applicable, exchange control approval from an authorised dealer in relation to any cross-border loans that may arise in relation the [sic] [SBB scheme]; and

(b)    by not later than 9 January 2020 or such later date as the South African Reserve Bank may allow, but in any event by no later than 31 May 2020, [DRA] (or its nominee) receiving valid and irrevocable acceptances on terms and conditions acceptable to [DRA], for application monies to the value of at least [AUD]$100 million by way of a primary capital raise or sell down of existing Shares in relation to the proposed listing of [DRA] on ASX (either by way of an initial public offering or a reverse takeover) and the secondary listing on the Johannesburg Stock Exchange.

(Emphasis added.)

40    Consistent with this, the NOM also included the following statements on pages 24 and 27, as part of the ‘Explanatory Notes’ in respect of Item of Business number 13:

ITEM 13, RESOLUTION 12 APPROVAL OF SHARE SCHEME BUY-BACK

…

The buy-back of Shares under Tranche 2 is also conditional on [DRA] or its nominee receiving valid irrevocable acceptances for at least [AUD]$100 million by way of an primary capital raise [sic] or sell down of existing Shares under an initial public offering or reverse takeover on the ASX and a secondary listing on the Johannesburg Stock Exchange. This condition may be waived by the Independent Non-executive Directors of [DRA] only with consideration to be given by Independent Non-executive Directors only to the likelihood and the timing of the Condition being satisfied and subject to the [Act].

…

The Board considers it to be in the interests of all Shareholders that the Share Scheme Buy Back is completed and that the proposed structure largely mitigates most of the risks posed to other Shareholders as most of the Share Scheme Buy Back Shares will only be bought back under Tranche 2 when there is certainty that the Listing will occur and other Shareholders will have an opportunity to realise value.

Extensive safeguards which prescribe the level of disclosure required are contained in Division 2 of Part 2J.1 of the [Act] which are designed to ensure that Shareholders are adequately informed and not disadvantaged by buy-backs.

(Emphasis added.)

41    Around July 2019, Mr Salomon who was then one of two DRA directors nominated by the applicants because of their shareholding, was informed for the first time, by DRA’s management personnel, that the financial position and performance of DRA in the fiscal year ended 31 December 2018 was not as represented in the Initial 2018 Financial Statements, including by reason of DRA’s performance in respect of projects it was undertaking, known as the Elikhulu Project in South Africa, the Nokeng Project in South Africa, the Dargues Reef Project in New South Wales, the Limpopo Iron Ore magnetite Project and other matters. There was a meeting of directors in approximately August 2019 attended by representatives from BDO – DRA’s auditors – where these matters were discussed. In those discussions, BDO’s representatives made it clear that the Initial 2018 Financial Statements did not present a true and fair view of DRA’s financial performance in the 2018 fiscal year, and that the Initial 2018 Financial Statements would need to be restated. Also around August 2019, DRA’s accountants commenced preparation of a corrected version of the financial statements for the fiscal year ended 31 December 2018. On 17 December 2019, DRA lodged with ASIC ‘Reissued and Restated’ audited financial statements in respect of the year ended 31 December 2018 (Corrected 2018 Financial Statements). Among other things, the Corrected 2018 Financial Statements reported an operating loss of approximately AUD$52,711,138 in respect of DRA’s fiscal year ended 31 December 2018, rather than the operating profit of AUD$25,451,479 that had been recorded in the Initial 2018 Financial Statements. Shareholders received a communication from Mr Mansell, sent on behalf of DRA by email on 17 December 2019 notifying them that the Corrected 2018 Financial Statements had been lodged with ASIC, providing a brief summary as to matters that the DRA said led to the restatement, and informing shareholders that a copies of the Corrected 2018 Financial Statements were available upon request from DRA. The reasons for, and effect of, the corrections to DRA’s reported financial performance in the 2018 fiscal year are recorded in detail in the notes in the Corrected 2018 Financial Statements and are produced by Mr Salomon in Exhibit 1 to his first affidavit.

42    Over several months in late 2019, there ensued discussions between directors of the applicants and their advisers at Stockdale Street about the matters considered and approved at the AGM held on 31 May 2019. Mr Salomon gives evidence which for reasons explained below, I do accept, that he knew from his role at Stockdale Street as adviser to the applicants that the applicants had only voted in favour of resolutions at the 2019 AGM, including Resolution 12, based on:

(a)    what the applicants understood to be the financial performance and position of the DRA as at the date of the meeting, as set out in the Initial 2018 Financial Statements; and

(b)    the applicants’ view at the time that an IPO was imminent and that the likelihood of DRA raising AUD$100 million of capital on such an IPO was high, since DRA was presenting a strong and healthy financial position to the public markets. This was why the applicants supported Resolution 12 but importantly only on the basis that Resolution 12 approved the implementation of the SBB agreements which contained the condition precedent at cl 3.2(b) in relation to a capital raise of AUD$100 million.

43    Had the applicants known the true financial position of DRA at the time, the applicants would not have held such a view as to the likelihood of raising such an amount imminently by way of an IPO.

44    In late October 2019, Mr Salomon caused DLA Piper to obtain a legal opinion from senior counsel as to the validity of Resolution 12 (among other things). He shared a copy of the opinion provided by senior counsel, on a limited waiver basis, with Mr Mansell who was Director and Chair of DRA at the time. In that opinion, senior counsel concluded that Resolution 12 was invalid.

45    Notwithstanding concerns about the validity of Resolution 12, the applicants understood that the SBB scheme approved by Resolution 12 could not occur because the condition precedent in cl 3.2(b) had not been and could not be satisfied because, in light of the true position of the financial affairs of DRA, a successful IPO with a AUD$100 million capital raise before 31 May 2020 was not realistic.

46    Approximately one or two weeks prior to 20 April 2020, it became apparent to the applicants that :

(a)    directors of DRA had been discussing the proposed SBB scheme pursuant to Resolution 12; and

(b)    if any meeting was to take place to consider waiver of the condition precedent in cl 3.2(b), Mr Nel and Mr Eliasov (the applicants’ current representative directors) would be precluded from attending such a meeting.

On 20 April 2020, the applicants learnt that a meeting was proposed to occur the following day, on 21 April 2020, to consider waiving the condition precedent in cl 32(b). Discussions ensued. DRA made clear that it held a view to the contrary of that expressed by the applicants on the two main issues which arise on this application.

47    There were also exchanges of correspondence from respective solicitors.

48    Mr Naude comments on the reason for changes to the Initial 2018 Financial Statements to the following effect. The revenues from the Elikhulu Project in South Africa required a write-off of AUD$13.2 million and there was a further issue with the Dargues Reef Project in New South Wales including a profit of some AUD$2.9 million, which should not have been included in the 2018 financial year, but rather in the 2019 financial year. Taken alone, this would fall below DRA’s audit materiality threshold of AUD$4.5 million. The board decided to reissue the Initial 2018 Financial Statements, which required a sign-off from DRA’s auditors and also as part of that sign-off required a revisiting for the purpose of the accounts of every estimate, every provision and every contractual position or project position under review with the benefit of hindsight, having regard to events and circumstances arising after the preparation of the Initial 2018 Financial Statements. This led to further changes in estimates on several projects including:

(a)    a loss provision of AUD$11.8 million for the Elikhulu Project;

(b)    a loss provision of AUD$26.1 million for the Nokeng Project in South Africa;

(c)    a loss provision of AUD$18.1 million the Limpopo Project; and

(d)    a loss provision of AUD$2 million for a project known as the Glencore EFC Project.

49    Mr Naude says that despite this, independent valuations of its shares in October 2019 from Azure put the equity valuation range at AUD$6.31 to AUD$7.58 per share. The BDO report of January 2020 gave the value range between AUD$6.50 and AUD$7.55 per share.

50    The evidence does not point to any imminent proposed listing on a stock exchange or an IPO or any other urgent step DRA proposes to take in the near future. It is not seriously contested that the steps required for an IPO would take some time as DRA’s own board materials make clear and it is plain from the same internal documents that there is uncertainty in the present economic climate due, amongst other things, to COVID-19. It is clear that DRA hopes to list by 30 June 2021, which is over 12 months away.

51    The applicants describe their concern as to the SBB scheme proceeding in this way: If the condition precedent is waived and the SBB scheme contemplated by Resolution 12 proceeds, such that the shares in question are cancelled, the applicants and other shareholders not participating in the SBB scheme will sustain loss. That is because:

(a)    the price at which the Tranche 2 shares are proposed to be bought back by DRA is significantly higher than that which the applicants regard as being fair value. Both of the valuations preceded the COVID-19 pandemic. The applicants consider that the price at which the buy-back would occur would be in excess of AUD$8 per share due to the rolled up interest in the formula in the SBB agreement relating the consideration: R74.25 x Tranche 2 shares plus the amount of interest which accrues on the shareholder’s loan between 1 August 2018 and the Tranche 2 completion date (Tranche 2 interim period)…’;

(b)    as a result, the number of shares that would be bought back would be fewer than the number that would have been bought back if the buy-back price was at fair value. The total number of shares on issue therefore following the completion of the SBB scheme would be greater in number than there would have been had the SBB scheme been undertaken at fair value; and

(c)    the shareholders not participating in the buy-back would suffer a reduction to the value of their shares.

52    Additionally, the applicants and shareholders other than the beneficiaries of the SBB (the agreements (the SBB counterparties) would also sustain loss, the applicants say, if the proposed SBB scheme proceeds because:

(a)    the transaction would effectively transfer value from existing shareholders of DRA to those persons participating in the proposed SBB scheme by virtue of the transaction proceeding regardless of the fairness of the price;

(b)    key management shareholders who participate in the SBB scheme would be allowed to de-risk and crystallise value ahead of all other shareholders after they oversaw significant value erosion sustained by shareholders not participating in the SBB scheme;

(c)    there would be loss of a loan asset in the hands of DRA of approximately AUD$30 million; and

(d)    there would be a loss of restrictions and leverage that the group of companies to which DRA belongs has over key management personnel who are the beneficiaries of the SBB scheme by virtue of such personnel being indebted to companies in the group.

53    In the absence of independent expert evidence, I am not in a position to determine whether or not all of these consequences would flow but for reasons I will explain, I accept the evidence that there is a real risk of disadvantage to the applicants if relief is not granted and that even though the applicants were plainly familiar with the SBB agreements at the 2019 AGM, they would only have given their necessary 35% support to the motion if they were satisfied that the terms of Resolution 12 and the stated financial position of DRA were sufficient to protect their financial position and preclude such disadvantage.

54    Mr Maw, a co-employee also employed by Stockdale, also gave evidence for the applicants, largely in response to Mr Naude’s affidavit. A substantial portion of his affidavit was devoted to various oral communications and denying certain communications referred to by Mr Naude. I cannot resolve these matters in the absence of cross-examination and while I can understand for completeness that they were included in the evidence on final hearing, my decision does not turn on who said what and when.

55    It seems apparent on the documents, however, that the applicants put to DRA their contentions that Resolution 12 was invalid and supported that view with an opinion from senior counsel. The respondents also sought their own advice. Nothing turns on this exchange of opinions other than to note that the debate about Resolution 12 has been ensuing for some months. It was only the proposed waiver of the condition precedent in cl 3.2(b) of the SBB agreements which caused the applicants to issue these proceedings. Up until that time, they were satisfied that the SBB scheme could not be implemented because the condition precedent in cl 3.2(b) could not possibly be waived. I accept this to have been a plausible view.

ANNUAL ACCOUNTS OVERSTATED BY AUD$78 MILLION

Applicants’ contentions

56    It will be recalled that the Initial 2018 Financial Statements reported an operating profit of AUD$28,451,479 and those statements were provided to the shareholders. About a week later, on 7 May 2019, DRA issued the NOM for the 2019 AGM which confirmed that the statements had been sent to the shareholders and indicated that the statements would be the first item of discussion at the 2019 AGM. Of course, the importance of that Item of Business is made clear by s 317(1) of the Act, which requires the directors of a public company (where that company is required to hold an AGM) to lay the financial report, directors’ report and auditor’s report before the members at the AGM. Section 317(2) of the Act creates an offence of strict liability for failure to do so. Clause 14.3 of DRA’s Constitution requires the business of an AGM to include consideration of DRA’s annual report.

57    The NOM also recorded the Item of Business number 13, which related to Resolution 12.

58    Importantly, the commercial background and purpose of the SBB scheme proposed by Resolution 12 was discussed in the NOM. Those matters can be summarised in this way:

(a)    from time to time senior management personnel in DRA were invited to acquire shares in DRA. The purpose of promoting share ownership was to align the interests of senior management with all shareholders. The acquisition of the shares by Share Scheme participants was funded, at least in part, by loans advanced by companies in the DRA group to participants;

(b)    in July 2018, the Minnovo Scheme had been implemented between DRA and former shareholders of another company in the DRA group, namely, DRAGH. As a result, shares held by previous shareholders in DRAGH, including the shares issued under the practice described in (a) above, were effectively exchanged for shares in DRA;

(c)    as at the date of the NOM:

(i)    a number of management personnel held shares in DRA;

(ii)    the acquisition of those shares had been funded by loans to those management personnel from companies in the DRA group, which remained outstanding as at the date of the NOM;

(d)    DRA proposed to become a listed entity (as it still does) and had in the NOM advised shareholders that the elimination of Shareholder Loans may enhance DRA’s prospects of listing successfully; and

(e)    DRA has advised shareholders that the purpose of the SBB scheme pursuant to Resolution 12 was to facilitate the repayment of the Shareholder Loans. The amount payable by DRA under the proposed SBB agreements was to be applied as repayment of the loans outstanding between the companies in the DRA group and the shareholders participating in the SBB scheme

59    It was also made clear in the NOM, that the transactions under both Tranches must ‘be in accordance with the terms and conditions of [the SBB agreement] and subject to the applicable provisions of Division 2 of Part 2J.1 of the Act’. The SBB agreement included the conditions precedent set out above (at [39]). Relevantly, the conditions precedent contained in cl 3.2 required the following circumstances to be satisfied:

(a)    by cl 3.2(a), DRA had to ensure that:

any necessary approvals or resolutions that may be required, including… a resolution approving the [SBB scheme] and the terms of [this SBB agreement] being passed and remaining valid in accordance with section 257D of the [Act].

(Emphasis added.); and

(b)    by cl 3.2(b):

… by not later than 9 January 2020 or at such later date as the South African Reserve Bank may allow, but in any event by no later than 31 May 2020, [DRA] (or its nominee) receiving invalid and irrevocable acceptances on terms and conditions acceptable to [DRA] for application moneys to the value of at least AUD$100 million by way of a primary capital raise or sell down of existing Shares in relation to the proposed listing of [DRA] on ASX (either by way of an [IPO] or reverse takeover) and the secondary listing on the [JSE].

60    Importantly, however, under the SBB agreement, notice of which was given to the shareholders in the NOM for the 2019 AGM it was possible to waive the conditions set out in cl 3.2(b) in certain circumstances. Those circumstances were described in cl 3.3 of the SBB agreement that was put before the shareholders. It is convenient to restate cl 3.3 which is as follows:

3.3    Waiver of Condition

(a)    The Condition in clause 3.2(b) is for [DRA’s] sole benefit and [DRA] may waive it in its discretion in accordance with clause 3.3(ii), with consideration to be given by [DRA] only to the likelihood and the timing of the Condition in clause 3.2(b) being satisfied and subject to the [Act]. For the avoidance of doubt, while [DRA] intends to seek admission to the Official List of the ASX by way of an initial public offering or reverse takeover and a secondary listing on the [JSE] it is not obliged for the purposes of this Agreement to do so if this would be contrary to the best interests of [DRA’s] shareholders as determined by the Board, acting reasonably.

(b)    Any decision as whether to waive the Condition in clause 3.2(b) must only be taken by the independent directors of [DRA], being those directors of [DRA] that are not employed by [DRA] or any Related Body Corporate (and who have not been employed by [DRA] or a Related Body Corporate in the past 3 years) and who are also not associated with a substantial shareholder of [DRA] or an existing executive of [DRA].

(Emphasis added.)

The applicants point out that although cl 3.3 details the process and standards against which a waiver of the condition precedent in cl 3.2(b) could be effected, cl 3.3 does not contemplate or provide for the waiver of the conditions set out at cl 3.2(a) regarding ‘any necessary approvals or resolutions that may be required.’

61    Entirely consistently with the SBB agreement, shareholders were advised that:

the [SBB scheme] shares will only be bought back under Tranche 2 when there is certainty that the Listing will occur and other Shareholders will have an opportunity to realise value.

62    As noted, the board of DRA formed the view that the Initial 2018 Financial Statements contained a material error, such that they no longer gave a true and fair value of DRA’s financial position and performance as at the relevant date. In August 2019, the board decided that a restated version of the Initial 2018 Financial Statements needed to be prepared correcting the identified errors.

63    On 17 December 2019, DRA lodged the Corrected 2018 Financial Statements with ASIC.

64    The Corrected 2018 Financial Statements disclosed an operating loss of AUD$52,711,138, rather than the operating profit of AUD$25,451,479 recorded in the Initial 2018 Financial Statements. That is the first essential point which the applicants stress, contending that the material put before shareholders in the Initial 2018 Financial Statements was misleading and deceptive. I will return to the arguments concerning this financial issue after identifying some other alleged problems to which the applicants point. The applicants say that the Corrected 2018 Financial Statements contained significantly changed information regarding the nature of the Shareholder Loans. The NOM stated that:

the purpose of the [SBB scheme] is to facilitate the settlement of the Shareholder Loans and to reduce the total number of shares in issue to [DRA’s] advantage.

(Emphasis added.)

65    The NOM referred to the Shareholder Loans as:

having “no fixed terms or annual repayment requirement”;

… the terms “(which are ring-fenced against the Shares and have no fixed terms of repayment)” …

66    Using this language, the applicants say that the NOM indicated that the Shareholder Loans were repayable on demand. The NOM to shareholders was consistent with the Initial 2018 Financial Statements before correction, which recorded that the Shareholder Loans ‘do not have fixed terms of repayment’. The Corrected 2018 Financial Statements qualified the statements as to the loans having no fixed terms of repayment by including an express statement that:

These loans are limited recourse loans and accounted for as share options in equity.

67    The applicants point to the fact that in correspondence, which is in evidence, the solicitors for the independent non-executive directors asserted that the Shareholder Loans (which they describe as ‘management facility agreements’, but which were defined as ‘Shareholder Loans’ in the NOM) are only repayable in two circumstances:

(1)    Out of declared dividends; and

(2)    From the proceeds of sale of those shares.

68    The applicants contend that it is clear that information as to the limited recourse nature of the Shareholder Loans, the extinguishment of which was the raison d'être of the SBB scheme, was information that was known to DRA at the time of the 2019 AGM and was material to the decision on how to vote on Resolution 12 and was required to be provided under s 257D(2) of the Act. DRA’s failure to provide this information, it is argued, is a breach of s 257A(b).

69    As the applicants note, the substantial revision to DRA’s profit for the 2018 fiscal year prompted serious discussions between DRA’s officers about the validity of Resolution 12 and notwithstanding the concerns expressed as to its validity, no steps were taken at any time to prevent reliance on Resolution 12. At that time, as a practical matter, the SBB scheme contemplated by Resolution 12 could not, in any event, occur, as the condition precedent under cl 3.2(b) of the SBB agreement had not been satisfied and there had been no suggestion that the condition precedent could be waived in circumstances where there was no likelihood of the condition being met and there was no certainty that a listing would occur. At short notice, in late April, however, the applicants became aware, for the first time, that the directors proposed to waive the condition precedent.

70    Part 2J.1 of the Act contains provisions enabling share capital reduction in share buy-back transactions. Amongst other things, the purpose of the Part is to protect the interests of shareholders and creditors by seeking to ensure fairness between company shareholders and requiring the company to disclose all material information (s 256A). Part 2J.1 of the Act is relevantly in the following terms:

Part 2J.1—Share capital reductions and share buy backs

256A    Purpose

This Part states the rules to be followed by a company for reductions in share capital and for share buy-backs. The rules are designed to protect the interests of shareholders and creditors by:

(a)    addressing the risk of these transactions leading to the company’s insolvency

(b)    seeking to ensure fairness between the company’s shareholders

(c)    requiring the company to disclose all material information.

…

Division 2—Share buy backs

257A    The company’s power to buy back its own shares

A company may buy back its own shares if:

(a)    the buy-back does not materially prejudice the company’s ability to pay its creditors; and

(b)    the company follows the procedures laid down in this Division.

Note 1:    If a company has a constitution, it may include provisions in the constitution that preclude the company buying back its own shares or impose restrictions on the exercise of the company’s power to buy back its own shares.

Note 2:    A company may buy-back redeemable preference shares and may do so on terms other than the terms on which they could be redeemed. For the redemption of redeemable preference shares, see sections 254J-254L.

…

257D    Buy-back procedure—special shareholder approval for selective buy-back

Selective buy-back requires special or unanimous resolution

(1)    If section 257B applies this section to a buy-back, the terms of the buy-back agreement must be approved before it is entered into by either:

(a)    a special resolution passed at a general meeting of the company, with no votes being cast in favour of the resolution by any person whose shares are proposed to be bought back or by their associates; or

(b)    a resolution agreed to, at a general meeting, by all ordinary shareholders;

or the agreement must be conditional on such an approval.

Information to accompany the notice of meeting

(2)    The company must include with the notice of the meeting a statement setting out all information known to the company that is material to the decision how to vote on the resolution. However, the company does not have to disclose information if it would be unreasonable to require the company to do so because the company had previously disclosed the information to its shareholders.

Documents to be lodged with the ASIC

(3)    Before the notice of the meeting is sent to shareholders, the company must lodge with ASIC a copy of:

(a)    the notice of the meeting; and

(b)    any document relating to the buy-back that will accompany the notice of the meeting sent to shareholders.

(4)    ASIC may exempt a company from the operation of this section. The exemption:

(a)    must be in writing; and

(b)    must be granted before the buy-back agreement is entered into; and

(c)    may be granted subject to conditions.

…

(Emphasis added.)

71    Section 9 of the Act defines a selective buy-back as meaning a buy-back that has none of the following:

(a)    a buy-back under an equal access scheme within the meaning of s 257B(2) and s 257B(3);

(b)    a minimum holding buy-back;

(c)    an on-market buy-back; and

(d)    an employee share scheme buy-back;

72    As s 257A(a) indicates, a company may buy-back its owns shares if the buy-back does not materially prejudice the company’s ability to pay its creditors and the company follows the procedures laid down in Div 2 of Pt 2J.1 of the Act. For a selective buy-back, the requirements under the Act are that:

(a)    a special resolution be passed at a general meeting of the company, with no votes being cast in favour of the resolution by any person whose shares are proposed to be bought back or by their associates (s 257D(1)(a)), or alternatively, a resolution agreed to, at a general meeting, by all ordinary shareholders (s 257D(1)(b)); and

(b)    the company includes with the notice of meeting a statement setting out all the information known to the company that is material to the decision how to vote on the resolution. An exception applies if it would be unreasonable to require the company to do so because the company had previously disclosed the information to its shareholders (s 257D(2)).

73    Section 259A prohibits the buy-back of shares except in certain circumstances which circumstances include, relevantly for present purposes, a buy-back under s 257A. That provision, in turn, requires compliance with the procedures in Div 2 of Pt 2J.1 of the Act. Section 256B prohibits reductions of capital unless, amongst other requirements, shareholder approval is obtained in compliance with s 256C (there are also civil penalty provisions in s 259F(2) and s 256B(3) prohibiting involvement in the company’s contravention of s 259A and s 256B(1) respectively).

74    Where injunctive relief is sought on the basis that, amongst other things, proceeding with the proposed buy-back would amount to a contravention of s 257A, the Court is required to assume that the conduct in question would constitute a contravention of s 257A unless the respondents prove otherwise (s 1324(1B)).

75    The obligation of a company to disclose to shareholders information relevant to the proposals to be considered at an AGM rests on a number of grounds. In this instance, s 257D(2) requires information known to the company that is material to the decision to be disclosed. This may be taken to be a subjective view of directors’ knowledge, which is relevant to one of the arguments advanced for the respondents, but the respondents also accept that information known includes information which should be known as a result of reasonable enquiry were it made.

76    The second ground is an obligation at general law to make a full and fair disclosure of all matters which would enable members to make a properly informed judgement on the matters in question: Re Boart Longyear Ltd (2017) 121 ACSR 377 per Brereton J (at [15]-[16]) and ENT Pty Ltd v Sunraysia (2007) 61 ACSR 626 per Austin J (at [14]-[22]). The applicants say that this general law obligation is tested on an objective view.

77    The third source of obligation is that when information is in fact given to shareholders in purported discharge of the general law duty immediately referred to above, a number of statutory provisions engage so as to require that the information given is not misleading or deceptive or likely to mislead to deceive. These provisions include s 1041H of the Act and s 12DA of the Australian Securities and Investments Commission Act 2001 (Cth) (the ASIC Act) upon which the applicants rely in this application. Those provisions provide respectively:

1041H    Misleading or deceptive conduct (civil liability only)

(1)    A person must not, in this jurisdiction, engage in conduct, in relation to a financial product or a financial service, that is misleading or deceptive or is likely to mislead or deceive.

Note 1:    Failure to comply with this subsection is not an offence.

Note 2:    Failure to comply with this subsection may lead to civil liability under section 1041I. For limits on, and relief from, liability under that section, see Division 4.

(2)    The reference in subsection (1) to engaging in conduct in relation to a financial product includes (but is not limited to) any of the following:

(a)    dealing in a financial product;

(b)    without limiting paragraph (a):

(i)    issuing a financial product;

(ii)    publishing a notice in relation to a financial product;

…

(x)    carrying on negotiations, or making arrangements, or doing any other act, preparatory to, or in any way related to, an activity covered by any of subparagraphs (i) to (ix).

…

12DA    Misleading or deceptive conduct

(1)    A person must not, in trade or commerce, engage in conduct in relation to financial services that is misleading or deceptive or is likely to mislead or deceive.

…

78    The question whether conduct is misleading or deceptive or is likely to mislead or deceive is judged objectively. A question arises as to whether this general position is qualified by the subjective content of s 257D(2). The contravention will occur, the applicants argue, even if DRA through its directors and officers do not have knowledge of the matters rendering the conduct misleading or deceptive. The applicants argue that a contravention of the statutory provisions may occur without knowledge or fault on the part of DRA and notwithstanding the exercise of reasonable care. Remedies for the contravention of these provisions include injunctive relief.

79    The position is explained in Fraser v NRMA Holdings Ltd (1995) 555 FCR 452, where Black CJ, von Doussa and Cooper JJ said in relation to s 52 of the Trade Practices Act 1974 (Cth) (at 467E-G):

This is not necessarily the same question as the one which would have arisen if the applicants had alleged breaches of directors' duties under the general law. For example, if the applicants had sought relief for a breach of the directors' duties described in Bulfin a question would have arisen whether the directors had knowledge or must be taken to have had knowledge of facts said not to be disclosed, whereas for the purposes of s 52, if by reason of what was said and what was left unsaid the conduct of the corporation is misleading and deceptive or likely to mislead or deceive, a contravention would occur even if the corporation through its directors and officers did not have knowledge of the undisclosed facts which rendered the conduct in breach of s 52. A contravention of s 52 may occur without knowledge or fault on the part of the corporation, and notwithstanding the exercise of reasonable care: Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd at 197.

Where the contravention of s 52 alleged involves a failure to make a full and fair disclosure of information, the applicant carries the onus of establishing how or in what manner that which was said involved error or how that which was left unsaid had the potential to mislead or deceive. Errors and omissions to have that potential must be relevant to the topic about which it is said that the respondents' conduct is likely to mislead or deceive.

80    For the proposition that injunctive relief is available, the applicants refer to s 1324(1) of the Act and s 12GD(1) of the ASIC Act, each of which provide respectively as follows:

1324    Injunctions

(1)    Where a person has engaged, is engaging or is proposing to engage in conduct that constituted, constitutes or would constitute:

(a)    a contravention of this Act; or

(b)    attempting to contravene this Act; or

(c)    aiding, abetting, counselling or procuring a person to contravene this Act; or

(d)    inducing or attempting to induce, whether by threats, promises or otherwise, a person to contravene this Act; or

(e)    being in any way, directly or indirectly, knowingly concerned in, or party to, the contravention by a person of this Act; or

(f)    conspiring with others to contravene this Act;

the Court may, on the application of ASIC, or of a person whose interests have been, are or would be affected by the conduct, grant an injunction, on such terms as the Court thinks appropriate, restraining the first mentioned person from engaging in the conduct and, if in the opinion of the Court it is desirable to do so, requiring that person to do any act or thing.

…

…

12GD    Injunctions

(1)    If, on the application of the Minister, ASIC or any other person, the Court is satisfied that a person has engaged, or is proposing to engage, in conduct that constitutes or would constitute:

(a)    a contravention of a provision of this Division; or

(b)    attempting to contravene such a provision; or

(c)    aiding, abetting, counselling or procuring a person to contravene such a provision; or

(d)    inducing, or attempting to induce, whether by threats, promises or otherwise, a person to contravene such a provision; or

(e)    being in any way, directly or indirectly, knowingly concerned in, or party to, the contravention by a person of such a provision; or

(f)    conspiring with others to contravene such a provision;

the Court may grant an injunction in such terms as the Court determines to be appropriate.

81    The applicants argue that, notwithstanding the subjective knowledge requirement of s 257D(2), they are entitled to rely upon s 1041H of the Act and s 12DA of the ASIC Act in the assertion that the state of individual director’s subjective knowledge at the time of the AGM does not detract from the fact that the Initial 2018 Financial Statements provided to the shareholders in advance of the 2019 AGM and presented to shareholders at the 2019 AGM as the first Item of Business, were in fact misleading and materially so.

82    The respondents, as will be seen, rely heavily on the absence of knowledge of the directors of the inaccuracies. The respondents also contend the inaccuracies were not material.

83    The applicants further contend, and again this is strongly opposed, that, to the extent that the buy-back transactions have not yet occurred, DRA may be precluded from relying on Resolution 12 if information previously disclosed in support of that Resolution has been overtaken by events. This assertion has analogues in the general law of misleading and deceptive conduct. For instance, the principle was formulated in McGrath v Australian Naturalcare Products Pty [2008] FCAFC 2 by Allsop J (as his Honour then was) in the following way (at [147]):

A so-called continuous representation may take a number of forms, recalling, of course, that though s 51A requires the consideration of a representation, s 52 is concerned with conduct. If a representation is made and it becomes evident to the maker that what has been represented, though accurate when made, has become false, there may well be a duty to speak. In such circumstances, the conduct, including the failure to correct the position, may be taken to be misleading or deceptive.

(see also: With v O’Flanagan [1936] Ch 575 (at 583); Tiplady v Gold Coast Carlton Pty Ltd (1984) 3 FCR 426 (at 458-459); Australian Securities and Investments Commission v Solution 6 Holdings Ltd (1999) ACSR 30 605 (at [25]-[35]); Re Skiwing Pty Ltd [2009] FCA 347 (at [19]); TPT Patrol Pty Ltd v Myer Holdings Ltd [2019] FCA 1747 (at [1477]-[1480]).

Of course, in this case DRA did rectify the errors through the issue of the Corrected 2018 Financial Statements but the question as to the validity of Resolution 12 based on the incorrect statements remains.

84    In the specific context of this case, the applicants also rely on ASIC’s ‘Regulatory Guide 110: Share Buy-Backs’, which records at RG 110.22:

When previously disclosed information is overtaken by events

If an event occurs in the 12 months after the shareholders approve the buy-back that makes any previously disclosed information misleading or deceptive, the company can no longer rely on that approval to carry out a valid buy-back.

85    As will be seen, the respondents contend that this statement in the ASIC Guide is wrong, is not based on any statutory foundation and is not supported by any authority.

86    The applicants also rely upon a takeover panel decision in Re Village Roadshow Ltd (No 3) (2004) 52 ACSR 238 (at [33]), where the panel said:

Although it did not accept ASIC’s submissions that the price at which VRL proposed to buy shares under the buy-back should be specified in the buy-back resolution, the panel was of the view that if the price at which VRL was able to buy back its shares in compliance with the ASX Listing Rules differed materially from the indicative terms disclosed in the notice of meeting, at some point VRL would no longer be entitled to rely on the buy-back resolution as a valid approval of continued buying of VRL shares on-market.

(Emphasis added.)

87    The respondents also contend that the applicants are not entitled to the relief that they seek, even if they make out their case. As to the relief sought, the applicants rely on the contention that a resolution may be invalid by reason of the provision to shareholders of information that is misleading in a respect that is material to the decision of whether to approve a resolution. As authority for this, they rely upon Cleary v Australian Co-operative Foods (No 3) (1999) 32 ACSR 701, where Austin J said (at [23]-[24]):

23    Typically, the question whether members of a corporation have been fully and fairly informed arises in the context of a meeting rather than a postal vote (see the cases cited in Ford's Principles of Corporations Law paragraph [7.460]). If the members were misled or not fully informed at the time when they voted at the meeting or appointed proxies for it, the appropriate remedy may be an order declaring invalid or setting aside the resolution of the members: Pacific Coast Coal Mines Ltd v Arbuthnot [1917] AC 607; Hughes v Union Cold Storage Co Ltd (1934) 78 Sol Jo 551. Alternatively, and perhaps more commonly, the Court may make an order restraining the company from acting on the resolution or carrying it into effect: eg, Kaye v Croydon Tramways Company [1898] 1 Ch 358; Tiessen v Henderson [1899] 1 Ch 861; Baillie v Oriental Telephone & Electric Co Ltd [1915] 1 Ch 503.

24    If the resolution has not been passed and a timely application is made, an order may be made restraining the company from proceeding with the meeting - perhaps subject to leave, in order to permit the directors to seek dissolution of the injunction if adequate corrective disclosure has occurred. An order of the latter kind was made by Gummow J in Fraser v NRMA Pty Limited (1994) 52 FCR 1, 32. Such orders do not deal directly with the validity of proxies. An order of the latter kind seem to leave open the question whether proxies lodged before the distribution of the corrective material can remain in place for use at the eventual meeting. If distribution of corrective material is a possibility, it may be necessary for the Court to make a determination as to the validity of proxies and votes which have already been lodged, or the use to which they may be put.

(Emphasis added.)

88    The applicants’ primary case is that the Initial 2018 Financial Statements disclosed to shareholders prior to the 2019 AGM on 31 May 2019 that DRA had an operating profit of approximately AUD$25.5 million, when in fact DRA had sustained an operating loss of AUD$52.7 million.

89    The applicants contend that on any reasonable view, the discrepancy of AUD$78 million is material.

90    To the extent that DRA’s performance in the 2017 fiscal year afforded a comparison, DRA then reported a profit of approximately AUD$34.8 million, highlighting the materiality of the true position in the 2018 fiscal year. In his second affidavit, Mr Salomon also deposes to the fact that the loss of AUD$52.7 million for the 2018 fiscal year was the first significant loss incurred by DRA in its history.

91    There is no doubt, the applicants contend, that DRA’s Corrected 2018 Financial Statements were material to the decision of how to vote on Resolution 12 as it was critical at least to:

(a)    the proper consideration of whether the proposed SBB scheme meets the statutory requirement that it does not materially prejudice DRA’s ability to pay its creditors (s 257A(a); and

(b)    evaluation by a shareholder of the reasonableness of the terms of the SBB agreements, including the quantum of the consideration payable for DRA’s shares.

92    Of course, the applicants rely upon affidavit evidence to support these contentions, but putting that evidence to one side, they contend that it is manifestly obvious that these considerations must be material. That is also supported, the applicants contend, by ASIC’s Regulatory Guide 110 which provides that a copy of the latest audited financial statements is material to a shareholder’s decision on how to vote on a buy-back resolution (at [RG110.18 and RG110.19]). The applicants argue that the consequence is that Resolution 12 cannot be relied upon to enable the SBB scheme to proceed. Any attempt to proceed with the SBB scheme will amount to:

(a)    a contravention by DRA of s 257A which requires DRA to follow the procedures laid down in Div 2 of Pt 2J.1 of the Act in order to engage in a share buy-back;

(b)    a contravention by DRA of s 257D(1) which requires a special or unanimous resolution for a selective buy-back;

(c)    a contravention by DRA of s 257D(2) which requires disclosure to shareholders of all information known to DRA that is material to the decision on how to vote on the resolution;

(d)    a contravention of s 259A which prohibits the buy-back of shares except (relevantly for present purposes) under s 257A which in turn requires compliance with the procedures in Div 2 of Pt 2J.1 of the Act;

(e)    contravention by the directors of s 259F(2) for being involved in DRA’s contravention of s 259A; and

(f)    contravention by the directors of s 256D(3) for being involved in DRA’s contravention of s 256D(1).

93    The applicants cite Re George Raymond Pty Ltd [2000] VSC 531, where Byrne J held (at [31]) that a misstatement may amount:

to a failure to follow the procedures laid down … contrary to s 257A(b) with the consequence that the transaction becomes or may become an unlawful acquisition by [the company] of its own shares contrary to s 259A.

94    The applicants rely on further suggested difficulties with Resolution 12 which they argue render it invalid.

95    The applicants argue that the NOM lacked the requisite clarity and quality of disclosure necessary to support the passing of a valid resolution. The applicants rely upon directors’ fiduciary or other duties of general law which inform the assessment of whether in the circumstances of the case the statutory proscription against misleading or deceptive conduct is contravened. They refer to Fraser (at 465E-F) and rely upon the observations in Google Inc v Australian Competition and Consumer Commission (2013) 249 CLR 435 per French CJ, Crennan and Kiefel JJ (at [7]) where it was held that in assessing the effect of conduct, the Court must consider whether the ordinary or reasonable members in that class would be misled or deceived. They also point to the decision of Young J in Devereaux Holdings Pty Ltd v Pelsart Resources NL [No 2] (1985) 9 ACLR 956 for the proposition that there is a need to ensure information provided to shareholders to inform the decision-making is accurate and clear on its face. In that case, his Honour said (at 958):

One asks what effect will the information provided have on the ordinary shareholder who scans or reads the document quickly, not as a lawyer, but as an ordinary man or woman in commerce or as an investor.

96    In this instance, the NOM expressly set out, amongst other things, the purpose of the SBB scheme, the advantages and disadvantages of the SBB scheme and the directors’ overall recommendation that the SBB scheme should be approved by voting in favour of Resolution 12.

97    The raison d'être of the SBB scheme was held out to be that the extinguishment of the Shareholder Loans was a necessary precursor to a successful listing of DRA. In those circumstances, it is said that it was necessary for the fact of, and the detail of, the limited recourse nature of the Shareholder Loans to be disclosed. Similarly, in order for shareholders to be informed as to whether to approve the SBB scheme for the purpose and in accordance with the price mechanism advanced, it was necessary for the shareholders to be equipped with true and complete information as to the financial position and performance of DRA and its subsidiaries and of the value of the Shareholder Loans which were to be extinguished. The applicants argue that without that information being provided, the shareholders were not in a position to evaluate the directors’ recommendation to approve the SBB scheme in accordance with the price formula set out in Resolution 12.

98    The applicants point to a letter which their solicitors received on 28 April 2020 from the solicitors for the independent non-executive directors (the second, third, fourth and fifth respondents) in which those respondents contend that:

(a)    the arrangements in place with the relevant shareholders are ‘management facility agreements’;

(b)    under the management facility agreements DRA has no right to call for repayment;

(c)    the facility is repayable only in two circumstances:

(i)    out of declared dividends;

(ii)    from the proceeds of sales of those shares;

(d)    the arrangements in question ‘do not meet the requirements for recognition as loan receivable’, the arrangements in question are ‘no longer listed on the balance sheet of DRA having been replaced by a once-off expense..’

99    The applicants complain that these matters were not disclosed in the NOM to shareholders for the 2019 AGM or in the material provided to shareholders for the purpose of voting on Resolution 12 which included the Initial 2018 Financial Statements.

100    Shareholders were informed on the one hand that DRA needs to ‘clean up its balance sheet’, but on the other, that DRA’s balance sheet had already been cleared. The applicants argue that neither the NOM nor the Initial 2018 Financial Statements disclosed that the Shareholder Loans were limited recourse loans. That was not noted until the Corrected 2018 Financial Statements were issued and the disclosure made at that time was incomplete, in any event. The way in which recourse on the Shareholder Loans was limited was not disclosed. The fact that the Shareholder Loans were in fact limited recourse in the way in which recourse was limited was material to the shareholders’ assessment of the worth of the loans and whether and, if so, at what share price the SBB scheme should be approved, the applicants argue. The applicants also point out that that under the heading ‘Advantages and Disadvantages of the share scheme buy-back’ in the NOM, the commitment to a voluntary escrow by the beneficiaries of the SBB scheme was identified as one of the ‘main advantages’ of the SBB scheme. No information was provided in relation to the effect of the ASX Listing Rules in this regard, and whether it was likely that the beneficiaries of the SBB scheme would in any event, have been required to enter into an escrow agreement under Ch 9 of the Listing Rules. The applicants argue, that in the absence of such information, shareholders were not equipped to assess whether the ‘advantage’ identified by the directors in support of their recommendation, was largely or wholly illusory, having regard to the likely application of the Listing Rules to the shares the subject of the SBB scheme in circumstances where those shares were issued in employee incentive schemes and were held by key management personnel of the entity which was to be listed.

101    As to the limited recourse argument and the escrow argument, no additional expert evidence was put on. The applicants relied upon the evidence of Mr Salomon on these topics. It seems clear that the applicants’ primary case has always been the large and uncorrected overstatement of the Initial 2018 Financial Statements.

102    The applicants go on to complain of further matters also said to be materially misleading. In addition to the AUD$78 million discrepancy between the Initial 2018 Financial Statements and the Corrected 2018 Financial Statements, the Corrected 2018 Financial Statements show, the applicants say, a significant difference in net assets. The net assets were represented in the Initial 2018 Financial Statements as in excess of AUD$285 million, when in fact they were less than AUD$230 million, a difference of approximately AUD$56 million. This is a difference of some 20% to the value of DRA, the applicants contend. Again, no independent expert evidence supports the materiality of this contention.

103    One most important document, in my view, is a letter to shareholders from DRA on 7 May 2019, which stated the following:

All information known to [DRA] and all documentation in connection with the [SBB scheme] is contained in this letter or has previously been provided to shareholders of [DRA] including as part of the notice of general meeting at which [Resolution 12] will be considered. [DRA] will advise Holders of any subsequent events that will have the effect of rendering any previously disclosed information misleading or deceptive and seek further shareholder approval in relation to the [SBB scheme] where required.

(Emphasis added.)

104    The applicants argue in support of what is a slightly different argument, that, notwithstanding the stark difference between what was represented to shareholders to be a true and fair financial view of DRA at the time Resolution 12 was proposed and the real state of affairs as subsequently confirmed by the Corrected 2018 Financial Statements, no ‘further shareholder approval’ has been sought. This would appear to directly contradict the position represented in the letter to shareholders dated 7 May 2019. That is so notwithstanding that DRA has been aware since at least July or August 2019 that the financial position and performance of DRA and its subsidiaries was not as represented in the Initial 2018 Financial Statements and from at the latest, 16 December 2019, that the true position was as represented in the Corrected 2018 Financial Statements. I will return to this argument which is strongly refuted by the respondents.

105    As a further consideration, the applicants point to the SBB agreement, provided as part of the NOM which conferred on DRA by cl 7(a)(i) express termination rights exercisable if Resolution 12 ‘does not remain valid or effective’ or ‘any information disclosed as part of the [SBB scheme] is determined by the Board (acting reasonably) to be misleading or deceptive’. There is a dispute as to whether this topic was raised between Mr Salomon and Mr Naude, nonetheless, the existence and content of the termination clause is, in my view, relevant to the question of materiality and the nature of the duty in this instance.

DRA’s response

106    DRA, Mr Naude, Mr Uys and Mr Gregory Lewis McRostie as executives within DRA (the first and sixth to eighth respondents), are represented separately from the non-executive directors. I will deal first with the response from DRA and the sixth to eighth respondents, which I will refer to compendiously as the DRA response.

107    There are four main reasons advanced against the contention of any breach. The first is that there was no material non-disclosure or misleading conduct.

108    In this regard, DRA argues that the main import of the Shareholders Loans that were to be extinguished by the SBB scheme was disclosed to shareholders prior to the 2019 AGM, including in the NOM.

109    No ordinary investor reading the documents could have been in any real doubt as to the essential import of the Shareholder Loans or as to the core ‘message’ that the Shareholder Loans were of very limited value to DRA, DRA argues. There is no reason to conclude that a shareholder might have been caused to vote or to abstain from voting Resolution 12 under any serious misapprehension or erroneous assumption as to the worth of the Shareholder Loans.

110    The second reason there was no misleading information, according to DRA, is that in relation to the erroneous financial figures, the relevant matters were not known by DRA at the time, but even if they had been known, they would have led to actual adjusted changes in DRA’s operating profit of only AUD$25.4 million down to AUD$7.97 million and in net assets from AUD$285.49 million to AUD$273.29 million. Underlying EBITDA adjusted on the same basis would have meant AUD$54.7 million, rather than AUD$72.2 million. Had such adjustments been made, DRA argues, no reasonable shareholder would have formed any materially different view about DRA’s financial performance and position as at April or May 2019. It could not reasonably be expected to have changed the shareholders’ attitude to the proposed SBB scheme. Indeed, DRA’s adjusted asset figure for 2018 would still have been higher than the figure for its net assets for the 2017 financial year as with the 2018 figure for DRA’s underlying EBITDA as another measurement for financial performance.

111    Thirdly, in assessing whether the inaccuracies in the Initial 2018 Financial Statements were material, DRA says it is relevant that the proposed SBB scheme was of a non-cash nature. The commercial reasons for going ahead with the transaction from the shareholders’ perspective were not diminished by the changes to the operating profit and net assets. The adjustments would not have been material to any proper determination of how to vote on Resolution 12 in any event.

112    Fourthly, the stated advantage of committing SBB counterparties to an escrow was only one of six advantages of approving the SBB agreements as identified to shareholders. Thus, any deficiency in disclosure in this issue could not be material. Further, obtaining a commitment to a voluntary escrow was not illusory. It would assist DRA in securing future compliance with the Ch 9 of the Listing Rules.

113    In any event, DRA argues that even if there was material non-disclosure or misleading conduct, Resolution 12 and the SBB agreements remain valid and enforceable by reason of s 259F of the Act. For that reason, no declaration of invalidity or associated injunction should be granted. Further, there is a lack of nexus between the misleading conduct and the injunction sought, as well as various discretionary reasons that support refusal of any injunction.

114    Fifthly, DRA argues that no separate declaratory relief as to the satisfaction of the conditions precedent in cl 3.2 of the SBB agreements can be entertained. The applicants are strangers to the SBB agreements and have no standing to seek declaratory relief upon those contracts. Further, even if they did have standing, the relief could not be entertained as the SBB counterparties have not been joined to the proceeding.

115    Sixthly, to the extent the merits of the claim fall for consideration, DRA says the applicants are incorrect as to how they construe the operation of the waiver provision at cl 3.3 of the SBB agreement. They seek to strain the ordinary meaning of the words of the clause by reference to equivocal surrounding circumstances.

116    DRA acknowledges that the first attempt to persuade shareholders to give approval for SBB scheme did not proceed after the applicants indicated they would not support it. DRA says that at general law, where directors take it upon themselves to recommend or advise members to exercise their powers on general meeting in a particular way, they are obliged to make a full and fair disclosure of all matters within their knowledge which would enable the members to make a properly informed judgement on the matters in question: ENT (at [15]). A proper discharge of this duty may also require that the directors take reasonable steps to ascertain relevant information for communication to members, if that information is not known to the board: Fraser (at 466). The general law obligation of disclosure does not oblige the directors to give shareholders every piece of information that might conceivably affect their voting. Rather, the adequacy of information provided is to be assessed in a practical and realistic way having regard to the complexity of the proposal: ENT (at [19]). The need to make full and fair disclosure must be tempered by the need to present a document that is intelligible to reasonable members of the class to whom it is directed and likely to assist, rather than to confuse: Fraser (at 468B). DRA and the applicants both point to the statement made by Young J in Deveraux (at 958, see [95] of these reasons) that the Court considers what effect the material provided will have on the ordinary shareholder who scans or reads the document quickly, not a lawyer but as an ordinary man or woman in commerce or as an ordinary investor. If a deficiency in a disclosure is identified, the critical question is whether there is any reasonable grounds for supposing that the deficiency would cause shareholders to vote or abstain from voting under a serious misapprehension as to the position: Deveraux (at 958-959).

117    In relation to s 257D(2), DRA contends that in the few cases to have touched on the point, no apparent distinction has been drawn between the principles applicable to the general law duty of disclosure and to the requirement under s 257D(2) to disclose ‘all information known to the company that is material to the decision how to vote on’ a share buy-back resolution.

118    DRA argues that unlike the general law duty, s 257D(2) could not oblige the taking of steps to ascertain relevant information for a communication to members if the information is not otherwise known. In any event, that does not arise in the present case. In a context such as the present, DRA says the essential question is whether by reason of what was said to members and what was left unsaid, the conduct of DRA is misleading or deceptive towards or likely to mislead and deceive the members.

119    DRA says the principles applicable to the general law duty of disclosure also inform the assessment of whether the misleading or deceptive conduct has occurred. One difference DRA says is, that unlike the general law duty, misleading or deceptive conduct can arise in the absence of knowledge or fault on the part of the corporation in failing to disclose material facts: Fraser (at 467F-G).

120    As with the general law duty, in order for errors and omissions in disclosure to have the potential to mislead or deceive the members, they must be material to the particular decision that members are being asked to make (here, to vote on Resolution 12). This means any errors or omissions in disclosure must have a tendency to lead a reasonable member into error, that is, to adopt some material erroneous assumption in the context of the decision in question.

121    As indicated, DRA contends that there was no material non-disclosure or misleading conduct in this case. DRA first addresses the nature of the Shareholder Loans, noting that the limited recourse nature of the Shareholders Loans argument is misconceived because although the words ‘limited recourse’ were not used, the NOM communicated that the Shareholder Loans were repayable out of dividends or proceeds of the sale of the relevant shares and that having regard to their terms, the Shareholder Loans would be considered of very limited value to DRA. In particular, the NOM recorded that it was a feature of the Shareholder Loans that ‘dividends paid in respect of acquired shares were applied to service the Shareholder Loans’, that ‘upon the disposal of the [DRA] shares acquired under the Share Scheme, SBB counterparties were expected to apply all or a portion of the proceeds in such disposal to settle the Shareholder Loans and that the Shareholder Loans were “ring fenced against the shares” and had “no fixed terms of repayment”’. The NOM also identified that due to their terms, the Shareholder Loans were considered by DRA to be unsalable and unattractive to a third party, were not considered by DRA’s auditors to meet the requirements for recognition as a loan receivable and thus could not be accounted for as an asset in the balance sheet and that the Shareholder Loans were considered by DRA to have a realisable fair market value significantly below their normal value. DRA also points to various earlier communications with shareholders, these had referred to similar features. In light of my finding on this topic below (at [123]) it is unnecessary to set that material out, but I accept that it has been presented accurately by DRA.

122    DRA contends that no ordinary investor reading the documents quickly or carefully could have been in any real doubt as to the main import of the Shareholder Loans or as to the core message that they were of very limited value to DRA. No deficiency in disclosure is identifiable. In any event, if that is wrong, any deficiency must be of a very minor or technical nature. The NOM distinguished between, on the one hand, problems which the ongoing existence of the Shareholder Loans for DRA’s future listing and the desirability on that account of settling or eliminating the Shareholder Loans entirely prior to a listing and, on the other hand, the way in which the nature and terms of the Shareholder Loans affected how they were to be accounted for and what this showed about their limited value to DRA.

123    In my view, shortly stated, for the reasons given by DRA, there is no substance in the ground of complaint by the applicants as to the nature of the Shareholder Loans.

124    In relation to financial performance, DRA argues that only two of the matters said by the applicants to give rise to inaccuracies in the figures contained in the Initial 2018 Financial Statements were ascertainable by DRA at the date of the AGM. These involved incorrect revenue figures for the Elikhulu Project of about AUD$13.3 million and for the Dargues Reef Project of about AUD$4.1 million. The issues were not in fact known to DRA when Resolution 12 was passed, but were discovered in late June or early July 2019.

125    The various further changes in estimates, provisions and impairments referred to by the applicants that were also reflected in the Corrected 2018 Financial Statements were not known or even ascertainable when Resolution 12 was passed. These adjustments were made in the Corrected 2018 Financial Statements as a result of DRA’s decision to reissue the Initial 2018 Financial Statements and arose from the consequential need under the accounting standards to revisit the 2018 project estimates, provisions and impairment tests with the benefit of hindsight.

126    In other words, the adjustments and changes beyond the AUD$17.4 million occurred because of events taking place after Resolution 12 was passed at the AGM. Since DRA and its directors had no knowledge of any of these issues at the time Resolution 12 was passed and there was no suggestion of any failure to take reasonable steps to identify the issues that were discoverable as at April and May 2019, the alleged deficiency in disclosure cannot give rise to a breach of s 257D(2), DRA argues or the general duty. It also must mean, DRA argues, that as to the misleading and deceptive conduct issue, the AUD$17.4 million overstatement of profit would have to be shown to have been material to a reasonable shareholder’s decision as to how to vote on Resolution 12. Would the discrepancies, had they been known to a shareholders, caused the shareholder to vote in a different way? Clearly, the answer is in the negative, DRA contends, for several reasons. First, the impact of the Elikhulu Project and the Dargues Reef Project issues is insignificant, it is said, in the context of DRA’s financial performance and financial position. If, as the applicants suggest, DRA’s operating profit and net assets were a relevant matrix for the purposes of deciding how to vote on Resolution 12, then those figures, if adjusted at April and May 2019 to account for the Elikhulu Project and the Dargues Reef Project issues would not have conveyed any materially different message about DRA’s performance. Operating profit would still have been in the positive territory at AUD$7.97 million, rather than AUD$25.45 million and net assets would still have been AUD$273.29 million, rather than AUD$285.49 million.

127    Such a difference does not lead, DRA argues, to the sort of contrast Mr Salomon seeks to draw between a ‘loss making business’ or one that has ‘sustained a significant loss’ on the one hand, and a business that is ‘performing strongly financially’ or that has a ‘healthy financial position and financial performance’ on the other. In truth, had the operating profit and net assets matrix been adjusted as they might have been, a reasonable shareholder would not have formed a materially different view about DRA’s financial performance and position as at April and May 2019 so as to vote differently in connection with Resolution 12. Indeed, DRA’s adjusted net asset figures would still have been higher than the figure for DRA’s net assets for the 2017 financial year.

128    That point is said to be confirmed when one has regard to a less volatile matrix for measuring DRA’s financial performance, such as the underlying EBITDA. A reasonable shareholder’s desire to form a view on DRA’s true performance would also have considered that matrix. Underlying EBITDA adjusted to reflect the Elikhulu Project and the Dargues Reef Project issues would have been AUD$54 million, rather than AUD$72 million, a difference which is not significant, DRA contends.

129    In any event, DRA argues that these highlighted adjustments to the Initial 2018 Financial Statements were not material in a proper determination of how to vote on Resolution 12 because the proposed SBB scheme, it says, was of a non-cash nature and the main reason for going ahead with the transaction from a shareholder’s perspective as highlighted in the NOM were not liable to be materially detracted from by either changes to the operating profit or the net assets. The advantages of the transaction were said to include removing potential issues that the Shareholder Loans may cause in terms of attracting investor interest in a future IPO, enhancing DRA’s earnings, dividends and net asset value per share, and giving voting shareholders an enhanced percentage interest in DRA following completion of the SBB scheme. Adjustments to operating profit and net assets were not capable of having a material impact on a reasonable shareholder’s assessment of the commercial wisdom of approving the SBB agreements, according to DRA.

130    I will consider these arguments further below.

131    DRA argues that in relation to the third alleged deficiency in disclosure which concerns the commitment to an escrow of shares from the date of listing until a later date to be determined by SBB counterparties, the allegation proceeds on a wrong premise. The applicants suggest that obtaining a voluntary commitment to escrow may have been an illusory advantage for DRA because an escrow arrangement may have been required to be put in place later anyway under the ASX Listing Rules. But cl 5(a) of the SBB agreement, which any shareholder sufficiently interested in the point could be expected to have considered, made it clear that the escrow undertaking was being agreed as part of the SBB agreement in anticipation of and with a view to DRA securing any necessary future compliance with the requirements of the ASX Listing Rules.

132    There is nothing illusory, DRA argues, in describing this as an advantage. By the SBB agreements, DRA secures an immediate contractual commitment from all SBB counterparties to do what may be necessary in the future, to escrow as many of their shares as the DRA board considers appropriate in respect of DRA’s future listing on the ASX. That is beneficial to DRA compared with the situation in which no similar commitment is put in place and instead, close to the time of listing DRA must then engage in ad hoc negotiations and attempt to procure escrow agreements from various individuals, so as to comply with Ch 9 of the Listing Rules. It is efficient and minimises uncertainty for DRA to lock in any necessary escrow parties well in advance of a future listing. Moreover, DRA argues, this argument concerns only one of six advantages of approving the SBB agreements as articulated in the NOM. Having regard to that matter and to the other reasons and advantages that were identified in support of the transaction, any deficiency in disclosure on the voluntary escrow point cannot be material to a reasonable shareholder’s decision about how to vote on Resolution 12.

133    Again, largely for the reasons advanced by DRA, I accept that this complaint advanced by the applicants should not be accepted and does not warrant relief.

134    Moving to the subsequent events argument, DRA says that as there has been no misleading or deceptive conduct or material non-disclosure, the issue does not arise. DRA also says that if the applicants are contending that a resolution once valid could cease to be valid because of subsequent events, in reliance upon the ASIC Regulatory Guide 110 and the decision of the Re Village Roadshow, the guide and the decision are not only incorrect but they also fail to identify any legal mechanism by which Resolution 12 could be invalidated.

135    For reasons I will develop below, I disagree.

The independent directors’ contentions

136    The independent directors (second to fifth respondents) adopt DRA’s submissions and to the extent they are duplicated, I will avoid repetition. I will refer to these as the directors’ submissions. The directors argue that in relation to the reissuing of the Initial 2018 Financial Statements and the applicants’ misleading or deceptive conduct claim, the representations must be considered at the time the representations were made. In this regard, the Initial 2018 Financial Statements were lodged with ASIC on 30 April 2019. The directors’ declaration was signed by a then non-executive director and an executive director and the executive director and CEO in satisfaction of the obligation under s 317 of the Act to lay before the AGM the financial report, the directors’ report and auditor’s report. The Initial 2018 Financial Statements were also provided to the shareholders prior to issuing the NOM in respect of the 2019 AGM and formed Item 1 of the business to be conducted at the AGM.

137    It is stressed that while in certain circumstances a statement of opinion may carry with it an implied representation beyond the entirely prosaic proposition that the person who states the opinion in fact holds that position, whether that is the case will turn on a number of factors peculiar to the particular instance. These matters include, but are not limited to, the qualifications of the maker, the circumstances on which the opinion is provided, the importance of the information and the extent to which it may be relied on by those hearing it. For the directors it is argued that the expression of an honest opinion cannot amount to a misrepresentation as to the accuracy of the opinion. Similarly, a statement of opinion is not misleading or deceptive merely because it turns out to be incorrect. Such a statement of opinion would be false if that opinion was not bona fide held: see Global Sportsman Pty Ltd v Mirror Newspapers Pty Ltd (1984) 2 FCR 82 (at 88) and Bangaru v R (2012) 269 FLR 367 (at [32]).

138    The directors argue that any representations alleged to have been conveyed by the Initial 2018 Financial Statements cannot be divorced from the terms of the financial statements themselves. As such, the express qualifications contained in the Initial 2018 Financial Statements are fundamental when considering what representation was made to shareholders. Those qualifications include statements in respect of the critical accounting estimates and judgements required to be made by management, including that ‘actual results in the future could differ from those estimates which may be material to the group annual financial statements’. The significant estimates and judgements embodied in the 2018 reports were expressly stated to include a revenue recognition and provision for loss making contracts. This is in these terms:

Revenue recognition

The recognition of construction revenue relating to EPC contracts is subject to the following judgements:

-    estimation of total contract costs and expected costs to complete

-    measurement of progress towards satisfaction of performance obligations using the input method

-    assessment of probability of customer approval of contract variations, penalties and bonuses

provision for loss making contracts

the estimate of provision for loss making contracts requires the group to make estimates and judgements regarding completion date, probability of approval of variations and claims and calculations of liquidated and risk damages.

139    For the directors, it is contended that when the Initial 2018 Financial Statements are understood in context, they convey only that, at the time they were prepared and presented to shareholders they constituted a true and fair view of the financial position of DRA. They were expressly stated to include estimates and to be subject to matters of judgement.

140    The concept of ‘true and fair’ was considered in Grant-Taylor v Babcock Brown Ltd (in liq) (2015) 322 ALR 723 per Perram J (at [136]), where his Honour said:

I therefore consider it is possible for accounts to fail to give a true and fair view of the financial position of a company notwithstanding that those accounts have been prepared in accordance with relevant accounting standards. The circumstances in which this may occur may be relatively rare but they can exist. They will occur when the accounts do not give a ‘true’ and ‘fair’ view of the financial position or performance of the company. I do not think ‘true and fair’ is a composite expression. Rather it reflects the reality that financial accounts not only deal with ascertainable facts but also with matters of opinion and impression. A financial statement will not be ‘true’ when it contains facts which are incorrect or where material facts are omitted. It will not be ‘fair’ where the opinions it contains are not reasonable in the context in which they appear. What is material to the former inquiry or contextual in the latter will usually include issues of accountancy but they are not determinative. It will follow that the obligation created by s 297 is substantive.

141    The directors point to the fact there was no assertion by the applicants or any evidence that the Initial 2018 Financial Statements were not prepared in accordance with the required accounting standards and did not give a true and fair view of the financial position and performance of DRA as at the date the view was expressed or that the declaration by directors and the opinion of the auditor when made were without reasonable grounds. These respondents contend (correctly) that there was no dishonesty or lack of bona fides asserted on behalf of any of the directors. The directors say that there is, therefore, no proper basis or evidentiary foundation for a finding that any of the respondents at the relevant time engaged in misleading and deceptive conduct in contravention of the statutory prohibition.

142    In any event, the directors argue that the NOM did not omit material information.

143    The directors also argue that the limited recourse nature of the Shareholder Loans was clear. As I have indicated in discussing DRA’s submissions, I accept this contention. In particular, the directors make the point that the terms of the Shareholder Loans as set out in the Explanatory Notes to Resolution 12 in the NOM relevantly include the following statements:

•    Deposit: 10%. At least 50% of the deposit was payable in cash with the remainder of the deposit able to be satisfied by DRAGH shares already owned by the participant which would be pledged as security for the Shareholder Loans (Pledged Shares). Any dividends paid on the Pledged Shares were to be used to service the Shareholder Loans;

…

•    Security: the Pledged Shares as well as any DRAGH shares issued under the Share Scheme which once issued were also pledged on the same basis as the Pledged Shares; and

•    Repayment: Dividends paid in respect of the acquired shares were applied to service the Shareholder Loans. There was no fixed term or annual repayment requirement. Voluntary prepayment was permitted.

…

•    the participants would participate in the [SBB scheme] and apply the entire proceeds from the buy-back to settle the outstanding Shareholder Loans in full.

(Emphasis added.)

144    Additionally, the directors make the point that s 257D(2) of the Act makes clear that information already provided to shareholders need not be provided again if it would be unreasonable to do so.

145    They point to the Explanatory Notes to Resolution 12 which go on to state:

The above mechanism [i.e. the proposed SBB scheme to facilitate the repayment of the Shareholder Loans] was included in the Combined Circular delivered to all DRAGH shareholders on or about May 2018 which detailed the terms of the Scheme of Arrangement approved and recommended by the Board and subsequently approved by DRAGH shareholders in July 2018.

146    The Combined Circular referred to above, including the Prospectus, was issued to shareholders on 24 May 2018 and included the following in respect of the Shareholder Loans:

DRA granted loans for purposes of the share incentive schemes (“Share Schemes”). DRA currently has 3 (three) Share Schemes namely Share Schemes 8, 9 and 10. Share Schemes 8 and 9 established in 2015, while 10 was established in 2017. All 3 (three) Share Schemes carry interest equal to the “official rate of interest” as published by the South African Revenue Service. The Share Schemes have no fixed repayment terms and the Shares itself, are given as security. The dividends that accrue to the Shares acquired through the Share Schemes are applied to the DRA Shareholder loans. As at the Last Practicable Date the DRA Shareholder loans for the Schemes is R302 294 830.

147    In addition, the letter dated 7 May 2019 sent to shareholders accompanying the NOM and attaching the SBB agreement, also made reference to that Prospectus, and referred to the circumstances in which repayment of the Shareholder Loans may occur:

(i)    at para 1.3, ‘The DRA Lenders agreed to allow the [SBB counterparties] to participate in the Scheme and to delay the settlement of the Shareholder Loans on condition that: (i) the Company would, as soon as practical after the implementation of the Scheme at a price equal to the Scheme Consideration (being, R74.25 per share) propose the [SBB scheme]; and (ii) the [SBB counterparties] would participate in the [SBB scheme] and apply the proceeds of the [SBB scheme] to settle the outstanding Shareholder Loans in full’;

(ii)    at para 1.4, ‘The purpose of the [SBB scheme] is, therefore, to provide the [SBB counterparties] with liquidity in order to allow them to settle their Shareholder Loans in full’; and

(iii)    at para 1.7, ‘Should the [SBB scheme] not be implemented, for any reason whatsoever (other than non-acceptance of the Offer by the Holder), the repayment terms of the Shareholder Loans will revert to those that were in place prior to the Scheme’.

148    In light of the above, no ordinary shareholder could or would have been misled or deceived as to the limited recourse nature of the Shareholder Loans by the information provided to shareholders in connection with Resolution 12.

149    The only inference properly available to shareholders is that the Shareholder Loans were repayable either by applying any dividends declared or the proceeds of sale of the shares. No personal guarantees were given, and the only security provided in respect of the Shareholder Loans were the shares themselves. Voluntary repayments were permitted, but the Shareholder Loans were by no means repayable on DRA’s demand.

150    To the extent that there remained any ambiguity in light of the above information provided to shareholders, the directors argue that the Initial 2018 Financial Statements themselves contain the clearest explanation of the nature and value of the Shareholder Loans. The relevant section of the Initial 2018 Financial Statements did not change between the Initial 2018 Financial Statements lodged with ASIC on 23 April 2019 and the Corrected 2018 Financial Statements lodged with ASIC on 17 December 2019. That section stated:

Restatement of Shareholders’ loans

During the current year a re-assessment was performed on the terms of Share Schemes 8, 9 and 10. The terms of these Schemes falls within AASB 2 and should have been accounted for as a share based payment. The Schemes were accounted for as an asset, shareholders' loans, in the 31 December 2017 annual financial statements. This should have been accounted for in equity as a reduction in equity. The Schemes have no repayment requirement other than the dividends on the shares. On this basis the face value of the loan should be deducted from equity and the Group should not recognise interest on these loans. There are no contractual rights to claim payment of interest. The nature of the reclassification is that the shareholders' loans asset have been reclassified to equity, with no interest recognised on the loans.

(Emphasis added.)

151    DRA re-assessed and reclassified the Shareholder Loans during the relevant period. The proper treatment, nature and value of the Shareholder Loans was clearly expressed and the fact that this had occurred was referred to in the Explanatory Notes to Resolution 12. The directors say there has been no failure to provide this information to shareholders, and no breach of s 257A(b) of the Act.

152    In relation to the complaint that the shareholders were not properly informed of the accounting treatment of the Shareholder Loans, again, I agree with the arguments advanced by both sets of respondents. The applicants assert that the DRA balance sheet had already been cleared, that the relevant notes in the Initial 2018 Financial Statements were inadequate and that the NOM conveyed a meaning inconsistent with the truth. I am unable to accept this submission. The explanation provided in the Explanatory Notes to Resolution 12 is in the following terms:

[DRA’s] auditors, having regard to the terms of the Shareholder Loans, have determined that they do not meet the requirements for recognition as loans receivable and should rather be accounted for as a share based payment in terms of IFRS 2 (AASB 2) Share Based Payments. The effect of the change is that the asset previously recorded on the DRAGH balance sheet no longer appears on the balance sheet of [DRA], having been replaced by a once-off expense recognised in FY2017.

(Emphasis added.)

153    This is entirely consistent with the notes in the Initial 2018 Financial Statements regarding the re-classification and proper accounting treatment of the Shareholder Loans, as explained above. There has been no failure to provide this information to shareholders, and no breach of s 257A(b) of the Act.

154    Additionally and in relation to the topic of the escrow arrangements, in my view, the arguments advanced for the director respondents are correct. They note that the applicants claim that shareholders were not provided with information as to the potential impact that certain provisions in the ASX Listing Rules in respect of escrow arrangements may have on relevant shares, such that ‘shareholders were not equipped to assess whether the “advantage” identified by the directors in support of their recommendation, was largely or wholly illusory’.

155    The obligation under s 257D(2) is to provide all material information known to DRA at the time. Information will be considered material if it has the capacity to have an ‘actual influence’ on the relevant decision, although it does not necessarily need to have a determinative influence: Re Lantern Hotel Group [2015] AATA 428 (at [70]). This question is narrower than the question of whether the information is relevant.

156    The information provided to shareholders must be clear and must assist in their consideration of the relevant business. Information that is unlikely to assist their judgment and would be more likely to confuse than assist should not be provided.

157    The applicants do not assert that Ch 9 of the Listing Rules imposed separate escrow obligations on certain shareholders. The complaint made is one of a failure to inform ‘whether it was likely’ that this would be the case.

158    If accepted, the directors say that the applicants’ submission would, in effect, require disclosure and explanation of a large volume of legislative provisions that might be likely to apply. That would impose an intolerable burden on DRA and its directors, and would serve only to confuse shareholders. I think that this overstates the effect but I do accept that to the extent that this information (expressed, in the opinion of the directors, as an advantage) would have been a factor in a shareholder’s consideration of how to vote on Resolution 12, the applicants have not demonstrated that shareholders would have voted under any serious misapprehension of the position.

159    The directors also submit that the effect of ASIC Regulatory Guide 110 and the decision of Re Village Roadshow can have no application to the circumstances of this case and, in any event, are incorrect. The directors make clear that s 257D(2) is directed to the disclosure of information about DRA at the time of issuance of the NOM. The notion that s 257D(2) could operate to subsequently invalidate an otherwise valid resolution relies upon the section being read as imposing some obligations after the issuance of the NOM. If that approach had been intended by the legislature, the directors say, it would have been expressed as such. No authority has been cited for the proposition and no court has used this section in this way the directors say. Similarly, the directors point to the fact that ASIC has cited no authority for the proposition contained in RG110.16 of the ASIC Regulatory Guide 110 or any provision in the Act or other legal basis. Further, ASIC’s Regulatory Guide 110 does not create binding legal obligations. The directors go on to note that at [33] of that Re Village Roadshow (the paragraph relied upon by the applicants in support of their submission), the Panel stated that:

Although [the Panel] did not accept ASIC's submissions that the price at which VRL proposed to buy shares under the Buy-Back should be specified in the Buy-Back Resolution, the Panel was of the view that if the price at which VRL was able to buy back its shares in compliance with the ASX Listing Rules differed materially from the indicative terms disclosed in the Notice of Meeting, at some point VRL would no longer be entitled to rely on the Buy-Back Resolution as a valid approval of continued buying of VRL shares on market.

(Emphasis added.)

160    The directors note that whilst Re Village Roadshow has been considered in other cases, the basis for, or correctness of, the proposition extracted above has not been affirmed: see Re Coopers Brewery (No 3) (2005) 57 ACSR 1; Re Murchison Holdings (2009) 235 FLR 417.

161    In any event, notwithstanding that decisions of the Takeovers Panel do not bind this Court, the facts of Re Village Roadshow are distinguishable it is said from the present circumstances in at least the following ways:

(a)    Re Village Roadshow concerned on-market buy-backs of shares regulated by the takeovers provisions of the Act, which is not the case here;

(b)    the very nature of an on-market buy-back of a listed company is materially different to that of a selective buy-back of an unlisted company (an on-market buy-back being subject to the forces of the open market, which constantly impact on the price at which a company’s shares can be traded);

(c)    the issues raised by ASIC in Re Village Roadshow included that a price had not been specified in the buy-back agreements, which was particularly relevant given the on-market nature of the transaction, but is clearly not the case here; and

(d)    the decision of the Takeovers Panel in Re Village Roadshow was made with a view to establishing whether an unacceptable circumstance existed. Crucially, the panel is entitled to declare the existence of an unacceptable circumstance without any actual contravention of the Act having occurred.

Analysis

162    The respondents place heavy reliance on the fact that the true financial performance and position of DRA in the 2018 fiscal year was not known to the directors at the time of publishing the Initial 2018 Financial Statements. In my view, this does not protect the respondents from liability pursuant to s 1041H of the Act. As with misleading or deceptive conduct in both the written law and the general law, the relevant test is objective. Whether or not the directors knew of the substantial errors in the accounts, is irrelevant to s 1041H of the Act. It will be relevant to whether there was any breach of directors’ duties (which is not asserted) or whether there has been non-compliance with s 257D(2).

163    It might be thought that this imposes an unreasonable burden on a company or its directors in the information which it must disclose. That would appear to be a policy decision taken by the legislature which, at least, for the purposes of potential civil liability under s 1041H places a premium on the protection of shareholders who are in the hands of a company through its directors. As a policy decision, it does require the company and directors to take special care to make sure that information they are required to, and do in fact, disclose is not misleading or deceptive. The requirement for directors to put before the meeting all information known to them relevant to the resolution is different in content from the proscription against engaging in misleading and deceptive conduct. The share buy-back provisions in Pt 2J.1 of the Act specify what information the directors must put before the meeting but this case is not concerned with a failure to put information before the meeting but with putting information before the meeting which was incorrect. The purpose of the obligation on the company in the buy-back provisions is to ensure that no relevant information is omitted. That is not the complaint the applicants raise. The complaint raised is that information that was put forward was seriously incorrect. It follows that there could be compliance with the obligation to put all relevant information known to directors before the meeting yet still a breach of the provisions proscribing misleading and deceptive conduct in relation to the content of that information.

164    The distinction between the objective and subjective components was clearly articulated by the Full Court in Fraser a quarter of a century ago. The passage has been set out above (at [79]). There has been no suggestion since Fraser that it is incorrect. Conduct will be misleading or deceptive either for the purposes of s 52 of the Trade Practices Act 1974 (Cth), as it was in Fraser, or for the purposes of the Act:

even if the corporation through its directors and officers did not have knowledge of the undisclosed facts which rendered the conduct in breach of s 52. A contravention of s 52 may occur without knowledge or fault on the part of a corporation, and notwithstanding the exercise of reasonable care.

165    I accept the applicants’ submissions, therefore, that the fundamental premise of the respondents’ approach in confining the extent of the misrepresentation to an overstatement of operating profit of AUD$17.48 million, rather than a loss of AUD$52.7 million is misconceived as a matter of principle. That is so because even if directors were unaware that DRA in fact sustained substantial losses in the year to 30 December 2018, and even if the taking of reasonable care would not have led to a discovery of the full extent of the errors, it does not detract from the conclusion that the position represented to shareholders in the Initial 2018 Financial Statements was wrong and substantially so. There was no expression of opinion nor statement about a future matter. The presentation of the accounts in accordance with the statutory obligation amounted to a representation that the accounts were true and fair. The AUD$78 million difference in the accounts was obviously material. The Corrected 2018 Financial Statements pertained to the position of DRA as at the reporting date, albeit that it was in some respects then unknown. The letter to shareholders explaining the need for the financial statements to be corrected itself referred to the materiality of the error. I can accept that the notion of materiality for auditing purposes may be a different concept from materiality of a misstatement, but nonetheless, the quantum of the error speaks for itself. The nature of the error which had not been recognised at the time of the publication of the Initial 2018 Financial Statements also supports a conclusion that they were material. For example, the errors in relation to the Elikhulu Project were attributed to serious systemic issues, including control circumventions, breaches of limited authority, concealment of information and misrepresentation by project management which added to the qualitative materiality of the misrepresentative position in the Initial 2018 Financial Statements. The Corrected 2018 Financial Statements are also accompanied by a breach report lodged by DRA’s auditors pursuant to s 311 of the Act. ASIC was also informed. As the applicants assert, fixed with the knowledge that the Initial 2018 Financial Statements were materially misstated, the directors would have been exposed to potential civil and penal claims for breach of the Act and by users of the accounts who would have been relevantly misled. A decision to restate and reissue the Corrected 2018 Financial Statements was clearly a significant decision, particularly given the listing aspirations of DRA and would not have been taken, and I infer would not have been taken absent DRA, its directors, and advisors concluding that the misstatements in the accounts were material in every sense. None of the actions taken by DRA at the time would suggest any other conclusion.

166    The respondents rely heavily upon indications that DRA is trading profitably and that its share value (DRA is not listed) is still in the broad range that was anticipated at the time of the Initial 2018 Financial Statements. This evidence may potentially support a conclusion that the applicants may not suffer the harm in the value of their 35% shareholding that they fear. It does not, however, cure the fact that the AUD$78 million error in the accounts, as originally presented, was materially misleading. It is important to recognise that the Act and the constitution of DRA specify that it must be the members in general meeting who authorise in specified ways any decision to reduce capital or buy-back shares. Such a requirement was also built into the SBB agreements at cl 3.2(a). The applicants are correct in saying that it may be the case that the members of DRA consider that the SBB scheme or a similar scheme should still proceed to support a listing of DRA in the future, but the point is that it is the members who have to make that decision, not the directors and secondly, the members must be advised of accurate relevant information as a necessary precursor to making that decision. If DRA wishes to proceed with a share buy-back scheme, it should go to the members with correct financial information and seek their approval.

167    Even if this analysis is wrong, there is no doubt, in my view, that DRA was bound to go back to the shareholders when it discovered the true financial position. That may not be so in every case, but it was so in this instance where the need to seek further shareholder approval was always expressly contemplated and conveyed to shareholders if the underlying information was misleading or deceptive. That is apparent from the fact that in the letter sent to shareholders dated 7 May 2019 shareholders were told that DRA would advise them ‘of any subsequent events that will have the effect of rendering any previously disclosed information misleading or deceptive’ and that it would seek further shareholder approval in relation to the buy-back where required. That letter was also lodged with ASIC. That is exactly what happened when DRA overstated the profitability to the extent of AUD$78 million. That was reinforced by other documents. The SBB agreement itself contemplated at cl 3.2(a) that Resolution 12 would need to ‘remain valid or effective’ and that ‘any information disclosed as part of a buy-back’ could potentially be ‘determined by the board (acting reasonably) to be misleading or deceptive’ leading to a termination of it (at cl 7(a)).

168    It is supported by ASIC’s Regulatory Guide 110, which was current at the time of these events and as a matter of common sense and consistently with general law obligations concerning misleading and deceptive conduct prescribes that if an event occurs in the 12 months after shareholders approve the SBB scheme that makes any previously disclosed information misleading or deceptive, DRA can no longer rely on that approval to carry out a valid buy-back.

169    There is ample documentary evidence that the problems with Resolution 12 were conveyed to DRA well before these proceedings. It is quite possible that DRA had been advised to the contrary, but of course, the risk DRA would have taken in seeking re-approval from shareholders as they undertook to do is that the shareholders may not approve the SBB scheme given that 35% of the shares are and were held by the applicants. It is not as though all of the respondents were blind to this difficulty. In a written communication from Mr Uys to Mr Salomon, amongst others, on 24 November 2019 Mr Uys quite correctly observed that the ‘restated 2018 financials reflects a reversal from a positive to an extremely and very alarming negative situation we have already agreed that we must again present those resolutions for shareholders to vote on’.

170    The suggestion that the presentation of the accounts was simply the expression of an opinion that the accounts gave a true and fair view of DRA’s financial performance to the year ending 31 December 2018 does not alter the conclusion that the representations in the accounts to the shareholders were misleading. The whole statutory purpose of presentation of accounts would be rendered pointless if they are nothing more than a vague idea of DRA’s affairs. Section 297 of the Act provides that the financial statements and notes for a financial year must give a true and fair view of the financial position and performance. This is an objective fact. The concept of true and fair has been identified in Austin & Black’s Annotations to the Corporations Act (LexisNexis, 2010) in these terms (at [2M.297]):

The obligation for the financial statements and notes to present a true and fair view under the section does not limit the requirement that those accounts comply with the accounting standards … the concept of true and fair is likely to require at least that the information contained in a company’s accounts be sufficiently complete and accurate to satisfy the reasonable expectations of users of those account …

(Emphasis added.)

171    That description cannot be applied to the accounts given to shareholders in May 2019. They were not true because they contained facts which are incorrect. Overstating operating profit by AUD$78 million or even AUD$17 million, amongst other things, is manifestly incorrect even if that overstatement was not known. I stress that this characterization does not go to any question of directors’ duties but rather to the conclusion that the accounts objectively viewed, were incorrect and therefore materially misleading.

172    For several reasons, the respondents have suggested that knowing the true position would not have affected the applicants’ vote. This submission cannot be accepted. The SBB scheme was part of a parcel of arrangements deemed by DRA to be necessary in order to facilitate a successful listing. It cannot be thought that an adverse discrepancy of AUD$78 million or AUD$17 million in DRA’s profit would not be relevant to those who might be considering supporting an IPO for a successful listing. That is entirely counter intuitive. It is also inconsistent with the fact that the applicants had previously rejected support for the SBB scheme in circumstances where they were not satisfied that these objectives were attainable. I accept the argument for the respondents that the authorities suggest caution in evidentiary statements to the effect that people relied on certain representations. But in this instance, I accept the evidence that the applicants did rely upon the Initial 2018 Financial Statements in changing their position to support Resolution 12 in their vote at the 2019 AGM. I do so because it accords with all objective facts and with common sense.

173     There is, in any event, documentary evidence of at least one other non-employee minor shareholder apart from the applicants (who are not minor shareholders) questioning the validity of the vote on Resolution 12 when they had been informed that the accounts were incorrect. In December 2019, Mr Lawrence, a minority shareholder sought clarification about the impact of the Corrected 2018 Financial Statements on the resolutions passed at the 2019 AGM in an email to Mr Von Maltitz of DRA. Relevantly, Mr Lawrence pressed DRA on the following (quoted verbatim):

•    The last AGM, and the resolutions passed at that meeting, were all premised on the AFS as presented by the Board at that time. Since that AFS has been shown to be materially incorrect, surely the resolutions passed at that time should also be voided since the shareholders had been materially misled?

…

•    Can you confirm that the INED’s have not waived the condition on capital raising preventing the Tranche 2 buy back and that no such buy backs have occurred or are contemplated in the near future?

174    This was not the first time Mr Lawrence had raised concerns. In the lead up to the abandoned general meeting in late 2018 which was scheduled to consider the SBB scheme, he emailed other shareholders in an attempt to canvass his concerns about the SBB scheme. Mr Lawrence asked fellow shareholders to pose the following questions at the meeting:

1.    Who is VMF Investments and which of the shareholders and directors have a direct or indirect interest in it?

…

3.    Considering that up until very recently, the company has maintained that the “fair value” of the share was R30 per share, how is it that it is now using R74.25 per share for this buy back?

…

5.    What will happen in the event that these “loans” are re-paid, but the IPO price achieved is lower than you estimate (used to calculate the number of shares required to be sold)?

In a communication to shareholders shortly after Mr Lawrence voiced these concerns, DRA’s CEO Mr Carvelas described VMF as ‘a family corporate entity for the benefit of a group of management and their extended families, who elect to holder their shares via a single entity.’ Moreover Mr Uys, a respondent in these proceedings expressed very similar concerns as set out above (at [173]). These communications suggest that the applicants were not alone in considering that the financial position of DRA was not only important in proving support for Resolution 12 but that its validity depended on it. DRA was undoubtedly aware of these concerns.

175    The argument that the transaction enabled by Resolution 12 was of a non-cash nature is not persuasive. Even if the transaction were of a non-cash nature, that does not detract from the materiality and influence of DRA’s true financial position and performance on the shareholders’ decision on how to vote on Resolution 12. It is uncontested that the reality of DRA’s financial performance in 2018 has rendered the prospects of an imminent and successful public listing less likely. To approve the SBB scheme at a time when the true position was that the requisite successful listing was far from certain or less likely would give rise to the very problem which was the reason for the withdrawal of the buy-back proposal in October 2018. The successful listing was defined in these circumstances as one which, as contemplated by cl 3.2 of the SBB agreement, secured a minimum capital raising of AUD$100 million. Similarly, this objective and requirement was referred to in the letter to shareholders of 7 May 2019. It was also referred to in the NOM. The content of that notice is significant. It read:

It is considered to be in the interests of all shareholders that the Listing receives appropriate institutional investor support in order to ensure that there will be adequate opportunity for all Shareholders to realise value at the Listing and post-Listing. On this basis [DRA] intends to target a capital raise from new investors of between [AUD]$100 million and [AUD]$150 million either by way of a primary issue of shares and/or a secondary sale of shares by existing shareholders.

176    It is plain that the buy-back proposal in October 2018 did not proceed after the applicants indicated they would not support it. The reason for the applicants withholding their support in October 2018 is of significance to the materiality argument. The events of October 2018 establish conclusively the importance of a high likelihood of an imminent and successful listing of DRA and, in turn critically, the financial health of DRA prior to any such listing to any decision to approve the SBB scheme. Materiality is also signified by the fact that DRA recognised the need to correct the Initial 2018 Financial Statements and that doing so was a reason for delaying the proposed listing of DRA.

177    For all those reasons, I am satisfied that the applicants have made out their misleading and deceptive conduct claim in relation to the Initial 2018 Financial Statements.

178    As to the inadequate disclosure of the nature of the Shareholder Loans, I have indicated that I accept the respondents’ submissions and do not consider the applicants succeed on this topic. The position is the same in relation to the representation as to the escrow arrangements. I do not consider that ordinary shareholders would be influenced by such sophisticated distinctions.

179    It is necessary to deal with the argument that s 259F of the Act saves Resolution 12. I am unable to accept this submission. It will be recalled that s 259F relevantly provides (at subs (1)(a)) that:

If a company contravenes section 259A or subsection 259B(1) ... the contravention does not affect the validity of the acquisition or security or of any contract or transaction connected with it …

180    The short response, I think, is that the case advanced for the applicants is not a case that the SBB agreements enabled by Resolution 12 are invalid, but rather that Resolution 12 itself is invalid. Section 9 of the Act contains a non-exhaustive definition of ‘transaction’ and it certainly does not embrace a company resolution at an AGM. Nor does it come within the ordinary meaning of ‘transaction’ or ‘contract’.

181    The section was also discussed in Knauf Plasterboard Pty Ltd v Plasterboard West Pty Ltd (in liq) (2017) 254 FCR 559 (at [91]) in which it was made clear that an acquisition of shares made contrary to s 259A, including a share buy-back not authorised by s 257A will be valid, but s 259F will not cure any defects in the contract or transaction underlying the acquisition. While that is not directly applicable to the present circumstance, it is clear that the effect of s 259F(1) is that the invalidity of Resolution 12 would not affect the validity of the completion of the Tranche 1 transaction, but it will do nothing to cure the validity of Resolution 12. The Tranche 1 transaction, of course, has already occurred. The Tranche 2 transaction has not yet occurred and the applicants may apply to prevent this from occurring. Indeed, that is expressly recognised in Ford, Austin & Ramsay’s Principles of Corporations Law (LexisNexis Butterworths, 17th ed, 2018) (at [24.380.12]) where the authors observed that an interested person (potentially a shareholder or creditor) may also be able to obtain an injunction under s 1324 to restrain a company and others involved from proceeding contrary to s 259A.

WAS THE WAIVER OF THE CONDITION PRECEDENT VALID?

182    The SBB agreement conferred on the independent non-executive directors of DRA power to waive the condition precedent by cl 3.3. This, however, was not a general power, it was a power which pertained to closely confined circumstances. The condition precedent was the receipt by DRA of irrevocable acceptances for application moneys to the value of at least AUD$100 million. This was contained in cl 3.2(b).

183    The contractual discretion to waive the condition precedent is controlled by an express provision in the SBB agreement. In particular, cl 3.3(a) provided:

… [DRA] may waive it in its discretion in accordance with clause 3.3(ii) [sic], with consideration to be given by [DRA] only to the likelihood and the timing of the Condition in clause 3.2(b) being satisfied and subject to the [Act]. For the avoidance of doubt, while [DRA] intends to seek admission to the Official List of the ASX by way of an initial public offering or reverse takeover and a secondary listing on the [JSE] it is not obliged for the purposes of this Agreement to do so if this would be contrary to the best interests of [DRA’s] shareholders as determined by the Board, acting reasonably.

(Emphasis added.)

At the hearing, counsel for the applicants pointed out that the reference to a cl 3.3(ii) should be reference to cl 3.3(b) to no objection from any party.

184    It follows that cl 3.3 prescribes considerations to which the directors must have regard before they can waive the condition precedent. The applicants place emphasis on the word ‘only’ where it appears in the second line.

185    While the text speaks for itself, the commercial context also confirms the importance of these constraints on the power to waive the condition precedent as found in the text of cl 3.3. There can be no suggestion, the applicants argue, that the discretionary power is absolute or at large. To the contrary it can only be exercised having regard to the likelihood and the timing of receipt of the irrevocable acceptances for application moneys to the value of at least AUD$100 million. In order for the independent non-executive directors to exercise the power they must have regard to the likelihood and timing of satisfaction of the condition precedent – the applicants contend that absent a concrete proposal for listing that is sufficiently certain, the independent non-executive directors cannot form a view on the likelihood and timing of the condition precedent in cl 3.2(b) being met.

186    The applicants say that the inclusion of the contractual limitation on the power to waive the condition precedent is entirely consistent with the commercial context that the objective of Resolution 12 was to enable a successful listing. It needs to be not a successful listing at any time or on any basis but a listing as defined in the contextual documentation. It reflected, the applicants argue, a calculated attempt to balance the competing interests of two groups of shareholders, namely:

(a)    those participating in the SBB scheme; and

(b)    those not participating.

187    That need arose because, as explained in the terms of the NOM describing the background to Resolution 12, in October 2018, the applicants, indicated that they would not vote in favour of the resolutions as they consider that it afforded the SBB counterparties the ability to realise value for a portion of their shares, albeit not in cash, ahead of other shareholders at a time when, in their view, there was limited visibility as to the timing or success of the intended Listing.

188    In similar vein, the letter to shareholders on 7 May 2019 explained what occurred in October 2018. That letter explained that:

[the applicants] would not vote in favour of the resolution as they considered that it afforded the [SBB counterparties] the ability to realise value ahead of other holders, albeit, not in cash at a time when there was limited visibility as to the timing or success of the intended listing of DRA … having now revised the structure of the [SBB scheme] through the inclusion of the condition precedent linked to [DRA’s] admission to the official list of the ASX and the secondary listing on the [JSE] … [DRA] now intends to propose and seek approval for the implementation of the buy-back …

189    Importantly, the applicants argue further that the NOM explained, in effect, that one of the measures in place to protect the interests of those shareholders not participating in the SBB scheme (such as the applicants) was the following constraint:

The buy-back of shares under Tranche 2 is also conditional on [DRA] or its nominee receiving valid irrevocable acceptances for at least [AUD]$100 million by way of a primary capital raise or sell-down of existing shares under an initial public offering or reverse takeover on the ASX and a secondary listing on the [JSE]. This condition may be waived by the independent directors of [DRA] only with consideration to be given by independent non-executive directors only to the likelihood and the timing of the condition being satisfied and subject to the [Act].

(Emphasis added.)

190    The commercial rationale and context was further explained in the NOM by the following statement:

The Board considers it to be in the interests of all Shareholders that the [SBB scheme] is completed and that the proposed structure largely mitigates most of the risks posed to other Shareholders as most of the Share Scheme Buy Back Shares will only be bought back under Tranche 2 when there is certainty that the Listing will occur and other Shareholders will have an opportunity to realise value.

(Emphasis added.)

191    The words ‘when there is certainty that the Listing will occur and other Shareholders will have an opportunity to realise value’ are central to the whole purpose of Resolution 12 and the SBB agreement.

192    It is clear that a balance between the competing interests of the two groups was needed following the October rejection was achieved by the applicants by making the power to waive the condition precedent itself conditional on:

(a)    the likelihood and timing of the condition in cl 3.2(b) being satisfied (by cl 3.3); and

(b)    the best interests of DRA’s shareholders.

193    It is common ground that there is no imminent proposed listing of DRA. DRA does hope to list, but its strategy is to list by 30 June 2021. The applicants say that timeline affords ample opportunity for approval and completion of a selective buy-back following proper procedures and completion of the requisite steps for listing. But whether it does or not, the fact of the matter is that there is no imminent proposed listing, let alone a successful public offering with an AUD$100 million capital raise. As will be seen when looking at the evidence more closely, DRA itself is conscious of the impact of the COVID-19 crisis on present economic circumstances.

194    In contrast, DRA argues that there are several reasons why such an assertion of an absence of a right to waive the condition precedent cannot succeed. The first reason is that if the claim were entertained, it would be contrary to the common law rules pertaining to privity of contract. Each of the SBB agreements entered into after the passage of Resolution 12 is a contract in the true sense. The parties to it are DRA on the one hand and the SBB counterparties on the other. The applicants are not parties to any of these contracts and have no rights or obligations under them. As a result, the rules of privity dictate that the applicants are strangers to the contracts and cannot have declaratory or other relief in respect of the rights or obligations arising between the parties to the SBB agreements. Reliance is placed on John Alexander’s Clubs Pty Ltd v White City Tennis Club Ltd (2010) 241 CLR 1 (at [131]-[137]) where the High Court said:

131    Walker Corporation submitted that where a court is invited to make, or proposes to make, orders directly affecting the rights or liabilities of a non-party, the non-party is a necessary party and ought to be joined. That submission is correct. The Court of Appeal's orders directly affected Walker Corporation. The majority of the Court of Appeal (Macfarlan JA, Giles JA concurring) erred when it held to the contrary.

132    In News Ltd v Australian Rugby Football League Ltd the Full Federal Court (Lockhart, von Doussa and Sackville JJ) said:

“Where the orders sought establish or recognise a proprietary or security interest in land, chattels or a monetary fund, all persons who have or claim an interest in the subject matter are necessary parties. This is because an order in favour of the claimant will, to a corresponding extent, be detrimental to all others who have or claim an interest.”

133    The relief claimed and granted – a constructive trust and a transfer of the land subject to the trust to the Club so as to make the interest transferred indefeasible on registration – directly affects the interests of any other person, like Walker Corporation, claiming an interest in the land, because orders in the Club's favour would, to a corresponding extent, be detrimental to those other persons. The Court of Appeal majority then said: “The appeal has only resolved the issues which arose between [the Club] and [JACS]”. That would be true if only personal remedies had been granted; but the constructive trust, a proprietary remedy, was granted in a way which resolved issues against Walker Corporation through creating indefeasible proprietary rights without its being heard.

134    The Court of Appeal majority also erred in saying: “Walker Corporation's claim that it has an equitable interest in the land ranking in priority to that of the [Club] may be pursued by it in separate proceedings against the [Club]” . Walker Corporation's claim was not merely that its equitable interest ranked in priority to the Club's interest in the Option Land. One of its claims was that the Club never had any interest in the Option Land at all and that no constructive trust should have been declared because of the existence of its equitable interest of which the Club had notice both before the option was exercised and before the Court of Appeal's declaration of constructive trust. Indeed, Walker Corporation was entitled to claim, if it wished, that the Club's substantive case was insufficiently strong to succeed at all, whatever the remedy available if it did succeed to any extent. Walker Corporation was entitled to call evidence against that substantive case. Even if it did not wish to do that, it was entitled to be heard on the weaknesses in the substantive case. Counsel for the Club criticised the lateness of Walker Corporation's submission about calling evidence, which was made on the second day of the appeal to this Court. It may have been late, but it is sound.

135    The Court of Appeal majority's belief that adequate protection of Walker Corporation's position would be achieved by pursuing its claim to an equitable interest in “separate proceedings” took no account of s 63 of the Supreme Court Act 1970 (NSW). Section 63 provides:

“The [Supreme Court] shall grant, either absolutely or on terms, all such remedies as any party may appear to be entitled to in respect of any legal or equitable claim brought forward in the proceedings so that, as far as possible, all matters in controversy between the parties may be completely and finally determined, and all multiplicity of legal proceedings concerning any of those matters avoided.”

136    The Court of Appeal majority next said that, in the separate proceedings in which Walker Corporation could pursue its claim that its Mortgage ranked in priority to the Club's constructive trust, “it would be open to Walker Corporation to seek interim relief preserving the status quo pending final determination of its claim”. That supports the view, contrary to what the Court of Appeal majority initially said, that its orders directly affected Walker Corporation, for here the Court of Appeal majority recognised that an interlocutory injunction of a judge in another Division of the Supreme Court was necessary to stop Walker Corporation's rights being taken away from it. The wisdom of the rule, which is about to be dealt with, that a person directly affected by an order in proceedings to which that person was not party is entitled as of right to have it set aside is thus demonstrated: it is a more efficient course than having to institute separate proceedings calling for an interlocutory injunction and an undertaking as to damages.

Walker Corporation's submission: entitlement of non-party who should have been joined to have order set aside

137    Walker Corporation submitted that if a court makes an order affecting a person who should have been joined as a necessary party, while the order will not be a nullity, that person is entitled to have the order set aside, and is not limited merely to seeking the favourable exercise of a discretion, whether or not the person in question becomes a party. As a general proposition this submission is correct. The setting aside of the order “lays the ghost of the simulacrum of a trial, and leaves the field open for a real trial”.

(Citations omitted.)

195    Additionally, DRA contends that if the earlier allegations of misleading or deceptive conduct on non-disclosure are not made out, there can be no separate contravention of the Act in the context of the waiver issue to support the ground of a statutory injunction. This contention can be put to one side as I have concluded in favour of the applicants on the primary issue.

196    Also relying on John Alexander’s Clubs DRA argues that even if the applicants have standing to advance the claim, it cannot be adjudicated upon unless the various counterparties to the SBB agreements are joined to the proceeding and given an opportunity to be heard. DRA says it has put the applicants on notice of that issue, but no joinder has taken place. DRA contends the reason why joinder is necessary is that the declaratory and injunctive relief sought with respect to cl 3.3 of the SBB agreements, if granted, will directly affect the rights or liabilities of both DRA and the various shareholder parties. DRA is joined, but the shareholder parties are not. This means that if this claim can be advanced at all, the shareholder parties are necessary parties to the claim, DRA contends a failure to join them as parties would entitle the shareholder parties to set aside any resulting adverse orders by parity of reasoning with John Alexander’s Clubs.

197    In any event, DRA says that the construction placed on cl 3.3 by the applicants is incorrect. The critical wording of cl 3.3(a), which permits DRA to waive the condition is contained in cl 3.2(b), which says relevantly that:

in accordance with clause 3.3(ii) [[sic] 3.3(b)], with consideration to be given by [DRA] only to the likelihood and the timing of the Condition in clause 3.2(b) being satisfied and subject to the [Act].

(Emphasis added.)

198    DRA contends that cl 3.3(b) relevantly requires that any decision as to whether to waive the condition in cl 3.2(b) must only be taken by independent directors of DRA. Further, the condition imposed by cl 3.2(b) is:

by not later than 9 January 2020 or such later date as the South African Reserve Bank may allow, but in any event by no later than 31 May 2020, [DRA] (or its nominee) receiving valid and irrevocable acceptances on terms and conditions acceptable to [DRA], for application monies to the value of at least [AUD]$100 million by way of a primary capital raise or sell down of existing Shares in relation to the proposed listing of [DRA] on ASX (either by way of an initial public offering or a reverse takeover) and the secondary listing on the [JSE].

199    The language of cl 3.3(a), read with cl 3.3(b), requires DRA’s independent directors to give ‘consideration to’ the likelihood and timing of DRA (or its nominee) receiving the requisite valid and irrevocable acceptances for application monies to the specified value (or greater) by way of a capital raise or sell down of existing shares in relation to the proposed listing of DRA on the ASX and the JSE.

200    While this no doubt requires the directors to give proper, genuine and realistic consideration to the likelihood for these things to occur, and the timing by which that may be expected, DRA contends that the wording does not require that the directors be satisfied that the likelihood of achieving these things rises to a particular level, nor that the anticipated timing for such achievement meets a particular standard.

201    DRA argues that as a matter of ordinary parlance, agreeing to consider the ‘likelihood’ and ‘timing’ of something before making a decision does not imply that one will only make the decision if one considers the thing to be particularly or very likely, or the timing of its occurrence to be imminent. It simply conveys a requirement to give consideration to the chances of the thing occurring, and to when it may be expected to occur.

202    There is no ambiguity in the language here so as to make it useful to have recourse to surrounding circumstances. Even if that were not so, DRA says the matters pointed to by the applicants are not sufficiently clear or unequivocal as to provide a reason to depart from (or strain) the ordinary meaning of the words ‘consideration’, ‘likelihood’ and ‘timing’ in the way the applicants suggest.

203    Accordingly, as a matter of construction of the SBB agreements, DRA contends that the applicants’ submission that the power to waive the condition precedent has not been enlivened should be rejected on the merits if this stage of analysis is reached.

204    The directors support DRA’s position and adopt DRA’s arguments. The directors argue that the applicants’ submissions would, if correct, imply into the SBB agreements terms and considerations that are not open on the proper constructions of those instruments. The directors accept that there is no doubt that the discretion to waive the condition precedent is fettered by cl 3.3 of the SBB agreements. Those considerations are expressly limited to ‘the likelihood and timing’ of the condition being satisfied. There are no additional restrictions or qualifications imposed on the discretion to waive the condition, other than that the waiver is subject to the Act. DRA says that in accordance with cl 3.3(b), the independent directors may waive the condition precedent provided that consideration has been given to the likelihood and timing of the condition being satisfied.

205    Clause 3.3(a) also clarifies that while DRA intends to seek admission on a stock exchange, it is ‘not obliged for the purposes of this agreement to do so if this would be contrary to the best interests of [DRA’s] shareholders’ (Emphasis added.) The directors say these words are important. The SBB agreements are not contingent on DRA listing on the ASX or the JSE. Properly construed, the clause contemplates a circumstance in which the condition precedent could be waived whilst not impacting on the purposes of the SBB agreement. That is, on the proper construction of the waiver provision, the directors argue, the condition precedent can be waived, and the SBB scheme implemented, even if a listing were to occur after 31 May 2020, or not at all so long as consideration had been given to the likelihood and timing of the condition precedent being satisfied, and so long as the independent directors were acting in accordance with the Act.

206    The directors suggest that consideration of the commercial context is not appropriate because there was nothing ambiguous in cl 3.3. The directors argue that the asserted construction of the SBB agreements would require the Court to read many additional words, about 60, into the relevant clauses. More importantly, it is argued that the first sentence in cl 3.3(a) commences by acknowledging that the ‘[c]ondition in clause 3.2(b) is for [DRA’s] sole benefit’. It concludes by acknowledging that the exercise of the discretion to waive is ‘subject to the [Act]’. That, of course, invokes the full range of statutory directors’ duties, which would be invoked in any event. There have been no complaints about breach of statutory directors’ duties. The obligation on the independent directors was to determine whether, in all the circumstances, waiving the condition precedent is in the best interests of DRA. That necessarily required them to consider the advantages and disadvantages of such a course, in addition to the likelihood and timing of the condition precedent being satisfied. Provided that the powers are exercised with a degree of care and diligence that a reasonable person would exercise, that is a matter of business judgment, and the independent directors are entitled to rely on s 180(2) of the Act. The directors point to the videoconference meeting held on 28 April 2020, by which they considered whether, in the circumstances, a waiver of the condition precedent was in the best interest of DRA. They unanimously resolved that they were in favour of waiving the condition precedent. A copy of the minutes of that meeting have now been tendered into evidence and will be referred to below.

207    The directors take strong objection to the opinion evidence of Mr Salomon which they argue is a back door method of attempting to undermine the business judgement rule by seeking to elevate Mr Salomon’s opinion as to what is in the best interests of DRA when the members of DRA left that decision to the independent directors. Mr Salomon is not an independent director and has a clear commercial interest in the outcome of the proceeding.

Consideration

208    I do not consider that the applicants’ construction of cl 3.3 is strained. Rather, it accords with the commercial context and purpose of the condition. I accept that the discretion to waive the condition precedent is confined as follows:

(a)    first, the decision-makers must have regard to the likelihood and timing of the condition in cl 3.2(b) being satisfied. In turn, the condition in cl 3.2(b) being the receipt by DRA of valid and irrevocable acceptances for application moneys to the value of at least AUD$100 million; and

(b)    secondly, the decision-makers must have regard only to the consideration prescribed in cl 3.3, being the likelihood and the timing of the condition in cl 3.2(b) being satisfied subject only to the Act.

209    In my respectful view, the construction advanced by the respondents is unrealistic. Were it accepted, its effect would simply be that the decision-makers need only think about the likelihood and timing of raising at least AUD$100 million, but having done so and concluding that it was completely unlikely, would be free to waive the condition precedent regardless of that lack of likelihood. That would deprive cl 3.3 of any meaningful work. It would be starkly inconsistent with the commercial context. There need not be ambiguity to construe the text of the contract in the commercial context. Ambiguity is not a precondition to consideration of the surrounding circumstances: Commissioner of Taxation v The Trustee for the Michael Hayes Family Trust [2019] FCAFC 226 per Steward J (with Griffiths and Derrington JJ agreeing) (at [32]) and Franklins Pty Ltd v Metcash Trading Ltd (2009) 76 NSWLR 603 per Allsop P (as his Honour then was) (at [14]).

210    As emphasised by the applicants, the relevant commercial context is:

(a)    the letter to shareholders dated 7 May 2019, which explained that in October 2018:

[The applicants] indicated that they would not vote in favour of the resolution as they considered that it afforded the Holders the ability to realise value ahead of other shareholders, albeit not in cash, at a time when there was limited visibility as to the timing or success of the intended Listing of [DRA] …

Having now revised the structure of the [SBB scheme] through the inclusion of a condition precedent linked to [DRA’s] admission to the Official List of the ASX and secondary listing on the [JSE] … [DRA] now intends to propose and seek approval for the implementation of the [SBB Scheme] …

(b)    the terms of the NOM, which also explained that, in October 2018:

[The applicants], the individual partners in the Stockdale partnership, indicated that they would not vote in favour of the resolution as they considered that it afforded the participants the ability to realise value for a portion of their shares, albeit not in cash, ahead of other shareholders at a time when, in their view, there was limited visibility as to the timing or success of the intended Listing.”

…

The buy-back of Shares under Tranche 2 is also conditional on [DRA] or its nominee receiving valid irrevocable acceptances for at least [AUD]$100 million by way of an primary capital raise or sell down of existing Shares under an initial public offering or reverse takeover on the ASX and a secondary listing on the [JSE]. This condition may be waived by the Independent Non-executive Directors of [DRA] only with consideration to be given by Independent Non-executive Directors only to the likelihood and the timing of the Condition being satisfied and subject to the [Act].

…

The Board considers it to be in the interests of all Shareholders that the Share Scheme Buy Back is completed and that the proposed structure largely mitigates most of the risks posed to other Shareholders as most of the Share Scheme Buy Back Shares will only be bought back under Tranche 2 when there is certainty that the Listing will occur and other Shareholders will have an opportunity to realise value.

(Emphasis added)

211    Thus, in summary, the respondents’ construction of cl 3.3 is not supported by the language used in cl 3.3, deprives cl 3.3 of any meaningful work, and further is contradicted by the contextual matters relevant to the construction of the clause.

212    The respondents provided a copy of the minutes of the meeting of independent non-executive directors held on 28 April 2020. It is useful and necessary to set out the substance of this meeting as recorded by the minutes in full: