Federal Court of Australia

Sharif v Vitruvian Investments Pty Ltd (No 4) [2023] FCA 1172

ORDERS

THE COURT ORDERS THAT:

1.    Pursuant to s 233 of the Corporations Act 2001 (Cth), within three business days from the date of this order:

(a)    the third defendant deliver to the plaintiff a share transfer form executed by it, as transferor, for the transfer of 3,000,000 unencumbered fully paid ordinary shares in the first defendant to the plaintiff for the consideration of $1.00; and

(b)    the plaintiff deliver to the third defendant a completed and executed Deed of Accession in the form set out in Schedule 4 to the Vitruvian Shareholders Deed, dated 11 February 2022, subject to the option 'Other Shareholders' being completed in cl 3(a) and (b) of the Deed of Accession.

2.    Within three business days of receipt of the share transfer form, the plaintiff deliver to the third defendant the share transfer form executed by him, as transferee.

3.    Within five business days of receipt of the executed share transfer form from the plaintiff, the third defendant lodge the executed share transfer form (which, if required by law, will be duly stamped), the Deed of Accession and the necessary share certificate(s) at the registered office of the first defendant for registration of the transfer of the shares from the third defendant to the plaintiff.

4.    Within five business days after the lodgement by the third defendant of the documents referred to in order 3, the first defendant register the transfer of the 3,000,000 shares in the first defendant, the subject of the executed share transfer form, from the third defendant to the plaintiff.

5.    The parties have liberty to apply in relation to the implementation of these orders.

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

REASONS FOR JUDGMENT

COLVIN J:

1    Mr Walid Sharif was a shareholder in Vitruvian Investments Pty Ltd (Vitruvian). His shareholding was cancelled. He commenced proceedings claiming, amongst other things, that the conduct of the affairs of Vitruvian, including the cancellation of his shares, had been oppressive to him as a member of the company contrary to s 232 of the Corporations Act 2001 (Cth) and that J & S Gregory Pty Ltd (J & S Gregory) had benefitted from that conduct. His claim was upheld: Sharif v Vitruvian Investments Pty Ltd (No 3) [2023] FCA 920 (Principal Reasons). It was determined that it was appropriate to order J & S Gregory to transfer three million shares in Vitruvian to Mr Sharif before the issue of any future shares by Vitruvian and that the transfer should occur without consideration being payable by Mr Sharif.

2    The parties have proposed separate minutes of orders to give effect to the Principal Reasons. They are in dispute as to two aspects of those orders, namely:

(1)    whether the share transfer form should state a consideration of $210 or any other amount; and

(2)    the terms in which a deed of accession should be executed by Mr Sharif.

Consideration for the share transfer

3    The conclusion reached as to the relief that should be ordered was expressed in the following terms in the Principal Reasons at [330]:

… The application by Mr Sharif for orders as provided for in s 233 on the basis of oppressive conduct contrary to s 232 should be allowed. The appropriate order to be made is to require J & S Gregory Pty Ltd to transfer three million shares in Vitruvian to Mr Sharif before the issue of any further shares by Vitruvian. The transfer should occur without consideration payable by Mr Sharif. There should be an order for costs in favour of Mr Sharif but that order will need to allow for the extent to which claims were not pursued. It should have regard to materials that the parties have been directed to file as to the question of costs.

4    Vitruvian seeks an order that would state the consideration for the transfer of the three million shares as being $210, alternatively a nominal amount. The consideration of $210 would reflect the nominated value at the time of issue to Mr Sharif of his shares in Vitruvian that were subsequently cancelled. Shares were also issued to J & S Gregory at the same time so it might also be viewed as the consideration for those shares.

5    The figure of three million shares was determined to be the shares that would have been held by Mr Sharif as a result of a share split if his shares had not been cancelled. The share split was an event that involved no further payment of consideration.

6    In substantive terms, the finding as to relief in the Principal Reasons simply reinstates Mr Sharif's previous shareholding, albeit that the share split means that the appropriate shareholding is 3,000,000 shares.

7    J & S Gregory points to the possible capital gains tax consequences of the relief to be granted to Mr Sharif. The shares are a 'CGT asset' for the purposes of the capital gains tax provisions of the Income Tax Assessment Act 1997 (Cth): see s 100-25(2)). If there is a change in ownership of shares then there will be a 'disposal of a CGT asset': s 104-10. J & S Gregory submits that if the transfer of the three million shares occurs without any identified consideration then it will be taken to have received the market value of the shares. The consequence in that event, so it is submitted, is that J & S Gregory will be treated as making a capital gain because the market value will be greater than the cost base. Also, Mr Sharif would be treated as having a cost base for capital gains tax purposes that is at least equal to the market value of the shares at the time of transfer. Therefore, his capital gains tax liability on any future sale of the three million shares, will be determined on the basis of the market value at the time of transfer of those shares to him. This, it is said, will give rise to a windfall gain to Mr Sharif.

8    The windfall is said to arise because the identified consideration for the shares that had been held by Mr Sharif was $210. If there had been no oppression and he had continued to hold the shares and had then participated in the share split then the capital base for his shareholding would have been $210. If he had then disposed of the shares at market value he would have been liable for the capital gain. However, if Mr Sharif is now reinstated to the position he would have been in if there had been no oppression and that is done by a transfer of shares by order of the Court with no consideration specified then the capital gains tax burden of that transfer would fall on J & S Gregory. In consequence, Mr Sharif would be placed in a much more advantageous position than would have been the case if the oppression had not occurred.

9    Mr Sharif does not dispute the contentions as to the tax consequences. Rather, he submits that those consequences are a matter for determination by the Commissioner of Taxation and ought to fall where they may having regard to the facts as they presently stand. He emphasises the statement in the Principal Reasons to the effect that the transfer should occur without consideration. He also says that the relief does not make any adjustment for the fact that Vitruvian has enjoyed the benefit of the shares in the meantime. As to that aspect, it may be noted that no relief was sought by Mr Sharif on the basis that he had suffered some loss by reason of being deprived of the benefit of the shares between their cancellation and the grant of relief.

10    I am persuaded that it would not be appropriate to express orders in terms that might afford a windfall capital gains tax benefit to Mr Sharif. On the material before the Court there appears to be that possibility if the transfer specified no consideration. On the other hand, it is not suggested that an order which required a transfer for nominal consideration, as a matter of substance, would result in an outcome that was inconsistent with the logic of the Principal Reasons. The statement in the Principal Reasons to the effect that the transfer of the three million shares should be without consideration was made because Mr Sharif had sought the transfer of substantially more shares on the basis that he pay the same issue price as had been paid when those shares were issued. I did not accept that claim. The statement was made to make clear that consideration of that kind was not to be paid. It should not be given a consequence beyond that purpose.

11    The appropriate order in those circumstances is for the transfer of the three million shares to specify consideration of $1.00 for the transfer. An order in those terms is consistent with the Principal Reasons and is necessary to ensure that the remedy removes the consequences of the oppressive conduct and does not do so in a manner that may operate so as to afford to Mr Sharif a greater remedy than is necessary to redress the nature of the oppression as determined.

Deed of accession

12    The shares in Vitruvian are closely held. The shareholders are parties to a shareholders deed. The constitution of the company provides for a transferee of shares to enter into a deed of accession. Mr Sharif accepts that the orders should be made on terms that require him to execute a deed of accession in the terms provided for by the constitution. The form of the deed of accession has provision for the party completing the deed to be identified as a Founding Shareholder, Investor Shareholder or Other Shareholder.

13    Mr Sharif says that the orders for the transfer of the three million shares should provide for him to be identified as 'Founder Shareholder'. J & S Gregory say that the orders should provide for him to be identified as 'Other Shareholder'.

14    One of the factual issues in the proceedings concerned whether Mr Sharif had been described as a founder of Vitruvian. At the time of the events in issue, there were three shareholders each representing the interests of parties who were identified as founders or co-founders. There was an issue as to whether Mr Sharif was a founder or co-founder. It was an issue that formed part of the context for determining whether an account of events given by Mr Gregory was to be accepted as an accurate and reliable account. It was not contended that there was any particular status conferred upon a founder when it came to the shareholding. Nor was any case advanced to the effect that the relief to which Mr Sharif was found to be entitled was relief that depended upon his status as a founder.

15    Significantly, no claim was made in the substantive proceedings that the changes to the constitution which introduced the status of 'Founder' and 'Founder Shareholder' as well as the requirement for a deed of accession formed part of the oppressive conduct as against Mr Sharif.

16    The fact that the shareholder deed uses those terms does not mean that they are deployed in the same manner as the term was deployed in the evidence given by Mr Sharif, Mr Gregory and Mr Larsen and in the various documents that were adduced in evidence in the course of the substantive hearing. It may be observed that neither Mr Larsen nor any entity associated with him is identified as a Founder or Founding Shareholder even though he was also identified in the evidence as a co-founder of Vitruvian.

17    Mr Sharif disavows any attempt to be treated as a Founder for the purposes of the shareholder deed. Rather, he says that the deed contemplates that a transferee of a Founder Shareholder may also have that status for the purposes of the deed and that it is appropriate for that to occur as part of the orders to be made.

18    The shareholders deed identifies Mr Gregory as the 'Founder' and identifies 'J & S Gregory Pty Ltd' as the 'Founder Shareholder'. The latter term is defined in the Schedule to include any party that subsequently enters into a deed of accession as a 'Founder Shareholder'.

19    Under the terms of the shareholders deed, the Founder Shareholder has important rights and obligations including:

(1)    the right to appoint, remove or replace two directors (cl 3.2(a)(1));

(2)    a right to control whether the number of directors is varied from five directors (cl 3.1(b));

(3)    a right to control certain issues of securities (cl 5.4(a));

(4)    an obligation to allow a co-sale option by other shareholders in the event that the Founder wishes to transfer more than 10% of its shares held at a particular date (cl 10.1);

(5)    restrictions on the circumstances in which the Founding Shareholder may transfer shares (cl 12.1);

(6)    delayed vesting of certain of the shares held by the Founding Shareholder (cl 12.2);

(7)    obligations in relation to the circumstances in which the Founder may be ceased to be employed or engaged by Vitruvian (cl 12.4); and

(8)    non-compete obligations for the Founder and Founding Shareholder (cl 13.1).

20    What is apparent from the nature of the rights and obligations associated with shares held by the Founder Shareholder is that they are concerned with affording a distinct status associated with the position of Mr Gregory as the Founder as described in the shareholders deed. J & S Gregory is the holder of a substantial shareholding where the exercise of the rights associated with that shareholder might affect the management of the company and the interests of other shareholders. The provisions in relation to the employment of the Founder and the non-compete provisions further indicate that the purpose of the status of Founder is also to impose those obligations.

21    Whilst it may be accepted that the deed of accession recognises the possibility that there may be a transfer from a Founding Shareholder to another shareholder who has that status, it must also be noted that the deed allows for exempted transfers (cl 8.2). They include transfers to a nominee or trustee for a shareholder. In short, the deed contemplates that there may be transfers by any shareholder to other associated interests.

22    For J & S Gregory, submissions were advanced to the effect that the deed of accession should be construed as contemplating that the Founder must have been a single nominated person, namely Mr Gregory and there is no mechanism to alter that person. In my view, it is not necessary to reach a concluded view as to whether that is the case. It is enough to conclude that I do not accept that the evidence that was adduced at the substantive hearing is a sufficient foundation upon which to conclude that Mr Sharif has demonstrated that the relief to which he is entitled should extend to being afforded the status of a Founder Shareholder under the terms of the shareholders deed. As has been explained, there are aspects of the obligations, particularly those that contemplate the Founder and initial Founder Shareholder being an employee of Vitruvian and also assuming non-competition obligations that are, at least, inappropriate for a person such as Mr Sharif who has no such status.

23    Further, I accept that there would be difficulties for the operation of the terms of the shareholders deed if the 'Founder Shareholder' rights and obligations were held by J & S Gregory and Mr Sharif in some joint way. What would occur if Mr Sharif or J & S Gregory wished to sell his shares, or add himself as a director or control the issue of securities in exercise of the rights conferred by the shareholders deed? Would J & S Gregory be obliged to allow that to occur? Would the exercise of the rights depend upon agreement between the Founder Shareholders?

24    In those circumstances, the appropriate relief is that the deed of accession provide for Mr Sharif to acquire his shares as an 'Other Shareholder'.

Conclusion

25    The other aspects of the final orders being agreed (save for orders as to costs which are to be addressed separately), there should be orders generally in the terms proposed with the consideration for the share transfer being $1.00 and the deed of accession to be executed on the basis that Mr Sharif acquire his shares as an 'Other Shareholder'. I will reserve liberty to apply as to the implementation of the orders.

Associate:

Dated:    29 September 2023