Joint venture glitch
Dec 2014 |
Introduction
This article examines the problem of imprecision when specifying rights attaching to shares in a company used as an incorporated joint venture. A recent case covered this issue.
What happened?
Wambo Coal Pty Ltd v Sumiseki Materials Co. Pty Ltd [2014] NSW CA 326 was a recent decision of the NSW Court of Appeal. One shareholder, Peabody Australia Mining Ltd (Peabody) owned all the ordinary shares in Wambo Coal Pty Ltd (Wambo). The other Wambo shareholder was Sumiseki Materials Co. Pty Ltd (Sumiseki). Sumiseki owned B class shares in Wambo and these shares had a right to receive a dividend for a specified six month period equal to a specified fraction of Wambo’s profits. Wambo’s directors decided not to pay dividends on the B class shares for certain periods. This was objected to by Sumiseki who sued Peabody alleging oppressive conduct against Sumiseki. The Court therefore was left to decide if the conduct was oppressive and if Sumiseki had a valid entitlement to its unpaid dividends.
The points in contention
Wambo’s constitution contained the usual discretionary clause allowing the directors to make a decision on paying dividends. The Court noted that for eight years from June 2001, when Sumiseki became a shareholder, to June 2009, it was paid its entitlement to profit based dividends. However, in 2010 the Board of Wambo directors resolved not to pay a dividend. This decision was based on financial pressure the company was under at the time including facing the problem of not meeting its financial covenants. In 2011, the Wambo directors also resolved not to pay a dividend based on inadequacy of profits.
Sumiseki claimed that it had a clear entitlement to dividends and that Peabody directors controlling Wambo acted oppressively towards Sumiseki by not agreeing to pay the dividends.
The Court’s decision
The Court agreed with Sumiseki i.e. that Sumiseki was entitled to the non paid dividends and that the deprivation of Sumiseki of those dividends amounted to oppression. Sumiseki sought an order that the constitution be rectified so as to make it abundantly clear that the relevant profits out of which its dividend was to be paid are profits undiminished by the decisions of the Wambo directors. This was sought from the Court pursuant to either ss 233(1)(b) or 1322(4)(b) of the Corporations Act 2001 (Cth).
The Court of Appeal considered that as Wambo was not a public company with a constitution registered with ASIC, that s 1322(4)(b) was not available to grant rectification of Wambo’s constitution.
Rectification of Wambo’s constitution was available under s 233(1)(b) (which was ordered by the primary judge). That left Sumiseki in a position where it had an entitlement to be paid the unpaid dividends. However, it did not appear to have sought orders against Wambo for the recovery of the unpaid dividends.
Lessons learned
Disputes do happen in joint ventures and this case again indicates how important it is to articulate the rights of each party in a way which leaves nothing to ambiguity. In this case, the ambiguity was whether a dividend was payable on B class shares arising from the joint venture company’s profits, regardless of other considerations affecting the company.
The second issue is to ensure that joint venturers using a joint venture company always use a shareholders’ agreement to record their contractual rights to each other, as well as the joint venture company.