On 3 September 2014 the Victorian Supreme Court handed down judgment in the matter of William Falkingham v Peninsula Kingswood Golf Club [2014] VSC 47, a proceeding brought by a member of the Peninsula Kingswood Country Golf Club Ltd who was attempting to undo a merger of Kingswood Golf Club Ltd (Kingswood) and Peninsula Country Golf Club (Peninsula).
BACKGROUND
On 26 March 2013 Kingswood and Peninsula signed a heads of agreement in relation to a potential merger of the clubs. The key feature of the proposed merger was the sale of Kingswood’s golf course at Dingley. It was intended that the merged club’s members would play their golf at the Peninsula’s two golf courses, with Kingswood’s golf course at Dingley being sold to ensure the ongoing financial viability of the merged club.
In September 2013, 63 percent of Kingswood members and 98 percent of Peninsula members voted in favour of the proposed merger. On 2 October 2013, the merger was effected when over 1000 members of Peninsula were made members of Kingswood.
THE PROCEEDING
The plaintiff, a Kingswood member who opposed the merger, sought a declaration that the admission of the Peninsula members was void and an order preventing the sale of the Dingley land on the grounds that the board had, in contravention of section 232 of the Corporations Act 2001, acted oppressively towards the plaintiff and other members who opposed the merger.
The main instance of alleged oppression examined by the Court was that when the board accepted the admission of the Peninsula members, they used their power to accept new members for a purpose other than that for which the power was conferred.
OPPRESSION FOUND
His Honour Justice Robson found that the substantial object of the decision to admit new members was to give effect to the merger agreement and that this was a purpose other than that for which the power to admit new members was granted under the constitution of Kingswood. His Honour held that but for the intention of the board to achieve the merger the power to admit the members would not have been exercised.
His Honour considered the general resolution of the members of Kingswood in support of the merger but found that it was ineffective to authorise the admission of the Peninsula members, noting:
“Constitutions protect the rights of the minority, not only those of the majority. The fact that the members in the general meeting approved the merger does not alter the constitutional obligation to the board to only exercise their powers for the purposes for which they were given.”
His Honour further found that the board’s admission of the members without constitutional authority was unfairly oppressive to the plaintiff as it deprived him of the use of the golf club he had been a member of for many years.
REMEDY AND COSTS
Having established that the conduct of the company was oppressive to the plaintiff, it was open to the Court to make orders under section 233 of the Corporations Act 2001, or in equity, voiding the admission of the Peninsula members and effectively undoing the merger.
The defendant pleaded an equitable defence of laches, acquiescence and delay arguing that the plaintiff’s delay in taking the action had meant that it would be unjust or unreasonable to grant the remedy sought. The defendant noted that the plaintiff was aware of the merger by December 2013 yet did not institute the proceeding until 24 August 2014 in circumstances where he knew the substantial expenses that were being incurred by the defendant and potential buyers of the Dingley land.
His Honour accepted the defendant’s defence finding that:
“The plaintiff has by his inaction and standing by, placed the defendant and third parties in a situation in which it would be inequitable and unreasonable to place them if the remedy of setting aside the merger would afterwards be asserted”
His Honour also took into account the fact that the majority of members had voted in favour of the merger when concluding that the relief sought by the plaintiff was unwarranted.
Typically, the unsuccessful party in a case pays the successful party’s costs but in this case each party was ordered to bear their own costs. His Honour found that although the plaintiff’s case was dismissed, he should not have to pay the defendant’s costs as he was successful on the oppression argument which was the issue that took up most of the time at the hearing.
REQUEST FOR INJUNCTIVE RELIEF PENDING APPEAL
The plaintiff has appealed. The plaintiff sought an injunction restraining the club from selling the Dingley land pending the hearing of the appeal. The injunction was not granted as the plaintiff could not establish that the granting of the order sought carried with it a lower risk of injustice if it should later be shown that the order should not have been made. The Court again referred to the substantial costs that would be incurred by the defendant and third parties if the merger or sale was halted.
CONCLUSION
The case highlights the importance of directors abiding by their company’s constitution even in circumstances where there is broad board and member approval to a course of action. The case also emphasises the need for oppressed parties to act swiftly when seeking to rely on the oppression remedy to challenge the actions of a company, particularly in situations where their delay in acting will cause the company or third parties to suffer loss or put themselves in a position of potential disadvantage.
If you do need any advice or assistance regarding the above, then please do not hesitate to contact Michael Bishop or Nicholas McCarthy .