Knights Quest Pty Ltd v Daiwa Can Company [2018] VSCA 349
The Victorian Court of Appeal granted leave to appeal but dismissed appeals from a winding up order and the dismissal of an oppression claim under the Corporations Act 2001 (Cth), holding that the good faith and reasonable endeavours clauses in the shareholders' deed, read against the parties' common understanding that the majority shareholder would keep its own competing business, did not stop it competing with the company, and that its competition and steps to protect its business were not oppressive.
What the court decided
Barokes Pty Ltd produces and sells wine in a can [2]. Daiwa Can Company is a Japanese can manufacturer [2]. It bought 60 per cent of Barokes in 2012, and Knights Quest Pty Ltd and SMS Management Pty Ltd, together called the applicants, held the remaining shares [1], [3]. Monde Shuzo Co Ltd, later a Daiwa subsidiary, ran a business competing with Barokes [2]. The shareholders' deed contained no non-compete clause, but it required each shareholder to act in good faith so as to achieve the company's objectives and each party to use reasonable endeavours to ensure that the business was conducted in accordance with the business plan [5], [22].
Once the relationship broke down, Daiwa sought a winding up under section 461(1)(k) of the Corporations Act 2001 (Cth) [7]. The applicants in turn sought an order under section 233(1)(d) that Daiwa buy their shares [8]. Sifris J heard the two proceedings together, ordered the winding up and dismissed the oppression proceeding [9]–[10]. Beach, Kyrou and Hargrave JJA, in joint reasons, rejected every proposed ground of appeal and refused to let the applicants run a different contract case, inconsistent with the one put at trial [108], [122]–[123], [126], [140], [156].
On the contract claim, the case run at trial, the Court held, was in substance that the two clauses obliged Daiwa to stop competing with Barokes and to have Monde take a licence, and it was precisely the case the trial judge decided [109]–[110]. His unchallenged findings were that the pre-contractual agreements the applicants alleged were never made, and that the parties commonly understood that Daiwa and Monde would carry on their own business after the deed [112]. Their Honours found that context supported by non-compete clauses binding the vendors in the share purchase agreement and the founders of Barokes, Gregory Stokes and Steven Barics, in their service agreements, set against the deed's silence [2], [23], [25], [117].
Construed in that context, the clauses could not bar Daiwa, directly or through Monde, from competing with Barokes [119]. Daiwa's steps to protect its business from Barokes' allegations of patent infringement therefore did not breach them [120]. Given the unchallenged finding of deadlock and the absence of any breach of the deed, the winding up order was right [121].
The Court refused to let the applicants argue on appeal that the clauses, while not barring competition outright, limited the steps Daiwa could take to promote its and Monde's business where those steps harmed Barokes [122], [126]. That case had not been run at trial and turned on fact and degree; Daiwa would have cross-examined differently and no findings had been made on it [123], [125]–[126]. The refusal applied the principles the Court had summarised on new points [92]–[94], [126].
On oppression, the Court said that the compound test in section 232, of conduct oppressive to, unfairly prejudicial to or unfairly discriminatory against a member, is concerned with commercial unfairness, tested objectively through the eyes of a commercial bystander [130]. A majority shareholder can be found to have acted oppressively without breaching any contract [142].
The applicants' sixth ground invoked Scottish Co-Operative Wholesale Society Ltd v Meyer [1959] AC 324 (‘Scottish Co-Op’) [127]. They relied on its similarities to this case for an oppression claim independent of the contract claim [142]. In that case the House of Lords had found oppression [146]. The Court distinguished that case: there the majority holder (the Society) and the subsidiary it formed with the minority shareholders had not competed before and the Society set out to destroy the subsidiary's business, whereas Barokes knew that Daiwa already competed with it through Monde and no such policy was shown [147]–[148]. The Court also noted that the relationship there had been treated by Lord Keith of Avonholm as a partnership, whereas this deed said the parties were neither partners nor fiduciaries [153].
Their Honours held that the trial judge's conclusion of no oppression was inevitable given the parties' common contemplation, part of the factual matrix, that Daiwa would continue its business via Monde [150]. Since Daiwa was free to compete, the trial judge was right, they held, to find its actions reasonable and not commercially unfair, because they were directed at protecting its business from Barokes' legal attacks [150].
The opposition of Daiwa's nominee directors to a resolution to sue Daiwa and Monde was not oppressive either, given Daiwa's freedom to compete and the deed's nominee directors clause, which entitled nominees, subject to their duties as directors, to represent their nominating shareholder's interests and act on its wishes [22], [151]. A broader complaint that the nominees did not even purport to act in Barokes' interests was rejected because it had not been put at trial [152]. The Court found it unnecessary to choose between the differing views in Scottish Co-Op on what amounts to the conduct of a company's affairs [154]. Because the grounds were arguable, it granted leave to appeal, but it dismissed the appeals [156].
Why it matters
General promises of good faith and reasonable endeavours were read here against what the parties knew when they signed, with restraints binding others in the companion documents supporting a reading that left Daiwa able to carry on its own business [117], [119]. The result rested on unchallenged findings that the competition already existed and was known when the deed was signed [64], [112]. A client who wants a co-venturer kept out of the company's market should bargain for an express restraint.
The decision does not hold that conduct consistent with a deed can never be oppressive [142]. Central to the result was that Daiwa's conduct neither breached the deed nor departed from the parties' common contemplation [154].
In my view the sharper lesson is about how a case is run. A claim that general good faith or reasonable endeavours clauses limit how a party may compete, short of barring it, is likely to turn on fact and degree (as the Court said this one did) and belongs at trial; the Court refused one first raised on appeal because Daiwa would have run its case differently and no findings had been made [125]–[126].
The provisions are described as the Court applied them; readers should check their current text.
Numbers in square brackets are paragraph numbers of the judgment. This note summarises a decided case for education and is not legal advice. See how the notes are written.