Rathner v Lindholm [2005] VSC 399
In the Commercial List of the Supreme Court of Victoria, Whelan J concluded that a deed administrator to whom a chargee agreed to assign shares, in contravention of pre-emption and disposal restrictions in the company's constitution and shareholders' agreement, has an equitable proprietary interest in them, subject to deferred issues, with his relief left undetermined [76], [101], [103].
What the court decided
ACTA owns about 57.5 per cent of the capital of AEPL, whose other shareholders are Newpage and Springwell, and Mr Rathner is ACTA's deed administrator [1]. In December 2001 ACTA gave Global a debenture charge over all of its assets, including its shares in AEPL [2]. Under clause 7(a) of the deed of company arrangement, Global and the Mays had agreed to cause $3.25m to be paid to Mr Rathner [40]. On 14 November 2003 Mr Rathner sued Global and the Mays, claiming payment of $3.25m from each [41]. On 17 August 2004 they entered into a settlement deed with him under which Global, as mortgagee in possession, purported to assign ACTA's shares in AEPL to Mr Rathner [3]. The transfer he forwarded to AEPL for registration has never been registered [56]. Receivers later appointed by Global entered into an agreement on 16 June 2005 under which, subject to conditions including court approval, they purported to deal with the shares [3]. Mr Rathner contended that the receivers had no power to deal with the shares [59].
Whelan J said that restrictions on transfer in a constitution apply to an equitable mortgagee, because the mortgagee can receive no more as security than the mortgagor has to transfer [18]. He rejected the submission that Mr Rathner lacked power to enter into the settlement deed, holding that he was empowered to take proceedings to enforce the deed of company arrangement and to compromise them [67]. He rejected the submission that clause 8 of the settlement deed, a consent to judgment, displaced clause 2.1, whose language is present and immediate [68]. He also rejected the objection based on a firm's lien over the share certificates: there was no effective assignment at law, but an equitable assignment could be given effect subject to an existing lien [71].
Counsel for Mr Rathner submitted that what was agreed was no more than a "change in control" [74]. His Honour did not accept Mr Rathner's position on this issue [76]. He found that the parties intended to assign the entire legal and equitable interest in the shares to Mr Rathner, and that this contravened the constitution and the shareholders' agreement [76].
The represented defendants proceeded on the basis that any assignment in contravention of those restrictions was necessarily entirely void, but his Honour said the trend of modern authorities is against that approach [77]. He held that the contention that an equitable interest can pass only where specific performance would be granted is not consistent with the authorities [91].
His Honour concluded from the authorities that a sale and transfer in contravention of pre-emption provisions is not a complete nullity, and the purchaser has no rights against the company [101]. The purchaser does have equitable proprietary rights which bind the vendor of the shares [101]. A vendor who receives a higher price as a result of compliance with the pre-emption provisions, or dividends or capital reduction proceeds, must account to the purchaser [101]. In a conflict with other shareholders wishing to enforce pre-emption rights, the equitable rights of those shareholders will almost inevitably prevail [101]. Many of the submissions of the fifth to ninth defendants, including those on Mr Rathner's conceded knowledge of the constitution and the shareholders' agreement, went properly to priority rather than to whether he obtained any interest [102].
At the request of all represented parties, issues concerning a 22 May 2003 settlement deed providing for cancellation of ACTA's shares in AEPL were deferred [37], [38]. In his conclusions thus far, his Honour held that, subject to those deferred issues, Mr Rathner has an equitable proprietary interest in the shares as a consequence of the assignment [103]. The relief, if any, to which Mr Rathner is entitled could not be determined until the position of Newpage and Springwell was further considered by reference to the May 2003 settlement, and perhaps the 16 June 2005 agreement [103].
Why it matters
A share transfer in breach of pre-emption provisions is not a complete nullity: the buyer has no rights against the company but may take equitable rights good against the seller, though those rights will almost always yield to other shareholders enforcing pre-emption. Anyone taking or enforcing security over such shares should check the constitution and any shareholders' agreement, as an equitable mortgagee is bound by restrictions on transfer in the constitution. The principles were stated by a single judge at trial with significant issues deferred, so this judgment does not record the final outcome between the parties.
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.