Alexander v Burne

1. [1]

   WARD JA: I agree with Tobias AJA.

2. [2]

   GLEESON JA: I agree with Tobias AJA.

3. [3]

   TOBIAS AJA: Prior to their merger in 2012, BDO and Grant Thornton were separate professional accounting firms. So far as the business of BDO was concerned, it operated under a unitised trust structure pursuant to which members of the BDO partnership were Unitholders (Unitholders) of the BDO Kendalls Holdings Unit Trust (Trust). The relevant Unitholders Deed (Deed) was entered into on 20 December 2007.

4. [4]

   On 27 April 2012 a meeting of the Unitholders of the Trust was held at the offices of BDO Sydney and BDO Melbourne. The meeting was called by BDO Group Pty Ltd (BDO Trustee), the trustee of the Trust, for the purpose of considering a resolution that approval be given to a proposed merger between Grant Thornton Australia Limited (the tenth respondent, Grant Thornton) and the Melbourne and Sydney offices of BDO (Resolution).

5. [5]

   As disclosed in the minutes, the meeting occurred in circumstances where the BDO business was in significant financial difficulty and was faced, in the view of the Chairman of the meeting, with a choice between merging with Grant Thornton or considering the future viability of the business and the possibility of voluntary administration. Addresses were made to the meeting about the terms of the Grant Thornton merger and the BDO business’ solvency.

6. [6]

   Fifty-nine Unitholders were present at the meeting, by person or proxy, out of a total of either 69 or 70 Unitholders. A quorum was declared because in accordance with cl 6.3(e) of the Deed, at least 75 per cent of all Unitholders were so present.

7. [7]

   Scrutineers were in attendance at the meeting in both Sydney and Melbourne. After the Resolution was put, the Unitholders voted by poll. The scrutineers announced the result of the poll as follows:

8. [8]

   There being no further business, the meeting was concluded. The businesses of BDO and Grant Thornton subsequently merged in accordance with the Resolution.

9. [9]

   The appellants were Unitholders of the Trust. They instituted proceedings claiming that the Resolution was invalid as the number of votes in its favour was less than two-thirds of the total number of Unitholders as required by the combined operation of cl 6.1(b) of the Deed and the definition of “Special Majority” in cl 1.1.

10. [10]

    The proceedings came on for case management before Young AJA who, on 5 March 2015, ordered the following question be determined separately pursuant to r 28.2 of the Uniform Civil Procedure Rules 2005 (NSW):

11. [11]

    The appellants contended for a negative answer to the Separate Question, whereas the first to ninth respondents, who are also Unitholders, and the tenth respondent (who was separately represented) sought an affirmative answer. The primary judge found in favour of the respondents and answered the Separate Question, “Yes”: Alexander v Burne [2015] NSWSC 345. The appellants now appeal to this Court on the sole issue as to whether the answer given by the primary judge was correct.

The primary provisions of the Deed

1. [12]

   The Deed made special provision in cl 6.2 with respect to what was referred to as Unitholder Matters. It provided as follows:

2. [13]

   The Unitholder Matter relevant to the present case was that referred to in cl 6.2(a)(iv). It is apparent that all the matters listed in cl 6.2(a) involve significant and fundamental aspects of the Unitholders’ interests under the Deed.

3. [14]

   It is in that context that the chapeau of cl 6.2(a) provided that Unitholder Matters must be determined by the Unitholders by a “Special Majority”. That term was defined in cl 1.1 of the Deed to mean:

4. [15]

   Clause 6.1 of the Deed was in the following terms:

5. [16]

   Clause 6.3 dealt with Unitholder Meetings. It relevantly provided:

6. [17]

   In their submissions the first to ninth respondents relied on a number of other provisions of the Deed to which I shall refer when recounting their contentions with respect to them.

The decision of the primary judge

1. [18]

   The primary judge relied on a statement of Chancellor Kent of New York in his commentaries on American law and on a decision of his own as well as a decision of the English Court of Appeal. Each of those cases depended upon their own facts although in his own decision (Cullen v Galloway Cattle Society of Australia Inc (1998) 27 ACSR 648), his Honour was concerned with the validity of a resolution of a council of an incorporated association whose constitution provided that a resolution of two-thirds majority of the council was required. The question was whether that meant two-thirds majority of those present and voting or two-thirds of the whole of the council members. His Honour held it meant the latter. In so finding, his Honour said (at 652):

2. [19]

   The approach of Chancellor Kent referred to was in these terms:

3. [20]

   In the decision of the English Court of Appeal referred to by his Honour (Knowles v Zoological Society of London [1959] 1 WLR 823), the constitution of the defendant Society provided that new by-laws could be made “if a majority of fellows entitled to vote” should vote in their favour. There were over 7,000 fellows in the Society. A meeting was held at which 3,034 fellows voted in person or by proxy. It was held on the facts that the word “majority” meant the majority of those present and voting. That is perhaps not surprising given the number of fellows of the Society. His Honour (at [27]) applied the result in Knowles to the present case.

4. [21]

   At [30] of his reasons, the primary Judge referred to a submission on behalf of the appellants which focussed on the word “eligible” in the definition of Special Majority. It was submitted that a vote (or the capacity to vote) is a right of property and a person who is eligible to vote cannot lose that right merely because he or she does not attend a meeting either in person or by proxy. His Honour’s response to that proposition was that:

The parties’ submissions on the appeal

1. [22]

   The appellants’ submissions may be summarised thus:

2. [23]

   The submissions of the first to ninth respondents may be summarised as follows:

3. [24]

   The tenth respondent made separate submissions in support of the construction for which the first nine respondents contended. Its submissions may be summarised as follows:

The Separate Question should be answered in the negative

1. [25]

   Without traversing all of the respondents’ submissions, I would reject them and accept those of the appellants. However, there are a number of points worth recording.

2. [26]

   In my opinion it is of significance that cl 6.3(e) provides that a quorum for meetings of Unitholders must be “at least 75 per cent of Unitholders present in person or by representative”. It is common ground that that refers to 75 per cent of the total number of Unitholders. It follows that as a Special Majority requires only a minimum of two-thirds of, relevantly, the Unitholders eligible to vote in respect of a resolution relating to a Unitholder Matter, there will always be present at a meeting more Unitholders (either in person or by proxy) than is necessary for a Special Majority vote of all Unitholders to be passed. Had the quorum requirement been less than two-thirds of all Unitholders, then there would be substance in the respondents’ submissions. In those circumstances even if all Unitholders present at the meeting voted in favour of a resolution, it could not be passed on the basis of the appellants’ construction unless at least two-thirds of all Unitholders attended the relevant meeting.

3. [27]

   In my view there is a difference between the requirement in the definition of Special Majority of a vote of two-thirds or more of the persons eligible to vote in respect of a resolution and the requirement of cl 6.1(a) that each Unitholder will be entitled to cast one vote at a meeting of Unitholders. It seems to me that the draftsman has specifically sought to distinguish between a Unitholder who is “eligible” to vote on one hand and a Unitholder who is “entitled” to vote on the other. Eligibility to vote assumes that a Unitholder has the legal right or capacity to vote if he or she attends a meeting either in person or by proxy. It looks to the future. On the other hand, a Unitholder’s entitlement to cast a vote requires the Unitholder to be present at the meeting either in person or by proxy. His or her entitlement arises by virtue of that presence. Importantly, cl 6.1(a) is a general provision applicable to any meeting of Unitholders irrespective of whether the subject matter calls for a Special Majority vote.

4. [28]

   Thus the first to ninth respondents conflate the requirements of eligibility and entitlement by contending that eligibility requires the Unitholder to be present, in person or by proxy, at the meeting at which the relevant resolution is part. In other words, the only Unitholders eligible to vote in respect of a particular resolution are those Unitholders who claim to be present in person or by proxy at the time the resolution is put to a vote. In effect the respondents were seeking to recast cl 6.1(b) by recasting it impermissibly adding at the end of the sub-clause the words “present at a meeting of Unitholders”.

5. [29]

   Although this contention was said to be supported by cl 6.1(a), in my opinion it is not. It deals only with entitlement to vote, not eligibility. To be entitled to vote the Unitholders must be present at the meeting in person or by proxy. So much is obvious but does not advance the respondents’ construction.

6. [30]

   As I have already observed, it is not without significance that there will always be more Unitholders present at a validly convened meeting of Unitholders than is necessary to pass a resolution by a Special Majority notwithstanding that that definition requires a vote of two-thirds or more of the Unitholders eligible to vote at such a meeting. Thus, contrary to the respondents’ submission that the appellants’ construction ignores cl 6.3(e), the quorum requirement of 75 per cent of all Unitholders supports the construction that for a resolution to be determined by Special Majority, two-thirds or more of all Unitholders eligible to vote have done so. There is no incongruity between the combined operation of cl 6.1(b) and cl 6.3(e) on the one hand, and cl 6.1(a) on the other.

7. [31]

   True it is that on the appellants’ construction two-thirds of all Unitholders must actually exercise their right to vote and do so in favour of the relevant resolution. But there is nothing untoward about that given that at least 75 per cent of the Unitholders must be present in person or by proxy for there to be a valid meeting at which the resolution is to be passed. It is noteworthy that cl 6.3(e) refers expressly to 75 per cent of Unitholders “present in person or by representative” whereas there is no such qualification in the definition of Special Majority. The respondents’ construction would require those words to be impermissibly read into the definition.

8. [32]

   As to the submission that the appellants’ construction could result in a block of Unitholders or even an individual Unitholder deliberately avoiding every meeting convened to consider a Unitholder Matter and continually stifling the consideration of that matter, that is not so. Only two-thirds of the Unitholders need to vote in favour of the resolution with respect to a Unitholder Matter, and that is less than the 75 per cent of Unitholders who must be present at the meeting to form a quorum. Of course, a meeting may be held with the necessary quorum but less than two-thirds of all Unitholders may vote in favour of the Resolution in which event it will fail.

9. [33]

   On the facts of the present case and assuming 69 Unitholders in total, a quorum complying with cl 6.3(e) required the presence, in person or by proxy, of 52 Unitholders. In fact, 59 were present. However, to pass the Resolution, only 46 votes in favour were required being two-thirds of 69. In other words, only 46 of the 59 present needed to have voted in favour for the Resolution for it to have been passed. On the respondents’ argument one needed two-thirds of 59, or 40 votes, for the Resolution to be passed, which is only 58 per cent of all Unitholders. In my view it is unlikely that given the nature of the provisions of cl 6.2(a) identifying the Unitholder Matters that must be determined by Special Majority, that it was intended by the draftsman that that requirement could be satisfied by a vote of only 58 per cent of all Unitholders.

10. [34]

    As noted at [17] above, the first to ninth respondents relied on a number of provisions of the Deed which, I note, were not specifically relied on by the tenth respondent. The first was cl 7.1 which provides, in effect, that the number of directors of the Board will not exceed eight. Clause 7.9(a) provides that a quorum for a meeting of the Board will be at least half of all the directors. Upon the assumption that there are eight directors, a quorum will be four directors. Clause 7.6 deals with voting of the Board. Clause 7.6(a) provides that each director is entitled to cast one vote in respect of any resolution put at a meeting of the Board. Clause 7.6(b) provides that, except for Special Board Matters (defined in cl 7.12), all Decisions of the Board will be by Simple Majority vote. I have referred to the definition of Simple Majority at [23(f)] above.

11. [35]

    It was submitted that if there was a Board meeting at which only four of the directors were present, thus satisfying the quorum requirement, and only two directors voted in favour of the relevant resolution, then it could not be passed as the Chairman of the Board, does not have a casting vote: cl 7.6(a). On the respondents’ argument, two votes would not be sufficient to constitute a Simple Majority. At least three members of the Board present in person or by proxy, would need to vote in favour of the resolution. On the appellants’ construction, five votes would be required. In my view, there is nothing unusual about either scenario.

12. [36]

    Contrary to the submission of the first to ninth respondents in the preceding paragraph, it is neither absurd nor results in the frustration of the Board’s business. It simply means that one more than the minimum number for a quorum must be present in person or by proxy for those matters of business that require a Simple Majority or, for that matter, a Special Majority. There is no incongruity in that. Furthermore, the argument breaks down if there are only an odd number of Board members such as seven. A quorum of four would then constitute a Simple Majority.

13. [37]

    Where a Special Board Matter is involved, cl 7.6(b) requires a Special Majority vote of the Board. If there are eight directors, on the appellants’ construction a resolution of a Special Board Matter could not be passed unless six directors voted in favour so that such a resolution could not be passed if only the minimum quorum of four directors were present at the Board meeting. Again, I see no incongruity in such a result. The quorum provision in cl 7.9(a) requires that “at least” half of all directors be present. If the Board proposes to deal with a Special Board Matter which requires, assuming there are eight directors, six directors vote in favour of the relevant resolution, then at least six directors must attend the meeting in person or by proxy, the latter being permitted by cl 7.7.

14. [38]

    The quorum provision applies to all meetings of the Board irrespective of whether or not they are dealing with a Special Board Matter or not. One can reasonably imagine that there are many decisions of the Board that do not require a Special Majority vote. If more than the minimum quorum is necessary to pass a resolution with respect to a Special Board Matter, then so be it. It certainly does not lead to any inconvenience, or inconsistency resulting in absurdity. Nor is there anything uncommercial as to the outcome.

15. [39]

    Reference was also made to cl 9 of the Deed relating to the Firm Council. Clause 9.1(a) provides that the Council is to consist of not more than six members. Clause 9.3(b) mandates a quorum for a meeting of the Firm Council of four council members. Clause 9.4(b) provides that all decisions of the Firm Council must be made by Special Majority. Two-thirds of six (assuming there are six council members) requires a vote of four council members to pass a Special Majority resolution. As the quorum for a meeting of the Firm Council is four, then all those present constituting a quorum must vote in favour of the resolution on the appellants’ construction. There is no incongruity in such a situation.

16. [40]

    Reference was then made to cl 10 of the Deed dealing with the Distribution Committee. Clause 10.1 provides that that Committee is to consist of a maximum of nine persons, being the Board and the Chief Executive Officer. Clause 10.3(b) provides that a quorum for a meeting of the Distribution Committee is three members. Clause 10.4(d) then provides that all Decisions of the Committee must be by unanimous vote. It was therefore submitted that, on the appellants’ construction, all nine Members of the Committee must vote in favour of any decision notwithstanding that only three Members of the Committee can form a quorum.

17. [41]

    It is noteworthy that cl 10.4(b) is in different terms to cll 6.1(b), 7.6(b) and 9.4(b), each of which requires a decision by Special Majority. Clause 10.4(b) requires decisions of a Distribution Committee to be made by unanimous vote. It is not necessary to apply the appellants’ construction of those provisions of the Deed requiring a decision to be made by Special Majority to cl 10.4(b). It is clearly open to construe that provision, as the respondents submit, as requiring a unanimous vote of the members of the Distribution Committee present at a meeting of that committee. Accordingly, if only three members of the Committee are present, and so form a quorum pursuant to cl 10.3(b), then the unanimous vote of all three may be sufficient for the purpose of cl 10.4(b). The provisions are different and, therefore, such a construction of cl 10.4(b) does not require adoption of the respondents’ construction in relation to those provisions of the Deed which require a Special Majority vote.

18. [42]

    The first to ninth respondents also relied on cl 6.3(d) which provides as follows:

19. [43]

    It was submitted that cl 6.3(d) was notable for specifying a situation in which the presence of all Unitholders is required as a consequence of the use of the expression “each Unitholder”. It was contended that in neither cl 6.1(b) nor in the definition of Special Majority, was there a reference to “each” person being eligible to vote (in the case of the definition of Special Majority) or of each Unitholder in cl 6.1(b). In my view, this type of parsing of the relevant provisions of the Deed is of no assistance in reaching a conclusion as to the proper construction of the relevant provisions.

20. [44]

    It is a matter of common sense that only the items specified in the notice convening a meeting of Unitholders should be considered at that meeting unless all Unitholders are represented at the meeting, and all agree otherwise. If that was not the case, then those Unitholders who did not attend a meeting either in person or by proxy, would be prejudiced as they would only have had notice of the agenda items referred to in the notice convening the meeting and thus would have a legitimate expectation that only those matters would be dealt with at the meeting. Importantly, cl 6.3(d) applies to all meetings of Unitholders irrespective of whether the matter in respect of which a Decision is sought requires a Special Majority vote. In my view, the first to ninth respondents gain no assistance from the wording of cl 6.3(d).

21. [45]

    Finally, the first to ninth respondents relied on cl 6.3(f), to which cl 6.3(e) is subject. It was accepted by the first to ninth respondents that the strength of the construction for which they contended and the essence of their case was based on cl 6.3(f) on the ground that one could have a reconvened meeting of Unitholders with a quorum of two as being sufficient to conduct any business that required the vote of a Special Majority.

22. [46]

    Under cl 6.3(f) a reconvened meeting of the Unitholders, where a quorum in accordance with cl 6.3(e) fails to eventuate, may be held with a quorum of only two Unitholders present in person or by proxy. It was submitted that if the appellants’ construction was correct, a Unitholder Matter could not be dealt with at such a reconvened meeting. This is clearly so. On the other hand, on the respondents’ construction, a decision regarding a Unitholder Matter could be implemented on the vote of only two Unitholders. Such a situation would, in my view, be clearly incongruous given the nature of the Unitholder Matters that must be determined by a Special Majority.

23. [47]

    Significantly, a reconvened meeting, albeit with only two Unitholders forming a quorum, still has work to do – such as dealing with the Unitholder Matters referred to in cl 6.2(b), neither of which requires a Special Majority vote. There is no limitation on the business that can be conducted at a reconvened meeting of Unitholders as cl 6.3(f), like the other provisions of cl 6.3, does not differentiate between different kinds of matters to be considered at Unitholder meetings. There are, no doubt, many matters that could be considered at a reconvened Unitholder meeting which do not require the vote of a Special Majority or for that matter a Special Majority as defined, but only the vote of a Simple Majority as that expression is ordinarily understood, and the contrary was not suggested. There is no logical reason why the reduced quorum requirement in cl 6.3(f)(iv) should, as a matter of construction, govern the interpretation of a Special Majority vote in cl 6.1(b).

24. [48]

    As to the tenth respondent’s “plug in” argument, I cannot accept that the words “of the Unitholders” have no work to do. The words in the definition “persons eligible to vote in respect of a resolution”, when “plugged in” to cl 6.1(b), do not require any manipulation of the provision. In its context, the “persons” referred to in the extended cl 6.1(b) are clearly the Unitholders, as it is the vote of the Unitholders to which the sub-clause refers. Furthermore, the sub-clause is concerned with a resolution of the Unitholders. The only word which does become surplusage on the “plug in” argument, is the word “vote”. But in my view that does not detract from the clear meaning of the sub-clause.

25. [49]

    Furthermore, reading cl 6.1(b) in conjunction with cl 6.1(a) takes the matter no further. Given that the Unitholders can only vote at a meeting which complies with the quorum requirement of cl 6.3(e), the effect of cl 6.1(a) is merely to provide that each Unitholder will only be entitled to cast one vote at the meeting irrespective of the number of units held. It seems to me that that fact is neutral in terms of competing constructions given that a vote at a meeting can only be that of a Unitholder who is present in person or by proxy. The tenth respondent’s submission that when cll 6.1(a) and (b) are read together, the Unitholders referred to in cl 6.1(b) are those referred to in cl 6.1(a) and are the persons who are entitled to vote at a meeting, states the obvious but, again in my view, takes the matter no further.

26. [50]

    I have already referred to the decisions of the English Court of Appeal in Knowles relied upon by the primary judge and by the appellants at [22(a)] and [22(b)] above. The case requires careful consideration. The Society’s by-laws provided that the “fellows have the right to be present and to vote at all general meetings”. They there provided, in effect, that a resolution will be confirmed “if the majority of fellows entitled to vote” shall vote in its favour.

27. [51]

    Lord Evershed MR said this (at 827):

28. [52]

    His Lordship rejected the trial judge’s construction on a number of grounds relating to context, of which one was as follows (at 828):

29. [53]

    His Lordship then proceeded to illustrate the practical difficulties in adopting the trial judge’s construction as concluding (at 829) that those difficulties were of so great a magnitude as to justify the use of the word “absurdity” to which he added (at 830) “inconvenience”, “repugnance” and “inconsistency”.

30. [54]

    In my view none of these epithets applies to the present case where one is dealing with a relatively limited number of Unitholders whose eligibility to vote was easily ascertainable.

31. [55]

    Accordingly, in my opinion, the Resolution in the present case required that two-thirds of the 69 Unitholders should vote in favour. That required a vote of 46 Unitholders. Some 59 Unitholders were present so that the quorum provisions of cl 6.3(e) were satisfied. But only 44 voted in favour which was two less than what, in my view, was required for the Resolution to be passed.

Conclusion

1. [56]

   It follows from the foregoing that the primary judge erred in answering the Separate Question in the affirmative. In my opinion it should have been answered in the negative. I would therefore propose the following orders;

   1. (1)

      Appeal allowed.

   2. (2)

      Set aside the affirmative answer of Young AJA to the Separate Question.

   3. (3)

      Answer the Separate Question, “No”.

   4. (4)

      Remit the proceedings to the Equity Division of the Supreme Court of New South Wales for directions consistent with these orders.

   5. (5)

      The respondents to pay the appellants’ costs of the Separate Question hearing before Young AJA and of the appeal, but to have with respect to the latter, a certificate under the Suitor’s Fund Act 1951 (NSW), if otherwise qualified.