Angelis as trustee for the Angelis Family Trust v Pemba Capital Partners Fund I Partnership, LP

1. [1]

   I am part heard in these proceedings which concern, among other things, a dispute between the shareholders of the sixth defendant, Coverforce Pty Ltd. Coverforce is Australia’s largest unlisted insurance broker. The business now carried on by Coverforce was founded in 1994 by the first plaintiff, Mr James Angelis.

2. [2]

   Prior to the events with which these proceedings are concerned, the shareholders in Coverforce were Mr Angelis and the remaining plaintiffs, who are three senior employees of Coverforce, (the “Angelis Parties”) as to 51% and the first and second defendants (together, “Pemba”) as to 49%. Pemba is a private equity investor.

3. [3]

   There is also dispute as to whether:

   1. (1)

      the third to fifth defendants (the “Kitchin Parties”) are now also shareholders in Coverforce; and

   2. (2)

      Coverforce has, through the Kitchin Parties, acquired from Suncorp Insurance Services Ltd the business of Suncorp’s then subsidiary, Resilium Pty Ltd.

4. [4]

   I have heard evidence and submissions over 13 days since 28 October 2019. Two further days have been allocated next week for hearing evidence and submissions on a remaining question.

5. [5]

   That question is, speaking very broadly, the value of the shares in Coverforce. The Court has appointed an independent expert, Dr Hung Chu from Lonergan Edwards & Associates, to express an opinion on that question.

6. [6]

   It has emerged that to assist Dr Chu to deal with that question it would be convenient for me now, and in advance of delivering a final judgment in the proceedings, to express an opinion about the proper construction of a provision of a shareholders agreement executed by the Angelis Parties, Pemba and Coverforce in November 2017.

The question

1. [7]

   Accordingly, I have ordered, pursuant to r 28.2 of the Uniform Civil Procedure Rules 2005 (NSW), that the following question be decided separately and in advance of any other question in the proceedings:

2. [8]

   The answer turns on the proper construction of the relevant provisions in the 2017 Shareholders Agreement.

Principles relevant to construction of commercial contracts

1. [9]

   The relevant principles were recently restated by the High Court of Australia in Rinehart v Hancock Prospecting Pty Ltd; Rinehart v Rinehart [2019] HCA 13 at [44] (Kiefel CJ, Gageler, Nettle and Gordon JJ):

Decision

1. [10]

   In my opinion, the answer to the question is that compliance with cl 9.1 only requires that the party seeking an Exit have the intention of achieving an Exit that maximises Shareholder value; not that the Exit in fact maximise Shareholder Value.

2. [11]

   Clause 8 of the 2017 Shareholders Agreement provides that, with irrelevant exceptions:

   1. (1)

      A “Management Shareholder” (that is, any one of the Angelis Parties) cannot dispose of their shares in Coverforce without Pemba’s consent; whereas,

   2. (2)

      Pemba can freely dispose of its shares in Coverforce.

3. [12]

   Clause 9 gives Pemba a further right.

4. [13]

   It provides:

5. [14]

   Schedule 3 of the 2017 Shareholders Agreement, referred to in cl 9.4, if enlivened gives the Angelis Parties the right to purchase Pemba’s shares at “the price per Share relating to the proposed Exit”.

6. [15]

   The agreement defined “Exit” as a “Share Sale or IPO”.

7. [16]

   Clause 9.3(b)(2) contains what the parties referred to as Pemba’s “Drag Right”. The effect of the Drag Right is that if Pemba wishes to sell its shareholding in Coverforce, it can require the Angelis Parties to sell their shares to Pemba’s purchaser at the same price and on the same terms.

8. [17]

   Exercise of the Drag Right would enable Pemba to deliver to its purchaser control of Coverforce. That may well enable Pemba to negotiate a “control premium” with its purchaser. Of course, such a premium would enure for the benefit of the Angelis Parties as well as for Pemba.

9. [18]

   Pemba accepts that cl 9.1 manifests the objective intention of the parties that, on seeking an Exit under cl 9, Pemba must have the intention to achieve an Exit that maximises value for all shareholders in Coverforce.

10. [19]

    The question is whether it also imposes on Pemba an obligation to achieve that result.

11. [20]

    In my opinion, it does not.

12. [21]

    I see the fundamental point to be that the language used by the parties in cl 9.1 is not that of obligation. It is the language of a recital. Clause 9.1 recites what, at the date of the agreement, the parties agreed should be Pemba’s intention if and when it exercised its right under cl 9. Although cl 9.1 refers to the intention “of the parties”, only Pemba’s intention could be relevant.

13. [22]

    It is obvious that the parties would have the intention that an Exit by Pemba maximise shareholder value. It would be in their mutual interests that it do so.

14. [23]

    The Angelis Parties contend that cl 9 of the Shareholders Agreement should be construed so that cl 9.1 “conditions” exercise by Pemba of its Drag Right and thereby imposes an obligation on Pemba “to achieve an Exit which maximises Shareholder value”.

15. [24]

    But that is not what cl 9 says.

16. [25]

    The only conditions to the exercise by Pemba of its Exit price expressed in cl 9 are the giving of a “Sale notice” in accordance cl 9.2 and the statement in cl 9.3(a) that, once a Sale notice is given, implementation of it is “[s]ubject to clause 9.4”.

17. [26]

    Clause 9.4 gives the Angelis Parties the right to acquire Pemba’s shares at the same price as Pemba is proposing to sell them if that price is less than a specified multiple of Coverforce’s EBITDAE.

18. [27]

    The Angelis Parties submitted, by reference to evidence led in the proceedings, that this “is not within the range of reasonable valuations for the company”. That may be what the Angelis Parties now believe. But it is irrelevant to the question of construction.

19. [28]

    The language used by the parties in cl 9 shows that the protection to which the Angelis Parties agreed in relation to any exercise by Pemba of its Exit right was the pre-emptive right in cl 9.4.

20. [29]

    If the parties had intended that the Angelis Parties have the further protection of an obligation on Pemba actually to “maximise Shareholder value” they could have said so. Instead, rather than using the language of obligation in cl 9.1, they used the language of subjective intention.

21. [30]

    The Angelis Parties submitted that the reference in cl 9.1 to “maximis[ing]” shareholder value “imports a requirement to compare the proposed exit with other practical or available exit options” and pointed to an “alternative scenario of allowing the Resilium Venture to proceed to an IPO in two years’ time, as envisaged by the Resilium Transaction” and to Pemba “undertaking a sale without competitive pressure, in the context of an ongoing shareholder dispute”.

22. [31]

    The first difficulty with that submission is that the words of cl 9 of the 2017 Shareholders Agreement have no relevance to the “Resilium Transaction” which, if it is to proceed at all, cannot proceed under the 2017 Shareholders Agreement, but only under one or other later purported shareholder agreements; none of which contains the Drag Right.

23. [32]

    In any event, the language used by the parties does not suggest they envisaged the spectre of the potentially complex exercise that this submission suggests.

24. [33]

    The language used by the parties suggests that they intended that Pemba have in cl 9 a certain path to Exit, additional to that available to it in cl 8 (which relates only to its own shareholding), without the need to engage in “a contentious and complex valuation exercise about whether the proposed Exit maximised Shareholder value compared to other hypothetical alterative Exit pathways” (to adopt the language of Pemba’s submissions).

25. [34]

    The Angelis Parties also sought to draw in aid evidence that Mr Angelis gave as to his reasons for agreeing to Pemba’s investment in Coverforce under an earlier shareholders agreement, which the 2017 Shareholders Agreement is expressed to amend and restate.

26. [35]

    But Mr Angelis’s subjective intentions are incapable of relevance to the construction question here.

27. [36]

    For those reasons I declare that, on the proper construction of cl 9 of the Shareholders Agreement made on 29 November 2017 between the plaintiffs and the first, second and sixth defendants: