The devil is in the detail

March, 2016

By Dan Mackay, Partner, Jacqueline Wang, Associate, and Jane Leong, Lawyer

Are you confident of what is required to transact the fundamental aspects of your organisation’s business?  You need to be.

The recent decision of the New South Wales Court of Appeal (NSWCA) in Alexander v Burne [2015] NSWCA 377 highlights the serious legal and practical issues that can arise from a lack of clarity and consideration in the drafting of a body’s constituent and/or governing documents.

The matter concerned the proposed merger of BDO’s Melbourne and Sydney offices with Grant Thornton and whether a resolution to approve the merger, had in fact approved it. The meeting had proceeded in April 2012 with 59 of 69 unitholders present.  44 voted in favour of the resolution, 3 voted against and 12 abstained, and the motion was declared carried.

The approval, or otherwise of the resolution, turned upon on the construction of the seemingly innocuous term ‘Special Majority’ in the unitholder deed of the BDO Kendalls Holding Unit Trust underlying the BDO business, and was heard as a separate question by the Primary Judge.  The Primary Judge ruled that it had been passed by the required ‘Special Majority’, holding that this was two-thirds of those present by proxy or in person at the meeting.  On appeal, the NSWCA overturned the Primary Judge’s decision, holding that the correct interpretation of the term ‘Special Majority’ in the context of the deed was two-thirds of all unitholders, and that therefore, 46 votes in favour were required and the requirement was not met.

The complexity of the submissions considered by the NSWCA, almost four years after the fact, reflects the complexity that can arise from a lack of clarity in documents concerning the fundamental aspects of a body’s operation.

Would 12 unitholders have sat on the fence if it had been clear before the meeting that the threshold was 46 in favour?  Would the meeting have proceeded or been adjourned to canvas more support?  How much time and money would have been saved if the relevant terms had been more clearly drafted?

The decision highlights the complexity that can arise from a lack of clarity in documents governing the fundamental aspects of a body’s operation, and the benefits of giving careful consideration to the relevant clauses of the body’s governing documents and seeking appropriate advice where the matters under consideration are contentious or high impact.

The Key Facts

BDO operated under a unitised trust structure pursuant to which members of the BDO partnership (Unitholders) were unitholders of the BDO Kendalls Holding Trust (Trust).  The relevant unitholders deed was entered into on 20 December 2007 (Deed).

On 27 April 2012, a meeting of the unitholders was called by the trustee of the Trust to consider a resolution to approve a proposed merger between Grant Thornton Australia Limited and the Melbourne and Sydney offices of BDO.  At the time, the BDO business was in significant financial difficulty and the Chair of the meeting indicated that it was faced with a merger with Grant Thornton or considering the future viability of the business and potential voluntary administration.

The Deed provided that any ‘Unitholder Matter’ (matters concerning significant and fundamental aspects of the Unitholders interests under the Deed) requires approval by a ‘Special Majority’‘Special Majority’ was defined in the Deed as ‘a vote of two-thirds or more (in number and not underlying equity) of the persons eligible to vote in respect of a resolution’.

As noted above, the meeting was attended by 59 in person or by proxy out of a total of 69[1]  unitholders.  On a poll 44 voted in favour of the resolution to approve the merger, 3 voted against and 12 abstained.  The motion was declared carried.

The Primary Judgment

Some 4 years later, the question of whether the resolution to approve the merger had been approved by the appropriate majority and in fact, validly passed, came before the Court.

Young AJA dealt with, as a separate question, the question of whether the resolution had been passed by a ‘Special Majority’ as required by the terms of the Deed, and found that a ‘Special Majority’ required a two-thirds majority of those present in person or by proxy.  As 44 had voted in favour and, on the Primary Judge’s reasoning that the threshold was 40 votes, the resolution was validly passed.

Young AJA, relying on his earlier decision in Cullen v Galloway Cattle Society of Australia Inc[2] and the decision of the English Court of Appeal in Knowles v Zoological Society of London [1959] 1 WLR 823, concluded that in the present case the requirement for a ‘Special Majority’ was met by two-thirds approval of those present at the meeting (in person or by proxy) rather than two-thirds approval of all unitholders eligible to vote.

In his reasons, Young AJA held that a unitholder’s eligibility to vote must be read in the context of the Deed and that a unitholder who declines to attend a meeting (either voluntarily or involuntarily) has submitted to the parts of the Deed which require a quorum and entitle a majority of those who are present and voting to make the decision.

On Appeal

On appeal, Tobias AJA (with Ward JA and Gleeson JA agreeing) overturned the decision of Young AJA, and held that approval by a ‘Special Majority’ in the present case required a vote in favour by two-thirds of all Unitholders.

In reaching their conclusion, the NSWCA placed particular reliance on the presence of the words ‘eligible to vote’ in the definition of ‘Special Majority’, interpreting this as referring to all Unitholders who have the right to vote at the meeting, contrasted with those ‘entitled to vote’ who are those present in person or by proxy.  In addition, the NSWCA also focused on the requirement in the Deed for a quorum of 75% to constitute a validly convened meeting, which, in effect, ensured that there would always be more unitholders present at a meeting than is necessary for a vote to be carried by ‘Special Majority’, and found that this was consistent with the appellant’s interpretation. The NSWCA also closely considered the fact that the outcome produced by the respondents’ interpretation would result in ‘Unitholder Matters’ – concerned with significant and fundamental aspects of Unitholder interests – being carried in circumstances where as little as 58% of all Unitholders had voted in favour, an unlikely intended consequence given the nature of the subject business and the terms of the Deed as a whole.

Key Takeaway

This decision highlights the importance of clarity in the drafting of governing documents such as constitutions, unitholder deeds and shareholder deeds, and the need for careful consideration of the mechanisms which are put in place to govern the fundamental elements and operations of the relevant body.

Voting provisions which are ambiguous can obstruct decision making, result in costly disputes or produce unintended outcomes.

You should ensure that any such provisions in your organisation’s key documents are clearly expressed and that you are confident they operate in the manner you understand in advance of transacting business.

Contact Mills Oakley

If you have any questions, please do not hesitate to contact:

 

mark-bland

Mark Bland | Partner 
T: +61 3 9605 0832
E: mbland@millsoakley.com.au


Or possibly 70.  No explanation is provided in the Judgments.

Cullen v Galloway Cattle Society of Australia Inc (1998) 27 ACSR 648

 

 

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