O'Donnell v Thor Industries Pty Ltd [1977] HCA 28; (1977) 136 CLR 296 (7 June 1977)

HIGH COURT OF AUSTRALIA

O'DONNELL v. THOR INDUSTRIES PTY. LTD. [1977] HCA 28; (1977) 136 CLR 296

Companies

High Court of Australia
Barwick C.J.(1), Stephen(2), Mason(3), Jacobs(4) and Aickin(5) JJ.

CATCHWORDS

Companies - Shares - Memorandum of association - Construction - Special class of shares - "Employee shares" - Employee shareholder required upon termination of employment to transfer shares as directed by governing director - Right to consideration for transfer.

HEARING

Melbourne, 1977, May 6, 9.
Sydney, 1977, June 7. 7:6:1977
APPEAL from the Supreme Court of Victoria.

DECISION

June 7.
The following written judgments were delivered: -
BARWICK C.J. These appeals involve the construction of a clause in the upon its true construction that clause entitles the appellant O'Donnell to refuse to execute a transfer of a share in the capital of the company of which he is at present the holder. (at p298)

2. The terms of the clause of the memorandum are fully set out in the reasons for judgment of other members of the Court, which I have had the advantage of reading. I am in agreement with the conclusion reached by my brother Stephen and with the reasons which support that conclusion. (at p298)

3. I would merely add that it is of the nature of a share in the capital of a limited liability company that the rights it confers are determined by the memorandum and articles of association to the extent that they specify those rights and are not inconsistent with any relevant statutory provision. No doubt such a share is an item of property: but its extent and significance as such may depend upon the terms of the constating instruments of the company. (at p298)

4. In this instance, the memorandum determined that upon loss of employment by the holder of an "E" class share, that holder could no longer hold the share and was bound to transfer it to the employee nominated by the governing director of the company or, in default of such a nomination, to the governing director. To require a transfer in pursuance of that provision of the memorandum is not, in my opinion, to expropriate the erstwhile employee holder, for his share at that stage did not entitle him in the circumstances to continue to hold it. Further, the obligation laid upon him at the time he ceased to be an employee was to transfer the share: not to sell it. Consideration is not an essential of a transfer as it would be in the case of a sale. (at p298)

5. I am unable to construe the memorandum as entitling the holder of an "E" class share, who has ceased to be employed by the company and who has received the appropriate direction, to withhold a transfer of the share to the nominated person until he is paid a sum of money. I have no need to expand on the difficulties of attempting to quantify such a sum. (at p298)

6. In my opinion, each appeal should be dismissed. (at p298)

STEPHEN J. The appellant, then an employee of Thor Industries Pty. Ltd., applied for and had allotted to him in June 1964 850 class "E" shares in the capital of that company. For these he paid in full on allotment, having at the time received the necessary sum of 850 pounds by way of gift from the governing director of the company, a Mr. K. L. Thompson. He became registered as the holder of the shares and received a scrip certificate in respect of them. (at p299)

2. Some years later, in July 1971, Mr. O'Donnell's employment with the company was terminated. A question thereupon arose concerning his holding of shares. These shares are described in the memorandum of association of the company only as class "E" shares and cl. XIV of the memorandum is devoted to them. That clause reads as follows: -

"XIV. Shares of the Class "E" shall bear equal voting
rights with shares of the class "G" share for share, and shall
bear no less dividend rights than shares of the class "G"
provided always that such shares may only be issued to and
held by employees of the Company so long as such holder
remains in the employment of the Company and upon the
termination of such employment for any reason whatsoever
such shares shall be transferred to such other employee or
employees in part or in whole as the Governing Director shall
direct, and in the event of no such employee or employees
being nominated or directed by the Governing Director, then
such shares shall be transferred to the Governing Director." (at p299)

3. Correspondence concerning these shares of his passed between Mr. O'Donnell and Mr. Thompson; this it is unnecessary to describe in any detail, suffice it to say that ultimately Mr. Thompson, in purported reliance upon cl. XIV, directed that the shares be transferred to another employee of the company, one Harding. Initially Mr. Harding offered $1,600, their par value, for this parcel of shares but nothing came of this offer, perhaps not surprisingly since they were valued as at 30th June 1971 at $24,480 for the parcel of 850 shares. At all events Mr. O'Donnell remained, and still is, the registered holder of these shares and it is this which has given rise to this litigation. (at p299)

4. Two actions were instituted concerning the shares. In one Mr. O'Donnell was plaintiff and the company and Mr. Thompson were defendants; in the other the positions were reversed save that in that case Mr. Thompson was not a party. In these actions rival declarations were sought as to the interpretation and effect of cl. XIV of the memorandum of association of the company. The actions were heard together and at first instance Mr. O'Donnell was successful in obtaining a declaration that a requirement that he transfer his shares at par value could not lawfully be imposed upon him and that he was not obliged to transfer his shares otherwise than at their fair market value; certain consequential orders were made. The company's action was dismissed. (at p300)

5. The company's appeals to the Full Court of the Supreme Court of Victoria in each action were allowed and the learned trial judge's orders set aside; in the company's action the Full Court's order included a declaration that Mr. O'Donnell had not since August 1971 been entitled to remain as a shareholder and an order that he do forthwith transfer to Harding for no consideration the 850 class "E" shares held by him. (at p300)

6. It is essentially that aspect of the order requiring transfer without consideration that the appellant now challenges on his appeals to this Court. The submissions urged on his behalf were, first, that despite cl. XIV the appellant, upon termination of his employment, nevertheless retained a "power to contract" for the sale of his class "E" shares and, secondly, that he was entitled to receive in return for the transfer of those shares payment of their market value. Of these two propositions the first does not, I think, pave the way for the second; instead they are to a degree mutually inconsistent. The first treats cl. XIV as leaving to the appellant some residual rights of ownership in the shares, at least the right to contract for their sale, although the precise content of this right was not clearly spelt out in argument. Does it, for example, include a power to demand whatever price the appellant chooses to ask for? If not it may be a quite illusory right. If it does it is capable of defeating the power to direct a transfer of the shares since, if the asking price is pitched high enough, no transferee will buy the shares. The second proposition appears to depend upon no question of any retention of rights of ownership; instead it adds to cl. XIV an implied term, that the transferee is to pay for the shares a particular amount, not to be arrived at by negotiation but being predetermined, regardless of the parties' wishes, as the fair market value of the shares, that presumably to be ascertained by a valuation made on some unspecified basis. (at p300)

7. Clause XIV is concerned with a definition, however inadequate, of the rights conferred upon the holders of class "E" shares. For present purposes it is its so-called proviso which is relevant, a provision which does not in fact qualify the provisions as to voting and dividend which precede it but is instead designed to ensure that only those who are for the time being employees of the company shall hold shares of this class. It does this by two measures, first the requirement that such shares may only be issued to and held by employees; secondly the requirement that upon termination of employment those shares shall be transferred to such other employees as the governing director may direct or, failing any such direction, to the governing director himself. (at p301)

8. It is this second requirement that produces consequences more far-reaching than might appear at first sight. It does so because it strikes at an important incident of ownership, freedom to retain or to dispose of property as the owner pleases; this is lost once the obligation to transfer takes effect, as it will upon termination of employment. Were that obligation coupled with a stipulation as to the price payable on transfer, the owner, while losing both his right to retain ownership and also his right to demand whatever price he chooses, would at least be assured of receiving the stipulated price. However in the absence of such a stipulation the position is that much the worse for the owner; there is no price upon the payment of which he may insist, instead the obligation imposed upon him to transfer to a nominated person effectively deprives him of all bargaining power and hence of all opportunity to get what he can by way of purchase price from the person so nominated. Since the transferee will know that the transferor is compelled to transfer to him and to him alone and to do so then and there, there will be no occasion to offer anything by way of purchase price; the transferor's want of power to refuse to transfer will be fatal to the striking of any bargain. (at p301)

9. Whether or not the obligation to transfer is coupled with a right, express or implied, to receive some stipulated payment in return for parting with the shares, it leaves no room for the retention of a so-called right to enter into a contract of sale. If that right is to have any effective meaning it must be that the appellant retains a power to bargain, but in this case cl. XIV ensures that the transaction will not truly be one by way of bargain and sale; the transferee will take not as a purchaser but rather as the object of the nominator's power to nominate, as the beneficiary of an involuntary disposition. (at p301)

10. I accordingly regard this second requirement of the proviso to cl. XIV as inconsistent with the retention of any effective power to contract as to the sale of class "E" shares. (at p301)

11. The appellant's second submission, that cl. XIV being silent as to transfer price, this is an appropriate case in which to imply some term as to payment of a reasonable price, fares no better. The fact that no term as to price appears in cl. XIV can, of itself, be no ground for the making of such an implication. The fact of omission is not enough to invoke the process of making good by implication, and there is in my view no other ground for the making of the necessary implication. By none of the accepted tests can this be shown to be a case requiring any term to be implied. (at p302)

12. Some reliance was placed upon what was said to be the apparent injustice, perhaps even the absurdity, of the operation of the clause in the absence of some such implied term. But this presupposes that a holder of class "E" shares will have found their purchase price out of his own funds. In fact cl. XIV is by no means necessarily predicated upon that assumption. The memorandum and articles of association reveal this company to be the very archetype of a private company wholly controlled by its governing director. What in fact occurred in this case, the subscription money for these class "E" shares being supplied by the governing director, may well have been what was in contemplation when cl. XIV was adopted, little practical difference being seen to exist between moneys of the company and the governing director's own funds. (at p302)

13. The concluding words of the clause do, in any event, provide a substantial obstacle in the path of any process of implication. They contemplate a transfer of class "E" shares to the governing director himself in default of any direction or nomination of a third party. It is highly unlikely to have been intended that he sould, as it were, be taken to hold out a standing offer at all times and from his own pocket to pay the fair market value of the class "E" shares of any resigning or dismissed employee whenever no continuing employee prepared to take such shares at that price is to be found. (at p302)

14. To imply a term such as that suggested only appears consistent with notions of general fairness upon the assumption that the initial payment for the shares has come from the funds of the employee. On the contrary assumption, which happens to coincide with the actual facts of this case, the suggested implied term may work manifest unfairness, especially where an employee's period of employment is but brief. (at p302)

15. In conclusion on this aspect it is to be remarked that the nature of the term sought to be implied is one involving payment of the "fair market value" of these shares. There will be no established market for any of the shares of this company, still less for shares of this particular class, and ascertainment of their fair value would present difficulties even greater than those customary in the valuation of shares in a proprietary company; art. 6 of the company's articles of association confers upon the directors a power at any time to compel any shareholder to transfer his shares of any class; to this must be superadded the prospect of the shares being divested on termination of employment and of confinement of the right of transfer, even during the continuance of employment, to fellow employees only. It is by no means clear to me that, were it appropriate to imply any term into cl. XIV, a term simply calling for payment of fair market value, without supplying detailed provisions as to valuation and the basis of that valuation, could ever be accepted as appropriate for that purpose. (at p303)

16. Two provisions contained in the company's constituting documents require final comment. Clause XIV imposes upon the holder of class "E" shares, while still an employee, no restraint upon his ability freely to dispose of them to a fellow employee on such terms as may be agreed upon, subject only to the general restrictions upon transfer common to proprietary companies. This however, involes no inconsistency as compared with the absence of all such rights once the employment is terminated; so long as he remains an employee his obligation to transfer as directed by the governing director does not take effect, it is only upon it taking effect on termination of that employment that the ability to bargain and sell comes to an end. If the purpose of cl. XIV be to ensure that class "E" shares do not pass out of the hands of the class of persons consisting of existing employees of the company there is no reason to restrict transfers as between members of that class but every reason to provide for expropriation of shares when a holder ceases to be an employee. It may be observed in passing that any transfer of class "E" shares as between existing employees is likely to take place only at a relatively low price since the worth of such shares resides exclusively in the entitlement to dividends which they confer and the declaration of dividends is exclusively within the control of the governing director. (at p303)

17. As already mentioned art. 6 empowers the directors to require any shareholder to transfer his shares to a nominated member of the company and provides, in that event, for payment of the "value" of such shares as determined by the auditor or an arbitrator. The existence of this provision for payment on involuntary disposition, applying as it does to the case of shares generally, casts, I think, no light upon the interpretation of cl. XIV. Certainly it affords no support for the appellant's contentions. (at p303)

18. In my view the order of the Full Court should stand. I would dismiss these appeals. (at p303)

MASON J. I would dismiss these appeals for the reasons given by Stephen J. (at p304)

JACOBS J. The memorandum of association of the respondent company contains the following clauses:

"IX. The capital of the Company shall be FORTY
THOUSAND POUNDS divided into forty thousand ordinary
shares of One Pound each, and such shares shall be further
divided into the Classes hereinafter set forth: -
(a) Governing Directors shares hereinafter referred to as
"G" Shares.
(b) Employees shares hereinafter referred to as "E"
Shares.
(c) Standard shares hereinafter referred to as "S" Shares,
and such class shall be of such number and such proportion
and bear such rights save as otherwise herein expressly
provided or negatived as shall from time to time be decided
by the Directors, and in the event of the Company increasing
its capital the further shares created by such increase shall
be of such class and bear such rights as the Director or
Directors shall determine."
"XIV. Shares of the Class "E" shall bear equal voting
rights with shares of the class "G" share for share, and shall
bear no less dividend rights than shares of the class "G"
provided always that such shares may only be issued to and
held by employees of the Company so long as such holder
remains in the employment of the Company and upon the
termination of such employment for any reason whatsoever
such shares shall be transferred to such other employee or
employees in part or in whole as the Governing Director shall
direct, and in the event of no such employee or employees
being nominated or directed by the Governing Director, then
such shares shall be transferred to the Governing Director." (at p304)

2. At a meeting of the board of directors held on 29th June 1964 there were allotted to the appellant 850 "E" class shares pursuant to a resolution of the board which so far as is relevant was as follows:

"The Meeting agreed upon the acceptance of the
applications of the following for Class "E" Ordinary Shares.

Lawrence William Thomas GARDINER - 850
Class "E" Shares
Michael Fitzgerald GALE - 850
Class "E" Shares
Peter Michael O'DONNELL - 850
Class "E" Shares
It was resolved that the Seal of the Company - when
consideration of payment in full thereof is received for the
abovementioned shares - be affixed to the Scrip to issue in
respect of the abovementioned Allotment of Shares."

The shares were issued fully paid in cash. In fact the cash came from the second respondent the governing director but that is not relevant. It is not claimed that the appellant held the shares in trust for the governing director. (at p305)

3. The appellant ceased to be an employee of the respondent company in July or August 1971. Clause XIV then came into operation. The question on these appeals is whether on the transfer of the shares envisaged by that clause the appellant is on the true construction of the clause disentitled to any payment for the shares transferred. The primary judge held that he was not and that he became entitled to be paid a price equal to the fair value of the shares; the Full Court on appeal held that he was not entitled to any payment. (at p305)

4. The approach of the Full Court is summarized in the following passage from their reasons for judgment:

"Clause XIV does not provide for any payment to be made
to a holder of class "E" shares, who becomes obliged upon the
termination of his employment to transfer his shares as
required by the proviso to cl. XIV. Hence if such a holder of
Class "E" shares is in fact entitled to a payment, that must
be because a stipulation to that effect ought to be implied into
the proviso to cl. XIV. But in our opinion the proviso is an
intelligible and workable provision as it stands, so that no
justification exists for making any implication of that kind:" (at p305)

5. I take a different approach to cl. XIV and that approach leads to a different conclusion. Clause XIV is silent on the question whether or not consideration is to be paid to an employee of the company who transfers his "E" class shares pursuant to the clause. Therefore cl. IX operates and "E" class shares bear such rights as shall from time to time be decided by the directors save as otherwise are expressly provided or negatived in the memorandum of association. The shares presently under consideration were issued by the directors fully paid in cash. The directors did not decide at the time of their issue that when they became liable to be transferred to another employee no consideration should be paid to the appellant. Therefore he is entitled in this respect to the ordinary incident of his beneficial ownership, namely, that his property should not be expropriated but that he should be paid its fair value. (at p305)

6. Clauses IX and XIV permit the issue of "E" class shares on a wide variety of terms, the only limit being the specific requirements of cl. XIV. Thus under an appropriate article or on a resolution of the directors imposing a term of the issue, such shares could be issued as a reward for services and on condition that, at the termination of the service, they be transferred without consideration, or for a consideration less than their true value. See for example the precedents of articles in Palmer's Company Precedents, 17th ed. (1956), Pt 1, p. 970 and of the kind of agreement which under cl. IX the directors might have made as terms of the issue in the present case, p. 985. But none of that is dealt with in cl. XIV itself. The clause leaves flexibility to the company in this respect. (at p306)

7. This conclusion is not affected by the fact that cl. XIV is in peremptory terms with the consequence that, if no person, including the governing director, is prepared to accept a transfer and consequently to pay the fair value of the shares, the implementation of the provisions may be postponed. This is a not uncommon difficulty with loosely drawn provisions for the compulsory transfer of shares. The provision that "E" class shares may only be held by employees of the company so long as the holder remains in the employment of the company cannot take effect according to its terms. If it did there would be an unauthorized reduction of capital. The operation provision is that the shares shall be transferred. But, quite apart from the matter of consideration, that provision assumes that there is a person willing to accept the transfer. The problem is made easier of solution by finding that no consideration is payable by a transferee. That should make it easier to find a willing transferee. However, it does not itself solve the problem; for instance, the shares may be partly paid. Therefore it is no sufficient reason for reading into cl. XIV something which is not expressly stated therein and thereby limiting the application of cl. IX contrary to the clear intention expressed in cl. IX. (at p306)

8. Orders 3 and 5 made by Murphy J. were as follows:

"3. The Defendants cause a valuation of the Plaintiff's said
shares to be made on the basis of their asset backing as at
31st July 1971 and that in the event of any dispute arising
as to the amount of such valuation and its fairness, that the
issue, as to the fair and reasonable valuation, be referred to
the appropriate Master of the Supreme Court for his
determination."
"5. The second-named Defendant nominate a person in
accordance with Clause 14 of the Memorandum of
Association of the Defendant company who shall be
willing and able to purchase the said shares and to whom
the Plaintiff shall transfer his said shares on payment of
the consideration arrived at in accordance with the orders
made herein, such nomination to be made within one
month of agreement or determination of the value of the
shares and such payment to be made within 21 days after
such nomination and upon delivery of a transfer by the
Plaintiff, or, failing such nomination within the said period
I order that the Defendant Thompson purchase the said
shares in his own name by payment to the Plaintiff of the
said consideration within two months of the agreement or
determination of the value of the shares." (at p307)

9. It has not been argued before this Court that even if the appellant is entitled to the fair value of the shares on their transfer, nevertheless these orders ought not to have been made, or that some different basis of valuation ought to have been adopted. (at p307)

10. Even if there was no contract between the appellant and the second respondent of the kind found by Vaisey J. in Rayfield v. Hands (1960) Ch 1 , there was the statutory contract between the appellant and the respondent company and between the second respondent and the respondent company. This may provide a proper basis for the ancillary orders. Without expressing any concluded opinion upon the correctness of this approach, I would restore the substantive declaration of Murphy J. as it appears in order 2 and would also restore the consequential orders in orders 3 and 5. I would also restore the liberty to apply and the order for costs. (at p307)

11. It has not been argued on behalf of the respondents that order 4 which declares that the issue of 1,700 so-called "B" class shares was void and of no effect ought not to have been made even if the appellant was otherwise entitled to succeed in his action. Counsel for the respondents described it as "not of that much consequence as far as the company was concerned". However, not all the persons interested, the persons to whom these shares had purported to have been issued, were parties to the action and, that being so and the substance of the question not having been argued before the Full Court or this Court, I would not restore order 4. (at p307)

12. I would therefore allow the appeal in part in both actions, set aside the orders of the Full Court and restore orders 2, 3, 5, 6, and 7 of the orders made by Murphy J. (at p307)

AICKIN J. In this matter I have had the advantage of reading the reasons for judgment of Stephen J. I agree with these reasons and with the reasons of the Full Court of the Supreme Court of Victoria. There is nothing I can usefully add. (at p307)

2. I am therefore of opinion that the appeals should be dismissed. (at p307)

ORDER

Appeals dismissed with costs.