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  4. Full Petential Pty Ltd v Vetzpetz Australia Pty Ltd - [2024] QSC 158

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Full Petential Pty Ltd v Vetzpetz Australia Pty Ltd[2024] QSC 158

Full Petential Pty Ltd v Vetzpetz Australia Pty Ltd[2024] QSC 158

SUPREME COURT OF QUEENSLAND

CITATION:

Full Petential Pty Ltd v Vetzpetz Australia Pty Ltd [2024] QSC 158

PARTIES:

FULL PETENTIAL PTY LTD

ACN 125 436 535

(applicant)

v

VETZPETZ AUSTRALIA PTY LTD

ACN 165 665 403

(respondent)

FILE NO/S:

BS 8344 of 2024

DIVISION:

Trial Division

PROCEEDING:

Application

ORIGINATING COURT:

Supreme Court of Queensland at Brisbane

DELIVERED ON:

26 July 2024

DELIVERED AT:

Brisbane

HEARING DATE:

17 July 2024

JUDGE:

Applegarth J

ORDER:

The application is dismissed.

CATCHWORDS:

CONTRACTS – GENERAL CONTRACTUAL PRINCIPLES – CONSTRUCTION AND INTERPRETATION OF CONTRACTS – where a Sub‑Distribution Agreement contains a clause that entitles the Distributor to terminate it if there is “any change in the direct or indirect beneficial ownership or control of the Sub‑Distributor” – where all of the shares in the applicant are owned by a company (“C”) – where changes occurred to the ownership of shares in C – where the Distributor contends this change triggered a right to terminate the Agreement – whether there was a change in the “indirect beneficial ownership” of the applicant

A Goninan & Co Ltd v Direct Engineering Services Pty Ltd (No 2) [2008] WASCA 112, cited

AIB Group (UK) Ltd v Martin [2002] 1 WLR 94, cited

Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337, cited

DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423, cited

Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd (2018) 261 CLR 544, cited

International Air Transport Association v Ansett Australia Holdings Ltd (2008) 234 CLR 151, cited

Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104, cited

Norton Property Group Pty Ltd v Ozzy States Pty Ltd (in liq) [2020] NSWCA 23, cited

Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451, cited

Pauls Trading Pty Ltd v Norco Co-Operative Ltd [2006] QCA 128, cited

Retirement Services Australia (RSA) Pty Ltd v 3143 Victoria St Doncaster Pty Ltd (2012) 37 VR 486, cited

Taylor v Santos Ltd (1998) 71 SASR 434, cited

Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2009) 219 CLR 165, cited

Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522, cited

Worsley Timber 2000 Pty Ltd (In Liq) v Commissioner of State Revenue (2007) 69 ATR 771, cited

COUNSEL:

D de Jersey KC for the applicant

N J Derrington for the respondent

SOLICITORS:

Mills Oakley for the applicant

Baker McKenzie for the respondent

  1. [1]
    In October 2017, the applicant and the respondent entered into a Sub-Distribution Agreement in relation to a veterinary food supplement product marketed under the name “Antinol”.
  2. [2]
    On 24 April 2024, the respondent gave notice of termination.  It claimed that:
    1. the applicant had sourced and sold in Australia green lipped mussel products on an online platform in breach of clause 8.1 of the agreement; and
    2. that there had been changes “in the direct or indirect beneficial ownership or control” of the applicant which occurred without the respondent being given “immediate” notice of the changes.
  3. [3]
    As to the first matter, the applicant submits, and the evidence is, that the breach of clause 8.1 was “remedied” pursuant to clause 10.2(a) within the 90-day period for remedying such breaches.  The respondent no longer presses this ground for termination. 
  4. [4]
    As to the second matter, Cenversa Ltd owns all of the shares in the applicant.  There have been changes in the ownership of shares in Cenversa.  The respondent contends that these are changes in the “indirect beneficial ownership” of the applicant.
  5. [5]
    The applicant contests this interpretation of “indirect beneficial ownership” and seeks declarations that the notice of termination is invalid and that the agreement has not been terminated.
  6. [6]
    The issue concerns the meaning of “indirect beneficial ownership” in clause 10.3(b)(i) of the agreement, having regard to its context.

Principal submissions

  1. [7]
    The applicant submits that there has been no change in the direct or indirect beneficial ownership or control of the applicant because, at all material times, Cenversa has owned all the shares in the applicant.  The only shareholding changes have been changes to the ownership of the shares in Cenversa.  According to the applicant, it does not follow that there has been a change in the “indirect beneficial ownership” of the applicant.  It submits that a person C is not an indirect beneficial owner of shares in company A because C holds shares in company B, where B owns all the shares in A. Company B is the owner of the shares in A; C is not.
  2. [8]
    According to the applicant, the reference to a change in the “indirect beneficial ownership” of the Sub-Distributor captures a case where a party holds the shares through a trust or an agent.  The purpose of this part of the clause is submitted to be to restrict changes in the agent or trustee with which the respondent must deal.
  3. [9]
    The applicant also submits that the respondent’s interpretation is inconsistent with a commercial or businesslike construction of the agreement.  It would permit the agreement to be terminated by the respondent when there is even a relatively small change in the ownership of Cenversa, and no change in the ownership or control of the applicant.  This is said to produce absurd results.
  4. [10]
    The respondent submits that the terms “direct beneficial ownership” and “indirect beneficial ownership” are plain.  They concern ownership, rather than control. The concern is with a change to “beneficial” ownership as opposed to legal ownership; for example, when there is a change to a corporate trustee that holds shares for a beneficial owner.
  5. [11]
    According to the respondent, when the words “indirect beneficial ownership” are looked at objectively, they are concerned with the identity of who stands behind the party with whom the respondent has contracted, and changes in that identity give rise to a right to terminate.  The right would not necessarily be exercised, but it would be available if, for example, a disreputable entity or a competitor of the respondent acquired shares in the company that wholly owns the Sub-Distributor, or if it acquired shares in some other company that was the parent company in a corporate chain of wholly owned subsidiaries.
  6. [12]
    Entitling the respondent to terminate the agreement in such an event is submitted to not constitute an absurd result.  It may produce harsh results where the parent company of the Sub-Distributor is a company that proposes to change its shareholders.  However, this consequence is submitted to be the result of the applicant agreeing to a standard form of agreement that was unsuited to its circumstance whereby its parent company has had changes in the identity of its shareholders.

The Sub-Distribution Agreement

  1. [13]
    A company named Pharmalink International Limited created a product known as Antinol.  Antinol is a patented, anti-inflammatory blend of marine lipid concentrates that is packaged for animal consumption.  The respondent licences from a subsidiary of Pharmalink the use of certain trademarks, patents and technical information and know‑how relating to Antinol. 
  2. [14]
    Mr John Waitzer is a director of Pharmalink and also a director of the respondent.  In 2014, he engaged external legal advisors to prepare a proforma Distribution Agreement for Antinol products that could be adapted for use by the Pharmalink Group.
  3. [15]
    Mr Lionel Bloom is the sole director of the applicant.  He is also Chief Executive Officer and Chairman of Cenversa, which is the sole shareholder in, or parent company of, the applicant.
  4. [16]
    Cenversa is an unlisted public company that began as a Bloom family-owned veterinary wholesaling business in 1960.  It has about 340 shareholders throughout Australia.  However, through various entities that Mr Bloom owns and controls, he has maintained at least 60 per cent ownership of Cenversa.  On occasions, his and his wife’s collective ownership of shares in Cenversa has been as high as 85 per cent.  In any event, effective control of Cenversa continues to lie with Mr Bloom.
  5. [17]
    In 2017, Mr Waitzer on behalf of the respondent undertook negotiations for a Sub‑Distribution Agreement with the applicant.  In those communications, Mr Bloom asked for a copy of the respondent’s draft distribution agreement and was provided with a marked-up draft agreement that used what is described as the Antinol “bare bones” Distribution Agreement.
  6. [18]
    The only present relevance of those negotiations is that while certain changes were made to the draft agreement, the applicant did not negotiate any variation of clause 10.3.
  7. [19]
    Clause 10.3 relevantly provides:

“10.3 Distributor Termination

  1. Distributor may terminate this Agreement with immediate effect by giving notice to the Sub-Distributor if an event referred to in clause 10.3(b) happens to the Sub-Distributor.
  1. The Sub-Distributor must notify Distributor immediately if:

(i) there is any change in the direct or indirect beneficial ownership or control of the Sub-Distributor;

  1. the Sub-Distributor disposes of the whole or part of its assets, operations or business other than in the ordinary course of business;
  1. the Sub-Distributor ceases to carry on business;
  1. the Sub-Distributor ceases to be able to pay its debts as they become due;
  1. any step is taken by a mortgagee to take possession or dispose of the whole or part of the Sub-Distributor's assets, operations or business;
  1. any step is taken to enter into any arrangement between the Sub-Distributor and its creditors; or
  1. any step is taken to appoint a receiver, a receiver and manager, a trustee in bankruptcy, a provisional liquidator, a liquidator, an administrator or other like person of the whole or part of the Sub-Distributor's assets, operations or business. …” (emphasis added)
  1. [20]
    Clause 10.3(c), which is not presently relevant, governs events following termination.

Principles of construction

  1. [21]
    The meaning of clause 10.3(b)(i) and the words “change in the … indirect beneficial ownership … of the Sub-Distributor” are to be determined objectively, by reference to their text, their context, and the purpose of the agreement.[1]
  2. [22]
    A contract’s meaning is to be decided in accordance with what its terms would convey to a reasonable person in the position of the parties, giving the contract a businesslike construction.[2]
  3. [23]
    This is not a case in which either party submits that ambiguity or some other factor permits the admission of extrinsic evidence, such as pre-contractual correspondence, to resolve the meaning of “indirect beneficial ownership”.  Background facts may assist in identifying the object or purpose of the agreement.[3]  However, the purpose of the agreement is sufficiently evident from its recitals and its terms.  Simply put, the applicant wished to be engaged as the authorised Sub‑Distributor of Antinol in Australia.  The respondent granted to it, as Sub‑Distributor, an exclusive, non‑transferrable sub-licence for an initial term of three years, with provision for extension periods.  Included among the applicant’s obligations was an undertaking to deal exclusively with the respondent in relation to the distribution, sale and use of muscle oil products or any product that includes muscle oil extracts or powder as an ingredient, and to refrain from entering into any commercial arrangement with any competitor.
  4. [24]
    The applicant acknowledged that “this Agreement is personal to the Sub‑Distributor” and agreed in clause 13 that it had no right to assign its rights under the agreement without the respondent’s consent, which may be withheld in the respondent’s absolute discretion.
  5. [25]
    The respondent relies on Mr Waitzer’s affidavit and the pre-contractual correspondence exhibited to it, but not to establish what was known to both parties at the time they negotiated the Sub-Distribution Agreement or as evidence of their subjective intentions or expectations in relation to the operation of clause 10.3(b)(i).  The limited purpose of his evidence is to prove that the parties made amendments to a common form of distribution agreement, which they partially modified but where no modification was made to clause 10.3(b)(i).  This evidence is relied upon on the basis that modifications to a standard or common form of contract may assist in interpreting its terms.[4] 
  6. [26]
    Clause 10.3(b)(i) having been shown to be an unmodified standard term, the respondent submits that background facts relating to the identity of the applicant and the identity of those who stand behind it should be given less weight when construing the term than if the term was in “bespoke agreement” where the term was drafted to take account of the mutually known circumstances of a party. The applicant cites authority that a standard form contract is designed to be used in a wide variety of different circumstances and is not “context specific”.[5]  A standard term should be able to be relied on to have the same meaning on all occasions. Therefore, the relevance of factual background about the identity of a party and other matters is “necessarily limited”.[6]   
  7. [27]
    The respondent also relies on the principle that while an agreement is to be construed by reference to the commercial circumstances addressed by it and the objects it was intended to secure, the most important guide to construction is the text of the document, especially when it is in a standard form.[7]

The text: a change in ownership or control

  1. [28]
    Clause 10.3(b)(i) uses the terms “ownership” and “control” disjunctively. 
  2. [29]
    This is not to say that a development may not involve both a change in ownership and a change in control.  Changes in ownership may coincide with a change in the control of an entity.  There may, however, be a change in ownership without any change in control.  For example, a passive investor may acquire 10 per cent of the shares in a company, which remains under the control of a party that owns the remaining 90 per cent.  There may be a change in control, without there being a change in ownership.  For example, shareholders may remain the same but replace all of the directors of a company, and thereby change control of the company.
  3. [30]
    Because “ownership” and “control” are treated disjunctively, notions of control should not colour what is required for there to be a change in beneficial ownership for the purposes of clause 10.3(b)(i).
  4. [31]
    The starting point is that the clause should be interpreted according to its ordinary meaning and in the context of a clause that deals with both ownership and control, with a change in either ownership or control being sufficient.  The clause does not mandate a threshold requirement, such as a 20 per cent change in the direct or indirect beneficial ownership of the Sub‑Distributor, or contain some other qualification upon the change in ownership, such as there being a “material” change in the direct or indirect ownership of the Sub-Distributor.  Absent such an express qualification, a court should be reluctant to read such a requirement into the clause so as to soften its operation.
  5. [32]
    Mr de Jersey KC did not urge an interpretation whereby a word such as “material” is read into the clause so that it only applies to a material change in the direct or indirect beneficial ownership of the Sub-Distributor.  Ms Derrington submitted that this would not be a proper construction of the agreement because that is not what it says and, in any case, any such requirement would be satisfied since the changes to the shareholding of the applicant were not de minimis or minor in nature.  I accept her submission.

The applicant’s textual argument

  1. [33]
    The applicant’s submissions focus on the text of clause 10.3(b)(i) in referring to a change in the ownership of the Sub-Distributor, not a change in the ownership of a corporate entity that owns the Sub-Distributor, or a parent company of that corporation.
  2. [34]
    If, however, the clause related only to the ownership of the Sub‑Distributor, then inclusion of the words “or indirect” would seem unnecessary.  A change in the (direct) beneficial ownership of shares in the Sub‑Distributor would trigger the clause.  The clause might have simply read: “there is any change in the beneficial ownership or control of the Sub-Distributor” or “there is any change in the direct beneficial ownership or control of the Sub-Distributor”.
  3. [35]
    The use of the words “direct or indirect” suggest that the concern is not just with ownership of shares in the Sub-Distributor.  The concern is with the identity of the party or parties who indirectly own the Sub-Distributor and changes to the extent of their indirect ownership.
  4. [36]
    The inclusion of the words “or indirect” may be seen to protect the respondent against any change in the indirect beneficial ownership of the applicant.  One such situation would be a disreputable entity acquiring a shareholding in the applicant’s parent company that fell short of a controlling interest in it.  A party in the respondent’s position might simply not want to be in a commercial relationship with an entity whose wholly owned parent company included such a disreputable entity as one of its shareholders.  The wholly owned subsidiary would remain wholly owned by the parent company that selected it as the corporate vehicle to be the Sub‑Distributor.  But the change in the ownership of the parent company whereby it became partly or wholly owned by a disreputable entity would be a concern for the Distributor. 
  5. [37]
    Such an association may cause reputational harm to the Distributor or challenge its ethics.  To use an extravagant example, the Distributor would wish to have a right to terminate if a convicted drug trafficker acquired an interest in its Sub-Distributor or an interest in the company that wholly owns its Sub-Distributor.  A less extravagant example would be the acquisition of such an interest by a competitor of the Distributor.  Such a shareholding would not automatically give the shareholder access to certain confidential information, and confidential information is otherwise protected by the agreement and the general law.  However, such a shareholding would entitle the competitor to the information to which a shareholder is entitled.  A reasonable businessperson would understand why the Distributor thought it should protect its interest in that regard by having a clause that entitled it to terminate the agreement in these kinds of events.
  6. [38]
    The applicant seems to accept that the respondent would have a legitimate interest in shares in the Sub-Distributor not being transferred to a disreputable entity, a competitor, or some other entity of which the respondent did not approve in advance of any transfer.  Hence the right to terminate the Sub-Distribution Agreement in such an event.  However, once this is accepted, the protection that such a provision gives the respondent in relation to changes in the shareholding of the applicant could be simply avoided by the purchaser acquiring its interest in the parent company that owns 100 per cent of the Sub-Distributor, rather than acquiring shares in the Sub‑Distributor. This explains the reference to “indirect”.  To read “indirect” as not applying to such a case would not be a businesslike interpretation of a clause that is concerned with the identity of those who stand behind the Sub-Distributor.
  7. [39]
    In short, the reference to a change in the “indirect beneficial ownership” protects against the simple avoidance strategy of making the ownership change to shares in the company that wholly owns the Sub-Distributor rather than to shares in the Sub‑Distributor.
  8. [40]
    One can imagine tiers of ownership, with all the Sub-Distributor’s shares being owned by an entity, and all that entity’s shares being owned by another entity, and so on, so that there is an ultimate parent company.  To describe that parent company as having an “indirect beneficial ownership” of the Sub-Distributor seems to accord with the ordinary meaning of those words.  The parent company may not have direct beneficial ownership of the Sub-Distributor, but it has indirect beneficial ownership of it.  In practical terms, a change in the ownership of the parent company would have the same commercial effect as a change in the ownership of one of that company’s wholly owned subsidiaries, including the Sub-Distributor.  If, for example, the party that owned all the shares in a parent company sold 20 per cent of those shares, it would dilute its indirect beneficial ownership of the Sub-Distributor by 20 per cent.  To say that the new shareholder in the parent company now has a 20 per cent indirect beneficial ownership accords with the ordinary meaning of the words of clause 10.3(b)(i).
  9. [41]
    To an ordinary person or a reasonable businessperson, the word “indirect” in clause 10.3(b)(i) encourages one to look through corporate veils and to consider the effective ownership of a subsidiary.  It does not require an indirect owner to have a direct interest in the subsidiary company by owning shares in it.

The applicant’s argument that “indirect beneficial ownership” has work to do in the case of shares held by an agent or trustee

  1. [42]
    The applicant responds to the argument that “indirect beneficial ownership” is apt to refer to ownership of a company that, in turn, owns the Sub-Distributor or to some more distant parent company in a corporate chain.  It submits that the term is apt to apply to a case where shares in the Sub-Distributor are held through a trust or by an agent.  It contends that the respondent would have an interest if the identity of the trustee or the agent changes, since this is the party with which it would deal in the business of the Sub‑Distributor, and to whom information about the business would be imparted, and that it might not wish to deal with a new trustee or agent.
  2. [43]
    This argument is unpersuasive.  Clause 10.3(b)(i) is not concerned with changes to the identity of the legal owner of shares, such as when a trustee is replaced.  Its concern is with changes to beneficial ownership.  This reflects the fact that a change in the identity of a trustee who holds shares on trust for a beneficial owner, or a change in the agent who holds shares on a bare trust for its principal, is unlikely to be of concern to the respondent.  The corporate trustee of shares will not necessarily be the party with whom the respondent deals on a day-to-day basis in the operation of the Sub-Distributorship.   The executives and managers appointed to operate the business will be.
  3. [44]
    It is not obvious that the replacement of a trustee who held the shares would mark a change in beneficial ownership.  The beneficial owner of the shares would remain the same, and the beneficial ownership of the company would be unaltered.
  4. [45]
    But if the applicant is correct and the term “indirect beneficial ownership” covers a case where the person holds shares through a trust or agent, and a change in the trustee or agent triggers clause 10.3(b)(i), then this does not exhaust the application of that part of the clause.  It may apply in other circumstances, such as a change in the ownership of the party that stands behind the Sub-Distributor and who may be said to have an indirect, rather than a direct, beneficial ownership of the Sub-Distributor.

The applicant’s argument that changes in the ownership of a parent company are catered for by the change in control provision

  1. [46]
    The applicant also submits that a businesslike interpretation is one that gives the respondent a right to terminate if there is a change in the control of its Sub-Distributor; for example, if a competitor of the respondent acquires a controlling interest in the parent of the Sub-Distributor.  An interpretation that triggers the clause if there is any change in the parent company is said to be uncommercial and not one which reasonable businesspeople would adopt.
  2. [47]
    I am not persuaded by the applicant’s arguments on these points.  If the clause was concerned simply with a change in control, and not with a change in ownership that did not or might not alter control, then it would have been differently worded.
  3. [48]
    The fact that a change in the ownership of a parent company may effect a change in the control of the Sub-Distributor does not require the part of the clause that relates to changes in indirect beneficial ownership to be read as requiring a change in control.  As earlier noted, the clause deals separately with ownership and control.  The respondent may be legitimately concerned about the identity of a party that assumes part ownership of the parent company of the Sub-Distributor and, in that sense, part of the “indirect beneficial ownership” of the Sub-Distributor.  The clause is drafted in a form that does not require the respondent to prove that the part ownership gives the new party control.  For example, it is not required to prove that the extent of ownership is such as to alter control of the Sub-Distributor. 
  4. [49]
    The words of the clause about beneficial ownership should be given work to do where there has not been a change in control, or the respondent does not wish to be put to the burden of proving a change in control.
  5. [50]
    The applicant cites Pauls Trading Pty Ltd v Norco Co-Operative Ltd[8] and submits that the purpose of clause 10.3(b)(i) in this case is similarly to protect from the risk that “effective control” might move to a third party that was unacceptable to the other party to the agreement.  But, as it notes, that was a case in which the clause referred to “effective control”.  Clause 10.3(b)(i) is submitted to be more limited than the clause in Pauls Trading and to be concerned instead with only the identity of who owns the applicant’s shares.
  6. [51]
    I do not regard Pauls Trading as illuminating the meaning of clause 10.3(b)(i) in respect of the issue of ownership.  Because clause 10.3(b)(i) extends beyond control to the matter of indirect ownership, it is unhelpful to compare it with a different clause about control in a different case. 

A businesslike interpretation

  1. [52]
    In circumstances in which shares in a prospective party to such an agreement might be owned directly or indirectly by a public company, an interpretation whereby any change in the shareholding of a parent company conferred a right to terminate is submitted by the applicant to be uncommercial and not businesslike.  This would be so particularly in the case of indirect ownership by a listed public company, whereby shares in that parent company are traded frequently.
  2. [53]
    But this is an argument about what might be taken to be the mutual understanding of the parties and a businesslike interpretation in a case in which the prospective Sub‑Distributor is known to be owned by a public company whose shares are known to trade frequently.
  3. [54]
    To the extent that the task of construction requires consideration of matters beyond the text of the contract, the surrounding circumstances should be known to both parties.[9] The type of extrinsic evidence that is admissible in construing a contract is governed by the objective theory of contract.  Leaving aside the issue of whether ambiguity is required before extrinsic evidence may be admitted, admissible extrinsic evidence includes evidence that tends to establish objective background facts known to both parties.[10]  In Mount Bruce, French CJ, Nettle and Gordon JJ stated:[11]

“Each of the events, circumstances and things external to the contract to which recourse may be had is objective. What may be referred to are events, circumstances and things external to the contract which are known to the parties or which assist in identifying the purpose or object of the transaction, which may include its history, background and context and the market in which the parties were operating. What is inadmissible is evidence of the parties’ statements and actions reflecting their actual intentions and expectations.” (emphasis added)

  1. [55]
    The applicant points to the fact that a company search of the applicant, undertaken by the respondent at the time the agreement was being negotiated, disclosed its sole shareholder to be a public company, Cenversa.  It also contends that it is probable that a party in the respondent’s position that was negotiating a Sub‑Distribution Agreement would have been acquainted with the identity of the party with which it was contracting and the identity of those who stood behind it.  A reasonable inference is that the representatives of the respondent that undertook a company search of the applicant would have understood that its sole shareholder was Cenversa.  However, if this knowledge be assumed, then it is consistent with an understanding or assumption that Mr Bloom or close members of his family owned all of the shares in Cenversa and did not plan to dispose of them, and that Cenversa had no plans to offer shares to the public.
  2. [56]
    The material does not establish what Mr Waitzer or any other representative of the respondent knew at the time the Sub-Distribution Agreement was negotiated in 2017 about the ownership of Cenversa, let alone anticipated changes in it.  The evidence is consistent with the respondent knowing that the applicant was both controlled and owned by Mr Bloom and members of his immediate family.  The evidence does not establish that the respondent knew that changes in the ownership of the company that owned the applicant were in prospect.  The lack of evidence about any consideration being given by the parties to this point makes it distinctly possible that future changes in the ownership of Cenversa were not considered by the parties, let alone discussed between them, in the context of clause 10.3(b)(i) or in any other context.
  3. [57]
    In summary, the evidence does not demonstrate that at the time the respondent was negotiating the agreement, its representatives such as Mr Waitzer knew that changes in the ownership of Cenversa during the term of the agreement were anticipated. 
  4. [58]
    What might be regarded as an unbusinesslike interpretation in the case of parties who both knew at the time they contracted that changes in the company that owned the Sub‑Distributor were planned or likely cannot be transposed to a case where this mutual knowledge has not been proven to exist. 

The applicant’s argument that the respondent’s interpretation would lead to harsh or absurd consequences

  1. [59]
    The interpretation contended for by the respondent produces harsh results in the case of a Sub-Distributor that is owned by a company whose shares are expected to be traded, or by a company that is, in turn, owned by such a company.  That is, however, a consequence about which the applicant and those who advised it should have been aware when the applicant agreed to a form of words which were ill-suited to an entity whose parent company might be subject to changes in its ownership.
  2. [60]
    According to its ordinary meaning, the standard form of clause 10.3(b)(i) that was used in the agreement confers upon the respondent a right to terminate in respect of a change in indirect beneficial ownership, even when the change effects no change in control of the applicant and entails a transfer of shares to a new shareholder about whom the respondent could have no reasonable objection. 
  3. [61]
    To avoid having its Sub‑Distribution Agreement terminated in such an event, the Sub‑Distributor would need to seek the prior assurance of the Distributor that it would not exercise its right to terminate under clause 10.3(b)(i) in respect of the proposed change in shareholding.  This is the effect of the words that the parties chose to adopt without modification.  The applicant did not propose some qualification, for example, one that required the change in ownership to be “material” or above a certain level, or which only permitted the respondent to refuse its consent to such a change only if it had reasonable grounds to do so.  The standard form provision entitles the respondent to terminate the agreement if there is a change in the indirect beneficial ownership of the applicant in any circumstances.  It is not confined to changes in ownership to disreputable interests, a competitor, or some other entity in circumstances where the respondent has a reasonable ground to disapprove of the proposed transfer.
  4. [62]
    Despite the potentially harsh operation of the clause, it should be interpreted according to its terms.  The clause confers a broad power that the respondent might choose to exercise in the event a change in shareholding displeases it, for example, because the new shareholder was thought to be disreputable.  Such a clause might be said to unfairly ossify the shareholding of the applicant’s wholly owned parent company and, in practical terms, compel the applicant to seek the respondent’s prior approval of any proposed change to the ownership of Cenversa.  However, that is a consequence that the clause in its unmodified form creates according to its plain meaning.
  5. [63]
    A clause with such a potential effect upon the ownership of the Sub-Distributor’s wholly owned parent company might be unremarkable and readily accepted where the parent company is a company that has a stable share register and has no plans to alter the identity of its shareholders or their shareholdings.  Such a form of words seems ill-suited to a private company or an unlisted public company that might expect to undergo such changes during the term of the distributorship agreement.  The words create an exposure to the risk of having the agreement terminated if the change is not approved by the respondent in advance of the change, and there is no constraint on the respondent in refusing its approval.  These consequences are not, however, a sufficient reason to depart from the plain meaning of the words that the parties used in their agreement.  This court should not rewrite their bargain to narrow its operation to a material change in beneficial ownership or a change in ownership that alters control.  If the parties intended the clause to have such a limited operation, they should have modified the standard form, or drafted a new clause that was suited to the applicant’s circumstances and Cenversa’s plans.
  6. [64]
    In summary, the harsh consequences for the applicant arise from its having adopted a standard form contract that was used by the respondent and suited to a Sub‑Distributor whose parent company has shareholders who are not expected to change. 

Caselaw on the meaning of “indirect beneficial ownership”

  1. [65]
    The respondent cites two authorities as supporting the proposition that, as a matter of ordinary English usage, the indirect beneficial owner of the Sub-Distributor includes the ultimate owners of a company, such as the parent in a corporate group or its shareholders (depending on context).  The applicant contests that these authorities support any contention about ordinary English usage of the words “indirect beneficial owner”. 
  2. [66]
    Taylor v Santos Ltd[12] is a case about discovery of documents and whether a document is within the power of a party.  The relevant documents were in the possession or custody of Santos Europe Limited (SEL), a wholly owned subsidiary of another company which itself was wholly owned by the appellant.  Olsson J[13] referred to a submission by senior counsel for the appellant that “indirect beneficial ownership” of a corporate entity asset and a strategic decision to sell it has little to do with the test of whether the appellant was in a position, directly, to exercise administrative power over specific documents held by it.  Neither Olsson J nor the other members of the Full Court of the Supreme Court of South Australia had to consider the meaning of “indirect beneficial ownership”.  Instead, the point was resolved by reference to a lack of evidence that the appellant exercised day-to-day administrative control over the operations and activities of the subsidiary within the group.
  3. [67]
    Worsley Timber 2000 Pty Ltd (In Liq) v Commissioner of State Revenue[14] concerned the interpretation of a provision of the Western Australian Stamp Act.  Simmonds J[15] referred to an earlier authority that accepted the proposition that “indirect beneficial ownership” by a transferor through a chain of wholly owned bodies corporate, the penultimate one of which held all the shares in the transferee body corporate fell within the term “beneficial owner of not less than 90% of the issued share capital of the other”.  The respondent simply relies upon the passage as an example of the usage of “indirect beneficial ownership” in the context of a chain of wholly owned bodies corporate.
  4. [68]
    Neither case determines that this is the sense in which “indirect beneficial ownership” is used in clause 10.3(b)(i).  The cases simply are examples of the use of “indirect beneficial ownership” in different contexts to refer to a parent company having indirect beneficial ownership of a wholly owned subsidiary in a corporate group.

Is the purpose of the words “indirect beneficial ownership” to protect the respondent from changes to the identity of those who stand behind the Sub‑Distributor?

  1. [69]
    If the beneficial ownership aspect of clause 10.3(b)(i) relates simply to ownership of shares in the Sub-Distributor, then the clause would be simpler and not refer to “direct or indirect beneficial ownership”.  It would be sufficient to refer simply to a change in the beneficial ownership or direct beneficial ownership of the Sub-Distributor.
  2. [70]
    This supports the respondent’s contention that the clause is concerned with the identity of those who stand behind the party with which it has contracted.  The clause gives the respondent, as Distributor, a complete discretion to terminate the agreement if there has been any change to the indirect beneficial ownership of the Sub‑Distributor, not simply to its direct ownership, being the party or parties who hold shares in it.
  3. [71]
    The words “indirect beneficial ownership” in their context suggest that both the identity of the party that is the respondent’s Sub-Distributor and the identity of those who stand behind it are important to the respondent.  The importance of the identity of a parent company that wholly owns the Sub-Distributor, and thereby stands behind it, is evident from the terms of the clause.  It provides that there must not be any change in either the direct beneficial ownership of the Sub-Distributor (being the beneficial owner or owners of shares in the Sub-Distributor) or the indirect beneficial ownership of the Sub-Distributor (being the beneficial owner or owners of shares in the Sub-Distributor’s parent company). 
  4. [72]
    The importance to the respondent of the identity of those who own (directly or indirectly) or control the Sub-Distributor is reflected in clause 13.  The applicant acknowledges in clause 13 that the agreement “is personal to the Sub-Distributor” and that the Sub-Distributor had no right to assign its rights without the respondent’s prior written consent, which may be withheld in its absolute discretion. Clause 13 restricts a transfer of rights that would result in the Sub-Distributor’s business being owned directly or indirectly by an entity of which the respondent does not approve.  Clause 10.3(b)(i) achieves a similar protective purpose in respect of a transfer of shares.
  5. [73]
    Clause 10.3(b)(i)’s use of the term “indirect beneficial ownership” suggests that it is concerned to lift corporate veils and go beyond the name or names on the Sub‑Distributor’s share register.  The term “indirect beneficial ownership” is apt to apply to a parent company that indirectly, rather than directly, owns the Sub‑Distributor because it owns all of the shares in the company that owns the Sub‑Distributor.
  6. [74]
    The agreement uses the term “indirect beneficial ownership” to capture the kind of effective or practical ownership that is entailed when a company like Cenversa owns all the shares in the Sub-Distributor.  The clause extends to changes that occur in the indirect ownership of the Sub-Distributor when there is a change in who owns the parent company or the extent of their ownership.
  7. [75]
    The apparent purpose of the clause is to protect the respondent from an unwelcome change in the ownership of not only the Sub-Distributor, but in the ownership of the parent company of the corporate vehicle that may be selected by that parent company to become the Sub-Distributor.  The change may be that the new shareholder is disreputable, unethical, of poor financial standing, a competitor of the respondent, or has some other feature that the respondent does not welcome.
  8. [76]
    The clause gives the respondent a broad power to protect its interests from any such unwelcome change by terminating the agreement in such an event, without the need to justify its assessment of the change in ownership or to prove that the change results in a change in control of the Sub-Distributor.
  9. [77]
    The clause should be interpreted to achieve its protective purpose, even if it has harsh consequences for a company that agreed to a standard form of contract in those terms in circumstances in which its director and advisers might have anticipated future changes to the ownership of Cenversa, and therefore to the “indirect beneficial ownership” of the applicant.  They seemingly did not appreciate that such a form of words was unsuited to their circumstances.  The clause should be interpreted in accordance with what a reasonable businessperson or other reasonable person would understand the words “indirect beneficial ownership” to mean in their context, namely words that had such a protective purpose.

Summary and conclusion

  1. [78]
    I prefer the interpretation of “indirect beneficial ownership” in clause 10.3(b)(i) contended for by the respondent.  On that basis, there was a change in the indirect beneficial ownership of the applicant.  That change gave rise to a right to terminate under clause 10.3(b)(i). The right was exercised.
  2. [79]
    The reasonableness of the respondent’s exercise of that right and whether it was exercised in good faith are not in issue before me.  The only issue for my determination is the meaning of “indirect beneficial ownership” in clause 10.3(b)(i).  The words have a plain enough meaning and the principles of contractual interpretation do not allow me to modify their meaning to avoid the harsh operation of a standard form contract.  If the applicant wished to avoid those consequences, it should have negotiated modifications to clause 10.3(b)(i) when the agreement was being drafted.
  3. [80]
    Those harsh consequences flow from a clause that uses the term “indirect beneficial ownership”.  That term is apt to apply to changes in the beneficial ownership of shares in a parent company that owns 100 per cent of the shares of the Sub-Distributor.  The clause is not confined to the identity of shareholders in the Sub-Distributor.  The words “indirect beneficial ownership” are apt to apply, and, when viewed objectively, are apparently intended to apply, to a change in the beneficial ownership of shares in a parent company. 
  4. [81]
    A parent company that owns 100 per cent of the shares in the Sub‑Distributor would be reasonably understood to have “indirect beneficial ownership” of the Sub‑Distributor.  Any other interpretation would permit an unwelcome change in the effective ownership of the Sub-Distributor and a right to terminate to be avoided by the simple expedient of transferring shares in the parent company, rather than in its wholly owned subsidiary.
  5. [82]
    I dismiss the application. 
  6. [83]
    I will hear the parties on the question of costs.  The respondent may not be entitled to all its costs because it abandoned reliance upon the first basis upon which it purported to terminate the agreement shortly before the hearing.  The applicant prepared material and submissions on that point.  Its written submissions on that point had substantial merit.  Therefore, I am presently disinclined simply to order that costs follow the event of the dismissal of the application.  The parties should agree, if possible, on a suitable order as to costs, failing which I will hear short oral submissions on costs.

Footnotes

[1] Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104 at 116 [46] (“Mount Bruce”).

[2] Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 at 461–2 [22]; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2009) 219 CLR 165 at 179 [40]; Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522 at 528 [15]; and International Air Transport Association v Ansett Australia Holdings Ltd (2008) 234 CLR 151 at 160 [8] and 174 [53].

[3] Mount Bruce at 117 [49].

[4] Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd (2018) 261 CLR 544 at [9]; A Goninan & Co Ltd v Direct Engineering Services Pty Ltd (No 2) [2008] WASCA 112 at [37]–[40].

[5] AIB Group (UK) Ltd v Martin [2002] 1 WLR 94 at 96 [7].

[6]  Ibid.

[7] Norton Property Group Pty Ltd v Ozzy States Pty Ltd (in liq) [2020] NSWCA 23 at [55].

[8]  [2006] QCA 128 (“Pauls Trading”).

[9] Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 at 461-2 [22]

[10] Retirement Services Australia (RSA) Pty Ltd v 3143 Victoria St Doncaster Pty Ltd (2012) 37 VR 486 at 513 [91] – 514 [94] quoting Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337 at 350 “factual background known to the parties” and DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423 at 429 “mutually known facts”. 

[11] Mount Bruce at 117 [50].

[12]  (1998) 71 SASR 434.

[13]  At 446.

[14]  (2007) 69 ATR 771.

[15]  At [321].

Close

Editorial Notes

  • Published Case Name:

    Full Petential Pty Ltd v Vetzpetz Australia Pty Ltd

  • Shortened Case Name:

    Full Petential Pty Ltd v Vetzpetz Australia Pty Ltd

  • MNC:

    [2024] QSC 158

  • Court:

    QSC

  • Judge(s):

    Applegarth J

  • Date:

    26 Jul 2024

  • White Star Case:

    Yes

Appeal Status

Please note, appeal data is presently unavailable for this judgment. This judgment may have been the subject of an appeal.

Cases Cited

Case NameFull CitationFrequency
A Goninan & Co Limited v Direct Engineering Services Pty Ltd. [No. 2] [2008] WASCA 112
2 citations
Jump To
Cite 1 - [2008] WASCA 112
Cite 2 - [2008] WASCA 112
AIB Group (UK) Ltd v Martin [2002] 1 WLR 94
2 citations
Jump To
Cite 1 - [2002] 1 WLR 94
Cite 2 - [2002] 1 WLR 94
Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 C.L R. 337
2 citations
Jump To
Cite 1 - (1982) 149 C.L R. 337
Cite 2 - (1982) 149 C.L R. 337
DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 C.L.R 423
2 citations
Jump To
Cite 1 - (1978) 138 C.L.R 423
Cite 2 - (1978) 138 C.L.R 423
Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd (2018) 261 CLR 544
2 citations
Jump To
Cite 1 - (2018) 261 CLR 544
Cite 2 - (2018) 261 CLR 544
International Air Transport Association v Ansett Australia Holdings Limited & Ors (2008) 234 CLR 151
2 citations
Jump To
Cite 1 - (2008) 234 CLR 151
Cite 2 - (2008) 234 CLR 151
Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104
2 citations
Jump To
Cite 1 - (2015) 256 CLR 104
Cite 2 - (2015) 256 CLR 104
Norton Property Group Pty Ltd v Ozzy States Pty Ltd (in liq) [2020] NSWCA 23
2 citations
Jump To
Cite 1 - [2020] NSWCA 23
Cite 2 - [2020] NSWCA 23
Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451
3 citations
Jump To
Cite 1 - (2004) 218 CLR 451
Cite 2 - (2004) 218 CLR 451
Cite 3 - (2004) 218 CLR 451
Pauls Trading Pty Ltd v Norco Co-operative Ltd [2006] QCA 128
2 citations
Jump To
Cite 1 - [2006] QCA 128
Cite 2 - [2006] QCA 128
Retirement Services Australia (RSA) Pty Ltd v 3143 Victoria Street Doncaster Pty Ltd (2012) 37 VR 486
2 citations
Jump To
Cite 1 - (2012) 37 VR 486
Cite 2 - (2012) 37 VR 486
Taylor v Santos Limited (1998) 71 SASR 434
2 citations
Jump To
Cite 1 - (1998) 71 SASR 434
Cite 2 - (1998) 71 SASR 434
Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2009) 219 CLR 165
2 citations
Jump To
Cite 1 - (2009) 219 CLR 165
Cite 2 - (2009) 219 CLR 165
Willkie v Gordian Run-off Ltd (2005) 221 CLR 522
2 citations
Jump To
Cite 1 - (2005) 221 CLR 522
Cite 2 - (2005) 221 CLR 522
Worsley Timber 2000 Pty Ltd (In Liq) v Commissioner of State Revenue (2007) 69 ATR 771
2 citations
Jump To
Cite 1 - (2007) 69 ATR 771
Cite 2 - (2007) 69 ATR 771

Cases Citing

No judgments on Queensland Judgments cite this judgment.

1

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