Patrick Corporation v Toll Holdings [2005] VSC 392

What the court decided

Patrick and Toll subsidiaries each owned 50% of the issued shares in the joint venture company Pacific National [13]. Sub-clause 13.1(a) allowed any director, where the board was unable to agree on a resolution, to require that the matter be adjourned to a subsequent meeting [53]. That meeting could not take place earlier than 1 month after the meeting at which the resolution was initially considered [53]. If the directors remained unable to agree at the adjourned meeting, either shareholder could by notice invoke a deadlock-breaking mechanism, subject to the conditions in paragraph (c) [53]. That mechanism could ultimately lead to the sale of the joint venture company's business [2].

At the board meeting on 1 September 2005 the Toll nominated directors voted against a resolution supported by the Patrick nominated directors, so it was not passed [28]. It was undisputed that no director then required that its subject matter or the meeting be adjourned [34]. On 2 September 2005 Patrick's solicitors forwarded to Toll a notice under sub-clause 13.1(b) [35]. At trial the plaintiffs did not maintain that a mere failure to pass a resolution entitled a shareholder to serve such a notice [58]. Mr Corrigan was one of the Patrick Rail nominated directors of Pacific National [16]. On 14 September 2005 he wrote to the other three directors [43]. That letter convened a board meeting for 4 October 2005 [136]. The accompanying notice enclosed a resolution amended principally to describe the advisers to be instructed as "independent" [44]. The plaintiffs sought declarations by amended summons on originating motion [6].

Toll argued that a director had to require, at the initial meeting, that both the resolution and the meeting be adjourned [68], [71]. It also argued that, in the absence of agreement, only the identical resolution could be put at the later meeting [73].

In her Honour's view, the words "subsequent meeting" indicated a new meeting, not a continuation of the initial meeting by its adjournment [95]. A single director could not adjourn a board meeting, which required the unanimous agreement of the directors present and entitled to vote [96]. Her Honour rejected Toll's argument that the other directors were obliged to agree to an adjournment, saying such a process would have been expressly set out [97], [98].

Toll said its construction was needed to give at least one month's notice that the mechanism might be invoked [108]. Her Honour said that the construction of a contractual provision should not be dictated by the aim of excluding possible abuse for ulterior purposes [113]. The usual minimum of three business days' notice for board meetings applied even to the most serious matters [115]. The mechanism also prescribed at least six weeks for discussion and attempts to resolve the deadlock [117]. Even if the second meeting were an adjourned meeting, the minimum one month period would run from the meeting at which the resolution was initially considered [105]. In this case that period would begin to run on 1 September 2005 [119].

Her Honour held that the different term "matter" was not a synonym for the resolution but was of wider reach [126]. Though it was unnecessary to decide, and counsel for both parties took a contrary view, she was not persuaded that a failure to agree must always be shown by a resolution put and not passed [126]. The term "matter" meant the substantive underlying subject matter of the resolution on which there had been a failure to agree [132]. The amendments clarified the independent status of the advisers and did not otherwise alter the resolution's substance [134]. Her Honour accepted that the wording of sub-clause 13.1(b) supported Toll, but held that it took its content from sub-clause 13.1(a), which spoke of "the matter" [135].

Her Honour held that Mr Corrigan's letter and notice were a requirement under sub-clause 13.1(a) and that the meeting convened for 4 October 2005 was the adjourned meeting within sub-clause 13.1(b) [136]. The plaintiffs were therefore entitled to the relief they sought [137].

Why it matters

The decision gives an imperfectly drafted deadlock clause a commercially sensible operation rather than a technical reading of "adjourn" [131]. Drafters of joint venture agreements should state expressly when a deadlock requirement must be made, whether the same resolution must be put again and what notice is required. The result turned on the particular words of one imperfectly drafted clause [88].

Numbers in square brackets are paragraph numbers of the judgment. This note summarises a decided case for education and is not legal advice. See how the notes are written.