Blue Oil and Morgan Stanley established a joint venture company
to build and operate a fuel storage and distribution facility. They
also entered into a shareholders' agreement pursuant to which
the construction costs were to be funded in instalments in return
for the issue of shares to the participants in the joint venture
In April 2013 the joint venture company resolved to increase the
funding by the issue of additional shares to the participants. Blue
Oil failed to pay its additional amount and fell into default under
the shareholders' agreement.
The shareholders' agreement provided that if Blue Oil was in
default, Morgan Stanley had the option to purchase all of Blue
Oil's shares in the joint venture company for $1.
The question for consideration by the Supreme Court of New South
Wales was whether this option to purchase constituted a penalty or
whether it was a reasonable pre-estimate of the loss that would be
suffered by the party not in default. If it was determined to be a
penalty, it would be unenforceable.
The shareholders' agreement expressly provided that the
option to purchase for $1 was a genuine estimate of the loss and
expense that Morgan Stanley would incur as a consequence of the
default. The Court held that this provision was not conclusive.
Blue Oil argued that the acquisition of shares for which it had
paid $13,000,000 for just $1 was unconscionable and bore no
comparison with the loss that would be suffered by Morgan Stanley
as a result of the default. The payment of the $1 option price was
applicable irrespective of how much Blue Oil had already paid to
the joint venture company. The option price payable was the same
whether the default occurred in respect of the first or last
Morgan Stanley argued that the figure of $1 was appropriate
because they would be left with a worthless partially funded
facility. The Court accepted that this would be the case if the
default occurred at an early stage. However, the later the breach
occurred the greater the likelihood that the facility would in fact
be worth a great deal.
The court held that Blue Oil's loss of all of its value in
the interest in the joint venture company was out of all proportion
to the breach and so constituted a penalty which was therefore
In the matter of Pioneer Energy Holdings Pty Ltd
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The most contentious change is that the transfer of assets must be part of a genuine restructure of an ongoing business.
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