New Zealand: High Court grants summary judgment in respect of claims under the Companies Act 1993: Feldman v Dexibit Limited [2021] NZHC 2488

Summary judgment is a process that allows plaintiffs to obtain judgment where they can satisfy the court that the defendant has no arguable defence to a claim. The process is faster and less expensive than a normal High Court trial, however, it has its limits.

Because the process relies on affidavit, rather than oral, evidence, it is ill-suited to cases where facts are disputed. The courts are also reluctant to decide complex issues of law that depend on those facts. For this reason, although in theory summary judgment is available for most types of proceedings, some claims are better suited than others.

Traditionally, claims against a company by a shareholder were understood to fall into the latter category. However, in Feldman v Dexibit Limited [2021] NZHC 2488, the High Court has confirmed that each case must be considered on its own facts. The decision represents (as far as we can tell) the first time in New Zealand where summary judgment has been granted in respect of a claim under sections 118 and 174 of the Companies Act 1993 (Companies Act).

This note provides an overview of the decision.

What did the case involve?

The company in question, Dexibit Limited (Dexibit), was a New Zealand based technology company providing data and analytics software services.

Incorporated in 2015, the company's founding shareholders (under the constitution and a separate shareholders' agreement) were Jeff Feldman, and Angelene and Justin Kearney. All the founders received shares in lieu of a salary, with the Kearneys taking a larger shareholding because of their greater day-to-day involvement in the business. Shares were subsequently issued to other investors, including trustees of Mr Feldman's Family trust.

Mr Feldman later indicated he wished to step down from his role as Chief Technology Officer. An offer was made to purchase his and the trust's shares, which was declined, and shortly after this Dexibit was valued at a much high price than that reflected in the offer.
The relationship between the parties deteriorated and in 2019 the company undertook a round of further capital raising (the Series A Round) that resulted in the dilution of the plaintiffs' shares, and amendments to both the constitution and the shareholders' agreement, in apparent breach of the process required by those documents.

The plaintiffs did not sign the resolutions approving the changes, nor were they ever provided with signed copies of the resolutions as required by the Companies Act. They sought to negotiate their exit from the company, however, the defendants refused to engage, which culminated in the bringing of proceedings.

Two causes of action were pleaded: the first being for Dexibit's failure to comply with the minority-buyout provisions in sections 111 and 118 of the Act; and the second (against the company and the Kearneys) for unfairly prejudicial conduct under section 174.

Although the court was not aware of any cases where summary judgment had previously been granted in respect of these sections, the plaintiffs' case relied on the documentary record, which would not change at trial. If the threshold for summary judgment was met, they argued, relief ought to be granted.

What did the court decide?

A key issue affecting both causes of action was whether the actions taken during the Series A Round affected rights attached to the plaintiffs' shares. The court found that they did, as rights attached to shares included the plaintiffs' right to appoint directors, and the right for the procedure for the alteration of rights not to itself be altered.

Because the plaintiffs' rights were affected, Dexibit was not entitled to act as it had unless this had been approved by a special resolution of each interest group.

It was unclear whether Dexibit's resolution was valid (on the basis it had obtained the necessary signatures), or whether it had failed to comply with this requirement (because the founding shareholders were a distinct interest group and the Kearneys lacked the necessary majority).

However, it was clear that no copy of the signed resolution (whether valid or invalid) was subsequently sent to the plaintiffs. This meant that, if the resolution was valid, the plaintiffs were within time when they issued their notice (some four months later) requiring the company to purchase their shares and were entitled to judgment.

However, the court did not make a final decision on this point, as it remained to be determined whether the resolution had been validly passed.

If not validly passed, then the claim fell to be dealt with in terms of the claim for breach of section 174. Such claims are not normally suitable for summary judgment, however, the court noted that, under the Act, a breach of section 117 is deemed to be unfairly prejudicial conduct. So, a failure to pass a resolution approved by a majority of each interest group would also entitle the plaintiffs to judgment.

The issue of whether there had been a breach was reserved, to be addressed by the parties at the next stage of the proceedings, which was directed at determining the appropriate relief and quantum. However, the upshot was that the plaintiffs succeeded in obtaining summary judgment as to liability.

Conclusion

As, seemingly, the first case in New Zealand where summary judgment has been granted for claims under sections 118 and 174 of the Companies Act, the decision illustrates that summary judgment is a process available to all plaintiffs, except where it has been expressly excluded.

Despite some factual disagreements between the parties, the Court was content to grant summary judgment. Importantly, the claim turned solely on the documentary record, and the factual disputes raised by the defendants were not relevant to the matters in issue.

The rights attached to the plaintiffs' shares had been affected, and the defendants had either failed to pass a resolution approving this, or had failed to provide a signed copy of the resolution to the plaintiffs—the plaintiffs were therefore entitled to relief.

Following this decision, it seems that some shareholders may have an easier avenue to obtaining relief from unfairly prejudicial conduct. Shareholders should be aware of the procedure in sections 111 and 118, but must recognise the strict timeframes that apply when a valid notice is provided.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.