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Company Law Case Summary: Mike Pero Mortgages Limited v Mike Pero [2016] NZHC 3185 per Katz J

Tuesday, July 18, 2017

Background

Mike Pero was the sole director of MPRE Limited and its wholly owned subsidiary MP Real Estate Limited (the MPRE Companies), companies described in the decision as a joint venture between a company ultimately owned by Mike Pero that held a 50% stake and MP Mortgages Limited which held the other 50% stake.

There was a constitution and shareholders' agreement relating to the MPRE companies that provided for each shareholder to appoint one director to the board. The quorum for the board was agreed to be two – one director to be appointed by each shareholder.  For a 10 month period, MP Mortgages Limited did not appoint a director due to a dispute between the shareholders of MP Mortgages Limited, Liberty Financial Group ("Liberty") and NZ Finance.  By the time the case came to trial, that dispute had been resolved and Liberty was the sole shareholder of MP Mortgages Limited.

While Mike Pero was the sole director of MPRE, MP Mortgages Limited, he purported to pass a series of company resolutions, which the Court noted all involved some element of self-interest.  In particular, resolutions were passed where Mike Pero dramatically increased his own remuneration package, provided himself with a car allowance and authorised a large annual "brand ambassador" payment to himself – despite his salary and remuneration being fixed and agreed in the shareholders' agreement.  MP Mortgages Limited sought to have the resolutions declared unlawful and have the sums paid under the resolutions refunded to MPRE.  It sought relief as an unfairly prejudiced shareholder under Section 174 of the Companies Act 1993 ("Act").

The Court's Findings

The shareholders' agreement and MPRE's constitution were very clear that there needed to be two directors of MPRE.  Mike Pero was aware of this and he was aware of the dispute that delayed MP Mortgages Limited appointing a director.  However, it was accepted that if MP Mortgages Limited had in fact known that Mike Pero wished to pass resolutions (he had done so without any reference to MP Mortgages Limited) it would have appointed a director – it in fact had done so as soon as Mike Pero expressed concern that it had no director on the board.

Mike Pero claimed he had relied on expert advice in passing the resolutions and sought to defend the amounts paid on the basis that the remuneration he had resolved to pay himself was fair and reasonable.  This argument was very strongly dismissed by the Court.

The Court had no hesitation in finding that the resolutions were passed in breach of both MPRE's constitution and the shareholders' agreement (which was expressed to override the constitution in a conflict situation).  The Court noted Mike Pero did not discuss the issues in the resolutions with the other shareholder or bring the decisions to that shareholder's attention.  It was held to be critical that there needed to be unanimous shareholder approval of any alteration of Mike Pero's remuneration as this had been set out in the shareholders' agreement.  The board (not having the two required directors) was inquorate, meaning shareholders would need to unanimously ratify that director purporting to exercise a power that director did not have – and to depart from the remuneration set out in the shareholders' agreement would also require unanimous shareholder agreement to vary the terms of the shareholders' agreement.

The Court declared all of the resolutions passed by Mike Pero as invalid as in breach of the constitution of MPRE and unlawful.  It was held that Mike Pero had breached his duty to MPRE to act in accordance with the Act and the company's constitution.  The Court also held Mike Pero had breached his duty to act in good faith and in the best interests of the company – which was also a requirement of the shareholders' agreement.

The Court was satisfied that the affairs of MPRE were operated in a way that was oppressive, unfairly discriminatory and unfairly prejudicial to MP Mortgages Limited as a shareholder – which was a requirement of Section 174 of the Act in respect of the remedies sought by the plaintiff company.  The Court noted that it has wide discretion under Section 174 to make such orders as were just and equitable and considered that the interests of justice meant that Mike Pero's related entities needed to disgorge any financial benefits they had received as a result of the invalid resolutions and any other actions of Mike Pero that increased his remuneration from the amount provided by the shareholders' agreement.

Accordingly, the Court ordered that all the amounts received under the resolutions needed to be repaid to MPRE from which they had been sourced.  The Court declared that Mike Pero's remuneration was as set out in the shareholders' agreement and ordered disclosure of any amounts received by his related interests above that sum.  Interest was awarded on the amounts to be repaid.

Brief Commentary

The Mike Pero case is particularly instructive because it involved both a disregard for duties under the Act as well as a direct breach of a shareholders' agreement (which gives rise to claims for breach of contract).

Section 134 of the Act requires directors to act in accordance with the Act and the constitution of the company.  It is a breach of duty for them not to do so, and they can be held liable to the company for not fulfilling that duty, as was the outcome here.

The Court also held Mike Pero had breached his duty to act in good faith and in the best interests of the company - this is a duty under Section 131 of the Act, but in this case, was also a requirement of the shareholders' agreement.

The case highlights that a director will always act at their peril when they unilaterally make decisions involving self-interest.  Such decisions should always require a full board and even if passed by a full board, the director's interests in the resolution should always be disclosed in the interests register of the company – and it would be prudent to consider getting shareholder approval to the resolution.

The Court had a particular focus on the conflict between Mike Pero's own self-interest and that of the company when he passed the resolutions at issue.  This effectively led to the Court entirely discounting any defence Mike Pero sought to raise.

Last, the case is instructive on the width of the discretion the Court has in applications under Section 174 of the Act – once finding that MP Mortgages Limited was subject to conduct that was prejudicial to it as a shareholder, there was no hesitation in crafting a remedy that did not require further burdensome Court action or cause any other undue difficulty for the shareholder to obtain appropriate remedies.

Please kindly direct any enquiries to:

Andrew Knight on (09) 306 6730 (aknight@mcveaghfleming.co.nz) or

Harry Forsythe on (09) 306 6727 (hforsythe@mcveaghfleming.co.nz)

 

This article is published for general information purposes only.  Legal content in this article is necessarily of a general nature and should not be relied upon as legal advice.  If you require specific legal advice in respect of any legal issue, you should always engage a lawyer to provide that advice.   

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