Connective majority shareholders succeed with appeal

Court decision means they can buy shares for 'fair value'

Connective majority shareholders succeed with appeal

Connective, one of Australia’s largest broker aggregators, has welcomed the Supreme Court of Victoria’s decision to rule in favour of three appeals brought by majority shareholders, Glenn Lees and Mark Haron, in its dispute with Slea Pty Limited.

Responding to the Court of Appeal’s judgment, handed down on Monday, December 18, by Justice Stephen McLeish, Justine Cameron Macaulay and Justice Kevin Lyons, Connective released a statement.

A Connective spokesperson said the judgment was in favour of the majority shareholders, Glenn Lees (pictured above left) and Mark Haron (pictured above right), in a number of important respects.

“We will continue to focus our attention on supporting our members as we have done over the last 20 years,” the spokesperson said. “Connective has grown to be the leading aggregator in Australia, with a membership of over 4,500 brokers who last year settled over $94 billion in loans.”

The original court case involved Lees, Connective CEO and executive director (Millsave Pty Ltd) and Haron, Connective executive director Haron (Connective Services Pty Ltd and OSN) and Graham Maloney, independent non-executive director and chairman, appointed as director and chairman of the boards at Connective companies in 2011.

Background of the Connective court dispute

The 15-year conflict between Slea Pty Limited (‘Slea’), of which Sofianos Tsialtas, now a national sales manager at Liberty, is key principal and Connective Services Pty Ltd (‘Connective’) came to a head on March 28, 2022,  when Justice Ross Robson handed down a 453-page judgment in favour of Tsialtas in the Supreme Court of Victoria.

The court ruled that Tsialtas, a minority shareholder and founder of Connective, had the right to buy the majority of shares in the company following a lengthy legal battle between him and the majority shareholders.

At the centre of the dispute were events occurring during and after Tsialtas’ alleged forced resignation as director of the Connective companies in May 2008.

Judge Robson’s decision raised the likelihood that if Tsialtas (Slea) acquired the majority shares that interest would be on sold to Liberty.

The judgment stated that, in 2011, as a result of a restructure of the Connective business, the business was transferred from Connective Services and OSN to a number of subsidiaries known as the Connective Group, without Slea’s knowledge or consent.

The court stated that following that restructure, and again without Slea’s knowledge, a 25% interest in the Connective Group was sold to Macquarie.

The restructure and sale to Macquarie formed part of Slea’s two legal proceedings – a claim of oppressive conduct and a derivative proceeding, alleging  that the restructure and sale to Macquarie had been undertaken for the improper purpose of circumventing Slea’s pre-emptive rights and the transaction should be declared null and void.

Slea also opposed an approval proceeding by the shareholders to seek court approval for Connective to enter an agreement with AFG for the aggregator to purchase Connective’s assets.

In his orders, Judge Robson found that the conduct of Connective Services and OSN by Millsave, Haron and the directors had been oppressive, unfairly prejudicial and discriminatory against Slea under the Corporations Act.

Majority shareholders’ successful appeal

But majority shareholders, led by Lees and Haron, lodged an appeal in May 2023 involving the oppression, derivative and approval proceedings.

That appeal has been successful; with the Supreme Court of Victoria Court of Appeal ruling being handed down on Monday, December 18, by judges McLeish, Macaulay and Lyons.

In the court of appeal’s findings, the judges found that Judge Robson had made a number of errors in his ruling. Of the 68 grounds of appeal, the court upheld 16.

Among the grounds upheld,  judges McLeish and Macaulay agreed that Judge Robson had erred in finding that Lees and Connective non-executive director Mark Korda did not discuss the potential merger with AFG during a meeting on August 16, 2018, and solely discussed Korda conducting a sale process.

They agreed that the judge should have found that Lees and Korda discussed the potential merger with AFG and the process that ought to be followed to explore that.

The judges also upheld that Robson erred in finding that there was no sensible explanation for the appointment of Korda to explore a possible merger or takeover with AFG and that Korda was appointed as a director due to his independence and his previous experience in dealing with complex and contentious situations, including shareholder disputes.

The court also found that the judge erred in rejecting the evidence of each of the Connective directors (and Korda) that their purpose or intention in relation to the sale process and AFG transaction was not to prevent Slea from obtaining relief in the oppression and derivative proceedings.

The appellants contended that the process could not have prevented the court from making orders to rescind the restructure and return direct ownership of the Connective business to the Connective companies.

The appeal judges also agreed with the applicants’ assertion that the judge erred in finding that the Connective directors breached their duties as directors in giving effect to the sale process and making consequential orders. The judge also erred in finding that the sale process and AFG transaction were oppressive.

But the most important conclusion the court drew regarded the ultimate matter of whether Judge Robson had erred in ordering that Slea be given an option to purchase the Connective shareholding of the majority.

Millsave and Haron in their appeal called for the court to order that Slea sell or be given the opportunity to sell its shareholding at fair market value, rather than the other way around. This was based on the following arguments:

  • the usual order is that the majority buy out the minority at fair market value with any appropriate adjustment on account of the adverse financial impact of oppression by the majority;
  • the ‘least intrusive’ remedy should be ordered and the oppressed minority are entitled to be released from the company if they find that because of the majority’s oppression they can no longer have their capital invested in it;
  • the majority have operated the Connective business to the exclusion of the minority since May 2008 generating extraordinary wealth for the minority;
  • to the extent that ‘moral blameworthiness’ of the majority might sometimes justify a minority buyout, no such circumstances arise and;
  • the preference of the minority, Slea, that a non-shareholder in the Connective companies, Liberty, be given the opportunity to control the Connective business should give way to the desires and preferences of the majority

The applicants said the minimum relief would be to rescind the Macquarie sale and enjoin completion of the AFG transaction.

“They submit that the judge erred in regarding a buy-out by the majority as rewarding them by giving them what they sought to achieve through their oppressive conduct,” the appeal court findings stated.

“The orders he made instead punished the majority, which not only owned the larger part of the shareholding but operated the business.

“They [majority shareholders] had built the business from a value of about $4 million when Mr Tsialtas left, to $120 million by the time of the AFG transaction, and dividends had been paid reflecting its success. Glenn Lees and Mr Haron were personal guarantors of the business, but Mr Tsialtas was not.”

The judges said that Slea submits that an order providing for its shares to be sold would not undo the oppressive conduct, which was directed to that very end.

“While a buy-out by the minority was an unusual remedy, the scope and scale of the oppression make this an unusual case.”

Judges McLeish and Macaulay said the applicants’ submissions should be accepted.

“We do not gainsay the egregious and pervasively oppressive manner in which the majority has conducted the affairs of the Connective companies, the dishonesty that the judge identified (including flagrant breaches of the obligations on parties to litigation) or the complete lack of acceptance that the conduct in question was both in fundamental breach of the duties of the directors and profoundly unfairly prejudicial to Slea.

“Slea was right to emphasise these matters and to submit that the oppression in this case has been unusually broad in scale and scope.”

Court of Appeal’s decision

The judges concluded that the relief that responded most appropriately to the oppression is that Millsave and Haron have the option of acquiring Slea’s shares for a fair value, “failing which Slea should have the option of buying their shares, again for a fair value”.

They came to this conclusion due to a number of factors.

“Firstly,  while we accept that Slea wishes to acquire the majority’s shares, it is also plain, in our view, that the majority wishes to acquire Slea’s shares. There is no neat divide by which one party can be designated a ‘seller’ and the other a ‘buyer’,” the judges said.

They said there was nothing unusual in a third party such as Liberty standing behind a shareholder (Slea), as a financier, to assist in litigation with an entitlement to some reward in the event of success.

“Nevertheless, the situation is complicated to a degree by the fact that Liberty is itself a participant in the mortgage lending market. It appears to have had its own commercial opportunity to pursue, beyond mere financial reward, through Slea’s success in the litigation,” it was stated.

Other factors include that Lees and Haron were overwhelmingly responsible for the prosperous state that the Connective business now enjoyed. The judges did also not “consider that an order enabling the majority to acquire Slea’s interest would give the majority what they had sought to achieve through their oppressive conduct, in any meaningful way”.

Remaining factors, include that the Macquarie transaction would be unwound pursuant to the orders already made; and that the ‘phase 3’ sales process and the AFG transaction had been taken out of the picture.

In conclusion,  the court said that the effect of the oppression was appropriately undone by an order that Millsave and Haron had the option of acquiring Slea’s shareholding for a fair value. This would strike “a balance between relieving Slea of the oppression and enabling Glenn Lees and Mr Haron to continue to operate the business they have developed”.’

Judge Robson had in the earlier court case ordered that Millsave and Haron pay Slea's costs of the oppression proceeding, including all reserved costs.

“We see no reason to disturb that order,” said judges McLeish and Macaulay. "The applicants offered no reason why, as ground 66 asserts, those costs should not have been ordered to be paid on the indemnity basis.

“The judge also made specific costs orders relating to the Macquarie transaction. They are not challenged and those orders should remain in place.

“Leave to appeal should be granted in each of the three appeals and the appeals should be allowed. We propose that the Court publishes draft forms of order and hears the parties before making orders finally disposing of the appeals, including orders as to the costs of the appeals.”

Judge Lyons agreed with the other judges except on the approval proceeding, where he said  Millsave and Haron undertook the AFG sale process to deprive Slea of the opportunity of obtaining the relief sought in these proceedings and/or to pressure Slea to the negotiating table to resolve these proceedings in some way.

“If successful, it would have had the effect of eliminating Slea’s interest in the Connective business.”

Judge Lyons concluded that he would allow the appeals in respect of the oppression proceeding and the derivative proceeding but would dismiss the appeal in the approval proceeding.