Beverley v Drylandcarbon GP One Limited [2022] NZHC 3606 (22 December 2022)

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IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY

I TE KŌTI MATUA O AOTEAROA TE WHANGANUI-A-TARA ROHE

CIV-2022-485-000158
[2022] NZHC 3606

BETWEEN	ANTHONY and WENDY BEVERLEY Applicants
AND	DRYLANDCARBON GP ONE LIMITED First Respondent
AND	DRYLANDCARBON ONE MANAGEMENT LIMITED Second Respondent
AND	DC ONE H1 LIMITED Third Respondent
AND	WILLIAM JAMES WATERHOUSE LECKIE Fourth Respondent
AND	CHRISTOPHER GORDON LEWIS MORRISON Fifth Respondent
AND	LEWIS TUCKER AND COMPANY LIMITED Sixth Respondent
AND	PHEASANT TAIL HOLDINGS LIMITED Seventh Respondent
AND	LEWIS TUCKER FOREST PARTNERS LIMITED Eighth Respondent
AND	LEWIS TUCKER FP INVESTMENTS LIMITED Ninth Respondent
AND	FOREST PARTNERS GP LIMITED Tenth Respondent AND

Hearing:	3 and 4 October 2022
Appearances:	M G Colson KC, K J Dobbs and M R M Gale for Applicants A S Olney and M Mallett for Fourth to Eleventh Respondents
Judgment:	22 December 2022

This judgment was delivered by me on 22 December 2022 at 3.00 pm pursuant to Rule 11.5 of the High Court Rules

What has happened	[5]
Section 165 of the Companies Act 1993	[31]
Standing	[34]
Threshold requirements	[35]
Mandatory criteria	[38]
The nature of the proposed claims	[41]
Likelihood of success – s 165(2)(a)	[43]
Diversion of corporate opportunity	[47]
Use of company information	[73]
Targeted special resolutions and the permanent transfer of DC Manager’s staff to Lewis Tucker	[79]
The position of the sixth to eleventh respondents	[84]
Section 165(2)(b) – cost/benefit analysis	[88]
Section 165(2)(c) – any action already taken by the company	[93]
Section 165(2)(d) – interests of the company or related company	[94]
The prudent business person	[103]
The position on costs	[104]
Result	[113]

[1] Anthony Beverley, William Leckie and Christopher Morrison established a carbon afforestation fund to produce carbon credits (NZUs) for the fund’s investors. The first to third respondents (the intended plaintiffs) are the corporate vehicles incorporated to pursue their joint enterprise. Major corporate investors participated in the fund via a limited partnership registered for the purpose. The fund has been very successful, but the relationship between Mr Beverley, on the one hand, and Messrs Leckie and Morrison (who for convenience I shall refer to as the Directors), on the other, has broken down.

[2] The Directors have now established a second fund, incorporating the eighth to eleventh respondents for that purpose. Mr and Mrs Beverley (the Beverleys) consider that in establishing the second fund the Directors unlawfully diverted a corporate opportunity belonging to the intended plaintiffs, misused company information belonging to the intended plaintiffs, and breached statutory¹and fiduciary duties owed by them as directors to the intended plaintiffs.

[3] The Beverleys apply for leave under s 165 of the Companies Act 1993 (the Act) to bring a derivative action on behalf of the intended plaintiffs against the Directors and their corporate entities (which include the sixth and seventh respondents) involved in the development, marketing and pursuit of the second fund.

[4] The Directors oppose the application and say the Court should not authorise the Beverleys to bring claims that no reasonably prudent business person would pursue because, principally:

¹The Beverleys rely primarily upon ss 131, 137 and 145 of the Companies Act 1993.

[5] Anticipating the introduction of the New Zealand Emissions Trading Scheme, Mr Beverley began exploring commercial opportunities in carbon afforestation. He prepared a concept document, and in late 2017 he approached the Directors with his Drylandcarbon concept.

[6] The Directors are experienced fund managers in the agricultural, horticultural and forestry sectors and the ultimate owners of the sixth respondent, Lewis Tucker and Company Ltd (Lewis Tucker). Lewis Tucker is an investment banking, funds management and corporate advisory firm.

[7] The Directors expressed an interest in becoming involved in the commercial venture with Mr Beverley. In short, the venture was to establish a carbon afforestation enterprise. A limited partnership was to be incorporated and the limited partners were to provide the capital to establish a geographically diverse forest portfolio to produce carbon credits (NZUs) and tree harvest revenue. The targeted investors were to be large greenhouse gas emitters seeking a low-cost supply of NZUs for offset or surrender under the Emissions Trading Scheme. Once the portfolio was generating material volumes of NZUs, operating expenses were to be funded through the sale of those NZUs. The balance of the NZUs would be distributed to the limited partners in accordance with their respective entitlements.

[8] The intended plaintiffs, Drylandcarbon GP One Ltd (DC General Partner), Drylandcarbon One Management Ltd (DC Manager) and DC One H1 Ltd (H1), were incorporated to pursue the joint enterprise, which included the establishment and registration of Drylandcarbon One Limited Partnership (Drylandcarbon LP).

[9] The Drylandcarbon concept was promoted to potential investors during 2018. Mr Beverley’s position is that what was taken to market was in all material respects the business model set out in his concept document. Mr Beverley also says that from the outset it was anticipated there may be further related commercial opportunities and it was envisaged that such opportunities would be owned equally by the Beverleys, and the Directors, as recorded in an initial “strawman” discussion document drafted and circulated by Mr Beverley in February 2018, and in other documents.

[10] It is necessary to describe in more detail the corporate structure that was adopted in pursuit of the enterprise. Central to the structure is Drylandcarbon LP, which was established in March 2019. The limited partners and their respective partnership interests in Drylandcarbon LP are Air New Zealand Ltd (20.6612%); Contact Energy Ltd (16.5289%); Genesis Energy Ltd (25.2066%); Z Energy Ltd (37.1901%); DC One H2 Ltd (H2) (0.2066%); and DC One H3 Ltd (H3) (0.2066%) (together the DC Limited Partners). H2 and H3 are owned by interests associated with the Beverleys and the Directors respectively.

[11] The business of Drylandcarbon LP is recorded in a Limited Partnership Agreement dated 7 March 2019 between DC General Partner and the DC Limited Partners (LPA). The mandate of Drylandcarbon LP is to invest capital to establish a diversified forest portfolio within New Zealand for the primary purpose of generating NZUs at a cost that meets certain investment criteria, and for secondary purposes of obtaining revenue from other activities that do not detract or hinder the primary purpose and are considered to be in the best interests of Drylandcarbon LP.

[12] DC General Partner was incorporated to act as the General Partner for Drylandcarbon LP. DC General Partner has statutory obligations under the Limited Partnerships Act 2008 and contractual obligations under the LPA.

[13] Of relevance to the issues arising is cl 6.4 of the LPA, which requires DC General Partner to perform its functions and duties exclusively for the DC Limited Partners. It also places restrictions upon affiliates (as defined) of DC General Partner providing similar functions and duties for itself or others. That clause reads:

and the relevant Affiliate provides the Limited Partners adequate information regarding the new investment vehicle before any other investors are approached and the Limited Partners are offered an opportunity to invest.

[14] Drylandcarbon LP is governed by a six-member Advisory Committee established by cl 4 of the LPA. The Advisory Committee operates much like a Board of Directors, holding regular meetings, having comprehensive reporting and providing general oversight. Some of DC Manager’s activities require the specific approval of the Advisory Committee.

[15] DC Manager was incorporated to act as the Manager of Drylandcarbon LP. DC Manager entered into a Management Services Agreement dated 7 March 2019 with Drylandcarbon LP (MSA). DC Manager is contracted under the MSA to manage the operations of Drylandcarbon LP and its investments, including being responsible for co-ordinating services from external specialists as needed. The activities of DC Manager have been resourced from a combination of direct employees, secondees from Lewis Tucker, and pursuant to service agreements.

[16] DC Manager is contractually required to act bona fide in what it believes to be the best interest of Drylandcarbon LP. Further, the MSA requires DC Manager to perform its services exclusively for Drylandcarbon LP and places restrictions upon

The External Manager’s appointment is exclusive. Accordingly, during the term of this Agreement:

[17] The Beverleys and the Directors were to receive their primary financial benefit through their ownership interests of DC Manager. DC Manager receives a base fee for its services at a margin of capital deployed, and a performance fee comprising a 5 per cent entitlement to any distributions (including distributions of NZUs) made by Drylandcarbon LP (other than a distribution of capital from the sale of an interest in land).

[18] H1 is the parent company of DC General Partner and DC Manager. It is a holding company and owns 100 per cent of the shares in both DC General Partner and DC Manager. It is owned 50 per cent by the Beverleys as trustees for the Puriri South Trust, and 50 per cent by the seventh respondent, Pheasant Tail Holdings Ltd (Pheasant Tail), a company owned and controlled by interests associated with the Directors.

[19] Initially, Mr Beverley and the Directors were the directors of H1, DC General Partner and DC Manager and all decisions were by unanimous agreement. Mr Beverley ceased to be a director of DC General Partner and DC Manager on 18 May 2021, in circumstances described below.

[20] Following the establishment of the Drylandcarbon enterprise, Mr Beverley’s relationship with the Directors quickly deteriorated. In November 2020, Mr Beverley indicated he was considering selling his entire interest in the Drylandcarbon enterprise.

[21] Ultimately, it was agreed the parties would attend mediation. On 20 April 2021, they reached an agreement at mediation (the mediated agreement), which was signed by Mr and Mrs Beverley and the Directors, and contained the following features:

[22] A joint statement was released to the Advisory Committee on 22 April 2021 to the effect Mr Beverley had decided to step back from the business and to explore the sale of his interest in the enterprise.

[23] The Directors were not prepared to acquire the Beverleys’ interest, nor have the Beverleys sold their interest to anyone else.

[24] On 17 May 2021, Mr Beverley advised the Directors that he had been unable to find an appropriate independent person to act as his nominee on the Boards of DC General Partner and DC Manager. He also noted that although the parties’ lawyers had been progressing the form of the shareholders agreement, that matter remained

[25] The Directors considered Mr Beverley was in breach of the mediated agreement and, on 18 May 2021, they removed him as a director of DC General Partner and DC Manager.

[26] In August 2021, Mr Beverley received a Lewis Tucker investment flyer promoting a new carbon afforestation fund (the Forest Partners opportunity). The Beverleys consider the investment flyer described a replica of Drylandcarbon LP and its supporting corporate structure, and did so using large sections of text and graphics reproducing material from both the 2017 concept document, as well as marketing and other documents developed for the promotion of Drylandcarbon LP. The Beverleys raised concerns with the Directors in respect to the new fund and the extent to which it replicated Drylandcarbon LP.

[27] Following circulation of the investment flyer, expressions of interest were taken from potential investors. Subsequently, in April 2022, the eighth to eleventh respondents were incorporated as the entities through which the new fund would be established. The eighth to eleventh respondents were incorporated as subsidiaries of Pheasant Tail. Forest Partners Limited Partnership (Forest Partners LP) was established on 11 April 2022 and registered the following day. Three of the four principal investors in Drylandcarbon LP are also investors in Forest Partners LP. The fourth principal investor is Todd Corporation, to whom the Drylandcarbon concept had been marketed in 2018.

[28] In December 2021, Mr Beverley became aware of a proposal to permanently transfer all DC Manager’s staff to Lewis Tucker. The Beverleys consider this would enable and necessitate Lewis Tucker to provide all DC Manager’s management services to Drylandcarbon LP for a fee, and would also provide Lewis Tucker with staff and expertise enabling the Directors to pursue the Forest Partners opportunity more easily.

[29] Further, DC Manager submitted a special resolution to the DC Limited Partners on 1 March 2022, seeking approval that the total committed capital had been fully committed and that the period of exclusivity had ended. The DC Manager then proposed a further special resolution of the DC Limited Partners on 22 March 2022, seeking that affiliates of DC General Partner and DC Manager be released from the exclusivity provisions of the LSA and MSA. This was expressly sought to:

... enable entities indirectly associated with the General Partner and the Manager to perform similar functions and duties for themselves or others in relation to a business with a purpose similar to the Drylandcarbon Mandate without the risk of them being restricted as “Affiliates” of the General Partner or Manager.

[30] This special resolution was passed, and its effect was to allow the Directors to advance Forest Partners LP but leave H1, DC General Partner and DC General Manager constrained pursuant to the LPA and the MSA respectively.

[31] Under s 165 of the Act, the Court may grant leave to a shareholder or director of a company to commence a derivative action and bring proceedings “in the name and on behalf of” that company “or any related company”.

[33] An applicant with standing must satisfy either of the thresholds set by s 165(3), following which the Court may exercise its discretion by reference to the four mandatory criteria in s 165(2), with a residual discretion to take into account other considerations.

[34] There is no challenge to the Beverleys’ standing to make this application. Their standing derives from the fact they are shareholders of H1 (and Mr Beverley is a

[35] Section 165(3) establishes a threshold requirement. In terms of s 165(3)(a), before I can grant the Beverleys leave, I must be satisfied the intended plaintiffs do not intend to bring proceedings in respect of the claims they wish to pursue.

[36] The Court of Appeal in He v Chen held the Court may draw inferences from the available evidence in deciding whether either threshold is met. It said, “We consider the direction that the court be ‘satisfied’, without more, permits the threshold to be met in this way, if the evidence justifies it.”³The Court considered such an approach was especially appropriate where the company is unable, as a matter of practical reality, to make a decision whether to bring the proceeding.⁴It said:

Situations in which this has proved to be the case include (1) where the company’s board is deadlocked, (2) where the proposed defendants of the derivative action control the board, and (3) where the company has ceased trading. In these situations it would be unrealistic to suggest the absence of positive affirmation by the company as to whether it intends to bring proceedings means the threshold requirement cannot be met.

[37] Here, the intended plaintiffs are not represented. However, they are controlled by the Directors and there is no suggestion they intend to bring the claims set out in the draft statement of claim that accompanies the Beverleys’ application. Further, it has not been suggested by the Directors the threshold requirement in s 165(3)(a) is not met in this case. I am, therefore, satisfied the threshold in s 165(3)(a) is met.⁵

[38] The Court must exercise its discretion whether to grant leave by reference to the four mandatory criteria set out in s 165(2). Counsel agree that in assessing each criterion the Court should adopt the standard “which would be exercised by a prudent business person in the conduct of his or her own affairs when deciding whether to bring a claim”.⁶

[39] In He v Chen, the Court confirmed that the prudent business person test should be adopted in assessing all criteria in s 165(2) as follows:⁷

This section requires the court to assess each consideration separately. The relative weight each carries will depend on the facts of the case. In assessing each statutory criterion the court should adopt the standard “which would be exercised by a prudent business person in the conduct of his or her own affairs when deciding whether to bring a claim.” It is very well established by High Court authority, which we endorse, that the prudent business person standard applies to an assessment of s 165(2)(a). It has also consistently informed the Court’s assessment of the remaining three criteria. While we emphasise it is the express words of each statutory consideration which the Court must have regard to, we consider it helpful to assess whether each criterion applies to the prudent business person standard.

[40] While consideration of the four criteria in s 165(2) is mandatory, ultimately the granting of leave is discretionary and not limited by those criteria.

[41] The Beverleys have submitted a draft statement of claim to support their application. It contains seven causes of action which all arise out of the involvement of the proposed defendants (the fourth to eleventh respondents) in the pursuit of the Forest Partners opportunity.

[42] Mr Colson helpfully set out the relevant law that underlies each of the causes of action. I do not consider it necessary to do that in the same detail here. I consider it more helpful in this case to consider the primary allegations underlying the causes of action, which can be summarised as:

[43] Section 165(2)(a) does not lay down any particular threshold that the merits of a claim must satisfy before leave can be granted.⁸In assessing the likelihood of success the Court does not conduct a mini-trial nor attempt to make a determination of the ultimate merits of the claim.⁹

[44] The authors of Company Law in New Zealand note the lack of consistency in the courts’ language as to the standard to be applied and:¹⁰

Whatever formulation a particular court ultimately adopts, the focus under s 165(2)(a) will be on the apparent strength of the claim and also any defences or counterclaims available to the proposed defendant. As Vrij v Boyle

indicates, it is important for the applicant to be able, at the time of the leave application, to particularise his or her claims sufficiently and to provide the court with a sufficient evidential basis for it to be able to assess in a general way the credibility of the allegations made.

[45] The Court of Appeal has confirmed that the inquiry is whether the claim to be advanced is at least arguable.¹¹Mr Olney submits that the identification of an arguable case to be advanced may be insufficient when balanced against other factors, such as if the costs of taking the proceeding are high when considered against the resources of the intended plaintiff. I do not see any conflict in these approaches. The applicant must establish that the claim to be advanced is at least arguable, and the more likely the claim is to succeed the stronger the case for granting leave.¹²

[46] In challenging the prospects of success of the proposed derivative action, the Directors engaged primarily on the first three matters in [42(a)] above, and so it is to them I now turn.

[47] The Beverleys’ position is that the Forest Partners opportunity belongs to the intended plaintiffs, or is sufficiently connected to the business of the intended plaintiffs that it was a breach of duty for the Directors to pursue it for themselves.

Directors must not pursue for themselves business opportunities that would connect with the company’s business, unless the company consents. This duty, called the “corporate opportunity” duty, operates whether or not the director has used his or her position, including use of confidential information, to pursue the opportunity. It is, hence, a discrete head of claim.

The most difficult aspect of the law relating to corporate opportunities is determining just when an opportunity “belongs” to the company. After all this time, the law has still not developed a generally accepted test or tests.

[50] The Beverleys say it was always envisaged that further commercial opportunities would be pursued under the broader Drylandcarbon management umbrella, and that given the success of Drylandcarbon LP, the creation of a further fund and management enterprise was a natural opportunity for the intended plaintiffs. They also consider the contractual documentation establishing Drylandcarbon LP contemplates the prospect of at least H1 pursuing other management enterprises, including those that provide the same or similar services as those provided to Drylandcarbon LP, once Drylandcarbon LP was fully invested (or earlier, if approval was given by the DC Limited Partners).

[51] Other matters relied upon to show the Forest Partners opportunity was connected with the intended plaintiffs’ business included that Forest Partners LP was promoted using a flyer significantly copying Mr Beverley’s original concept document and other promotional materials relating to Drylandcarbon LP, Forest Partners LP replicates the Drylandcarbon LP concept and structure, its major investors comprise three of Drylandcarbon LP’s existing investors, and the fourth major investor is Todd Corporation to whom the Drylandcarbon investment opportunity had been promoted. The submission is made that it can be inferred that Todd Corporation’s involvement with Forest Partners LP is a result of the Directors’ involvement with the intended plaintiffs.

[52] The Directors say that in determining the scope of a director’s duties a nuanced approach is required. They refer to Canadian Aero Service Ltd v O’Malley where Laskin J said:¹⁵

The general standards of loyalty, good faith and avoidance of a conflict of duty and self-interest to which the conduct of a director or senior officer must conform, must be tested in each case by many factors which it would be reckless to attempt to enumerate exhaustively. Among them are the factor of

position or office held, the nature of the corporate opportunity, its ripeness, its specificness and the director’s or managerial officer’s relation to it, the amount of knowledge possessed, the circumstances in which it was obtained and whether it was special or, indeed, even private, the factor of time and the continuation of fiduciary duty where the alleged breach occurs after termination of the relationship with the company, and the circumstances under which the relationship was terminated, that is whether by retirement or resignation or discharge.

[53] The Directors argue the claims the Beverleys wish to make on the intended plaintiffs’ behalf have insufficient prospects of success because there was no commercial opportunity in a relevant sense belonging to one or more of the intended plaintiffs. They submit the position of each of the intended plaintiffs needs to be considered individually, and for that reason there are several strands to the argument. In my view, for the reasons that follow, none of the matters raised suggest the intended plaintiffs do not have an arguable case under this head of claim.

[54] There is an air of unreality about the submission that the position of DC General Partner, DC Manager and H1 must be considered in isolation. Those companies were incorporated with common ownership and control to act together in advancing a carbon afforestation fund and such other commercial opportunities that arose from that. I agree with Mr Colson KC that it is artificial to divide each one from the other on the basis of the precise role that they were to perform within that enterprise. Such an approach fails to recognise that the derivative action is a procedural device “designed to prevent a wrong going without a remedy”¹⁶and thus should be applied flexibly to serve the interests of justice.

[55] In relation to DC General Partner and DC Manager, the Directors argue these were single purpose vehicles incorporated to implement the mandate of Drylandcarbon LP. They say it is common ground that it was not envisaged that a subsequent afforestation fund would be conducted through DC General Partner or DC Manager, and that if a subsequent fund was to be established it would be conducted through different entities. They say the LPA and MSA provide that DC General Partner and DC Manager are precluded from participating in another fund and that DC General Partner and DC Manager accepted, by the terms of the LPA and MSA

¹⁶Universal Project Management Ltd v Fort Gilkicker Ltd [2013] Ch 551 at [24].

[56] The Directors’ arguments cannot prevail for several reasons. First, there is a factual dispute that I cannot resolve on this application as to the exact extent to which possible future commercial opportunities were considered. There is, however, more than sufficient evidence that other opportunities were a real possibility and that they included a nursery business, a carbon trading business, and a forest management business. As far as a further carbon afforestation fund is concerned, that was also considered and concerned native forest species (rather than the exotic species mandated by Drylandcarbon LP) and was originally called Drylandmanuka and later Drylandnative. Dryland Native Ltd was incorporated in December 2019 as a subsidiary of H1, but this initiative was later put on hold to maintain focus on the establishment of the exotic forest portfolio.

[57] I do not accept it is the case there was no prospect that the Forest Partners opportunity could have been pursued by DC General Partner and DC Manager. It is accepted by the Beverleys that the LPA and MSA were inconsistent with DC General Partner and DC Manager pursuing another afforestation fund. There is also expert evidence that there are good commercial reasons why they might not be used for such a purpose. That said, there remained the possibility, notwithstanding the terms of the LPA and MSA, that the DC Limited Partners might give both DC General Partner and DC Manager permission to provide services for an alternative fund by way of special resolution. In this regard, it is notable the Advisory Committee did pass a special resolution effectively authorising Forest Partners LP to be created in circumstances where three out of four of the major investors wished to participate in that fund.¹⁷

[58] Mr Olney recognised the possibility that the DC Limited Partners could have passed a special resolution to allow DC General Partner and DC Manager to provide services for a second afforestation fund, but submits that given the trajectory of

[59] A further difficulty with the Directors’ arguments is that the authorities show that breach of fiduciary duty by diversion of a corporate opportunity can occur even in circumstances where the prospects of the company itself succeeding in obtaining the contract or benefit sought are remote or even nil. Mr Colson took me to several authorities. These included Canadian Aero Service Ltd v O’Malley, also relied upon by the Directors, where Laskin J said:¹⁸

The reaping of a profit by a person at a company’s expense while director thereof is of course an adequate ground upon which to hold the director accountable. Yet there may be situations where a profit must be disgorged, although not gained at the expense of the company, on the ground that a director must not be allowed to use his position as such to make a profit even if it was not open to the company, as for example, by reason of legal disability, to participate in the transaction. An analogous situation, albeit not involving a director, existed for all practical purposes in the case of Phipps v Boardman, which also supports the view that liability to account does not depend upon proof of an actual conflict of duty and self-interest. Another, quite recent, illustration of a liability to account where the company itself had failed to obtain a business contract and hence could not be regarded as having been deprived of a business opportunity is Industrial Development Consultants Ltd v Cooley ... There, the managing director, who was allowed to resign his position on a false assertion of ill health, subsequently got the contract for himself. That case is thus also illustrative of the situation where a director’s resignation is prompted by a decision to obtain for himself the business contract denied to his company and where he does obtain it without disclosing his intention.

What these decisions indicate is an updating of the equitable principle whose root lies in the general standards that I have already mentioned, namely, loyalty, good faith and avoidance of a conflict of duty and self-interest. Strict application against directors and senior management officials is simply recognition of the degree of control which their positions give them in corporate operations, a control which rises above day-to-day accountability to owning shareholders and which comes under some scrutiny only at annual general or at special meetings. It is a necessary supplement, in the public interest, of statutory regulation and accountability which themselves are, at one and the same time, an acknowledgement of the importance of the corporation in the life of the community and of the need to compel obedience by it and by its promoters, directors and managers to norms of exemplary behaviour.

[60] In Hunter Grain Ltd v Price, Allan J said that the principle underpinning the corporate opportunity doctrine: ¹⁹

... does not depend for its application on whether a company might itself take up the opportunity if it had the chance; it is policy driven. A director allowed to take up an opportunity personally, if his company is not able to do so, would be tempted to reduce or play down his company’s ability.

[61] In Kawhia Offshore Services Ltd v Rutherford,²⁰Kawhia had a contract to provide marine services to BHP. The contract was terminated by BHP, and a contract for the services was entered into between BHP and a company called Marine Mooring. At all relevant times, Mr Rutherford was a director of both Kawhia and Marine Mooring. Kawhia brought an action against Mr Rutherford and Marine Mooring alleging Mr Rutherford had breached his fiduciary duty as director in negotiating the contract on behalf of Marine Mooring. After noting that a director cannot take for him or herself a specific business opportunity which the company is pursuing or would or might pursue, Glazebrook J stated:

[25] The barrier goes further than including a realistic business opportunity. A breach of fiduciary duty can occur even in situations where the prospects of the company itself succeeding in obtaining the contract or benefit sought are remote or indeed nil ... the rule is policy driven. A director allowed to take up an opportunity personally would be tempted to reduce or down play the company’s ability.

[62] Glazebook J held that in order to be liable there must be a linkage between the director’s office and the usurpation of the company’s business opportunity and that such a linkage existed on the facts before her as:

[43] On the basis of the principles set out above Mr Rutherford’s arguments must fail. The contract with BHP was the only business of Kawhia Offshore. There must in such circumstances, be a real sensible possibility of conflict between Mr Rutherford’s personal interest and his duties to Kawhia Offshore in his even considering taking on the contract for himself. In such a case, it is irrelevant whether or not Kawhia Offshore had any prospect of retaining the contract with BHP or negotiating a new contract. McGechan J in [Holden v Architectural Finishes Ltd]²¹ made it clear that the concept of not usurping a company’s business opportunity includes a situation where the prospect of the company, retaining or acquiring that business opportunity is remote or indeed nil. It follows that it is also irrelevant to whether Mr Rutherford was convinced that there was no such prospect or not.

²⁰Kawhia Offshore Services Ltd v Rutherford HC Hamilton CP 61-99, 24 April 2002.

[63] Finally, it cannot be the case, as is submitted, that by the terms of the LPA and MSA it was accepted by DC General Partner and DC Manager that affiliates were entitled to be involved in another fund once all the capital in Drylandcarbon LP was fully committed. The fact the LPA required DC Limited Partners be given the first opportunity to invest in any subsequent fund confirms the Beverleys’ position it was always envisaged there may be a second or subsequent funds. However, the LPA and MSA regulate the relationship between DC General Partner and the DC Limited Partners (in respect of the LPA) and DC Manager and Drylandcarbon LP (in respect of the MSA). They do not speak to the duties owed by the Directors to DC General Partner and DC Manager or any liability that affiliates that participated in breaches of duty might incur.

[64] In respect to H1, the Directors present a different analysis. They say the Beverleys’ application to bring a derivative action in the name of H1 depends upon several contentions, namely that:

[65] The Directors submit there is an absence of credible evidence there was an agreement or understanding of the sort alleged, and the existence of such an agreement is implausible in circumstances where Mr Beverley had not previously done business with the Directors and none of them had established an afforestation fund before. The Directors also deny there was any agreement to pursue other commercial opportunities beyond ”ancillary opportunities relating to the same portfolio”. They rely upon a draft shareholders agreement prepared by Buddle Findlay in 2019, which they say did not

[66] Next the Directors argue that if there had been such an agreement or understanding, it was no longer operative by mid-2021 when the Directors first took steps towards establishing Forest Partners LP. Related to this, they say the relevant context must be considered. That context is said to be the breakdown in the relationship between Mr Beverley and the Directors, and the April 2021 mediated agreement which provided that the Beverleys would sell their entire interest in the enterprise and did not give the incoming investor a right to participate in any subsequent fund. The Directors submit that this context means there could have been no breach by the Directors of duties owed to H1 from that time.

[67] The next matter advanced is that if the parties had agreed to establish another afforestation fund, they would not have chosen to hold their interests in such a fund through H1. The reasons include that the parties might contemplate the possibility that a shareholder would sell down their interest in one fund but not in another, or the shareholders might wish to sell their combined interest in one fund but not another, or they might agree to contribute resources to the establishment of a second fund otherwise than equally.

[68] The Directors’ arguments proceed from an incorrect premise. The claims the Beverleys wish to advance on behalf of the intended plaintiffs do not depend upon the existence of an agreement between Mr Beverley and the Directors that any subsequent fund would be jointly owned and controlled by them through H1. The draft statement of claim pleads breaches of statutory and fiduciary duties.²²Mr Colson advises that the existence of an understanding that future opportunities would be developed and ultimately jointly owned and controlled is relied upon as context only.

[69] It is also not correct that there could have been no breach by the Directors of duties owed to H1 because any agreement or understanding was no longer operative by mid-2021. It is true that the relationship between Mr Beverley and the Directors appears to have broken down by the time they attended mediation, but the mediated agreement is not a complete answer to the allegations the Directors breached a fiduciary duty not to divert a business opportunity from the intended plaintiffs. The acknowledgement in the mediated agreement, that if the Beverleys sold their interest the Directors would not be obliged to pursue any further fund with the incoming investor, could not give them free rein to appropriate opportunities and resources from the intended plaintiffs. Further, the mediated agreement did not represent a final parting of the ways between the Beverleys and the Directors. That may have been the result had the Directors chosen to purchase the Beverleys’ entire management and partnership interest, but they did not do so. In those circumstances, the mediated agreement provided that if the Beverleys had not sold their interest by 30 November 2021 the parties were to return to mediation.

[70] Mr Olney relies upon Nobilo v Nobilo which concerned an accountancy firm, NCL, owned by a husband and wife.²³Following the break-up of the spouses’ relationship, Mrs Nobilo set up a separate accountancy firm taking a large percentage of the clientele with her. Mr Nobilo sought leave to bring a derivative action against Mrs Nobilo on behalf of NCL, but was unsuccessful. Importantly, this was not because upon the breakdown of the parties’ relationship there could be no breach of duty owed to NCL by Mrs Nobilo. The Court of Appeal recognised that Mrs Nobilo’s actions in inviting clients to have their work done by a new company owned by her was, on its face, “a clear breach of the fiduciary duty Mrs Nobilo owed to NCL as a director”.²⁴ Mr Nobilo was not granted leave to bring a derivative action for other reasons. The case supports the position of Mr and Mrs Beverley.

[71] I do not accept the Directors’ argument that it is necessarily the case that had the parties agreed to establish another afforestation fund, they would not have chosen to hold their interest in the new fund through H1. While there may have been disadvantages in doing so, there is force in the expert evidence before me that the

[72] Further, the fact that some of the DC Limited Partners consented to the creation of Forest Partners LP (and invested in the new fund) cannot validate a breach of the Directors’ duties because such duties were not owed to the DC Limited Partners but to the intended plaintiffs. The agreement of the DC Limited Partners to the establishment of Forest Partners LP enabled the Directors and their several entities to pursue the Forest Partners opportunity but cannot absolve the Directors for breaches of duties owed to the intended plaintiffs.

[73] The Beverleys argue the Directors breached s 145 of the Act which prohibits a director from disclosing or otherwise using company information other than for the company or as required by law. The section is not concerned with confidential information per se but protects all information that would otherwise be available to a director.²⁵

[74] Mr Olney submitted that care is needed when looking to restrict the use of information, relying on Holden v Architectural Finishes Ltd, where McGechan J said:²⁶

It is as well to keep principle in mind. The fiduciary obligation is designed to protect the company against exploitation. There will be no protection if a director can acquire truly confidential information, or learn of unique opportunity, resign, and exploit. On the other hand, prohibitions must not be taken too far. More general knowledge and skills acquired in the course of office, even if quite specialised, and use of information or opportunities learned but in any event globally available, are not to be suppressed. To do so would injure commerce, and with that the public interest. The dividing line at times is an exercise in judgment.

[75] The Directors submit the Beverleys have failed to identify with precision the information in issue, that some of the information was generic or publicly available,

[76] In my view, the evidence is quite overwhelming that the Directors have utilised information that was available to them by virtue of their positions as directors of the intended plaintiffs to establish Forest Partners LP. For instance, Mr Beverley has provided a detailed analysis of the contents of the Drylandcarbon promotional material and the Forest Partners investment flyer. The similarities are striking. I am also satisfied it is arguable that in establishing Forest Partners LP the Directors have used other knowledge and information only available to them through their involvement as directors of the intended plaintiffs relating to matters such as the appetite of potential investors to enter a new fund and invest in alternative funds, and the likely investment performance potential of a new fund together with the investment performance expectations and requirements of the potential investors. They would also be aware of arrangements that would be acceptable to those likely to be potential investors regarding governance and control of a new fund. In the hands of the Directors, such information would be of considerable value.

[77] The Directors’ arguments that some information regarding Drylandcarbon LP was publicly available is undoubtedly correct, but also not a complete answer. The Beverleys do not have to establish, and as I understand it do not assert, that the general concept of a carbon afforestation fund is novel. It is, they say, the detail of the business strategy, methodology, modelling, and other key elements of the Drylandcarbon enterprise mechanics that were novel, that the Directors had knowledge of these matters as directors of the intended plaintiffs, and used that information to advance the Forest Partners opportunity.

[78] Insofar as the Directors assert the claim is insufficiently particularised, that is not surprising at this early stage when the intended plaintiffs have not had the benefit of discovery, but the claim is sufficiently clear that I can conclude it is at least arguable.

Targeted special resolutions and the permanent transfer of DC Manager’s staff to Lewis Tucker

[79] Mr and Mrs Beverley argue that at a time when DC Manager was wholly directed and controlled by the Directors, they facilitated and supported a process by which DC Manager sought approval from Drylandcarbon LP for special resolutions which would not provide any benefit to DC Manager but would enable Lewis Tucker to proceed with the development of Forest Partners LP. The purpose, Mr and Mrs Beverley say, was to allow Lewis Tucker the freedom to offer competing services to others in the market while DC General Partner, DC Manager and H1 remained restricted in this same respect.

[80] It is also argued that the preparation and execution of the proposal to transfer DC Manager’s staff to Lewis Tucker was a breach of duty because it enabled and necessitated that Lewis Tucker would provide all of the management services to Drylandcarbon LP for a fee, which was not in DC Manager’s best interests. Further, the decision to remove the internal resourcing, expertise and general capability of DC Manager meant that the enterprise would otherwise be unable to utilise and pursue other business opportunities.

[81] The Directors’ primary response is that this claim must fall away because it is accepted that neither DC General Partner nor DC Manager would or could participate in Forest Partners LP. The Directors also argue that DC Manager has always accessed services from third parties, including through Lewis Tucker, and that the proposals put to the Advisory Committee were in discharge of DC Manager’s obligation to act in the best interests of Drylandcarbon LP. Related to this, it is submitted the fact that the proposals were considered and approved by the Advisory Committee confirms they were in discharge of that obligation.

[82] I have already rejected the Directors’ argument that it is common ground that DC General Partner or DC Manager could not have participated in the Forest Partners opportunity.

[83] There is force in the Beverleys’ submission that the proposals were not in the best interests of DC General Partner and DC Manager and were advanced in the Directors’ personal interests in establishing Forest Partners LP. Certainly, it is difficult to see how the DC Manager’s proposal of 22 March 2022, seeking that affiliates of DC General Partner and DC Manager be released from the exclusivity provisions of the LSA and MSA, can be viewed in any other way. I also do not accept that because the Advisory Committee agreed to the proposals they can be considered to have been in proper discharge of the DC Manager’s duties to act in the best interests of Drylandcarbon LP, when all but one of the major investors in Drylandcarbon are investors in Forest Partners LP. I am satisfied the Beverleys’ position is arguable.

[84] The Directors’ submissions did not engage directly with the proposed causes of action against the sixth to eleventh respondents, and for that reason they can be dealt with briefly. The primary causes of action against them allege they provided dishonest assistance in the breaches of fiduciary duties by the Directors and acted in breach of confidence in using information belonging to the intended plaintiffs.

[85] In respect to the dishonest assistance claim, a stranger to a fiduciary relationship may be held personally liable, as if they were a constructive trustee, where they dishonestly assist a fiduciary to breach a fiduciary duty.²⁷I am satisfied that it is arguable the Directors facilitated the participation of the sixth to eleventh defendants in the diversion of the corporate opportunity to establish Forest Partners from the intended plaintiffs. Lewis Tucker directed and assisted to develop the opportunity, the eighth to eleventh respondents were incorporated to manage and give effect to Forest Partners LP, and Pheasant Tail Ltd is the parent company of the Forest Partners’ companies. Mr Colson submits the dishonesty on behalf of the sixth to eleventh respondents can be inferred from the direct involvement of the Directors. That is a

[86] As far as the cause of action alleging breach of confidence is concerned, Mr Colson submitted there is a three limb test for establishing breach of confidence, and the requirements are:²⁸

[87] I am satisfied the sixth to eleventh respondents, via the Directors, came into possession of confidential information regarding the business of the intended plaintiffs and, as third party recipients, were obliged to keep the information confidential and not misuse it.²⁹I am also satisfied that the sixth to eleventh respondents arguably misused the confidential information in designing, promoting and establishing Forest Partners LP, thereby causing loss to the intended plaintiffs.

[88] Pursuant to s 165(2)(b), the Court is required to have regard to the “costs of the proceedings in relation to the relief likely to be obtained”.

[89] The relief the Beverleys intend to seek on behalf of the intended plaintiffs includes orders that the commercial benefit of the Forest Partners management enterprise is returned to the intended plaintiffs. Mr Beverley has estimated its value

²⁸Hunt v A [2007] NZCA 332, [2008] 1 NZLR 368 at [65] citing Coco v A N Clark (Engineers) Ltd

²⁹Lancashire Fires Ltd v S A Lyons & Co Ltd (1996) FSR 629 (CA) at 676 per Sir Thomas Bingham MR cited with approval in Hunt v A, above n 28, at [88]. I note that there is a further cause of action against Lewis Tucker that it breached a services agreement with DC Manager by its involvement in drafting and distributing the investment flyer for Forest Partners and producing large amounts of information belonging to the intended plaintiffs.

[90] In addition to the very large sum at stake, there is said to be a further commercial benefit to the intended plaintiffs to the extent that the proceeding may confirm that any further fund opportunities also belong to them. The Beverleys also argue that as there are other proceedings on foot between the parties which draw on the same factual background, the costs of litigating the derivative action are likely to be significantly lower than the costs of the proceeding being brought on a stand-alone basis.

[91] It is accepted by the Directors the Forest Partners management enterprise has a significant value and whilst it is said Mr Beverley’s valuation is flawed, it is accepted that a plaintiff who stood to gain through litigation relief equating to the actual value of the Forest Partner’s enterprise, even at a level significantly less than $50 million, might consider that worth pursuing.

[92] Mr Olney made submissions that the proposed claims based on the wrongful use of company information and the putting of targeted proposals to the DC Limited Partners had not resulted in any loss to the proposed intended plaintiffs. The submission overlooks that in respect of such claims the relief that is being sought includes an accounting for gains that the Directors or their interests have made, or will make, as a result of their various breaches of duty.

[93] This is not a relevant consideration here, as no action has been taken on behalf of the intended plaintiffs in respect of the matters the Beverleys wish to pursue.

[94] It has been noted the courts have struggled to find a distinct role for this statutory consideration beyond factors that in reality relate to the costs, the likely

[95] It has also been noted that, in principle, if a company has an otherwise justified claim it will be in its interests to pursue it,³¹and that there is a general interest in holding a director to account for breaching a fiduciary duty. In Thorrington v McCann, the Court said: ³²

As a matter of principle it is desirable that the matter of the fiduciary duty allegedly owed to [the intended plaintiff] be resolved. This is so notwithstanding that the result of a successful derivative claim will realistically be for the benefit of Thorrington who might otherwise be unsuccessful in relation to his own claims.

[96] The Directors submit that before granting leave to bring a derivative action the Court must consider the availability of alternative remedies,³³and there is no injustice in declining the present application when the Beverleys are free to take other proceedings to satisfy their grievances, including a proceeding under s 174 of the Act that they are already pursuing.

[97] The foundation of this submission is the Directors’ belief that the proposed derivative claim is concerned with the interests of the Beverleys as shareholders of the intended plaintiffs, and that their complaint is that they were cut out of the Forest Partners opportunity contrary to an agreement or understanding that any such fund would be jointly owned and controlled. It is said the desired outcome the Beverleys seek to achieve is access to 50 per cent of the financial benefits that flow from Forest Partners LP and there are other means by which the Beverleys can seek such relief.

[98] The Beverleys submit that while their unfair prejudice claim and the intended derivative action have some factual commonality, the two proceedings are directed at different wrongs, involve different respondents, and seek different remedies. They argue the derivative action seeks to enforce the rights of the intended plaintiffs and hold the Directors accountable for breaches of their duties as directors, as well as

[99] A derivative action and unfair prejudice claim arising from a common factual background can co-exist particularly in a case where the two proceedings are directed at different wrongs, involve different respondents and seek different remedies.³⁴In Vrij v Boyle, Fisher J said:³⁵

It seems to me that in principle one could have a situation in which a plaintiff allows the company to recover in the company’s own name compensation for losses which have been suffered due to breach of fiduciary duty owed to the company and the plaintiff simultaneously sues the same defendants for quite independent wrongs done not to the company, but to the plaintiff direct. In those circumstances there would be no duplication. To take just one example, if this plaintiff is able to demonstrate that the partnership suffered a loss which had nothing to do with the company, then obviously the plaintiff would have his own action in that regard and this would not overlap with any claim which the company might also have against Mr Boyle and his relatives. The statement of claim and proposed cross-notice between defendants warrants reappraisal but at this point I would not wish to withdraw leave for a derivative action on the basis that there is an incompatibility.

[100] The Directors’ submissions proceed on the same incorrect premise that the real issue is whether the establishment of Forest Partners was in breach of the agreement between Mr Beverley and the Directors when it is founded on allegations of breach of fiduciary and statutory duty.

[101] I do not accept that the proposed derivative action would amount to an unnecessary duplication of proceedings. The relief that is sought in the Beverleys’ s 174 proceeding is fundamentally different from that sought here. Furthermore, the Beverleys could not in that proceeding seek relief against the non-director third parties who they propose should be parties to a derivative action. The point comes into sharp focus when one considers that if it was found in any action by the Beverleys that there was no agreement or understanding that any future fund would be jointly owned, they would have no cause of action nor any entitlement to relief, but the intended plaintiffs’

³⁴Vrij v Boyle, above n 6, and Greymouth Holdings Ltd v Jet Trustees Ltd [2011] NZHC 471.

[102] I therefore accept Mr Colson’s submission that this is not a situation in which the issues to be determined in the proposed derivative action are more appropriately addressed in an unfair prejudice claim or some other proceeding. The Directors have also not shown that the derivative claim would be unnecessarily duplicative of the unfair prejudice claim or any other action the Beverleys might pursue.

[103] Standing back and looking at all the matters raised in the round, I am satisfied that a prudent business person conducting their own affairs would commence the intended proceeding. In arriving at that conclusion, I note that the proposed claims are at least arguable, they are potentially very valuable and the costs of pursuing the litigation are not significant when measured against the amounts at stake. Further, I accept that it is relevant that the proceeding may determine the position that applies in the event of further funds being created.

[104] The question whether some or all of the reasonable costs of bringing the proposed action should be met by the intended plaintiffs is governed by s 166. Section 166 provides:

The court shall, on the application of the shareholder or director to whom leave was granted under section 165 to bring or intervene in the proceedings, order that the whole or part of the reasonable costs of bringing or intervening in the proceedings, including any costs relating to any settlement, compromise, or discontinuance approved under section 168, must be met by the company unless the court considers that it would be unjust or inequitable for the company to bear those costs.

[105] In Investor Corp Holdings Ltd v Quinn,³⁶Woodhouse J confirmed that s 166 must be applied broadly and there is nothing to prevent the Court dealing with costs issues at a later stage, or at the end, of the derivative proceeding. This is the case even when the Court has already made a costs order at the leave stage and is effectively being asked to rescind or vary the earlier costs order.

[106] As noted by Winkelmann J in Presley v Call Plus Ltd,³⁷s 166 creates a “clear onus” on the respondent to satisfy the court it would be unjust or inequitable for the company to bear the costs. There, it was argued that because of the proposed defendant’s substantial shareholding in the intended plaintiff, he was effectively being required to fund litigation against himself. Winkelmann J was not prepared to rule out that the extent of the shareholding interest of a proposed defendant in a company might be a relevant consideration in some cases but held:³⁸

...where, as here, the only matter raised is the significant shareholding interest of the proposed defendant, the proposed defendant cannot call in aid his own shareholding as a means of placing further obstacles in the way of an applicant in the way of costs.

[107] The Beverleys consider the intended plaintiffs are likely to have the means to fund the derivative action, but they are also prepared to provide the intended plaintiffs with funding if that becomes necessary. The Directors argue that the Beverleys’ willingness to provide such funding is not relevant to the question of whether a reasonably prudent business person would commit such a proportion of the companies’ resources to the pursuit of the claim.³⁹

[108] The Directors also argue this case is quintessentially a shareholder/joint venture dispute and as each of the intended plaintiffs was a single-purpose vehicle in which no capital is invested by the shareholders, it is not equitable that costs be met by them. It is also said to be relevant that the Directors had only taken steps to establish Forest Partners LP after having agreed to part ways and concluded the mediated agreement. I was referred to Catley v Waipa Corp Ltd, where the Judge could see no reason why the intended plaintiff and its subsidiaries should have to pay

[109] I accept the fact the Beverleys are prepared to provide funding in the event that the intended plaintiffs cannot do so is of limited relevance. As the Court noted in He v Chen:⁴¹

A party in Mr He’s position cannot avoid the court directing itself to s 165(2)(b) (as it is required to do) by offering to underwrite the claim. The court would not, for example, allow a director to use the company to pursue a weak claim against other directors, even if the director offered to underwrite the claim.

[110] I do not consider Catley v Waipa Corp Ltd is of relevance to this case. There the director sought leave to bring a derivative action to impugn payments he had previously agreed be made. Duffy J stated that since the applicant’s acquiescence was partly the reason for the payments progressing as they had done, any concerns he had regarding their legitimacy should be pursued in the context of a proceeding under s 174. This is a very different case. The derivative proceeding the Beverleys wish to bring is a consequence of the Directors establishing Forest Partners LP which is not something they ever acquiesced in, but actively opposed.

[111] Apart from those matters, the arguments advanced for the Directors are ones they raised to oppose the granting of leave, which I have rejected.

[112] I therefore do not consider the Directors have advanced any good reason why it would be unjust or inequitable for the intended plaintiffs to bear the costs of a proceeding brought for their benefit.

High Court of New Zealand Decisions

Beverley v Drylandcarbon GP One Limited [2022] NZHC 3606 (22 December 2022)