Phelan v. Goodman [2001] IEHC 142 (11th September, 2001)

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1.1. In 1986 Mr. Pascal Phelan, the Plaintiff, entered into a joint venture agreement with Mr. Zakaria El Taher, the second named Defendant in respect of several companies in the meat trade loosely called the Master Meat Group. A series of agreements were formalised on the 10th October, 1986 comprising joint venture agreements, disclosure letters, side agreements and the Memorandum and Articles of Association in identical terms for each of the companies.

1.2. Six months later on the 15th April 1987, by which time Mr. El Taher held his interest in the Master Meat Group through Master Meat Anstalt, an agreement was made unknown to Mr. Phelan whereby Tarsos Anstalt, controlled by the first named Defendant, Mr. Lawrence Goodman, acquired 80% of Master Meat Anstalt for a price of US$9.75 million together with an option over the remaining 20% for a nominal consideration of US$100. Consideration was by way of bank draft drawn by or on behalf of Mr. Goodman and payable to Mr. El Taher personally.

1.3. On the 4th August, 1988 Mr. Phelan invoked deadlock provisions of the 1986 joint venture agreement by offering to purchase Mr. El Taher’s interest for IR£2.5 million. Solicitors on behalf of Mr. El Taher made a counter offer, as provided for by the deadlock agreement, to acquire Mr. Phelan’s shares for IR£2.75 million. In effect, Mr. Goodman acquired control and Mr. Phelan alleges that he suffered loss.

1. Mr. Phelan now claims damages for conspiracy, for fraudulent misrepresentation, for inducing or procuring breaches of the various agreements entered into between himself and Mr. El Taher and for breach of the said agreements and other reliefs.

2.1. There are extensive pleadings extending from 1988 to early this year. It is not necessary, at this stage, to refer to these other than to say that an admission was made by the first named Defendant on the 29th of September, 2000 as follows:-

2.2. The matter came before the Court for Plenary Hearing on the 15th May, 2001 and was heard for 35 days up to the 25th July, 2001, before any oral evidence was given.

2.3. It had been agreed between the parties, and so ruled upon by O’Donovan J on the 29th July, 2000, that the first three matters would proceed before the fourth mentioned matter is heard.

2.4. In respect of the first three matters it was agreed that this Court, having received extensive submissions from the parties each of whom had an opportunity of opening their respective cases and adducing all relevant documentary evidence, should decide on certain preliminary issues before any oral evidence was adduced.

2.5. There had already been extensive litigation with regard to discovery (see the decision of the Supreme Court in Phelan -v- Goodman and El Taher [2000] 2 ILRM 378) and numerous other interlocutory applications in relation thereto.

3.1. The second named Defendant, by motion dated the 15th of January, 2001 requested certain matters to be dealt with as preliminary points. This motion was adjourned to the trial of the action. During the hearing each of the parties put forward its submission on what issues could be dealt with at this stage. It is unnecessary to go into the debate in this matter other than to say that the parties were in agreement that two issues could properly be dealt with at this stage of the proceedings.

3.2. Firstly, what is the legal effect of the 1987 agreement on the 1986 joint venture agreement between Mr. Phelan and Mr. El Taher?

2. Secondly, it was agreed that the Court should determine the legal effect of the application of the rule in Foss -v- Harbottle and the effect of the Supreme Court decision in O’ Neill -v- Ryan.

3. I will then consider the issues in respect of which there was less than unanimous agreement.

4.1. The first issue is whether the 1987 acquisition by Mr. Goodman breached the 1986 agreement. Article 12(a) of the Articles of Association of each of the companies provide as follows:

“For the purpose of this article where any person is unconditionally entitled to be registered as a holder of a share, he and not the registered holder of such share shall be deemed to be a member of the company in respect of that share.”

Each of the parties agree not to sell his shares held by him personally or through any company as nominee for him without offering such shares to the other party first.

4.3. The joint venture agreement entered into between Zakaria El Taher, Pascal Phelan and each of the companies provides, by way of recital, that the parties have agreed to enter into the agreement for the purpose of:

11.01 Subject as provided elsewhere in this Section, this agreement shall continue in force until terminated in accordance with the provisions of this Section 11.00

11.02 Subject as provided elsewhere in this Section, this agreement shall automatically and absolutely cease and determine on the happening of any of the following;

4.5. Provision is also made in the joint venture agreement, at Section 12, for a sale mechanism in the event of deadlock .

5. Section 15.06 provides that the rights of the parties shall be deemed to be personal and to be not assignable.

6. The final provision requires Taher to devote 30% of his monthly working time to promoting the company’s interest in certain countries.

4.6.1. The Plaintiff stresses the personal nature of the contract, the provision in the Articles of Association that Mr. El Taher, being at that time unconditionally entitled to be registered as a holder of a share, be deemed to be a member of the company in respect of that share. Accordingly, the requirement in the side agreement not to sell his shares necessarily includes the shares in the Master Meat Anstalt.

4.6.2. The first named Defendant urges the Court to construe the provision in the side agreement strictly. It does not prohibit the sale of shares in the member. The reference to shares must necessarily be the shares held by Master Meat Anstalt in the Master Meat Group companies which were not transferred on the 15th April, 1987.

4.7. I have had the benefit of the extensive authorities dealing with the interpretation of restrictions on the alienability of shares. I have been referred in particular to Greenhalgh -v- Mallard (1943) 2 ALL ER 234 and to Swaledale Cleaners Limited (1968) 3 ALL ER 619 at 622. In that case Harmon LJ stated:-

“If the right of transfer, which is inherent in property of this kind, is to be taken away or cut down, it seems to me that it should be done by language of sufficient clarity to make it apparent that this was the intention.”

However, in Lyle and Scott Limited -v- Scotts Trustees (1959) AC 763 the House of Lords held that “transferring” obviously meant assigning the beneficial interest and not the technical process of having a transfer registered. Lord Keith at 785 stated as follows:

“ A share is of no value to anyone without the benefits it confers. A sale of a share is sale of the beneficial rights that it confers, and to sell or purport to sell the beneficial rights without the title to the share is, in my opinion, in plain breach of the provision of (the relevant article).”

5.1. The reality of the agreement of the 15th of April 1987, taken as a whole, seems to me, and I so find, to involve a disposal of Mr. El Taher’s beneficial interest in the shares by the personal payment to him of the bank draft sourced by or on behalf of Mr. Goodman in the sum of US$9.75 million. In addition the power of attorney executed by Mr. El Taher in favour of Mr. Prentice and Mr. Roche are further evidence of a disposal of a beneficial interest while maintaining an illusion of ownership.

5.2. It follows that Mr. El Taher is in breach of Article 12(c) of the Articles of Association which provide that every member who desires to transfer any share should give to the company notice of in writing as provided for by that article and of paragraph 1 of the side agreement.

5.3. It does not seem to me that the retention of the 20% interest, subject to the grant of an option, affects that finding. The extent to which it attempts to avoid an automatic and absolute cessation and determination of the agreement (pursuant to 11.02 (c)) should now be considered.

5.4. That provision, already referred to above, raises the question as to Mr. El Taher’s holding directly or through third parties in circumstances where he had, effectively, relinquished control and had disposed of his beneficial interest in the shares but still, through Master Meat Anstalt, might be regarded as holding at least 10% of the equity capital in the company. If, however, a share is of no value to anyone without the benefits it confers then, after the 15th April 1987, Mr. El Taher holds nothing. Lord Keith’s admonition in Lyle and Scott Limited , referred to above, must apply:

“A shareholder who has transferred, or pretended to transfer, the beneficial interest in a share to a purchaser for value is merely endeavouring by a subterfuge to escape from the peremptory provisions of the Article.”

5.6. The termination of the joint venture agreement is without prejudice to rights that may have accrued thereunder to either party against the other before such termination as is provided for in 11.03. That paragraph further provides:

“Further the termination of this agreement shall not effect the continuance in force after such termination of such provisions as are by their nature capable of enforcement against either shareholder by the other.”

7. The Plaintiff pleads, in addition to the damage resulting from wrongs perpetrated on the company (paragraphs 11 to 14 and 16, 17 and 19), the following:

8. In addition paragraphs 19, 20, 22 and 24 would seem to affect the Plaintiff directly.

6.2. Lynch J in O’Neill -v- Ryan and Others (1990) 2 I.R. 200 at 209, stated that the rule in Foss -v- Harbottle:

“.........merely prohibits persons who are not directly affected by the breaches from maintaining an action which is more properly to be maintained, if at all, by the company in which such persons are shareholders. The desirability of avoiding a multiplicity of actions in many cases contrary to the will of the director and/or the majority of shareholders is obviously a major factor in the thinking underlying the rule in Foss -v- Harbottle and demonstrates the sound sense of that thinking.”

9. In the Supreme Court, on appeal, [1993] ILRM 557 at 560 O’Flaherty J held:

“There can be no doubt that the Plaintiff wishes to assert alleged wrongs done to the company. I would attach no importance to the possibility that because there is some allegation of conspiracy that the Plaintiff had suffered some damage over and above what was allegedly suffered by the company. If there were a possibility of any such damage, which I doubt, it would be negligible in comparison to what was suffered by the company.

The most fundamental obstacle of all to the Plaintiff, in my estimation, is the fact that he has now parted with his shares and has no standing whatever. I agree, therefore, that the rule in Foss -v- Harbottle cannot come into the reckoning. Therefore, consideration of the exception to it does not arise either and, in any event the only one that might have any relevance would be the one suggested that some “injustice” had been done to the Plaintiff. I do not believe that any injustice was visited on the Plaintiff.”

10. Blayney J, at 569, held that a shareholder had no right to being a personal action in respect of the value of his share holding resulting from damage to the company against the party who caused such damage.

6.3. The Plaintiff submits that O’Neill -v- Ryan has no relevance as the damage caused to the Plaintiff was directed towards the forced acquisition of his share holding. That is clear from the memorandum of the 12th August 1988 from Mr. Mooney to the first named Defendant, referring to Connaught as the code name for the Master Meat Group, which was as follows:

6.4. The Plaintiff further submits that the letter dated 19th May 1989 (eight months after the forced sale) from O' Donnell to Taher, relates to a personal loss and damage. The letter concludes as follows:

"In Clause 3 of the Agreement you undertook to continue to exercise your rights under the various Shareholders Agreements in accordance with the direction of our client.

We are instructed that you singularly failed to do this, and that as a direct result you caused our client loss for which you are personally responsible.

At a meeting some months following the purchase by our client of Master Meat Anstalt, and called with the purpose of reviewing your unsatisfactory performance and the relationship between you and our client, you solemnly undertook to assist our client in purchasing the remaining shares in the Master Meat Companies and then to repurchase from our client half of the Master Meat Meat Plants at the average of the cost paid by our client to you and the cost to be paid to Paschal Phelan. To date you have failed to honour this undertaking, and we now call upon you to do so.

Unless our client gets immediate satisfaction, including a refund of all monies paid, together with interest and damages for its losses, costs, inconvenience, time and other expenses, our client will take immediate legal proceedings in all courts available to it".

6.5. The Plaintiff submits that the documentary evidence open to the Court shows a pattern of instructions given by Mr. Goodman through agents including, but not restricted to, that memorandum and letter.

11. The Plaintiff submits that it was the threat of damage to the company and its viability which was critical, rather than any specific damage done to the company. In the Plaintiff’s submission the situation in O’Neill -v- Ryan was quite different because of the loss being entirely derivative and also because the Plaintiff in that case had succeeded in obtaining a settlement in his proceedings for oppression's under Section 205.

6.6. The first named Defendant submits O’Neill -v- Ryan to be of particular significance. Firstly, because the case framed by the Plaintiff is an action for a conspiracy, fraudulent misrepresentation and the inducing of a breach of contract. It is clear that a shareholder cannot circumvent the rule in Foss -v- Harbottle by invoking such cause of action and relying on wrongs to the company as the basis for the illegality pleaded.

In addition O’Neill -v- Ryan is significant in that, by the time of the appeal, Mr. O’Neill had sold his shares in Ryanair Limited as was indeed stressed by O’Flaherty J as cited above.

7.1. The Plaintiff’s action against the second named Defendant arises out of an agreement entered into by the Plaintiff and the second named Defendant personally. The action against the first named Defendant, as referred to above may require further evidence. At this stage the Court has to rely on the pleadings and the documents before it.

7.2. There is no question of a multiplicity of actions arising if the rule in Foss -v- Harbottle were not to apply. The allegation that the Plaintiff personally suffered damage by reason of the breach of the 1986 agreement as admittedly induced by the first named Defendant would seem, at this stage, sufficient to allow the claim proceed.

8.1. It is submitted by the first named Defendant that there is no claim by the Plaintiff that he would have bought shares if he had been offered them in 1987.

12. This is a matter that is not pleaded by the Plaintiff. There is no documentary evidence that he was offered the shares by Mr El Taher prior to April 1987.

13. Having found that there was a breach, the issue arises whether the Plaintiff has any remedy where he does not claim that he would have purchased the shares had they been offered and that he could finance that purchase.

14. This would appear to be a hypothetical issue which raises a further issue as to damages suffered by the Plaintiff. It further overlaps with the issue of ex turpi causa non oritur actio which is not available for adjudication. It seems more appropriate to postpone the determination of this issue.

8.2. The first named Defendant has urged the Court to address the issue of there being no cause of action where the Plaintiff has

15. The Plaintiff submits that there is going to be a significant dispute on various aspects of the evidence in relation to this matter which form an element in the alleged conspiracy.

16. Accordingly, this would also seem to be a matter which should await oral evidence.

8.3. Mr. El Taher, the second named Defendant, has raised discrete issues regarding the legal effect of (a) the power of attorney given by him to Messrs. Roche and Prentice and (b) the indemnities given to him and to his son by Mr. Goodman.

17. It is submitted by the Plaintiff that these and, more particularly the latter, are matters between the Defendants themselves. They may require submissions in relation to the effect of the documents in the circumstances and evidence in relation to compliance with the provisions thereof.

18. It would seem prudent to await such further evidence and submissions as may be necessary.

8.4. To the extent that the issues determined by the Court are dispositive, it is proposed to limit evidence to those matters which are still outstanding.

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You are here: BAILII >> Databases >> High Court of Ireland Decisions >> Phelan v. Goodman [2001] IEHC 142 (11th September, 2001) URL: http://www.bailii.org/ie/cases/IEHC/2001/142.html Cite as: [2001] IEHC 142

High Court of Ireland Decisions

Phelan v. Goodman [2001] IEHC 142 (11th September, 2001)