This decision underscores the importance of a carefully drafted shareholder agreement.

Background

Global Advanced Metals Pty Ltd v Metallurg Inc [2017] WASCA 188 is a recent decision of the Court of Appeal of the Supreme Court of Western Australia regarding a dispute between Global Advanced Metals Pty Ltd and one of its shareholders, Metallurg Inc. Metallurg had signed on to a shareholder agreement when it acquired the shares in Global, which relevantly included clauses which allowed all shareholders access to company records for accounting, taxing, and verification of investment, and which imposed a duty on shareholders to keep confidential all confidential information it receives.

Metallurg requested access to records of Global in order to verify the value of its shares for its own accounting and reporting purposes. Global denied the request for two reasons:

Global’s concern was that the information would be passed on and misused, either to gain a competitive advantage in trade and commerce or an evidence advantage in the US litigation. Global had proposed instead to only allow information to be given to Metallurg if Metallurg executed an additional, much stricter confidentiality agreement and agreed that it would not have direct access to the records, but that an independent accountant would be appointed to compile a report.

The question before the Court of Appeal was whether Global was entitled to demand the additional requirements before giving access to the company’s information under the shareholder agreement, or whether it was breaching that shareholder agreement by refusing access and demanding the additional requirements.

Decision

The Court of Appeal determined that Metallurg was entitled to review the documents without any additional requirements or restrictions being imposed.

The language and construction of the shareholder agreement was central to the Court of Appeal’s decision. The shareholder agreement had been structured so that the clause which gave shareholders the right of access and inspection of the company records was a separate clause to the clauses which enclosed the permitted uses of confidential information. The definition of “confidential information” was contained in yet another separate clause.

Relevantly, the definition of “confidential information” used language which, when correctly interpreted, meant the restrictions on and permitted use of confidential information only applied once the information had been obtained by the shareholder. The Court of Appeal found that on the correct interpretation, they did not apply to accessing and obtaining the information.

The Court of Appeal also noted that the clauses which contained the definition of “confidential information” and the permitted uses of confidential information were general clauses which applied throughout the shareholder agreement, while the clause which dealt with the right of access and inspection of the company records was a specific clause dealing with specific circumstances. It is an established rule of interpretation of contracts that situations where there is general and specific clauses, the specific clauses will prevail within the scope of the clause, if there is any inconsistency. This meant that the clause dealing with access and inspection of records, which was limited to access for the purpose of taxation, accounting, and verifying investments, would prevail over the general use of confidential information clauses in those circumstances.

It was also noted that there were no clauses in the shareholder agreement at all which appeared to consider the potential circumstances where a trade competitor became a shareholder, but instead treated all shareholders equally with rights to access and use of information. This was considered particularly relevant as there were clauses in the agreement by which existing shareholders could prevent a trade competitor from becoming a shareholder. This meant that Global could not treat Metallurg differently than other shareholders despite its position as a trade competitor or as an opponent in litigation in another jurisdiction.

As a result, on the correct construction of the shareholder agreement, the restrictions on shareholder use of confidential information of the company did not apply to access and inspection of company records, only to information once it had already been obtained by the shareholder. On that basis, Metallurg was prevented from using the information in an unfavourable way once it had already obtained the information, but it was not prevented from accessing the information.

Conclusion

The goal of a shareholder agreement is to prevent disputes by setting out the rights of shareholders and the company in advance. This case demonstrates that careful drafting and foresight is vital to preparing effective shareholder agreements.

It is important when preparing an agreement to give consideration to how the clauses will apply when there is inconsistency in their effect, and to the particular language used when defining important terms. It’s also important to give consideration to possible future matters and disputes such as who may become a shareholder, and whether this should be provided for in the agreement.