Roywest Trust Corporation (Bahamas) Ltd et Al v Savannah N. v et; The Bank of Nova Scotia Trust Company (B'Mas) Ltd v The Bank of Nova Scotia Trust Company (Cayman) Ltd

• Jurisdiction: Bahamas
• Judge: Georges, C.J.
• Judgment Date: 22 July 1987
• Docket Number: No. 431 of 1985
• Date: 22 July 1987
• Court: Supreme Court (Bahamas)

Supreme Court

Georges, C.J.

No. 431 of 1985

Roywest Trust Corporation (Bahamas) Ltd. et al

and

Savannah N. V et

The Bank of Nova Scotia Trust Co. (B'Mas) Ltd.

and

The Bank of Nova Scotia Trust Company (Cayman) Limited

Appearances:

Peter Curry Q.C., Patrick Toothe & Stephanie Unwalla with him for the plaintiffs, the first/second and third defendants on the Counterclaim John Mowbray Q.C., Brian Moree with him for the first and fifth defendants Robert Reid Q.C., Michael Barnett with him for the third & fourth defendants and the first and second plaintiffs on the Counterclaim.

Company law - Shares — Option to purchase — Last minute changes in price — Transfer did not take place within time stipulated — Whether transactions void for self — dealing in that trustee was buying shares for himself — Finding by court that transactions did not amount to self—dealing.

Georges, C.J.

1 This strenuously contested action is one of the consequences of the untimely and tragic death of Curtis Mathes Jr. (Curtis) in an air crash on June 2, 1983. Had he lived I do not doubt that by agreement he and his cousin Burke Mathes (Burke) would have amicably settled their financial arrangements in a manner they would both have considered fair and reasonable whatever the view others may have taken of it.

THE HISTORY

2 The history begins with Curtis Mathes Snr. who built up a successful business in Athens, Texas, which at the date of the events with which this litigation is concerned was known as the Curtis Mathes Corporation (CMC). It was a Delaware company. CMC is involved in the manufacture, assembly and sale of electronic equipment, mainly stereo and television, admittedly a cyclical industry but capable of generating substantial returns.

3 CMC was a public company. Some 25% of the stock was publicly owned. The remainder was divided into four fairly equal groups - Curtis Mathes Snr., his daughter, an elder son (now deceased) and Curtis. Effectively Curtis Mathes Snr. controlled the company as he could count on the support of his daughter, her husband and his deceased son.

4 In the early 60's Curtis worked with CMC and while there he recruited Burke, no doubt with his father's consent. Burke ‘was a lawyer and his prospects of success in that profession appeared considerable. He had merited the distinction of being selected as a clerk to a justice of the Supreme Court of the United States.

5 In 1964, shortly after Burke joined CMC, Curtis left. He disagreed with the management philosophies of Curtis Mathes Snr. and he had no support among the other shareholders.

6 In 1971 Curtis returned to CMC after the death of his elder brother. In his view CMC was not doing as well as it could. His brother-in-law appeared interested only in selling the business. Curtis thought differently. He decided to gain control of it. There was a confrontation with his father and eventually it was agreed that his father would sell him his holding on the condition that he also bought out the holdings of other family members who wanted to sell.

7 It is Burke's evidence, which I accept, that he supported Curtis in this venture and they agreed that once the outstanding holdings (including public holdings) had been acquired, ownership of CMC would be shared between them in the ratio of 75% to 25%. At that time Burke held 27,000 shares in CMC - which later became 27 shares when there was a 1000 - 1 reverse split. He had purchased that holding with a $100,000 loan made to him by Curtis Mathes Snr.

8 While these events were in train Curtis Mathes Snr. had created a number of trusts in the Cayman Islands for the benefit of members of his family. One of these trusts, the Monarch Trust named among others as beneficiaries Curtis, any spouse of his at the date of distribution, any of his natural or adopted children, and any natural or adopted grandchildren of the settlor Curtis Mathes Snr. Another of these trusts, the Kensington Trust, named among others as beneficiaries, Burke, his wife, their children, his father and mother and his wife's mother. The terms of these trusts will in due course be considered. The trustee for both trusts was the Bank of Nova Scotia Trust Company (Cayman) Ltd. (BNS(C).

9 In November 1975 CMC granted an option to Curtis for the purchase of 60,000 shares in CMC for $90,000. The option was exercisable in two stages, 30,000 shares at any time before November 30, 1977 and 30,000 shares between November 30, 1977 and November 30, 1978. A similar option was granted to Burke. Both these options were assigned to the Kensington Co. Ltd. - a Cayman Islands Company wholly owned by Burke. Subsequently, the option was assigned to Savannah N. V. (Savannah) a company wholly owned by the Kensington Trust. Savannah had been incorporated for the purpose of holding property managed by that trust. Burke also transferred to Savannah the 27 shares in CMC, which he owned. The other option was eventually assigned to Mathes B.V. (Mathes) a company formed in circumstances, which will later be narrated. Curtis' holding in CMC was transferred to Hamset Holdings N.V., (Hamset) a company wholly owned by the Monarch Trust, and incorporated for the purpose of holding property managed by that trust.

10 By the end of 1977 almost all the shares in CMC held by the public had been bought in. Hamset held 873 of these shares and Savannah held 27. There were also the options granted by CMC, which have already been mentioned. Burke's evidence, which I accept, is that by mid-1977 Curtis and himself had reached agreement that Hamset would sell Savannah a sufficient number of shares which, added to those available through the options, would give Savannah a 25% share of CMC.

11 Hamset and Savannah were both owned and wholly controlled by the trustee BNS(C). The same officers of BNS(C) who were directors of Hamset were also directors of Savannah. Playing the principal role was Royan D. Ellis then the manager of BNS(C).

12 On October 28, 1977, Curtis wrote BNS(C) as trustee suggesting that Hamset sell to the trust created principally for the benefit of Burke 153 shares of CMC stock at a price of US$6,250 on deferred basis secured by a promissory note at 6% simple interest. This letter was directed to the attention of Royan Ellis. Another letter in almost similar terms dated December 7, 1977 was directed to BNS(C) as director of Hamset. There was the identical suggestion of a sale although no potential purchaser was named. In each case the reason underlying the suggested sale was that CMC had significantly reduced its outstanding stock and that as a result the percentage ownership, which the Monarch Trust, through Hamset, held in CMC could be considered undesirably high.

13 There were doubts in some quarters in BNS(C) of the propriety of such a transaction. The assistant manager of BNS(C), Roger Davies, wrote Mr. Carl Estes on February 28, 1978 stating that they could not comply because as trustees they were not willing to put themselves in the position of self dealing and that the shares in CMC had recently been traded at a much higher price.

14 The matter was nonetheless pursued and in May 1978 Royan Ellis sought advice from a London firm of solicitors on the proposal. The letter setting out the facts stated that Burke was President of CMC and Curtis Chairman and that Burke's service to CMC and his experience in its management were crucial, particularly at that period, but there was no mention of a contract of employment as a factor in the sale. In the course of discussions the factor of Burke entering into a contract to serve as President of CMC for three years was introduced. It was mentioned in a letter dated May 24, 1978 from Royan Ellis to Sir David Wilson, a partner in the firm of solicitors.

15 This correspondence indicates that Sir David had his doubts about the transaction. Its aim appeared to be that of making Burke happy rather than that of benefiting the Monarch beneficiaries. He suggested alternative methods of achieving the result including the trustee transferring shares to Curtis as a beneficiary who could then transfer them to the Kensington Trust. That could be agreed but created tax problems.

16 While these exchanges were taking place it emerged that Rotan Mosle Inc. a reputable American firm dealing in securities had valued CMC at $6,250 per share in July 19, 1977 for the purpose of the acquisition of some CMC shares still held by the public. They were asked to update that calculation. They made what they described as a limited review of various factors influencing the current value of CMC shares including financial statements up to June 1978. In their view, a sale in October 1978 of 153 CMC shares at $6,250 per share represented a trade at not less than fair market value though they expressed no opinion as to the amount if any by which such trade might exceed fair market value. Doubts as to self - dealing had by then fallen away and there was on the record a price appraisal, which could not be described as too low.

17 Finally, Sir David approved documents effecting the transaction, which has been referred to as “the 1978 agreement.” This consisted of a contract of sale, an employment agreement and a promissory note.

18 Under the contract of sale Hamset sold to Savannah 153 shares in CMC at a price of $6,250 per share. $250 was paid in cash and the balance of $956,000 by a promissory note payable to the order of Hamset on or before 5 years from the date of the agreement - November 30, 1978, and bearing interest at 8%. On the signing of the agreement Hamset delivered to Savannah certificates for those shares endorsed in blank. These certificates were duly noted in the books of CMC as having been transferred to Savannah who thereupon endorsed them in blank and handed them to BNS(C) as Escrow Agent. If the employment agreement was duly performed and the promissory note and...