01 July 2016

Preference Shares: Cadre Investments v. Activedocs

Directors of cash-strapped Activedocs Ltd could not strip out unpaid dividends of nearly two million dollars owed preference shareholders by unilaterally converting their shares to ordinary shares.
Activedocs started life in software development as Keylogix Ltd.  In 2002 it was critically short of cash, having burned through $5.5 million in shareholder funding.  ABN AMRO Craigs was approached for advice on a public share issue.  Plans were derailed by Keylogix getting a qualified audit report questioning whether it was a going concern.  The board then raised $1.27 million offering existing shareholders preference shares paying 15 per cent with conversion in two years time. Offer documents said conversion would be delayed if preference dividends were in arrears.
The High Court was told Keylogix continued to struggle financially.  Any financial surplus was insufficient in most years to pay any preference dividend.  By 2014, accruals for unpaid preference dividends had reached $1.9 million.  But prior to that, in 2007 and 2008,  directors paid preference shareholders their 15 per cent dividends unpaid for the first two years since issue and called it quits saying preference shareholders had all they were entitled to.  Their preference shares were converted to ordinary shares.  Preference shareholders sued.
Justice Courtney ruled as invalid the directors’ decision to convert preference shares to ordinaries.  The terms of issue delayed conversion until all arrears of dividend were paid and dividends continued to accrue annually if unpaid.  Nothing in the terms of issue stated the preference share dividends were non-cumulative.  Dividends payable on preference shares are presumed to be cumulative.    
Cadre Investments v. Activedocs – High Court (1.07.16)
16.103