Australian Co-operative Foods Limited v Dairy Farmers Milk Co-operative Limited

Australian Co-operative Foods Limited v Dairy Farmers Milk Co-operative Limited - [2007] NSWSC 1311 - NSWSC 2007 case summary — Zoe

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10 The principal controversy between the parties is whether or not those resolutions had that effect. 11 The defendant brings a cross-claim for an order restraining ACF from declaring the excess interest to be forfeited, for declarations that the resolutions were effective to permit it to have the excess interest and for orders under s 1322 of the Corporations Act 2001 (Cth) that it be relieved from any civil liability in respect of any contravention of s 289(1) of the Act. BACKGROUND 12 As at 2004 ACF operated a dairy products processing and manufacturing business. Its members consisted of dairy farmers and co-operatives of dairy farmers. 13 During that year it put a restructure proposal to its shareholders. One of the commercial drivers of the proposal was to put ACF in an improved position to raise capital, so that it did not have to rely on farmer members as the sole source of its share capital. 14 The restructure proposal involved two stages. 15 Stage 1 (which entailed two steps) provided for ACF's ownership structure to be restructured by the establishment of a new entity, described as the Supply Co-operative, and for the split of the then member capital of ACF into two component parts: 20% into shares in the new Supply Co-operative and 80% in ACF. Members of ACF would now have separate holdings in two co-operatives. The shares held in ACF would be equal to 80% of the number originally held by members in ACF and the reduction in ACF shares would be balanced by a new holding in the Supply Co-operative equal to 20% of the members' original holding in ACF. 16 Stage 2 envisaged the future corporatisation of ACF and the possibility of raising capital perhaps by listing on the Australian Stock Exchange. 17 The defendant was incorporated on 13 April 2004 as a separate co-operative to undertake the role of the Supply Co-operative. 18 The restructure proposal made provision for the entry into of a milk supply agreement between ACF and the Supply Co-operative. Instead of supplying their milk to ACF as they had in the past, members would supply the Supply Co-operative which would in turn supply ACF which would process it. 19 The proposal made provision for a loan agreement ("the Loan Agreement") to be entered into under which the Supply Co-operative would lend money to ACF. 20 Stage 1 provided for the issue of convertible CCUs (convertible co-operative capital units) which are instruments to facilitate the issue of shares (in the event that ACF subsequently became registered as a company) to former members of ACF whose membership had been declared cancelled because they had become inactive members. 21 Stage 1 also provided for a Share Acquisition Program which would require members to increase their investment in the Supply Co-operative to a level proportionate to the amount of milk supplied by the member.

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22 The restructure of ACF's ownership structure was effected by a Scheme of Arrangement ("the Scheme") between ACF and its members. The defendant was not itself a party to the Scheme. However, it covenanted by way of Deed Poll to submit to and be bound by the Scheme as if it were a party. 23 The Scheme was approved by the Court on 29 June 2004. 24 A Scheme booklet ("the Booklet") including an Explanatory Statement (containing the terms of the Scheme), an Independent Expert's Report, Taxation Adviser's Report and an Active Members' Voting Guide ("the Guide") which included a Postal Ballot Paper, was circulated to ACF's Members. 25 Stage 1 did not seek approval for the introduction of external or non-farmer ownership capital. It was described in the Chairman's introductory letter contained in the Booklet as a proposal: to introduce a supply co-operative and to effectively split existing Member capital into two component parts: 1. 20% of shares into the new supply co-operative, Dairy Farmers Milk Cooperative Limited. 2. 80% into shares in the processor co-operative, Australian Co-operative Foods Limited trading as Dairy Farmers. 26 The "Provisions of the Scheme" were in four Parts and were contained in section 12 of the Booklet. Part 2 contained "Definitions and Interpretation" provisions and Part 4 the "Provisions of the Scheme". 27 The operative provisions of the Scheme were as follows: "Cancellation of Scheme Shares and Issue of Supply Co-operative Shares and ACF Shares 4.1 On the Implementation Date and in the following order: (a) ACF will issue 5 shares of $1.00 each in its capital to the Supply Co-operative (the First Shares) in consideration of a payment of $5.00 made by the Supply Co-operative to ACF; (b) (i) The Scheme Shares will be cancelled and, by virtue of the cancellation, capital to the extent of $1.00 per Scheme Share will be payable by ACF to the Existing Members in proportion to the number of Scheme Shares held by them; (ii) Each Existing Member directs that the capital repayable by ACF to the Member in respect of such cancellation of Scheme Shares be applied to the issue to the Member (in accordance with 4.1(c) of shares of $1.00 each in the capital of the Supply Co-operative so that such shares are issued as fully paid; (c) (i) The Existing Members will subscribe for, and the Supply Co-operative will in compliance with the Deed Poll issue to the Existing Members an aggregate number of shares of $1.00 each in the capital of the Supply Co-operative equal to the number of Scheme Shares, on the footing that the shares so subscribed for shall be issued by the Supply Co-operative to the Existing Members in proportion to the numbers of Scheme Shares held by them and in consideration of the payment of subscription moneys of $1.00 per share; (ii) The Supply Co-operative will in compliance with the Deed Poll direct that the subscription moneys payable to the Supply Co-operative by each Existing Member in respect of such issue of shares be applied to the issue to the Supply Co-operative (in accordance with 4.1(d)) shares of $1.00 each in the capital of ACF so that such shares are issued as fully paid; (d) (i) The Supply Co-operative will in compliance with the Deed Poll subscribe for, and ACF will issue to the Supply Co-operative, an aggregate number of shares of $1.00 each in the capital of ACF equal to the number of Scheme Shares, in consideration of the payment by the Supply Co-operative of subscription moneys of $1.00 per share; (ii) the aggregate of the capital payable by ACF to the Existing Members (in accordance with 4.1(b)) shall be applied by ACF (in accordance with the directions described in this clause) in fully paying up the shares so issued. Part Cancellation of Shares by ACF and Issue of Shares by ACF to Existing Members 4.2 Following the implementation of clause 4.1, on the Implementation Date and in the following order: (a) (i) 80% of the shares in the capital of ACF held by the Supply Co-operative (including the First Shares) will be cancelled and, by virtue of the cancellation, capital to the extent of $1.00 for each share so cancelled will be payable by ACF to the Supply Co-operative. (ii) The Supply Co-operative will in compliance with the Deed Poll direct that the capital repayable by ACF to the Supply Co-operative in respect of such cancellation of shares be applied to the repayment (in accordance with 4.2(b)) of capital by the Supply Co-operative to the Existing Members; (b) (i) The Supply Co-operative will in compliance with the Deed Poll cancel 80% of the shares in the capital of the Supply Co-operative held by each Existing member, and will also cancel a further 4 shares being part of the initial holding of ten (10) shares allotted to any one of the formation members of the Supply Co-operative, and, by virtue of such cancellations, capital to the extent of $1.00 per share will be payable by the Supply Co-operative to the Existing Members in proportion to the number of shares in the capital of the Supply Co-operative so cancelled formerly held by them; (ii) Each Existing Member directs that the capital repayable by the Supply Co-operative to the Member in respect of such cancellation of shares be applied to the issue (in accordance with 4.2(c)) of shares of $1.00 each in the capital of ACF so that such shares are issued as fully paid; (c) (i) The Existing Members will subscribe for, and ACF will issue to the Existing Members an aggregate number of shares of $1.00 each in the capital of ACF equal to the number of shares cancelled in accordance with 4.2(a), on the footing that the shares so subscribed for shall be issued by ACF to the Existing Members in proportion to the number of shares so cancelled formerly held by them and in consideration of the payment of subscription moneys of $1.00 per share; (ii) The aggregate of the capital payable by ACF to the Supply Co-operative (in accordance with 4.2(a)) shall be applied by ACF ( in accordance with the directions described in this clause) in fully paying up the shares so issued. 28 Scheme Share was defined in cl 2.1 to mean an ACF Share on issue immediately prior to the Implementation Date. 29 Existing Members was defined in cl 2.1 to mean registered members of ACF in its Register of Members as the holders of ACF shares on the business day immediately preceding the Implementation Date including members entitled to be registered by dealings in ACF shares before that date where the dealings were approved by the Board of ACF before that date. 30 Clause 4.14 of the Scheme provided that it became effective on the "Implementation Date" which was either the date on which an office copy of the Court Order approving the scheme was lodged with the New South Wales Registrar of Co-operatives by ACF, or such other date as the Court specified in the Order. 31 The Scheme accordingly entailed the following steps: a the Supply Co-operative was introduced by the issue to it of five shares in ACF ; b all members' shares in ACF (except for the five shares allotted to the Supply Co-operative) were cancelled and the members were paid $1.00 per share; c the face value of the cancelled shares was applied to the subscription for shares in the Supply Co-operative by the ACF members whose shares in ACF were cancelled; d the Supply Co-operative subscribed for and was issued the same aggregate number of shares in ACF as had been previously held by the ACF members, for $1.00 per share; and e 80% of the shares held by the Supply Co-operative in ACF were cancelled, 80% of the shares held by members in the Supply Co-operative were cancelled and shares in ACF equal to the number of shares which the Supply Co-operative had held in ACF and which were cancelled, were then issued to the members. 32 On completion of these steps the original ACF members held 100% of the Supply Co-operative and 80% of ACF and the Supply Co-operative held the remaining 20% of ACF. 33 Clause 2.1 (in Part 2) and clause 4.7 (in Part 4) of the Scheme provided that conditions precedent to its operation were (amongst others) the occurrence of the following events: "(a) the passing of the Members' Scheme Resolution; and (b) … (c) the passing in a postal ballot , in accordance with the Act, of resolutions each of which is in or to the effect of the resolutions set out in Schedule B to Part 4…" (emphasis added)"

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"(4) (a) The number of shares which may be held by or by and on behalf of any one member of the Co-operative shall not exceed a number having the nominal value of Two million dollars ($2,000,000.00); (b) For the purpose of sub-rule (4)(a), a person holds shares if that person has a relevant interest, as defined in the Act, in those shares; (c) No member of the Co-operative shall hold, or have a relevant interest in, shares the nominal value of which exceeds · a number having the nominal value of Two million dollars ($2,000,000.00), or · one-twentieth of the total nominal amount of issued share capital of the Co-operative, whichever is the lesser. 44 By Resolution 2 that rule was deleted and the following new Rule 16(4) was inserted: "(4) (a) (i) On the Implementation Date the number of shares which may be held by or by and on behalf of any one member of the Co-operative shall not exceed a number having the nominal value of Two hundred million dollars ($200,000,000): (ii) After the Implementation Date, the number of shares which may be held by or by and on behalf of any one member of the Co-operative shall not exceed a number having the nominal value of Fifty million dollars ($50,000,000) (b) For the purposes of sub-rule (4)(a), a person holds shares if that person has a relevant interest, as defined in the Act, in those shares; (c) No member of the Co-operative, apart from the Supply Co-operative , shall hold, or have a relevant interest in, shares the nominal value of which exceeds (i) a number having the nominal value of Two million dollars ($2,000,000) or (ii) one-twentieth of the total nominal amount of issued share capital of the Co-operative, whichever is the lesser." (emphasis added) 45 Under Rule 1(a) "Supply Co-operative" meant the defendant and "Implementation Date" meant the same as in the Booklet. 46 Rule 2(2) provided relevantly that "[t]hese rules may not be altered except by special resolution passed by the members…". 47 The explanatory note in the Booklet to the amendment to rule 16(4) was in the following terms: "It is necessary for tax purposes to have a specific limit on the number of shares any member may hold or have held on the member's behalf. Because the Supply Co-operative after Step 1 of Stage 1 will hold all of the shares of Restructured ACF, the specific limit in new rule 16(4)(a) is a very high number on the Implementation Date and a lower figure thereafter. In addition to the overall limit required by the tax legislation, the rules contain a provision which restricts substantial shareholdings to the lesser of 5% of the nominal value of the issued share capital or $2 million. As the Supply Co-operative will hold more than this limit it is necessary to amend the rule by excluding the Supply Co-operative from its operation." 48 Resolutions 1 and 2 were (as were the other resolutions) passed with over 85% of votes received being in favour. 49 The Implementation Date was 29 June 2004, when a copy of the Court Order approving the Scheme was lodged with the Registrar. 50 On that date, and as a consequence of the implementation of the Scheme, the defendant held 25,848,746 shares in ACF out of a total 129,248,218 on issue, that is, 19.999%. 51 Between the Implementation Date and 31 July 2007 the percentage of ACF's issued capital held by the defendant increased as a consequence of the forfeiture by members of shares in ACF, cancellation of shares in ACF in accordance with its policies on hardship and members turning 65 (ACF has a policy of re-purchasing shares of members in case of extreme hardship or who have reached age 65), and the issue of shares to the defendant pursuant to ACF's Dividend Reinvestment Plan. 52 As at 3 January 2006 the defendant held 23.35% of ACF's share capital. 53 As at 31 July 2007 it held 27.13%. There is no evidence that there has been any change since then. OTHER RELEVANT PROVISIONS OF THE ACT AND ACF'S RULES The Act 54 Section 127(1)(b) provides as follows: "Cancellation of membership of inactive member (1) The board of a co-operative must declare the membership of a member cancelled if: (a) … (b) the member is not presently an active member of the co-operative and has not been an active member of the co-operative at any time during the required period immediately before that time." 55 Section 128(1) provides as follows: " Shares to be forfeited if membership cancelled (1) If a co-operative has a share capital, the board of the co-operative is to declare the shares of a member to be forfeited at the same time as the member's membership is cancelled under section 127." 56 Sections 134(1)(a) and (2)(b) provide as follows: " Repayment of amounts due in respect of cancelled membership (1) If the membership of a member of a co-operative is cancelled under this Part, the co-operative must, within 12 months after the date of cancellation: (a) repay to the former member the amount due to the member in respect of that cancellation, or (b) … (2) The amount due may be applied as follows: (a) … (b) the co-operative may allot or issue debentures or CCUs of the co-operative to the former member in satisfaction of the amount." 57 Sections 139(1) and (2)(b) provide as follows: " Former shareholders to be regarded as shareholders for certain purposes (1) This section applies to a co-operative only if the co-operative has a share capital. (2) Even though a person's shares in a co-operative have been forfeited under this Part, the person is to be regarded as the holder of shares in the co-operative (the same in all respects as those that were forfeited) for the following purposes: (a) … (b) the entitlement of a shareholder when the co-operative becomes registered as a company if the relevant special resolution under section 316 (2) is passed within 5 years after the person's shares were forfeited." 58 A CCU is defined in s 5 of the Act to mean a co-operative capital unit as provided for by Division 2 of Part 10. Section 269(1), which is within that Division, provides that:

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70 It is not in dispute that Resolution 1 met the criterion of being passed by special postal ballot. Section 344(1)(b) of the Act required members' approval of the Scheme to be by special resolution passed by means of a special postal ballot, and it was. 71 Whether Resolution 2 was or should be regarded as having been passed by special postal ballot, and if not, whether its passing by postal ballot was no more than a procedural irregularity arises only if, on its proper construction (either alone or together with Resolution 1), it increased the statutory maximum. 72 Resolution 1, Resolution 2 and ACF's rules are commercial documents and are to be construed according to the canons of construction which apply to commercial contracts. 73 The meaning of the words used is to be determined by what a reasonable person would have understood them to mean. This requires consideration of the language used, the surrounding circumstances known to the parties, the purpose of the transaction and the objects which it is intended to secure: Toll( FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 at 179. 74 In construing a suite of related documents, preference is given to a construction supplying a congruent operation to the various components of the whole: Wilkie v Gordian Runoff Limited (2005) 221 CLR 522 at 529. 75 In construing a written contract the Court is to endeavour to discover the intention of the parties from the words of the instrument in which the contract is embodied. The whole of the instrument has to be considered. If the words used are unambiguous, the Court must give effect to them. If the language is open to two constructions, that will be preferred which will avoid consequences which appear to be capricious, unreasonable, inconvenient or unjust: Australian Broadcasting Commission v Australasian Performing Right Association Limited (1973) 129 CLR 99 at 109. Resolution 1 76 Was Resolution 1 on its proper construction a resolution to increase the maximum of 20% in respect of the defendant so as to enable it to have the excess interest? 77 Resolution 1 did not directly provide for any increase in the maximum either in respect of a particular person or at all. 78 However, the Scheme which it approved did. 79 The terms of the Scheme are unambiguous, and its operation is clear. 80 Under clause 4.1 of the Scheme, the defendant and only the defendant was issued with five shares in ACF. Immediately thereafter all other shares in ACF were cancelled so that the defendant, at that point, owned all the shares on issue in ACF. The members whose shares were cancelled then subscribed for shares in the defendant in proportion to the shares which they had held in ACF. 81 Under clause 4.2 of the Scheme, after the defendant had through its subscription for shares in ACF and the cancellation of all the member's shares become the holder of all of the shares in ACF, 80% of the shares in the capital of ACF held by it (including the initial five shares) was cancelled. The defendant's 100% shareholding in ACF was thus immediately reduced to 20% (in fact 19.999%).

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89 Resolution 1 approving the Scheme was not a resolution authorising the defendant to have the excess interest after the Implementation Date. That was clearly not one of the objects Resolution 1 was intended to secure. 90 Upon the reduction taking place, unless there was some other complying resolution in respect of the defendant, it was governed by s 289(1) of the Act and the 20% statutory maximum applied to it. 91 It follows from my conclusion that Resolution 1 did not authorise a holding beyond 20% after the Implementation Date, that the proposition that Resolution 2 "clicked in" to effect a reduction to a level higher than 20% is unsustainable. There was no reduction for Resolution 2 to bring about. The proposition that Resolution 2 authorised a level higher than 20% after the Implementation Date is also unsustainable for further reasons which appear below. Resolution 2 92 It was put that the terms of Resolution 2, either in conjunction with Resolution 1 or alone, were effective to increase the 20% maximum under s 289(3) of the Act in respect of the defendant. 93 This submission is not accepted. 94 Resolution 2 did no more than authorise an alteration to ACF's rules. 95 Prior to its alteration, rule 16(4)(a) limited the number of shares which could be held by or on behalf of any one member to shares having the nominal value of $2,000,000. Rule 16(4)(c) limited the number of shares in which a member could have a relevant interest to the lesser of the number of shares having the nominal value of $2,000,000 or one-twentieth (i.e. 5%) of the nominal amount of ACF's issued share capital. 96 Neither the rules nor the Act required alteration to rule 16(4) to be by special resolution by special postal ballot. Under rule 2(2) the rules could be amended by special resolution passed by postal ballot. 97 Rule 16(4), as it stood, neither in terms nor by implication concerned a relevant interest of a member in shares in excess of the 20% maximum in s 289(1) of the Act. 98 Rule 16(4)(a) was not directed to a percentage and rule 16(4)(c) insofar as it concerned a percentage, concerned one well below 20%. 99 It is clear too that the alteration to rule 16(4) made by Resolution 2 was not directed to the statutory maximum in s 289(1) of the Act. 100 Firstly, s 289(3) is directed to an increase in respect of a particular person not to the entirety of the available body of persons to whom the maximum could conceivably apply. The statutory reference to "a particular person" is not mere "drafting verbosity", it has work to do: Rural Press Ltd v ACCC (2003) 216 CLR 53 at 62. New rule 16(4)(a) was directed to "any one member" of ACF, and therefore did not satisfy the requirements of a resolution under the section: cf Bullock v Federated Furnishing Trades Society of Australia (No 1) (1985) 5 FCR 464 at 473. 101 Secondly, new rule 16(4)(a) contained thresholds not expressed in percentage terms. Because the number of shares on issue is not static the number specified in new rule 16(4)(a)(ii) could represent any percentage of the shares on issue at any particular time in the future and be less than 20% of the nominal value of shares on issue. 102 Thirdly, new rule 16(4)(a)(ii) imposes a limitation on the number of shares which may be held by or on behalf of any one member. It does not purport to supplant the statutory one. If the number of shares having the nominal value of $50,000,000 were less than 20% the rule operates to restrict a member to the nominal value of $50,000,000. If the nominal value of $50,000,000 is greater than 20%, then in the absence of a complying resolution under s 289(3) of the Act the 20% maximum applies. 103 Fourthly, the explanatory note to the rule change informed the reader that for tax purposes it was necessary to have a specific limit on the number of shares "any member may hold or have held on the member's behalf". It went on to explain that because the Supply Co-operative "would hold all the shares" after Step 1 of Stage 1 the specific limit in the new rule "is a very high number on the Implementation Date and a lower figure thereafter". The note further explained that the rule restricted substantial shareholdings to the lesser of 5% of the nominal value of the issued share capital or $2,000,000 and that as the Supply Co-operative's holding would be above this limit it was necessary to amend the rule by excluding the Supply Co-operative from its operation. 104 Those tax purposes are connected with s 117 of the Income Tax Assessment Act 1936 (Cth) which defines a co-operative company to mean one, which amongst others, the rules of which limit the number of shares which may be held by or on behalf of any one shareholder. 105 There is nothing to suggest that the new rule was directed to allowing the defendant to have the excess interest after the Implementation Date pursuant to s 289(3) of the Act. 106 Fifthly, whilst new rule 16(4)(c) makes express reference to the Supply Co-operative (and is therefore in respect of the defendant), all that alteration did was to relieve the defendant from a limitation on its shareholding which was even more severe than the statutory one. 107 Alteration to rule 16(4)(c) was necessary because after the Implementation Date the defendant was going to hold 20% of ACF. This would not have been permissible under the rule without alteration. The amendment was directed to avoiding a breach of the rules. It did not, nor was it intended to, operate on the statutory limit. It was not concerned with the statutory "maximum permissible level of share interest in the co-operative" within the meaning of s 194A(d) or Rule 36A(1)(d). 108 Accordingly, no special postal ballot was required for it. 109 Insofar as the momentary increase in the statutory maximum was required to be by special resolution by special postal ballot, that requirement was satisfied by Resolution 1. 110 So viewed, Resolution 1, Resolution 2, the Scheme and the explanatory material work together in a congruent manner. 111 It was neither by coincidence nor by error that Resolution 2 was not put as requiring a special postal ballot but only a postal ballot. 112 As with Resolution 1 the terms of Resolution 2 are unambiguous and its operation is clear. It was not a resolution to increase the statutory limit to allow the defendant to have the excess interest.

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124 Under s 189(3) of the Act the failure to specify that the resolutions were being proposed to allow the defendant to have more than 20% after the Implementation Date means that neither Resolution 1 nor Resolution 2 is to be considered to have been passed as a special resolution having the effect contended for by the defendant. 125 Mr Sackar QC who, together with Mr Foreman, appeared for the plaintiff, put that to construe the resolutions as the defendant would have it, would mean that the directors of ACF had breached their fiduciary duty, and that the Court should be reluctant to so conclude. 126 The Scheme, the Booklet, the resolutions and the amendments to the rules were manifestly carefully constructed. It seems clear that the Scheme and the resolutions had in mind the application of the 20% statutory maximum to the defendant, not its abrogation. On the construction of the resolutions I have found, no issue of breach of fiduciary duty arises. WOULD THE RESULT BE CAPRICIOUS, UNREASONABLE OR UNJUST? 127 In support of the construction for which he contended Mr Bathurst put that if the resolutions did not increase the 20% maximum with respect to the defendant and it had to forfeit the excess interest, the result was capricious, unreasonable or unjust. 128 In Australian Broadcasting Commission v Australasian Performing Right Association Limited at 109 Gibbs J said: "If the words used are unambiguous the court must give effect to them, notwithstanding that the result may appear capricious or unreasonable, and notwithstanding that it may be guessed or suspected that the parties intended something different. The court has no power to remake or amend a contract for the purpose of avoiding a result which is considered to be inconvenient or unjust. On the other hand, if the language is open to two constructions, that will be preferred which will avoid consequences which appear to be capricious, unreasonable, inconvenient or unjust,.…" 129 Because, in my view, the terms and operation of Resolution 1 and Resolution 2 are unambiguous the question as to whether giving them effect brings about a result which is capricious, unreasonable, or unjust does not arise. However, I propose nevertheless to consider whether if the defendant in the circumstances here has to shed the excess interest that is a capricious, unreasonable or unjust outcome. 130 In considering this question it is necessary to refer to various aspects of the restructure proposal and the related arrangements. The Share Acquisition Program 131 In or about July 2004, shortly after the approval of the Scheme, the defendant commenced its Share Acquisition Program. Under it an amount per litre of milk supplied by a farmer member is deducted from the price otherwise payable for the farmer's milk and used to pay for additional shares in the defendant up to the maximum shareholding permissible under the defendant's rules. The increase in the member's shareholding in the defendant under this program does not lead to a corresponding increase in the defendant's shares in ACF. The Loan Agreement 132 Also in July 2004 the defendant entered into the Loan Agreement under which surplus funds raised by the defendant's Share Acquisition Program are lent to ACF. Under the heading REPAYMENT the Loan Agreement contains the following provision: "3.1 In the event that a dividend is declared on shares held by the Lender in the Borrower at any time during the currency of this agreement, the Lender may by notice in writing to the Borrower direct the Borrower to apply out of the Loan an amount equivalent to the amount of the dividend to the purchase of shares in the Borrower at the cost of $1 per share." 133 Although infelicitously drafted, this provision seems to provide that if a dividend is declared by ACF, the defendant may direct it to apply out of the loan an amount equivalent to the amount of the dividend to purchase ACF shares at $1 per share, or it may receive the dividend in cash. The ACF Dividend Reinvestment Plan 134 ACF has a Dividend Reinvestment Plan under which members may take dividends as shares rather than as cash. The defendant's interest in ACF pursuant to the Scheme 135 In section 10 of the Booklet entitled Supply Co-operative under the heading "Supply Co-operative's Interest in ACF" the following appeared: "10.1.3 Supply Co-operative's Interest in ACF Upon implementation of the Scheme of Arrangement, the Supply Co-operative will hold approximately 20% of the issued Restructured ACF Shares. The other 80% (approximately) of the Restructured ACF Shares will be held by its existing Members. While ACF remains a co-operative, the Supply Co-operative and each of the other Members of Restructured ACF will have one vote each at meetings or in postal ballots of ACF. Section 9 describes the board and governance of Restructured ACF. The effect of Rule 65 of the Rules of the Supply Co-operative is that the Supply Co-operative cannot sell shares it holds in the Processor without a 75% majority resolution of the members of the Supply Co-operative, who cast formal votes. If Restructured ACF were to be converted to a public company, called "the Company" and also called "Dairy Farmers Limited" in this booklet, the Supply Co-operative and the other shareholders would become entitled to one vote for each share held in the Company. On conversion to a company those Qualifying Former Members of ACF who hold Convertible CCUs at the time of the vote to convert (Resolution Date) would become shareholders of the Company (absent a Restructure Event. For information about Restructure Events, see Section 11.4.6). In addition, the former shareholders of Restructured ACF who have entitlements under section 139 of the Act would also become shareholders of the Company. Both of these holdings would have an impact on the proportion of shares held by the Supply Co-operative. The value of the forfeited shareholdings of Qualifying Former Members as at the Implementation Date is estimated to be 53,500,000. In other words Qualifying Former Members as at that date will have held approximately 53,500,000 shares in ACF at the time their Membership was cancelled under section 127 and their shares were forfeited under section 128 of the Act. Assuming that the value of the shareholding of Qualifying Former Members as at the Implementation Dated is $53.5 million, the maximum number of Convertible CCUs which could be issued if all Qualifying Former Members apply, will have a value of $42.8 million. Assuming that the issued share capital of ACF as at the Implementation Date is $125 million, the following represents the range of potential holdings in the Company by Qualifying Former Members, if ACF converts to a company immediately following the Implementation Date.

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Hence, ignoring the introduction of external investors the net effect of the entitlements of former Members of ACF and the investment by the Supply Co-operative in ACF shares will be that the proportion of shares in the Company on issue which will be held by the Supply Co-operative will fall within the range of 14.9% to 20%. (emphasis added) However, it is quite possible that the conversion of ACF to a public company will be done in conjunction with a capital raising which may coincide with a listing of the Company on the Australian Stock Exchange. Such capital raising will dilute the percentage interest of the Supply Co-operative in the Company. The extent of the dilution and the percentage interest held by the Supply Co-operative after this initial capital raising will depend upon the number of, and issue price of, new shares in the Company issued in the capital raising. Other factors which will have an influence on the final percentage shareholding of the Supply Co-operative in Restructured ACF and hence the Company, and in the relative holdings in the Company of the Supply Co-operative, individual farmer Members, Qualifying Former Members, and external investors, include: · The number of Members of Restructured ACF who have shares forfeited under section 128 after the Implementation Date; · The amount of money raised by the Supply Co-operative's Share Acquisition Program and on-lent to Restructured ACF and the amount eventually applied towards shares in the Company; · The amount of capital raised if DFL floats which is taken up or subsequently acquired by farmer Members of the Supply Co-operative; · The number of shares sold by farmer Members of the Supply Co-operative immediately following any float. Commercial effects 136 After the Implementation Date it was inevitable, having regard to the inactive member provisions of the Act, the operation of ACF's Dividend Reinvestment Plan and ACF's policy of re-purchasing shares from members for hardship and age reasons, that the percentage of ACF held by the defendant would not be static, but would change from time to time. 137 The number of shares on issue would decrease by forfeitures and re-purchases which would correspondingly increase the defendant's percentage. 138 The number of shares on issue would increase by further issues of shares under the Dividend Reinvestment Plan which would have the effect of decreasing the defendant's percentage if the number of shares it received was less than 20% of the total being issued. This was not a factor referred to in section 10 of the Booklet (referred to above) as potentially having an influence on the final percentage shareholding of the defendant in ACF. The number of shares on issue and the defendant's holding would increase if money under the Loan Agreement was applied to the issue of shares in ACF. The defendant's submissions 139 Firstly, it was submitted that "a strong commercial argument" that forfeiture was capricious and unjust was that: a if the cumulative effect of the various possibilities and permutations at any one time put the defendant's percentage shareholding above 20% it would forfeit the excess at $1 per share without any right of re-entry equivalent to that given to former shareholders under s 139(2)(b) of the Act; b under its own rules the defendant could not sell the shares to be forfeited without a 75% majority resolution of its members; and c the defendant would lose the potential benefit of holding those shares on a subsequent float of ACF, it being anticipated that the value on a float would be more than $1. 140 I do not accept this submission. 141 Firstly, other shareholders would be in the same position if they were at the statutory limit and forfeitures and issues of shares pushed them beyond that limit. The defendant is in no special position simply because it is already at that limit. 142 Secondly, it is not apt to equate a shareholder who forfeits because of inactivity with one who forfeits for breach of the statutory limit. 143 Thirdly, the Booklet stated in Section 3 entitled DETAILS OF THE PROPOSAL that: "4. Upon completion, the proportionality of ownership interests held by the members in Restructured ACF, whether directly or indirectly through the Supply Co-operative, will remain unchanged for their ownership interests originally held in ACF at the Implementation Date." (emphasis added) 144 The defendant was to be a vehicle to hold ownership interests in ACF for persons who might overlap with, but who would over time almost certainly not be identical to, the members holding interests in ACF directly. Whether the defendant's forfeiture worked prejudice on any particular member would depend on that member's circumstances. If the member held interests in both the defendant and ACF the forfeiture might on balance benefit the member. It is not only the defendant's position in isolation that is relevant. Forfeiture by the defendant might be a benefit to some whose interests it was intended to represent. 145 Fourthly, the defendant was not precluded from selling the excess interest or any part of it. A resolution permitting sale was open to its members. 146 Fifthly, s 290(4) of the Act read with s 134(2)(b) of the Act provides machinery for ACF to issue CCUs to the defendant in satisfaction of an amount owed to it in respect of forfeiture. The issue of such an instrument would enable it to recapture forfeited shares at a later time. 147 Next it was put that it was capricious, unreasonable or unjust that the defendant would not be able to direct ACF to issue shares to it as provided in the Loan Agreement where that direction involved issuing shares at a time when the defendant held more than the maximum. 148 I do not agree. Under the Loan Agreement if the defendant could not have shares issued to it, it would receive its dividend in cash rather than shares at a price of $1 per share. If the shares were worth less than $1 at the time there would be no detriment. If the shares were worth more than $1, there would be a dilution effect which would benefit the defendant to the potential detriment of other members of ACF. 149 It does not seem to me that an inability (beyond a particular threshold - or perhaps at all) on the part of defendant to exercise an option to obtain shares at a discount to value as an alternative to repayment is capricious, unreasonable or unjust. 150 If an inability on the part of ACF to issue shares beyond the statutory limit was an event of default under the Loan Agreement the defendant would have its right to repayment. This does not seem to me to involve any capriciousness, unreasonableness or injustice. 151 Finally, it was put that if the defendant was held to the statutory maximum it was capricious, unreasonable or unjust that it would not be able to obtain further shares under the Dividend Reinvestment Plan 152 Once again, any member at the maximum limit would be in this position. Moreover, it was not suggested that the defendant would receive shares at a discount under the Dividend Reinvestment Plan. Receiving the cash equivalent does not appear to me to involve any capriciousness, unreasonableness or injustice. 153 It does not seem to me that the forfeiture of the excess interest by the defendant involves any capriciousness, unreasonableness or injustice. 154 To the contrary, as I have said above, the explanatory material provides no inkling that any interest above 20% is either possible or foreshadowed, even after ACF is converted to a company. In the part of section 10 of the Booklet set out above, and to which emphasis has been added, the reader is informed that the Supply Co-operative's shareholding will fall within the range of 14.9% to 20%. 155 The explanatory material makes it clear that the defendant did not acquire its interest in ACF other than on the footing that the statutory maximum applied to it.

At a glance

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Judgment (57 paragraphs)

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Legislation Cited (5)

Cases Cited (7)

Cited By (2)