REASONS FOR JUDGMENT
1 These are my reasons for making an order under s 411(4)(b) of the Corporations Act 2001 (Cth) (Corporations Act) approving a scheme of arrangement between the plaintiff (David Jones) and its ordinary shareholders in the form of Annexure D of the Scheme Booklet which is Exhibit 1 in this proceeding (Scheme) and an order under s 411(12). These reasons have been expanded from the reasons I delivered ex tempore at the time I made the orders.
2 Terms used in these reasons bear the same meaning as in my reasons for making orders under s 411(1) on 22 May 2014: see Re David Jones Limited [2014] FCA 530. The Scheme Meeting was held on 14 July 2014 pursuant to directions which I made on 19 June 2014 under s 1319 of the Corporations Act. The background to those orders and further directions I made on 2 July 2014 relating to the despatch of supplementary information (Supplementary Information) to David Jones shareholders is set out in Re David Jones Limited (No 2) [2014] FCA 720 (David Jones (No 2)).
3 The matters the Court must take into account in deciding whether to approve the Scheme include:
a. whether the orders of the Court convening the Scheme Meeting were complied with;
b. whether the resolution to approve the Scheme was passed by the requisite majority and whether other statutory requirements have been satisfied;
c. whether all conditions to which the Scheme is subject (other than Court approval and lodgement of the Court's orders with ASIC) have been met or waived;
d. whether the Scheme is fair and reasonable so that an intelligent and honest David Jones shareholder, properly informed and acting alone, might approve it. In considering this question, it is not the role of the Court to usurp the decision of shareholders by imposing its own commercial judgement on the Scheme or to consider whether a better scheme might have been proposed;
e. whether David Jones has brought to the attention of the Court all matters that could be considered relevant to the exercise of the Court's discretion; and
f. whether there was full and fair disclosure to David Jones shareholders of all information material to the decision whether to vote for or against the Scheme.
See Re Solution 6 Holdings Ltd (2004) 50 ACSR 113 at [18]-[24]; Re Permanent Trustee Company Limited (2002) 43 ACSR 601 at [8]-[10]; Re Central Pacific Minerals NL [2002] FCA 239 at [8]-[14]; Re Seven Network Limited (No 3) [2010] FCA 400 at [35]-[39].
4 Affidavits of Mr Gordon Cairns, chairman of David Jones, affirmed on 15 July 2014, Ms Maria Dzopalic, a senior relationship manager at Computershare Investor Services Pty Limited, sworn on 15 July 2014, Mr Luke Hastings affirmed on 16 July 2014 and Mr Craig Semple sworn on 16 July 2014 were read. The certificates relating to satisfaction of conditions precedent signed by David Jones (17 July 2014) and Vela Investments Pty Ltd (Bidder) (16 July 2014) were tendered.
5 I am satisfied that the procedural requirements of s 411 and other formal matters have been addressed based on the affidavits and documents referred to at [4] and the affidavits read and documents tendered at the first court hearing. I note in particular:
a. the Scheme Booklet and other correspondence with David Jones shareholders was produced and despatched in accordance with the Court's orders;
b. the Scheme Meeting was held at the time and place specified in orders made by the Court, Mr Cairns acted as chairman of the Scheme Meeting and the resolution approving the Scheme was passed by a majority which substantially exceeded that required under s 411(4)(a)(ii). Of 537,137,845 shares on issue:
267,782,527 or 96.81% of shares and 15,203 or 89.64% of shareholders present and voting voted "for" the resolution; in person or by proxy;
8,834,078 or 3.19% of shares and 1,758 or 10.36% of shareholders present and voting voted "against" the resolution, and
53,861,408 shares held by 107 shareholders abstained. Of these, 53,119,754 shares or 9.89% of the issued shares were held by an entity associated with Mr Solomon Lew (Mr Lew).
c. the date and place of the second court hearing were published in The Australian on 8 July 2014 in accordance with orders of the Court;
d. the conditions precedent to the Scheme (other than the Court approving the Scheme and lodgement of orders with ASIC) have been satisfied or waived;
e. a deed poll in the usual form was executed by Woolworths Holdings Limited (WHL) and the Bidder on 10 May 2014; and
f. the Scheme was not proposed for the purpose of avoiding the provisions of Chapter 6 of the Corporations Act. Due to the complexity of WHL's financing arrangements in relation to the acquisition of shares in David Jones it was necessary that it acquire all or none of the shares and the mechanism provided by s 411 was most appropriate for this purpose.
6 It is the issue in [3e] and the fact that ASIC has refused to provide the "usual letter" under s 411(17)(b) which are most relevant to the exercise of the discretion at this hearing.
7 ASIC was given leave to appear amicus curiae and provided written submissions. In the circumstance where ASIC acknowledges that the Scheme was not proposed for the purpose of avoiding the provisions of Chapter 6 but it nonetheless declines to provide the usual s 411(17)(b) letter, it is appropriate that ASIC assist the Court by appearing at the second court hearing and drawing to the Court's attention the reasons for ASIC taking that position.
8 ASIC said that it did not oppose approval of the Scheme, taking into account the fact that interests associated with Mr Lew abstained from voting at the Scheme Meeting. However, it would not provide the usual s 411(17)(b) letter in relation to the Scheme because it appears to ASIC that an inducement to vote in favour of the Scheme or abstain from voting against the Scheme was provided to Mr Lew. The inducement was by means of the $17 per share offer announced by WHL on 24 June 2014 for all of the shares in Country Road Limited (Country Road) conditional on the Scheme being implemented (Country Road Bid). Mr Lew holds 11.8% of Country Road shares and WHL holds 87.88%. The Country Road Bid was announced during the period after the despatch of the Scheme Booklet. ASIC submitted that this offends the equal opportunity principle in s 602(c) of the Corporations Act and therefore has the potential to undermine the integrity of the scheme process as a method of effecting a control transaction. At the equivalent time during the bid period in a takeover conducted under Chapter 6, the offer of a benefit likely to induce acceptance of the bid or disposal of securities in the bid class would give rise to a breach of s 623 of the Corporations Act.
9 ASIC's concerns arise from the following circumstances:
a. In May and early June 2014, before the Country Road Bid was announced, there were discussions between WHL and Mr Lew and their advisors following the appearance of entities associated with Mr Lew on David Jones' share register. Mr Halley SC, Counsel for ASIC, acknowledged that great care was taken by the professional advisors in the communications between the "Lew" camp and the "WHL" camp, but he submitted that it is not the case that WHL made the Country Road Bid unprompted nor can the incentive to Mr Lew which it represents be ignored;
b. The Country Road Bid was announced on 24 June 2014, which was less than a week after Mr Lew filed a substantial holding notice on 18 June 2014 disclosing his acquisition of interests constituting 9.89% of the voting power in David Jones;
c. Mr Lew holds 98% of the securities that are subject to the Country Road Bid;
d. The Country Road Bid is conditional on the Scheme becoming effective; and
e. The Country Road Bid presents an opportunity for Mr Lew to sell shares in what is a very illiquid stock to the only likely buyer.
10 In accordance with a request from ASIC, David Jones provided to the Court affidavits in relation to negotiations between persons associated with David Jones or WHL and Mr Lew and his representatives. Mr Cairns' affidavit addresses this issue in relation to communications between David Jones and Mr Lew. Mr Simon Susman, chairman of WHL, affirmed an affidavit on 10 July 2014 in relation to his conversations and correspondence with Mr Lew. Mr Sam Prentice swore an affidavit on 14 July 2014 in relation to his conversations with Mr Susman and advisors to Mr Lew and David Jones; Mr Prentice is a Managing Director of Rothschild. Rothschild provided financial advisory services to WHL in connection with the Scheme and the Country Road Bid. Mr Craig Semple is a partner at Gilbert + Tobin, lawyers to WHL, and he swore an affidavit on 14 July 2014 in relation to his conversations with advisors to Mr Lew and David Jones.
11 Although David Jones did not consider that these affidavits raised any issue relevant to the proceedings, as the Court had been provided with the affidavits David Jones read them as a formal matter but did not rely on them. I consider that it was appropriate for ASIC to require the production of these affidavits. If an independent expert's report was not available to David Jones shareholders at the time they voted, exposing these negotiations to scrutiny supports the integrity of the Scheme approval process.
12 Both David Jones and ASIC made submissions concerning when a "collateral benefit" may be taken to exist by reason of the Country Road Bid. It is unnecessary in these reasons to canvas in detail the technicalities which are called into consideration in determining this issue under s 623 of the Corporations Act, breach of which is an offence or may give rise to "unacceptable circumstances". The transaction under consideration is a scheme of arrangement to which s 623 does not apply. The relevance of the principles set out in s 602 goes to the question of fairness and the desirability of there being, so far as relevant and possible, neutrality between "acquisition" schemes and Chapter 6 takeovers.
13 However, one of the reasons for the continued existence of the s 411 avenue for effecting mergers is that it is a flexible way of accommodating differences in the treatment of shareholders. It is for this reason that it is not illegal for a collateral benefit to be offered or given. Nor is it necessarily inappropriate for there to be differential consideration or collateral benefits subject to how the related questions of fairness and adequacy of disclosure to shareholders who will not participate in a benefit are addressed. The "fairness" issue is usually dealt with in one of two ways: first, by deciding whether there are differences which are "class creating" or, second (and arguably more appropriately where the issue is collateral benefits), by enquiring whether processes have been established by the scheme company to "tag" votes of interested shareholders or for interested shareholders to abstain from voting. Either approach allows appropriately informed shareholders who will not share in a benefit to determine the outcome of the approval resolution and prevents shareholders with greater bargaining power from being advantaged over shareholders with less bargaining power without the consent of the less powerful shareholders.
14 In this case, I am satisfied that the fact that Mr Lew holds 11.8% of the shares in Country Road is not class creating and I am mindful that care needs to be taken in the definition of classes to avoid giving minority shareholders effective "veto" rights. David Jones took steps to "tag" Mr Lew's votes, but in the event Mr Lew did not vote his David Jones shares at the Scheme Meeting. The question which remains is whether David Jones shareholders who voted to approve the Scheme had adequate information.
15 In the context of a scheme, I accept that the appropriate measure of whether a benefit exists is the "net benefits" test which has been adopted by the Takeovers Panel in Guidance Note 21: Collateral Benefits (GN 21) at [15] and [31] in determining whether "unacceptable circumstances" exist by reason of the existence of such an interest. This test was posited by Santow J in Boral Energy Resources Ltd v TU Australia (Queensland) Pty Ltd (1998) 43 NSWLR 638 at 680:
The preferred holistic view instead takes into account whatever rights or benefits are conferred by each transaction, to be netted off against whatever rights or benefits are thereby given up, to the extent such benefits are commensurable at least in an approximate sense. The resultant net benefit is to be compared under each transaction. Only if there is overall disparity in favour of the party to the non-bid transaction is s 698(1) [now s 623] contravened. This is in the sense of a balance of advantage, profit or good in favour of the party to the non-bid transaction.
16 I also accept that, as contemplated by GN 21 at [32], there may be "inducement" arising from collateral benefits which should be taken into account where there is no material "net benefit" but a shareholder is offered the opportunity to acquire or dispose of an asset for which there is no ready market or easily ascertainable value.
17 I reject the contention that to be relevant the "benefit" must be offered to a shareholder in its capacity as such.
18 I also reject the contention it may be more acceptable if the collateral benefit is something related to the scheme company (such as full payment of a convertible note or debt facility owed by a questionably solvent scheme company) as opposed to a transaction unrelated to the scheme company but nonetheless dependent on the scheme being approved. Approval of the scheme "unlocks" both benefits.
19 The circumstances in which this issue comes to be considered are unusual because it appears that Mr Lew was not a shareholder of David Jones (or did not hold a material number of shares) at the time the Scheme was announced or when orders were made on 22 May 2014 convening the Scheme Meeting. It was therefore not possible to deal with this issue in the usual and appropriate way, by including in the Scheme Booklet an independent expert's report quantifying the nature and extent of any benefit which Mr Lew may obtain from the Country Road Bid and having regard to factors, such as the illiquidity of Mr Lew's substantial holding in Country Road, which might operate as an inducement to him in deciding how to vote in relation to the Scheme.
20 In David Jones (No 2) at [34]-[35] I accepted that it was not logistically possible without significant delay for an independent expert's report to be obtained. In any event, Country Road must provide an expert's report under s 640 as to whether the offers under the Country Road Bid are "fair and reasonable", which would ordinarily include a valuation range for the shares. At the hearing on 2 July 2014, Mr Foreman, Counsel for WHL, advised that on an "aggressive" timetable, Country Road might have been able to put out a target statement by 14 July 2014. I commented that the availability of the expert's report and the capacity of David Jones shareholders to access that report may be a relevant matter at the second court hearing, depending upon its contents. Since then, on 9 July 2014, Country Road made an announcement to the ASX that it expects to release its target statement, together with the independent expert's report, in the week commencing 21 July 2014. That is, after the scheduled date of the second court hearing.
21 ASIC submitted, and I accept, that logistical difficulty, or even significant delay, should not be accepted by the Court as an adequate reason for the provision of inadequate information to shareholders of a scheme company about the nature and extent of a possible collateral benefit. I also do not find it an adequate reason that information relevant to a benefit is not held by the scheme company in an "acquisition" scheme if the information is held or can be obtained by the bidder. The fact that a shareholder who would receive the collateral benefit abstains from voting will not cure inadequacy of the information provided to the shareholders who do vote. An independent expert's report remains the best information about the nature and extent of a possible collateral benefit and a scheme company must justify to the Court departure from that standard and how the information requirements of shareholders are otherwise adequately met. For the Court to apply a lesser standard would impair the integrity of "acquisition" schemes which proceed under s 411.
22 Mr Jackman SC, Counsel for David Jones, submitted that there was no evidence before the Court on the basis of which to find that Mr Lew had been offered a benefit. I did not accept this factor as being determinative. Mr Jackman acknowledged that the purpose of the Supplementary Disclosure was to inform the David Jones shareholders that the $17 bid price offered in the Country Road Bid had been described as "generous" and that some shareholders may elect to vote against the Scheme if they considered it unfair that Mr Lew would receive a benefit that they would not share. Country Road is an illiquid stock and Mr Lew has an 11.8% stake with a free float of only 0.24% of the issued share capital: see David Jones No 2 at [40]. This is enough, in my view, to raise the question of whether Mr Lew's interest under the Country Road Bid has been adequately disclosed to other David Jones shareholders as a relevant factor in the exercise of the Court's discretion whether or not to approve the Scheme under s 411(4)(b).
23 This is especially so when WHL has held almost 90% of the shares in Country Road since 1997 and was therefore in a position to influence the timing of release of relevant information. It is disappointing that Country Road did not release the independent expert's report before the Scheme Meeting, or at least before the second court hearing. As a result, it is likely that only WHL and Mr Lew are in a position to assess accurately the fair value of Country Road shares and therefore the net benefit Mr Lew might receive.
24 It is also the case that by means of the Country Road Bid, not only does Mr Lew have the opportunity to sell a significant minority shareholding, WHL has much to gain, in each case dependent on the Scheme proceeding. If the Scheme is implemented, not only would WHL acquire 100% of David Jones, it would also (subject to the highly likely event of Mr Lew accepting the Country Road Bid), be in a position to "mop up" the minorities in Country Road, thus removing Mr Lew who appears to have been an irritant since he refused to accept WHL's last offer for Country Road in 1997. Additionally, WHL would achieve cost synergies, including those resulting from delisting Country Road from the ASX and possible tax benefits which arise from 100% ownership.
25 Having regard to these circumstances, I considered whether it was appropriate to adjourn the second court hearing until Country Road issued its target statement with the independent expert's report so that the market and the Court were in a better position to assess the nature and extent of any benefit which Mr Lew might receive through the Country Road Bid. If that information demonstrated that Mr Lew would receive a significant net benefit, then it might be appropriate to require David Jones to convene a shareholders' meeting to allow the David Jones shareholders an opportunity to decide whether, in light of that information, they wished to ratify the approval resolution passed at the Scheme Meeting before the Court determined in what manner to exercise the discretion to approve the Scheme.
26 The factors which weighed in favour of making orders to approve the Scheme without adjournment are:
a. Mr Lew abstained from voting on the resolution to approve the Scheme;
b. While the Supplementary Disclosure is not a substitute for an independent expert's report, it did disclose that:
David Jones could not be precise about the net benefit Mr Lew might receive from accepting the Country Road Bid. Trading of Country Road shares on the ASX was not a good guide to fair value because the shares were thinly traded and prices were volatile (between a low of $3.33 and high of $15.40 in the past 12 months and $14 immediately before the Bid was announced);
the Country Road Bid gave Mr Lew the opportunity to sell (for $209.2 million) a substantial illiquid shareholding which he had held for 17 years;
the Country Road Bid was conditional on implementation of the Scheme;
even though David Jones was not in a position to value the benefit Mr Lew would receive, some David Jones shareholders might not think it fair that Mr Lew receive the consideration under the Country Road Bid and might accordingly vote against the Scheme;
the independent expert, Grant Samuel, maintained its recommendation that the $4 Scheme Consideration was fair and reasonable and in the best interests of David Jones shareholders; and
the directors of David Jones did not change their recommendation;
c. The David Jones shareholders approved the Scheme by a substantial majority in excess of the statutory majority;
d. In light of the Supplementary Disclosure, it was available to any concerned David Jones shareholder to seek an adjournment of the Scheme Meeting to allow time (a little more than a week) to consider the independent expert's report issued with the Country Road target statement but no shareholder sought to do so;
e. No David Jones shareholder gave notice of intention to appear at the second court hearing and (after the matter was called outside the courtroom at the appointed time) no person appeared to oppose the Court making orders approving the Scheme; and
f. ASIC did not oppose the Court approving the Scheme.
27 Taking all of these factors into account, I decided that it was on balance appropriate to make orders approving the Scheme under s 411(4)(b) rather than to adjourn the second court hearing until after the release of the Country Road target statement with the independent expert's report.
I certify that the preceding twenty-seven (27) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Farrell.