Cleary and Another v Australian Co-Operative Foods Limited and Others

REASONS FOR JUDGMENT 1 This matter has come before me urgently this afternoon. The reason it does so is explained in an affidavit of Mr Luke Bradshaw Hastings, sworn today. The substance of what Mr Hastings says is set out in an announcement that was released to the market this morning by Seven Network Limited ("Seven"). The announcement discloses that following negotiations between Seven and two major shareholders, including Ausbil Dexia and Perennial Value, Australian Capital Equity Limited ("ACE") has committed to "stand behind" WesTrac's forecast earnings before interest, taxes, depreciation and amortization ("EBITDA") for the financial year 2011 as forecast, so that in the event it is not achieved, ACE will cancel 15 million of the 115 million shares it is due to receive as part of the proposed scheme consideration, other than in a number of limited circumstances which are explained in the deed poll by which the cancellation would be effected if it becomes operative. 2 The announcement states that the agreement provides earnings downside protection to non-ACE affiliated shareholders, that is to say, Seven shareholders who are not associated with Mr Stokes' interests. The announcement also says that the agreement: …reflects ACE's confidence in the underlying earnings growth of WesTrac. 3 The announcement goes on to say that Ausbil Dexia and Perennial Value, whose shares together represent approximately 28.1 per cent of unrelated shareholders have said they will vote in favour of the proposed scheme. In addition, the announcement states that the independent expert, Deloittes, has confirmed that its "fair and reasonable" opinion previously given on the share scheme is not affected by the announcement, and, therefore, "is in the best interests of shareholders." 4 The announcement also states in bold that: The independent directors of Seven welcome the ACE commitment and the support of Ausbil Dexia and Perennial Value for the proposed scheme. 5 The announcement goes on to explain that the negotiations and the effect of the agreement with Ausbil Dexia and Perennial Value is reflected in a deed poll in which ACE has agreed to "stand behind" WesTrac's forecast EBITDA of approximately $231 million for the 2011 financial year. The effect of the cancellation of those shares is also referred to in the announcement. If that were to come about, ACE's interests in Seven Group Holdings Limited ("SGH") would reduce from approximately 67.9 per cent to 66.2 per cent, that is to say, a reduction of approximately 1.7 per cent from the figure previously disclosed to shareholders. 6 The announcement also states that the 15 million shares are worth approximately $130 million based on the $8.70 at which SGH shares are to be issued to ACE for WesTrac Group. The only exception is "force majeure" circumstances which are explained in the deed poll to which I have been taken. 7 Evidence has been put before me this afternoon of press clippings which show that the agreement reached with the two shareholders has been the subject of extensive press coverage. The possibility of an agreement with the shareholders was foreshadowed in the financial press this morning, where it was referred to in some detail on page 1 of most of the major financial daily publications. 8 ASIC Regulatory Guide 60 for schemes of arrangement states at paragraph 60.92: If a scheme company proposes to amend the terms of a scheme, or otherwise provide supplementary information to its members, after the dispatch of the explanatory statement, it is important that all members who are required to vote on a scheme have adequate time to consider that supplementary information before they decide to accept or reject the scheme. 9 ASIC also states in its Regulatory Guide 60 at paragraph 60.93 that it will generally be appropriate for members to be given at least 10 days notice to consider any supplementary documentation. The 10 day period is intended to be applicable to shareholders voting in person as well as those voting by proxy. 10 In Cleary and Another v Australian Co-operative Foods Limited and Others (Nos 2 and 3) (1999) 32 ACSR 701 at [30], Austin J said that the obligation of directors to disclose material new information implies that the disclosure must be timely. 11 His Honour went on to say that: In any event the court would be unlikely to exercise its discretion in favour of approving an arrangement which has been affected by material new information if the members had not had the opportunity to consider and respond to it. 12 This statement was made in a different context, namely a hostile takeover involving co-operatives registered under the Co-operatives Act 1992 (NSW). Nonetheless, it seems to me that the statement of principle to which his Honour referred is the applicable one. What it shows is that the question of whether the disclosure has been sufficiently timely is a matter of judgment. Needless to say the Court would take strong note of the ASIC Regulatory Guide 60, but each case will depend upon its own facts and circumstances. 13 I note that, in the Australian Government Corporations and Markets Advisory Committee ("CAMAC") Report of December 2009 at paragraph 4.5.1, it is said that the directors of a company have a duty to disclose to shareholders before they vote on a scheme any information available to the company that was not included in the original disclosure document and that would be material to the shareholders' decision (other than information already reasonably available to shareholders, including through continuous disclosure). There is no doubt that the information which was disclosed in the ASX announcement would be material to a shareholder's decision whether to vote in favour of or against the scheme. 14 The question which arises is whether I ought to exercise my power in respect of a possible postponement or adjournment of the meeting of shareholders set down for 20 April 2010, or whether I ought merely to note the matters to which I have referred. If I take the latter course, the matter of the timeliness of the disclosure could, if it becomes an issue, be dealt with at the second Court hearing. Mr Bathurst QC, who appears for Seven, asks me to take that course. He asks me to take the course of merely noting the information. He points to the extensive press coverage and accepts that his client takes the risk that, at the second Court hearing, the matter may become an issue, in which case it would be open to me to determine that an inadequate period of notice has been given to shareholders. 15 Ms Williams, who appears today for ASIC, made a number of points of substance. I should point out that Ms Williams informed me this afternoon that, although ASIC was aware that developments were occurring in relation to the terms of or incidental to the scheme itself, ASIC had not seen the terms until they were made available shortly before the matter was listed for hearing this afternoon. Ms Williams informed me that concerns were expressed to Seven about the notice period. She said that, whilst ASIC had seen the deed poll before it was released, ASIC had not seen the terms of the ASX announcement until the announcement was made this morning. 16 Ms Williams submitted that the announcement is not in the nature of a balanced statement of the kind that would be made in scheme documents. She described it as a sales pitch which is underscored or supported by the two major shareholders to whom I have referred. In my opinion, there is some force in what Ms Williams says, and that should be evident from the terms of the announcement to which I referred above. Ms Williams also pointed out that, in relation to the deed poll, ASIC has not had the opportunity to consider whether the definition of WesTrac EBITDA, which appears in the deed is in conformity with the definition elsewhere referred to in the scheme documents. 17 The deed poll was only signed on 11 April 2010, that is to say, on Sunday. Mr Mavrakis, who appears for ACE, informs me that the definition does conform with the appropriate definition of that term elsewhere appearing. It seems to me that, if for some reason that turns out to be incorrect, then, once again, that is a matter on which Seven takes a risk when the matter comes back before me later this month. 18 The third major point which Ms Williams raised, was that the company which is to hold the 15 million shares in SGH, which would be subject to the deed poll, are to be held in the name of North Aston. 19 That company is apparently a wholly owned subsidiary of ACE but it is not a party to the deed and is, therefore, not bound by the deed poll. However, Mr Mavrakis told me this afternoon that, on his instructions, North Aston undertakes to enter into a deed poll with SGH, for the benefit of SGH and its minority shareholders, in terms which will mirror the terms of the deed poll which has been executed by ACE. He also informs me that North Aston undertakes not to encumber the 15 million shares in SGH for the period during which the deed poll is operative. 20 These concessions seem to meet the concerns expressed by ASIC. I have come to the view that the appropriate course is that which was submitted by Mr Bathurst. That is to say, that I should note the information which is the subject of the press release, leaving it open to a shareholder at the second Court hearing to submit that the period, or the terms of the disclosure, are insufficient. 21 Although ASIC did not say so directly, it seems to me that the effect of Ms Williams' submissions was that there ought to be a mail out to shareholders with a postponement or adjournment of the meeting for a period of 10 days, in accordance with the ASIC Regulatory Guide. 22 However, I think that, in light of the extensive newspaper coverage and bearing in mind, also, the possible market uncertainty which is inherent in further delay, the better course is the one which I have mentioned. The submissions which Ms Williams made this afternoon, on behalf of ASIC, were particularly helpful. And it has to be borne in mind that ASIC and its counsel have only had the briefest opportunity to consider the information which has now been disclosed. At the risk of repetition, I think the underlying consideration is that Mr Bathurst accepts the risk to which I have referred, and that expense, although not very substantial, has been incurred in convening the meeting. 23 If a complaint is to be made about the adequacy of the period of disclosure, or of the subject matter, those are matters which can be addressed at the second Court hearing, when the scheme comes before me for approval. I certify that the preceding twenty-three (23) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jacobson.