Cleary v Australian Co-operative Foods Ltd

RELEVANT PRINCIPLES 8 Before coming to the specific evidentiary grounds, it is important to say something about the relevant principles of interlocutory injunctions of this nature. While the power in s 1319 is unfettered, its application should accord with the text and purpose of the statute. In an analysis by Foster J in a comparable application in Stratford Sun Limited v OM Holdings Limited; In the Matter of OM Holdings Limited [2011] FCA 414, his Honour said (at [7]-[12]): 7 In Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd (2001) 208 CLR 199; 185 ALR 1; 54 IPR 161; [2001] HCA 63, a majority of the High Court held that, where an interlocutory injunction is sought (inter alia) in respect of private rights, it is necessary to identify the legal or equitable rights which are to be determined at the trial and in respect of which the final relief is sought. Their Honours who comprised the majority in that case made clear that the final relief sought need not be injunctive in nature: see at [8]-[21] per Gleeson CJ; at [59]-[61] per Gaudron J; and at [86]-[92]; [98]-[100]; and [105] per Gummow and Hayne JJ. At [10], Gleeson CJ also specifically cited with approval ICF Spry, The Principles of Equitable Remedies: Specific Performance, Injunctions, Rectification and Equitable Damages, 5th ed, LBC Information Services, Sydney, 1997, pp 446-56. 8 In his reasons for judgment, at [13], Gleeson CJ expressly approved the following passage from the reasons for judgment of Mason ACJ in Castlemaine Tooheys Ltd v South Australia (1986) 161 CLR 148 at 153; 67 ALR 553 at 557: In order to secure such an injunction the plaintiff must show (1) that there is a serious question to be tried or that the plaintiff has made out a prima facie case, in the sense that if the evidence remains as it is there is a probability that at the trial of the action the plaintiff will be held entitled to relief; (2) that he will suffer irreparable injury for which damages will not be an adequate compensation unless an injunction is granted; and (3) that the balance of convenience favours the granting of an injunction. 9 These remarks of Mason ACJ which were approved by Gleeson CJ echo the observations made by the High Court in Beecham Group Ltd v Bristol Laboratories Pty Ltd (1968) 118 CLR 618 at 622-3; [1968] ALR 469 at 470-1. 10 In Australian Broadcasting Corporation v O'Neill (2006) 227 CLR 57; 229 ALR 457; [2006] HCA 46 at [65], when referring to the well-known passage in Beecham at CLR 622-3; ALR 470-1, Gummow and Hayne JJ said: By using the phrase "prima facie case", their Honours did not mean that the plaintiff must show that it is more probable than not that at trial the plaintiff will succeed; it is sufficient that the plaintiff show a sufficient likelihood of success to justify in the circumstances the preservation of the status quo pending the trial. That this was the sense in which the Court was referring to the notion of a prima facie case is apparent from an observation to that effect made by Kitto J in the course of argument [(1968) 118 CLR 618 at 620; [1968] ALR 469 at 470]. With reference to the first inquiry, the Court continued, in a statement of central importance for this appeal [(1968) 118 CLR 618 at 622; [1968] ALR 469 at 470]: "How strong the probability needs to be depends, no doubt, upon the nature of the rights [the plaintiff] asserts and the practical consequences likely to flow from the order he seeks." 11 In O'Neill at [70]-[72], their Honours went on to explain the similarities and differences between the test expounded in Beecham and the test articulated in American Cyanamid Co v Ethicon Ltd [1975] AC 396; [1975] 1 All ER 504 as follows (at [70]-[72]): 70 When Beecham and American Cyanamid are read with an understanding of the issues for determination and an appreciation of the similarity in outcome, much of the assumed disparity in principle between them loses its force. There is then no objection to the use of the phrase "serious question" if it is understood as conveying the notion that the seriousness of the question, like the strength of the probability referred to in Beecham, depends upon the considerations emphasised in Beecham. 71 However, a difference between this Court in Beecham and the House of Lords in American Cyanamid lies in the apparent statement by Lord Diplock that, provided the court is satisfied that the plaintiff's claim is not frivolous or vexatious, then there will be a serious question to be tried and this will be sufficient. The critical statement by his Lordship is "[t]he court no doubt must be satisfied that the claim is not frivolous or vexatious; in other words, that there is a serious question to be tried" [[1975] AC 396 at 407]. That was followed by a proposition which appears to reverse matters of onus [[1975] AC 396 at 408]: "So unless the material available to the court at the hearing of the application for an interlocutory injunction fails to disclose that the plaintiff has any real prospect of succeeding in his claim for a permanent injunction at the trial, the court should go on to consider whether the balance of convenience lies in favour of granting or refusing the interlocutory relief that is sought." Those statements do not accord with the doctrine in this Court as established by Beecham and should not be followed. They obscure the governing consideration that the requisite strength of the probability of ultimate success depends upon the nature of the rights asserted and the practical consequences likely to flow from the interlocutory order sought. 72 The second of these matters, the reference to practical consequences, is illustrated by the particular considerations which arise where the grant or refusal of an interlocutory injunction in effect would dispose of the action finally in favour of whichever party succeeded on that application [See the judgment of McLelland J in Kolback Securities Ltd v Epoch Mining NL (1987) 8 NSWLR 533 at 535-536; 11 ACLR 630 at 632-4 and the article by Sofronoff, "Interlocutory Injunctions Having Final Effect", Australian Law Journal, vol 61 (1987) 341.95]. The first consideration mentioned in Beecham, the nature of the rights asserted by the plaintiff, redirects attention to the present appeal. [Emphasis added.] 12 In the present case, Stratford Sun seeks interlocutory relief in respect of its private rights. In order to obtain the relief which it seeks, it must, therefore, identify the legal or equitable rights which are to be determined at the trial and in respect of which the final relief is sought. 9 In the present case, Lois Lane Investments points to the rights it may have as a shareholder to require the directors of Kasbah to inform shareholders of a relevant change in circumstances since calling the shareholders meeting or to challenge their failure to do so. It can be assumed for today that such a challenge would be open. Lois Lane Investments points to Cleary v Australian Co-operative Foods Ltd (No 3) (1999) 32 ACSR 701 where Austin J held (at [51]) that: … [T]he directors of a corporation which has embarked upon a scheme of arrangement have an obligation to disclose to the members or creditors affected by the scheme any material new development occurring after the dispatch of the explanatory statement and notice of meeting and before the scheme is approved. I do not suggest that before doing so the directors are obliged to make an application to the Court. However in a case such as the present, where there is a substantial dispute already on foot, directors who wish to discharge their obligation to disclose material information may well think it prudent to apply to the Court for directions.

EVIDENCE IN SUPPORT OF THE APPLICATION 10 As mentioned, the evidence in support of the application took the form of exchanged communications between representatives of the relevant parties from which Lois Lane Investments contends the following events and circumstances have been established.

First issue - independent expert report - material change in circumstances 11 Lois Lane Investments has identified changes in world market tin prices since the Scheme Booklet was published which changes it says materially affect the accuracy of the key base case valuation of Kasbah. Lois Lane Investments also refers to documents including a letter from the solicitors for Lois Lane Investments to the author of the initial independent expert report, BDO, setting out the basis of that information and a letter in which the expert responds and states that there is no change to the opinion expressed in the independent report included in the Scheme Booklet.

Second issue - shareholder classes 12 Lois Lane Investments contends the distinction of interests of Lion Selection Group Limited (the major shareholder in Kasbah) from other shareholders is not disclosed in the Scheme Booklet and raises a question as to whether Lion ought to be able to vote in the same class as the other Kasbah shareholders, or be placed in a special class reflecting its special interest in receiving a benefit on the other side of the transaction.

Third issue - Pala Investments Limited as controlling shareholder and financier 13 The third issue arises from the 72% ownership of AMR shares by Pala Investments Limited. In the event that the merger with AMR proceeds pursuant to the Scheme, Pala will hold the beneficial interest of approximately 38% in the merged entity. Pala will also be a major creditor of the merged entity, the effect being that Pala will have effective control of AMR post-merger. 14 Lois Lane Investments complains that the Scheme Booklet fails to disclose the identity of the controller of Pala, nor any information about the controller of Pala or his intentions for the merged entity. In particular, it relies on information that has emerged since publication of the Scheme Booklet. The Scheme Booklet, it says, is silent on the 'owner'.

Change in Circumstances 15 On these bases, Lois Lane Investments argues that there are material matters that affect the capacity of the shareholders to make a fully informed decision on which way to vote at the scheme meeting. These matters, it says, give rise to a serious risk that the vote of shareholders will not be on a fully informed basis. 16 Where there is a material change in circumstances that occurs after the date of the dispatch of the Scheme Booklet and prior to the scheme meeting, the proponents of the Scheme need to consider whether supplementary disclosure is required and if so what form it takes. 17 Kasbah has declined Lois Lane Investments' request to postpone the meeting or provide supplementary material. In any event, Lois Lane Investments contends that any supplementary disclosure will not be received in sufficient time prior to the close of proxies for the members.

Shareholder 'Classes' 18 In the circumstances, Lois Lane Investments submits that the scheme meeting should be adjourned to allow further consideration to be given to the disclosure and class issues raised in this application. To wait until the second court hearing to apply to the Court to sanction the Scheme, it says, would be a costly alternative to making directions today and prejudicial to the shareholders. 19 Lois Lane Investments also submits that an adjournment of the scheme meeting will give the Court the opportunity to consider whether the shareholder Lion ought to be able to vote in the same class as the other Kasbah shareholders or be placed in a special class. 20 Even though there is no separate class, the Court may take into account the fact that particular members have extraneous commercial or other interests when deciding, in the exercise of its general discretion at the second Court hearing, whether to approve the Scheme: Takeovers and Reconstructions in Australia (LexisNexis, September 2016) (at [1629], 16,069), citing Re Chevron (Sydney) Ltd [1963] VR 249 per Adam J (at 255). 21 In Opus Prime Stockbroking Limited (2009) 179 FCR 20, Finkelstein J referred to the new practice statement in relation to companies and schemes of arrangement published in [2002] 1 WLR 1345 under which the applicant for a scheme meeting must draw to the attention of the court as soon as possible any issue that may arise about the constitution of the meetings or which might otherwise affect the conduct of the meetings, and, if appropriate, notice must be given to any person affected by the proposed scheme so they may apply to be heard at the convening application. His Honour noted that he adopted this practice in Re United Medical Protection Ltd [2007] FCA 631. His Honour held that the purpose of the new practice is to avoid the waste of costs and court time which would result if it were not until the approval hearing that it was determined that classes were wrongly constituted: Opus Prime (at [19]-[20]).

CONSIDERATION 22 The first court hearing was held on 18 October 2016, where I made orders in relation to the scheme meeting on the basis of the materials which were before the Court at that time. 23 The first issue to which reference is made, and I think arguably the most important issue, is the material change in circumstances in relation to the underlying tin price. Lois Lane Investments has identified changes in world market tin prices since the Scheme Booklet was published which materially affect the accuracy, it says, of the key base case valuation of Kasbah. It relies upon the material contained in the affidavit of Ms Hughes and refers to the expert report itself. 24 The experts, BDO, through solicitors for Kasbah, however, have indicated that there is no change to the opinion that they expressed in the independent report, being that the Scheme is in the best interests of shareholders. Lois Lane Investments complains that no reasoning is given behind that conclusion in circumstances where it is clear that there has been a significant movement in the tin price which would, in turn, significantly, it says, affect the valuation of the company. 25 However, my attention is drawn both by senior counsel and counsel for ASIC to the fact that the independent experts have, in the original materials, prepared a sensitivity analysis that accommodates significant fluctuation. That fluctuation may cater for long and medium-term adjustment in prices of the underlying commodity which is at the centre of the valuation of the company. 26 Further, and more importantly, all the information which Lois Lane Investments today seeks to put before the Court in relation to tin prices has, in substance, been put to the independent experts. I have no reason to think that they have not applied their own proper independent consideration to that material in arriving at a conclusion that there is no reason to adjust the independent views that have been expressed to the shareholders in the Scheme Booklet. 27 However, if I am wrong on that point, or, more importantly, if Lois Lane Investments is able to establish that there is a significant underlying change which could have or would have affected the way shareholders voted and should have been put before the shareholders, then that is a matter which is capable of being ventilated at the second approval hearing in relation to the Scheme. 28 The second issue raised is in relation to shareholder classes, concerning the interests of a major shareholder in Kasbah, Lion. This issue has fallen away on the basis of the undertaking given at the first hearing that relevant votes will be tagged so that the effect of those particular votes can be evaluated at the second hearing, should that be considered necessary. 29 The third issue raised is the failure to disclose circumstances surrounding the identity of the controller of Pala, which is said to be a relevant issue as Pala owns 72% of the shares in AMR, and if the merger with AMR proceeds, Pala will hold the beneficial interest of some 38% in the merged entity. Pala will also be a major creditor of the merged entity; the effect being that Pala will have, it is said, effective control of AMR post-merger. 30 The evidence as to circumstances surrounding certain investigations concerning a person said to be the controller of Pala is very much on a hearsay basis. I discount those factors put up on a hearsay basis as being outside the realm of relevantly changed circumstances of which directors should give information to voting shareholders, bearing in mind the recency of the information and the secondhand and even thirdhand nature information which has been supplied. Indeed, directors may possibly have more questions to answer in making an announcement about such material than in not doing so. There has been no technical objection to the affidavit material, and I appreciate that, on short notice, there would be difficulty in putting such material before the Court in any other way. But, nonetheless, there is no satisfactory evidence before me at this point in time which would warrant any inference being drawn as to a need on behalf of the directors to bring that information to the attention of shareholders. 31 Further, the actual role of Pala is quite clearly conveyed to shareholders in the Scheme Booklet and, in my view, for present purposes, no more needs to be said. I note that this view also accords with the view expressed by counsel for ASIC. The role of Pala was also discussed in submissions made in open court in support of orders relating to the first hearing where Kasbah said: Pala Loan Agreement 74. Pala Investments Limited (Pala) and the plaintiff entered into a loan agreement pursuant to which Pala may lend the plaintiff up to $1,000,000 (Pala Loan Agreement). Pala holds about 72% of the issued shares in the bidder but is not a member of the plaintiff. The plaintiff has drawn down $500,000 on the loan facility (first Bramwell affidavit, paras 67-73). 75. The Pala Loan Agreement was made to provide the plaintiff with sufficient working capital to meet its short-term cash requirements. If the Scheme is not implemented the balance of the Pala Loan will become due and payable three months after the relevant event leading to the failure to implement the proposed Scheme. Such events include the failure of the Shareholders to vote in favour of the proposed Scheme at any Scheme Meeting (first Bramwell affidavit, paras 67-73). The non-default interest rate on the Pala Loan is 12%, which is not excessive for a short-term unsecured loan. Details of the Pala Loan Agreement are disclosed and set out in the draft Scheme Booklet (Sections 6.10(a), 9.3(a), 9.3(b), 9.3(c)). 76. The relevant question for the fairness of the proposed Scheme is whether the existence and terms of the Pala Loan Agreement might have the effect of coercing Shareholders to vote in favour of the Scheme or of deterring a competing bidder from making a bid. These issues were noted and addressed by the Court in Re Peak Coal Ltd [2010] FCA 6 at [7]. 77. It is submitted that the terms of the Pala Loan Agreement are not uncommercial and the plaintiff required funding from Pala or some other source for working capital in the short-term. It is to be inferred in these circumstances that the directors considered the Pala Loan Agreement to be in the plaintiff's best interests because the SIA provided a solution to the difficulty of raising funds to progress the plaintiff's projects. 78. It is submitted that the Pala Loan Agreement in this case should not have a coercive or deterrent effect because irrespective of whether or not the plaintiff entered into the SIA and the Pala Loan Agreement it would have required a source of funding for short-term working capital. If such funding had been provided by another party, any competing bidder would have had to have taken any debt finance or short-term liabilities into account. Likewise, the Shareholders, when considering if the Scheme is in their best interest would always have to have taken into account the ability of the plaintiff to raise funds to meet its debts, repay its loans and fund future expenditure on its projects. 79. It is manifest that reasonable commercial people might consider the proposed Scheme to be in their best interests for the very reason that it will indirectly provide them with a source of funding to overcome the plaintiff's working capital deficiency and advance the plaintiff's projects in the future. 80. It is submitted that the existence and terms of the Pala Loan Agreement is not a reason for considering that the proposed Scheme is unfair or for refusing to make orders convening the Shareholders Meeting. 32 Admittedly, this material does not focus on the intentions or 'antecedents' of any particular individual, but even though the information Lois Lane Investments would like to convey to shareholders has arisen since the first hearing, I do not consider that it warrants the postponement of the meeting tomorrow. 33 It does fall for directors to carefully consider as matters unfold whether there are significant material changes in circumstances which should be conveyed to shareholders of the company in connection with a vote such as the present. Having regard to the response from the independent experts on the tin price, there is no information before me which would lead me to a view that the directors have failed in exercising such a duty. Whether such material becomes apparent either expressly or by inference for the purpose of the second hearing remains to be seen. But, at present, I am unpersuaded that there is any such material. 34 I need to have regard to the interests of justice and the balance of convenience. Being mindful of the court's reluctance to interfere in commercial affairs in the absence of good reason, I consider that this is a case which tends to fall on the side of the line where such interference by way of granting restraints on conducting the company's commercial affairs as previously authorised by the Court would not be justified. 35 I am particularly mindful that any ultimate alteration in the parties' rights is unlikely to occur before the final hearing, at which point if there is substance in the issues raised, there will be an adequate opportunity for them to be identified and be the subject of a court ruling. 36 In a strong case, the position might be otherwise. But in the present case, I consider the balance of convenience cannot justify the cost involved in postponing the meeting to be held within a few business hours from now compared with considering these matters at the subsequent hearing. 37 For all those reasons, in my view, the relief which is sought should not be granted on this occasion. 38 I will dismiss the interlocutory application and reserve costs. I certify that the preceding thirty-eight (38) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice McKerracher.