Costa Group Holdings Limited, in the matter of Costa Group Holdings Limited [2023] FCA 1562

O'CALLAGHAN J 1 After a hearing this morning, I made the orders set out above. These are my reasons. 2 By originating process filed on 24 October 2023, Costa Group Holdings Limited (Costa) sought orders pursuant to s 411(1) of the Corporations Act 2001 (Cth) directed to convening a meeting (Scheme Meeting) of holders of ordinary shares in Costa for the purpose of considering a proposed scheme of arrangement (Scheme) between Costa and its shareholders. 3 Costa Group is a public company listed on the Australian Securities Exchange (ASX), limited by shares. It is registered in Victoria. It is an Australian grower, packer, and marketer of fresh produce, and has strategic foreign interests, including in Morocco and China. 4 On 22 September 2023, Costa entered into a "Scheme Implementation Agreement" with Chilli Buyer Pty Ltd (BidCo), a proprietary company incorporated for the purpose of acquiring all the issued shares in Costa. BidCo is to be controlled by Paine Schwartz Partners LLC, Driscoll's Inc, and British Columbia Investment Management Corporation (each a consortium member; together the consortium). 5 The consortium members and their associates are "Excluded Shareholders" and hold 19.62% of Costa's shares on issue. Excluded Shareholders are not a party to the Scheme and will not vote at the Scheme Meeting. 6 If the Scheme is implemented, the following will occur: (a) existing Costa shareholders other than any "Excluded Shareholder" (eligible Costa shareholders) will transfer Costa shares they hold on the Record Date (Scheme Shares) to BidCo; and (b) each eligible Costa shareholder will receive Scheme Consideration of $3.20 per share (less the cash amount per share of any dividend paid between the date of the Scheme Implementation Agreement and the implementation of the Scheme). 7 Costa's directors have unanimously recommended that eligible Costa shareholders vote in favour of the Scheme. Those directors intend to vote in favour of the Scheme. 8 A draft Scheme Booklet, including the explanatory statement required by s 412 of the Act, has been prepared (Annexure DAT-1 to the affidavit of Davis Alastair Martin Thomas affirmed 7 December 2023) (Scheme Booklet). It provides a detailed description of the Scheme, including its advantages and disadvantages. 9 An independent expert report has been prepared by Kroll Australia Pty Ltd and is annexed to the Scheme Booklet. That report assesses the Scheme and opines that the Scheme is fair and reasonable, and concludes that the Scheme in the best interests of eligible Costa shareholders, in the absence of a superior proposal. 10 On 20 November 2023, the Scheme Booklet was lodged with the Australian Securities and Investments Commission (ASIC). On 7 December 2023, ASIC sent a letter to the Directors of Costa, indicating that it did not propose to appear to make submissions or intervene to oppose the Scheme at the first court hearing.

Key aspects of the Scheme 11 The terms of the Scheme are contained in Annexure B to the Scheme Booklet. 12 The Scheme is subject to several conditions precedent, including that eligible Costa shareholders vote in favour of the Scheme, Foreign Investment Review Board approval, and that the court approves the Scheme at the second court hearing. 13 The key steps in the Scheme are as follows: (a) eligible Costa shareholders will vote on whether to approve the Scheme at the Scheme Meeting; (b) if the Scheme is to proceed, all conditions precedent (other than court approval) must be either satisfied or waived by the applicable time, which for most conditions precedent is 8:00am on the date on which the application for approval comes before the court (currently listed at 7 February 2024); (c) if the Scheme is agreed to by the requisite majorities at the Scheme Meeting and approved by the Court, it becomes effective on the lodging of an office copy of the court's approval orders with the Australian Securities and Investments Commission; (d) if the Scheme becomes effective as anticipated, by no later than the business day prior to the Implementation Date (23 February 2024), BidCo is required to deposit the aggregate amount of the Scheme Consideration into the Trust Account, and on the Implementation Date, Costa must pay to each eligible Costa shareholder an amount equal to the Scheme Consideration for each Scheme Share; and (e) on the Implementation Date, but subject to the provision of the Scheme Consideration to eligible Costa shareholders, the Scheme Shares will be transferred to BidCo. 14 If the Scheme is implemented and completion occurs under conditional transfer agreements between BidCo and the consortium members, BidCo will acquire all of the Costa shares on issue, and Costa will become a wholly owned subsidiary of BidCo. 15 Following the implementation of the Scheme, Costa will apply for termination of the official quotation of Costa shares on the ASX and to have itself removed from the ASX.

Statutory framework 16 The statutory framework relating to schemes of arrangement is set out in Part 5.1 of the Act and involves a three stage process: (a) the hearing of an application to the court for orders to convene a meeting or meetings (s 411(1)); (b) the holding of the meeting or meetings (s 411(4)(a)); and (c) the hearing of an application to the court for an order to approve the scheme (ss 411(4)(b) and 411(6)). 17 The hearing this morning concerned the first stage. 18 The court's discretion to make an order under s 411(1) is enlivened if: (a) a compromise or arrangement is proposed between a Part 5.1 body and its members (or any class of them); (b) an application for the order is made in a summary way by the body; (c) 14 days' notice of the hearing of the application has been given to ASIC (or such lesser period as the court or ASIC permits); and (d) the court is satisfied that ASIC has had a reasonable opportunity to: (i) examine the terms of the proposed compromise or arrangement to which the application relates and a draft explanatory statement relating to the proposed compromise or arrangement; and (ii) make submissions to the court in relation to the proposed compromise or arrangement and the draft explanatory booklet. See, by way of example only, Re Kidman Resources Ltd [2019] FCA 1226; (2019) 375 ALR 760 at 763-4 [22]. 19 I was satisfied that the criteria set out above have been met, including that ASIC has had a reasonable opportunity to examine the terms of, make submissions in relation to, the Scheme. 20 Accordingly, the court's discretion to make orders for the plaintiff to convene the Scheme Meeting was enlivened.

Should the discretion be exercised? 21 The principles which apply to the exercise of the court's discretion are well-understood. The court must be satisfied that: (a) the Scheme is fit for consideration by the proposed meeting in the sense that it is of such a nature and cast in such terms that, if it achieves the statutory majority at the meeting, the court would be likely to approve it on the hearing of a petition which is unopposed; and (b) members are to be properly informed as to the nature of the Scheme before the Scheme Meeting. 22 The role of the court at the first court hearing is supervisory. Justice Finkelstein summarised relevant authorities in an oft cited passage in Re CSR Ltd (2010) 183 FCR 358 at 379-80 [74]-‍[76], explaining that the court should generally confine itself to ensuring that certain procedural and substantive requirements are met (for example, that there will be adequate disclosure), with limited consideration of issues of fairness. The court should only consider the merits or fairness of a proposed scheme at the convening hearing if the issue is such as would "unquestionably" lead to a refusal to approve the scheme at the approval hearing; that is, the scheme may "appear on its face so blatantly unfair or otherwise inappropriate that it should be stopped in its tracks before going any further". 23 I had the benefit of detailed written and oral submissions by Mr BK Holmes and Ms E Brumby of counsel.

Fit for consideration 24 Costa's submissions raised the following features of the Scheme to demonstrate that it is fit for consideration by the Scheme Meeting: (a) safeguards against performance risk; (b) opinion of the independent expert; (c) customary break fee and exclusivity provisions; (d) no benefits to any director, secretary or executive offer in connection with the Scheme; (e) no payment of a dividend in respect of the financial half year which ended 2 July 2023; and (f) treatment of employee share rights. 25 Counsel submitted, and I agreed, that none of these matters provide reason to deem the Scheme unfit for consideration by the proposed meeting. There are no matters arising from those submissions that require explanation in these reasons.

Members to be properly informed 26 Costa submitted, in relation to whether eligible Costa shareholders will be properly informed as to the nature of the Scheme before the Scheme Meeting, as follows: [Section] 412(1) of the Act and Schedule 8 (Part 3) of the [Corporations Regulations 2001 (Cth)] set out the disclosure requirements of the explanatory statement (which is included in the Scheme Booklet). The prescription of the contents of the explanatory statement in these provisions ordinarily provides guidance to the court in assessing this matter, bearing in mind that these applications are made in a summary way. Accordingly, if the court is satisfied that the statutory disclosure requirements are met … it will ordinarily be satisfied that information to be provided to shareholders is adequate for the purposes of the exercise of the court's discretion to convene a meeting. 27 Costa also submitted that eligible Costa shareholders will be presented with a clear and detailed explanation of the Scheme in the Scheme Booklet, will have the benefit of the independent expert report, and the benefit of the directors' recommendation. 28 I was satisfied that the statutory disclosure requirements were met and that, including for the further reasons submitted at paragraph [26] above, eligible Costa shareholders will be properly informed as to the nature of the Scheme before the Scheme Meeting.

Dispensation with the Rules 29 Costa sought dispensation under r 1.3 of the Federal Court (Corporations) Rules 2000 (Cth) from compliance with rr 2.4(1), 2.15, and 3.4 (including Form 6) of those Rules. 30 Paragraph 3 of the Federal Court's Schemes of Arrangement Practice Note (GPN-SOA) (Practice Note) states that: The Court recognises that the process for approval of schemes of arrangement is intended to be as simple as possible and the Court is supportive of simplification so far as it is consistent with the Court's statutory responsibilities and binding authority. 31 Rule 2.4(1) requires that, unless the court otherwise directs, an originating process must be supported by an affidavit stating the facts in support of the process. 32 Paragraph 3(b) of the Practice Note states that: The Court will generally be prepared to dispense with the requirement under rule 2.4(1) of the Federal Court (Corporations) Rules 2000 (Cth) for the initial affidavit filed in support of the application to state the facts in support of the Originating Process, where that will be addressed by later evidence. It is ordinarily sufficient for that affidavit to identify, in brief terms, the nature of the scheme and key dates, and annex a company search. 33 The affidavit of Mikkeli Godfree affirmed 23 October 2023 identified, in brief terms, the nature of the Scheme and key dates, and annexed a company search. I was prepared to dispense with the requirement under r 2.4(1) of the Rules. 34 Rule 2.15 relevantly provides that, to the extent applicable, Division 75 of the Insolvency Practice Schedule (Corporations) and Division 75 of the Insolvency Practice Rules (Corporations) 2016 (Cth) apply to scheme meetings. There was no reason to withhold dispensation, as is the usual practice of the court. 35 Rule 3.4 requires (in summary) that, unless the court otherwise orders, the plaintiff must publish a notice of the second court hearing of the application in accordance with Form 6 and in a daily newspaper. 36 Paragraph 3(f) of the Practice Note states that: The Court will be prepared to dispense with the publication of a notice of the second Court hearing in a newspaper, if notice can be given by an announcement made on the Australian Securities Exchange or by an announcement on the scheme proponent's website if it is not listed. A newspaper advertisement would only be required if the scheme proponent has reason to think that neither of those mechanisms would be effective to bring the scheme to the attention of its securityholders. 37 Costa submitted that it proposes to provide notice of the details of the second court hearing via an announcement made on the ASX. I was prepared to dispense with the requirement under r 3.4 of the Rules.

Disposition 38 For the above reasons, I was satisfied that the Scheme is of such a nature and cast in such terms that, if it achieves the statutory majorities at the Scheme Meeting, the court would be likely to approve it at the second court hearing. I was also satisfied that the information to be provided to eligible Costa shareholders as to the nature of the Scheme before the Scheme Meeting is adequate. 39 It was therefore appropriate to make the orders sought by Costa. I certify that the preceding thirty-nine (39) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice O'Callaghan.