Costa Group Holdings Limited, in the matter of Costa Group Holdings Limited [2024] FCA 59

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Introduction 1 On 8 December 2023, I made orders pursuant to ss 411(1) and 1319 of the Corporations Act 2001 (Cth) (Act) directing the plaintiff (Costa) to convene and hold a meeting on 30 January 2024 (Scheme Meeting) to consider a proposed scheme of arrangement (Scheme). See Re Costa Group Holdings Limited [2023] FCA 1562 (First Court Hearing Reasons). 2 At a hearing today, Costa sought, and I made, orders including for the approval of the Scheme pursuant to s 411(4)(b) of the Act. These are my reasons for doing so.

Summary of the Scheme 3 The details of the Scheme are set out in the First Court Hearing Reasons at [4]-[6]. In summary, the commercial purpose of the Scheme is to effect the acquisition of all of the issued shares in Costa by an entity (Bidco) to be controlled by a consortium, other than the Costa shares the consortium and its associates already own (being 19.62% of the total number of Costa shares on issue). The consortium and its associates are "Excluded Shareholders" for the purposes of the Scheme and, pursuant to the orders of 8 December 2023, did not participate in or vote at the Scheme Meeting and will not participate in the Scheme. If the Scheme is implemented, each person who is a Costa shareholder (other than an Excluded Shareholder) will transfer the Costa shares they hold to Bidco, and will receive $3.20 per Costa share.

The evidence 4 In support of this application, Costa read and relied on an affidavit of Mr David Alistair Martin Thomas, General Counsel and Company Secretary of Costa, affirmed on 6 February 2024. 5 That affidavit was consistent with the approach set out in the Federal Court's Schemes of Arrangement Practice Note (GPN-SOA) (Practice Note). 6 The Practice Note at paragraph [3(i)] states that "[t]he Court expects a scheme proponent to lead evidence at the second Court hearing of the dispatch of scheme documents in accordance with the Court's orders. That evidence may include evidence on information and belief and need not be extensive, but should disclose any issues with compliance with those orders". 7 The Practice Note at paragraph [3(j)] also states that "[i]n addition to evidence that the scheme was approved by the requisite statutory majorities, the Court expects a scheme proponent to lead evidence at the second Court hearing as to voter turnout at the scheme meeting(s), being the number or percentage of members who attended the scheme meeting, in person or by proxy, as compared to the total number of members of the scheme company". 8 Mr Thomas deposed as to: (a) the registration of the Scheme Booklet and lodgement of a copy of the 8 December 2023 orders with the Australian Securities and Investments Commission (ASIC); (b) the dispatch of the scheme materials in accordance with the 8 December 2023 orders; (c) the voter turnout and results of the poll taken at the Scheme Meeting; and (d) the ASX announcement advising the details of the second hearing. 9 At the hearing, Costa additionally tendered: (a) conditions precedent certificates from Costa and Bidco dated 7 February 2024; and (b) a letter from ASIC to the directors of Costa dated 6 February 2024 stating that ASIC has no objection to the Scheme.

Role of the court 10 Section 411(4) of the Act provides that a scheme of arrangement is binding if, at a meeting of members, it is passed by a majority of members present and voting (in person or by proxy) and by 75% of votes cast, and it is subsequently approved by order of the court. 11 On an application to approve a scheme, the court must ensure that all statutory and procedural requirements in relation to the convening and conduct of the meeting have been observed. This requires the court to conclude that the meeting was properly convened and held in accordance with the convening orders, that the resolution to agree to the scheme was duly passed, and that all relevant requirements of the Act and the Federal Court (Corporations) Rules 2000 (Cth) (Rules) have been complied with. Once satisfied of these matters, the court has a discretion to approve the scheme pursuant to s 411(4)(b) of the Act. 12 The principles relevant to the exercise of the court's power to approve a scheme of arrangement are well understood. See, by way of example only, Re Crown Resorts Limited (No 2) [2022] FCA 710 at [11]. 13 In making an order pursuant to s 411(4)(b) of the Act (approving a scheme of arrangement), the role of the court is supervisory. The court is not bound to approve a scheme merely because it previously made orders convening a meeting or because statutory majorities were achieved. However, as Jacobson J observed in Re Seven Network Limited (No 3) [2010] FCA 400; (2010) 267 ALR 583 at 588 [32], "the court will usually approach the task upon the basis that the members are better judges of what is in their commercial interests than the court". See also Re Huon Aquaculture Group Limited (No 2) [2021] FCA 1385 at [10]. 14 The cases establish that the following matters should be taken into account: (a) the orders of the court convening the scheme meeting were complied with; (b) the resolution to approve the scheme was passed by the requisite majority, and whether other statutory requirements have been satisfied; (c) 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) the scheme is fair and reasonable so that an intelligent and honest shareholder, properly informed and acting alone, might approve it; (e) there was full and fair disclosure to shareholders of all information material to the decision whether to vote for or against the scheme; (f) the plaintiff has brought to the attention of the court all matters that could be considered relevant to the exercise of the court's discretion; and (g) the court is satisfied under s 411(17) that the scheme has not been proposed to avoid Chapter 6 of the Act, or that the plaintiff has a statement from ASIC that it has no objection to the scheme. See, by way of example only, Re PayGroup Limited (No 2) [2022] FCA 1350.

Statutory and procedural requirements 15 I had the benefit of detailed submissions by Mr BK Holmes and Ms E Brumby of counsel. Those submissions drew attention to the following relevant matters. Mr J Rudd appeared for Bidco and supported the making of the orders.

Dispatch of scheme materials 16 The Scheme Booklet and associated materials were dispatched to eligible Costa shareholders on 13 December 2023, in accordance with the 8 December 2023 orders. The Scheme Booklet was registered by ASIC as required by s 412(6) of the Act, and the orders were lodged with ASIC as required by r 3.5(b) of the Rules.

Results of Scheme Meeting 17 The Scheme Meeting was conducted on 30 January 2024, in accordance with the 8 December 2023 orders. 18 At the Scheme Meeting, the resolution to agree to the Scheme was passed by the requisite statutory majorities of eligible Costa shareholders, with 98.35% of the votes cast and 75.05% of shareholders present and voting (in each case, in person or by proxy) being in favour of the Scheme.

Voter turnout 19 The number of shareholders present and voting (including by proxy) constituted 11.39% of the total number of eligible Costa shareholders, and the number of votes cast (including by proxy) constituted 51.86% of the total number of shares eligible to be voted. 20 Low voter turnout is not, without more, a reason to refuse to exercise the discretion to approve a scheme. As Santow J said in Re Matine Ltd (1998) 28 ACSR 268 at 295: The apathetic shareholder who chooses not to vote upon a scheme should not be presumed to be antagonistic to the scheme or to warrant paternalistic protection… See also Re Amcor Limited (No 2) [2019] FCA 842 at [18]-[20]; and Re Surf Lakes Holdings Limited (No 2) [2023] FCA 1601. 21 The levels of voter turnout here do not give rise to any concern that shareholders were deterred from attending the Scheme Meeting or did not have notice of it, because: (a) there is nothing to suggest that there was any irregularity in the manner of dispatch of material to the shareholders; (b) eligible Costa shareholders were provided with notice of the Scheme Meeting; (c) there is no evidence of any issue that would have deterred Costa shareholders from voting at or from attending the Scheme Meeting; and (d) those shareholders who did vote voted overwhelmingly in favour of the Scheme.

Notice of second court hearing 22 Order 9 of the 8 December 2023 orders required that, by no later than 31 January 2024, Costa publish an announcement via the ASX Market Announcements platform setting out the details for the second court hearing and the process by which a person could appear to oppose approval. Order 9 required that the notice be substantially in the form of page 578 of Exhibit DAT-1 to the affidavit of Mr Thomas affirmed on 7 December 2023 (Draft Notice). 23 On 30 January 2024, Costa published a notice of the second hearing on the ASX Market Announcements platform. There were a number of very minor and necessary differences between the notice published by Costa and the Draft Notice, viz: (a) the language regarding the Scheme Meeting was amended to reflect that it had occurred, and that the Scheme had been approved; (b) the time of the second court hearing was amended; (c) an error in the draft notice regarding Costa's foreign operations was corrected; and (d) the inclusion of a footnote which advised that, if the Foreign Investment Review Board approval condition precedent to the Scheme was not satisfied before the second court hearing, Costa intended to approach the court to seek a postponement, with consequential changes to the Scheme timetable. 24 I accept Costa's submission that the notice published was nonetheless substantially in the form of the Draft Notice and that Order 9 has been complied with.

Conditions precedent 25 The Scheme is subject to a number of conditions precedent. In addition to shareholder approval of the Scheme by the requisite majorities under the Act, and court approval, the conditions precedent include, for example, various regulatory approvals and the independent expert not changing their conclusion that the Scheme is in the best interests of Costa shareholders prior to 8.00am on the date of the second court hearing. 26 The conditions precedent certificates tendered at the hearing confirm that all relevant conditions precedent to the scheme have been satisfied. The only exception is the condition precedent requiring regulatory approval by the Moroccan Competition Counsel. As the conditions precedent certificates confirm, neither Costa nor the consortium members meet the Moroccan local revenue or market share financial thresholds applicable to trigger the approval requirement. The relevant condition precedent thus did not apply.

Exercise of the discretion 27 Costa submitted, and I agree, that the following matters are relevant in considering whether the scheme is fair and reasonable so that an intelligent and honest shareholder, properly informed and acting alone, might approve it: (a) the overwhelming support of the eligible Costa shareholders as reflected in the voting results of the Scheme Meeting; (b) the directors' recommendation that eligible Costa shareholders vote in favour of the Scheme; (c) the opinion of the independent expert that the Scheme is in the best interests of eligible Costa Shareholders; (d) the disclosures in the Scheme Booklet, which set out a detailed description of the proposed Scheme, including its potential benefits and disadvantages; (e) there was no application to oppose the orders approving the Scheme, and no evidence suggesting any oppression in the conduct of the Scheme Meeting; and (f) the Scheme contains measures to protect shareholders against performance risk. 28 In my view, the evidence clearly established that the Scheme was made in good faith and was "at least so far fair and reasonable, as that an intelligent and honest [person], who is a member of the class, and acting alone in respect of [their] interest as such a member, might approve of it". See Re Alabama, New Orleans, Texas and Pacific Junction Railway Company [1891] 1 Ch 213 at 247 (Fry LJ).

Section 411(17) 29 The court's power to approve a members' scheme is restricted by section 411(17) of the Act. At the approval stage, the court must be satisfied there is no proscribed purpose as described in s 411(17)(a), or there must be provided to the court a statement in writing by ASIC that it has no objection to the arrangement (see s 411(17)(b)). 30 The "no-objection" letter from ASIC tendered at the hearing satisfies the requirements of s 411(17)(b), and consequently, the bar under s 411(17) to approval of the Scheme was removed.

Exemption from s 411(11) 31 Section 411(11) of the Act requires, subject to s 411(12), that a copy of the court's order approving a scheme of arrangement be annexed to every copy of the company's constitution issued after the order is made. 32 Section 411(12) relevantly allows the court to exempt a body from compliance with s 411(11). 33 In Re Equinox Resources Ltd [2004] WASC 143; (2004) 49 ACSR 692 at [22], EM Heenan J explained that the purpose of s 411(11) is: to ensure that any modification of the rights of shareholders of the company which is the subject of the scheme or any other provision in the scheme which may affect the interests of persons dealing with the company, such as prospective creditors or purchasers of shares, will be sure to have the opportunity of seeing what the exact rights of shareholders in the company or of its creditors are, as modified, if at all, by the scheme which has been approved. See also Re Hostworks Group Limited (No 2) [2008] FCA 248 at [36]. 34 Costa submitted, and I agree, that exemption from compliance with s 411(11) is appropriate in the circumstances, given: (a) the Scheme will not alter the constitution of Costa or the rights of Costa shareholders, creditors or other persons dealing with the company, and following implementation of the Scheme, Bidco intends not to make any material changes to Costa's constitution; (b) no ongoing purpose will be served by requiring the orders approving the Scheme to be annexed to Costa's constitution. Costa will become a wholly owned subsidiary of Bidco; and (c) current shareholders of Costa are fully informed of the Scheme and will be informed if the court approves the Scheme.

Conclusion 35 For the foregoing reasons, I made the orders set out above. I certify that the preceding thirty-five (35) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice O'Callaghan.