David Jones Limited, in the matter of David Jones Limited [2014] FCA 530

IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 419 of 2014

JUDGE: FARRELL J DATE: 22 May 2014 PLACE: SYDNEY

REASONS FOR JUDGMENT 1 This is an application for orders in the first instance under s 411(1) of the Corporations Act 2001 (Corporations Act) to convene a meeting (Scheme Meeting) of the shareholders of the plaintiff (David Jones) to approve (with or without modification) a scheme of arrangement between David Jones and its members (Scheme). David Jones also seeks directions under s 1319 as to the manner in which the Scheme Meeting is to be convened and conducted.

Scheme 2 David Jones operates a well-known department store chain in Australia and its shares are listed for quotation on the Australian Stock Exchange Limited (ASX). 3 The Scheme is a conventional acquisition scheme under which Vela Investments Pty Limited (Bidder) proposes to acquire 100% of the shares issued by David Jones for a cash consideration of $4.00 each (Consideration). The total Consideration is approximately $2.15 billion. The Scheme requires the Bidder to procure that the total Consideration payable to Scheme Shareholders be deposited in an Australian currency denominated trust account operated by David Jones on the business day before the Scheme's Implementation Date and subject to that, 100% of the shares in David Jones will be transferred to the Bidder on the Implementation Date and the Consideration paid to Scheme Shareholders. This is a common form of "arrangement" proposed under s 411 of the Corporations Act.

Bidder and Woolworths 4 The Bidder is incorporated in Australia and it is a wholly owned subsidiary of Woolworths Holdings Limited (Woolworths). Woolworths is a body corporate incorporated in South Africa with its headquarters in Cape Town. Its shares are traded on markets of the Johannesburg Stock Exchange and it is one of the top 40 listed companies. 5 Through a subsidiary, Woolworths operates a chain of retail stores in 16 countries, primarily in South Africa and sub-Saharan Africa. It trades in food, clothing and general merchandise and financial services. Woolworths owns approximately 88% of Country Road Limited which is a clothing and homewares retailer in Australia and New Zealand; shares in Country Road Limited are traded on markets of the ASX. 6 Woolworths is not the company which operates supermarkets under that name throughout Australia.

Issues 7 The broad details of the Scheme, statutory requirements and relevant considerations for the Court in making the orders and directions for which David Jones has applied are usefully set out in the written outline of submissions dated 21 May 2014 prepared by Counsel for David Jones; I have marked the outline of submissions MFI-1. The Bidder and Woolworths were represented by Counsel at the hearing of the application.

Formal requirements 8 David Jones is a public company registered in New South Wales. I am therefore satisfied that it is a Part 5.1 body as defined in s 9 of the Corporations Act. 9 On 24 April 2014, the originating process was served on the Australian Securities and Investments Commission (ASIC). A draft of the Scheme Booklet incorporating the usual shareholder information for acquisition schemes was filed with ASIC on 6 May 2014 and updated on 16 and 20 May 2014. On 21 May 2014 ASIC issued the "usual letter" indicating that it did not intend to attend the hearing to oppose orders being made. I am therefore satisfied that the formal requirements of s 411(2) have been met.

Announcement, recommendations and assessment of Consideration 10 On 9 April 2014, David Jones announced to the ASX that it had executed a Scheme Implementation Deed (Implementation Deed) with the Bidder and Woolworths (Announcement). The Announcement attached a copy of the Implementation Deed which had been executed by David Jones, the Bidder and Woolworths. The Announcement advised that the proposal had the unanimous support of the David Jones board of directors (Board) in the absence of a superior proposal and subject to an independent expert concluding that the Scheme is fair and reasonable and in the best interests of shareholders. The Scheme Booklet indicates that this recommendation has not changed. 11 The Announcement also noted (among other things) that the proposed Consideration of $4.00 represented: a 25.4% premium to the closing price of David Jones shares on the day before the Announcement; a 26.8% premium to the volume weighted average price of David Jones shares for the three month period before the Announcement; and a 39.4% premium to the price of David Jones shares on 30 January 2014, the last closing price before the proposal by rival department store retailer, Myer, was announced. 12 David Jones appointed Grant Samuel & Associates Pty Limited (Grant Samuel) as the independent expert. Grant Samuel has formed the view that the proposed Scheme is fair and reasonable and in the best interests of David Jones shareholders in the absence of a superior proposal. Grant Samuel values each David Jones share in the range of $3.73 to $4.14. The proposed Consideration is therefore at the higher end of the range assessed by the independent expert and represents a significant premium to the price at which David Jones shares traded before the Announcement.

Conditions precedent 13 The conditions precedent to implementation of the Scheme are set out in the Implementation Deed. They include: a approval by David Jones shareholders and the Court; a approval by Woolworths shareholders to the Scheme and to a rights issue to Woolworths shareholders. The rights issue must be approved by a special majority of 75% plus one vote; a approvals by the South African Reserve Bank and by the Foreign Investment Review Board under the Foreign Acquisitions and Takeovers Act 1975 (Cth); a the non-occurrence of material adverse changes and other standard conditions. 14 The approvals of the South African Reserve Bank and the Foreign Investment Review Board have both been obtained. 15 Woolworths despatched a circular dated 16 May 2014 to its shareholders in relation to a meeting to be held on 17 June 2014 to consider approving the Scheme and the Woolworths rights issue. Therefore the outcome of the Woolworths shareholders' meeting will be known in advance of the proposed meeting of David Jones shareholders on 30 June 2014 and the second court hearing at which the application under s 411(4)(b) to approve the Scheme will be considered. 16 The Scheme is not conditional on Woolworths obtaining funding to enable it to pay the Consideration. The total Consideration will be funded partly from Woolworths' internally generated cash resources and partly by an equity bridge facility which will be paid down by the proceeds raised under the rights offer to be considered by Woolworths Shareholders at their meeting on 17 June 2014. Sections 8.6 and 8.7 of the Scheme Booklet set out the relationship between the rights issue and the funding arrangements for Scheme Consideration.

Performance risk 17 "Performance risk" is managed under the Scheme in the usual way. As mentioned at [3] above, under the terms of clause 5 of the Scheme which are set out in Annexure D of the Scheme Booklet, the Bidder must pay all Consideration to a trust account established by David Jones for the benefit of the Scheme Shareholders before David Jones shares are transferred to the Bidder. The Bidder and Woolworths have entered into a Deed Poll for the benefit of David Jones shareholders in which they undertake to perform their obligations under the Scheme; the form of the Deed Poll is set out in Annexure E of the Scheme Booklet.

Execution of Deed Poll by foreign company 18 Mr Johannes Els is a partner in the law firm, Webber Wentzel, which acts for Woolworths in South Africa. Mr Els is an attorney admitted to practice under the South African Attorneys Act, 1979. Having considered the relevant provisions of the South African Companies Act, 2008, and a circulating minute of a resolution of the directors of Woolworths, Mr Els gave the following opinion in relation to the execution by Woolworths of a Deed Poll which he understood to have been executed on 10 May 2014. The Deed Poll to which he refers is in Exhibit JCE-1. It is in a form which was attached to the David Jones ASX announcement and which is usual for Schemes in Australia. Mr Els deposed as follows: Accordingly, the Deed Poll, having been executed by the directors of the Bidder's Guarantor authorised to do so, and such authorisation being in compliance with the relevant provisions of the Companies Act and the memorandum of incorporation of the Bidder's Guarantor, has been duly executed for the purposes of the law of the RSA. If a claim under the Deed Poll was to proceed before a South African court, and provided that New South Wales law was pleaded and proven and that the Deed Poll was executed in accordance with New South Wales law, the choice of the laws of New South Wales under the Deed Poll would be given effect by a South African court (save to the extent that a mandatory rule of South African law applied regardless of the law chosen in the Deed Poll or the South African court was bound, in respect of specified issues, to apply the law of a different jurisdiction) and so the Deed Poll would be enforceable in the RSA in accordance with its terms by the classes of shareholders of the Plaintiff in whose favour they are severally expressed to operate to the extent that they are so enforceable under the laws of New South Wales. 19 I note that although the Deed Poll attached to Mr Els' opinion appears to be signed by two directors of Woolworths, it is not complete; for instance, the terms of the Scheme (which are intended to form Annexure 1 to the Deed Poll) have not been included. I take from Mr Els' opinion that if a completed form of the Deed Poll is executed it will be enforceable against Woolworths and evidence will be provided of a completed and duly executed Deed Poll at the second court hearing.

Exclusivity provisions, Break Fee and Reimbursement Amount 20 These arrangements are summarised at section 12.2 (d)-(f) of the Scheme Booklet. 21 The Implementation Deed contains "No-shop", "No-talk" and "Notification obligation" provisions which apply during the Exclusivity Period (exclusivity provisions). The Exclusivity Period extends to the earlier of 23 September 2014 and the termination of the Implementation Deed. The "No-talk" and "Notification obligation" provisions do not apply if the David Jones Board, in good faith and after receiving legal advice, and in order to avoid breach of fiduciary or statutory duties, determines that a competing proposal is or may lead to a superior proposal. This "fiduciary carve out" does not impose undue impediments to directors placing reliance on it in an appropriate case. The directors are only required to get legal advice, something they are likely to do in any event. There is no specification of from whom the legal advice must be obtained or that it must be disclosed to the Bidder; requirements of this kind are likely to have a more anti-competitive effect. 22 The Implementation Deed contains a "Break Fee" of $22 million (exclusive of GST). The Break Fee is in excess of 1% of equity value (approximately $2.15 billion based on the proposed Consideration). The Break Fee is therefore inconsistent with the guideline concerning when a break fee may not be unacceptable under [9] of the Takeovers Panel Guidance Note 7: Lock-up Devices. 23 Mr Ralph Buddle, the head of corporate finance at Woolworths, deposed that the total estimated transaction costs which Woolworths and the Bidder will incur if the Scheme does not proceed is $38.2 million which includes financial advisory, consulting and legal costs. He also verifies clause 9.1(c) of the Implementation Deed in saying that Woolworths and the Bidder would not have entered into the Implementation Deed unless provision was made for the Break Fee. 24 The Implementation Deed also contains provision for Woolworths to reimburse David Jones for costs reasonably incurred by David Jones (capped at $5 million) if the Woolworths shareholders do not approve the Scheme or the rights issue or if the Woolworths directors do not recommend that the Woolworths shareholders vote in favour of each of those resolutions (Reimbursement Amount). 25 Mr Brad Soller, the chief financial officer of David Jones, deposed that the exclusivity provisions and the "Break Fee" and "Reimbursement Amount" provisions of the Implementation Deed were negotiated between the parties, including direct discussions between the Chairman of David Jones and the Chief Executive of Woolworths. He says that he does not believe that the Scheme proposal would have been agreed between the parties in the absence of these provisions. 26 Mr Soller deposed that David Jones resisted any break fee on the basis that the Scheme would be subject to significant shareholder approvals by both companies and each should bear its own costs if the Scheme did not proceed, and insisted that the Scheme should not be subject to a financial condition for the benefit of Woolworths. Woolworths insisted on a break fee and "strong exclusivity provisions" on the basis that it would incur substantial costs in connection with the transaction, including finance costs in excess of the Break Fee in order to obtain committed finance. David Jones ultimately acceded to Woolworths' request for the Break Fee and to less extensive exclusivity provisions than those sought by Woolworths as part of a package which included Woolworths' agreement to pay the Reimbursement Amount if Woolworths shareholders failed to give required approvals. 27 Mr Soller considers the Break Fee reasonable, appropriate and not to the detriment of David Jones. He notes (in effect) that the "No-shop" provision would not be an impediment to a potential competitor to Woolworths emerging, because the Scheme is public and will take some time to implement. The fiduciary carve out would allow David Jones to deal with a competing bidder if the competing proposal is or is likely to be superior. He also notes that no Break Fee is payable if the Scheme is not approved by David Jones shareholders. 28 I accept that the Break Fee and the exclusivity provisions result from vigorous negotiation between parties acting in their own interests. The Break Fee is only slightly in excess of the 1% guidance given by the Takeovers Panel and I am satisfied that it reflects significantly less than the estimated genuine costs to be incurred by the Bidder/Woolworths. It is important that there is symmetry in the costs indemnities provided for, albeit that the dollar amount is different. In each case the difference between the Break Fee/Reimbursement Amount and actual cost incurred is likely to promote genuine efforts to implement the proposal: pursuing the proposal is not a "no cost" option for either party. I am satisfied that in the circumstances, these provisions should not be an impediment to granting the orders sought under s 411(1). 29 I note that section 4.4 of the Scheme Booklet discloses both (1) the existence of the Break Fee, and (2) the fact that the failure to vote in favour of the Scheme does not trigger payment of it. It is appropriate that the early reference in the Scheme Booklet to the Break Fee contains this balance because it mitigates the potentially coercive impact on shareholders of the existence of the Break Fee.

Capital structure and performance rights 30 Schedule 2 of the Implementation Deed contains a table of the David Jones capital structure which indicates that there are 537,137,845 issued ordinary shares. 31 David Jones has issued performance rights to its employees under which employees have a vested right to 18,000 David Jones shares under the 2012/2013 Short Term Incentive Plan which have not yet been issued on conversion of performance rights. There are a further 2,035,000 shares subject to performance rights which have not yet vested under the Financial Year 13/15 and 14/16 Long Term Investment Plans. Section 12.1 of the Scheme Booklet discloses that, conditional on the Scheme being implemented and short term financial budgets being met, in an effort to retain executives, the David Jones Board has exercised a power it has under the Long Term Incentive Plan rules so that Long Term Incentive Plan entitlements will vest pro rata to the portion of the relevant period which has elapsed at the Implementation Date if the executive has not given notice of resignation. The shares which may vest will be capped at the number of unallocated shares in the David Jones Incentive Plan Trust (approximately 1.2 million shares). The result will be that no new shares need to be issued to implement Long Term Incentive Plan vesting.

Verification and due diligence 32 Each of David Jones, the Bidder and Woolworths has conducted due diligence and verification processes in relation to the information in the Scheme Booklet for which they are each responsible. The processes adopted appear to comply with current practice designed to ensure that material statements in the Scheme Booklet are correct and not misleading and that no material information is omitted.

Consent to act as Chairman 33 Mr Gordon Cairns (Chairman of David Jones) and Ms Melinda Conrad (a non-executive director of David Jones) affirmed affidavits on 20 May 2014 in which they consented to act as chairman of the Scheme Meeting. They made declarations of interest on the basis of which I am satisfied that they have no interest which would disqualify them from acting as chairman of the Scheme Meeting.

Email notification to David Jones shareholders 34 Tab 7 of BS-1 contains a proposed form of notification to David Jones shareholders concerning the Scheme Meeting. It is proposed that this form of notification will be used for those shareholders who have elected to receive communications from David Jones by email. 35 The first page of the notification sets out that it is notice of the Scheme Meeting and the purpose of the meeting. Halfway down the page it states in bold: You can now lodge an electronic version of the Proxy Form for the Scheme Meeting (Scheme Meeting Proxy Form) by clicking here. It then goes on to discuss the time by which the proxy form must be lodged to be valid and the balance of the page is taken up with the various ways a proxy form can be lodged. The last words on the page are a heading "Scheme Booklet". 36 It is only on the second page that a shareholder is told that they can view the Scheme Booklet online and the shareholder is invited to "click here" to do so. It is only in the ninth of ten paragraphs that it is suggested that the shareholder should read the Scheme Booklet. 37 This order of material is inappropriate: shareholders should not be asked to act before they have been provided with access to the material on the basis of which to make an informed decision. Through Senior Counsel, David Jones agreed to move the material concerning the Scheme Booklet to precede the invitation to vote electronically.

Other Affidavit and Exhibits 38 The affidavits referred to below were read and the exhibits and documents were tendered. 39 Mr Ralph Buddle swore an affidavit on 19 May 2014. 40 Mr Gordon Cairns and Ms Melinda Conrad affirmed affidavits on 20 May 2014. 41 Mr Johannes Els swore an affidavit on 19 May 2014 and referred to Exhibit JCE-1. 42 Mr Luke Hastings affirmed two affidavits: (1) on 23 April 2014 which referred to Exhibit LBH-1; and (2) on 21 May 2014 which referred to LBH-2-4. Mr Hastings is a partner in Herbert Smith Freehills, the law firm which acts for David Jones in these proceedings. 43 Mr Stephen Wilson affirmed an affidavit on 20 May 2014 and referred to Exhibit SJW-1. Mr Wilson is a director of Grant Samuel and he indicated his intention to sign an independent expert's report in the form set out in the exhibit. 44 Mr Brad Soller affirmed an affidavit on 21 May 2014 and referred to Exhibit BS-1. 45 Exhibit 1 is the Scheme Booklet and Exhibit 2 is ASIC's "usual letter".

Conclusion 46 I will make the orders and directions for which David Jones has applied under s 411(1) and s 1319 of the Corporations Act. I certify that the preceding forty-six (46) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Farrell.