Gazal Corporation Limited, in the matter of Gazal Corporation Limited [2019] FCA 701

Judgment (10 paragraphs)

[1]

Convening of Scheme Meetings Key Management Scheme Meeting

Pursuant to s 411(1) of the Corporations Act 2001 (Cth) (Act) there be convened a meeting (Key Management Scheme Meeting) of Michael Gazal, MJ & HH Gazal Pty Limited, Michael & Helen Pty Limited, Titan Sydney Pty Ltd, Cleocatra Pty Ltd, Archapal Pty Ltd, Craig Barnett and any other Key Management Shareholder as defined in paragraph 1(a)(ii) of the originating process (Key Management Shareholders) for the purpose of considering and, if thought fit, agreeing (with or without modification) to a scheme of arrangement (Scheme), the terms of which are set out in Annexure 2 of the scheme booklet, a copy of which is at Exhibit A (Scheme Booklet).
The Key Management Scheme Meeting be held at The EY Centre, Level 34, 200 George Street, Sydney, New South Wales on 14 May 2019 at 1:00 pm (Sydney time). General Scheme Meeting
Pursuant to s 411(1) of the Act there be convened a meeting (General Scheme Meeting) of holders of fully paid ordinary shares of the plaintiff (Gazal Shareholders), other than: (a) those held by or on behalf of or for the benefit of Sunshine B Pty Ltd (ACN 631 685 553) or any of its related bodies corporate (Excluded Shareholders); and (b) those held by the Key Management Shareholders, for the purpose of considering and, if thought fit, agreeing (with or without modification) to the Scheme.

Background and First Court hearing 3 Gazal is listed on markets operated by the Australian Securities Exchange Limited (ASX). Its business was founded in 1958. That business was acquired by an ASX listed company in 1987. Gazal's issued capital comprises 44,687,514 fully paid ordinary shares. Its market capitalisation as at 3 April 2019 was $273 million based on a closing price of Gazal shares on the ASX of $6.11. 4 Gazal, through its wholly-owned subsidiary, Gazal Apparel Pty Ltd, owns 50% of the shares in PVH Brands Australia Pty Ltd (PVHBA). PVHBA is a joint-venture company. Its other shareholder is PVH Services (UK) Limited (PVH Services UK). PVH Services UK is a wholly owned subsidiary of PVH Corp., which is incorporated in the United States of America and listed on the New York Stock Exchange. Sunshine B is an indirectly wholly-owned subsidiary of PVH Corp. If the scheme becomes effective, PVH Services UK will, before the scheme is implemented, transfer its existing shareholding in Gazal to Sunshine B in exchange for new shares in Sunshine A Pty Ltd (also known as PVH HoldCo) which is Sunshine B's immediate parent company. PVHBA manufactures, imports, markets and distributes the PVH Group's apparel brands led by Calvin Klein and Tommy Hilfiger or other licensed or PVHBA-owned brands through its branded retail stores and via wholesale channels (principally Myer and David Jones) in Australia and New Zealand. 5 Aside from its 50% interest in PVHBA, Gazal's only other major asset is its property at 3-7 McPherson Street, Banksmeadow in New South Wales. Gazal has entered into a sale and leaseback arrangement with a large Australian industrial real estate fund in relation to the Banksmeadow property which is conditional on Sunshine B acquiring all of the shares in Gazal other than shares held by Excluded Shareholders (Excluded Shares). The sale is for $85 million and Gazal (but not the purchaser) is entitled to waive the condition in relation to Sunshine B's acquisition of the Scheme Shares. 6 There are 796,579 Gazal Performance Rights held by nine Gazal directors and employees, all of which were issued on 4 May 2018. There is no exercise price for any of the current Gazal Performance Rights. Upon exercise, each Gazal Performance Right entitles the holder to acquire one Gazal share or an equivalent cash amount, plus a payment equivalent to the aggregate dividends per Gazal share paid between the date of granting and the data vesting (known as a "dividend equivalent payment"). Vesting of a Gazal Performance Right relies upon Gazal and/or PVHBA achieving specific profit targets and a participant's continued employment by Gazal until 2 February 2021. Based on the audited financial statements for financial year 2018, the profit targets have been met. 7 There are 527,215 PVHBA Performance Rights held by nine PVHBA employees. They are on substantially same terms as the Gazal Performance rights and would vest upon relevant participants remaining in employment with Gazal until 2 February 2021. 8 Upon the scheme become effective, both the Gazal Performance Rights and the PVHBA Performance Rights will be cancelled in accordance with the Scheme Implementation Agreement which was signed and announced to the ASX on 21 February 2019 (SIA). As stated in the scheme booklet, it is a condition of the scheme that the Key Managers (identified below) reinvest approximately 25% of their respective direct and indirect interests in Gazal shares, Gazal Performance Rights or PVHBA Performance Rights (that is, their economic interests in Gazal) to take up a minority (6.4% in aggregate) holding in PVH HoldCo Shares and enter into new employment agreements. They will be required to hold this interest in PVH HoldCo Shares for a two year period following implementation of the scheme. The purpose of this is said to be to assist PVH Group in transitioning Gazal to new management and so that a portion of the cash consideration that the Key Management Shareholders will receive under the scheme will be (effectively) contingent on PVHBA's financial performance being maintained. 9 The current directors of the Gazal are described as follows: (1) Michael Gazal, Executive Chairman; (2) Patrick Robinson, Managing Director and Chief Executive Officer; (3) Bruce Klatsky, Non-Executive Lead Independent Director. Mr Klatsky has a direct or indirect interest in 2,000,000 Gazal shares. (4) Graham Paton, Non-Executive Independent Director. Mr Paton has a direct or indirect interest in 700,000 Gazal shares; and (5) Craig Kimberley, Non-Executive Independent Director. Mr Kimberley has a direct or indirect interest in 765,000 Gazal shares. 10 The Key Managers are: (1) Michael Gazal, who owns 1,202,211 Gazal shares directly. A further 16,566,069 Gazal shares are owned by companies for the benefit of Mr Gazal and/or his spouse; (2) Patrick Robinson. 769,158 Gazal shares are held by two companies for the benefit of Mr Robinson and/or his spouse; (3) Guy Griffiths (the Chief Financial Officer of both Gazal and PVHBA). 338,474 Gazal shares are held by a company on behalf of or for the benefit of Mr Griffiths and/or his spouse; and (4) Craig Barnett (PVHBA's Chief Executive Officer) who owns 150,000 Gazal shares. 11 Key Management Shareholders are those Key Managers who hold Gazal shares and the entities which hold Gazal shares on behalf of or for the benefit of the Key Managers or any of their spouses or any person directly or indirectly controlled by any of those Key Managers or any of their spouses. There are seven Key Management Shareholders. 12 Pursuant to the originating process taken as filed on 13 March 2019, Gazal sought orders that the Court convene two meetings, being: (1) A meeting of members holding fully paid ordinary shares in Gazal other than those held by the Excluded Shareholders or Key Management Shareholders (General Scheme Meeting); and (2) A meeting of the Key Management Shareholders (Key Management Scheme Meeting), for the purpose of considering and, if thought fit, agreeing (with or without modification) to the scheme. The Court was satisfied that this was appropriate, accepting that the Key Management Shareholders form a separate class to other shareholders. 13 Mr Paton, or failing him, Mr Kimberley agreed to act as chairman of both scheme meetings. As they were independent directors, the Court was satisfied that this was appropriate. 14 Pursuant to the scheme, Sunshine B will acquire all of the Scheme Shares for: (1) Cash consideration of $6.00 per Gazal share; or (2) In the case of Key Management Shareholders who so elect in respect of up to approximately 25% of their economic interest in Gazal, shares in Sunshine A. 15 The cash consideration of $6.00 per Gazal share represents: (1) A 39.2% premium to the closing price per Gazal share on the ASX on 20 February 2019 of $4.31. 20 February 2019 was the last trading day before the announcement of the scheme; (2) A 39.2% premium to the weighted average price of a Gazal share for the period from 18 January 2019 (when Gazal released its EBITDA guidance for the year ended 2 February 2019) until 20 February 2019 of $4.31; and (3) A 48.3% premium to the three months volume weighted average price of a Gazal share of $4.05 as at 20 February 2019. 16 Gazal's directors determined that Gazal will pay to Gazal shareholders who are registered as such on the dividend record date a fully franked dividend of $0.17 per Gazal share. The dividend record date will be after the scheme is approved by shareholders and the Court, and payment of the dividend will be contingent on those approvals. The SIA permits the payment of this dividend. 17 The scheme is conditional on (among other things) certain arrangements being entered into by Key Managers (Key Manager Arrangements), being: (1) At least one Key Management Shareholder of each Key Manager having signed a Subscription and Shareholders Deed in a form agreed between Gazal and Sunshine B and agreed to subscribe for their Relevant Number (as defined in the SIA) of fully paid ordinary shares in Sunshine A; and (2) Each Key Manager having signed new employment agreements with Gazal or PVHBA in a form agreed between Gazal and Sunshine B. 18 The independent expert, Deloitte Corporate Finance Pty Ltd, was appointed by the independent directors (Graham Paton, Bruce Klatsky and Craig Kimberley) to assess the merits of the proposed scheme. The independent expert has concluded that the scheme is fair and reasonable and therefore in the best interests of Gazal shareholders (other than the Excluded Shareholders). The independent expert has assessed the value of a Gazal share as being between $5.55 and $6.11 per share and has noted that the cash consideration is within this range while the total cash payments (inclusive of the proposed dividend) exceeds this range. 19 Each of the independent directors recommended that the Gazal shareholders vote in favour of the scheme in the absence of a superior offer and subject to the independent expert maintaining its opinion. Each of the executive directors (Michael Gazal and Patrick Robinson) make the same recommendation. On that basis, each of them stated that they intend to vote in favour of the scheme (it being noted that Michael Gazal and Patrick Robinson will vote at the Key Management Scheme Meeting). 20 At the first Court hearing on 8 April 2019, the Court noted that Mr Robinson would receive from Gazal a bonus of approximately $1.7 million if the scheme becomes effective. The draft scheme booklet provided to the Court contained a "Letter from the Independent Director", Mr Paton, which (as usual) appeared at the beginning of the Scheme Booklet. The letter contained a section headed "Directors' recommendation" which stated that the directors had "concluded that the scheme is compelling for Gazal shareholders" and set out six reasons in support of that view, and noted three disadvantages. However, there was no disclosure at this point of the interest that Mr Robinson and Mr Gazal had in the outcome of the scheme. That matter was mentioned at Section 8.4.1 of the Scheme Booklet. In the Court's view, the fact that Mr Robinson would receive this bonus was insufficiently prominent. Consequently Gazal amended the letter to include the following paragraph after the first paragraph of the "Directors recommendation": As noted, Michael Gazal and Patrick Robinson are "Key Managers" and so are in a different position to other shareholders in their treatment under the Scheme. In addition, Mr Robinson will receive a bonus of approximately $1.7 million if the Scheme becomes Effective (as discussed in Section 8.4.1 of the Scheme Booklet). Despite these matters, Mr Gazal and Mr Robinson consider that it is appropriate for them as Executive Directors to make a recommendation to shareholders. 21 The question of the appropriateness of a director making a recommendation in these circumstances is the subject of further comment in these reasons. 22 The Australian Securities & Investments Commission (ASIC) provided its "usual letter" indicating that it had been provided with a draft Scheme Booklet and stating that it did not intend to appear at the first court hearing. Also provided was a letter from ASIC stating that it had granted relief in relation to paragraph 8302(h) of Part 3 of Schedule 8 to the Corporations Regulations 2001 (Cth). 23 The submissions filed by Gazal in support of its application for orders under s 411(1) of the Corporations Act, which have been marked "MFI-1", address a range of issues including aspects of the SIA dealing with exclusivity arrangement and break fees which raise no issues which require special comment. They also note the evidence given by Mr Paton and Reuben van Werkum (a solicitor for Sunshine B) in relation to the verification of the Scheme Booklet.

Director's recommendation 27 At the first Court hearing, the Court raised the question of whether it was appropriate for Mr Robinson to make a recommendation that shareholders vote in favour of the scheme having regard to the interest that he had in the scheme being approved, since he would be entitled to receive a $1.7 million bonus if the scheme was approved. Gazal readily agreed to the amendment of the "Letter from the Independent Director" to include disclosure of this matter, but Gazal considered it appropriate that Mr Robinson's recommendation be maintained because: (1) It would be a breach of the SIA for Mr Robinson to change his recommendation; (2) ASIC had raised the issue in correspondence with Gazal's solicitors in relation to the content of the draft scheme booklet and Gazal's solicitors had responded by noting the condition in the SIA concerning change of directors' recommendations. As mentioned above, ASIC nonetheless provided its "usual letter"; and (3) They relied on remarks made by Robson J in Re SMS Management & Technology Ltd [2017] VSC 257 at [26]. 28 In Re SMS Management & Technology Ltd, Robson J said the following at [22]-[27]: 22 A further issue which was raised by ASIC in communications with the target, is the proposed recommendation by the managing director of SMS, Mr Rostolis, that the members approve this scheme. 23 The issue that is raised is whether this is appropriate in the circumstances where Mr Rostolis is to be compensated with the payment of $600,000 if the scheme is implemented, to provide a recommendation. Mr Ahern submitted that the Corporations Act and the Regulations made under it, requires that the directors state their opinion as to whether or not the scheme is recommended to be approved by the members. Mr Ahern referred me to schedule 8 reg 8301(a)(i) of the Corporations Regulations which so provides. 24 Regulation 8301(a) of the Corporations Regulations states: Part 3 - Prescribed information relating to proposed compromise or arrangement with members or a class of members 8301 The statement must set out: (a) unless the company the subject of the Scheme is in the course of being wound up or is under official management, in relation to each director of the company: (i) whether the director recommends the acceptance of the Scheme or recommends against acceptance and, in either case, his or her reasons for so recommending; or (ii) if the director is not available to consider the Scheme - that the director is not so available and the cause of his or her not being available; or (iii) in any other case - that the director does not desire to make, or does not consider himself or herself justified in making, a recommendation and, if the director so requires, his or her reasons for not wishing to do so. 25 What is now footnote 3 to the chairman's letter addresses Mr Rostolis receiving the $600,000. It states: With respect to Rick Rostolis' recommendation, SMS shareholders are advised that Mr Rostolis will receive a $600,000 cash incentive conditional upon the Scheme becoming Effective. Despite this fact, Mr Rostolis considers that it is appropriate to make a recommendation on the Scheme. SMS has also agreed to tag the votes of Mr Rostolis at the Scheme Meeting at the request of ASIC. Further details of the incentive payment are set out in Section 8.11, and further details of the vote tagging are set out in Sections 4.1 and 7.10(a). As discussed in Section 13.3(b), no similar incentives, agreements or arrangements exist with any other SMS director. 26 In my view, it is appropriate for Mr Rostolis to make the recommendation that he proposes. I think it is important that the managing director, who in this case is the main moving force behind the company, give his reasons for putting forward the scheme. In my opinion, the footnote to the chairman's letter satisfies the concerns raised by ASIC. 27 Shareholders are able to discern that one of the benefits of the scheme could be seen to be that Mr Rostolis receives $600,000, but on the other hand, he may no longer be involved in management. 29 With respect to Robson J, it is possible for a board to put forward reasons why shareholders might approve a scheme (along with reasons why they might not), without the need for a director who has a clear pecuniary incentive for the scheme to proceed making a recommendation concerning voting. It is, of course, appropriate for each director to say what their own voting intentions might be. 30 In my view, it would have been better practice for Mr Robinson to adopt the common practice of declining to make a recommendation to shareholders as to how they should vote, and to explain that the reason for that is that he will receive a substantial benefit depending on the outcome of the scheme which other shareholders will not receive. While it is most important that there be prominent disclosure in a scheme booklet of those matters which might, realistically, affect a director's judgment in making a recommendation about whether shareholders should vote in favour of approving a scheme, directors who are interested in the outcome of the scheme because they stand to receive a bonus or benefit (other than as a shareholder) only if the scheme proceeds should exercise caution in making recommendations and, in my view, generally should not do so. As demonstrated in this case, the disclosure did not carry over in summary statements of the directors' recommendation. Both the front of the Scheme Booklet and the script used for telephone canvassing of shareholders contained the directors' recommendation without reference to the fact that Mr Robinson would receive a bonus. 31 It is true that a change of Mr Robinson's recommendation may have triggered the bidder's right to terminate the SIA, however that issue was wholly within the hands of the parties to the SIA. According to the evidence of Mark David Fischer, a director of Sunshine B, it was during the bidder-side due diligence process in or around mid-January 2019 that he first became aware that Gazal's board had, in September 2018, approved the payment of a bonus to Mr Robinson dependent on the scheme becoming effective. To the best of Mr Fischer's information, knowledge and belief, no one acting on behalf of Sunshine B was involved in negotiating the bonus. 32 In my view, the question of whether it is appropriate for all directors to make a voting recommendation should be considered at the time a scheme implementation agreement is executed and conditions crafted appropriately. While it may be true that it has become a common practice for a bidder to require unanimous and unqualified recommendations from the directors of the target company, that "practice" does not justify the bidder and the directors of the target failing to address the circumstances of each individual case. As I said at the second court hearing, I am satisfied that Gazal, the bidder and Mr Robinson all acted honestly. Nonetheless, the "usual practice" (as it was described by counsel) does not eliminate the director's individual obligation to consider whether he or she has an interest different from other shareholders which would properly preclude them from making a voting recommendation. Where a director has an interest in the outcome of a scheme which is plainly different from other shareholders, the issue of whether it is appropriate for that director to make a recommendation should be confronted. It is difficult to see how the success of a scheme is prejudiced by a recommendation made only by those directors who are not interested in the outcome otherwise than as a shareholder. It is common and appropriate for the recommendation to be made only by independent directors. It remains open for the scheme implementation agreement to be subject to a condition that an interested director who declines to make a voting recommendation does not decide to make an adverse recommendation. 33 Of course, it remains appropriate for the director to disclose his or her own voting intentions and for it to be a condition of the scheme that those intentions do not change in the absence of a superior offer. 34 Having regard to the recommendation made by the independent expert and the overwhelming support for the scheme from general shareholders and the Key Management Shareholders, I decided that the fact that Mr Robinson (and Mr Gazal) elected to make a recommendation should not preclude dispatch of the Scheme Booklet nor preclude the making of orders approving the scheme. Scheme proponents cannot count on that always being the outcome where an interested director elects to make a recommendation. I certify that the preceding thirty-four (34) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Farrell.

At a glance

Court

Decision date

Before

Source

Judgment (10 paragraphs)

Legislation Cited (3)

Cases Cited (2)

Cited By (28)