GrainCorp Limited, in the matter of GrainCorp Limited [2020] FCA 143

MARKOVIC J: 1 On 5 February 2020 on the application of the plaintiff, GrainCorp Limited (GrainCorp), I made orders including an order pursuant to s 411(1) of the Corporations Act 2001 (Cth) (Act) convening a meeting (Scheme Meeting) of the holders of fully paid ordinary shares in GrainCorp (GrainCorp Shareholders) for the purpose of considering and, if thought fit, agreeing, with or without modification, to a scheme of arrangement (Scheme) and orders for the approval and distribution of the scheme booklet as the explanatory statement for the purposes of s 411(1) of the Act (Scheme Booklet). These are my reasons for making those orders.

Background 2 GrainCorp is a publicly listed company incorporated in Australia and admitted to the official list of the Australian Securities Exchange (ASX). 3 GrainCorp is an agribusiness with operations including grain, oils and other materials accumulation, storage, handling and trading, and ownership of storage facilities, rail and road operations and bulk export ports in eastern Australia, edible oils crushing and processing operations in Australia and New Zealand and origination and marketing teams positioned across four continents (GrainCorp Business). 4 GrainCorp also operates an international malt business through its wholly-owned subsidiary, United Malt Group Limited (UMG). UMG has 100 ordinary shares on issue.

The Scheme 5 On 13 January 2020 GrainCorp and UMG entered into a demerger scheme implementation deed (SID) to facilitate the implementation of the demerger of UMG from GrainCorp (Demerger). 6 Under the SID the Demerger will be implemented by way of an equal reduction of GrainCorp's share capital (Capital Reduction), special dividend (Demerger Dividend) and the Scheme. That is, under the proposed Scheme, GrainCorp proposes to demerge UMG from GrainCorp, following which, there will be two independent ASX listed companies being: GrainCorp, which will continue to operate the GrainCorp Business; and UMG, an international commercial maltster that also operates a distribution business, which provides malt, hops, yeast, adjuncts and related products to craft brewers and distillers. 7 If the Scheme is implemented, GrainCorp Shareholders, other than Ineligible Foreign Holders and Selling Small Shareholders (as to which see [8]-[9] below), will be entitled to receive one UMG share for each GrainCorp share they hold on the record date in respect of the Scheme (Demerger Scheme Record Date) (expected to be 25 March 2020) and will retain their shareholding in GrainCorp. 8 Ineligible Foreign Holders are those GrainCorp Shareholders with a registered address outside Australia and its external territories, the Bahamas, Canada, Germany, Hong Kong, Isle of Man, New Zealand, the United Kingdom, the United States of America, or any other jurisdiction in which GrainCorp believes it is not prohibited or unduly onerous or impractical to implement the Demerger and to transfer shares to GrainCorp Shareholders. 9 Selling Small Shareholders are those eligible GrainCorp Shareholders who hold 500 or fewer GrainCorp shares on the Demerger Scheme Record Date and who elect to have the UMG shares that they would otherwise be entitled to receive on implementation of the Scheme sold on the ASX by the Sale Agent (see [11] below). 10 According to Mark LeRoy Palmquist, the chief executive officer (CEO) of GrainCorp, as at 4 February 2020 Ineligible Foreign Holders represented approximately 0.15% of GrainCorp Shareholders holding approximately 0.02% of GrainCorp shares, and Small Shareholders, being eligible GrainCorp Shareholders who individually hold 500 or fewer GrainCorp shares, represented approximately 39% of GrainCorp Shareholders holding approximately 0.47% of GrainCorp shares. 11 Ineligible Foreign Holders and Selling Small Shareholders (collectively, Selling Shareholders) will have the UMG shares which they would otherwise be entitled to receive under the Demerger sold on the ASX by a nominee appointed by GrainCorp (Sale Agent) under the Sale Facility, the terms of which are set out in the Scheme and summarised in the Scheme Booklet, as soon as reasonably practicable and not more than 20 business days after implementation of the Demerger. The amount received by each Selling Shareholder will be calculated on an average basis so that all Selling Shareholders receive the same price for each UMG share sold on their behalf under the Sale Facility, subject to rounding down to the whole Australian cent. 12 Immediately following implementation of the Scheme, 90% of the UMG shares will be held by GrainCorp Shareholders participating in the Scheme and the Sale Agent on behalf of Selling Shareholders, and 10% of the UMG shares on issue will be retained by GrainCorp. 13 The directors of GrainCorp unanimously recommend that GrainCorp Shareholders vote in favour of the resolutions to approve the Demerger.

Independent expert's report 14 The directors of GrainCorp engaged Grant Samuel & Associates Pty Limited (Grant Samuel) to prepare an independent expert's report (IER) setting out whether, in its opinion, the Demerger is in the best interests of GrainCorp Shareholders and to provide reasons for its opinion. Grant Samuel was also asked to provide its opinion as to whether the Capital Reduction associated with the Demerger materially prejudices GrainCorp's ability to pay its creditors. 15 As set out in the IER Grant Samuel is of the opinion that the Demerger is fair and is in the best interests of GrainCorp Shareholders. Grant Samuel is also of the opinion that the Capital Reduction will not materially prejudice the ability of GrainCorp to pay its existing creditors.

Legal Principles 16 The principles governing the exercise of the Court's discretion to make an order convening a scheme meeting are well settled. 17 At the first court hearing the Court is not concerned with whether final approval should be given to the scheme but whether the scheme is adequately explained to those who have a financial interest in it and whether there is any obvious flaw in the scheme such that it would be inappropriate for it even to be submitted for consideration: see Re Abacus Funds Management Ltd (2006) 24 ACLC 211; [2005] NSWSC 1309 at [23]. 18 In Re Capilano Honey Ltd (2018) 131 ACSR 9; [2018] FCA 1568 at [32] Farrell J noted that the Court will order that a scheme meeting will be convened and approve a draft explanatory statement to be sent to shareholders if it is satisfied that: (1) The plaintiff is a Pt 5.1 body; (2) The proposed scheme is a compromise or (relevantly) an "arrangement" within the meaning of s 411 …; (3) The scheme booklet will provide proper disclosure to shareholders; (4) The scheme is bona fide and properly proposed; (5) ASIC has had a reasonable opportunity to examine the terms of the scheme and the scheme booklet and make submissions and it has had at least 14 days' notice of the proposed hearing date; (6) The procedural requirements of the Federal Court (Corporations) Rules 2000 (Cth) have been met; and (7) The scheme is of such a nature and cast in such terms that, if it receives a statutory majority at the meeting, the Court will be likely to approve it on the hearing of a petition which is unopposed. 19 As to the last matter referred to by Farrell J, the Court will not ordinarily convene a meeting unless the scheme is of such a nature and is cast in such terms that, if it receives the statutory majority at the meeting, the Court would be likely to approve it on the hearing of an application that is unopposed: see Central Pacific Minerals NL [2002] FCA 239 at [8]; Re CSR Ltd (2010) 183 FCR 358 at [12]. 20 The Court is not required to be satisfied that no better scheme could have been proposed. Rather the question is whether it is reasonable to suppose that sensible business people might consider the proposed arrangement is of benefit to members: see Centrebet International Limited, in the matter of Centrebet International Limited [2011] FCA 870 at [29].

Matters for the Court's satisfaction 21 Based on the evidence before me, which included a checklist of references which established that there had been compliance with s 411 and s 412 of the Act as well as the requirements of the Federal Court (Corporations) Rules 2000 (Cth) (Corporations Rules) I was satisfied that: (1) GrainCorp is a Pt 5.1 body as defined in s 9 of the Act; (2) the proposed Scheme is a compromise or "arrangement" within the meaning of s 411(1) of the Act; (3) ASIC has been given at least 14 days' notice of the first court hearing and has had a reasonable opportunity to examine the terms of the Scheme and the draft Scheme Booklet and to make submissions; (4) the Scheme Booklet provides adequate disclosure to GrainCorp Shareholders; (5) the Scheme is bona fide and properly proposed; and (6) the procedural requirements set out in Div 3 of the Corporations Rules have been met.

Other matters 22 GrainCorp brought the following matters to the Court's attention in the course of the hearing.

Capital Reduction 23 As set out at [6] above the Demerger will be effected by way of the Capital Reduction and Demerger Dividend (together, the Demerger Distribution) and implemented by the Scheme. 24 The Demerger Distribution Amount, which is the aggregate amount of the Demerger Distribution, is described in section 5.1(c) of the Scheme Booklet as "an amount equal to the market value of all UMG Shares, calculated by reference to the VWAP [Volume Weighted Average Price] of UMG Shares for the first 5 Business Days starting from the date of the commencement of trading of UMG Shares on ASX". 25 The Capital Reduction is also described in section 5.1(c) of the Scheme Booklet in the following terms: The Capital Reduction is a return of capital to Demerger Participants on their GrainCorp Shares. The Demerger Scheme is conditional on the Capital Reduction Resolution being approved. The Capital Reduction is an equal capital reduction pursuant to section 256B(1) of the Corporations Act. The Capital Reduction Amount will not be paid in cash to GrainCorp Shareholders. Instead, under the Demerger Scheme, GrainCorp will apply the Capital Reduction Entitlement (together with the Demerger Dividend) on behalf of GrainCorp Shareholders as consideration for the transfer of the UMG Shares under the Demerger. GrainCorp Shareholders will be asked to approve the Capital Reduction at a general meeting of GrainCorp Shareholders to be held after the Scheme Meeting. 26 The Demerger Dividend Amount, which is the aggregate amount of the Demerger Dividend, will be an amount equal to the Demerger Distribution Amount less the Capital Reduction Amount which is the aggregate amount of the capital of GrainCorp that is to be reduced. As noted in section 5.1(c) of the Scheme Booklet the Demerger Dividend does not require the approval of GrainCorp Shareholders but its payment is conditional on the Scheme becoming effective. The Demerger Dividend Amount will not be paid in cash to GrainCorp Shareholders but will be applied on their behalf as consideration for the transfer of the UMG shares. 27 Relevant to the Capital Reduction is s 256B(1) of the Act which provides that: (1) A company may reduce its share capital in a way that is not otherwise authorised by law if the reduction: (a) is fair and reasonable to the company's shareholders as a whole; and (b) does not materially prejudice the company's ability to pay its creditors; and (c) is approved by shareholders under section 256C. A cancellation of a share for no consideration is a reduction of share capital, but paragraph (b) does not apply to this kind of reduction. 28 GrainCorp submitted, and I accepted, that the Capital Reduction satisfies the requirements of s 256B of the Act. It: (1) is fair and reasonable because it is necessary to effect the Demerger which Grant Samuel has concluded is in the best interests of GrainCorp Shareholders; (2) does not materially prejudice GrainCorp's ability to pay its creditors. Again Grant Samuel, having considered the issue, has expressed that opinion; and (3) will not proceed unless it is approved by GrainCorp Shareholders in accordance with s 256C of the Act.

Selling Shareholders 29 Ineligible Foreign Holders and Selling Small Shareholders, who together make up the Selling Shareholders, will be subject to the processes described at [11] above for the sale of their shares rather than receiving UMG shares. 30 I was satisfied that the way in which GrainCorp proposes to treat Selling Shareholders did not operate to create separate classes of shareholders and that there remained a sufficient community of interest between those and other shareholders. 31 In Re Wesfarmers Ltd; Ex parte Wesfarmers Ltd [2018] WASC 308 the Supreme Court of Western Australia considered a similar proposed treatment of what were there described as "Ineligible Overseas Shareholders" and "Small Shareholders" to that proposed for the Ineligible Foreign Holders and Selling Small Shareholders in this case. At [96]-[98] Vaughan J said: 96 The proposed treatment of Ineligible Overseas Shareholders as evinced by the scheme as now promoted by Wesfarmers is not class creating. The intrinsic value for members if the proposed demerger scheme is approved is the same for all. There remains a sufficient community of interest between the Ineligible Overseas Shareholders and the other members such that they may consider whether it is in their collective interest for Coles to be demerged from Wesfarmers. Similar issues concerning different arrangements for foreign shareholders in other schemes have been considered by the courts on numerous occasions. Those earlier authorities have concluded that there is a single class. There is nothing in the present proposed scheme to differentiate it from those earlier authorities. 97 In this regard it has been acknowledged that often foreign shareholders are treated differently under a scheme of arrangement so as to avoid the costs and logistics to the company of assessing and complying with the securities law in an overseas jurisdiction. 98 For the same reasons that the Ineligible Overseas Shareholders do not constitute a separate class, so too the Small Shareholders do not constitute a separate class. Here it is material that the Small Shareholders must elect to become a Selling Shareholder. The arrangement is thus an 'opt-in' regime and is clearly explained as such in the Scheme Booklet (see eg pages 16 and 99). (Footnotes omitted.)

Performance rights 32 At 4 February 2020 GrainCorp had on issue: (1) 228,855,628 ordinary shares; and (2) 657,518 performance rights. 33 Each of the performance rights is a right to acquire a GrainCorp share subject to the terms on which the relevant right was granted. The performance rights relate to two employee incentive arrangements which GrainCorp currently operates: a short term incentive (STI) plan and a long term incentive (LTI) plan. 34 Under the STI plan participants may become eligible to receive an award delivered partly in the form of cash and partly in deferred rights to acquire GrainCorp shares depending on performance during the relevant financial year assessed against a scorecard of specified measures. Deferred rights awarded to the GrainCorp managing director and CEO cease to be restricted after 12 months and, for other senior managers, 50% of deferred rights cease to be restricted after 12 months and the remaining 50% cease to be restricted after 24 months. 35 Under the LTI plan participants are granted performance rights, each being a right to acquire a GrainCorp share for nil consideration, subject to the satisfaction of specified performance conditions over a three year performance period. 36 The treatment of these rights as part of the Demerger is described in section 5.7(a) and (b) of the Scheme Booklet. Relevantly: (1) under the STI plan: (a) participants who hold deferred rights that are scheduled to vest on 30 September 2020, and who will be employees of GrainCorp after the Demerger, will be granted additional deferred rights and the Demerger will not impact the terms under which the participants' existing deferred rights are held. The existing deferred rights will remain on foot subject to restriction until they vest on 30 September 2020, following which they will convert to GrainCorp shares; and (b) participants who hold deferred rights that are scheduled to vest on 30 September 2020, and who will be employees of UMG after the Demerger, will have their deferred rights cancelled prior to implementation of the Demerger. After the Demerger has been implemented, new awards will be granted to these participants by UMG in deferred rights to acquire UMG shares to ensure alignment between participants and UMG shareholders and to incentivise participants to focus on the performance of UMG after the Demerger; and (2) under the LTI plan: (a) the GrainCorp board has decided, subject to the Demerger becoming effective, to shorten the performance period applicable to the GrainCorp FY18 LTI award which is currently scheduled to end on 30 September 2020 to enable the FY18 LTI award to be performance tested shortly before implementation of the Demerger against the existing performance conditions applicable to the FY18 LTI award. To the extent performance rights the subject of the FY18 LTI award vest, those performance rights will be settled in GrainCorp shares or cash in lieu of GrainCorp shares at the discretion of the GrainCorp board. If performance rights are settled by way of the issue or transfer of GrainCorp shares to participants, those GrainCorp shares will be issued or transferred to the relevant participants before the Demerger Scheme Record Date to allow those participants to participate in the Demerger on the same basis as the other GrainCorp Shareholders; and (b) if the Demerger becomes effective, the GrainCorp board will cancel the GrainCorp FY19 LTI award prior to the Demerger implementation date (expected to be 1 April 2020) given that only a short portion of the performance period applicable to the FY19 LTI award will have elapsed at the time of the Demerger. 37 I was satisfied that the treatment of the performance rights holders was not class creating. This was because the commonality of interest of the performance rights holders with GrainCorp Shareholders was maintained by the process proposed to be implemented. As Ferguson J observed in Re Foster's Group Limited (No 2) [2011] VSC 547 at [42]: The position of performance rights holders was considered by Jacobson J in Re Cashcard Australia Limited. His Honour considered that no class issue arose on the basis that each shareholder would get the same benefit for his or her shares under the scheme and that the possibility for two shareholders to receive additional payments did not mean that their rights were so dissimilar that they could not consult together with the other shareholders. I agree with this view. There may be a number of benefits to shareholders that are peculiar to them because of some personal arrangements that they have. In this regard, the scheme may be more commercially advantageous for them than for other shareholders. However, that does not mean that they cannot consult with other shareholders who are in a different position. Information about the performance rights is contained in the explanatory memorandum. (Footnote omitted.) 38 The position of performance rights holders in this case is no different. As GrainCorp submitted any marginal difference in their position falls well short of the necessary differential position required to justify division into separate classes. 39 Information about how the performance rights are to be treated is contained in the Scheme Booklet.

Conclusion 40 Having regard to the evidence before me and submissions made on behalf of GrainCorp I was satisfied that the Scheme is of such a nature and is cast in such terms that if it achieves the requisite statutory majorities at the Scheme Meeting I would be likely to approve it. 41 For those reasons I made the orders sought by GrainCorp. I certify that the preceding forty-one (41) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Markovic.