By Originating Process filed on 9 October 2019, the Plaintiff, Bellamy's Australia Limited ("Bellamy's) seeks orders under ss 411 and 1319 of the Corporations Act 2001 (Cth) that it convene a meeting of its members to consider and, if thought fit, approve a scheme of arrangement.
In the matter of Bellamy’s Australia Limited [2019] NSWSC 1671 | Case summary | Zoe
Broadly, that scheme provides for Wise Journey Pty Ltd ("Wise Journey"), an indirect wholly-owned subsidiary of China Mengniu Dairy Company Limited ("Mengniu") to acquire all of the scheme shares (as defined) in Bellamy's for cash consideration. Bellamy's is a public company listed on the Australian Securities Exchange ("ASX") and produces, supplies and markets a range of organic food and infant formula for babies and toddlers. Mengniu is a dairy product manufacturer in China, which is listed on the Hong Kong Stock Exchange. On 16 September 2019, Bellamy's announced to the ASX that it had entered into a scheme implementation deed with Mengniu, by which Bellamy's agreed to propose the scheme. If that scheme is approved and becomes effective, shareholders in Bellamy's will receive a total of A$13.25 cash per share in respect of scheme shares, comprising A$12.65 per scheme share paid under the scheme and a fully franked special dividend of A$0.60 per Bellamy's share to be paid by Bellamy's. The scheme is subject to a number of conditions precedent set out in cl 3.1 of the scheme implementation deed, including a requirement as to Foreign Investment Review Board ("FIRB") approval.
Bellamy's reads several affidavits in support of the application. First, Bellamy's relies on an affidavit dated 9 October 2019 of Ms Ellen Trevanion which referred, inter alia, to a release made on 16 September 2019 by Bellamy's to ASX in connection with the scheme. Bellamy's also reads the affidavit dated 21 October 2019 of Mr John Ho, a non-executive director and chairman of Bellamy's, who consents to act as chair of the proposed scheme meeting. By an affidavit dated 21 October 2019, Mr John Murphy, also a non-executive director and deputy chair of Bellamy's, consents to act as alternate chair at the scheme meeting if Mr Ho is unable to act as chair of that meeting.
Bellamy's also relies on the affidavit dated 29 October 2019 of its company secretary and general counsel, Ms Melinda Harrison. Ms Harrison there refers to Mengniu's and a wholly-owned subsidiary's combined holding of approximately 2.9% of the total ordinary shares on issue in Bellamy's which are treated as "Excluded Shares" for the purposes of the scheme and will neither be acquired by nor able to be voted in respect of the scheme. She also refers to events leading up to the scheme proposal; to the contents of the scheme booklet and to the drafting and verification process adopted for the scheme booklet; to exclusivity provisions and a break fee included in the scheme booklet and to the commercial negotiations which gave rise to those arrangements. Ms Harrison outlines the scheme consideration of A$12.65 in cash per scheme share, and refers to a resolution passed by Bellamy's board to pay a fully franked special dividend of A$0.60 per Bellamy's share immediately prior to implementation of the scheme, conditional upon specified matters.
Ms Harrison's affidavit in turn exhibits a draft scheme booklet. The chairman's letter in that scheme booklet refers to the scheme consideration to which I have referred above and to the unanimous recommendation of the Bellamy's board that shareholders vote in favour of the scheme in the absence of a superior proposal and subject to the independent expert continuing to conclude that the scheme is in the best interests of Bellamy's shareholders. The chairman's letter draws attention to the fact that four out of five of Bellamy's directors have an interest in that recommendation, so far as they had previously been issued options under Bellamy's long term incentive plan, and the vesting conditions to those options will be waived if the scheme becomes effective. The chairman's letter, appropriately, also discloses the number of options held by each of the directors who have made the recommendation and the total amount that each director would receive on vesting of the options. The chairman's letter also sets out reasons for the directors' recommendation that shareholders vote in favour of the scheme; draws attention to matters to which shareholders might have regard in voting against the scheme; and notes that Bellamy's board had appointed Grant Samuel & Associates Pty Ltd ("Grant Samuel") as independent expert and that that firm has concluded that the scheme is fair and reasonable and therefore in the best interests of Bellamy's shareholders, in the absence of a superior proposal.
The scheme booklet also contains, in customary form, a section setting out key considerations relevant to shareholders' voting decision, including reasons why shareholders might vote in favour of or against the scheme and a series of "frequently asked questions" which again disclose directors' interests in making a recommendation in respect of the scheme, arising from the vesting of options pursuant to the scheme. That section of the scheme booklet also discloses several conditions precedent to the scheme, including a condition in respect of FIRB approval. The scheme booklet also provides information about Mengniu, including information as to its funding arrangements in respect of the scheme. The scheme booklet discloses risks attached to the payment of the special dividend by Bellamy's, although they are no greater than those which are commonly seen in schemes that contemplate the payment of a dividend by the company in addition to cash consideration by an acquirer. The scheme booklet also refers to the commencement of representative proceedings brought against Bellamy's in February 2017 and March 2017, alleging contraventions of continuous disclosure obligations and misleading or deceptive conduct, and notes that Bellamy's is defending those proceedings which have been set down for trial in the Federal Court of Australia in August 2020.
The scheme booklet also refers to the execution of a deed poll in favour of Bellamy's shareholders in common form by Mengniu and Wise Journey and to deemed warranties to be given by Bellamy's shareholders to which I will refer below. Appropriately, the scheme consideration will be payable into a trust account, being an Australian dollar denominated trust account held with an Australian bank and operated by Bellamy's or its share register on its behalf, as trustee for scheme shareholders. The scheme provides, in cl 5.2, for Mengniu to deposit or procure the deposit of the amount of the scheme consideration into that trust account no later than the business day before the implementation date for the scheme. Clause 8.4 of the scheme contains a warranty by scheme shareholders in common form. The deed poll made on 22 October 2019 by Mengniu and Wise Journey contains covenants in favour of scheme shareholders that they will observe and perform their obligations under the scheme, including obligations relating to the provision of the scheme consideration (as defined) in accordance with the terms of the scheme.
By an affidavit dated 25 October 2019, Mr Wai Cheong Kwok, who is the financial controller and company secretary of Mengniu, outlines the steps taken by Mengniu and its advisers to verify the information contained about it and Wise Journey in the scheme booklet. Mr Kwok also refers to the execution of the deed poll in respect of the scheme and to the negotiation of the break fee payable in respect of the scheme. By an affidavit dated 24 October 2019, Mr Michael Johns, who is a partner in a firm practising in the Cayman Islands and is retained by Mengniu, verifies a legal opinion which he has provided as to corporate matters concerning Mengniu and as to the execution of, inter alia, the deed poll dated 22 October 2019 made by Mengniu and Wise Journey in favour of each of the scheme shareholders.
Bellamy's also relies on the affidavit dated 28 October 2019 of Ms Jaye Gardner, who is a managing director of Grant Samuel and confirms the opinions contained in her expert report. As I noted above, Grant Samuel has concluded that the scheme is fair and reasonable and, accordingly, is in the best interests of Bellamy's shareholders in the absence of a superior proposal. That report also sets out a valuation of Bellamy's shares, conducted on several scenarios addressing different contingencies for Bellamy's business.
Bellamy's also read the affidavit dated 29 October 2019 of its solicitor, Mr Guy Alexander, which refers to the provision of drafts of the scheme booklet to the Australian Securities and Investments Commission ("ASIC") and to the service of documents relating to these proceedings on ASIC. By its letter dated 29 October 2019, ASIC has provided a confirmation, in the usual form, that it has had a reasonable opportunity to examine the terms of the scheme and draft explanatory statement and does not currently propose to appear to make submissions or oppose the scheme at the first hearing. ASIC has reserved its position as to a statement under s 411(17)(b) of the Act to the second hearing in the usual way.
[3]
The Court's power to make orders under s 411(1) of the Corporations Act
Mr Jackman, who appears for Bellamy's, points out that Pt 5.1 of the Corporations Act provides a procedure by which a compromise or arrangement between a company and its members can be made binding on all members by a specified process. As Mr Jackman points out, s 411(1) of the Act allows the Court to order a meeting of members to be convened, and to approve the applicable explanatory statement, where a compromise or arrangement is proposed between a Pt 5.1 body and its members or any class of them; application for the order is made in a summary way by the body or by a creditor or member of the body; 14 days' notice of the hearing of the application, or such lesser period of notice as the Court or ASIC permits, has been given to ASIC; and the proposed scheme booklet provides proper disclosure to shareholders. In order to make such an order, the Court must also be satisfied that ASIC has had a reasonable opportunity to examine the terms of the proposed compromise or arrangement to which the application relates and a draft of the explanatory statement relating to the proposed compromise or arrangement and to make submissions to the Court in relation to the proposed compromise or arrangement and the draft explanatory statement.
Mr Jackman submits, and I accept, that each of these matters has been satisfied with respect to the proposed scheme. Bellamy's is a Pt 5.1 body as defined in s 9 of the Act and the proposed scheme falls within the concept of a "compromise or arrangement" within the meaning of s 411(1) of the Act. The Originating Process and a copy of a draft of the scheme booklet were provided to ASIC more than 14 days before the first hearing date, and ASIC has confirmed by letter that it does not currently propose to appear to make submissions or intervene to oppose the scheme. Mr Jackman submits, and I accept, that the Court therefore has power to convene the requisite scheme meeting.
Mr Jackman in turn refers to Farrell J's summary of the matters relevant to the Court's discretion to convene a scheme meeting in Re Associated Advisory Practices Limited [2013] FCA 761 at [22], as follows:
"The court will not ordinarily convene a meeting of members to consider a scheme of arrangement unless the court is satisfied that the scheme is of such a nature and cast in such terms that, if it receives the statutory majority at the meeting of members, the court would be likely to approve the scheme on the hearing of an unopposed application: Re Central Pacific Minerals NL [2002] FCA 239 at [8]; Re CSR Ltd (2010) 183 FCR 358 at [12]; Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485 at 504. By granting leave to convene the meeting, the court does not give its imprimatur to the proposed scheme or foreshadow its approval at the second court hearing for the purposes of s 411(4)(b): Re Foundation Healthcare Ltd (2002) 42 ACSR 252 at [36]; Australian Securities Commission v Marlborough Gold Mines Ltd at 504-505. The question for the court is whether it is reasonable to suppose that sensible business people might consider the arrangement proposed as being beneficial to members: In Re Alabama, New Orleans, Texas and Pacific Junction Railway Co [1891] 1 Ch 213 at 243; Re CSR Ltd at [80]. The court does not need to be satisfied that no better scheme could have been proposed: Re Foundation Healthcare Ltd at [44]. Ultimately, the question is for the members themselves: see FT Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 at 72."
Mr Jackman submits, and I accept having regard to the evidence to which I have referred above, that the Court can here be satisfied that the proposed scheme is of such a nature and cast in such terms that, if it receives the statutory majorities at the meeting of members, the Court would be likely to approve the scheme on the hearing of an unopposed application. As Mr Jackman points out, relevant factors here include the unanimous support of the board of Bellamy's for the scheme, in the absence of a superior proposal; the nature of the scheme, involving a proposed cash acquisition at a premium of all the shares in Bellamy's not already held by members of the Mengniu group; the conclusion reached by Grant Samuel that the scheme is fair and reasonable and therefore in the best interests of Bellamy's shareholders; and the sufficiency of the disclosure of the terms of the scheme, including its key features and advantages and disadvantages in the scheme booklet, to which I have referred above.
[4]
Particular issues
As is common in scheme applications, Mr Jackman draws attention to several particular matters that warrant the Court's attention in exercising the discretion conferred on it by s 411(1) of the Act. First, Mr Jackman submits, and I accept, that the verification process outlined in Ms Harrison's affidavit was consistent with that which is ordinarily conducted in other schemes. Bellamy's board was provided with drafts of the scheme booklet for review and resolved, on 25 October 2019, to approve the scheme booklet, and recorded their belief that there is no information in the scheme booklet for which Bellamy's is responsible that is misleading or deceptive in any material respect or contains any material omission. As I noted above, Mr Kwok's affidavit in turn addresses the verification process adopted in respect of the information pertaining to Mengniu as contained in section 5 of the scheme booklet.
Second, Mr Jackman points out that, at a first hearing in respect of a proposed scheme, the Court will consider the question of "performance risk", involving any risk that the acquirer will not comply with its obligation to pay the scheme consideration to shareholders of the scheme company: Re SFE Corporation Ltd (2006) 59 ACSR 82 at [4]; Re Brambles Industries Ltd (2006) 59 ACSR 501 at [9]; Re APN News & Media Ltd (2007) 62 ACSR 400 at [23]; Re Macquarie Capital Alliance Ltd (2008) 67 ACSR 484 at [43]; Re Simavita Holdings Limited [2013] FCA 1274 at [43]-[44]. That risk is appropriately addressed here by provision for the scheme consideration to be paid by Mengniu in cleared funds into a trust account held with an Australian ADI, no later than the business day before the implementation date (as defined) and for Bellamy's to make or procure the payment of the relevant funds in that trust account to scheme shareholders. The transfer of the scheme shares will not occur until the funds have been received by Bellamy's, as trustee for scheme shareholders. Mr Jackman submits, and I accept, that substantially identical arrangements have been accepted in previous cases: Re APN News & Media Ltd above at [23]; Re Coles Group Limited (2007) 25 ACLC 1380 at [38]; Re Hostworks Group Ltd (2008) 26 ACLC 137 at [32].
Third, Mr Jackman draws attention to the statutory requirements in respect of the payment of the proposed special dividend by Bellamy's under s 254T of the Act and to the matters that lead Bellamy's to anticipate that the requirements for payment of that dividend will be satisfied as at its proposed payment date. Mr Jackman fairly noted that Bellamy's would approach the Court for directions in relation to appropriate supplementary disclosure and timing of the scheme meeting if that position changed.
Fourth, Mr Jackman draws attention to the exclusivity provisions adopted in respect of the scheme. Mr Jackman points out that cl 11 of the scheme implementation deed imposes "no-shop" (cl 11.2), "no talk" (cl 11.3) and "no due diligence" (cl 11.4) restrictions on Bellamy's, and cl 11.6 requires Bellamy's to notify Mengniu of third party "competing proposals" (as defined) and cl 11.7 confers on Mengniu a "matching right" in respect of a "competing proposal". Mr Jackman notes that the "no talk" and "no due diligence" restrictions in that clause are subject to a "fiduciary carve-out", if not taking the specified actions would likely be inconsistent with the duties of Bellamy's directors under applicable law. Mr Jackman submits, and I accept, that provisions of this kind are now commonplace in schemes under s 411 of the Act, and that the provisions adopted here do not infringe the principles indicated by the Takeovers Panel's Guidance Note 7: Lock-up devices; see also Re Macquarie Private Capital A Limited (2008) 26 ACLC 366 at [18]-[19]; Re Coles Group Limited above at [62]-[63]; Re Hostworks Group Ltd above at [34]-[37]; Re Investa Listed Funds Management Ltd as responsible entity for the Armstrong Jones Office Fund and the Prime Credit Property Trust [2018] NSWSC 1766 at [15]; Re Villa World Ltd [2019] NSWSC 1207 at [23]. Mr Jackman submits, and I accept, that the relevant exclusivity restrictions are in effect for no more than a reasonable period capable of precise ascertainment and that they are clearly disclosed in the explanatory statement sent to shareholders: Re Arthur Yates & Co Ltd (2001) 36 ACSR 758 at [9].
Fifth, Mr Jackman fairly points out that cl 12 of the scheme implementation deed provides for the payment of a break fee in specified circumstances. Mr Jackman submits, and I accept, that break fees are common features in schemes of arrangement and will be permitted unless "the amount of the break fee was such that it could influence voting at the meeting to be convened or if there were some other unusual circumstances": Re SFE Corporation Ltd above at [6]-[7]; Re APN News & Media Ltd above at [43]; Re Hostworks Group Ltd above at [40]; Re Investa Listed Funds Management Ltd as responsible entity for the Armstrong Jones Office Fund and the Prime Credit Property Trust above at [16]; Re Villa World Ltd above at [24]. The break fee is not payable if the meeting of Bellamy's shareholders (other than Excluded Shareholders) does not approve the scheme and that fee is therefore not a disincentive to the shareholders in their consideration of the proposed scheme. Mr Jackman also submits, and I accept, that the amount of that fee is consistent with the Takeovers Panel's guideline of a maximum of 1% of equity value set out in Guidance Note 7 above, which has been applied in the cases: Re APN News & Media Ltd above at [55]; Re Hostworks Group Ltd above at [40]ff; Re Coles Group Limited above at [69]-[74]. The break fee is also disclosed in the scheme booklet and the evidence addresses the matters relevant to its negotiation to which Lindgren J referred in Re APN News & Media Ltd above at [55].
Sixth, Mr Jackman recognises that cl 8.4 of the scheme contains a "deemed warranty", by which scheme shareholders are taken to have warranted to Bellamy's and Mengniu that all their scheme shares are fully paid and free from all mortgages, charges, liens, encumbrances, pledges, security interests and third party interests. Mr Jackman submits, and I also accept, that clauses in these terms are permissible and now commonplace: Re Macquarie Private Capital A Limited above at [14]; Re Mitchell Communication Group [2010] VSC 423 at [10]-[12]; Re Ardent Leisure Ltd [2018] NSWSC 1665 at [26]; Re Villa World Ltd above at [25]. The existence of the deemed warranty is disclosed in the scheme booklet, as contemplated by Re APN News & Media Ltd above at [63].
Seventh, Mr Jackman recognises that s 411(17) of the Act provides that the Court must not approve a scheme unless satisfied it is not proposed for the purpose of enabling avoidance of the takeovers provisions in Chapter 6 of the Act or ASIC provides a statement that it has no objection. This matter is properly deferred for consideration at the second Court hearing.
Eighth, Mr Jackman notes that, as disclosed by the evidence to which I have referred above and the scheme booklet, Bellamy's has granted options to several directors and senior executives under its long term incentive plan rules, and 286,765 of those options are held by four of its directors. The scheme booklet also discloses that Bellamy's board has determined that, if the scheme becomes effective, all of the options that remain outstanding at that time will vest so that those options will become immediately exercisable by their holders. Mr Jackman submits that the Court ought not be concerned with the fact that the four directors of Bellamy's who hold such options have recommended that Bellamy's shareholders vote in favour of the scheme. In particular, Mr Jackman submits that the immediate vesting of the options is to be distinguished from a "bonus" or "incentive fee" made as a result of, and to incentivise, the scheme becoming effective; the statutory and regulatory regime, and particularly reg 8301(a) of Schedule 8 of the Corporations Regulations 2001 (Cth), contemplates that directors will ordinarily make a recommendation in relation to a scheme; a bidder seeking to require all of the shares in the target would reasonably require that there be no outstanding options on issue at the scheme record date; the intended treatment of options in connection with the scheme is prominently disclosed in the scheme booklet; and Bellamy's shareholders will be placed on notice of the intended treatment of options such that it will be open to them to consider this when assessing the extent of any weight they give to the recommendation of Bellamy's directors to approve the scheme. While I doubt that substantial weight should be given to the first of these matters, it seems to me that, following the approach adopted in Re GBST Holdings Limited [2019] NSWSC 1280 at [26]ff, the clear disclosure of the options, their value and their potential relevance to the directors' recommendation in the scheme booklet sufficiently addresses this issue.
[5]
Orders
For these reasons, I am satisfied that there is no reason that the scheme should not be put to Bellamy's shareholders for their consideration or that it could not be approved at the second Court hearing if it receives the requisite shareholder approvals. The Court should therefore make orders convening the scheme meeting. I am also satisfied that the scheme booklet should be approved for distribution to Bellamy's shareholders. I therefore made orders in accordance with those proposed by Bellamy's at the hearing on 30 October 2019.
[6]
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Decision last updated: 29 November 2019