Lion Nathan Australia Pty Ltd (ACN 008 596 370) v Coopers Brewery Ltd

REASONS FOR JUDGMENT (No 2) 1 In my reasons for judgment delivered on 11 October 2005: Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd [2005] FCA 1426, I reached the conclusion that there was a serious question to be tried that the Explanatory Memorandum sent to shareholders in Coopers Brewery Ltd ("Coopers") on 21 September 2005 in its initial form was misleading and did not make a full and fair disclosure of the nature and effect of the resolution to be put to the shareholders in Coopers. The further Explanatory Memorandum propounded by Coopers in the course of the earlier hearing did not clarify or resolve all the issues which had arisen. 2 In particular, two issues emerged: · the valuation of shares in Coopers; · the nature, effect, and consequences of the resolution if passed. 3 I granted an interlocutory injunction restraining the directors of Coopers and Coopers from proceeding further with the conduct of the general meeting of shareholders proposed to be held on 20 October 2005 (other than to adjourn it to a date and time to be notified to shareholders at the time of such adjournment) until further order. I reserved liberty to Coopers and its directors to apply to the Court to vary or discharge this restraining order on short notice. 4 Coopers has now propounded a Modified Explanatory Memorandum which Coopers proposes to send to shareholders. In the light of this Modified Explanatory Memorandum, Coopers seeks to have the interlocutory injunction granted on 11 October 2005 discharged. 5 The Modified Explanatory Memorandum has picked up matters which were the subject of criticism by Lion Nathan Australia Pty Limited ("Lion Nathan") and addressed by me in my earlier reasons. Most of these criticisms have been satisfactorily resolved. 6 However, Lion Nathan has submitted that there are still outstanding issues in the Modified Explanatory Memorandum which render it incomplete and that there are deficiencies in it which have not been remedied. In general terms, the issues raised by Lion Nathan relate to: · The value of shares in Coopers, in particular the alternative value to be placed on the shares if the Lion Nathan offer is not alive. This raises for consideration a valuation carried out by KPMG, Coopers' auditor; · The proposed buy‑back by Coopers and the financial implications of it; · The effect of the resolution if passed. 7 Lion Nathan contends that it is apparent on the face of the Modified Explanatory Memorandum that there is further information which exists and is known to the directors in relation to the value of shares in Coopers and in relation to the buy‑back proposal which should be disclosed to shareholders before the general meeting is allowed to proceed. 8 The Modified Explanatory Memorandum states in the section headed "2.4 Lion Nathan Takeover Offer", inter alia, the following: "Within the next few days, each shareholder will receive a target's statement from the Company that responds to the bidder's statement. Shareholders will have received a letter with the notice of Annual General Meeting on 7 November 2005, which informed you that KPMG, the Company's auditor had recently determined that the fair value for a parcel of shares as at 28 September 2005 was $260 per share. Further details about KPMG's determination will be included in the target's statement. The letter accompanying the Annual General Meeting also informed you that the Company intends to propose a buy‑back to shareholders of up to 15% of the Company's share capital at a price of $260 per share. That buy‑back will be conditional upon shareholder approval. Explanatory material regarding the buy‑back will be sent to you at the same time as the target's statement." 9 During the hearing on Friday 11 November 2005 I was told that the Target's Statement and the explanatory material regarding the buy‑back would be sent to shareholders on Monday 14 November 2005. Having regard to some of the submissions by Lion Nathan, I took the view that it was relevant to know what were the further details about KPMG's determination and what was in the explanatory material regarding the buy‑back referred to in the above section of the Modified Explanatory Memorandum before making a decision on the application to discharge the interlocutory injunction. Accordingly, I adjourned the further hearing of the application to enable the Target's Statement and the explanatory material regarding the buy‑back to be placed before the Court and to enable the parties to make submissions in relation to them. In fact, the Target's Statement and the explanatory material regarding the buy‑back were sent to shareholders on Tuesday 15 November 2005. 10 There are a number of references in the Target's Statement to the KPMG valuation. In particular, at p 22 there appears the following: "KPMG recently concluded that the Fair Value (as at 28 September 2005) for the individual class C Shares subject to a recent Transfer Notice was $260 per Share1. However, KPMG assessed the value of a class C share under the Coopers Constitution without regard to Lion Nathan's Offer to be $190 (as at 28 September 2005), this indicates what Fair Value would have been as at that date if Lion Nathan's Offer did not exist. If a Transfer Notice was lodged in relation to any of your Shares, and after Lion Nathan's Offer had lapsed, or after it became increasingly likely that its Offer would lapse, it is possible that Fair Value of your Shares may be determined to be lower than $260 per Share and you would be required to sell your Shares at this lower Fair Value." The footnote numbered "1" is in the following terms: You should note that the Recent Fair Value Determination relates only to the Shares that were the subject of a Transfer Notice lodged with Coopers and was made for the benefit of the buyers and seller of those Shares. Any future Share transfers at Fair Value will be subject to a separate Fair Value determination. KPMG has said that the Recent Fair Value Determination is not intended to be used by Coopers or any Shareholder other than for this specific purpose nor is it intended to influence a person in making a decision in relation to Shares. For details of the Fair Value Mechanism, see section 11.2." 11 There are similar references on pp 23, 31, 63, 64 and 70. The detailed discussion in relation to, and analysis of the KPMG valuation is found at pp 76‑79. 12 Lion Nathan submitted that the Modified Explanatory Memorandum was still misleading and failed to disclose information known to the directors which ought to have been included in it. Lion Nathan pointed to the references to the KPMG valuation on pp 22 and 77‑78 of the Target's Statement. That valuation by KPMG assessed the value of a class C share under the Coopers' Constitution without regard to Lion Nathan's offer to be $190 as at 28 September 2005. The Target's Statement noted that this value indicated what "Fair Value" of a share in Coopers would have been as at 28 September 2005 if Lion Nathan's offer did not exist. This valuation was amplified and explained on pp 77 and 78 of the Target's Statement. KPMG's methodology was set out in some detail by reference to a capitalisation of earnings approach, which was then crosschecked and adjusted in the terms set out in the Target's Statement. 13 Lion Nathan submitted that the methodology was not described in sufficient detail to enable a reader to know anything other than what it called the broad pillars of the methodology. It was said that little was known about the multiple used by KPMG, the maintainable earnings and the discount arrived at for lack of marketability. Lion Nathan's criticism was that there was no information provided in the Modified Explanatory Memorandum in relation to the limited valuation of $190 referred to in the Target's Statement. It referred, more pointedly, to the fact that the Modified Explanatory Memorandum referred only to the $260 valuation and did not refer to the $190 valuation at all. 14 I consider there is merit in Lion Nathan's submission that the Modified Explanatory Memorandum is still misleading and does not make a full and fair disclosure of information known to the directors because of the omission of any reference to KPMG's alternative valuation of $190. 15 At the hearing on 11 November 2005 Senior Counsel for Coopers said that Coopers had applied to the Australian Securities and Investments Commission ("ASIC") for permission to release the KPMG valuation to shareholders as KPMG had apparently refused permission to release it to anyone other than the directors of Coopers. At that time I was told that ASIC's permission had not yet been obtained. In the events which occurred the KPMG valuations of $260 a share and $190 a share and a discussion and analysis of KPMG's methodology appeared in the Target's Statement sent to shareholders on 15 November 2005. If that publication was approved, I can see no reason why, at the least, reference to the fact of the $190 valuation having been made, cannot now appear in the Modified Explanatory Memorandum to be sent to the same persons as received the Target's Statement. 16 I do not consider there is merit in Lion Nathan's submission that the KPMG methodology is not set out in sufficient detail in the Target's Statement. I consider that the description and explanation of KPMG's methodology particularly contained on pp 77 and 78 of the Target's Statement is sufficient for the purposes of putting shareholders on notice of the manner in which the two valuations of $260 and $190 have been determined. 17 However, I consider that the omission of any reference to the valuation figure of $190 in the Modified Explanatory Memorandum is a material omission which renders it misleading and discloses a failure to make a full and fair disclosure of information known to the directors and to Coopers. 18 The Modified Explanatory Memorandum in various places refers to two valuation scenarios. First there is one with the Lion Nathan offer on the table; secondly there is one without the Lion Nathan offer being available to shareholders. In those circumstances, the statement in the first paragraph on p 5 of the Modified Explanatory Memorandum that: "… KPMG, the Company's auditor had recently determined that the fair value for a parcel of shares as at 28 September 2005 was $260 per share. Further details about KPMG's determination will be included in the target's statement", was not candid or complete. 19 This inadequacy is demonstrated by the last bullet point in section 2.5 of the Modified Explanatory Memorandum which stated, inter alia: "If the Lion Nathan Offer were not available because the resolution to amend the Constitution was passed, the auditor would not be able to take into account the Lion Nathan Offer in determining fair value and the fair value figure may well be less than $260 per share. Shareholders should therefore consider that, by removing the Lion Nathan provisions, fair value may well be less than $260 per share under the pre‑emptive rights regime." This statement is incomplete having regard to the information available to the directors and to Coopers. They know, and shareholders should be told specifically in the Modified Explanatory Memorandum, that KPMG has determined the value of the class C share without regard to the Lion Nathan offer as at 28 September 2005 to be $190. Although that valuation was determined as at that date only and although a valuation would have to be made as at any later date if the issue arose as to the valuation of Coopers' shares at a specific later point in time, I consider that the directors and Coopers were obliged in the Modified Explanatory Memorandum, at least, to inform shareholders of the KPMG valuation of $190, albeit as at 28 September 2005. 20 I do not propose to settle the form of the Modified Explanatory Memorandum myself but rather to point out such deficiencies as may exist in it. Nevertheless, the deficiency to which I have just referred could be cured if something along the lines of a reference to the $190 valuation by KPMG as at 28 September 2005 was included within the two paragraphs of the Modified Explanatory Memorandum to which I have referred in pars [18] and [19] above. 21 Lion Nathan also submitted that as the directors had given forecasts in the Target's Statement as to continued strong growth in Coopers' earnings and dividends in 2006, their knowledge was not limited to financial information as at 30 June 2005, upon which KPMG acted in making its valuations. Thus, the directors had the opportunity and the ability to say whether or not, if KPMG's methodology remained constant, the valuation figure of $190 was still valid as at 30 November 2005. It was also said that they had the ability to say whether the valuation figure of $190 would also be valid if the forecast earnings before interest tax depreciation and amortisation (EBITDA) for 2006 were achieved. 22 I do not consider that the directors need to go as far as this submission suggests and undertake what is, in effect a valuation in the future themselves. I do not consider that it is necessary for them to extrapolate the KPMG valuation into the future on the basis of forecasted figures so long as they inform the shareholders as to the nature and extent of the existing KPMG valuations. 23 I also do not consider that it is necessary at the present time for the directors to assess or determine in the Modified Explanatory Memorandum what effect the impact of the buy‑back would have on the valuation of shares in Coopers in the absence of a Lion Nathan bid being on the table. Much would depend upon other variables in the equation, such as, for example, subsequent earnings, any variations in costs and other financial variables. Any issue as to the effect or consequences of the buy‑back on share value is a matter to be considered at the meeting to vote upon the resolution for the buy‑back and not at the meeting to consider the Constitutional amendments. 24 Lion Nathan submitted that valuation material available to KPMG needed to be brought up to date to take account of not only current financial circumstances but also the pendency of the Lion Nathan offer, the Constitutional amendments to exclude Lion Nathan from acquiring shares and the proposed buy‑back. The pendency of the Lion Nathan offer and the proposed Constitutional amendments were known to KPMG at the time it made its valuation as at 28 September 2005. Although KPMG may not have been aware of, or had not taken into account the proposed buy‑back, I do not consider that there need to be further valuations carried out, whether by KPMG or anyone else, prior to the general meeting so long as it is made known to shareholders that in the absence of the Lion Nathan offer the value of the shares may be well less than $260 and that there is in existence a valuation of $190 as at 28 September 2005 by Coopers' auditor based on the absence of any Lion Nathan offer being on the table. 25 Lion Nathan made much of the views of Grant Samuel, the independent expert retained for the purpose of providing a report in the Target's Statement. I do not consider that there is anything in the Grant Samuel report referred to in the Target's Statement which needs to be incorporated into the Modified Explanatory Memorandum, whether by reference or otherwise. Grant Samuel's report and conclusion is directed to the issue of the fairness and reasonableness of the Lion Nathan offer. I do not consider that it was necessary for the Modified Explanatory Memorandum to provide the extensive material which was found in the Grant Samuel report. 26 Lion Nathan submitted that there were a number of uncertainties involved in the buy‑back proposal and particularly referred to the fact that clauses 6.8 and 6.9 of the buy‑back booklet gave Coopers a complete discretion to withdraw the buy‑back offer at any time even if it had received acceptances for it and also to amend any of the terms of the buy‑back. I do not consider that any criticisms or complaints about the nature and content of the buy‑back documentation is relevant to the issues which I have to determine in relation to the sufficiency of the Modified Explanatory Memorandum. It refers to the proposal for the buy‑back and in my view, it was not necessary to elaborate any further on the issues in relation to the buy‑back proposal in the Modified Explanatory Memorandum. 27 Lion Nathan was critical of the options available to shareholders set out on pp 72‑74 of the Target's Statement. However, if there be any validity in that criticism, and I express no view about it, it is not relevant to the issues which I have to determine in relation to the content of the Modified Explanatory Memorandum. The relevance of the contents of the Target's Statement in relation to the Modified Explanatory Memorandum depends upon the extent to which the Modified Explanatory Memorandum refers to the Target's Statement. In this respect I have already referred to, and considered, the reference in the Modified Explanatory Memorandum to the fact that further details about KPMG's determination will be included in the Target's Statement. That was the only matter found in the Target's Statement which I consider needed to be explained further in the Modified Explanatory Memorandum. 28 Lion Nathan complained about the timing of the General Meeting to consider the Constitutional amendments relative to the timing of the Extraordinary General Meeting for the buy‑back proposal. However, I do not consider that that is an issue which I have to consider. It is not relevant to any issue in relation to the content of the Modified Explanatory Memorandum and whether it is misleading and not a full and fair disclosure of information known to the directors and Coopers. 29 Lion Nathan submitted that none of the material in the Modified Explanatory Memorandum contained any clear and unequivocal statement that the passage of the proposed resolutions would make it impossible for the Lion Nathan bid to proceed on its existing or any other terms. I do not consider that this is a correct analysis of the Modified Explanatory Memorandum. Paragraph 2.5 is headed "If the proposed resolution is passed". In that section the following statement appears: "In practical terms, if the proposed resolution is passed, the Lion Nathan takeover offer will not be available on its current terms." There is also the earlier statement that unless the Constitution is amended again, Lion Nathan could not purchase Coopers' shares and seek to be registered as the holder of those shares. 30 There were a number of subsidiary submissions made by Lion Nathan but I do not consider that they bear upon the issues of the misleading nature of the Modified Explanatory Memorandum or the issue whether it contains a full and fair disclosure of information known to the directors and to Coopers. 31 My conclusion is therefore, that in its present form the Modified Explanatory Memorandum is incomplete and the injunction should not be discharged unless there is included in the Modified Explanatory Memorandum a statement along the lines to which I have referred earlier in relation to the fact that KPMG has carried out a valuation as at 28 September 2005 of a parcel of class C shares in the absence of the Lion Nathan offer being on the table, which value it has determined as $190 per share. 32 I will stand the matter down for a short time to enable the parties to consider the manner in which this present application may be disposed of and such orders as should be made. I certify that the preceding thirty‑two (32) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Goldberg.