Pauls Limited v Dwyer & Ors

[2] The applicant seeks to compulsorily acquire the remaining preference shares pursuant to Part 6A.2, Division 1 of the Corporations Law. I was informed by counsel that this is the first occasion on which a court has been asked to interpret the legislation directly.

(b) Pauls Victoria Limited (formerly Associated Dairies Limited) ("PVL");

(c) Australian Securities and Investments Corporation ("ASIC");

(d) Ferrier Hodgson Corporate Advisory (Vic) Pty Ltd ("Ferrier Hodgson");

(e) The respondents, and in particular Milly Elkington, her husband Dr Elkington, and one Mr Robert Catto.

[4] Though there were originally more respondents to the application only those three took an active part at the hearing.

[5] The applicant provided a chronology to the court which, in essence, was not challenged by the respondents. It is as follows:

07.03.00 The applicant decides to obtain ASIC nomination of an expert, and obtain valuation, and subject to the contents of the valuation, to commence compulsory acquisition proceedings.

17.03.00 Board resolution of the applicant to proceed to obtain ASIC nomination and valuation.

27.03.00 The applicant requests ASIC to nominate a list of persons to prepare an expert's report pursuant to s 667AA(1) Corporations Law.

05.04.00 ASIC nominates a panel of experts to prepare a valuation report.

13.04.00 The applicant engages Ferrier Hodgson Corporate Advisory (Vic) Pty Ltd to prepare an expert valuation report.

06.07.00 The applicant receives a draft valuation from Selak to be checked for factual accuracy.

07.07.00 The applicant board resolves to compulsorily acquire remaining preferences shares at $2.57.

13.07.00 The applicant provides Ferrier Hodgson with a proposed letter and compulsory acquisition notice, and seeks a further report in terms of ss 664C and 667A Corporations Law.

24.07.00 Ferrier Hodgson express an opinion that the terms proposed in the notice of compulsory acquisition give a fair value for the preference shares.

25.07.00 Notice of compulsory acquisition in Form 6024 lodged with ASIC pursuant to s 664E(3), together with a copy of an expert report and a copy of an objection form.

25.07.00 The applicant gives a compulsory acquisition notice, a copy expert's report, and a copy objection form to each of the owners of preference shares, other than Pauls Trading Pty Ltd, listed in Schedule A to the originating application.

25.07.00 The applicant gives copies of the compulsory acquisition notice, expert's report and objection form to PVL.

21.08.00 The applicant lodges an objection form submitted by Milly Elkington with ASIC.

24.08.00 The applicant lodges an objection form submitted by Richard Kirkby with ASIC.

25.08.00 The applicant lodges an objection form submitted by Pamela Wendy Etheridge with ASIC.

28.08.00 The applicant lodges objection forms submitted by Robert John Charles Catto, Batoka Pty Ltd and Super John Pty Ltd with ASIC.

31.08.00 The applicant forwards a list to ASIC pursuant to s 664E(3) Corporations Law.

31.08.00 The applicant provides a copy of the list to PVL.

21.09.00 An originating application is filed seeking an order pursuant to s 664F Corporations Law.

21.09.00 The applicant gives notice to all preference shareholders of its intention to proceed with the compulsory acquisition of the preference shares and serves the application and affidavit material on each preference shareholder as required by s 664E(4)(b).

22.09.00 ASIC served with application and affidavit material.

28.09.00 Directions hearing before Moynihan SJA where orders for the expeditious resolution of the proceedings were made.

28.09.00 The applicant advises each preference shareholder of the orders made.

05.10.00 The applicant lodges objection forms submitted by Gordon B Elkington and Lucas Investments Pty Ltd and a revised list of objectors with ASIC.

05.10.00 The applicant gives a notice to PVL of the further objections received from Gordon B Elkington and Lucas Investments Pty Ltd.

[6] Essentially it is submitted on the part of the applicant that there are only two questions for the court to consider:

(a) is the applicant a 90% holder, as to which s 664A is relevant? and

(b) do the terms of the applicant's compulsory acquisition notice offer fair value for the remaining securities?

It is said by the applicant that if each of these questions are answered affirmatively the effect of the legislation is that the court must approve the acquisition on the terms proposed.

[7] It is clear that the purpose of the legislation is to allow for compulsory acquisition in a more efficient way than was previously possible, subject to the shareholder receiving fair value for their shares. The provisions relied upon are part of amendments to the Corporations Law known as the CLERP Amendments which stand for Corporate Law Economic Reform Program.

[8] As is permitted by s 109J Corporations Law the court may have regard to a number of documents in ascertaining the proper meaning of s 667A and s 667C of the Law_._ Amongst those are the following:

(a) the explanatory memorandum in respect of the CLERP bill;

(b) the report by the Legal Committee on Compulsory Acquisitions for the Companies and Securities Advisory Committee of January 1996; and

(c) the report on the Corporate Law Economic Reform Program Bill 1998 by the Parliamentary Joint Committee on Corporations and Securities in May 1999.

[9] In the explanatory memorandum at para 7.31 the following appears with respect to compulsory acquisitions:

"7.31 Extending the power to compulsorily acquire security will:

* discourage minority shareholders from demanding a price for their securities that is above a fair value (often referred to as `greenmailing')."

Further, at para 7.45 of the document the following appears:

"7.45 The issue of valuing companies for purposes of compulsory acquisition is a difficult one and the draft provisions provides guidance to experts as to how they should go about valuing a company ... . It is proposed that experts would not account for premiums on account of the special value of the outstanding securities to the acquirer, or discounts on account of the lack of a market for particular securities."

[10] Reference should also be had to para 1.11, 10.1, 10.20-21 and 10.35 of the report on the CLERP Bill by the legal committee on compulsory acquisitions for the Companies and Securities Advisory Committee of the Parliament of the Commonwealth of Australia. This is the "Advisory Committee" as referred to in s 109J and s 9 of the Law.

[11] Finally, with respect to such documents the report on the Corporate Law Economic Reform Program Bill 1998 by the Parliamentary Joint Committee on Corporations and Securities referred expressly to para 7.31 of the explanatory memorandum at paras 3.58 and 3.66-68, indicating that what was being proposed (and eventually passed) was an entirely new scheme for the valuing of securities in cases of compulsory acquisition of shares and the like.

[12] It is also obvious from the documents to which I have referred and the provisions of Part 6A.2 of Division 1 of the Corporations Law which are relevant, that the practice of `greenmailing' was to be discouraged if at all possible. There is no doubt in this case that the respondents who took part in the matter before me were avowed `greenmailers'.

[13] Before considering the main issues the respondents to the application took objection that a number of the procedural requirements of Part 6A Division 1 had not been satisfied. In particular that:

(a) contrary to s 667B the report did not set out any financial or other interests of the expert;

(b) exhibit 2 (the resolution of the applicant on 7 March 2000) made it clear that the expert was only going to be retained to prepare a report under s 667A if the valuation was satisfactory to the applicant;

(c) contrary to s 667B(2)(c) the report of the expert did not disclose any fee or other financial interest or benefit the expert received in connection with the report, namely the fee the expert received for the preparation of the valuation;

(d) no valuation of the securities in accordance with s 667C occurred because the expert did not determine the extent to which the value of the securities in PVL would have been increased by the synergies arising from the compulsory acquisition, nor did the expert lock that value across the various class of shareholders. It was submitted that 100% of the value of the synergies should have been allocated amongst the preference shareholders and divided equally between all of the shareholders in that class.

(e) contrary to s 667B(2), the report prepared pursuant to s 667A did not set out the relationship between the expert and the acquirer, nor did it state the circumstances under which the expert gave the applicant advice in relation to the valuation method he would use if retained under s 667A.

[14] There were other objections raised that appear to me to be somewhat more minor and can be dealt with compendiously.

[15] An objection to the constitutional validity of Part 6A.2 of the Law was taken by Mrs Elkington. I determined earlier in these proceedings that the legislation was valid under the Australian Constitution. That decision is subject to an appeal by Mrs Elkington.

[16] In my view the applicant must, as was submitted, satisfy three matters. The first two are apparently non contentious, i.e. that the preference shares sought to be acquired are shares, and that the applicant's voting power in PVL is at least 90%. The applicant has the requisite shareholding because it holds full beneficial interests in at least 90% by value of all securities of the company which are shares. There are 24,716,071 ordinary shares issued by PVL with a paid up value of $23,159,452.85. There are 37,660 preference shares, of which the applicant and its wholly owned subsidiary own 13,397 shares. Both Mr John Selak, the valuer engaged by the applicant, and a Mr Ryan, a valuation witness called by the respondents, and Mr Catto and Dr Elkington agree that this contention was satisfied. The third is the question of "fair value".

[17] I am satisfied that the following procedural requirements of Part 6A Division 1 of the Law have been satisfied that:

(a) the compulsory acquisition notice was lodged within the time stipulated by s 664AA;

(b) the applicant prepared and lodged a compulsory acquisition notice in the prescribed form in compliance with s 664C(1);

(c) the compulsory acquisition notice was lodged with ASIC and given to the holders of the redeemable preference shares, together with the other documentation as required by s 664C(2) and (3);

(d) copies of the documents were given to PVL as required by s 664C(2)(c);

(e) the consideration offered for the preference shares is cash, as required by s 664B;

(f) the preference shares in PVL do not give the holders thereof any right to occupy or use real property that the company owns or holds under lease;

(g) the applicant asked ASIC to nominate an expert pursuant to s 667AA(1) and that ASIC responded within the time prescribed. (This fact is admitted by all respondents as is the previous fact in (f) above.);

(h) Ferrier Hodgson is not an associate of the applicant or PVL;

(i) the applicant obtained an expert's report purportedly pursuant to Part 6A.4;

(j) the notice of compulsory acquisition has not been withdrawn;

(k) the applicant has not offered any benefits outside the compulsory acquisition procedure;

(l) copies of the objection forms received were lodged with ASIC pursuant to s 664E(2), which fact is admitted by all respondents;

(m) the applicant prepared the list required by s 664E(3), lodged it with ASIC, and gave a copy to PVL;

(n) the applicant gave each of the preference shareholders the notice of the bringing of this applications required by s 664E(4)(b);

(o) this application was filed within one month after the end of the objection period as is admitted by all respondents; and

(p) a copy of the application and supporting affidavits were served on ASIC, as required by Corporations (Queensland) Rule 105.

[18] Mr Catto made an objection to the apparent error on the face of the notice of compulsory acquisition, whereby the words "preference shares" were wrongly inserted in section 1 of the document. Those words were mere surplusage or at least an irregularity, and therefore excused by s 1322 Corporations Law.

[19] Similarly the failure to give a notice pursuant to s 665D can be cured. The grounds of objection in relation to this section are without substance.

[20] Although this trial appeared to be at first a complicated one, it is clear that what the respondents sought to establish was that a special value should be attributed to the preference shares not in the applicant's control when assessing their valuation. It is said (as was submitted by the applicant) that the contention of the respondents was: "Is PVL worth more to the applicant with 100% ownership, and should the applicant pay a premium to acquire such ownership?"

[21] The applicant contended that special value should not be taken into account for two reasons, which are:

(a) that the legislation prescribes a method for the assessment of fair value which expressly excludes taking into account any such premium; or

(b) alternatively, if a special value should be taken into account, it should only be done in the valuation of the company as a whole. In the case of preference shares, because of their unique characteristics, none of the special value will be apportioned to the preference class shares.

[22] As I have said the CLERP amendments were designed to as far as possible outlaw the concept of `greenmailing'. Such a practice has long been the modus operandi of Messrs Catto and Dr and Mrs Elkington, a fact which they readily accept. In my view the valuation of these preference shares must be done in accordance with the procedures prescribed by Part 6A.2 of the Law. Therefore no question of special value arises in this case. I am fortified in this view that s 667C(1)(c) uses the words in connection with the valuation "without allowing a premium".

[23] Initially I was concerned that Mr John Selak, an employee of Ferrier Hodgson, carried out both the valuation on behalf of the board of the applicant, and then made the report, which was the report sent to each of the preference shareholders in respect of the shares the subject of the proposed compulsory acquisition. However, it seems to me that once it is established that Selak carried out his valuation on the proper basis, any apparent objection to what was done evaporates. In circumstances where two valuers may be engaged, each would have to perform the same task, that is to value the shares in accordance with the proper methodology. In my view the proper methodology was to value the shares on a capitalisation basis which was the methodology adopted by Selak. As submitted by the applicant, to suggest that one valuer should undertake the valuation and that another should comment on a proposal formulated in reliance upon it, is to put form ahead of substance, and to involve the compulsory acquirer in an unnecessary and duplicated expense, because both valuers will necessarily have to perform the valuation required by s 667C.

[24] It follows then that I am of the view that the value offered by the applicant to the respondents of $2.57 per share represents "fair value" for the remaining preference shares.

[25] In deference to the respondents' arguments short reference should be had to some arguments put forward by them. Firstly, heavy reliance was placed upon ASIC Practice Note 42. That Practice Note, however, is one which applied to different legislation and in circumstances which I believe are irrelevant, bearing in mind the compendious nature of the reforms brought about in the CLERP legislation.

[26] It must be remembered that the rights of the preference shareholders in PVL are very limited. They are entitled to a cumulative annual dividend of 7%, which may or may not be franked, and they have the right to attend and speak, but not vote, at annual and general meetings of the company. They have voting rights in respect of capital reductions, and priority to a redemption of their capital on a winding up of the company. It is clear that other than by acquisition, the preference shareholders cannot ever achieve greater than par value for their shares.

[27] Relying on Melcann Ltd v Super John Pty Ltd & Ors (1995) 13 ACLC 92, PVL may be worth more as a whole to the applicant than to a third party. But this does not mean that the additional value should be attributable wholly to the preference shares or to the minority interests. Melcann was a case which involved ordinary shares as was Re Goldfields Kalgoorlie: Winpar Holdings Ltd v Goldfields Kalgoorlie Ltd [2000] NSWSC 728; (2000) 34 ACSR 737. That case recognises that any component of special value is not to be attributed solely to the remaining minority shareholders. Even though that case considered a selective capital reduction, Santow J remarked on the operation of s 667C, in which I regard as obiter comments. At para 68 of that judgment his Honour said:

"[68] ASIC admitted that the reference to "premium" in s 667C(1)(c) includes a reference to the "special benefits" identified by McLelland CJ in Eq in Melcann, supra. It is true this premium, or reciprocal discount, may reflect particular special benefits for the acquirer in getting 100% ownership. But I consider that the references to premium (and discount) is primarily directed to the situation where a key holding within the acquired minority (say QBE in this present context) might command a "premium" price to acquire; that is, absent the statutory definition in s 667C of "fair value" which precludes such circumstances in favour of a pro rata allocation of the total value including any such special benefits (s 258B would likewise preclude this). In that sense, pro rata allocation of value reflected in price paid is certainly the invariable norm within classes of value reflected in price paid is certainly the invariable norm within classes where 10% or less is being acquired - or convertible securities. But by parity of reasoning, the acquirer's 90% or more is not allowed to command any (notional) premium as against the minorities' 10% or less, in calculating what is paid for the minority under s 667C.

[69] I therefor consider that s 667C in its particular context is a clear legislative indication in its context that the collective value of the company as a whole, including any special value derived from 100% ownership, is to be allocated without attributing a premium or discount to particular securities first within a class, including for example a key holding from within this minority holding compulsorily acquired and second as between majority and minority. Thus that value should be allocated pro rata, though clearly the acquirer may choose to be more generous. Thus while an expert is ordinarily required to take into account the special value 100% ownership may have to a majority holder in working out the total value of the company, fairness requires that special value is to be allocated pro rata. But can that reasoning be extrapolated to selective reductions of capital, where the test is what is fair and reasonable?

[28] With respect I am of the view that his Honour's comments at para 68 do not sit easily with the explanatory memorandum and the other documents referred to in para 8 above. I disagree with them.

[29] However, his Honour's remarks at para 69 if applied to the present case would mean that in so far as there are special benefits to 100% ownership they should be included in valuing the company as a whole, and should then be allocated, usually pro rata.

[30] One final objection to Mr Selak's valuation was that it failed to take into account the extra value to the applicant in acquiring the balance of the preference shares because of the synergies which would be obtained. True it is that the evidence revealed that there would be some synergies, and perhaps some savings, which would reflect in valuation. However, the evidence as to the synergies was vague, and the effect even on the best view of them, would make a minimal difference to the share price at a "fair value" of the preference shares as envisaged by Part 6A.2 Division 1 of the Law. In my view any objection to the value offered on this ground has not been made out.

[31] Any remaining objections to the applicant's failure to comply with the procedural requirements of Part 6A Division 1 can be excused, in my view, by the provisions of s 1322 Corporations Law. I say this in particular with respect to the objections made by the respondents and referred to in para 13 above. They are minor and did not affect the substance of the valuation, the report, or the offer in any consequential way.

[32] In the event it follows that I am of the view that the price of $2.57 per share (being at the top end of the range of value assessed by Mr Selak) represents fair value for the preference shares in PVL sought to be acquired by the applicant. I so declare.