Re Coles Group Limited [2007] VSC 389 (27 September 2007)

(1) An order pursuant to subsection 411(1) of the Act that Coles convene a meeting of Scheme Shareholders for the purpose of considering and if thought fit, agreeing (with or without modification) to the Scheme;

(2) Directions as to the manner in which the meeting is to be convened and conducted, the time and place at which the meeting is to be held, and the persons authorised to act as Chairman and alternate Chairman at that meeting;

(3) An order pursuant to subsection 411(1) of the Act that the explanatory statement in relation to the Scheme be approved; and

(4) Such further or other orders as the court thinks fit.

4 Mr Tom Bathurst, one of Her Majesty's counsel, appears for Coles. Mr M. Oakes of senior counsel appears for Wesfarmers Ltd. There is no defendant to the application. There is no appearance at this stage by ASIC.

5 Mr Bathurst provided the court with helpful written submissions.

6 The application is supported by an affidavit affirmed by Mr Paul Django Wenk, of 101 Collins Street, Melbourne, a partner of Freehills, the solicitors acting for Coles in this proceeding.

7 After formal matters, Mr Wenk affirms that Coles is a public company limited by shares and is admitted to the official list of ASX Ltd ("ASX") with its ordinary shares quoted for trading on the stock market conducted by the ASX.

8 He deposes that the registered office of Coles is situated at 800 Toorak Road, Tooronga, Victoria.

9 Under the heading of "Coles share capital", Mr Wenk exhibits a letter from Link Market Services Ltd, which is responsible for maintaining Coles' share register, to the Company secretary of Coles, confirming that, on 13 September 2007:

(a) Coles had 1,198,786,888 ordinary shares on issue;

(b) the total number of Coles shareholders was 329,006;

(c) the number and proportion (rounded to two decimal places) of Coles shares recorded in the register as being held by persons with addresses in Australia and overseas was as follows:

10 Mr Wenk further says that at the close of business on 13 September 2007, Coles' market capitalisation was $17,394,397,749. 88 (being 1,198,786,888 shares multiplied by $14.51, the closing price of Coles shares that day according to details published in The Australian Financial Review dated 14 September 2007).

11 Under the heading of "Proposed acquisition by Wesfarmers", Mr Wenk deposes that on 3 July 2007, Coles announced that it received a proposal from Wesfarmers to acquire Coles and he exhibits a copy of that announcement. Further, that on 5 September 2007, Coles and Wesfarmers announced that they had agreed to an enhanced proposal, and he exhibits a copy of that announcement.

12 The proposal of 3 July 2007 is outlined in a letter of that date from Mr Rick Allert, Chairman of Coles to the shareholders. The letter said, in part:

PROPOSAL TO ACQUIRE ALL YOUR COLES GROUP SHARES

As a result of the ownership review process, the Board have received a proposal from Wesfarmers Limited to acquire Coles in an enterprise value of $21.9 billion, or $17.25 per share (including a 25 cent dividend) through a scheme of arrangement to be put to shareholders at the earliest opportunity.

- Wesfarmers script equivalent to $13 (0.2843 per Coles share), based on the closing price of Wesfarmers shares of $45.73 on 29 June 2007;

- the benefit of roll-over relief on script consideration; and

- the opportunity to continue to share in the future growth potential of the Coles businesses.

The price of $17.25 per Coles share (including the 25 cent dividend) represents a premium of 50% of the Coles closing share price on 14 August 2006, the day before speculation of the first private equity approach to Coles, and a 19% premium to the share price on February 22 2007, the day before the Board announced the review of ownership option.

I am conscious that as I write, Wesfarmers' shares are now trading at less than their level of last Friday and Coles' own share price is less than $17.25 per share. It is common in large transactions of this nature for short-term share prices to fluctuate considerably. However, we are confident that in the long term the combination of Wesfarmers and Coles will create an outstanding organisation that will produce excellent returns for shareholders."

13 The enhanced proposal of 5 September 2007 is contained in a news release issued by both Wesfarmers Limited and Coles. Under the enhanced proposal, Wesfarmers is to issue a category of shares called Wesfarmers' Price Protected Shares ("WPPS") for an equivalent of half of the share component to be offered to Coles shareholders. Thus, the consideration for Coles shares will now be equivalent to:

Coles shareholders will also receive the Coles final fully franked dividend of $0.25 per share.

14 The news release says that it is intended that the WPPS will:

• Pay a fully franked dividend of at least $2 per WPPS, subject to the availability of sufficient retained earnings and franking credits;

• Provide shareholders with additional Wesfarmers ordinary shares in the event that the Wesfarmers' ordinary share price is less than $45 at their Reclassification Date - four years from the date of issue which may occur earlier or be subject to extension for up to four years in certain circumstances - on the basis there set out in the letter;

• Be capable of being reclassified into ordinary shares at any time by the WPPS holder. In addition, the WPPS will be reclassified into ordinary shares if the 20 day volume weighted average price exceeds $45.

15 At the Reclassification Date, one WPPS will convert into a Wesfarmers' ordinary share with the possibility of a further portion of an ordinary share being issued to the holder.

16 The basis of a portion of a further ordinary share being issued is dependant upon the price of an ordinary share at the Reclassification Date being at or above $45, between $45 and $36 or at or below $36. If the price of the Wesfarmers' ordinary share at the Reclassification Date is at or above $45, then there is no entitlement to a further portion of a Wesfarmers' ordinary shares. If the price of a Wesfarmers' ordinary share at the Reclassification Date is between $45 and $36, then there is a sliding scale as to the portion of an additional Wesfarmers' ordinary share that will be issued to make up the total value of the Wesfarmers ordinary shares issued to the holder of a WPPS to $45. If the Wesfarmers' ordinary share price is at or below $36 at the Reclassification Date, then 0.25 of a Wesfarmer ordinary share will be issued for each WPPS held by the shareholder in addition to one Wesfarmer ordinary share.

17 The press release also announced that the Scheme Implementation Agreement between Coles and Wesfarmers had been modified to, amongst other things, increase the break-fee to $150m and to broaden the circumstances in which the break-fee is payable to Wesfarmers, including the sale of all or a substantial part of a Coles Group business. There were other modifications, including the removal of the share price movement termination right and considerable strengthening of the "no shop" and "no solicitation" provisions.

18 The name of the WPPS under the scheme has now been altered to Wesfarmers' partially protected share where "price" has been replaced by "partially."

19 The application is also supported by affidavits of Richard John Loveridge of 27 September 2007, Stephen John Wilson of the same date, Thomas Joseph Patrick O'Leary of 26 September 2007 and two affidavits affirmed by Richard Edward Dammery on 27 September 2007.

20 Subsection 411(1) provides:

"Where a compromise or an arrangement is proposed between a Part 5.1 body and its creditors or any class of them or between a Part 5.1 body and its members or of any class of them, the Court may, on the application in a summary way of the body or of any creditor or member of the body, or in case of a body being wound up, of the liquidator, order a meeting or meetings of the creditors or class of creditors or the members of the body or class of members to be convened in such manner, and to be held in such place or places (in this jurisdiction or elsewhere), as the Court directs and, where the Court makes such an order, the Court may approve the explanatory statement required by paragraph 412(1)(a) to accompany notices of the meeting or meetings."

21 Thus, the Court has power to order a meeting or meetings to be convened and held as therein provided and if it does so order, the court has the power to approve the explanatory statement required by paragraph 412(1)(a) to accompany notices of the meeting or meetings.

22 The Court must not exercise its power under subsection 411(1) to so order, unless certain matters are satisfied as provided in subsection 411(2).

23 Subsection 411(2) provides:

"The court must not make an order pursuant to an application under subsection (1) or (1A) unless:

(a) 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

(b) the Court is satisfied that ASIC has had a reasonable opportunity:

(i) to examine the terms of the proposed compromise or arrangement to which the application relates and a draft explanatory statement relating to the proposed compromise or arrangement; and

(ii) to make submissions to the Court in relation to the proposed compromise or arrangement and the draft explanatory statement."

24 Subsection 411(3) sets out the meaning of the draft explanatory statement for the purposes of subsection 411(2). It provides:

"In subsection (2), draft explanatory statement, in relation to a proposed compromise or arrangement between a body and its creditors or any class of them or between a body and its members or any class of them, means a statement:

(a) explaining the effect of the proposed compromise or arrangement and, in particular, stating any material interests of the directors of the body, whether as directors, as members or creditors of the body or otherwise, and the effect on those interests of the proposed compromise or arrangement in so far as that effect is different from the effect on the like interests of other persons; and

(b) setting out such information as is prescribed and any other information that is material to the making of a decision by a creditor or member of the body whether or not to agree to the proposed compromise or arrangement, being information that is within the knowledge of the directors of the body and has not previously been disclosed to the creditors or members of the body."

25 Under subsection 411(4) of the Act, an arrangement is binding on the members, or on a class of members, as the case may be, of the body and on the body, if and only if (a) the meetings approve the arrangements as provided in the subsection, and (b) the Court approves the arrangement.

26 At this hearing, I am only concerned with the first stage. It is necessary to note, however, that the court must not approve an arrangement under section 411 of the Act unless certain matters as provided in subsection 411(17) are satisfied. Sub-section 411(17) provides:

"The Court must not approve a compromise or arrangement under this section unless:

(a) it is satisfied that the compromise or arrangement has not been proposed for the purpose of enabling any person to avoid the operation of any of the provisions of Chapter 6; or

(b) there is produced to the Court a statement in writing by ASIC stating that ASIC has no objection to the compromise or arrangement;

but the Court need not approve a compromise or arrangement merely because a statement by ASIC stating that ASIC has no objection to the compromise or arrangement has been produced to the Court as mentioned in paragraph (b)."

27 I shall examine the role subsection 411(17) plays in the first stage in due course.

28 The explanatory statement I have been asked to approve should satisfy the requirements of paragraph 412(1)(a) as provided in subsection 411(1). Paragraph 412(1)(a) is as follows:

"(1) Where a meeting is convened under section 411, the body must:

(a) with every notice convening the meeting that is sent to a creditor or member, send a statement (in this section called the explanatory statement):

(i) explaining the effect of the compromise or arrangement and, in particular, stating any material interests of the directors, whether as members or creditors of the body or otherwise, and the effect on those interests of the compromise or arrangements in so far as that effect is different from the effect on the like interests of other persons; and

(ii) setting out such information as is prescribed and any other information that is material to the making of a decision by a creditor or member whether or not to agree to the compromise or arrangement, being information that is within the knowledge of the directors and has not previously been disclosed to the creditors or members;..."

29 In F.T. Eastman & Sons Pty Ltd v. Metal Roof Decking Supplies Pty Ltd[1], the New South Wales Court of Appeal considered the approach that the court should adopt when considering an application for meetings. Street CJ said:

"The approach taken upon a summons is that the court will not ordinarily summon a meeting unless the scheme is of such a nature and cast in such terms that if it achieves the statutory majority at the creditors' meeting, the court would be likely to approve it on the hearing of a petition which is unopposed.[2]"

30 Samuels JA agreed with the Chief Justice and Hutley JA also agreed that the orders proposed should be made without expressly commenting on the Chief Justice's reasons. Hutley JA did relevantly add however, about the scheme before them:

"It is not so certain the scheme would be unsupportable when before the court for approval that it is appropriate to dispose of it out of hand."[3]

31 In Australian Securities Commission v. Marlborough Goldmines Ltd[4], the Full High Court of Australia comprising of Mason CJ and Brennan, Dawson, Toohey and Gaudron JJ cited with approval the test adopted by Street CJ. It has been consistently followed since: see for example Re HIH Casualty and General Insurance[5] and Re CSR Ltd. [6]

32 In Re Sonodyne International Ltd[7], Hayne J of the Supreme Court (as he then was) said:

"It may be that in years past this court has not always applied to the question whether meetings should be ordered precisely the test described by Street CJ [referring to FT Eastman & Sons] but for the purposes of this application I am content to do so."[8]

"In the end the question as presented at this stage of the process of a company propounding and implementing a scheme of arrangement is whether the scheme is such that it could reasonably be supposed by sensible business people to be for the benefit of the clients concerned. That is, the test in the present case is whether it is reasonable to suppose that sensible business people might consider the arrangement proposed by the company is of benefit to its members."[9]

34 By these observations Hayne J added guidance to the applicable test as to whether the court would be likely to approve the scheme.

35 It is useful also to note Hayne J's observation about the role of the court at the first stage where he said:

"The role of the court at this stage of the process of a company propounding and implementing a scheme of arrangement is not to pass finally on whether the scheme should be approved. That decision must await the expression of the will of the members at the meeting and any argument that may be advanced on behalf of dissenting members or other interested parties at the time of the application for approval."[10]

36 I propose to apply those tests in the exercise of my discretion in the Coles Scheme.

37 In Re APN News & Media Ltd[11], Lindgren J looked at several relevant factors in considering whether to order meetings in addition to the express statutory requirements and in particular matters under the heading of "Performance Risk", "No-Shop Restriction", "Break-Fee" and "Deemed Warranty".

38 Mr Bathurst submitted that adequate provision has been made for performance risk as the shares are not to be transferred until the consideration has been provided. I accept this submission.

39 Lindgren J referred with approval[12] to Re Arthur Yates & Co Ltd[13], where Santow J expressed the opinion that a no-shop provision should satisfy the following concerns:

"(a) it should be for no more than a reasonable period capable of precise ascertainment;

(b) while it may differentiate between actively soliciting an alternative merger proposal and simply dealing with an unsolicited one, in either case the provision should be framed so that it is subject to the overriding obligation not to breach the directors' fiduciary duties or be otherwise unlawful;

(c) there should be adequate prominence given to the provision in the explanatory memorandum sent to shareholders."[14]

40 In Re APN News & Media[15], Lindgren J held in respect of a break-fee and no-shop provision that:

"It would be desirable that applications under s 411(1) be supported by affidavit evidence directed to showing:

• that the no-shop and break-fee provisions are the result of a normal commercial negotiation, and explaining, at least briefly and in general terms, the factual basis for that statement (see para [46] above];
• that the directors of the target company, or at least those directors of it who are not affiliated with the offeror, believe that the provisions do not operate against the interests of offeree shareholders, and that in fact it was in the interests of such shareholders that the directors agreed to the inclusion of the provisions in the merger implementation agreement (see [46] above and Re Paramount communications Inc Shareholders' Litigation 637 A2d 34 (Del Supr 1993) for a case in which a target company's directors' commitment to no-shop and break-fee provisions was held, in all the circumstances, to constitute a breach of their fiduciary duty) ; and
• in the case of the break-fee, explaining by reference to calculations based on the evidence before the court, the percentage the break-fee represents (a) of the "equity value" of the target company calculated in accordance with paragraph 17.18 of the Takeover Panel's guidance note 7, and (b) of the scheme consideration (the explanation might, instead, be conveyed in a submission, but still by reference to the evidence before the court)."[16]

41 Lindgren J went onto say that if the independent expert is in a position to express an opinion on the matter, the expert should state whether the no-shop and break-fee provisions appear to be reasonable and not detrimental to the interests of shareholders, and if so, the basis for that opinion.[17]

42 By clause 9.3 of the Scheme, each Scheme Shareholder is deemed to have warranted to Coles (in its own right and for the benefit of Bidder) that all of their Coles ordinary shares will, at the date of transfer to Bidder, be fully paid and free from all encumbrances, and that they have full power and capacity to sell and transfer their shares to Bidder. In Mincom Ltd v EAM Software Finance Pty Ltd[18], Fryberg J described an almost identical deemed warranty clause as:

"...onerous, unreasonable and calculated to catapult unsuspecting shareholders who have not read the small print of the arrangement in the schedule to the explanatory statement into a state of breach of warranty."[19]

43 Mr Bathurst submitted that Fryberg J's approach is at odds with the approach taken to deemed warranties by the Federal Court. In Re APN News & Media Ltd[20], Lindgren J disagreed with the approach in Mincom Ltd v EAM Software Finance Pty Ltd[21] and made the following observations regarding the operation of deemed warranties:

"In substance, the purpose of the deemed warranty is to prevent a shareholder whose shares are subject to encumbrances from receiving the same scheme consideration as that to be received by those whose shares are free from encumbrances, without any obligation, in effect, to refund to [the bidder] the amount required to discharge the encumbrance. It is not practicable for amounts secured by encumbrance to be deducted from the scheme consideration payable to the relevant scheme participants on the scheme implementation date.

The warranty will be deemed to be given, not only by those offeree shareholders who vote to agree to the scheme, and who, therefore, can be seen to be consenting to give it, but also those who do not vote at all or who vote against the scheme. However, I do not think this matters. What is important, in my view, is that the deemed warranty is no more than a device directed to ensuring that a scheme participant whose shares are subject to an encumbrance is not unfairly advantaged. The amount of the damages payable for breach of the warranty is the amount required to discharge the encumbrance.

Nor do I think it matters that the time for the clearing of the title by payment by the shareholder to the encumbrancee may not yet have arrived under the terms of the encumbrance and therefore may be being accelerated by the deemed warranty. Any disadvantage a shareholder who has borrowed on advantageous terms on the security, may suffer by being required to discharge the encumbrance early, is, in principle, no different from the disadvantage suffered by any shareholder who becomes bound by a scheme to which the shareholder did not agree."

44 Mr Bathurst submitted that Lindgren J adopted the same approach to a similar provision in Re Investa Properties Ltd[22]. Mr Bathurst has submitted that the approach taken by Lindgren J is to be preferred and that the deemed warranty contained in clause 9.3 of the Scheme is unobjectionable.

45 I propose to adopt the approach taken by Lindgren J.

46 I note, however, that Lindgren J did require attention of scheme participants to be drawn to the existence of the deemed warranty in the scheme by specific mention of it and I note the explanatory statement now does so, as indicated in exhibit C.

Subsection 411(17)

47 In Mincom Ltd v. EAM Software Finance Pty Ltd[23], Fryberg J held that the application of the test laid down in FD Easement & Sons Pty Ltd v. Metal Roof Decking Supplies Pty Ltd that I have referred to above, required the Court at the first stage to consider the likelihood of subsection 411(17) being satisfied at the approval stage.

"The first point to be made about that subsection [subsection 411(17)] is that it is expressed in the negative. In other words the default provision is non-approval. Unless there is proof of compliance with one or other of the lettered paragraphs, the court must not grant its approval at the second hearing. Such proof is not required at the first hearing. However, that does not mean that the subsection can be ignored. There is an onus at this stage on the applicant to demonstrate that at the second hearing, the court would be likely to approve the arrangement, if the application be unopposed. That onus cannot be satisfied if there is a complete absence of evidence in respect of either lettered paragraph."[24]

Application of Legal Principles to the Coles Scheme

49 Subject to my observations about subsection 411(17) below, I am of the opinion that the Court would be likely to approve the Coles Scheme if it achieves the statutory majority and is unopposed. I have sufficiently described above the Scheme in the letter from the Chairman of 3 July 2007 and in the press release of 5 September 2007.

50 I find it is reasonable to suppose that sensible business people might consider that the arrangement proposed by Coles is of benefit to its members. Amongst other matters, the independent expert has said as much, although in qualified terms. I think it is unnecessary to go into any detail of the efforts the board has undertaken to seek a buyer for the Coles business. At the end, Coles only had one genuine buyer and it is only fair and proper for the shareholders to assess whether that buyer is making an offer to them that they wish to accept. Accordingly, I propose to make orders convening and holding the meetings.

Subsection 411(17)

51 I have some difficulty in fully understanding the work that this subsection does in relation to schemes, and in particular to a scheme involving a take over by one company of another as in this case.

52 There is an implication in subsection 411(17) that an arrangement under section 411 should not be proposed for the purpose of enabling any person to avoid the operation of any of the provisions of Chapter 6 of the Act.

53 There is, as far as I am aware, no provision in the Act, however, which expressly says that an arrangement under section 411 must not be proposed for the purpose of enabling any person to avoid the operation of any of the provisions of Chapter 6. Further, there is no provision, as far as I am aware, which requires ASIC to be satisfied that the arrangement has not been proposed for the purposes of enabling any person to avoid the operation of any of the provisions of Chapter, or for that matter, to have regard to the operation of Chapter 6, in part or at all before stating in writing that it has no objection to the arrangement under paragraph 411(17)(b).

54 Further, if ASIC does give a statement that it has no objection to the arrangement under paragraph 411(17)(b), and there is no evidence that ASIC has satisfied itself in terms of paragraph 411(17)(a), what relevance, if any, does subsection 411(17) have to the court exercising its discretion to approve the scheme arrangement? Is the court required to have regard to the implication in paragraph 411(17) (a) that I have referred to? If it is to have regard to the implication, how is it to do so if ASIC has given a statement that it has no objection to the scheme arrangement under paragraph 411(17)(b)?

55 In the Coles Scheme, Coles has purportedly disclosed those matters that shareholders should be informed of if the takeover was proceeding under Chapter 6. I am unsure of the relevance of this fact to the court exercising its discretion to approve the scheme if a statement under paragraph 411(17)(b) by ASIC is relied on.

56 If this scheme is sought to be approved, the court would be assisted by any submissions ASIC may wish to make on the relevance of subsection 411(17) at the approval hearing, as well as submissions by the proposer of the scheme, Coles.

57 I intend to and do direct Coles to serve a copy of my reasons on ASIC so my comments can be brought to its attention.

58 Nevertheless, for the purpose of this application, I have been informed and I accept that Coles will be relying on an ASIC statement under paragraph 411(17)(b) if approval of the scheme is sought. Further, I have evidence that ASIC does not propose to appear at the first hearing to make submissions or to intervene to oppose the scheme. I can and do infer that ASIC does not wish to raise any matter concerning subsection 411(17) at this stage.

59 In addition, I have evidence from Mr Dammery in his second affidavit of today's date, and in particular paragraphs 3, 4, 5, 6, 13 and 14 that may go some of the way to satisfying paragraph 411(17)(a). Accordingly, I find that it is likely that subsection 411(17) will not be a barrier to the scheme being approved if Coles seeks to have it approved, it is passed by the statutory majority and the scheme is unopposed by ASIC or any other person .

60 By clause 10 of the Scheme Implementation Agreement, Coles agreed to terminate discussions with parties other than Wesfarmers regarding possible competing transactions and agreed to what are commonly referred to as "no talk" and "no shop" obligations during the "Restricted Period". The "Restricted Period" is defined as a period ending on the earlier of the implementation date for the Scheme or the date on which the Scheme Implementation Agreement terminates (which is, at the latest, 31 December 2007 by reason of clause 12.1(a)(5) of the agreement). Coles' obligations under clause 10 are disclosed in section 10.4 of the draft scheme booklet.

61 Mr Bathurst submitted that, as referred to above, in Re APN News & Media Ltd[25], Lindgren J referred with approval to the decision of Santow J in Re Arthur Yates & Co Ltd[26], and said that such "no shop" "no talk" provisions should satisfy the three matters I quoted above.

• the "Restricted period" during which the provisions are operative will end no later than 31 December 2007: a reasonable period having regard to the size and complexity of the transaction and the fact that it is to be implemented by way of scheme of arrangement;

• Coles' obligation to comply with the "no talk" provision is subject to a fiduciary carve-out (see clause 10.4(a) (4) of the Scheme Implementation Agreement);

• the ASX announcement relating to the "Enhanced Wesfarmers Proposal" (which is Exhibit PDW6) discloses that the "no shop" and "no talk" provisions were "strengthened" in order to enable the proposed transaction to move to completion;

• that Coles agreement to the strengthened "no shop" provision was, in effect, no concession at all to Wesfarmers having regard to the widely reported ownership review process conducted by Coles in 2007 (and which ultimately led to the Wesfarmers proposal);[27]

• the ASX announcement (Exhibit PDW6) also discloses that the directors' of Coles had formed the view that the acquisition of Coles by Wesfarmers was the best outcome for Coles shareholders (thus revealing Coles' motivation for agreeing to the provisions); and

• Coles' obligations under these provisions are the subject of detailed disclosure in section 10.4 of the draft scheme booklet.

63 I accept Mr Bathurst's submissions. I find the "no talk" "no shop" provisions do not contain any matter that may prevent the Scheme going forward for consideration of the Scheme Shareholders.

64 By clause 11.2 of the Scheme Implementation Agreement made on 5 September 2007, Coles has agreed to pay a break fee of $150 million to the Bidder (Wesfarmers Retail Holdings Pty Ltd) in certain circumstances. The circumstances in which the fee is payable are disclosed in section 10.5 of the draft scheme booklet. As set out in that section, Coles and the Bidder considered it was reasonable and appropriate to have agreed to the payment of the break fee to secure the benefits available to each of them from participation in the Scheme.

65 Mr Bathurst submitted that in Re SFE Corporation Limited[28] Gyles J observed that clauses providing for the payment of break fees would not prevent the making of orders convening a meeting of shareholders to consider a proposed scheme of arrangement, unless the break fee were such that it could influence voting at the meeting, or if there were some other unusual circumstance.

66 Mr Bathurst submitted similar observations were made by Lindgren J in Re APN News & Media Limited[29]. In that case, Lindgren J observed[30]that such fees are common and have not been an obstacle to the making of orders under subsection 411(1) of the Act. His Honour held that the issue is whether "the liability to pay the break fee would be likely to coerce offeree shareholders into agreeing to the scheme, or to deter companies from making a competing offer."[31]

67 Mr Bathurst submitted that in this case, the break fee is not payable if Scheme Shareholders fail to support the Scheme by the requisite majorities (see clause 11.2 of the Scheme Implementation Agreement which sets out the circumstances in which the fee is payable).

68 Mr Bathurst submitted that accordingly, there can be no suggestion that provision for its payment in those limited circumstances will operate to coerce Scheme Shareholders to vote in favour of the Scheme.

69 Mr Bathurst referred to the Takeovers Panel's Guidance Note 7 "Lock-up devices" where it said :

"It is good practice for anyone who agrees to pay a break fee to agree a fixed or capped figure, whether dollar or percentage based. In this regard, the Panel will use a guideline that a fee should not exceed 1% of the equity value of the target. For this purpose, the equity value is the aggregate of the value of all classes of equity securities issued by the target, where relevant having regard to the value of the consideration under the bid, as at the date the bid is announced."[32]

70 Mr Bathurst also referred to the report of Grant Samuel where it valued the aggregate of the Scheme Consideration and Coles' final dividend (of $0.25 per share) at between $14.87 and $15.44 per share.[33] Mr Bathurst submitted that as at 21 September 2007 there were 1,198,884,888 Coles share on issue.[34] Accordingly, the total implied value of the transaction (being the number of Coles shares on issue multiplied by the value of the consideration offered) was between approximately $17.8 billion and $18.5 billion, with the result that the break fee of $150 million is between 0.84% and 0.81% of the value of the transaction (and below the 1% guideline established by the Takeovers Panel).

71 As to the possibility that the break fee might deter other companies from making a competing offer, Mr Bathurst submitted the break fee arrangement is expressly subject to a qualification contained in clause 11.3(b) of the Scheme Implementation Agreement which provides that if the Takeovers Panel determines that Coles' agreement to make the payment to, or the making of the payment to, Bidder constitutes or would constitute "unacceptable circumstances" within the meaning of the Act, then to that extent Coles is not obliged to make the payment.

72 Mr Bathurst submitted that this qualification protects against the risk that the break fee arrangement might otherwise be seen to operate as an unacceptable deterrence to the making of a competing offer.

73 Mr Bathurst further submitted that the break fee would not have that effect in any event, as its payment represents only approximately $0.12 per share (or 0.81% of the low end of Grant Samuel's assessment of the value of the Wesfarmers offer).

74 I accept Mr Bathurst's submissions. I am satisfied accordingly that the break fee does not contain any matter that may prevent the Scheme going forward for consideration of the Scheme Shareholders.

75 Coles has included certain information such as the full Independent Expert's report and the full Scheme Implementation Agreement in a booklet called the Scheme Booklet Supplement. The booklet will not be sent to Scheme Shareholders unless they ask for it. It will be available on the Coles' website.

76 I accept Mr Bathurst's submission that in the light of the summaries and other information contained in the Scheme Booklet , the Scheme Booklet Supplement does not contain any matter otherwise required to be sent to the members under paragraph 412 (1) (a), and that otherwise that paragraph is complied with.

77 The Independent Expert's report by Grant Samuel concluded that if no superior proposal emerges prior to the Scheme meeting, Grant Samuel's judgment is that Wesfarmers' proposal would be in the interest of shareholders.

78 In coming to that conclusion, Grant Samuel found that Wesfarmers' offer was not "fair" in the sense that the offer did not fall within the current fair value range of Coles shares and that this suggested that shareholders are not receiving a full premium for control under the Wesfarmers' Proposal. Grant Samuel also said choosing between the arguments for and against the proposal is a finely balanced judgment and that shareholders could validly form either view.

79 I suggested, and Coles accepted, that the Chairman's letter to shareholders should be amended to contain these elements of Grant Samuel's report to ensure a balanced view of the report is given. I accept that Exhibit A amending the explanatory statement achieves that result.

80 I was informed that the funding agreement would be signed before the meetings were held. I expressed the view that this was important to ensure, and that if it was not done, the court should be informed if approval of the scheme is subsequently sought.

81 I was provided with evidence that the deed poll has now been signed and executed and that the Scheme Implementation Agreement has been signed. I was also informed that Coles' annual accounts for 2007 have now been audited and are relied upon in the Scheme Booklet.

82 I raised with Mr Bathurst the issue that a reference to directors' fiduciary duties in the explanatory statement or its annexures may not pick up prescriptive duties (as opposed to prescriptive duties) such as the duty of a director to exercise reasonable care and skill or the duty of a director to act bona fide in what the director considers to be the best interests of the company as a whole. I had in mind observations by members of the High Court on the nature of fiduciary duties in Breen v Williams[35] and Pilmer v Duke Group Ltd (in liquidation)[36] To avoid any uncertainty on the issue of directors' duties, I suggested that the reference should be to the "directors' duties, whether statutory or otherwise" rather than to the "directors' fiduciary duties." Mr Bathurst agreed that would be done where it could. He pointed out that it could not be done in the SIA as that had already been signed.

83 I do not consider it necessary to go through the minor drafting matters that have been attended to. I accept the amendments which have been made in Exhibit C.

84 Mr Bathurst pointed out to me the novel approach being taken by Coles with shareholders whose mail has been returned as not known at the address used by Coles. I accept the procedure that he has put forward for dealing with that circumstance.

85 In the circumstances, for the reasons I have given, I propose to make the orders as sought by the plaintiff.

[1] (1977) 3 ACLR 69.

[2] (1977) 3 ACLR 69, 72.

[3] (1977) 3 ACLR 69, 73.

[4] [1993] HCA 15; (1993) 177 CLR 485.

[5] [2005] NSWSC 240; (2005) 215 ALR 562, per Barrett J at 569-570.

[6] [2003] FCA 82; (2003) 45 ACSR 34, per Conti J at 36-37..

[7] (1994) 15 ACSR 494.

[8] (1994) 15 ACSR 494, 497.

[9] (1994) 15 ACSR 494, 499.

[10] (1994) 15 ACSR 494, 497.

[11] [2007] FCA 770; (2007) 62 ACSR 400.

[12] [2007] FCA 770; (2007) 62 ACSR 400, at [20].

[13] [2001] NSWSC 40; (2001) 36 ACSR 758.

[14] [2001] NSWSC 40; (2001) 36 ACSR 758, at [9].

[15] [2007] FCA 770; (2007) 62 ACSR 400, 411.

[16] [2007] FCA 770; (2007) 62 ACSR 400, 411.

[17] [2007] FCA 770; (2007) 62 ACSR 400, 411, at [55].

[18] [2007] QSC 37; (2007) 61 ACSR 266.

[19] [2007] QSC 37; (2007) 61 ACSR 266, at [39].

[20] [2007] FCA 770; (2007) 62 ACSR 400, 412-413, at [59]-[61].

[21] [2007] QSC 37; (2007) 61 ACSR 266.

[22] [2007] FCA 1104 at [21].

[23] [2007] QSC 37; (2007) 61 ACSR 266.

[24] [2007] QSC 37; (2007) 61 ACSR 266, at

[25] [2007] FCA 770; (2007) 62 ACSR 400.

[26] [2001] NSWSC 40; (2001) 36 ACSR 758.

[27] See, for example, paragraph 2 of the letter from the Chairman of Coles on page 10 of the draft scheme booklet; the ASX announcement which is Exhibit PDW5 and the ASX announcement which is PDW6.

[28] [2006] FCA 670; (2006) 59 ACSR 82 at 84 ([7]).

[29] [2007] FCA 770; (2007) 62 ACSR 400.

[33] See section 9.1 of Grant Samuel's report (section 1 of the draft scheme booklet supplement).

[34] See Exhibit RJED6 to the Dammery affidavit.

[36] [2001] HCA 31; (2001) 207 CLR 165.