Re Foster's Group Limited (No 2) [2011] VSC 547 (26 October 2011)

2 SABMiller plc, through its indirect wholly owned Australian subsidiary, SABMiller Beverage Investments Pty Limited, proposes to acquire all of the shares in Foster's. SABMiller plc is a company incorporated in England and Wales. It is listed on the London and Johannesburg stock exchanges. SABMiller is the world's largest brewer by volume, with operations in a number of regions around the world.

3 In broad terms, it is proposed that the acquisition of the shares in Foster's by SABMiller will be achieved through the implementation of a proposed scheme of arrangement[2] between Foster's and its shareholders and through the equal reduction of the share capital of Foster's ("Capital Return"). It is proposed that Foster's shareholders will receive $5.40 for each fully paid share and between $1.36 and $2.17 for each partly paid share.

4 Foster's seeks orders under s 411(1) of the Corporations Act 2001 (Cth) for the convening of a meeting of its shareholders for the purpose of voting on the proposed scheme. The proposed scheme should be put to the Foster's shareholders for their consideration at the proposed meeting. This will give them an opportunity to express their views as owners of the company as to whether they support the proposed scheme or not. Having heard the debate and considered the explanatory memorandum, they can then exercise their right to vote in favour of or against the proposed scheme. That decision is theirs alone.

5 Earlier today I made orders for the convening of the meeting to be held on 1 December 2011 in relation to the proposed scheme. These are my reasons for making those orders.

6 Foster's and SABMiller have entered into a scheme implementation deed. Under that deed, Foster's agreed to propose and implement the scheme and the Capital Return and SABMiller agreed to assist Foster's in this regard. Together, the proposed scheme and the Capital Return are referred to as "the Transaction".

7 If the Transaction is implemented then it is intended that the Foster's fully paid shareholders will receive $5.40 for each share:

(a) $5.10 cash per share from SABMiller Beverage Investments under the Scheme;

(b) 30 cents cash per share from Foster's under the Capital Return.

8 So far as the Foster's partly paid shareholders are concerned, it is intended that:

(a) the Capital Return of 30 cents per share will be applied to reduce the issue price (the effect being to reduce the unpaid call liability) of each Foster's partly paid share;

(b) they will receive, as scheme consideration, amounts in the range of $1.36 per share to $2.17 per share depending upon the unpaid amount of the issue price of the share.

9 The Capital Return is subject to receipt of a class ruling from the Australian Taxation Office that the Capital Return is not a dividend for Australian income tax purposes. If the ATO class ruling is not obtained then the Capital Return will not be implemented. In those circumstances, the scheme consideration for the Foster's fully paid shares will be increased by 30 cents from $5.10 to $5.40 per share. If the ATO class ruling is obtained but only in respect of part of the 30 cent Capital Return amount, then the Capital Return will only proceed in respect of that part. For example, if the ATO class ruling is obtained in respect of the amount of 15 cents per share, then Foster's will make a capital return of 15 cents per share to fully paid shareholders and the scheme consideration payable to them by SABMiller Beverage Investments would increase by 15 cents from $5.10 to $5.25. The effect is that if the scheme is implemented, fully paid shareholders will receive $5.40 per share whether or not the Capital Return proceeds fully, partially or not at all.

10 If the ATO class ruling is not obtained or is only partially obtained, no change will be made to the amount to be received by holders of Foster's partly paid shares; they will still receive between $1.36 and $2.17 if the scheme is implemented.

11 According to the current proposed timetable, payment for their shares will be sent to Foster's shareholders on 21 December 2011 if the Transaction is implemented.

12 The Foster's directors unanimously recommend that the Foster's shareholders vote in favour of the proposed scheme, in the absence of a superior proposal. They intend to vote in favour of the scheme resolution for all shares they hold or control. An independent expert, Grant Samuel & Associates Pty Limited, is of the opinion that the proposed scheme is in the best interests of both the fully paid and partly paid shareholders.

13 As the cases make clear and as I have said previously, on an application for orders convening a meeting of members to consider a proposal for a scheme of arrangement, the Court has a supervisory role. [3] The Court will not delve into issues of fairness at the first court hearing unless it is clear on its face (which is not the case here) that the scheme would not be approved by the Court at the second hearing, even if the shareholders voted in favour of it. Rather, the Court's attention is focussed on whether the substantive and procedural requirements of s 411 of the Corporations Act have been fulfilled.

14 The first substantive requirement is that the Court must be satisfied that the scheme is an "arrangement" within s 411(1). Change of control schemes, similar to that proposed by Foster's, have been considered by the courts on a number of occasions and the proposed scheme is clearly an "arrangement".[4]

15 The Court must also consider the scheme booklet to assess whether (as here) it adequately explains the effect of the scheme and sets out information which is prescribed or which is material for the shareholders to know before they make a decision. In addition, the Court must be satisfied (as I am here) that the Australian Securities and Investments Commission ("ASIC") has had a reasonable opportunity to examine the terms of the proposed scheme and to make submissions to the Court. In this case, ASIC has provided a letter stating that it does not intend to appear to make submissions to the Court.

16 The Court also reviews the procedural arrangements for the calling and conduct of the meeting. In this case, those arrangements are satisfactory.

17 Finally, the Court addresses the issue of classes at the first court hearing if the scheme company raises with the Court that there may be such an issue. In those circumstances, "the court will deal with it as best it can on the material then before it, even though the situation is one in which submissions are received from the subject company alone".[5] Potential issues of separate classes have been raised by Foster's in relation to partly paid shareholders and certain fully paid shareholders who hold performance rights.

18 The test for identifying a class for the purposes of a scheme of arrangement was formulated by Bowen LJ in 1892 in Sovereign Life Assurance Co v Dodd as follows:

The word 'class' is vague, and to find out what is meant by it we must look at the scope of the section, which is a section enabling the Court to order a meeting of a class of creditors to be called. It seems plain that we must give such a meaning to the term 'class' as will prevent the section being so worked as to result in confiscation and injustice, and that it must be confined to those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest. [6]

19 That test has been adopted ever since in members' schemes. In more recent times, the courts have observed that the test laid down is not one of identical treatment but rather one of community of interest.[7] As Santow J noted, "[d]ivergent commercial interests extrinsic to share membership are ordinarily not a factor which should differentiate classes".[8] The courts are also mindful that if there is more than one class, each will have a power of veto.[9] As Lush J stated in Re International Harvester this:

... undermines the basic approach of decision by a large majority, and ... should only be permitted if there are dissimilar interests related to the company and its scheme to be protected. The fact that two views may be expressed at a meeting because one group... prefer[s] one course, while another group prefers another, is not a reason for calling two separate meetings. [10]

20 There are 786,510 partly paid shares representing approximately 0.04% of Foster's issued share capital. They are held by four registered holders with one of the four holding some 80% of those shares. The partly paid shares were issued under 1980's trust deeds relating to employee share plans with the last issue being made in 1989. The position now is that each partly paid share is paid up to 1.67 cents with issue prices ranging between $4.32 and $9.40. More than 99% of the Foster's partly paid shares are "out of the money" in the sense that their issue price exceeds either the Foster's share price, the scheme consideration of $5.10 per Foster's fully paid share or the Transaction consideration of $5.40 per Foster's fully paid share.

21 No call may be made by Foster's unless on the day on which the call is made and for each of the preceding 40 business days, the current market price of a fully paid Foster's share either equals or exceeds the issue price of the relevant Foster's partly paid share.

22 Under the terms of the trust deeds, the holders of partly paid shares are entitled to participate in reconstructions, amalgamations, mergers and schemes of arrangement involving Foster's upon the same basis as the holders of fully paid shares after due regard (in the opinion of Foster's directors) has been taken of the unpaid portion of the issue price of the partly paid shares. In determining the basis upon which the Foster's partly paid shares were to participate in the Transaction, the Foster's board took into account the unpaid portion of the issue price of those shares, the terms upon which the Foster's partly paid shareholders have participated in previous transactions and the degree of "option value" that the Foster's partly paid shares have in light of their terms of issue and, in particular, the call limitations on the part of Foster's. As part of the valuation process undertaken in respect of the Foster's partly paid shares, a Black-Scholes option valuation methodology was employed, from which the amount to be paid per tranche for the Foster's partly paid shares was derived. The Black-Scholes valuation methodology employed in this case:

(a) takes into account the application of the 30 cent capital return against the unpaid issue price;

(b) takes into account the differential in the issue prices and the unpaid call liability as between the tranches of the Foster's partly paid shares on issue;

(c) uses the scheme consideration amount of $5.10 as the starting price of the Foster's fully paid shares;

(d) does not factor in or take into account any right of Foster's to make a call on the unpaid issue price.

23 In accordance with Foster's constitution and the terms of issue of the partly paid shares, the vote of the holders of partly paid shares will be proportionate to the amounts paid up on those shares. Proportionate voting in this regard is not unusual.[11]

24 In a change of control transaction, such as the present, all existing shareholders (whether fully or partly paid) will relinquish their shares. In the case of fully paid shareholders, they will receive cash in exchange for their shares. Partly paid shareholders will receive cash (of a lesser amount than fully paid shareholders) and will no longer have a call liability. In this sense, there are differences between the partly paid shareholders and the fully paid shareholders. The issue is whether those differences lead to the conclusion that there is no community of interest between the partly and fully paid shareholders such that there should be separate classes for voting at the scheme meeting.

25 Last year, Stone J had cause to consider the question of separate classes for fully and partly paid shareholders in Re Wattyl Ltd.[12] In that case, the fully paid shareholders were to receive $1.67 per share with partly paid shareholders to receive $0.37 per share (the call price being $1.30). Stone J accepted that the partly paid shareholders were being treated equally with the holders of fully paid shares. Her Honour observed:

It is not denied that in some respects the position of the partly paid shareholders is different from that of fully paid shareholders. This much is clear simply from the fact that the former are liable to calls whereas the latter are not. Moreover, Art 88(3) of the Wattyl constitution provides that whereas fully paid shares carry one vote per share, a partly paid share carries a fractional vote 'equivalent to the proportion which the amount paid (not credited) is of the total amount paid and payable (excluding amounts credited)'.

It does not follow, however that because different rights attach to partly paid shares holders of these shares are to be treated as a separate class for present purposes. The question is whether at the meeting convened for the purpose of obtaining shareholder approval of the Scheme the interests of the two groups of shareholders are so different 'as to make it impossible for them to consult together with a view to their common interest'.

...

Where ... community of interest... is lacking, even identical treatment will not be a sufficient basis for treating different groups of shareholders as being of the same class. The principles governing the distinction between classes are directed to avoiding the unfairness which would result if groups that do not have a community of interest were denied separate meetings in which to consider a proposed scheme of arrangement. The policy underlying those principles would be equally offended by a decision to order a separate meeting in respect of groups which in fact have the requisite community of interest.

In this case the issue before the both fully paid and partly paid shareholders is whether to consent to Valspar Australia's acquisition of their share at a designated price. Although the price for a fully paid share is greater than for a partly paid share, on a pro rata basis each group would be paid the same in respect of the equity they have in their shares. That being so the issue for all shareholders is the same, namely whether they accept a price that ascribes a certain price to their shares on a basis that is proportionate to the value which each shareholder has in the shares. Although not treated the same, the groups can be seen to be being treated fairly, and, in that sense, equally. In any event, I am satisfied that the requisite community of interest exists and that the partly paid shares do not form a separate class.[13]

26 There appears to be a factual difference between Re Wattyl and the present case. In Re Wattyl the partly paid shares appear to have been "in the money." As noted above, in this case, more than 99% of the partly paid shares are "out of the money." Does that make a difference?

27 It was submitted by Foster's that in considering the question of equal and fair treatment, it is necessary to look at the basis upon which value has been attributed to the fully paid shares and the partly paid shares for the purposes of the scheme and, if it be relevant to the class question, the basis of participation in the Capital Return. The value attributed to the fully paid shares is, in essence, the amount per fully paid share offered by the bidder. On this basis, it was submitted, each of the Foster's fully paid shareholders is receiving a price which fully reflects the value in their shares. As to the Capital Return, each fully paid shareholder is receiving in cash the full amount of the 30 cent per share capital return.

28 In relation to the value attributed to the Foster's partly paid shares, Foster's noted that those shareholders are entitled to participate in reconstructions, amalgamations, mergers and schemes of arrangement involving Foster's upon the same basis as the holders of fully paid shares after due regard (in the opinion of Foster's directors) has been taken of the unpaid portion of the issue price of the partly paid shares. Further, Foster's noted that the holders of the Foster's partly paid shares are not exposed to an immediate call by Foster's given their terms of issue and in particular the call limitation which I have referred to in [21].

29 Foster's submitted that the valuation process undertaken by the Foster's board and the valuation methodology adopted similarly identifies prices which fully reflect the value in the respective partly paid shares. That process and that methodology, it was submitted, take account of the differential in the issue prices, have due regard to the unpaid portion of the issue price and take account of the option value that the Foster's partly paid shares have. Further, and to the extent that it is relevant to the class question, Foster's submitted that the participation of the partly paid shares in the Capital Return through the application of the 30 cent amount against the unpaid issue price reflects and is consistent with the terms upon which those shares were issued. Accordingly, it was contended, as both the valuation process and methodology adopted in respect of the partly paid shares is consistent with and reflects the terms governing the Foster's partly paid shares, the value ascribed to them is one that is fair and equal as far as relations between the holders of Foster's fully paid shares and the holders of Foster's partly paid shares is concerned, as the respective values attributed to the fully paid shares and the partly paid shares maintain their value relativities. Further, it was submitted that any element of beneficial or generous treatment of the Foster's partly paid shares by reason of the matters to which the independent expert Grant Samuel has referred does not displace this equal and fair treatment, and does not deprive the Foster's fully paid shareholders of any opportunity for a price increment.

30 Foster's submitted that even if it could be said that the terms of participation of the Foster's partly paid shares under the scheme and the Capital Return afforded some measure of preferred treatment to the holders of those shares over the Foster's fully paid shareholders, that treatment would not be a reason to require the Foster's fully paid shareholders and the Foster's partly paid shareholders to vote in separate classes for the purposes of considering the scheme.

31 Foster's contended that it is difficult to see from the perspective of the Foster's partly paid shareholders why any preferred treatment of them could be said to result in the required "community of interest" being lost. Nor, it was submitted, from the perspective of the Foster's fully paid shareholders (again assuming for the purposes of the argument that the partly paid shareholders are being afforded preferred treatment under the scheme), can the requisite community of interest be seen to be lost.

32 The contention was developed as follows. First, it was said, any element of preferred treatment is deminimis given the aggregate amount being paid to the holders of partly paid shares ($1.1 million) in the context of the amount of $9.89 billion being paid to the holders of fully paid shares under the scheme. Further, it was put, the Foster's fully paid shareholders are not receiving less per share by reason of the amounts being paid to the Foster's partly paid shareholders under the scheme. Accordingly, it was contended that each group is well able to consult together with a view to determining whether the proposed scheme is acceptable or not acceptable to them.

33 It was also submitted that there is no basis for any class separation within the holders of Foster's partly paid shares. In this regard, it was submitted that each of the holders of those shares has been treated equally and fairly under the valuation process undertaken and the Black-Scholes option valuation methodology employed. Foster's referred to the observations of Barrett J in Re MIA Group Ltd[14] in relation to the Black-Scholes valuation methodology:

The Black-Scholes option pricing method uses a mathematical formula to ascribe a value to an option by reference to a combination of factors including the applicable share price, the option exercise price, the time until option expiry and rates of return for the time being prevailing in the market. For present purposes, its significant feature is that it can be applied, at a particular time, to options having different exercise prices and different expiry dates so as to produce what are argued to be consistent relativities of value....

In the present case, consistent and indiscriminate application of the same pricing or valuation methodology to options having different characteristics in terms of exercise price and expiry, being a methodology that has regard to value criteria in one market at one time, should lay to rest any argument that those different characteristics so destroy community of interest as to indicate different classes. The matter is, to my mind, sufficiently clear to make it appropriate that a single meeting of all optionholders be convened on the basis that separate classes do not exist. Any contrary view can be agitated in due course should anyone see fit to raise it.[15]

34 I accept the submission that such reasoning applies equally in the present case in respect of partly paid shares. By the employment of the Black-Scholes methodology in valuing the Foster's partly paid shares, there has been a consistent and indiscriminate application of the same methodology to the various tranches of partly paid shares, which have different issue prices. Further, as to the Capital Return, there has been equal treatment between the tranches of partly paid shares as the 30 cent amount has been applied in the same manner across all tranches, that is such amount has been applied against the unpaid issue price of the partly paid shares. The Black-Scholes methodology has then taken account of that application of the capital return in ascribing a value to the partly paid shares.

35 It was submitted and I accept that to the extent that there has been any favourable or beneficial valuation treatment of the holders of Foster's partly paid shares by reason of not taking into account Foster's right to call or using the scheme consideration of $5.10 as the starting price rather than the pre-announcement share price of $4.53, such favourable or beneficial treatment has been applied consistently and indiscriminately across all tranches of partly paid shares through the Black-Scholes methodology.

36 In the context of classes, counsel for Fosters referred to the position of two current employees of Fosters who are beneficially entitled to partly paid shares. While these two persons remain employees a call cannot be made by Foster's in respect of their shares. In this sense they have greater immunity from a call than the other partly paid shareholders, but only so long as they are still employees. As noted above, the Black-Scholes methodology adopted has not taken into account any right on the part of Foster's to make a call. Accordingly, all the other partly paid shareholders are being treated as being in the same position for call immunisation purposes as the two employees. It was submitted that the extent to which this factor may confer a benefit on the other partly paid shareholders does not render their rights or interests so dissimilar as to make it impossible for them to consult together.

37 In my view, there is nothing to prevent all Foster's shareholders from meeting together, expressing their views, listening to others and then voting on the proposed scheme. The fact that each will receive an amount which may differ from others is not a reason why there should be separate classes in circumstances where the relativities between shareholders appear to have been preserved. The position may have been otherwise if it was obvious that the interests of the shareholders were significantly dissimilar. However, it seems to me that they are not. Each shareholder (whether they are partly or fully paid) is faced with the same question. "Should I vote in favour of the scheme which, if implemented, will mean that I will receive the amount that is proposed to be paid for my shares or should I vote against the scheme?" No doubt the answer to that question will be informed by a number of matters which may include the amount to be paid to other shareholders if the scheme is implemented, non-monetary considerations and the personal circumstances of the individual shareholder.

38 Foster's has a plan under which performance rights are issued to senior executives of Foster's. The performance rights are not quoted on ASX or on any other financial market. Upon vesting, each performance right entitles the holder to be issued with one Foster's fully paid share. Vesting is subject to the satisfaction of certain performance conditions.

39 Fourteen senior executives of Foster's hold performance rights. Ten of them also hold Foster's fully paid shares. Foster's and each holder of performance rights have entered into a Vesting and Cancellation Deed in respect of their performance rights. The effect of the deed is that some of the performance rights are to be vested and the remainder cancelled. As to those performance rights that vest, Foster's fully paid shares will be allocated so that they are able to participate in the Transaction in the same way as all other Foster's fully paid shares.

40 The Foster's Board has also determined that if the scheme becomes effective, Foster's will pay to each holder of performance rights a cash bonus of an amount equal to 13.25 cents (which is equivalent to the amount of the total final dividend per share declared by Foster's on 23 August 2011) in respect of each performance right that vests.

41 Foster's submitted that the vesting and cancellation arrangements that have been agreed upon in respect of the performance rights and the proposed cash payments to be made to performance rights holders do not require those shareholders who hold performance rights to be treated as a separate class for the purposes of the Scheme.

42 The position of performance rights holders was considered by Jacobson J in Re Cashcard Australia Limited.[16] His Honour considered that no class issue arose on the basis that each shareholder would get the same benefit for his or her shares under the scheme and that the possibility for two shareholders to receive additional payments did not mean that their rights were so dissimilar that they could not consult together with the other shareholders. I agree with this view. There may be a number of benefits to shareholders that are peculiar to them because of some personal arrangements that they have. In this regard, the scheme may be more commercially advantageous for them than for other shareholders. However, that does not mean that they cannot consult with other shareholders who are in a different position. Information about the performance rights is contained in the explanatory memorandum.

43 In summary, in my view all shareholders - partly paid, fully paid (including those who hold performance rights and those who do not) - are able to consult together at the scheme meeting. There is only one class of scheme shareholders.

44 The proposed scheme contains a number of features that are common in change of control schemes. None of them are exceptional and I will mention just one, which is the break fee. The break fee is $99 million and is payable by Foster's to SABMiller in certain circumstances, essentially where the scheme does not proceed. However, the fee is not payable if the reason for the scheme not proceeding is because the shareholders do not approve the scheme or the Capital Return. There is a Takeovers Panel guideline which states that break fees should not exceed 1% of the equity value of the target. Where the break fee is not in excess of that percentage, the courts have been willing to make orders for the convening of the first meeting of shareholders. What is relevant is whether the liability to pay the break fee would be likely to coerce the scheme company's shareholders into agreeing to the scheme or to deter other companies from making a competing offer. Here, the break fee represents, on some views, slightly over 1% of the equity value of Foster's. In the context of the amounts involved in the proposed scheme, I do not think that it could be said that the amount of the break fee is likely to affect how the shareholders will vote let alone coerce them. The margin by which the fee may exceed 1% is so minimal that this should not be a barrier to permitting the proposal for the scheme to proceed to the next stage.

45 For the reasons given above, I made orders for the convening of the meeting of members for the purpose of considering and voting on the proposed scheme.

[1] Foster's also produces cider and has a portfolio of spirits, ready-to-drink and non-alcohol brands.

[2] Section 411 of the Corporations Act 2001 (Cth).

[3] Re Healthscope Limited [2010] VSC 367; Re NRMA Ltd [2000] NSWSC 82; (2000) 156 FLR 349; Re CSR Limited [2010] FCAFC 34; (2010) 183 FCR 358; Re Foster's Group Limited [2011] VSC 93.

[4] For example, see Re Healthscope Ltd [2010] VSC 367 and Re AXA Asia Pacific Holdings Ltd [2011] VSC 4.

[5] Re MAC Services Group Ltd [2010] NSWSC 1316; (2010) 80 ACSR 390 per Barrett J at 394.

[6] [1892] 2 QB 573 at 583.

[7] Re Orica Ltd [2010] VSC 231; Re Hills Motorway Ltd [2002] NSWSC 897; (2002) 43 ACSR 101.

[8] Re NRMA Ltd [2000] NSWSC 82; (2000) 156 FLR 349 at 371.

[9] Re International Harvester (Aust) Ltd [1983] VicRp 89; (1983) 7 ACLR 796, Re Opes Prime Stockbroking Ltd [2009] FCA 813; (2009) 179 FCR 20, Re Cashcard Australia Ltd [2004] FCA 223; (2004) 48 ACSR 738.

[10] [1983] VicRp 89; (1983) 7 ACLR 796 at 799.

[11] See for example, Re Wattyl Ltd [2010] FCA 854.

[12] [2010] FCA 854.

[13] [2010] FCA 854 [14]-[17]. Stone J made similar observations in Re Mosaic Oil NL [2010] FCA 985.

[14] [2004] NSWSC 712; (2004) 50 ACSR 29.

[16] [2004] FCA 223; (2004) 48 ACSR 738.