Re Foster's Group Limited [2011] VSC 93 (21 March 2011)

2 Foster's proposes to demerge Treasury Wine Estates from the existing corporate structure of the Foster's group. In this way, the wine business will be separated from the rest of Foster's business. Foster's proposes to effect the demerger by a reduction of its share capital and the implementation of a proposed scheme of arrangement under s411 of the Corporations Act 2001 (Cth). Under the proposed scheme, subject to some exceptions which I mention below, the holders of shares in Foster's (whether they be fully paid or partly paid) will receive one ordinary share in Treasury Wine Estates for each three shares that they hold in Foster's. It is intended that Treasury Wine Estates will be listed on the official list of ASX following the demerger.

3 Foster's sought orders under s411(1) of the Corporations Act for the convening of a meeting of its shareholders for the purpose of voting on the proposed scheme. I made those orders on 17 March 2010. These are my reasons for making them.

4 Foster's and Treasury Wine Estates have entered into an Implementation Deed under which they agree to take all the necessary steps required to implement the proposed scheme and the capital reduction to bring about the demerger. In addition, by a deed poll in favour of the Foster's shareholders participating in the scheme, Treasury Wine Estates will be bound to perform its obligations under the Implementation Deed and the proposed scheme.

5 Foster's and Foster's Australia have entered into a Transfer Agreement under which Foster's has agreed to pay to Foster's Australia the capital reduction amount (which I refer to below) in consideration of Foster's Australia transferring the Treasury Wine Estates shares to the eligible Foster's shareholders under the scheme.

Outline of the demerger and how it is to be effected

6 The demerger is to be effected by performance of the terms of the Implementation Deed, the Transfer Agreement and the proposed scheme. In summary, the proposed demerger steps are as follows:

(a) Foster's will reduce its capital by approximately $1.25billion being an amount determined by Foster's after consultation with the Australian Taxation Office to ensure that the allocation between capital and profits (for tax purposes) appropriately reflects the circumstances of the demerger;

(b) the capital reduction will be satisfied by Foster's agreeing to pay to Foster's Australia the capital reduction amount, in exchange for the transfer by Foster's Australia of the Treasury Wine Estates shares to the "eligible shareholders" (in effect, all Foster's shareholders other than some overseas shareholders (referred to as the "ineligible overseas shareholders"));

(c) the payment of the capital reduction amount may be left outstanding as an intercompany receivable between Foster's and Foster's Australia or offset to the extent possible against any outstanding loan owed by Foster's Australia to Foster's as at the date of transfer of the Treasury Wine Estates shares;

(d) in respect of each ineligible overseas shareholder, the Treasury Wine Estates shares which they would otherwise have received will be transferred to a selling agent and sold with the proceeds being paid to them as soon as practicable following the sale of those shares;

(e) in respect of each eligible shareholder with a registered address in Australia or New Zealand who holds 1,000 shares in Foster's or less and who elects to sell their Treasury Wine Estates shares through the share sale facility, the Treasury Wine Estates shares which they would otherwise have received will also be transferred to a selling agent and sold with the proceeds being paid to them as soon as practicable following the sale of those shares;

(f) Treasury Wine Estates will apply to ASX for admission to the official list of ASX and for official quotation of the Treasury Wine Estates shares on ASX;

(g) the capital reduction amount to be paid by Foster's to its subsidiary, Foster's Australia, is likely to be subsequently forgiven by Foster's Australia.

7 An ineligible overseas shareholder is one whose registered address is in a jurisdiction in which there are legal or other restrictions on transferring the Treasury Wine Estates shares in the manner proposed.

8 The Foster's directors are unanimously of the view that the demerger is in the best interests of Foster's shareholders. 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 demerger is in the best interests of both the fully paid and partly paid shareholders.

9 As the cases make clear, 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. [1] 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.

10 The first substantive requirement is that the Court must be satisfied that the scheme is an "arrangement" within s411(1). Demerger 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".[2]

11 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. However, ASIC did request that certain matters (which I deal with later in these reasons) be brought to the attention of the Court.

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

13 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 before it, even though the situation is one in which submissions are received from the subject company alone."[3] Potential issues of separate classes have been raised both by Foster's and by ASIC in its correspondence. The first issue concerns foreign shareholders and the second concerns partly paid shareholders.

14 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. [4]

15 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.[5] As Santow J has noted, "divergent commercial interests extrinsic to share membership are ordinarily not a factor which should differentiate classes."[6] The courts are also mindful that if there is more than one class, each will have a power of veto.[7] 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 prefers one course ... while another group prefers another, is not a reason for calling two separate meetings. [8]

16 Foster's estimates that 0.07% of its total ordinary shares will be held by ineligible overseas shareholders.

17 As noted above, under the proposed scheme, the Treasury Wine Estates shares that would have been transferred to them will instead be transferred to a selling agent and sold by that agent on their behalf. As such, they receive different treatment under the proposed scheme from other shareholders.

18 However, there is still community of interest between the ineligible overseas shareholders and the other shareholders in considering whether it is in their collective interests for the wine business to be demerged from the balance of Foster's business. In those circumstances, although there is differential treatment in respect of this very small percentage of Foster's shareholders, there is no separate class for the purposes of the proposed scheme.

19 I also note that the treatment of the ineligible overseas shareholders under the proposed scheme is comparable to that of ineligible overseas shareholders the subject of the demerger schemes in each of Re CSR Ltd[9] and Re Orica Limited[10]. The overseas shareholders were not treated as a separate class in those cases.

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. The issue price in respect of a substantial majority of the partly paid shares exceeds the current share price of Foster's fully paid shares. In this sense, they are "out of the money".

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 this regard, the Foster's Board has determined that the holders of partly paid shares are entitled to participate in the demerger on the same basis as holders of fully paid shares. As such, they will be entitled to receive one Treasury Wine Estates share for every three Foster's partly paid shares held by them.

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 If the proposed scheme is implemented, the holders of the partly paid shares in Foster's will continue to hold them (as will the holders of fully paid shares continue to hold their shares in Foster's). The terms of issue of the partly paid shares are not altered or varied by the terms of the proposed scheme or by reason of its implementation.

25 ASIC requested that the Court's attention be drawn to those parts of the scheme booklet and the independent expert's report which deal with what may be additional advantages of the proposed scheme to holders of partly paid shares. Those sections of the scheme booklet and independent expert's report are set out in full in the schedule to these reasons.

26 In summary, the main potential advantages to holders of partly paid Foster's shares are that:

(a) they receive the same number of Treasury Wine Estates shares as holders of fully paid Foster's shares without having to pay up the unpaid amounts on their Foster's partly paid shares; and

(b) the shares that they will hold in Treasury Wine Estates will rank equally with all other shares in that company, will carry the same rights to dividends and will be freely transferable unlike the partly paid shares that they hold in Foster's.

27 However, these advantages must be viewed in context. As noted in the scheme booklet, the amount paid up on, and the issue price of, the partly paid shares in Foster's will remain the same after the demerger. This is so even though Foster's asset base will be reduced (because it will no longer have the wine business). This may result in partly paid shares which are "in the money" (that is, their issue price is less than the current share price of Foster's fully paid shares) becoming "out of the money" and those that are already "out of the money" becoming even further "out of the money" if, after the demerger has been effected, the share price of Foster's fully paid shares decreases as a result of its reduced asset base.

28 As counsel for Foster's submitted, what is important in a demerger scheme such as that proposed is the maintenance of the existing economic relativities between the fully paid shareholders and the partly paid shareholders so that the relativities that existed between them when the two businesses were part of the one corporate structure are maintained when the two businesses are separated.

29 Counsel submitted that the preservation of the call liability in these circumstances necessitates that the partly paid shareholders receive shares in Treasury Wine Estates under the proposed scheme on the same basis or footing as the fully paid shareholders. In that way the partly paid shareholders post demerger continue to have an economic interest in both the beer business and the wine business. If participation on the same footing was not afforded it would provide a windfall gain to the fully paid shareholders and distort the economic relativities that existed prior to the demerger. I accept those submissions.

30 Certainly, there is nothing in the treatment of the partly paid and fully paid shareholders that would preclude rational discussion between them at the scheme meeting. As counsel noted, the partly paid shareholders and the fully paid shareholders participate in annual general meetings. They sit down together; they have a community of interest in that meeting. If they want to talk about the businesses as they are, they can. The position is really no different in the demerger scheme; the common interest is, is it in the interests of the body of shareholders to separate the wine and beer businesses for the common good?

31 It follows that there is only one class of scheme shareholders.

32 Where, as here, proposed schemes involve a third party who will not be bound by the scheme, the courts consider the level of risk that the third party will not perform its obligations.[12] Here, neither Treasury Wine Estates nor Foster's Australia will be bound by the scheme as they are not the scheme company nor one of its members.[13] In this case, as noted above, the steps to be undertaken by Treasury Wine Estates are to be secured by a deed poll in favour of the Foster's shareholders. A deed poll in favour of the shareholders has not been executed by Foster's Australia in respect of its obligation under the Transfer Agreement to transfer the Treasury Wine Estates shares to them or the selling agent (as the case may be). However, unlike Treasury Wine Estates, Foster's Australia will remain a wholly owned subsidiary of Foster's even after the demerger. Foster's is required under the proposed scheme to procure that Foster's Australia performs it obligations. As the scheme company, Foster's will be bound by the terms of the proposed scheme. In those circumstances, I do not think that it is necessary for Foster's Australia to enter into a deed poll as the risk of non-performance by that company is sufficiently low.

33 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.

Extract from scheme booklet regarding partly paid shares

"(c) Additional relevant considerations for Foster's Partly Paid Shareholders

The advantages, disadvantages and risks of the Demerger in Section 2 also apply to, and should be considered by, Foster's Partly Paid Shareholders in determining how they should vote on the Demerger Resolutions. There are also a number of additional considerations that are specific to Foster's Partly Paid Shareholders:

• Under the Demerger, Foster's Partly Paid Shareholders will receive the same number of Treasury Wine Estates Shares per Foster's Share as Foster's Fully Paid Shareholders without having to pay up the unpaid amounts on their Foster's Partly Paid Shares.
• The amount paid up on, and the issue price of, Foster's Partly Paid Shares will not alter as a result of the Demerger, despite the Demerger decreasing the asset base of Foster's.
• Accordingly, Foster's Partly Paid Shares which are "in-the-money" (that is, their issue price is less than the share price of Foster's Partly Paid Shares) may become "out-of-the-money" and those that are already "out-of-the-money" may become even further "out-of-the-money" if, following the Demerger, the share price of Foster's Fully Paid Shares decreases as a result of the reduced asset base of New Foster's.[14]
• However, any perceived disadvantage arising from the above is ameliorated because the Foster's Partly Paid Shareholders will receive fully paid Treasury Wine Estates Shares in accordance with the terms of the Scheme if the Demerger proceeds, without having to pay up the unpaid amounts on their Foster's Partly Paid Shares. In addition, Foster's Partly Paid Shareholder's liability to pay up any unpaid amounts on their Foster's Partly Paid Shares does not increase as a result of the Demerger and Foster's ability to call any unpaid amounts will be constrained in the same manner following the Demerger as it is prior to the Demerger.

The Independent Expert, Grant Samuel, has also noted that the Demerger may provide additional potential benefits to Foster's Partly Paid Shareholders and concluded that the Demerger is in the best interests of Foster's Partly Paid Shareholders. A concise version of the Independent Expert's Report is included in Section 11. "

Extract from independent expert's report regarding partly paid shares

"Holders of Foster's partly paid shares will participate in the Proposed Demerger on broadly the same basis as holders of Foster's fully paid shares. They will be entitled to receive one Treasury Wine Estates share for every three Foster's partly paid shares held.[15] The Treasury Wine Estates shares received by the partly paid shareholders will be fully paid and will rank equally with all other Treasury Wine Estates shares, including in relation to dividends. However, the vote of partly paid shareholders on the demerger resolutions will be proportionate to the amounts paid up on the partly paid shares.

Holders of partly paid shares will not be required to pay up the unpaid amounts on their partly paid shares. Instead, the potential commitment to pay the unpaid amounts will continue to attach to partly paid shares in New Foster's (i.e. neither the amount paid up nor the issue price of Foster's partly paid shares will be adjusted as a result of the Proposed Demerger).

The Proposed Demerger will potentially improve the position of holders of partly paid shares in two ways:

• through increasing (over time) the aggregate value of the economic interests in the Beer and Wine businesses attributable to the partly paid shares; and
• through delivering a value uplift as a result of restructuring the interests of holders of partly paid shares such that these interests are held, in part, through fully paid Treasury Wine Estates shares.

Holders of partly paid shares will continue to have the same aggregate asset exposures to the Beer and Wine businesses and exposure to the same contingent call liability. Grant Samuel has concluded that the Proposed Demerger is in the best interests of holders of fully paid shares. For the same reasons Grant Samuel believes that, on balance, the Proposed Demerger is likely over time to result in an improvement in the aggregate value of the interests in the Beer and Wine businesses attributable to holders of partly paid shares. On this basis alone the Proposed Demerger is in the best interests of holders of partly paid shares.

In addition, the restructuring of the interests of holders of partly paid shares into two separate components, including fully paid shares in Treasury Wine Estates, should of itself deliver a value uplift (regardless of any impact on the value of the Beer and Wine businesses). The interests of holders of partly paid shares in the Wine business will be separated and held through fully paid Treasury Wine Estates shares, which unlike the current partly paid shares in Foster's are freely transferable. The ongoing contingent call liability will be confined to the continuing partly paid shares in New Foster's.

Because the issue price of the partly paid shares will not be adjusted, the value of the partly paid shares in New Foster's will be reduced if the New Foster's share price falls to reflect the removal of the value of Treasury Wine Estates. However, the quantum of value delivered to holders of partly paid shares in the form of fully paid Treasury Wine Estate shares should exceed any diminution in the value of the continuing partly paid shares in New Foster's. The extent of this benefit will depend upon the relativities between the issue price of various tranches of partly paid shares and the Foster's share price (because the diminution in value of those partly paid shares that are currently already well "out of the money" will be less significant). Overall, the restructuring of the interests of holders of partly paid shares resulting from the Proposed Demerger should result in an increase in the aggregate value of those interests, particularly in relation to partly paid shares with issue prices well above the current Foster's share price.

Accordingly, in Grant Samuel's opinion, the Proposed Demerger is in the best interests of holders of Foster's partly paid shares."

[1] Re Healthscope Limited [2010] VSC 367; Re NRMA Ltd [2000] NSWSC 82; (2000) 33 ACSR 595; Re CSR Limited [2010] FCAFC 34; (2010) 183 FCR 358.

[2] See for example Re Amcor Ltd [2000] VSC 157; (2000) 34 ACSR 199; Re CSR Ltd [2003] FCA 82; (2003) 45 ACSR 34; Re Orica Limited [2010] VSC 231 and Re Straits Resources Ltd [2010] FCA 1467.

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

[4] [1892] 2 QB 573 at 583.

[5] Re Orica Ltd [2010] VSC 231; Re Hills Motorway [2002] NSWSC 897; (2002) 43 ACSR 101; Re Wattyl Ltd [2010] FCA 854; Re Mosaic Oil NL [2010] FCA 985. Both Re Wattyl and Re Mosaic considered the position of partly paid shareholders in change of control schemes of arrangement. The amount payable by the bidder reflected the paid up amount of the partly paid shares and the exoneration of the call liability. In each case, Stone J held that the partly paid shareholders did not constitute a separate class.

[6] Re NRMA [2000] NSWSC 82; (2000) 33 ACSR 595 at 617.

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

[8] [1983] VicRp 89; (1983) 7 ACLR 796 at 799.

[9] [2003] FCA 82; (2003) 45 ACSR 34.

[10] [2010] VSC 231.

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

[12] See for example, Re Coles Group Ltd [2007] VSC 389; Re Cytopia Ltd [2009] VSC 560.

[13] Section 411(4) Corporations Act 2001 (Cth) and see, for example, Re Westfield Holdings Ltd [2004] NSWSC 458; (2004) 49 ACSR 734 at 739.

[14] The reference to "New Foster's" is a reference to Foster's following the proposed demerger.

[15] Rounded up or down to the nearest whole Treasury Wine Estates share.