Re Orica Limited [2010] VSC 231 (28 May 2010)

2 The proposed scheme is the demerger of DuluxGroup Ltd ("DuluxGroup"), a wholly owned subsidiary of Orica, into a separately listed company. The reasons for the demerger are explained in the chairman's letter to shareholders which will accompany the scheme booklet that will be sent out to shareholders with the notice of the meeting:

"The Orica and DuluxGroup businesses are significantly different in terms of market segments, strategy and geographic focus. Over time, Orica has substantially grown its core mining services and chemicals businesses through organic growth, acquisitions and investments. The Orica Directors see a range of highly attractive global expansion opportunities to continue this strategy, such as the construction of an ammonium nitrate plant in Bontang, Indonesia. DuluxGroup is a high quality, growing business and the Orica Directors consider that the position of the DuluxGroup businesses and market conditions are now conducive to a separation of DuluxGroup to form an independent company.

The Orica Directors are of the view that the Demerger will enhance the value of Orica shareholders' investment over time, by enabling each of Orica and DuluxGroup to:

• better focus on its business strategy, growth objectives and core competencies, supported by a dedicated board and management team;
• adopt a tailored capital structure and dividend policy appropriate to its financial profile and business objectives;
• respond with greater flexibility to challenges and opportunities as they arise; and
• better attract shareholders with a specific industry focus."

3 If the demerger proceeds, Orica's shareholders will keep their existing Orica shares but will receive one DuluxGroup share for each Orica ordinary share. In the case of a relatively small group of overseas shareholders who will be ineligible to participate in the scheme because they have a registered address in a jurisdiction in which there are legal or other restrictions on transferring shares in this manner ("the ineligible shareholders"), their DuluxGroup shares will be transferred to a sale agent for sale on their behalf. Ordinary shareholders with a registered address in Australia and New Zealand who will be entitled to 1,000 DuluxGroup shares or less following the demerger may also elect to have their DuluxGroup shares sold on their behalf via a share sale facility.

4 To implement the demerger, Orica will reduce its capital by $219m, being an amount (agreed with the Australian Taxation Office) which is said to reflect the value in Orica's accounts of Orica's contributed ordinary equity which is attributed to DuluxGroup ("the capital reduction"). In addition to the capital reduction, Orica will declare a demerger dividend ("the demerger dividend") in respect of the Orica ordinary shares. Orica will apply the capital reduction and the demerger dividend on behalf of Orica ordinary shareholders as payment for the DuluxGroup shares to be transferred to those shareholders. No amount of cash will be paid to Orica shareholders as a result of the capital reduction or the demerger dividend.

5 If the scheme is implemented and becomes effective, DuluxGroup will be listed on the ASX and the DuluxGroup shares will be quoted on the ASX.

6 The proposal is unanimously supported by the directors of Orica who have authorised this application to the Court. The independent expert engaged by the directors to review the proposed demerger has expressed the opinion that the demerger is in the best interests of the ordinary shareholders of Orica and that the capital return will not materially prejudice Orica's ability to pay its creditors.

7 The function of the Court on an application to convene a meeting essentially is:

(a) to consider whether the scheme booklet that will be provided to the shareholders sufficiently discloses the detail and effect of the scheme to enable shareholders to make an informed decision on how to vote;

(b) to consider procedural matters about the calling and conduct of the meeting;

(c) to ascertain whether the Australian Securities and Investments Commission ("ASIC") has had reasonable opportunity to examine the proposed scheme;

(d) to consider whether there may be matters that may make it unlikely that the scheme would be capable of a grant of approval by the Court if, in due course, its approval is sought and so make it futile to put the scheme to the shareholders for their vote. [1]

8 It is not the function of the Court on an application for a order convening a meeting to consider the business or commercial efficacy of the proposed scheme, as that is a matter for the shareholders nor is it the Court's role to express a view on whether the proposed scheme should be approved, if the requisite majority of votes is obtained.[2] An order of the Court that the meeting be convened is not an indication that the Court has a view as to the merits of the scheme or as to how shareholders should vote.

9 The application was supported by several affidavits. The evidence, shortly stated, comprised:

(a) the draft scheme booklet and Independent Expert's Report;

(c) proposed letter to shareholders from the Chairman to accompany the scheme booklet;

(d) Orica's constitution, annual report 2009, half yearly report for the period ended 31 March 2010, ASX announcement 3 May 2010 and DuluxGroup Demerger Information Pack and letter to shareholders 5 May 2010;

(e) an affidavit from the Group General Counsel of Orica deposing that he was not aware of any fact, matter or circumstance that has resulted in, or is likely to result in, the failure of any of the condition precedents to implementation of the scheme; deposing to his satisfaction that the draft of the scheme booklet contains all the information required to be disclosed to the Orica shareholders in connection with the scheme and that in the case of statements of fact, nothing material has been omitted, that in the case of statements of opinion and "looking forward" statements, they are fair and based on reasonable grounds and that the information is not misleading or deceptive; deposing that holders of over 99.95% of the Orica ordinary shares will be eligible to receive DuluxGroup shares under the Scheme; deposing that there will be no change to Orica step-up preference securities, whether the demerger proceeds or not; and exhibiting various transactional documents;

(e) an affidavit of the independent expert exhibiting the Independent Expert's Report in which the opinion is expressed that shareholders are likely to be better off if the demerger proceeds, notwithstanding the disadvantages and risks and that the capital return will not materially prejudice Orica's ability to pay its creditors;

(f) an affidavit of the investigating accountant exhibiting the Investigating Accountant's Report in which the investigating accountant expresses the opinion, based on his review of the pro forma historical financial information, which was not an audit, that nothing had come to his attention that caused him to believe that the pro forma historical financial information contained in the scheme booklet concerning Orica and DuluxGroup was not prepared in all material respects on the basis that the demerger was completed and effected as at 31 March 2010 and in accordance with Accounting Australia Accounting Standards and accounting policies adopted by Orica;

(g) an affidavit of the tax adviser exhibiting the tax letter for inclusion in the scheme booklet containing the opinion of the tax advisor on the general Australian taxation position of individual and corporate Australian resident ordinary shareholders in relation to the demerger;

(h) an affidavit from Peter John Benedict Duncan, the Chairman and a non-executive director of Orica, deposing to the directors' consideration of the scheme and their unanimous recommendation; deposing that he, or failing him, Michael Tilley, another non-executive director of Orica, will act as Chairman of the meeting; and disclosing his indirect ordinary shareholding in Orica; and

(i) an affidavit from Michael Tilley to the effect of his willingness to act as chairman in place of Peter Duncan and disclosing his ordinary shareholding in Orica.

10 Senior counsel for Orica brought four particular aspects of the scheme to the attention of the Court.

11 The scheme provides for steps to be undertaken by DuluxGroup. As DuluxGroup, is not the scheme company nor a member,[3] the approval of the scheme would not bind DuluxGroup. The performance risk has been dealt with by a deed poll that DuluxGroup made on 25 May 2010 in favour of the ordinary shareholders for the purposes of covenanting to perform its obligations. The terms of the deed poll are set out in the scheme booklet.

(ii) Whether ineligible shareholders a separate class?

12 The question arises as to whether the ineligible shareholders should be treated as a distinct class for the purposes of the scheme because their DuluxGroup shares will be transferred to a sale agent for sale on their behalf.

13 The test for whether those shareholders would be treated as a separate class is not one of identical treatment but of community of interest. As Barrett J observed in Re Hills Motorway[4] the focus is not on the fact of differentiation but on its effects. His Honour continued:

The extent and nature of differentiation must be measured in terms of the effect on the ability to consult together in a common interest or, in other words, the ability to come together in a single meeting and to debate the question of what is good or bad for the constituency as a whole and where the common good lies. Only if the differentiation destroys that ability does the class distinction come to prevail.[5]

In Re CSR Limited[6] Conti J concluded that a similar sale mechanism in the context of a demerger did not cause those shareholders to be treated as a separate class for the purposes of the scheme.[7]

14 I accept the submission that the proposed treatment of the ineligible shareholders under the scheme does not constitute those shareholders as a separate class for the purposes of s 411 of the Act. I am satisfied that there will be the requisite community of interest, despite the differential treatment. The rights attaching to the shares will be the same under the scheme. The difference is that ineligible shareholders, although entitled to DuluxGroup shares paid for out of the capital reduction and demerger dividend, will receive the proceeds of the sale of those shares on their behalf instead of receiving the shares in specie.

(iii) the holders of Orica's step up preference shares will not be entitled to participate in the scheme or capital reduction

15 Holders of Orica's step up preference shares will not be entitled to participate in the scheme or capital reduction due to the terms on which those shares were issued. There will however be no change to those securities, whether the demerger proceeds or not and no issue would appear to arise out of this for the purpose of considering whether the order convening the meeting should be made.

(iv) Environmental transformation and remediation projects

16 In the scheme booklet, Orica discloses (properly) that former operations at various Orica sites have contaminated soil and groundwater as the result of manufacturing activities. Orica has made provision in its accounts for the costs relating to transformation and clean up projects. The Orica directors are of the view that Orica's ability to address these environmental legacy issues will not be adversely affected by the demerger and consider that the provisions that have been made in the accounts are appropriate based on currently available information, although they acknowledge that it cannot be guaranteed that additional costs will not be incurred beyond the amounts provided. The Independent Expert has also opined that the demerger will have no significant impact on Orica's ability to pay its debts. In the circumstances, the risk that costs may be greater than anticipated is not a reason for refusing to make an order convening a meeting.[8]

E. An order for convening of the meeting should be made

17 I am satisfied that the information required by s 411(3) of the Act as to the content of the scheme booklet is contained in, and adequately disclosed to, the shareholders.

18 It is prudent in my view that the scheme booklet should include the following statement so that shareholders do not think that Court approval for the convening of the meeting should be taken as an indication of the Court's view about the proposed demerger:

The fact that the Court has ordered that the meeting be convened is no indication that the Court has a view as to the merits of the scheme or as to how shareholders should vote. On these matters shareholders must reach their own decision.

19 I am satisfied that there are no matters that would warrant the Court declining to make an order for the convening of the meeting of Orica's ordinary shareholders to consider and vote on the proposed demerger.

20 I am also satisfied that ASIC had reasonable opportunity to consider the proposed scheme before today's application. A letter from ASIC was produced to the Court in which ASIC stated that it did not wished to be heard on today's application.

1. The Plaintiff convene and hold a meeting of its ordinary shareholders (Scheme Meeting):

(a) to consider, and, if thought fit, to approve (with or without modification), the scheme of arrangement (Scheme) proposed to be made between the Plaintiff and its ordinary shareholders (Scheme Participants), the terms of which are as set out in section 16 of Annexure A (Scheme Booklet); and

(b) to be held at The Auditorium, Melbourne Exhibition Centre, 2 Clarendon Street, South Wharf, Melbourne, on 8 July 2010 commencing at 10.00am (AEST).

2. The Scheme Meeting be convened by sending the following documents to each Scheme Participant or, in the case of joint holders, to the holder whose name appears first in the Plaintiff's register:

(a) a document substantially in the form of the Scheme Booklet, which contains among other things the notice of the Scheme Meeting at section 18 and at section 19 the notice of the general meeting of the Plaintiff proposed to take place following the Scheme Meeting;

(b) a letter from the Chairman substantially in the form of Exhibit "NCP6" to the affidavit of Mr Neil Pathak sworn 25 May 2010 (the Pathak Affidavit);

(c) a proxy form for the Scheme Meeting, substantially in the form of Exhibit "NCP3" to the Pathak Affidavit (Scheme Meeting Proxy form);

(d) a proxy form for the general meeting, substantially in the form of Exhibit "NCP4" to the Pathak Affidavit;

(e) a sale facility form for Australian and New Zealand resident shareholders who hold 1,000 Orica ordinary shares or less, substantially in the form of Exhibit "NCP5" to the Pathak Affidavit;

(f) in the case of Scheme Shareholders with registered addresses in the United States of America (USA), a letter regarding certain USA tax issues, substantially in the form of Exhibit "NCP7" to the Pathak Affidavit;

(g) in the case of Scheme Participants with registered addresses within Australia, a reply paid envelope addressed to Link Market Services Limited; and

(h) in the case of Scheme Participants with registered addresses outside Australia, a return envelope addressed to Link Market Services Limited.

3. The documents referred to in Order 2 be sent on or before 9 June 2010:

(a) in the case of Scheme Participants whose registered address is within Australia, by prepaid ordinary post addressed to the relevant addresses recorded in the Plaintiff's register; and

(b) in the case of Scheme Participants whose registered address is outside Australia, by Airmail addressed to the relevant addresses recorded in the Plaintiff's register.

4. The Plaintiff publish once, on or before 11 June 2010, in each of The Age, The Sydney Morning Herald, The Courier Mail, The West Australia, The Australian Financial Review and The Australian, a prominent advertisement in substantially the form of Annexure B.

5. Subject to these Orders, the Scheme Meeting be convened, held and conducted in accordance with:

(a) the provisions of Part 2G.2 of the Corporations Act 2001 (Cth) (save for any applicable replaceable rule) that apply to a meeting of Orica's members; and

(b) the provisions of the Plaintiff's constitution that apply in relation to meetings of members and that are not inconsistent with Part 2G.2 of the Act.

6. Voting on the resolution whether to approve the Scheme is to be conducted by way of poll.

7. A Scheme Meeting Proxy Form will be valid and effective if, and only if, it is completed and delivered in accordance with its terms by 10.00am (AEST) on 6 July 2010.

8. For the purposes of voting at the Scheme Meeting, shares in the Plaintiff will be taken to be held by Scheme Participants who are registered as holding them at 7.00pm (AEST) on 6 July 2010.

9. Mr Peter Duncan, or failing him Mr Michael Tilley, or failing both any director of the Plaintiff, be Chairman of the Scheme Meeting.

(a) rule 2.15 of the Supreme Court (Corporations) Rules 2003 (Vic), except insofar as it operates to apply regulation 5.6.13 of the Corporations Regulations 2001 (Cth) to the Scheme Meeting; and

(b) rule 3.2(d) of the Supreme Court (Corporations) Rules 2003 (Vic),

11. Compliance with rule 3.4 and Form 6 of the Supreme Court (Corporations) Rules 2003 (Vic) is dispensed with.

12. The Plaintiff publish once in "The Australian" newspaper an advertisement substantially in the form of Annexure C to these Orders, such advertisement to be published on or before 1 July 2010.

13. The further hearing of the Originating Process be adjourned:

(a) to Associate Justice Efthim on 8 July 2010 at a time to be agreed with Associate Justice Efthim for the hearing of an application for orders and declarations pursuant to rule 16.6 of the Supreme Court (Corporations) Rules 2003 (Vic) as to the convening and conduct of the Scheme Meeting; and

(b) to a Judge in the Commercial Court at 10.00am on 9 July 2010.

14. An office copy of this Order be lodged with the Australian Securities & Investments Commission on 31 May 2010.

15. The solicitors for the Plaintiff draw up this order and that it be signed by a Judge pursuant to rule 60.04 of the Supreme Court (General Civil Procedure) Rules 2005.

[1] FT Eastman and Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69, 72 (Street CJ); Australian Securities Commission v Malborough Gold Mines Ltd [1993] HCA 15; (1993) 177 CLR 485, 504 (Mason CJ, Brennan, Dawson, Toohey, Gaudron JJ); Lindholm, Re Opes Prime Stockbrocking Limited (Administrators appointed)(Receivers and Managers Appointed) [2008] FCA 1425; (2008) 171 FCR 473, [102] (Finklestein J); Re CSR Limited [2010] FCAFC 34, 64 (Keane CJ, Jacobson J), 76 (Finklestein J); Re Foundation Health Care Limited ([2002] FCA 742; 2002) 42 ACSR 252, [36], [44] (French J).

[2] Re Sonodyne International Limited (1994) 15 ACSR 494, 497 (Hayne J).

[3] Re Westfield Holdings Ltd [2004] NSWSC 458; (2004) 49 ACSR 734, 739.

[4] [2002] NSWSC 897; (2002) 43 ACSR 101.

[6] [2003] FCA 82; (2003) 45 ACSR 34.

[8] Re CSR Limited (2010) FCAFC 34.