Ruralco Holdings Limited, in the matter of Ruralco Holdings Limited [2019] FCA 878

FARRELL J 1 These are the reasons for the Court making orders under ss 411(1) and 1319 of the Corporations Act 2001 (Cth) in relation to convening a meeting of members of Ruralco Holdings Limited to consider whether to approve a scheme of arrangement between Ruralco and the holders of fully paid ordinary shares (scheme meeting) and approving the dispatch of a scheme booklet and related documents.

Background 2 Ruralco is a public company, registered in Queensland. Ruralco's shares are listed on the official list of the Australian Securities Exchange Limited (ASX). Ruralco's business services Australian farmers through the provision of a diversified range of agricultural supplies, with a presence in over 500 locations nationally. It operates through four key divisions: (1) Rural services, being the supply of fertiliser, crop protection products and general farm merchandise as well as agronomic advice and agency services; (2) Water services, being distribution of water products, providing on-farm water infrastructure services and broking water entitlements; (3) Live export, being short-haul live export of feeder and slaughtered cattle mainly to Indonesia and Vietnam; and (4) Financial services, being insurance and finance broking and commodity advice and analysis. 3 Nutrien Ltd. is a body corporate incorporated in Canada, shares in which are listed on the official list of the Toronto Stock Exchange and the New York Stock Exchange. Nutrien is a global supplier of crop nutrients, inputs and services. Nutrien operates in Australia through its wholly owned subsidiary, Landmark Operations Limited, and under the "Landmark" brand. 4 On 27 February 2019, Ruralco and Nutrien entered into a scheme implementation deed pursuant to which a wholly owned subsidiary of Nutrien would acquire all of the shares issued by Ruralco (Ruralco shares). On 19 May 2019, Nutrien nominated Agrium Australia Limited (also referred to as Landmark Acquirer), an indirect wholly-owned subsidiary of Nutrien, to be the acquirer of the Ruralco shares pursuant to a scheme.

Total cash consideration and special dividend 5 If the scheme is approved, each shareholder will receive total cash consideration comprising: (1) Scheme consideration of $4.40 per Ruralco share, less the amount of any fully franked special dividend of up to 90 cents per share declared and paid by Ruralco on or before the date on which the scheme is implemented (special dividend); and (2) The special dividend. 6 On 14 May 2019, the board of Ruralco announced that it will pay an interim dividend of 10 cents per Ruralco share on 18 June 2019, and that dividend will not reduce the total cash consideration. The Court understands this to mean that the interim dividend will not be regarded as part of the special dividend. 7 The total cash consideration of $4.40 per Ruralco share represents a 43.8% premium to the closing price of $3.06 per Ruralco share on 25 February 2019, being the last trading day before Ruralco entered into a trading halt and announced that it had entered into the scheme implementation deed with Nutrien. It also represents a premium of 44.4% to the 30-day value weighted average price (VWAP) of $3.05 per Ruralco share up to and including 25 February 2019 and a 44.6% premium to the 90-day VWAP of $3.04 per Ruralco share up to that date. This implies an equity value of $469 million and an enterprise value of $615 million.

Ruralco's capital structure and changes incident on the scheme 8 Ruralco's capital structure is as follows: (1) 105,052,247 ordinary shares on issue; (2) 1,301,611 performance rights granted or issued under a Long Term Incentive Plan (Ruralco Performance Rights); (3) 165,130 share rights, granted or issued under Ruralco's Employee Retention Plan or otherwise in connection with the retention of Ruralco's employees (Ruralco Share Rights); (4) 67,510 matched share rights, being rights to Ruralco shares awarded under Ruralco's executive share matching plan (Ruralco Matched Share Rights). 9 On the effective date of the scheme, holders of Ruralco Performance Rights, Ruralco Share Rights and Ruralco Matched Share Rights will be issued Ruralco shares such that the number of Ruralco shares on issue by the scheme record date will increase to 106,540,034 and there will no longer be any of those Rights on issue.

The directors and their recommendation 10 The directors of Ruralco are all described as non-executive independent directors other than Mr Dillon who is the Managing Director and Chief Executive Officer. The number of Ruralco shares in which they have a relevant interest are as follows: (1) Richard John Lee AM, Chairman, 83,334; (2) Elizabeth Mabel Johnstone, 51,860; (3) Andrew John MacPherson, 34,000; (4) Trudy Joy Vonhoff, 46,607; and (5) Travis Andrew Dillon, 111,854 of which 7,247 are shares held in the employee share trust that are allocated to Mr Dillon pursuant to his 7,247 Ruralco Matched Share Rights. 11 The directors unanimously recommend that members vote in favour of the scheme in the absence of a superior proposal and each has stated his or her intention to vote their shares in favour of the scheme on the same basis. 12 The Chairman's Letter, which appears in the scheme booklet after "important notices" and the table of contents, draws members' attention to important features of the scheme. It sets out the directors' recommendation that members vote in favour of the scheme in the absence of a superior proposal. It then discloses that, if the scheme is implemented, Mr Dillon will become entitled to a maximum cash payment of up to $2,460,375 (in aggregate) as disclosed in section 11.5 of the scheme booklet and his Ruralco Performance Rights and Ruralco Matched Rights will be subject to the regime set out at section 11.12. 13 At section 11.5, the scheme booklet makes the following disclosure: As noted above, Travis Dillon, Ruralco's Managing Director and Chief Executive Officer, holds 435,782 Ruralco Performance Rights and 7,247 Ruralco Matched Share Rights that will be subject to the regime described in section 11.12. Ruralco has an executive performance plan (EPP) in place, which became operational on 1 October 2018 and was intended to replace Ruralco's then existing short-term incentive and long term incentive arrangements. The EPP operates with the effect that, if the Scheme becomes Effective, participating executives will be entitled to receive the incentive in cash only in lieu of their entitlement or otherwise receive the incentive in a combination of cash and the deferred right to be issued Ruralco Shares. Under the EPP, participating executives will be entitled to receive in aggregate up to a maximum of $4,375,433 (including the payment to Travis Dillon). Travis Dillon, Ruralco's Managing Director and Chief Executive Officer, participates in the EPP and will be entitled to a cash payment of up to a maximum of $1,215,000 in lieu of his entitlements under the EPP. Ruralco has in place specific retention arrangements with certain senior executives (each, a Senior Executive), including Ruralco's Managing Director and Chief Executive Officer, Travis Dillon. The Ruralco Board considered it appropriate and in the interests of Ruralco to put in place the retention arrangements: • to protect Ruralco against the risk that if it loses some of its Senior Executives given the uncertainty and disruption arising from the Scheme by incentivising them to remain with Ruralco until, and for six months after, the Scheme is implemented; and • in recognition of the significant role of each Senior Executive both in respect of the process relating to the Scheme and in ensuring the continuity of the business regardless of the outcome of the Scheme. Under these retention arrangements: • half of the retention amount will be paid on the Implementation Date in the event that the Scheme is approved by Ruralco Shareholders and the Court; • half of the retention amount will be paid six months following the Implementation Date; and • entitlement to an payment of any retention amount is conditional on the Scheme being implemented and the continued employment of the relevant Senior Executive (unless the Senior Executive's employment is terminated before that date other than for serious misconduct or breach of the Senior Executive's contract of employment). The maximum aggregate amount of the retention payments that may be payable to Senior Executives is $4,548,149 (including the payment to Travis Dillon). The amount of Travis Dillon's retention payment is $1,245,375. Other than these agreements and arrangements, there is no agreement or arrangement made between any Ruralco Director and any other person, including a Nutrien Group member, in connection with or conditional upon the outcome of the Scheme. 14 Section 11.12(a) of the scheme booklet sets out the number of Rights on issue as noted at [8] above. Section 11.12(b) then discloses the intended treatment of those Rights under the scheme as follows: Under the terms of the Long-Term Incentive Plan in relation to Ruralco Performance Rights and the terms that apply to Ruralco Share Rights, in the event of the proposed change of control of Ruralco: • Ruralco Performance Rights and Ruralco Share Rights automatically vest on a pro rata basis based on the proportion of the applicable performance period which has elapsed at the date of the proposed change of control; and • the Ruralco Board has discretion to determine the treatment of the Ruralco Performance Rights and Ruralco Share Rights that do not automatically vest (in the manner described above). The Ruralco Board has exercised its discretion and determined that all such unvested Ruralco Performance Rights and Ruralco Share Rights will vest in connection with the Scheme. The Ruralco Performance Rights and Ruralco Share Rights will, subject to the Scheme becoming Effective, automatically converting to Ruralco Shares on the Effective Date (after trading in Ruralco Share has been suspended at the close of trading on the ASX on that date). Under the terms of the Long-Term Incentive Plan, which also apply to Ruralco Matched Share Rights, all Ruralco Matched Share Rights will, subject to the Scheme becoming Effective, automatically convert to Ruralco Shares on the Effective Date (after trading in Ruralco Shares has been suspended at the close of trading on the ASX on that date). 15 The consequence of the arrangement referred to in section 11.12 of the scheme booklet is that Mr Dillon will be issued with the same number of Ruralco Shares as he has Rights (save that it appears that, at least as to 7,247 Matched Share Rights, those shares may already be on issue). The shares will be issued on the effective date of the scheme (expected to be 23 July 2019) such that they will participate in the total cash consideration (which would include any special dividend since the special dividend record date follows the effective date).

Independent expert's recommendation 16 The independent expert, Grant Thornton Corporate Finance Pty Ltd, has concluded that the proposed scheme is fair and reasonable and therefore in the best interests of Ruralco's members in the absence of a superior proposal. 17 The independent expert assessed the fairness of the proposed scheme by comparing the value of each Ruralco share before the scheme on a control basis with the total cash consideration of $4.40 per share and on the conservative basis that no special dividend is declared. The total cash consideration was assessed as fair because it fell within the independent expert's valuation range of $4.14 to $5.03. 18 In assessing the reasonableness of the scheme, the independent expert took into account the following quality factors: the premium for control (see [7] above), the certainty of the cash consideration compared to the ongoing risks associated with holding an investment in Ruralco (such as rainfall activity, commodity prices and competition), the franking credits attached to the special dividend which would benefit Australian resident shareholders on a lower tax rate in the absence of brokerage costs. The independent expert also noted the disadvantage that shareholders would not be able to participate in the future upside of Ruralco. The independent expert also referred to a range of other factors which include: that following the announcement of the scheme, shares in Ruralco have traded substantially in line with or slightly below the total cash consideration indicating investor support for the transaction; the value of Ruralco to Nutrien does not represent a fair market value to a pool of potential purchasers because of the synergies unique to Nutrien; the prospects of a superior offer emerging in light of the fact that none has emerged since the scheme was announced; the likelihood that Ruralco shares will trade at prices below the total cash consideration, at least in the short-term, if the scheme does not proceed; the fact that if a competing superior proposal is announced and completed or the directors withdraw their recommendation, Ruralco will be required to pay a break fee to Nutrien of $4,698,000 plus GST; that capital gains tax obligations may crystallise upon the scheme being implemented; and the directors recommendation that members vote in favour of the scheme.

Conditions of the scheme 19 The scheme is subject to conditions contained in the scheme implementation deed which are commonplace in member schemes designed to effect a takeover, save that the scheme is subject to obtaining, before 8:00 am on the day of the second court hearing: (1) Written notice under the Foreign Acquisitions and Takeovers Act 1975 (Cth) that the Treasurer of Australia (or the Treasurer's delegate) has no objection to Nutrien acquiring all of the shares in Ruralco; and (2) Written notice from the Australian Competition and Consumer Commission (ACCC) to the effect that the ACCC does not propose to oppose, intervene or seek to prevent the implementation of the scheme under or by reference to s 50 of the Competition and Consumer Act 2010 (Cth), which notification is either unconditional or subject to conditions or undertakings acceptable Nutrien acting reasonably. 20 At section 11.11 of the scheme booklet, it is noted that on 22 March 2019, the ACCC commenced an informal review to assess whether the acquisition of shares under the scheme would be likely to have the effect of substantially lessening competition in a market. The provisional date for the announcement of the ACCC's decision is 13 June 2019, although that may change. At that time, the ACCC will either make a final decision to approve the transaction or release a statement of issues in which it will identify its preliminary competition concerns and it will seek information on those issues before making the final decision. It is noted that, unless and until ACCC informal clearance is obtained, the scheme meeting and second court hearing will not be held, unless Ruralco's board determines otherwise. This might result in a need to delay the scheme meeting. If ACCC informal clearance is not obtained before the "end date" of the scheme implementation deed (defined as 26 August 2019 or if the FIRB or ACCC conditions are not satisfied by that date, 25 September 2019 or such other date and time as agreed between Nutrien and Ruralco) the scheme will not proceed. 21 At the first court hearing, senior counsel for Ruralco acknowledged that, should the ACCC not decide to approve the transaction by 13 June 2019, it will be necessary to approach the Court to address issues arising from the impact of that uncertainty on how the proposed scheme approval process will be conducted. Ruralco also agreed to amend the Chairman's Letter in the scheme booklet to refer to the potential for the date of the scheme meeting to change.

Other matters 22 Submissions of senior counsel for Ruralco filed in this matter addressed other features of the scheme in a manner which has become commonplace in member schemes designed to effect a takeover. They include: (1) The existence of deemed warranties given by members pursuant to the scheme; (2) Performance risk, including the execution of a deed poll by Ruralco, Nutrien and Agrium. I note that a foreign law legal opinion has been provided in relation to Nutrien's obligations under the deed poll. (3) Exclusivity provisions and a requirement for the payment of a break fee by Ruralco or Nutrien in the circumstances set out in the scheme implementation deed. I note that the break fee of $4,698,000 is approximately 1% of Ruralco's equity value based on the total cash consideration consistently with the Takeovers Panel's Guidance Note 7: Lock-up devices and the obligation to pay is not triggered if Ruralco shareholders vote against the scheme. The exclusivity provisions include "no shop", "no talk", "no due diligence" restrictions and Ruralco's obligations to provide "notification" and "matching rights" in respect of competing proposals. There is a "fiduciary carve-out" in respect of the "no talk" and "no due diligence" restrictions and aspects of the "notification" obligation inappropriate terms. There is evidence of the negotiation of these provisions. (4) Factual information on the scheme booklet has been verified through procedures adopted by Ruralco and Nutrien respectively. (5) Consent by Mr Lee (Chairman of the Board) or failing him, Ms Vonhoff to act as chairman of the scheme meeting. The Court notes that both are non-executive independent directors. (6) Communications with the Australian Securities & Investments Commission (ASIC) in relation to the scheme booklet. ASIC has provided the "usual letter" dated 4 June 2019 referring to communications concerning the content of the scheme booklet and confirming that it did not propose to appear to make submissions or intervene in the scheme at the first court hearing.

Evidence 23 The evidence supporting the matters addressed above was as follows: (1) An affidavit of Colleen Anne Platford (a partner of Gilbert + Tobin Lawyers, solicitors to Ruralco) sworn on 17 May 2019 which includes a search of ASIC's records that verifies that Ruralco is a company registered in Queensland and therefore a Part 5.1 company. (2) An affidavit of Travis Andrew Dillon affirmed on 5 June 2019 and exhibit TAD-1. This affidavit deals with a number of matters including negotiation of exclusivity and break fee arrangements in the scheme implementation deed and verification of the scheme booklet. (3) An affidavit of Costas George Condoleon (also a partner at Gilbert + Tobin Lawyers) sworn on 5 June 2019 and exhibit CGC-1 which verifies communications with ASIC concerning the scheme booklet. (4) An affidavit of Andrea De Cian sworn on 4 June 2019 and exhibit ADC-1, being a copy of the draft independent expert's report. Mr De Cian is a director of Grant Thornton Corporate Finance Pty Ltd, a partner at Grant Thornton Australia Limited and a signatory of the report (5) An affidavit of Richard John Lee affirmed on 29 May 2019 indicating Mr Lee's consent to act as chairman of the scheme meeting. (6) An affidavit of Trudy Joy Vonhoff affirmed on 31 May 2019 indicating her consent to act as chairman of the scheme meeting if Mr Lee is unwilling or unable to do so. (7) An affidavit of Thomas Michael Mix affirmed on 3 June 2019 and exhibits TMM-1 to TMM-7. Mr Mix is Vice President and General Counsel, Mergers & Acquisitions of Nutrien. He gives evidence concerning the verification of Nutrien information in the scheme booklet, negotiation of exclusivity and break fee arrangements in the scheme implementation deed and due execution of the deed poll by Nutrien.

Consideration 24 Senior counsel for Ruralco has set out in the submissions filed in connection with the first court hearing the principles to be applied in determining whether to make orders under s 411(1) of the Corporations Act. Those principles are well known and do not need to be repeated here. 25 Save for one issue which deserves comment, on the basis of the evidence set out above and having regard to those principles, I was satisfied that this is an appropriate case for the exercise of the discretion to make orders under ss 411(1) and 1319 and that: (1) The plaintiff is a Part 5.1 body within the meaning of the Corporations Act. (2) The proposed scheme is an arrangement within the meaning of s 411 of the Corporations Act. (3) The scheme booklet marked as Exhibit 1 in the proceeding provides appropriate disclosure. (4) The scheme is bona fide and properly proposed. (5) ASIC has had at least 14 days' notice of the proposed hearing date and has had a reasonable opportunity to examine the terms of the scheme and the scheme booklet and to make submissions. (6) The various procedural requirements of the Corporations Act and the Federal Court (Corporations) Rules 2000 (Cth) have been met. 26 Senior counsel for Ruralco's submissions noted my recent decision in Gazal Corporation Limited, in the matter of Gazal Corporation Limited [2019] FCA 701 and suggested that the Court ought not be concerned with the existence of proposed payments to Mr Dillon (described in section 11.5 of the scheme booklet) in circumstances where he, as a director, recommended to shareholders that they vote in favour of the scheme. This was on the basis that the payments (amounting to up to $2,460,375 in aggregate) are to be distinguished from a bonus or similar payment that is made by virtue of and to incentivise the recipient to work towards a scheme becoming effective. 27 I do not accept that submission. The proposed payments are dependent on the shareholders voting in favour of the proposed scheme. While the payment under the executive performance plan may be determined having regard to its terms, the immediate cash payment eliminates the risk attached to the value of deferred shares under that scheme. It may readily be accepted that the retention payments are designed to ensure that key staff (including Mr Dillon) remain with Ruralco during the uncertainty of the scheme process (serving Ruralco's legitimate interest) and for at least six months thereafter if the scheme is approved (serving Nutrien's legitimate interests). There is, nonetheless, an incentive effect supportive of the scheme. 28 It is certainly the case that it is an issue for Mr Dillon to decide whether to make a recommendation or decline to do so and explain why. It is for the Court to be satisfied that the disclosure in the scheme booklet is adequate and not misleading. Disclosure of Mr Dillon's interest in securing approval of the scheme in the Chairman's Letter and in every other place in the explanatory material in the scheme booklet where the directors' unanimous recommendation is mentioned allows a shareholder to understand that there is an issue of what weight should be given to his recommendation. Save for the front cover of the scheme booklet, that is what has occurred in this case, and it is the reason why approval to dispatch of the scheme booklet was given. The bare statement of the directors' recommendation (without reference to Mr Dillon's interest) in other communications with shareholders, such as in telephone canvassing, might be a circumstance which might lead a Court at the second court hearing to decline to approve the scheme because the Court could not be assured of the integrity of the outcome of the shareholder vote. Such issues would be avoided if Mr Dillon had declined to make a recommendation on the basis of his interest in the outcome of the scheme which is both material and different from that of other shareholders.

Conclusion 29 For the foregoing reasons, the Court made the orders under ss 411(1) and 1319 of the Corporations Act sought by Ruralco. I certify that the preceding twenty-nine (29) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Farrell.