Schrapel v Coopers Brewery Ltd

SAD 316 OF 2005 BETWEEN: LION NATHAN AUSTRALIA PTY LTD (ACN 008 596 370)

APPLICANT AND: COOPERS BREWERY LTD (ACN 007 871 409)

REASONS FOR JUDGMENT 1 Each of the applications in these two proceedings seek interlocutory injunctive relief to restrain the respective respondents from conducting an extraordinary general meeting of the first respondent, Coopers Brewery Limited ("Coopers"), on 29 November 2005 the purpose of which is to consider and pass proposed constitutional amendments the effect of which, put shortly, will be to bring to an end Lion Nathan Australia Pty Ltd's ("Lion Nathan") takeover bid of Coopers. The grounds relied upon in each of the applications differ although there is much factual material common to both of them. For this reason I set out the following background material which is drawn largely from Coopers' Modified Explanatory Memorandum for shareholder approval of modifications to the Constitution and from Lion Nathan's offer document of 1 September 2005. 2 Because of the obvious need for these applications to be resolved expeditiously, I have prepared these reasons in some haste, hence the composite form of them.

BACKGROUND 3 Until approximately ten years ago, the South Australian Brewing Company Ltd Limited (SA Brewing) held shares in Coopers. 4 When Lion Nathan acquired SA Brewing, a dispute arose between Coopers and SA Brewing as to whether the SA Brewing holding in the company should have been offered to other members through the pre-emptive rights in the Constitution. 5 At or about the same time, a dispute arose between SA Brewing/Lion Nathan and Coopers concerning the Adelaide Bottle Company. 6 The disputes were settled on the basis that the Constitution would be amended so that there would be a three tier pre-emptive rights mechanism. In summary, the mechanism provides that if a member wishes to sell shares, first the shares must be offered to other members or member's relatives (as that term is defined in the Constitution), if other members or member's relatives do not take them up, they must be offered to the superannuation fund of Coopers, and if the superannuation fund (or the trustee of the superannuation fund) does not take them up, they are then offered to Lion Nathan under what is known as the third tier pre-emptive right. 7 In addition to providing Lion Nathan with a third tier pre-emptive right, Article 143 of the Constitution, which restricts competitors of Coopers from being members, was amended so that SA Brewing, Lion Nathan and any related body corporate of Lion Nathan were deemed not to be competitors of Coopers for the purposes of the restriction. 8 The Lion Nathan pre-emptive rights and the Art 143 exemption were entrenched in the Constitution and could not be changed without the consent of Lion Nathan. The Constitution provided, though, that the entrenching ceased to have effect if Lion Nathan suffered a change in control. 9 In 1998, Kirin Brewery Company Limited acquired 45 per cent of the voting shares in Lion Nathan. 10 Coopers subsequently applied for a declaration from the Supreme Court of South Australia that the control of Lion Nathan had changed within the meaning of the Constitution, with the consequence that the Company could amend its Constitution to delete the Lion Nathan provisions without Lion Nathan's consent. 11 On 1 September 2005, Lion Nathan announced its intention to make a takeover bid for all of the shares in the company. 12 To anticipate matters, while the offer was unrestricted it contained a number of conditions, two of which were that Coopers did not enter into a buy-back agreement during the period of the offer or make any change to its articles in the same period. Coopers is in the process of taking steps to secure the happening of both of these events. 13 On 2 September 2005 the Supreme Court of South Australia held that there had been a change in control of Lion Nathan such that Coopers was entitled to change its Constitution without the consent of Lion Nathan. On 8 September 2005 Lion Nathan announced it was appealing this decision. The appeal was heard by the Full Court of the Supreme Court of South Australia on 10, 11 and 12 October 2005, and on 19 October 2005 the Full Court unanimously dismissed Lion Nathan's appeal. 14 The effect of the Full Court's decision is that Lion Nathan's rights cease to be entrenched and shareholders are entitled to consider and, if thought fit, approve the removal of the Lion Nathan pre-emptive provisions from the Constitution. 15 On 8 September 2005, Coopers received a requisition from members holding more than 5 per cent of the shares of the company requiring the board to call a general meeting in order to propose amendments to Coopers' Constitution. 16 Put shortly, the object of the proposed amendments is to delete Lion Nathan's pre-emptive rights and also its exemption from the Art 143 "no competitor" provision. In consequence, Lion Nathan would not be able to purchase Coopers' shares or seek to be registered as the holder of those shares and if it did become registered as a holder of Coopers shares it could be required to sell them. Moreover, if the resolution is passed it would trigger one of the conditioning events of Lion Nathan's offer. 17 If the resolution is passed, shareholders wishing to sell will still be able to avail of the pre-emptive rights regime or in consequence of a recent announcement to participate in a proposed share buy-back scheme under which subject to shareholder approval would permit the company to acquire up to 15 per cent of its shares at a price of $260 per share. 18 In relation to the pre-emptive rights regime, since the takeover announcement on 1 September 2005 some shares have been sold at $260.00 and the sale of shares awaiting the fair value determination will now take place at $260.00 being the fair value determined by the auditor, KPMG, as at 28 September 2005 having regard to the existence of the Lion Nathan offer. The determination of fair value by the auditor, KPMG, was made against the background of the Lion Nathan offer. Any further transfers of shares under the pre-emptive rights regime may require a further determination of fair value which will be made with regard to the facts and circumstances at that time. If the Lion Nathan offer were not available, because the resolution to amend the Constitution was passed, the auditor, KPMG, would not be able to take into account the Lion Nathan offer in determining fair value and the fair value figure may well be less than $260.00 per share. The auditor, KPMG, also assessed the value of a class C share under Coopers Constitution without regard to the Lion Nathan offer to be $190.00 as at 28 September 2005. This indicates what fair value would have been as at that date if the Lion Nathan offer did not exist. By removing the Lion Nathan provisions, fair value may well be less than $260 per share under the pre-emptive rights regime. 19 Thus Directors of Coopers, while not formally recommending that the amending resolutions be passed have indicated to shareholders that they will vote in favour of it.

THE SCHRAPEL APPLICATION 20 In the main proceeding Mr Schrapel seeks relief primarily under Pt 2F.1 (Oppressive Conduct of Affairs) of the Corporations Act 2001 (Cth) ("the Corporations Act"). While that claim raises serious issues as to the conduct of the affairs of Coopers over a period of about five years, for the purposes of the present application only one matter is in contest in this proceeding and it relates to the holding of the extraordinary general meeting on 29 November 2005. The second basis of claim in the principal proceeding purports to be founded on a claim of fraud on the minority. It likewise relates to the proposed amendments to Coopers' Constitution. I merely note in passing that this aspect of the application is defective in form in that the other shareholders of the company are not parties to the proceedings. 21 Mr Schrapel became a registered member of Coopers in 1997 when 9,800 shares were transmitted to him from his mother's estate. Between that time and 2005 he sold some of his shares both under a share buy-back and through the pre-emptive rights regime. By the beginning of 2005 he appears to have had about 7,000 shares. 22 He had negotiations with officers of Lion Nathan in July and August of 2005 which resulted in his entering into an agreement with Lion Nathan under which he was paid initially $220 a share (later altered to $260 per share) for 6,000 of his shares. That agreement contemplated that the only way in which the shares at that time could ultimately be transferred to Lion Nathan was under the pre-emptive regime. To that end, Mr Schrapel lodged a transfer notice with the directors of Coopers dated 27 August 2005 in which he specified a fair value of $260 for each of his 6,000 shares. On 28 September 2005 the company informed him that members had been found to purchase all of the shares and nearly all of those members wished the fair value to be determined by KPMG. He was given the option of withdrawing his transfer notice by 1.00 pm on the following day. On 1 November Mr Schrapel indicated he did not seek to withdraw the transfer. On 1 November KPMG determined that the fair value of the shares was $260 a share. Mr Schrapel subsequently sought to have the transfer price changed to $310 to match Lion Nathan's revised offer. The company considered that the sale had in fact already been agreed with other members of the company under its articles and indicated to Mr Schrapel its intent to complete the transfer. I would note that under the agreement with Lion Nathan, Mr Schrapel was to have the benefit of a sale at $260.00 in any event. 23 Mr Schrapel also transferred a further 500 shares to a company which has euphemistically been described as "LNX" and which would appear to be owned by Lion Nathan. Those shares were also sold for $260 a share. Of the remaining 500 shares he owns it is clear that he has had and has the opportunity both to avail of the pre-emptive rights regime and to enter into an arrangement with Lion Nathan of a similar character to those described above. He has not availed of these, his apparent reason for not doing so being one of family sentiment in relation to his shareholding in Coopers. He indicated in cross-examination he has not as yet made up his mind whether he will or will not sell these shares in the event of a takeover being successful. What is very clear from Mr Schrapel's affidavit and his evidence is that he has throughout wished to liquidate virtually the entirety of his shareholding so as to make future financial provision for his children and grandchildren.

The serious question to be tried 24 It is alleged that if the amendment resolution is passed at the EGM it would (i) be beyond the power conferred on the members of Coopers by s 136 of the Corporations Act because it constituted a fraud on the minority or was not in the interests of the members of Coopers as a whole; or (ii) it was oppressive to those members of Coopers who wished to sell their shares to Lion Nathan. As I have noted earlier, the practical effect of the passing of the resolution would be to end Lion Nathan's offer of $310 per share to Coopers. It is alleged that the exercise of the s 136 power which would have that consequence would not be a bona fide exercise of the power for the benefit of the company as a whole. It is said it would unfairly discriminate against those members of Coopers who are presently contemplating or desiring to take up the Lion Nathan offer and it would be objectively unfair in that by making Coopers "takeover proof" it will deny shareholders the ability to realise such value as could only be realised through a takeover offer or other change of control transaction. It is clear that, with the removal of the Lion Nathan pre-emptive rights and Art 143, it is unlikely that any other takeover bid by another company, but particularly another competitor, will either be received or if received be countenanced by the Board of the company. 25 I have been taken to the well known authorities on alterations of articles and I simply mention Peters' American Delicacy Company Ltd v Heath & Ors (1939) 61 CLR 457, Gambotto & Anor v WCP Ltd & Anor (1995) 182 CLR 432 and Shears & Anor v Phosphate Cooperative Co of Australia Ltd (1988) 14 ACLR 747. I mean no disrespect to the parties in not entering at any length upon a discussion of those cases. Counsel for Mr Schrapel acknowledged that to the extent that he was relying upon fraud on the minority he had to make out that there was an issue to be tried as to whether the power was being exercised for a purpose or with an intention that was beyond the scope of, or not justified by, the instrument creating the power. It is contended that the purpose of bringing an end to the takeover in this setting is an improper one and for that reason there is a serious question to be tried. 26 For my own part given the history of the Lion Nathan provisions in Coopers' Constitution, the reason for their insertion and then the change of control in Lion Nathan which was the subject of proceedings in the South Australian courts, it is difficult to see that the proposed alteration is anything other than the taking of a step contemplated at the time the Lion Nathan rights were inserted in the Constitution of returning to the tight constraints on membership of the company which existed prior to Lion Nathan being given its rights. For that reason it is difficult to attribute any particular strength to the fraud on the minority claim so put. 27 The alternative ground of the resolution being unfairly discriminatory similarly seems to me to be slight when that ground is likewise considered in the context of (a) this company's history, (b) the reasons for the original amendment giving Lion Nathan its rights, (c) the circumstances in which Lion Nathan lost its right to veto any amendment to the articles consequent on the change of control in Lion Nathan and (d) in consequence, the expectations which members could reasonably entertain as to future saleability of their shares to Lion Nathan after that change in control. It seems to me, notwithstanding the proposed alteration will have a likely adverse affect on the realisable value of members' shares and to that extent may disadvantage those wishing to sell their shares under the present constitutional arrangements, there is much to be said for the view that the appropriate forum in which to determine the future character and direction of the company is at a general meeting of shareholders where this issue can be ventilated as it will be by the proposed amendments. The opportunity to do so arises because the articles now permit this to be done. 28 I should indicate that I do not consider that this alteration involves an expropriation of a shareholder in a way discountenanced by Gambotto. The right to transfer shares has always been tightly circumscribed by pre-emption provisions. Those provisions were altered in Lion Nathan's favour in 1995. In the events which have occurred, Coopers is now in a position again to alter its Articles to take away Lion Nathan's right. That was countenanced in the 1995 agreement. Mr Schrapel acquired his shares subject to that possibility. While I consider that the issue propounded in the injunction application is not a strong one, I do not consider it necessary to say that it is doomed to fail. 29 I have earlier outlined Mr Schrapel's history of dealings with his shares. I am not satisfied that, whatever detriment he considers he may suffer if the meeting is to go ahead and the resolution is passed, that detriment cannot adequately be remedied by an award of damages: see generally Mobileworld Operating Pty Ltd v Telstra Corporation Ltd [2005] FCA 1365 at [22]. His present arrangements with Lion Nathan virtually indemnify him from any prospect of loss in respect of the shares, the subject of those agreements. As to the remaining 500 shares as he says himself he has not decided whether or not to sell them in any event. Any recompensable loss (if any) he might suffer in respect of these is an appropriate matter for a damages award. 30 Beyond the question of adequacy of damages, I equally am not satisfied that the balance of convenience favours the award of an interlocutory injunction. It would in my view be a significant step to disenfranchise the shareholders of this company in a case in which the issues to be tried are as weak as they appear in this matter. I agree with the submission put by counsel for Coopers that the time has come for the shareholders to be allowed to address the future of their company even though it is quite predictable that the issue confronting them is one upon which they will divide sharply. No other shareholder has brought similar or like proceedings against Coopers. No other shareholder has, apparently, given a transfer notice to Coopers' board. 31 I dismiss the motion for interlocutory relief.

THE LION NATHAN APPLICATION 32 This matter was only filed on 22 November 2005. It could reasonably have been anticipated that there was some likelihood of the extraordinary general meeting being held late in 2005 and that timely steps would have been taken against this contingency. Instead this application has been made as a matter or urgency. 33 The principal proceedings seek: (1) declarations relating to the effect of the constitutional amendments to be considered at the EGM in light of the provisions of ss 45(2)(a)(i) and 45(2)(b)(i) of the Trade Practices Act 1974 (Cth) and the common law doctrine of restraint of trade; and

(2) injunctive relief in relation to the proposed constitutional amendments.

34 By way of preface I should say this application is a somewhat adventurous one. Put shortly, it is alleged that the second to the fifth respondents (all of whom are shareholders in Coopers) made an arrangement or arrived at an understanding that they would join together to make a request under s 249D of the Corporations Act 2001 (Cth) that the sixth to the eleventh respondents (all of whom are Directors of Coopers) would arrange to hold the EGM for the purpose of considering and passing the proposed constitutional amendments. It is said that they gave effect to that arrangement or understanding by signing and delivering a written requisition for the meeting. It is equally alleged that the Directors made an arrangement or arrived at an understanding to call and arrange to hold the EGM to consider the proposal and they gave effect to it by sending notices of that meeting and a written explanatory statement to Coopers' shareholders. 35 As I have already indicated, Lion Nathan had sent an offer to each of the holders of shares in Coopers which, unless withdrawn, will remain open for acceptance until 28 February 2006. It is said that the effect of the proposed constitutional amendments if adopted will be: (a) to prohibit Lion Nathan, SA Brewing and any other related company of Lion Nathan from becoming a member of Coopers; and

(i) the acquisition by Lion Nathan Australia or any related company of Lion Nathan Australia of rights in relation to shares in Coopers, including but not limited to the rights to be acquired by Lion Nathan Australia on acceptance of any of the Lion Nathan Offers;

(ii) the supply by and or to members of Coopers of rights in relation to shares, including but not limited to the prices at which and the market to which members of Coopers can offer and dispose of their shares. 36 It is then pleaded in the Amended Statement of Claim that at least the second to fifth respondents and/or the second to eleventh respondents and/or all the members of Coopers are and were at all material times persons who were or likely to be in competition with each other in relation to the acquisition and/or supply of rights in relation to shares in Coopers. It is then said that the purpose of each of the second, third, fourth and fifth respondents in making the arrangement or arriving at the understanding was to procure the effects noted above. A similar purpose is attributed to the Directors of Coopers in respect of the arrangement or understanding ascribed to them. In consequence, it is alleged there have been breaches of s 45(2)(a)(i) and 45(2)(b)(i) of the Trade Practices Act 1974 (Cth) ("the TP Act") or of the like provisions in the schedule version of Part 4 within the meaning of the Competition Policy Reform (South Australia) Act 1995 (which version and Act are hereafter included in references to the Trade Practices Act).

Serious Issue to be Tried 37 Put shortly, s 45(2) prohibits (in subsection (a)(i)) the making of a contract or arrangement, or arriving at an understanding, which contains an exclusionary provision and (in subsection (b)(i)) the giving effect to an exclusionary provision of a contract, arrangement or understanding. 38 Section 4D of the TP Act defines what provisions of a contract arrangement or understanding constitute an "exclusionary provision". The requirements are: (i) at least 2 of the parties to the contract arrangement or understanding must be or be likely to be in competition with each other in relation to the supply or acquisition of goods and services to which the relevant provision relates: 4D(1)(a) and 4D(2); and

(ii) the provision was included in the contract arrangement or understanding for the substantial purpose of preventing restricting or limiting the supply or acquisition of goods or services to or from a particular person or class of persons: 4D(1)(b) and 4F. 39 Section 4(1) of the Trade Practices Act defines "services" to include any rights (including rights in relation to and interests in real and personal property), benefits, privileges or facilities that are provided granted or conferred in trade or commerce. 40 It is contended that the definition of "services" in the TP Act would encompass any rights in relation to and interests in personal property including choses in action which are provided, granted or conferred in trade or commerce. In the context of the Lion Nathan offer it is contended that Lion Nathan was seeking to acquire rights in relation to choses in action, i.e. shares. It is then contended that: (1) the shareholders are in competition in relation to both the sale and acquisition of Coopers shares, this being the relevant market; and

(2) the purpose of the requisitionists was to prevent, restrict or limit the acquisition of shares and rights as a member by Lion Nathan and its related companies and that this purpose was clearly evidenced both in the proposed amendment itself and in statements made by the Managing Director and other Directors. 41 In response to this, the respondent Coopers contends: (1) that while Coopers and Lion Nathan are in competition within a market, such cannot properly be said of the members of Coopers in relation to the sale and purchase of Coopers shares;

(2) in buying and selling shares Coopers members are not engaging in commercial activity nor are they acting in trade or commerce;

(3) there is not relevantly a members' market in which Coopers shares are bought and sold; and

(4) it is said, the exclusionary provision does not relate to the competition between the shareholders. 42 For my own part, I am not prepared to say that there is not a serious question to be tried in this matter. Nonetheless, I entertain some doubt as to whether members of a company having constitutional arrangements such as exist in Coopers' pre-emption provisions are likely for the purposes of the TP Act to be found to be competitors in the "market" contrived by that regime. Relatedly, I consider there is a real question as to whether the resolution of the conflicting visions of members of Coopers as to the future of their shareholding in this company, is likely to be found in the provisions of s 45 of the TP Act. 43 Lion Nathan has not advanced any significantly compelling case on the issue of balance of convenience. It says that Coopers has not demonstrated any urgency up until the time of Lion Nathan's takeover offer in seeking to have the Constitution amended. It goes on to say that if the amendments are passed and steps were taken in reliance upon it, they would be unable conveniently to be rectified in the event that Lion Nathan is successful in its claims in this proceeding. In particular it says it is concerned that: (a) Coopers may proceed with its proposed buy back and purchase and cancel up to 15 per cent of shares, which are shares that might otherwise become available to Lion Nathan; and

(b) members of Coopers may purchase shares under the share transfer provisions of Coopers' constitution at a price below the price which LN would pay if LN were permitted to purchase those shares. 44 Coopers conversely submits that the balance of convenience favours rejection of the motion. It contends that the claim to be made is not a strong one. As early as 1998 it foreshadowed the prospect of a constitutional amendment given the change of control in Lion Nathan. It goes on to emphasise that even if the proposed amendment is illegal, Lion Nathan is seeking to take advantage of it despite its early agreement to the alteration conferring rights upon it in 1995. It also is said no explanation has been given of the delay in bringing this particular application. 45 I do not consider this is a proper matter in which interlocutory injunctive relief should be given. This question has been raised very late in the day. I entertain doubt as to the prospects of the claim made although I am not prepared to say there is not a serious question to be tried given the brief argument that has been able to be had about the matter. I am satisfied, though, that on the balance of convenience the meeting should be allowed to occur. What is being sought is to restrain the members of the company from expressing their views as to the character and future direction of their company at an important moment in its history. Their right to do this is not one which should lightly be interfered with. I am not satisfied that the inconvenience likely to be suffered if the resolution is passed and is later to be found illegal, is not capable of being adequately remedied by appropriate orders of this Court. I equally consider as a discretionary matter that the very type of "agreement" about which Lion Nathan raises the spectre of illegality now is one envisaged in the agreement that Lion Nathan entered into with Coopers in 1995. 46 I have also given consideration to the consequences of the amendments if passed. On their face they would bring Lion Nathan's takeover offer to an end, as also this particular opportunity of members to realise their shares. If the amendments were subsequently invalidated in this proceeding, there is nothing to suggest that their having been made would foreclose the prospect of a further bid by Lion Nathan for Coopers. In the event I consider that the balance of convenience lies in favour of rejection of the interlocutory application. I will so order. I certify that the preceding forty-six (46) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Finn .

No S 255 of 2005 Counsel for the Applicant: Mr Houghton QC with Mr Wyles

Solicitor for the Applicant: Mallesons Stephen Jaques

Counsel for the Respondents: Mr Whitington QC with Mr Blight

No S 316 of 2005 Counsel for the Applicant: Mr Rares SC with Mr Strong

Solicitor for the Applicant: Mallesons Stephen Jaques

Counsel for the Respondents: Mr Stevenson SC with Mr Gyles Mr Whitington QC with Mr Blight