SENGATE PTY LTD v SOUTHERN EQUITY HOLDINGS LTD No. SCGRG-98-1247 Judgment No. S6993 [1998] SASC 6993

Under the scheme, SEQ is to issue five non redeemable preference shares to Balmoral. It is to cancel all ordinary shares on issue, being 7,951,000 fully paid ordinary shares of $1 each. The holders of shares in SEQ, and whose shares are to be cancelled, will receive an issue of Balmoral shares in the ratio of four Balmoral shares for every three SEQ shares. By those arrangements SEQ will become a wholly owned subsidiary of Balmoral. In order to implement the scheme there will be a reduction of capital in respect of SEQ brought about by the cancellation of the ordinary shares in the company.

Under the terms of the scheme, it was made unconditional, on becoming effective on or before 30 November 1998, or such later date as this Court with the consent of SEQ and Balmoral permits.

The scheme meeting was held on 27 October 1998, when the scheme was agreed to by shareholders by the requisite majorities under s411 of the Corporations Law. The scheme was approved by this Court on 18 November 1998.

The appellant, Sengate Pty Ltd (Sengate), is and was the holder of 42 per cent of the issued ordinary shares in Southern Equity.

James Hayward, and persons associated with him, are the holders of 53 per cent of the shares in Sengate. At some time before 27 October 1998, Mr Hayward and his associates issued a tender seeking a party to purchase that 53 per cent share holding in Sengate.

Mr Hayward is the secretary of Sengate and he said, in an affidavit filed in these proceedings and relied upon by Sengate, that before the scheme meeting, he and the directors of Sengate reviewed the explanatory statement. On the basis of that document, they resolved that Sengate would vote in favour of the scheme. It did so and the scheme was duly agreed to by the requisite majorities.

The substantial complaint made by Sengate is that SEQ failed to make disclosure in the explanatory memorandum and accompanying documents of matters which were material to shareholders of SEQ in their consideration of the proposed merger.

Two matters were said not to be disclosed. The first complaint was that there was no disclosure of an agreement, arrangement or understanding between Mr Hayward and his associates and Balmoral which was entered into before the shareholders meeting and which was consummated after that meeting.

The second complaint on the part of Sengate is that Balmoral has been committed to purchase certain assets of the company known as Sakkara and at a purchase price of $1.6 m or greater, a price which is regarded by Sengate as a gross over valuation of the assets concerned. Both facts were known to the directors of Balmoral at the time the meeting was held, but not known at the time to the shareholders of SEQ.

As the scheme contemplates the issue of shares in Balmoral to SEQ, it was argued that there should have been a full disclosure of all of that information to the shareholders of SEQ in the explanatory statement.

It was further argued, that if the purchase proceeds, because of the transaction which is contemplated between Balmoral and Sakkara, the shares of Balmoral, including the shares in Balmoral acquired by SEQ, if this merger is to take place, would suffer a significant diminution in value.

The complaints to which I just referred arose after the scheme meeting and a few days before the scheme was to receive the approval of this Court. The complaint was taken up with the judge who approved the scheme, but he decided, nevertheless, to approve it.

Substantial time and effort has been put into the task of preparing the scheme and seeking its approval and for the Court to embark on steps which may well bring the scheme to a premature end is, at this stage, a very serious step indeed.

The information on which the court is asked to act is found in the affidavit of Mr Hayward, sworn on 16 November 1998.

Mr Hayward apparently had a meeting with the chairman of Balmoral the day before the SEQ shareholders were to vote upon the scheme. Apparently he was told by the chairman of Balmoral, Mr Farrar, that Balmoral would bid for Mr Hayward and associates shareholding in Sengate in conformity with the tender offer which Mr Hayward had previously published. Sengate then voted for the scheme of arrangement. Sengate, SEQ, and all other interested parties, were unaware of the agreement, arrangement or understanding entered into by Mr Hayward and Balmoral. More particularly, the shareholders of SEQ did not know that the principal shareholder of its principal shareholder would become entitled to receive a sum of money in the order of $1.25m from Balmoral. Nor did those shareholders know that Mr Hayward and his associates would not be locked into Balmoral like the company of which he was a shareholder, and the rest of the shareholders of SEQ.

Balmoral's offer was not in accordance with the tender, although I infer from Mr Hayward's affidavit that the offer, as made in due course, was acceptable. The offer was withdrawn or purportedly withdrawn, when Silverton Corporate Advisory Services Pty Ltd, another company controlled by Mr Hayward, advised Balmoral that it would lend to Sengate sufficient funds for Sengate to repay its indebtedness to National Australia Bank and, in turn, would take a fixed and floating charge over the assets of Sengate.

It was immediately after communication in a letter to Balmoral of that information, that Balmoral withdrew its offer to Mr Hayward and his associates. Further, it was immediately after the withdrawal of that offer, that Mr Hayward made these allegations in these proceedings.

The withdrawal of that offer had no effect upon Sengate because Sengate was in the same position as any other shareholder of SEQ. That is, on the implementation of the scheme it would become a shareholder of Balmoral. However, the withdrawal of the offer meant that Mr Hayward and his associates would not receive cash of in the order of $1.25m.

Mr Hayward's further allegation is that, Balmoral intended, at that time, that is at about 28 October, 1998, but still intends, to enter into transactions with Sakkara Pty Ltd (Sakkara), a company controlled by Mr McGivor and Mr Wilson, whereby Balmoral would purchase assets from Sakkara at a gross over valuation.

The transaction between Balmoral and Sakkara was originally contemplated in a put and call option which has been evidenced in these proceedings. That put and call option was not exhibited to Mr Hayward's affidavit, but a copy has been exhibited to an affidavit sworn by Mr Latham, a director of SEQ. The put and call option contemplated that Balmoral would purchase, apparently pursuant to the tender Mr Hayward and associates published their 53 per cent shareholding in Sengate. The parties to the option were Balmoral and Sakkara. The put and call option provided that Balmoral could put to Sakkara and Sakkara could call from Balmoral between half and all of the 53 per cent shareholding in Sengate. It was contemplated that the price for those shares would be the same price as Balmoral had paid Mr Hayward and his associates.

There was a condition precedent to the option transaction, which was in the following form:

"7. Put Conditions Precedent 7.1 Conditions Precedent Balmoral may not exercise the Put Option until all the following conditions precedent have occurred or been waived by Sakkara: (a) the acquisition by Balmoral of the Sakkara Assets at the Asset Sale Price; (b) the approval of the shareholders, in a general meeting of Balmoral, to the acquisition of the Sakkara Assets; (c) a nominee of Sakkara is appointed to the board of Balmoral."

The Sakkara assets are defined in the put and call option, as meaning all the assets business and undertakings of Sakkara. It was, therefore, a condition precedent for the put and the call to Sakkara, that Balmoral would firstly, acquire all of the assets, business and undertakings of Sakkara.

In due course that transaction did not go forward and the put and call option was not exercised.

However, Balmoral should have brought to the attention of SEQ, that it proposed to enter into the transaction with the principal shareholder of Sengate, and that it would do so after acquiring Sakkara's assets.

It had that obligation, in my opinion, both at law and under the terms of the merger agreement.

"2.2 Undertakings by Balmoral In consideration of the undertakings herein given by SEQ, Balmoral shall do all those things and execute all those deeds and other documents as may be necessary or expedient on its part to implement the Scheme and the Merger, and without limiting the generality of the foregoing, Balmoral shall: 2.2.1 provide to SEQ in accordance with such timetable as SEQ shall reasonably request a memorandum containing such information as SEQ shall reasonably request to enable SEQ to comply with the requirements of the Law in relation to the Scheme;"

That obligation was referred to in the explanatory memorandum. The explanatory memorandum provided:

"2.8.2 Balmoral Information Memorandum Details about Balmoral and its activities are included in Appendix VI, which is called the Balmoral Information Memorandum. The Balmoral Information Memorandum was prepared by Balmoral and is directors. It was provided to SEQ and its directors by Balmoral for inclusion in this Explanatory Statement. Balmoral also provided additional information to SEQ to assist in the preparation of this Explanatory Statement pursuant to the Implementation Agreement. Balmoral has provided SEQ and each of its directors with an undertaking and in indemnity that the Balmoral Information Memorandum and other specific information supplied by Balmoral is in all material respects complete and accurate and contains no material omissions."

The Balmoral Information Memorandum was silent on the two matters complained of. The Balmoral Information Memorandum provided for the rectification of false or misleading information, and for the notification of change affecting a matter in the Memorandum or which arises and would have been required to be included. The Balmoral Information Memorandum provides:

"SUPPLEMENTARY INFORMATION MEMORANDUM In the event that Balmoral becomes aware of any of the following matters between the date of issue of this Information Memorandum and the date the Company's securities are quoted, a Supplementary Information Memorandum will be issued.

* If a Material statement in the Information Memorandum is found to be false or misleading;

* If there is found to be a material omission from the Information Memorandum;

* If there is a significant change affecting a matter included in the Information Memorandum;

* If a significant matter arises which would have been required to be included in the Information Memorandum."

There is no doubt, in my opinion, that Balmoral undertook to SEQ, that it would provide SEQ with all information which was material for SEQ and for its shareholders in a consideration of the proposed merger.

Moreover, Balmoral recognised that information supplied to SEQ would be published to the shareholders of SEQ for their consideration of the proposed merger.

It understood that it had to disclose all information which was material to the shareholders consideration and undertook to provide any changes which might affect the matters contained in the memorandum.

It was put by SEQ, that Balmoral did not have an obligation to disclose either of the transactions. That is to say, if the transaction was a transaction to acquire all of Sakkara assets before the put and call option, that need not be disclosed. Nor should any transaction which was simply an acquisition of the assets of Sakkara need be disclosed. It was put that that disclosure need not be made because the first transaction that is the put and the call option, never went forward in any event. The second transaction, was within the contemplation of the explanatory memorandum and, in those circumstances, need not be separately addressed.

In my opinion, neither of those arguments would excuse Balmoral from its obligation to provide the information in relation to both of those transactions.

In my opinion, it is not relevant, in determining whether or not the information was relevant, that the transaction in relation to the put and the call option did not go forward. If an arrangement or understanding was entered into before the shareholders meeting then there can be no excuse for Balmoral not disclosing that information to SEQ. However, it was said that it was not entered into before that time. Whilst it might be right to say that no formal agreement had been entered into before the shareholders meeting clearly, on the evidence available to the Court such a transaction was contemplated. The contemplation of the transaction between Mr Hayward and his associates and Balmoral meant that the transaction need be disclosed.

Even if it was not entered into until after the shareholders meeting and even if in due course Balmoral claimed to be entitled to avoid the transaction, during the period between the bid in response to the tender and the withdrawal of the bid, Balmoral had an obligation to SEQ to advise SEQ.

It was a matter of importance to the shareholders of SEQ, that they were aware that the company of which they were about to become shareholders, had entered into a transaction of the kind which, as I put to counsel during argument, amounted to a side deal, with a principal shareholder of one of the shareholders of SEQ. The remaining shareholders were entitled to know that Balmoral was prepared to enter into transactions of that kind. That was important in my opinion, for the purpose of making an investment decision.

As to the second argument, in my opinion, the acquisition of the whole of the assets of Sakkara, could not be described as an acquisition contemplated by the explanatory memorandum or the material accompanying that memorandum. It was a transaction of a kind that needed to be included in the Balmoral Information Memorandum. It was an acquisition, if it went forward which would have consumed a significant percentage of the shareholders funds in Balmoral. In those circumstances, it needed to be disclosed. It was important for the shareholders of SEQ to have that information to make an investment decision.

In any event, there is evidence that the Sakkara transaction was not necessarily tied to the purchase of Mr Hayward's interest in Sengate. Independent experts reports suggest that the transaction might have taken place without the transaction between Mr Hayward and his associates and Balmoral proceeding.

The matters needed to be disclosed when the matter came before Millhouse J on 13 November, 1998. His Honour was put in a position on short notice, of having to consider whether it was appropriate for the Court to approve the transaction. It was incumbent, in my opinion, on Balmoral to advise SEQ and the Court of the circumstances of those transactions. When the matter first came before Millhouse J his Honour made the following orders:

"1 That in relation to: (a) any offers concerning the sale or possible sale of shares in Sengate Pty Ltd; and (b) any contract, arrangement or understanding between Balmoral and Sakkara Pty Ltd or any other party or parties relating to any sale (whether actual, contingent, contemplated or possible) of shares by Balmoral to Sakkara Pty Ltd or any person or persons associated with or interested in Sakkara Pty Ltd. Balmoral Corporation Limited ("Balmoral"), Sengate Pty Ltd ("Sengate"), Silverton Corporate Advisory Services Pty Ltd, Dexbold Pty Ltd and Silverton Holdings Pty Ltd by 4.00 pm on Tuesday 17 November 1998: (i) make such discovery and provide such photocopies of all discovered documents to each other party to this order and the plaintiff. (ii) file and serve on all other parties including the plaintiff any such affidavit or affidavits. as they may be advised. 2. That this matter be adjourned for further consideration at 1.00 pm on Wednesday 18 November 1998."

Balmoral was represented by counsel before Millhouse J on 13 November, and again on 18 November. Indeed, Balmoral sought to address this Court in relation to this appeal.

Notwithstanding its interest in these proceedings, it did not bring forward any evidence of any of the matters referred to in his Honour's ruling. Of course, it was not a party to the proceedings and perhaps could not have been obliged in law so to do, at least pursuant to that order. Clearly, however, there are documents in the possession power or control of Balmoral which are relevant to the matters raised in Mr Hayward's affidavit. That is undoubtedly so because Mr Hayward has exhibited some of those documents to the affidavit which he filed in these proceedings.

There were therefore, on both 13 and 18 November, documents in the possession or power or control of Balmoral, which were relevant to the question before Millhouse J, which was whether or not the proposed merger should be approved.

In the absence of Balmoral bringing forward any information, whilst at the same time wishing to be heard both before the learned Judge and this Court, it can be inferred that the transaction which Mr Hayward says was still in the contemplation of Balmoral and Sakkara was in fact proceeding or, at least, was to proceed.

Balmoral, in my opinion, has failed in its obligation to bring to the attention of the shareholders of SEQ, and this Court, information which is material.

The shareholders of SEQ were entitled to full and adequate disclosure of all information which may be material for the purpose of making a decision in relation to the merger. The Court is also entitled to all information which might be material for its determination whether it would be appropriate for the Court to sanction such a merger.

The Court, in considering whether or not to approve the scheme, will ensure that the information in the explanatory memorandum, and all documents accompanying the explanatory memorandum, is fair and adequate to assess whether the scheme is reasonable. It will also ensure in so far as it can that all reasonable information was before the meeting so that the shareholders can or could make a properly informed decision in relation to the proposed merger, Re Pheon (1986) 47 SASR 427.

Balmoral had the opportunity before the learned Judge to explain the omission of this information. It did not.

There were two parties, of course, who were party to the side agreement, namely, Mr Hayward and Balmoral. If this Court allows this appeal, Mr Hayward who was a party to the understanding or arrangement with Balmoral, which he entered into for his advantage and perhaps to the disadvantage of all other shareholders, may profit. He will profit in the sense that he will have set aside a transaction which he supported at a time when he knew that he would, or at least might, obtain a cash advantage and when he knew that the shareholders of SEQ were unaware of the benefits that might flow to him. However, Mr Hayward had no obligation in law to advise the shareholders of SEQ of the side agreement. It was only Balmoral which had an obligation to advise SEQ of that proposed transaction; moreover its obligation was to advise SEQ and the Court. Therefore, whilst Mr Hayward may profit by the allowing of this appeal, it is in circumstances where he was not under any obligation to make any disclosure.

In my opinion, for the reasons given, I would allow the appeal and set aside the orders made by Millhouse J on 18 November 1998. I would also order that the application by the respondent for approval of the scheme of arrangement dated 8 September 1998 be dismissed.

PRIOR J: I agree with the orders proposed by Lander J.

WICKS J: For the reasons given by Lander J, I agree with the order he proposes.

1. That the Appeal be allowed and that the Orders made by Justice Millhouse on the 18th day of November 1998 be set aside.

2. That the application by the respondent for Court approval of the Scheme of Arrangement by application dated the 8th day of September 1998 be dismissed.

3. Questions of costs reserved for submissions on Monday, 30 November 1998 at not before 2.15 p.m.