Sovereign Life Assurance Company v Dodd

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REASONS FOR JUDGMENT 1 This is an application under s 411(1) of the Corporations Act 2001 (Cth). The plaintiff seeks an order that the plaintiff convene a meeting of its Shareholders for the purpose of considering, and if thought fit, agreeing (with or without modification) to a Scheme of Arrangement (Scheme). Directions as to conduct of the meeting are also sought. At the conclusion of the first court hearing on 4 August 2010, I made the orders sought by the plaintiff. These are my reasons for those orders. 2 The Scheme is proposed pursuant to a Scheme Implementation Agreement entered into between the plaintiff, Wattyl Limited (Wattyl), and The Valspar Corporation (Valspar), a company incorporated in Delaware, Minnesota, and listed on the New York Stock Exchange. Under the proposed Scheme, Valspar (Australia) Paint Acquisition Pty Limited, a subsidiary of Valspar will acquire all the shares in the plaintiff. The proposal is explained in detail in the Scheme Booklet which is exhibited to the affidavit of John Weir Ingram sworn on 29 July 2010. Mr Ingram is a director of the plaintiff and the Chairman of its board. 3 The plaintiff is an Australian listed public company limited by shares. Its business involves the manufacture, sale and distribution of paint and surface coatings in Australia and New Zealand. Valspar is one of the world's largest paint and coating companies with operation in over 25 countries. Valspar (Australia) is a wholly-owned subsidiary of Valspar and has been incorporated for the purpose of acquiring Wattyl shares. The Chairman's letter in the Scheme Booklet explains the Scheme as follows: Under the Scheme, [Valspar Australia] will acquire all of the fully paid Wattyl Shares for $1.67 in cash per fully paid Wattyl Share. This represents a substantial premium of: · 113% to the closing price of $0.785 per fully paid Wattyl Share on 24 May 2010, being the day prior to Wattyl's announcement of receipt of an indicative and non-binding proposal; · 91% to the three month volume weighted average price to 24 May 2010 of $0.875 per fully paid Wattyl Share; and · 33% to the closing price of $1.26 per fully paid Wattyl Share on 25 June 2010, being the last trading day prior to Wattyl's announcement that it had entered into the Implementation Deed. Your Directors believe that the Scheme provides an opportunity for Wattyl Shareholders to realise cash for their fully paid Wattyl Shares at a significant premium to recent trading levels. This opportunity may not be available if the Scheme does not proceed. Partly paid Wattyl Shares issued under the Wattyl Employees Share Scheme will be acquired for $0.37 cash per partly paid Wattyl Share as part of the Scheme. Your Board unanimously recommends that Wattyl Shareholders vote in favour of the Scheme at the Scheme Meeting in the absence of a superior proposal. Subject to this same qualification, each Director will vote (or procure the voting of) all the Wattyl Shares held or controlled by them in favour of the Scheme at the Scheme Meeting. 4 The Scheme is explained in some detail in the Scheme Booklet and a copy of the Scheme itself is annexed to the Scheme Booklet. The Scheme Booklet includes a list of frequently asked questions with brief answers which include references to those sections of the document which describe the relevant aspect of the Scheme in more detail. The Booklet canvasses reasons why shareholders might choose to vote in favour of or against the Scheme and points out that, as Court approval is required for the Scheme to proceed, it may not do so even if shareholders vote in its favour. 5 Under section 8.3(c) of the Scheme, each shareholder is to give the usual warranty to the effect that all of the shares transferred under the Scheme are free from any interest of third parties and that the shareholder has "full power and capacity to sell and to transfer its Wattyl Shares to Valspar". This warranty is common to schemes such as this and provided it has been drawn to the shareholders' attention it is not an obstacle to approval of the Scheme. 6 Pursuant to its duty of disclosure the plaintiff brings a number of matters to the Court's attention. It submits, however, that none of these matters should be of concern to the Court. In particular, there is no personal risk for Shareholders as the Scheme provides for the consideration to be provided to Shareholders before the shares are transferred. In addition there is provision for a Deed Poll to be executed by Valspar and Valspar (Australia) in favour of the plaintiff's shareholders. Under the Deed Poll the Valspar Company undertakes to ensure that the Shareholders are paid. An executed copy of the Deed Poll was tendered at the hearing. 7 The Scheme Implementation Deed provides for a break fee of $1.415 million if the Scheme does not proceed. This amount is under 1% of the equity value of Wattyl and is within the Takeovers Panel Guidelines; see Re Coles Group Limited No 1 [2007] VSC 389 at [69] per Robson J. The circumstances in which the break fee is payable are set out in Section 6.13(g) of the Scheme Booklet. They do not include the Scheme not proceeding merely because the Shareholders rule against it. Clause 11.1 is a liquidated damages clause about which the plaintiff acknowledges that it has received legal advice. Clause 11.6 provides a "fiduciary carve-out" in favour of Wattyl designed to ensure that the obligation imposed on the plaintiff are not inconsistent with other of its legal obligations. 8 Clause 10 of the Implementation Deed provides for a period of exclusivity with both "no shop" and "no talk" and "no due diligence" restrictions. The exclusivity period is the period from 28 June 2010 to 20 December 2010 on the date the deed is terminated, which ever is the earlier. These provisions are not unusual in Schemes such as this. Evidence in support of the Scheme has been given by Mr Ingram along the lines suggested by Lindgren J in Re APN News & Media Limited, in the matter of APN News & Media Limited (2007) 60 ACSR 400 at [55]. Mr Ingram deposes, inter alia, as follows: Both the Break Fee and the No Shop, No Talk and No Due Diligence clauses in the SID (Clauses) were agreed between Wattyl and Valspar following arm's length commercial negotiations. Both parties were separately advised and represented in such negotiations by external legal advisers and external financial advisers, with extensive experience of transactions of this kind. Wattyl received legal advice from Clayton Utz and financial advice from Gresham Advisory Partners Limited (Gresham) on the operation of the Clauses and Wattyl had regard to the Guidance Note in the negotiations set out above. Valspar required that provisions in the nature of the Clauses be included in the SID and Wattyl was satisfied that the final form of the Clauses were acceptable to it. I believe that the Clauses do not operate against the interests of Wattyl Shareholders and it was in their interests that the directors of Wattyl agree to include the Clauses in the SID to secure Valspar's execution of the SID and its agreement to implement the Scheme. To the best of my knowledge and belief, my view is shared by the other directors of Wattyl. 9 In my view these clauses do not present an obstacle to the approval of the Scheme. 10 Annexed to the Scheme booklet is the draft report of Lonergan Edwards & Associates Limited (LEA), the independent expert commissioned by the directors of Wattyl to review the Scheme. In valuing Wattyl's Australian and New Zealand business LEA adopted the capitalisation of EBIT (Earnings Before Income Tax) method as the most appropriate valuation method. The method is described in Section VI of the Report and the reasoning behind the adoption of an EBIT multiple range of 7.5 to 8.5 for the Australian Operations and 6.5 to 7.5 for the New Zealand operations is explained. For the purposes of the Scheme LEA have valued 100% of the shares in Wattyl on a controlling interest basis at between $1.35 and $1.56 per share. In comparison, if the Scheme is approved, holders of fully paid Wattyl shares will receive consideration of $1.67 per share. 11 As indicated in the Chairman's report, partly paid Wattyl shares issued under the Wattyl Employees Share Scheme will be acquired for $0.37 cash per share as part of the Scheme. At the hearing Mr Oakes SC made submissions to the effect that the holders of partly paid shares did not form a separate class for the purposes of approving the Scheme. 12 Footnote 1 to the LEA Report refers to the position of the holders of the partly paid shares: The Scheme Consideration for 10,800 partly paid ordinary shares issued under the Wattyl Employees Share Scheme would be $0.37 cash per share. Based on the Scheme Consideration of $1.67 per share the amount yet to be paid up in respect of these shares is $1.30 per share. We note therefore that holders of partly paid ordinary shares in Wattyl are being treated equally with holders of fully paid ordinary shares under the Scheme

13 Mr Oakes submitted that because the partly paid shareholders are being treated equally with the fully paid shareholders, they are not a separate class for scheme of arrangement purposes. The written submissions for the plaintiff supported this proposition with reference to the basis on which the consideration payable in respect of partly paid shares has been calculated and summarised as follows: Detail about the two issues of partly paid shares appears in Section 7.4 of the Scheme Booklet. A summary of that information is that the amount to be paid up on each partly paid share is the "Current Market Price" on the last trading day on which fully paid shares were traded prior to the call on the partly paid shares, less the amount paid on subscription ($0.20). "Current Market Price" is an amount equal to 90% of the last recorded sale price. The consideration payable to the partly-paid shareholders has been calculated as follows: · Bid price $1.67 · Take bid price as last sale price · Apply 90% · 90% x $1.67-$1.50.3; round off to $1.50 · Deduct $0.20 paid on subscription yields call price of $1.30 · From bid price ($1.67) deduct call price ($1.30) yields $0.37. · $0.37 is the scheme consideration payable for each partly paid share. I am satisfied that the above summary is correct. 14 It is not denied that in some respects the position of the partly paid shareholders is different from that of fully paid shareholders. This much is clear simply from the fact that the former are liable to calls whereas the latter are not. Moreover, article 88(3) of the Wattyl constitution provides that whereas fully paid shares carry one vote per share, a partly paid share carries a fractional vote "equivalent to the proportion which the amount paid (not credited) is of the total amounts paid and payable (excluding amounts credited)". 15 It does not follow, however that because different rights attach to partly paid shares holders of these shares are to be treated as a separate class for present purposes. The question is whether at the meeting convened for the purpose of obtaining shareholder approval of the Scheme the interests of the two groups of shareholders are so different "as to make it impossible for them to consult together with a view to their common interest"; Sovereign Life Assurance Company v Dodd [1892] 2 QB 573 at 583 per Bowen LJ. As Barrett J commented in Re Hills Motorway Management Ltd (2002) 43 ACSR 101 at 104: The test is thus not one of identical treatment. It is one of community of interest. The court must ask itself whether the rights and entitlements of the different groups, viewed in the totality of the scheme's context, are so dissimilar as to make it impossible for them to consult together with a view to their common interest. The focus is not on the fact of differentiation but on its effects. The extent and nature of the 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 - the word used by Bowen LJ is "impossible" - does class distinction come to prevail. 16 Where the community of interest to which Barrett J refers is lacking, even identical treatment will not be a sufficient basis for treating different groups of shareholders as being of the same class. The principles governing the distinction between classes are directed to avoiding the unfairness which would result if groups that do not have a community of interest were denied separate meetings in which to consider a proposed scheme of arrangement. The policy underlying those principles would be equally offended by a decision to order a separate meeting in respect of groups which in fact have the requisite community of interest; Application of Australian Co-operative Foods Ltd (2001) 38 ACSR 71 at 88 per Santow J. 17 In this case the issue before both fully paid and partly paid shareholders is whether to consent to Valspar Australia's acquisition of their share at a designated price. Although the price for a fully paid share is greater than for a partly paid share, on a pro rata basis each group would be paid the same in respect of the equity they have in their shares. That being so the issue for all shareholders is the same, namely whether they accept a price that ascribes a certain price to their shares on a basis that is proportionate to the value which each shareholder has in the shares. Although not treated the same, the groups can be seen to be being treated fairly and, in that sense, equally. In any event, I am satisfied that the requisite community of interest exists and that the partly paid shareholders do not form a separate class. 18 The LEA report concludes: On balance, given the above analysis, we consider the acquisition of Wattyl shares by Valspar under the Scheme is fair and reasonable and in the best interests of Wattyl shareholders. As holders of partly paid shares in Wattyl are being treated equally under the Scheme we also consider the acquisition of partly paid Wattyl shares by Valspar under the Scheme is fair and reasonable and in the best interest of Wattyl partly paid shareholders. 19 The balance of the report outlines the valuation methodology used to assess the underlying value of Wattyl and concludes that the offer of $1.67 per fully paid share is above the valuation range determined by the Independent Expert. It also states that the offer of $0.37 for each partly paid share is fair and reasonable. 20 Other evidence before the Court at the first hearing established that the plaintiff is a "Part 5.1 body"; that the proposed Scheme is an "arrangement" within s 411; that Mr Ingram has consented to act as Chairperson of the meetings and Mr Anthony Matthew Dragicevich, Managing Director, Wattyl Limitedhas consented to act in his absence. I am satisfied that the information in the Scheme Booklet and annexed documents will result in proper disclosure to the shareholders. I am also satisfied that the Scheme is bona fide and properly proposed: and that ASIC has been given an opportunity to examine the proposal and adequate notice of the first Court hearing date. The plaintiff has tendered a letter dated 3 August 2010 from ASIC stating that it does not propose to appear at the first Court hearing, or intervene to oppose the Scheme at that time. 21 The factual information in the Scheme Booklet has been verified by affidavits tendered on behalf of Wattyl and Valspar. From Wattyl's perspective the verification process was described by Mr Ingram. Mr Ingram describes the responsibilities of the various participants in the process and the collation of the input from each participant. 22 For Valspar the affidavit of Rolf Engh was tendered. Mr Engh is the Executive Vice-President, General Counsel and Secretary of Valspar. He described the verification process undertaken by Valspar in respect of the information in the Scheme Booklet provided by it. On the basis of the evidence given by Mr Ingram and Mr Engh I am satisfied that both for Valspar and the plaintiff the process was careful and thorough and provides an adequate basis for the deponents' respective assertion that each believes the information in the Scheme Booklet to be correct and not misleading or deceptive. 23 On the basis of the evidence tendered at the first Court hearing and for the reasons given above, I made the order sought by the plaintiff. I certify that the preceding twenty-three (23) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Stone.