HIS HONOUR: The plaintiff CIC Australia Limited applies pursuant to (Cth) Corporations Act 2001, s 411(1), for an order that a meeting of a class of its members, namely the members other than Peet Limited (who, for the sake of convenience, are referred to as the "non-Peet shareholders"), for the purpose of considering and if thought fit agreeing to a scheme of arrangement proposed to be made between the company and the non-Peet shareholders, the effect of which scheme, if agreed to and implemented, would be that the company will buy back the shares of all non-Peet shareholders so that it would then be a wholly-owned subsidiary of Peet.
The proposed transaction is to be effected by a combination of the share buyback procedure provided for by Corporations Act, s 257D, and a scheme of arrangement. It is proposed that a general meeting of shareholders be held at 10 am on 8 May 2015 for the purpose of considering the buyback resolution and that it be immediately followed by a scheme meeting of the non-Peet shareholders for the purpose of considering the scheme resolution.
Peet currently holds 86.05% of the issued shares in the company, having acquired its shareholding pursuant to an off-market takeover offer in or about April 2013, in which the share price was 60 cents per share. The current proposed scheme was initiated by some of the remaining minority shareholders, who in effect have invited Peet to acquire the remaining shareholdings at 82.7 cents per share. That represents a significant premium on the price paid under the 2013 takeover. Fourteen of the non-Peet shareholders, holding between them in excess of 12% of the total shares on issue (being almost 88% of the shares that would be the subject of the scheme) have committed to voting in favour of the scheme resolution, upon condition that there is no superior proposal and that the company obtains a draft ATO class ruling that is either to the satisfaction of CIC or to the satisfaction of the relevant shareholder. Relevantly, that condition will be satisfied at least if the ruling accords with the indicative view of the ATO that it is likely to treat 49 cents of the buyback consideration as a capital return and the balance of 33.7 cents as a dividend.
On an application under s 411(1) for an order convening a meeting, at the so-called first Court hearing, the Court's approach is that it does not ordinarily summon a meeting unless the scheme is of such a nature and in such terms that, if supported by the requisite majority at the scheme meeting, the Court would likely approve it on the second hearing, if the application were unopposed. The Court's function at this stage includes consideration of whether the draft explanatory statement sufficiently and fairly discloses the effect and detail of the scheme to enable shareholders to make an informed and sensible decision as to how to vote, whether the procedural course proposed for the meeting is appropriate, and whether, as required by s 411(2), ASIC has had proper notice of the application and an opportunity to consider the draft explanatory statement. The Court will not ordinarily decline to order that a meeting be convened just because of reservations about commercial aspects of the proposal.
As the present scheme involves a selective off-market buyback, the company is required to comply with Corporations Act, Pt 2J.1 Div 2. That does not require the approval of the Court, but, where the two processes are interdependent, the Court would not likely order a meeting to be convened if it were of the view that those provisions would not be satisfied.
One pre-condition to a share buyback, contained in Corporations Act, s 257A, is that a company may not buy back its shares unless the buyback does not materially prejudice the company's ability to pay its creditors. The evidence in this case establishes that the company has a high liquidity ratio, and there is not the slightest reason to think that this buyback would materially prejudice its ability to pay its creditors.
The procedures to be followed are set out in s 257D and include a resolution of the type described in s 257B. It is unnecessary, I think, on this application, that I express a view as to the proper construction of that section, but the company proposes to act on a construction that is well-supported by the authorities [see Village Roadshow Ltd v Boswell Film GmbH (2004) 8 VR 38].
As to whether there is any fundamental objection to this scheme such as would likely preclude its approval at the second meeting, a number of matters should be mentioned. Chief among them is the fact that the independent expert has expressed the conclusion that the scheme is not fair to shareholders, but is reasonable, and that in the absence of a superior offer it is in the best interests of the scheme shareholders. In order to understand that at first sight internally inconsistent opinion, it is necessary to appreciate the conventional distinction drawn in this area between fairness and reasonableness. Notwithstanding the difficulties that have been mentioned by Hayne J in Re Rancoo Limited (1995) 17 ACSR 206 and by Dodds-Streeton J in Zenyth Therapeutics Limited v Smith [2006] VSC 436; (2006) 60 ACSR 548, [106]-[113], essentially, fairness is concerned with a comparison of the consideration for the offer and the true value of the shares, and reasonableness is concerned with other factors that may make it reasonable to accept an offer that is less than fair. As Dodds-Streeton J said in Zenyth (at [114]):
Courts should adopt a cautious approach to the approval of any scheme which the independent expert considers "not fair", particularly when it may involve expropriation at an undervalue.
Nonetheless, Courts have made orders convening meetings and approving schemes when the independent expert has concluded that the scheme was reasonable though not fair [see, for example, GRD Ltd, In the matter of GRD Ltd [2009] FCA 1595, [28]-[32]; Re Cytopia Ltd [2009] VSC 560, [5]-[9]]. The distinction to which I have referred between "fairness" and "reasonableness" reflects ASIC Regulatory Guide 111 - Content of Expert Reports, [111.10]-[111.12], [111.21]. Experts are guided by the ASIC Regulatory Guide and for that reason, notwithstanding the reservations expressed by Hayne and Dodds-Streeton JJ, I think that distinction does have meaning.
In this case, the expert has come to the conclusion that the scheme is not fair, as a result of comparing the scheme consideration of 82.7 cents with a valuation reached on two alternative bases. The first is a so-called "sum of parts" valuation, by which the expert essentially considered the discounted cash flows of the various projects in which the company is currently engaged to attribute a value to its interest in each of those projects and accumulate them to obtain a total value of the company. On that basis, the expert concluded that the company's shares were worth between $1.15 and $1.30, with a "preferred value" of $1.22. Because that valuation involves a discounted cash flow approach to projects underway, it has regard to income to be generated in the future by the company.
The alternative valuation approach used by the expert was "quoted market price", which involves consideration of the price at which shares in the company had traded on the stock exchange. Over the last year or so, that price had varied between a low of 69 cents, increasing to a high of about 83 cents. It will be observed that that high of 83 cents, which was achieved in about November of 2014, is relatively indistinguishable from the scheme consideration. It is also to be observed that the scheme consideration is equivalent to the net tangible asset value of the company per share.
The expert expressed the view that a substantial premium should be applied to the market price, on the footing that the market reflected the price at which minority shares were trading and the offeror would effectively be obtaining control and should be prepared to pay a substantial premium for it. Although it has not, in the nature of this application, been possible or necessary to examine and challenge the expert's analysis in any detail, it seems to me that in a situation where Peet already holds 86% of the shares, it already controls a general meeting, it already has power to carry a special resolution and there is little for which it would pay a premium except ridding itself of the inconvenience of having a small minority which would pose little practical impediment to its control of the company. In those circumstances, if any premium at all were appropriate, I doubt that it would exceed 10%, let alone approach the 40% spoken of by the expert.
It is also true, as the expert points out, that the trading in the company's shares has been very thin, with only 0.1% of its shareholding being traded over the last 12 months. This significantly decreases the reliability of a quoted market price valuation. That said, the scheme consideration is effectively the same as the last market price before the scheme was announced, and its highest price since Peet obtained control.
The minority shareholders could not bring about a winding up so as to realise value in that way. At least since Peet obtained control, the company has no dividend history worth speaking of, and the directors have indicated that they do not propose to declare a dividend but to reinvest profits in the company's business.
As I have said, the price proposed represents a very significant premium on that at which Peet acquired its shareholding in the takeover offer of April 2013.
In those circumstances, where the alternative position to be contrasted to acceptance of the scheme is the prospect of remaining a minority shareholder, without even the ability to resist a special resolution, in a company that though profitable is not proposing to declare dividends in the foreseeable future. In contrast, the view of the independent expert that the scheme is reasonable, though not fair, and in the best interests of shareholders, is an open one.
Ultimately, so long as they are properly appraised that the independent expert considers the scheme not to be fair and why, it is for the scheme shareholders to decide whether it is an offer that they should accept.
It is material that, as I have mentioned, the proposal emanated from the non-Peet shareholders in the wake of a takeover offer at a much lower price.
The other matters for consideration can be dealt with in much less detail. I am satisfied that there is adequate safeguard in respect of performance risk by way of provision for payment of the buyback consideration into a trust account to be operated by the company as trustee for the non-Peet shareholders prior to transfer of the scheme shares. Provision is also in place for the buyback consideration to be fully-funded by a loan from a subsidiary of Peet.
The scheme includes a deemed warranty by scheme shareholders that their shares are unencumbered and that they have the full power and capacity to sell and transfer the scheme shares. Such clauses have not infrequently been approved in like schemes. Their purpose is to ensure that shareholders are dealt with on an equal basis. The existence of the warranty is disclosed in the explanatory statement, which has been amended in the course of the hearing more clearly to inform shareholders of the implications of that warranty.
ASIC has been given 14 days' notice of this hearing, and an opportunity to examine a draft of the explanatory statement. It made some observations in respect of the draft explanatory statement, all of which have been addressed in the revised version. ASIC has indicated by letter that it does not propose to appear at this hearing.
Conformably with the Court's obligation in approving an explanatory statement, I have closely examined the scheme booklet and made a number of observations in the course of the hearing, the effect of which is that a clear notification to scheme shareholders of their entitlement to appear at the second Court hearing and oppose approval has been inserted. The provisional view of the ATO in respect of tax treatment of the consideration has been rendered less categorical. Greater emphasis has been given to the directors' intention not to pay a dividend, and reference has been included to the price at which the 2013 takeover was effected. In addition, some stylistic and formatting changes, for ease of comprehension, have been included. As so amended, I am satisfied that the scheme booklet contains an appropriate level of disclosure and provides scheme shareholders with the necessary information upon which to make an informed decision.
As to procedural matters, Mr James Service and in default Mr John MacKay, directors of the company, have consented to be chair of the scheme meeting. I am satisfied that it is appropriate to dispense with (NSW) Supreme Court (Corporations) Rules 1999, r 2.15, on the basis that the company's constitution will govern the procedure at the scheme meeting; and that it is appropriate to dispense with r 3.4 having regard to the timeframe between the meeting and the second Court hearing, provided that a notice in the form referred to in the orders is published in accordance with the orders.
The Court orders that:
1. pursuant to Corporations Act, s 411(1), the plaintiff convene a meeting ("the scheme meeting") of the holders of ordinary shares and the plaintiff other than Peet Limited ("non-Peet shareholders") for the purpose of considering, and if thought fit agreeing with or without modification, to the proposed scheme of arrangement between the plaintiff and the non-Peet shareholders, the terms of which scheme of arrangement are set out in annexure B of the document which has been tendered and marked exhibit 1 ("the scheme");
2. the scheme meeting be held on 8 May 2015 at level 3, 64 Allara Street, Canberra in the Australian Capital Territory, commencing at the later of 10.15 am or the conclusion of a general meeting of the holders of ordinary shares and the plaintiff due to commence at 10 am ("the general meeting");
3. the chairperson for the scheme meeting be Mr James Service or, failing him, Mr John MacKay;
4. the chairperson appointed to the scheme meeting has the power to adjourn or postpone the scheme meeting and has absolute discretion for such time and to such date as he considers appropriate;
5. at the scheme meeting the resolution to approve the scheme be decided by way of a poll;
6. the explanatory statement substantially in the form of or to the effect of exhibit 1 ("the scheme booklet") be approved for distribution to CIC shareholders, together with the proxy form for the scheme meeting (substantially in the form of the pro forma copy which is set out in annexure E to the affidavit of Guy James Vilias Sanderson sworn on 31 March 2015 and the proxy form for the general meeting substantially in the form of the pro forma copy which is set out in annexure F to the affidavit of Guy James Vilias Sanderson sworn on 31 March 2015);
7. the scheme booklet may be dispatched by ordinary prepaid post or, in the case of a non-Peet shareholder whose registered address is outside Australia, by email;
8. other than (Cth) Corporations Regulations 2001, reg 5.6.13, Supreme Court (Corporations) Rules, r 2.15, shall not apply to the scheme meeting;
9. notice of the hearing of the application for orders approving the proposed scheme be published once in The Australian newspaper by advertisement substantially in the form of annexure A to these orders, such advertisement to be published on or before 7 May 2015, and the plaintiff otherwise be exempted from compliance with the requirement to publish a notice at least five days before the date fixed for hearing of the application pursuant to Corporations Rules, r 3.4.
10. the proceedings be stood over to 15 May 2015 at 10am before me for the hearing of any application to approve the scheme; and
11. there be liberty to apply.
[3]
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Decision last updated: 13 May 2015