Biala Pty Ltd v Mallina Holdings Ltd
[1997] FCA 165
•13 MARCH 1997
CATCHWORDS
CORPORATIONS LAW - proposed issue of shares at a discount - Corporations Law s 190(3) - factors to be considered by the Court in determining whether to confirm the proposed issue - extent to which the Court is to consider for itself whether the issue of shares is in the best interests of the company - whether proposal commercially appropriate course for the company - substantive and procedural fairness of proposal - whether proposal prejudiced shareholders - whether shareholders were given adequate information on proposed issue of shares at a discount - distinction between information required by shareholders to vote on proposed issue and information required to decide whether to subscribe for shares.
Corporations Law (Cth), ss 190, 203(2)
In Re Addlestone Linoleum Company (1887) 37 Ch.D 191
Re "Air North West" Pty Limited (1988) 13 ACLR 728
Carruth v Imperial Chemical Industries Limited [1937] AC 707
Devereux Holdings Pty Limited v Pelsart Resources NL (No.2) (1985) 9 ACLR 956
Re Esmeralda Exploration Limited (1992) 10 ACLC 20
Fraser v N.R.M.A. Holdings Limited (1995) 55 FCR 452
In re Imperial Chemical Industries Limited [1936] Ch. 587
Re Jarass Pty Limited (1988) 6 ACLC 767; 13 ACLR 728
Leatch v National Parks and Wildlife Service (1993) 81 LGERA 270
Re Mallina Holdings Limited (1989) 8 ACLC 281
Re Melacare Industries of Australia Pty Limited (1993) 12 ACSR 236
Ooregum Gold Mining Company of India Limited v Roper [1892] AC 125
Poole v National Bank of China Limited [1907] AC 229
Southern Resources Limited v Residues Treatment & Trading Co. Limited (1988) 6 ACLC 913
Wayde v New South Wales Rugby League Limited (1985) 180 CLR 459
Re Wintulichs Pty Limited (1996) 22 ASCR 281BIALA PTY LIMITED AND T S HOLDINGS PTY LTD v MALLINA HOLDINGS LIMITED
WAG 6 of 1997Beaumont, Lindgren, Sackville JJ.
Sydney
13 March, 1997IN THE FEDERAL COURT OF AUSTRALIA )
WESTERN AUSTRALIA DISTRICT REGISTRY ) No. WAG 6 of 1997
GENERAL DIVISION )ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA
BETWEEN:
BIALA PTY LIMITED and T S
HOLDINGS PTY LIMITED
Appellants
AND:
MALLINA HOLDINGS LIMITED
Respondent
CORAM: BEAUMONT, LINDGREN, SACKVILLE JJ.
PLACE: SYDNEY
DATE: 13 March 1997MINUTES OF ORDER
THE COURT ORDERS THAT:
1.The appeal be dismissed, with costs.
NOTE:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA )
)
WESTERN AUSTRALIA DISTRICT REGISTRY ) No. WAG 6 of 1997
)
GENERAL DIVISION )ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA
BETWEEN:BIALA PTY LIMITED and T S HOLDINGS PTY LIMITED
Appellants
ANDMALLINA HOLDINGS LIMITED
Respondent
CORAM:BEAUMONT, LINDGREN, SACKVILLE JJ.
DATE:13 March 1997
REASONS FOR JUDGMENT
BEAUMONT J.
INTRODUCTIONBy s.190(2) of the Corporations Law (“the Law”), it is provided that a company may issue shares, at a discount, if (inter alia) the issue is authorised by resolution passed at a general meeting and the resolution is confirmed by order of the Court.
By s.190(3), it is provided that the Court “may, if having regard to all the circumstances of the case it thinks proper to do so”, make an order confirming the issue on such terms and conditions as it thinks fit.
The respondent, Mallina Holdings Limited (“the Company”), applied to this Court under s.190(3) for confirmation of an issue of shares at a discount. The application was opposed by three shareholders, two of whom, the appellants, Biala Pty Limited (“Biala”) and T S Holdings Pty Limited (“TS”), were respondents to the application. Relevantly for present purposes, the main ground of their opposition was that the information provided by the Company to shareholders for their consideration at the general meeting was insufficient, misleading and not a fair statement of the situation; so that, the appellants contended, the application for confirmation ought to be dismissed. A Judge of the Court (Carr J.) made an order conditionally confirming the issue. (Nothing turns upon the conditional aspect of the order for present purposes). Biala and TS now appeal against that order, contending that the application ought to have been refused at first instance.
BACKGROUND
The background to the litigation is as follows:
The Company, incorporated in 1969, is listed on the Australian Stock Exchange. Its home exchange is Perth. Its principal activity is mining. The Company owns a large deposit of diatomaceous earth, which has a range of industrial uses. The Company proposes to develop this deposit as a diatomaceous earth mine (“the DE project”).
Prior to the general meeting held on 14 November 1996, at which it was resolved to authorise the issue of shares at a discount, the Company issued to shareholders a prospectus (“the Prospectus”) dated 28 October 1996 for a pro rata renounceable rights issue of approximately 41,344,526 shares on a one for one basis, such shares to be issued credited as fully paid up to par (50 cents) at an issue price of 15 cents per share payable on application, and therefore issued at a discount of 35 cents per share.
The Prospectus contained (in Section 2) a letter from the Company’s Chairman, David Sutton, in (inter alia) these terms:
"The purpose of the Issue is primarily to finance the development of [the DE project] and also to assist in providing funds for working capital and other investments to be identified by the Board. The development of the Diatomaceous Earth deposits located between Geraldton and Perth has been the subject of extensive feasibility and engineering studies previously reported to Shareholders and the Directors believe that the resources should be brought into production as soon as possible, more particularly to take advantage of perceived market opportunities in Australia. The total funding requirement for the project will exceed the amount raised by the rights issue and Directors are investigating additional sources of funding to provide for the balance of the project. Funds raised by this Issue will also assist in financing further new investments.
In recent months, the Board has reviewed the Company’s operations and instituted several changes to improve management efficiency, selling activities and operating costs. These moves include the upgrading of production facilities at the Geraldton plant, the closure of the office at Claremont and the transfer of most of the administrative functions to the Company’s premises at Geraldton and the appointment of a new sales agent in New South Wales.
In areas of management, Mr Jamal Hamdan, employed as a consultant on the Diatomaceous Earth Project, has been appointed to manage the production activities at Geraldton. Mr Peter McMinn, a newly appointed non-executive Director will be the Board’s Perth resident Director and Mr Peng Ee of Hudson Corporate Pty Limited, has been appointed Company Secretary. The Board sees these appointments as significantly strengthening Mallina’s management in this new expansion phase. Mr K Gee Teh, a Director of the Company since 1992, will continue to closely supervise the Company’s activities on behalf of the Board of Directors.
The Directors believe that the additional capital will assist the Company in establishing new opportunities for earnings growth."
The Prospectus disclosed (in Section 8) several “Risk Factors”, including the following:
"8.1 GENERAL
While the Directors commend this Issue, the Shares offered under this Prospectus are considered speculative and Shareholders and investors should consider risk factors before deciding whether to apply for Shares under this Prospectus, including the following:· Factors such as inflation, currency fluctuation, interest rates, supply and demand and industrial disruption have an impact on operating costs, product prices, the competitive nature of the relevant markets and stock market prices. The Company’s future possible revenues and share price can be affected by these factors which are beyond the control of the Company.
· The Company’s business of exploration, development and production of Diatomite and Attapulgite products, does currently by its nature and will in the future, contain risk. To prosper, the business depends upon successful exploration, successful project development in accordance with forecasts, and successful management of the operations. Exploration and production are speculative endeavours which may be hampered by force majeure circumstances, cost over-runs, land claims and unforeseen claims.
· As the Company is an industrial mineral processing Company, the stock market’s perception of the value of its Shares can alter significantly from time to time which can cause fluctuations in their price. Fluctuations may also occur as a result of factors influencing the price of Shares in industrial mineral processing companies or share prices generally."
In describing the “Effect of the Issue on the Company”, the Prospectus stated (in Section 10) (inter alia):
"10.2 DIATOMACEOUS EARTH PROJECT
Shareholders are referred to the Chairman’s Letter in Section 2 of this Prospectus that indicates that the principal purpose for this Issue is for the development of the Company’s Diatomaceous Earth Project located between Perth and Geraldton W.A.
Shareholders are referred to the Company’s 1996 annual report for the year ended 30 June 1996 that provides:
‘Mallina owns the largest deposit of diatomaceous earth in Australia. The deposits are the only known deposits of filter grade quality diatomaceous earth in Australia. Diatomaceous earth is used in a wide range of industries as a filtering agent, an insulating material and a filler and extender. All of Australia’s current requirement is imported from the USA. The Project represents the development of a new and valued industry to the Australian Economy.
During the financial year, a total of approximately $575,000.00 was spent on the project. Successful product development work was carried out, confirming that a broad range of commercial filter-aid products can be produced from the company’s deposits. Also, consulting engineers have undertaken preliminary engineering work for a diatomaceous earth plant. Discussions are currently taking place with a view to engineers commencing the detailed engineering work for the plant.’
Based on preliminary engineering and design studies, the total cost of a 12,000 to 15,000 tonne per annum production plant is estimated to cost approximately $14 million and the forecast time required for construction is between nine and twelve months. The Directors anticipate construction of the production plant will be commenced in the first six months of 1997."
The Company’s shareholding as at 8 September 1996 was as follows: There were 2,472 shareholders, of whom 32 held more than 100,000 shares. The three largest shareholders were: HTH Nominees Pty Limited (8,200,000 shares - i.e. 19.83% of the issued capital); Kian Gee Teh (5,260,404 - 12.72%); and Biala (4,400,000 - 10.64%). Substantial shareholders, as shown in the Company’s Register of Substantial Shareholders, were: HTH Nominees Pty Limited (8,200,000); Mr Teh and a Malaysian corporation, Tixxon Holdings (M) Sdn Bhd (5,514,404); and TS and Biala (4,800,000 - i.e. 11.61% of the issued capital).
According to the minutes of the general meeting held on 14 November 1996, 20 shareholders, in addition to the Company’s directors and other officers, were in attendance. The Chairman reported the receipt of 16,763,882 proxies in favour of the resolution. The resolution was passed, with 18,795,140 votes in favour and 7,635,906 against; that is, a majority of 71.1% of the votes cast.
THE PROCEEDINGS AT FIRST INSTANCE
At first instance, TS and Biala opposed the application for confirmation on several grounds. They claimed that there was no legitimate commercial justification for the issue, and that the Prospectus had given misleading and insufficient information about the proposal and its objectives.
THE REASONING AT FIRST INSTANCE
Carr J. cited with approval the factors, amongst others, to be taken into account by the Court under s.190(3), as listed by French J. in Re Esmeralda Exploration Limited (1992) 33 FCR 192 (at 199), as follows:
"1.The public interest in ensuring that prospective shareholders and creditors are not misled by a nominal capital figure that exceeds the true capital of the company. .....
2.The effect of the proposal upon the interests of actual or prospective shareholders and creditors.
3.The extent to which shareholders have been informed of the reasons for the issue prior to voting on it.
4.The extent to which creditors may find the proposal objectionable and the notice both formal and substantive that they have been given to enable them to object if they so wish.
5.The objectives of the proposed issue and the extent to which it serves the interests of the shareholders and creditors of the company."
Carr J. referred to observations by Young J. in Re Jarass Pty Limited (1988) 6 ACLC 767 (at 769-770) to the effect that firstly, the approach of the Court here should be similar to that taken in application to confirm a reduction of capital; and secondly that, if all persons who might be affected by the proposal, have had the appropriate information put before them and have been given the chance to object and “there is nothing in the proposal which makes it appear other than one submitted bona fide and in the best commercial interests of the company”, the proposal ought to be confirmed.
Carr J. said (at 6-7):
"In Re Mallina Holdings Ltd (1990) 8 ACLC 281 (‘Mallina I’) ... which involved an earlier issue at a discount by the applicant in this matter, Seaman J was satisfied that the proposal was submitted bona fide and in the best commercial interests of the Company. A great deal of time at the hearing of this application was taken up with what was alleged to be the paucity of information contained in the Company’s 1996 annual report and the Prospectus, both of which documents were forwarded to its shareholders when the meeting was convened at which the resolution of 14 November 1996 was passed. Notwithstanding the width of the language in s.190(3) (‘...having regard to all the circumstances of the case...’), I think it is important to remember that the focus of the inquiry should be on the matter of whether the shares may be issued at a discount. That is not to suggest that the level of information provided to the shareholders is not important. It is obviously a most important matter. The second main objection in Mallina I was (as in this case) that a sufficient statement of facts had not been put before the shareholders before they voted upon the resolution. Seaman J acknowledged the importance of the information provided to the shareholders, but drew a distinction between the information which is needed by the shareholders of a company before making a decision to vote on the Issue (i.e. to authorise the issue of the shares at a discount) and the information which they need before deciding whether or not to subscribe for the shares. I respectfully agree with the distinction drawn by his Honour in that case. In my view, there are strong parallels between Mallina I and the present matter."
Carr J. accepted (at 36) the appellants’ argument, which really was common ground, that the directors were under a duty, imposed by both the Law (s.1022AA) and the general law of fiduciary obligations to provide “sufficient information to enable [shareholders] to make a reasoned decision [on]... the resolution [proposed].”
Carr J. (at 37) found “most helpful” the following observations by Young J. in Devereux Holdings Pty Limited v. Pelsart Resources NL (No.2) (1985) 9 ACLR 956 (at 958):
"...one does not adopt the legalistic approach of a 19th century examiner of titles searching for a base fee nor does one approach the question in what counsel aptly described as a nit-picking way, but one asks what effect will the information provided have on the ordinary shareholder who scans or reads the document quickly, not as a lawyer, but as an ordinary man or woman in commerce or as an ordinary investor. One asks, viewed in such a way, will the information fully and fairly inform and instruct the shareholder about the matter upon which he or she will have to vote?"
After extensively reviewing the evidence and noting that the matter voted on was the discounted share issue, “not simply whether the Company should raise further equity capital”, the primary Judge said (at 38):
"While I have some reservations (possibly unfounded) on the question whether the shareholders have been provided with sufficient information to make an informed decision about whether to subscribe for some or all of their entitlement to additional shares, I am satisfied that they had sufficient information before the resolution approving the Issue was passed. In summary, that information included the following:
· the Board of the Company had decided to proceed with the DE project;
· the Board has caused preliminary engineering and design studies to be carried out which indicated that the production plant would cost approximately $14 million to build;
· the Board had decided to raise further equity capital of about $6 million on the basis of a one-for-one issue to existing shareholders;
· those funds would be applied primarily to finance the DE project. By using the word ‘primarily’ the Board conveyed to its shareholders, in my opinion, that at least half of the funds so raised would be thus applied. The balance would be used for working capital and other investments;
· the total funding required for the DE project would exceed the amount raised by the rights Issue and the Board was investigating additional sources of funding to provide the balance needed for the DE project;
· the share price information (see p.11 of the Prospectus) was as I have summarised above in respect of the period to 23 October 1996. It was made sufficiently clear to the shareholders that if the Issue were to be successful the subscription price would need to be at a discount to par which would make it approximately the current market price."
THE GROUNDS OF THE APPEAL
By their grounds of appeal, the appellants contend, in essence, that the trial Judge should have held that the information provided to shareholders was not sufficient to enable them to make an informed judgment; and that, instead, the shareholders had been exposed to “a serious misapprehension” of the position with respect to the proposal to issue shares at a discount. The grounds for the appeal were developed in the appellants’ written submissions, to which reference will be made in stating my conclusions on the appeal.
CONCLUSIONS ON THE APPEAL
On behalf of the appellants it is submitted that the trial Judge was obliged to have regard to all the circumstances of the case in order to be able to form a view as to whether it was proper to confirm the issue of shares at a discount (see s.190(3)); and that factors to which it was imperative that regard be had included: (a) the sufficiency and accuracy of the information provided to shareholders to enable them to evaluate how to cast their vote; (b) the objectives of the proposed issue and the extent to which it served the interests of the shareholders and creditors of the Company; and (c) the effect of the proposal upon the interests of actual or prospective shareholders and creditors (see Re Esmeralda, above).
The source and nature of the Court’s jurisdiction in this kind of matter are well settled. As Lord McNacnaghten pointed out in Poole v. National Bank of China Limited [1907] AC 229 (at 239) in the analogous context of a reduction of capital, “[t]he condition that gives jurisdiction is not proof of loss of capital or proof that capital is unrepresented by available assets, or that capital is in excess of the wants of the company. The jurisdiction arises whenever the company seeking reduction has duly passed a special resolution to that effect.”
In Carruth v. Imperial Chemical Industries Limited [1937] AC 707, Lord Maugham said (at 766) that since Poole, it was clear that a reduction in any way authorised by the Companies Act “was not unlawful (apart from the question of fairness)...” (Emphasis added). His Lordship rejected, on the merits, a claim that, by reason of the contents of and omissions from a circular issued by the directors in that case, the reduction should not have been confirmed. He said (at 768-9):
"The salient and most important of the facts necessary to enable a deferred shareholder to form a judgment on the scheme were in my view stated clearly and fairly in the circular." (Emphasis added).
Lord Maugham went on to say (at 770):
"Secondly, I think the fairness or unfairness of the scheme as a whole, including the reduction, is not a matter for the discretion of the learned judge in a technical sense, but is a matter to be decided on the evidence. The question in this case depends on the view which should be taken as to the future commercial success of the Company. We are not entitled to substitute our own views for those of the directors and experts who have given evidence. Considerable importance should be attached to the unanimous opinion of the directors whose good faith I repeat is not in question, and having regard to their standing and position I think little weight can be given to the circumstance that their combined holdings are predominantly in ordinary shares. I am also impressed by the fairness and candour with which the experts called on behalf of the Company gave their evidence." (Emphasis added).
In Wayde v. New South Wales Rugby League Limited (1985) 180 CLR 459, Brennan J., citing Poole and Carruth, said (at 469):
"As Lord Wilberforce said in delivering the judgment of the Judicial Committee in Howard Smith Ltd v. Ampol Petroleum Ltd.:
‘There is no appeal on merits from management decisions to courts of law: nor will courts of law assume to act as a kind of supervisory board over decisions within the powers of management honestly arrived at.’
That proposition does not apply, of course, where the statute requires a decision to be confirmed by the court and the court gives or withholds confirmation according to its opinion of the fairness of the decision - e.g., a decision to reduce capital." (Emphasis added).
Senior Counsel for the Company submitted, in the outline of its submissions, that disclosure (semble by the directors, in the discharge of their fiduciary duty to the Company and its members) was required of the “salient and most important” of the facts bearing upon the question whether the shares should be issued at a discount; and that “fair weight” should be given to the directors’ commercial decision as to what information it is appropriate to disclose.
Again, in my view, the general principles to be applied in this area are well settled, even if their application can sometimes be difficult. In Carruth, above, Lord Maugham (at 768) approved the approach taken below in the Court of Appeal (see In re Imperial Chemical Industries Limited [1936] Ch. 587 per Lord Wright MR, Clauson and Charles JJ.) where, in a frequently cited passage, Clauson J. said (at 618):
"No line can logically be drawn which can exclude any [particular]... circumstance from consideration. But as Maugham J. pointed out in In re Dorman, Long & Co., the very object of such a circular as that with which we have to deal would be defeated if it were extended so as to state all relevant facts. Where the matter is one of difficulty, the Court will always scrutinize such a circular very carefully; but where, as in this case, there is no suggestion that the directors were doing otherwise than honestly putting forward to the best of their skill and ability a fair picture of the company’s position, the question is not whether the circular might not have been differently framed, but whether there is any reasonable ground for supposing that such imperfections as may be found in the circular have had, with or without other circumstances, the result that the majority (who have approved the proposal placed before them) have done so under some serious misapprehension of the position. In this particular case the suggestion that the imperfections of the circular, if they are properly so called, in regard to these two matters have led to any such result seems to us to be quite unreasonable. When one studies the circular in the light of such of the evidence as the appellants drew to our attention, the disproportion between the importance of the two matters in question and the importance of the other matters explained in the circular becomes very striking indeed." (Emphasis added).
See also, to the same effect, Southern Resources Limited v. Residues Treatment & Trading Co. Limited (1988) 6 ACLC 913 per White J. at 916-7; Fraser v. N.R.M.A. Holdings Limited (1995) 55 FCR 452, per Black CJ., von Doussa and Cooper JJ., at 465-6, 468.
The principles in this area may be summarised as follows:
(1)The statute requires a judgment to be made by the Court, on all the relevant material before it, whether it is proper to confirm under s.190(3) of the Law. In making this judgment the fundamental consideration, from the viewpoint of those concerned, that is, shareholders and creditors, is whether the proposal for a discounted issue is fair, both substantively and procedurally.
(2)The question is a matter to be determined objectively, on the evidence. It is not to be decided by the exercise of an unfettered judicial discretion.
On behalf of the appellants it is submitted that the learned primary Judge (a) “misconceived and misapplied” the principles as to the sufficiency and accuracy of the information which shareholders are entitled to receive in relation to a course of conduct or action advocated by the directors; (b) wrongly concluded that “inaccurate, insufficient and misleading” information (that had been provided to shareholders, as part of the materials performing the function of an explanatory memorandum concerning the proposed resolution) was to be disregarded on the ground that it was relevant to a decision whether to take up the issue, but was not relevant to a decision whether to approve the issue; (c) wrongly sought to apply to the instant case the distinction between matters relevant to an investment decision and matters relevant to a voting decision that had been drawn in Mallina I upon the basis of a difference revealed by the evidence in that case, notwithstanding that no such distinction was revealed by the evidence in the instant case. Moreover, it is said, there was expert evidence before the Court that the information provided to shareholders was insufficient both for a decision whether to approve the issue, and for a decision whether to subscribe to the issue. Further, it is submitted, his Honour wrongly treated the “distinction” as a matter of principle rather than as a consequence of a differentiation revealed by evidence.
I will consider these submissions in turn.
As to (a), I cannot accept that his Honour “misconceived” the principles to be applied in this area. They were familiar. As has been seen, in many respects, they were common ground. Carr J. cited many of the authorities. A reading of his Honour’s reasons as a whole indicates that the primary Judge was fully aware that, in the context of s.190(3), the essential requirement was fairness; and that this was something to be measured objectively, in that it did not merely rest in the assertion of the directors that there had been a sufficient disclosure. His Honour’s method of approaching the question for decision was consistent with the need for the Court to make an objective assessment of what was fair.
As to the challenge to his Honour’s application of these principles, it will be necessary to consider the detail of the complaints now made. I will do this below.
As to (b), the submission is, on any view, overstated. The passage in his Honour’s reasons (at 38) that is relied upon has been set out above, commencing with the words “While I have some reservations [possibly unfounded]...”. In principle, his Honour was correct to identify the relevant subject matter arising under s.190(3) as the discounted share issue.
As to (c), it is true that in Mallina I, Seaman J. did say (at 287) that the (expert) evidence there did “reveal[ ] [the] difference” mentioned. It is also true that the appellants called expert evidence before Carr J. to the effect stated in (c). But, in principle, the approach taken by Carr J. was correct; that is, as has been said, his Honour correctly focussed on the issue of shares at a discount as relevant subject matter of his inquiry. The circumstance that, in his evidence, an expert mentioned the investment aspects in his process of reasoning, could not be determinative of the present issue. Carr J. rightly treated the question as one of principle for ultimate determination by the Court.
On behalf of the appellants, it is next submitted that shareholders were not provided with such material information as would fully and fairly inform them of the proposal to issue shares at a discount and as would enable them to judge whether to attend the meeting and to vote, or whether to leave the matter to be determined by the majority attending and voting; and that the directors chose to send the information to shareholders, and the shareholders had the right to expect, that the information was fairly presented, reasonably accurate and not misleading. It is contended that, in fact, the materials were (and, it is said, the trial Judge ought to have held them to be) “unfairly presented, inaccurate and misleading”; the information was at best, it is submitted, “tricky”. The trial Judge ought, it is contended, to have declined to confirm the issue because the shareholders had not been able to make a properly informed decision and had been exposed to a serious misapprehension of the position. It is contended that the need for substantially full and true information was all the more acute because the underwriter was the largest shareholder, and stood to increase its shareholding significantly (beyond 20%) without having to make a takeover bid, and at least two directors (including the Chairman, Mr Sutton) represented the interests of that underwriter.
Again, in my view, the primary Judge correctly appreciated the principles to be applied. The question whether his Honour erred in the application of those principles will need to be considered in its specific aspects below.
On behalf of the appellants it is then submitted that shareholders should have been, but were not, informed specifically of the following:
(i)That the 1994 feasibility study concerning the DE project (the Kaiser Report), (which had been disseminated to shareholders and even in 1996 was, it is said, the “focal point” of reference for shareholders’ assessment of the DE project, was “fundamentally inaccurate and unreliable”, and the directors had come to that conclusion by 11 April 1996.
(ii)That on 11 November 1996, the Company had sued Kaiser for breach of contract, negligence and misleading and deceptive conduct in respect of its report.
(iii)That the current plant design (VRR design) was preliminary only, different from the design in the Kaiser Report and of a different rated capacity.
(iv)That no currently valid feasibility study of the DE project had been performed.
(v)That no steps had been taken to ascertain the current availability of the additional (debt) finance required for the project, and shareholders had not been advised that applications by the Company for such finance in 1994 and 1995 had been rejected.
(vi)That sales tax, inceptive from the commencement of the current financial year, would have a significant impact upon the profitability of the Company’s existing operations, and budgets had been redrawn to show losses for the current financial year.
I will consider these in turn.
As to (i), his Honour accepted (at 16) that the directors had so concluded; and that, as stated in (ii), the Company had sued Kaiser. His Honour also (at 17) accepted that the VRR preliminary design was different from the design in the Kaiser Report.
However, Carr J. noted that in a report to the Stock Exchange in April 1996, the Company had announced that “[p]reliminary Engineering work on a revised Processing Plant is being carried out by a firm of US Engineers...”; and that, as has been seen, there was a similar reference in para. 10.2 of the Prospectus.
His Honour said (at 17):
"The question is whether, for the purposes of authorising the Issue, the Company’s shareholders should have been told about the deficiencies in the Kaiser Report and the fact that a new design had been developed for the plant. The matter is one of degree."
I agree. As has been seen, the authorities make this clear.
His Honour continued (at 17-18):
"For reasons which I set out below in relation to the matter of “No Feasibility Study”, I do not consider that detail of this type had to be provided to the shareholders before they could be said to be fully and fairly informed upon the matter upon which they had to vote. That matter was whether to authorise the issuing of the shares at the discount specified. Whether these details should have been provided to the shareholders to ensure that they had sufficient information to make an informed decision about whether the subscribe for some or all of their entitlement to additional shares, is not something which I consider that I am required to decide. The applicant has indicated that it proposes to issue a supplementary prospectus dealing with the matter of the revised estimate of the time required for construction of the plant. It is for the directors and their advisors, possibly in consultation with the two principal regulatory bodies, to decide whether any additional information should be provided in the proposed supplementary prospectus."
Again, as has been noted, I agree that the relevant subject matter here was the Company’s decision to issue shares at a discount, rather than a hypothetical investment decision.
As to the merits of the feasibility study question (which also picks up (iv), above), Carr J. said (at 18-19):
"The evidence discloses that the existence of diatomaceous earth reserves on the Company’s mining tenements in sufficient quantities for large scale production has been confirmed and reconfirmed by numerous independent studies over the last 20 years. That would seem to be the first basic step in assessing the feasibility of ‘the DE project’. The evidence also shows that revised preliminary engineering drawings have been prepared by VRR to reflect their recommended design for a plant to process the product of the mine. The evidence also shows that, apart from the work which led to the preparation of the Kaiser Report, there have been marketing studies over the years including reference to the need to obtain at least letters of intent from proposed major customers. On the financial front, there is evidence (to which I refer further below) of approaches to financiers to fund the DE project. In my view, it might well have been misleading to give the shareholders the impression that the necessary work has not been done. If reference were made to the need for a further complete feasibility study, it would also have been appropriate to inform the shareholders of all the work that had been done over the years. In my opinion, even without that additional information, to set out the details of how much further work is required in the way of feasibility studies and the like would have shouldered the shareholders with an unnecessary burden of information - see Killen v. Marra Developments Ltd [1979] ACLD 608. Mr Sutton, in cross-examination, made it clear that the Company would not be committed (in the sense of final commitment) to the DE project unless it had all the requisite information. On the question whether the Company should have commissioned complete feasibility studies before seeking shareholder authorisation for the Issue, I have considerable sympathy for the view expressed by Mr Sutton (at p.132):
‘At present we have put financial feasibilities and particularly financial feasibilities, on hold until we are able to raise the equity funding, on the basis that if we are unable to raise any further equity funding we don’t want to have a liability of several hundred thousand dollars for a project feasibility which won’t proceed.’"
In these circumstances, it was, in my view, reasonably open to Carr J. to form the opinion or judgment that the information provided to shareholders was neither an understatement nor an overstatement of the position at the time; and that it gave a fair impression of a complex matter in which the directors had to make a selective judgment in what they disclosed. As his Honour said, this exercise by the directors involved “questions of degree”. In my opinion, no appellable error is indicated in his Honour’s conclusion, in this regard.
As to (v), his Honour accepted (at 23) that, taken literally, it was not wholly accurate to state, as appeared in Section 2 of the Prospectus, that directors “are” investigating funding. But, as his Honour in effect held if, as seems to be implicit in it, the statement is read as “...directors are [proposing to] investigat[e]...”, the problem raised by the appellants is avoided. It will be recalled that, in the exercise of its jurisdiction under s.190(3), the Court is concerned that there be no serious misapprehension of the position.
As to the balance of (v), i.e. the rejection of applications for finance, I agree with his Honour (at 21) that there was no apparent need to refer to this detail in the Prospectus. The sales tax question (vi) is, I think, in the same category. Again, it will be remembered that there are questions of proportion here. The directors were bound to state the salient and most important facts clearly and fairly. They had no duty to overemphasise, or to understate, any negative aspects of the Company’s activities or of the DE project. Mention of matters of historical interest only and collateral issues, could itself create a misleading impression. His Honour recognised these considerations and, in my opinion, his conclusion was reasonably open.
It is then submitted on behalf of the appellants that the material provided to shareholders was misleading in these respects:
(a)The information conveyed (the impression) that the Board had made a decision to proceed with the DE project (subject, of course, to confirmation of the capital raising and obtaining sufficient debt finance) whereas, in fact, the Board had made no decision, and needed important additional information before a decision could be made.
(b)The Prospectus stated that the “directors are investigating additional sources of funding to provide for the balance of the project” whereas the evidence showed (and his Honour held (at 23)) that no steps of that kind had been taken.
(c)The Prospectus referred to a 12,000-15,000 tonne capacity plant whereas the VRR Report addressed only a 12,000 tonne plant.
(d)The Prospectus referred to a construction period of 9-12 months, whereas the VRR Report indicated a period of 18-24 months.
(e)The Company reported to shareholders on 12 September 1996 that the DE project was “extremely viable”, and at the 1996 Annual General Meeting (at which the discounted issue was authorised) the Chairman predicted a return from the DE project of 25% before tax and that the project would be profitable even with 100% debt financing, whereas no currently valid feasibility study had been performed and no responsible view as to viability could be expressed.
(f)The information conveyed that extensive feasibility and engineering studies with respect to the VRR Plant had recently been undertaken whereas no feasibility study at all had been carried out in respect of the VRR Plant.
(g)The information indicated a continuity between The Kaiser Report and the VRR Plant design whereas in truth there was no continuity.
(h)The information tried to invoke and apply the conclusions of the Kaiser feasibility study for the purposes of the presently proposed project, when in fact the plant the subject of the Kaiser Report was different from the plant the subject of the presently proposed project, and the conclusions of the feasibility study were known to be flawed and invalid.
(i)The information stated that, apart from the DE project, funds raised by the issue were to be used to provide working capital and for other investments to be determined by the Board, whereas the fact was that all funds raised by the issue were to be used in the DE project.
I will address these contentions in turn.
As to (a), his Honour held (at 24) that:
"...the shareholders would understand [from the information provided] that the Board’s commitment was to do everything reasonably possible to develop the mine, build the plant and bring it into production. My assessment of the evidence is that that is what the Board has decided."
In my opinion, both of his Honour’s findings were reasonably open. The evidence showed that the project had been under consideration for some time, that it was a complex and substantial undertaking and that shareholders had been made aware of progress, and of difficulties encountered, from time to time. In my view, the text of Sections 2, 8 and 10 of the Prospectus, which has been set out above, fairly indicates the complexities involved. The present point is really one of impression. It is apparent that no simple explanation of the transaction was possible. The trial Judge had the benefit of hearing a substantial body of evidence on this question. We should be reluctant to intervene unless persuaded that some error was made in his approach. In my view, his conclusion was open and we should not interfere.
As to (b), this has already been dealt with.
As to (c), his Honour said (at 25):
"...this matter may perhaps be one which might be considered appropriate to disclose to shareholders deciding whether to take up part or all of their entitlement to the Issue. In my view, whether the plant has a 12,000 or a 15,000 tonne capacity is not a matter upon which the shareholders require information for the purposes of deciding whether to authorise the Issue at a discount."
I agree. It may be noted that, according to Mr Sutton’s evidence, it is necessary in any event, to take other considerations into account in order to appreciate the full dimensions of this aspect of what the Board had in mind. Mr Sutton said (T.p.53):
"[Q.]That addresses a 12,000 ton[ne] plant. It does not address a 15,000 ton[ne] plant, does it?---If I could just make a comment on capacity. I understand that there are a number of variables in relation to capacity that Mr Hamdan has informed me and that there are issues such as whether it is three shifts a day; whether it is 7 days a week. Those sort of things can have a material effect on capacity and that whether it is a 12 or a 15,000 tonne plant can be influenced by operational activities so that there’s perhaps it’s not quite black and white 12,000 tonne or black and white 15,000 tonne."
As to (d), Carr J. also regarded this difference as not material for present purposes. In my opinion, this view was reasonably open.
As to (e) and (f), these have, in substance, already been considered in (iv) above, in dealing with the “no feasibility study” contention. So far as concerns the “forecast” aspect in (e), I agree with Carr J. (at 21-2) that, for present purposes, this is not material to the question at hand.
As to (g) and (h), I have difficulty in accepting that the indications suggested were given by the informational material. At all events, no appellable error has been demonstrated.
As to (i), the position is the same. It will be recalled that in the Chairman’s letter (Prospectus, Section 2), it was stated that “[t]he total funding requirement for the project will exceed the amount raised by the rights issue...” Nor, in my view, has it been shown that there was any “half-truth” or other “tricky” statement made here.
It is further submitted for the appellants that there was no evidence supporting the conclusions of irrelevance of any of the information to a shareholder’s voting deliberations as distinct from investment deliberations. The expert evidence of their witness, Mr Willis (upon which he was not cross-examined) to the contrary was again relied upon. But, as has been said, this question was one for his Honour to decide. True, the Court can be assisted by expert opinion evidence in this connection; yet the ultimate issue requires the Court to make a judgment, on the objective material, on whether the process has been fairly carried out in all the circumstances. No appellable error has been demonstrated in my view.
It is further argued for the appellants that the capital fund raising was, in truth, not for general purposes, but was explicitly and specifically tied to the DE project. The merits of that project were integrally intertwined with the merits of the proposed discount issue; and the issue of shares, if authorised, would transform the Company’s capital base and, it is said, set it on the course of expending on the DE project at least $14 million - a sum more than double the Company’s total market capitalisation.
This argument has, in effect, already been addressed. As has been seen, it is inevitable that, in any explanation of a complex proposal, there will be questions of degree and selectivity involved. His Honour’s duty was to make a judgment as to whether all concerned had been fairly treated. In my view, as has been said, no appellable error in his Honour’s approach in this respect has been demonstrated.
It is next submitted for the appellants that the issue “was not in the best commercial interests of shareholders...as a whole” for several reasons.
But before going to those reasons, it should be noted that the question for the Court is not as submitted. Rather, as Young J. observed in Jarass, in the passage cited above, the question is whether, judged objectively, the proposal appears to be bona fide and in the company’s interests. This is the aspect of the substantive fairness previously mentioned. It does not call for any direct assessment by the Court of the commercial prospects of a particular translation. It is sufficient if the Court is satisfied that the proposal appears to be in the Company’s interests as a whole, that is, that the proposal appears to be substantively fair.
The matters, or suggested reasons, here relied on by the appellants are as follows:
(a)The supposed justification for the issue resided in the need to raise equity funds to be committed primarily to the DE project, whereas the directors had not committed themselves to the DE project and did not have the information to form a view as to whether the Company should proceed with the project, even if adequate total funding were available.
(b)The Company was not in dire straits or in circumstances of financial exigency, contrary to the position in virtually every reported case in which a discount issue has been confirmed.
(c)The issue would substantially dilute the net asset backing of the shares.
(d)There had been no investigation of the availability and appropriateness of other means of funding the DE project it if were to proceed.
(e)The issue would halve the proportionate interest in the Company of shareholders who did not take up the issue.
(f)The issue would result in the underwriter, already the largest shareholder, increasing its interest in the Company without having to launch a takeover bid and without paying a premium for control.
Again, I will consider these contentions in turn.
As to (a), this has already been dealt with.
As to (b), the statutory power to confirm is, plainly, not limited to those classes of case.
As to (c), (e) and (f), even if it be accepted that these considerations may be seen as some of the consequences of any issue of shares at a discount, it does not follow that the Court should not confirm a particular issue, provided that it appears that fairness is observed in the process.
As to (d), this has already been dealt with.
Overall, in my opinion, his Honour addressed the correct legal question for his determination; and no appellable error has been shown in his opinion that the process, as a whole, appeared to proceed without unfairness to those concerned. The appeal should be dismissed, with costs.
I certify that this and the preceding twenty seven (27) pages are a true copy of the reasons for judgment herein of his Honour Justice Beaumont
Associate:
Date : March 1997
IN THE FEDERAL COURT OF AUSTRALIA )
WESTERN AUSTRALIA DISTRICT REGISTRY ) No. WAG 6 of 1997
GENERAL DIVISION )ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA
BETWEEN:
BIALA PTY LIMITED and T S HOLDINGS PTY LIMITED
Appellants
AND:
MALLINA HOLDINGS LIMITED
Respondent
CORAM: BEAUMONT, LINDGREN, SACKVILLE JJ.
PLACE: SYDNEY
DATE: 13 March 1997REASONS FOR JUDGMENT
LINDGREN and SACKVILLE JJ:
We have had the advantage of reading a draft of Beaumont J's reasons. We adopt his Honour's account of the facts and of the trial Judge's reasons. We agree that the appeal should be dismissed. However, we wish to express briefly our own views on some aspects of the case.In Re Esmeralda Exploration Ltd (1991) 33 FCR 192 (FCA/French J), French J traced the legislative history of the current provisions governing the issue of shares at a discount. His Honour pointed out (at 196) that in the United Kingdom, until 1929 a company was not able to issue shares at a discount. This position resulted from a series of cases in the nineteenth century, which held that a company could not relieve shareholders from the liability, where the company was wound up, to pay any amount not already paid on their shares: In re Addlestone Linoleum Company (1887) 37 Ch.D 191; Ooregum Gold Mining Company of India Ltd v Roper [1892] AC 125. In the latter case, Lord Halsbury LC observed (at 133) that the system created by the Companies Act 1862, under which the memorandum of association of a limited liability company had to state the amount of the capital with which the company proposed to be registered divided into shares of a certain fixed amount, and under which a shareholder's liability was limited by the amount unpaid on his shares,
"renders it impossible for the company to depart from that requirement, and by any expedient to arrange with their shareholders that they shall not be liable for the amount unpaid on the shares, although the amount of those shares has been, in accordance with the Act of Parliament, fixed at a certain sum of money. It is manifest that if the company could do so the provision in question would operate nothing."
The prohibition against the issue of shares at a discount is now contained in s.203(2) of the Corporations Law.
The Companies Act 1929 (UK), s.47, conferred power on the court to confirm the issue of shares at a discount. As French J noted in Re Esmeralda Exploration Ltd, this provision, which was the forerunner of the present s.190 of the Corporations Law, recognised that in some circumstances the issue of shares at a discount could serve legitimate purposes. This might be the case, for example, where the company's issued shares were trading on a stock exchange at a substantial discount to their par value and the company was unable to raise new share capital except by a fresh issue of shares at a discount. In the United Kingdom, the statutory procedure created by s.47 of the Companies Act 1929 is no longer available, so that the issue of shares at a discount is prohibited: Companies Act 1980 (UK), s.21(1). However, in Australia, s.190(3) of the Corporations Law, provides that "[t]he Court may, if, having regard to all the circumstances of the case, it thinks it proper to do so, make an order confirming the issue [of shares at a discount] on such terms and conditions as it thinks fit."
Section 190(3) of the Corporations Law, or its immediate predecessor, s.118(3) of the Companies Code, has been considered in a number of recent cases: Re Jarass Pty Ltd (1988) 13 ACLR 728 (S Ct NSW/Young J); Re "Air North West" Pty Ltd (1988) 6 ACLC 1143 (S Ct NSW/McLelland J); Re Mallina Holdings Ltd (1989) 8 ACLC 281 (S Ct WA/Seaman J); Re Esmeralda Exploration Ltd; Re Melacare Industries of Australia Pty Ltd (1993) 12 ACSR 236 (S Ct NSW/Young J); Re Wintulichs Pty Ltd (1996) 22 ACSR 281 (FCA/Mansfield J).
In Re Esmeralda Exploration Ltd, French J, after considering the authorities, identified (at 199) some factors to which the Court should have regard in exercising its discretion under s.190(3) of the Corporations Law. They are as follows:
"1.The public interest in ensuring that prospective shareholders and creditors are not misled by a nominal capital figure that exceeds the true capital of the company. The significance of this factor may be mitigated by the contemporary recognition that issued capital may, by reason of trading losses and the like, not reflect the asset backing of the company.
2.The effect of the proposal upon the interests of actual or prospective shareholders and creditors.
3.The extent to which shareholders have been informed of the reasons for the issue prior to voting on it.
4.The extent to which creditors may find the proposal objectionable and the notice both formal and substantive that they have been given to enable them to object if they so wish.
5.The objectives of the proposed issue and the extent to which it serves the interests of the shareholders and creditors of the company."
The various authorities have employed slightly different language to describe the extent to which it is appropriate for the court to consider for itself whether and how the proposed issue of shares at a discount serves the interests of the company. In Re "Air North West" Pty Ltd, McLelland J considered (at 1143) that the issue of shares at a discount should be confirmed if the court is satisfied "that the issue has a legitimate commercial justification and that it is not likely to operate to the prejudice of any interested person". In Re Jarass Pty Ltd, Young J (at 731) considered that ordinarily a proposed issue at a discount should be approved "[at] least... where there is nothing in the proposal which makes it appear other than one which is submitted bona fide and in the best commercial interests of the company".
We are inclined to think that the differences in expression are more apparent than real. Young J prefaced his comments in Re Jarass Pty Ltd (at 731) with the observation that
"[i]n the twentieth century the doctrine of maintenance of capital has not had the same sanctity as it had in the nineteenth, and that if all persons who might be affected by the proposal have had the appropriate information put before them and have been given the chance to object, then the court should be confident that it is proper in the spirit of the Code to confirm the resolution."
This observation rather suggests that his Honour did not have in mind that the court should objectively determine whether the issue of shares at a discount is the best of all options for raising capital available to the company, but considered that the court should give weight to the directors' assessment of the commercial justification for choosing an issue of shares at a discount.
In Re Wintulichs Pty Ltd, Mansfield J identified the approach to be taken as follows (at 288):
"It is incumbent on the court to be satisfied that the proposal is a commercially appropriate one to follow, as the test otherwise on this aspect would fall, not much if at all, above a test of bona fides. It is not necessarily appropriate for the court to assess the best commercial course for a company, and sometimes the court will simply not be in a position to do so. Indeed, it is for those controlling the company to form such judgments: s232ff [of the Corporations Law]. On the other hand, the check which s190 creates on the issue of shares at a discount does oblige the court to have regard to how the proposal will serve the interests of shareholders and creditors of the company, in the process of weighing its pro and cons. In many cases the answer will be clear, and certainly in the absence of opposition or of asserted prejudice the balance in favour of a proposal being confirmed will be tilted by evidence of its commercial justification. Where there is opposition, or evidence of actual or potential prejudice, the weight to be given to the commercial justification for the proposal may be enhanced by evidence as to its particular merits or as to the particular disadvantages of other commercial options."
We are in general agreement with these observations.
In the present case, the trial Judge found that the proposed issue was put forward by the Board of Directors bona fide and in the belief that it was in the best commercial interests of the company. His Honour relied on Re Wintulichs Pty Ltd for the proposition that it was not the Court's function to form a view about whether the proposed issue was objectively the best commercial avenue available. He was satisfied that the issue of shares at a discount was a commercially appropriate course to follow. His Honour identified the legitimate commercial purposes as those put forward by the company's directors, namely, to use at least half the funds for the project to develop the company's diatomaceous earth deposit (the "DE project"), to provide working capital, and to provide funds for other investments to be identified by the Board.
The appellants attacked his Honour's approach, on the ground that he should have found that the DE project was not in the best commercial interests of the company, in part because there had been insufficient investigation of the availability and appropriateness of other means of funding that project. However, we agree with his Honour that it was not necessary or appropriate for him to consider whether the proposed issue of shares at a discount was objectively the best course for the company to adopt. It was enough for his Honour to find - as the evidence allowed him to do - that the proposed issue was a commercially appropriate course for the company to pursue.
The trial Judge also specifically found that there was no prejudice to creditors, whether present or future, in the proposed issue of shares at a discount. His Honour observed that no creditor had objected to the proposed issue. His Honour also observed that the nominal capital of a company (by which we take him to have meant the nominal amount of its issued capital) is not as commercially significant as it once was, and that it is unlikely that creditors now pay much attention to that amount when deciding whether to extend credit. In any event, there was no challenge to the finding that creditors would not be prejudicially affected by the proposed issue.
The trial Judge also found that there would be no prejudice to existing or future shareholders as a result of the proposed issue. He took account of the fact that every shareholder was to be given an equal opportunity to participate in the issue. In addition, he imposed a condition that to the extent that some shareholders might not sell their rights and simply let them lapse, a "second round" of offers was to be made to all shareholders or their assignees in proportion to their shareholdings at the conclusion of the first round. His Honour protected future shareholders by making an order that the company not issue any further shares for a period of five years unless it provides full particulars, at the time of the issue, of any shares issued at a discount pursuant to the subject resolution passed at the general meeting (see the similar order made by McLelland J in Re "Air North West" Pty Ltd, at 1144). Again, there was no challenge to the finding that existing and future shareholders would not be prejudiced.
As Beaumont J has explained, the thrust of the appellants' attack was that the information supplied to shareholders in connection with the proposed issue was inaccurate, insufficient and misleading. His Honour has dealt in detail with the appellant's arguments in these respects. It is enough for us to make two points.
First, we agree that the trial Judge correctly drew a distinction between information which is needed by the shareholders of a company before making a decision to vote on a proposed issue and information which they need before deciding whether or not to subscribe for shares. That distinction is not dependent upon expert evidence, although, of course, the significance of the distinction may depend on the evidence adduced in a particular case.
We also agree with Beaumont J's reasons for rejecting the appellants' contention that the trial Judge should have found that the shareholders were not provided with sufficient and accurate information to enable them to be fully and fairly informed of the proposed issue of shares at a discount. It was open to the trial Judge to find that the materials put before the shareholders prior to the passing of the resolution stated clearly and fairly the salient and most important of the facts necessary to enable them to form a judgment on the proposed issue: Carruth v Imperial Chemical Industries Ltd [1937] AC 707, at 768-789, per Lord Maugham; Re Mallina Holdings Ltd, at 286-287, per Seaman J.
We agree with Beaumont J that the appeal should be dismissed with costs.
I certify that this and the preceding 8 pages are a true copy of the Reasons for Judgment of the Honourable Justices Lindgren and Sackville.
Associate:
Date: 13 March 1997
Heard: 19 February 1997
Place: Sydney
Decision: 13 March 1997
Appearances: Mr A Archibald QC with Mr A Mizen appeared for the Appellants.
Mr P G Hely QC with Mr P Jooste, instructed by Hely Edgar Solicitors, appeared for the respondent.
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