Cleary v Australian Co-operative Foods Ltd
Case
•
[1999] NSWSC 991
•12 October 1999
No judgment structure available for this case.
CITATION: Cleary v Australian Co-operative Foods (No.2) [1999] NSWSC 991 CURRENT JURISDICTION: Equity FILE NUMBER(S): 3968/99 HEARING DATE(S): 24, 27 and 28 September 1999 JUDGMENT DATE:
12 October 1999PARTIES :
Patrick Cleary and Maxwell Cochrane (P)
Australian Co-operative Foods Limited (D1)
Ian A Langdon; Phillip J Bruem; Alan R Tooth; Jamie G Alison; Jeff E Ballon; Trevor R Connor; Thomas J Girgensohn; Wilf J Jarrett; Mal E Lanham; John J Mcaulay; Duncan A McInnes; Rowan R Moore; John J Reynolds; Michael D Ross; Charlie R Shearer; Ian H Zandstra (being the board of D1) (D2)
Geoffrey D Boxsell (being the 'returning officer' and an employee of D1) (D3)JUDGMENT OF: Austin J
COUNSEL : S Rares S C with S Emmett (P)
M Oakes SC with W Muddle (D)
T Stuart (Registrar of Co-operatives)
R Newlinds (ASIC)SOLICITORS: Corrs Chambers Westgarth (P)
Addisons (D)
I V Knight, Crown Solicitor (Registrar of Co-operatives)
J Redfern, Regional General Counsel (ASIC)CATCHWORDS: CORPORATIONS - co-operatives - scheme of arrangement - misleading and deceptive conduct - disclosure of takeover proposal with commentary - commentary held to be misleading - voting by postal ballot - procedure for replacement of postal votes held to be invalid; TRADE PRACTICES - misleading and deceptive conduct - spheres of application of Trade Practices Act, Fair Trading Act, Australian Securities and Investments Commission Act and Corporations Law ACTS CITED: Australian Securities and Investments Commission Act 1900 (Cth), ss 5(3), 12AE, 12BA, 12DA, 12GE, 12GH, 12GJ
Co-operatives Act 1992 (NSW), ss 6, 8, 106, 107, 112, 176, 188, 193, 194, 199, 266, 316, 354
Corporations Law, ss 9, 92, 109J, 109L, 411, 762, 995, 1022, 1114, 1322
Fair Trading Act 1987 (NSW), ss 42, 67, 70
Trade Practices Act 1974 (Cth), ss 51AF, 52, 80ACASES CITED: Australian Electoral Commission v Towney (1994) 51 FCR 250
Bowen v Hinchcliffe (1924) 24 SR 262
Chanter v Blackwood (No 2) (1904) 1 CLR 121
Cleary v Australian Co-operative Foods [1999] NSWSC 973
Eyre v Milton Pty Ltd [1936] Ch 244
Fraser v NRMA Holding Ltd (1995) 55 FCR 452
Fraser v NRMA Holdings Ltd (1994) 14 ASCR 656
GIO Australia Holdings Ltd v AMP Insurance Investment Holdings Pty Ltd (1998) 30 ACSR 102
Kean v Kerby (1920) 27 CLR 449
NRMA Ltd v Yates [1999] NSWSC 859
Pettit v Atkinson (1994) 50 FCR 174
Re Advance Bank Australia Ltd (1997) 22 ACSR 513
Re Archaean Gold NL (1997) 23 ACSR 143
Re Australian Foundation Investment Co Ltd [1974] PR 331
Re Dorman Long & Co Ltd [1934] Ch 635
Re Jessel Trust Ltd [1985] BCLC 119
Re MB Group plc [1989] BCLC 672
Re Minster Assets plc [1985] BCLC 200
Re The City Bank of Melbourne Ltd (1897) 3 ALR 220
Sengate Pty Ltd v Southern Equity Holdings Ltd [1998] SASC 6993 (FC)
Tooheys Ltd v Commissioner of Stamp Duties (1960) 105 CLR 602
Webb v Bloch (1928) 41CLR 331
Woods v Sullivan (1993) 30 NSWLR 586
Yates v Whitlam [1999] NSWSC 976DECISION: See under heading, 'Conclusion'
1 In proceedings 2882/99 the first defendant (which I shall call ‘Dairy Farmers’) sought orders for the convening of a meeting of the holders of co-operative capital units called ‘Members’ Capital Units’ or ‘MCUs’ to consider a scheme of arrangement. The scheme was part of a larger proposal by Dairy Farmers to its members and MCU holders (‘the Restructure Proposal’) which also involved a postal ballot by the members to consider two special resolutions, namely resolutions for the approval of a scheme of arrangement between them and Dairy Farmers and for the registration of Dairy Farmers as a company under the Corporations Law within the next three years. The scheme between Dairy Farmers and MCU holders is an arrangement for the purposes of s 344(1)(a) of the Co-operatives Act 1992 (NSW) (‘the Act’), as the MCU holders are creditors for that purpose. The scheme between Dairy Farmers and its members is an arrangement for the purposes of s 344(1)(b), and the procedure for approval of a transfer of incorporation is set out in s 316. In conjunction with the schemes and approval of transfer of incorporation, Dairy Farmers proposes that a meeting of members be held to approve rule amendments and to make other decisions necessary for the implementation of the Restructure Proposal. 2 The purpose of the Restructure Proposal is to permit funding flexibility which would strengthen the competitive position of Dairy Farmers in the market place for its products. It has been developed after extensive consultation between management and members, which has included meetings at district and ‘ward’ level in New South Wales and other States where the members are located. Under Stage I of the Restructure Proposal a new co-operative referred to as the ‘Supply Co-operative’ would be interposed between the members and MCU holders and Dairy Farmers, by the cancellation of 75% of their shares and MCUs in exchange for 100% ownership of the Supply Co-operative. The Supply Co-operative would in turn hold 75% of the shares in Dairy Farmers. The farmer members would thereafter supply their milk to the Supply Co-operative, and Dairy Farmers would then acquire the milk from the Supply Co-operative for processing and selling purposes under a new milk supply agreement. Stage II would involve the conversion of Dairy Farmers from a co-operative to a company registered under the Corporations Law, at a time decided by the directors within three years from the date of implementation of Stage I. Conversion would facilitate the raising of external capital and would permit Dairy Farmers to list on the Stock Exchange, although the Supply Co-operative would retain a controlling interest (but not necessarily a majority interest). 3 On 30 July 1999 I made orders for the convening of a meeting of MCU holders, directing that two volumes of explanatory materials entitled ‘the Restructure Booklet’ be sent to them. The Restructure Booklet also made disclosure to the members for the purposes of their postal ballot and meeting. It was dated 5 August 1999 and was sent to members and MCU holders shortly thereafter. The closing date for the postal ballot was originally fixed as 15 September 1999 and the meetings were scheduled to occur on that day.
THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISIONAUSTIN J
TUESDAY 12 OCTOBER 1999
3968/99 - PATRICK CLEARY & ANOR V AUSTRALIAN CO-OPERATIVE FOODS LIMITED (NO.2)
JUDGMENT (Delivered 12 October 1999 and revised on 13 October 1999)
HIS HONOUR:
The Restructure Proposal
4 As was pointed out in the Restructure Booklet, Parmalat Finanziaria S.p.A. (‘Parmalat’) through its Australian subsidiaries (including Pauls Ltd) is one the two main competitors of Dairy Farmers, the other being National Foods. Paragraph 5.9 of Volume I of the Restructure Booklet draws attention to the competitive position and notes that both competitors have the flexibility to make large capital raisings, a flexibility which Dairy Farmers does not presently possess but would obtain through the Restructure Proposal. A further reference to the competitive positions of Dairy Farmers and Parmalat may be found in paragraph 4.2 of Volume II. Notwithstanding that they are competitors, the managing director of Dairy Farmers, Mr Tooth, and its chairman, Mr Langdon, had discussions with representatives of Parmalat prior to the application by Dairy Farmers in proceedings 2882/99. In those discussions Parmalat proposed a transaction under which it would acquire a controlling interest in Dairy Farmers. Given that Parmalat was a competitor seeking to acquire control, and that an important component of the Restructure Proposal was that a farmer-owned co-operative would retain a controlling interest in Dairy Farmers, one can infer that Parmalat’s proposal was not welcomed by Dairy Farmers’ management at the time. However, the discussions continued until Parmalat transmitted to Dairy Farmers a letter and annexures dated 31 August 1999 which set out a specific proposal for Parmalat to acquire a controlling interest in Dairy Farmers (‘Parmalat Proposal’). The ingredients of the Parmalat Proposal included the following:
The Parmalat Proposal
5 Two things are immediately evident. First, whereas under the Restructure Proposal a controlling interest in Dairy Farmers would be retained at both stages by the farmer-owned Supply Co-operative, the Parmalat Proposal would entail that a controlling interest in Dairy Farmers would be acquired by Parmalat. Secondly, the implementation of the Restructure Proposal would not necessarily prevent the Supply Co-operative and the other members of Dairy Farmers from disposing of a controlling interest in Dairy Farmers at a later stage, under some such proposal as the Parmalat Proposal. The question whether the implementation of the Restructure Proposal would affect the prospects of success of the Parmalat Proposal has been the subject of evidence and submissions, and I shall return to it.
(i) the merger would be effected by the sale of Pauls Ltd to Dairy Farmers in consideration of the issue of approximately 107 million shares by Dairy Farmers;(ii) an enterprise value of $676 million was placed on Dairy Farmers for the purposes of the proposal and after deducting debt Parmalat valued the equity in Dairy Farmers at $471 million or $4.02 per share;
(iii) the valuation of Dairy Farmers was derived by using a multiple of 13.5 times EBIT (earnings before interest and tax) for the year to 30 June 1998;
(iv) on the same basis Parmalat assessed the enterprise value of Pauls at $561 million and the equity in Pauls at $431 million;
(v) Parmalat’s proposal was to make a cash payment of $4.02 a share in respect of a minimum of 25% of the Dairy Farmers shares held by each of the members;
(vi) a share sale facility would be established for the balance of Dairy Farmers shares which would enable the members to sell shares at $4.02 each until 31 December 2000, and thereafter for a cash consideration calculated by using a formula;
(vii) a new Supply Co-operative would be formed with each farmer member being eligible for membership and holding one share, and the Supply Co-operative would enter into a supply agreement with Dairy Farmers similar to the one proposed in the Restructure Proposal;
(viii) after the merger Parmalat would own a minimum 60.9% of the equity of the merged entity.
6 On 6 September 1999, following a board meeting on 3 September, Dairy Farmers sent the Parmalat Proposal to its members and MCU holders, together with a letter from Mr Langdon (‘Mr Langdon’s Letter’) and a document headed ‘Australian Co-operative Foods Limited Restructure Proposal to Continue in the Best Interests of Members and MCU Holders’ (‘the Response’). Dairy Farmers made a media release on the same day (‘the Media Release’). I shall refer to Mr Langdon’s Letter, the Response and the Media Release together as ‘the 6 September Materials’ or ‘the Materials’. 7 According to Mr Langdon’s Letter, the Board had decided to forward the Parmalat Proposal in its entirety ‘so that Members are fully informed’. But instead of simply distributing the Parmalat Proposal, the Board chose to comment on it in a disparaging way. The 6 September Materials confirm that the Parmalat Proposal was unwelcome to the Board and management of Dairy Farmers. Their tone is emotive, critical and negative. Mr Langdon’s Letter characterises the Parmalat Proposal as one to ‘take control of the Dairy Farmers Group away from its farmer Members’, and after making specific criticisms which are discussed below, the letter says:
The Board’s response to the Parmalat Proposal
8 The 6 September Materials informed the members that the closing date for the postal ballot would be extended to 23 September, and the meetings of members and MCU holders would be adjourned to 29 September 1999. Members and MCU holders would be given the opportunity to request new ballot papers or new proxy forms if they wished to change their previously lodged ballots or proxy appointments, and a procedure was set out. The Materials stated that the Board had decided to defer consideration of the Parmalat Proposal until the Restructure Proposal had been voted on and the members had been given the opportunity to discuss the issue of ‘farmer control’. There would be a forum discussion on the issue of ‘Farmer Control - a Prerequisite for the Future or Not?’ at the national meeting of ward representatives on 2 November 1999 and the members’ convention on 3 November 1999.
‘It is possible that the very public campaign against your Board will intensify in the coming days and weeks. It may become increasingly personal in an attempt to challenge the integrity of the Board, especially that of the Chairman and CEO. This type of propaganda is an unfortunate tactic.
Dairy Farmers is a business with exciting commercial prospects. Thus the motivation to seize control is strong. Hostile approaches are not pleasant but your Board will not be intimidated by them.’
These comments suggest an intensity of reaction on the part of the Board. Read as a whole, the 6 September Materials appear combative and intemperate rather than balanced and informative. This overall impression needs to be borne in mind when one turns, as I shall, to the plaintiffs’ specific complaints about the Materials.
9 The present proceedings were commenced on 14 September 1999. The plaintiffs are two dairy farmers who are members of Dairy Farmers. The defendants are Dairy Farmers, its directors and the returning officer for the postal ballot. The plaintiffs contend that the directors of Dairy Farmers have breached their fiduciary duty, as well as their duty of disclosure to the Court, by failing to disclose their negotiations with Parmalat and by misrepresenting various aspects of the Parmalat Proposal. They say that Dairy Farmers and its directors have failed to make adequate disclosure for the purposes of the schemes of arrangement, contrary to the requirements of ss 354 and 266 of the Act, the latter of which imports s 1022 of the Corporations Law. They say that Dairy Farmers and its directors have engaged in misleading and deceptive conduct under one or more of s 52 of the Trade Practices Act 1974 (Cth), s 42 of the Fair Trading Act 1987 (NSW), s 12DA of the Australian Securities and Investments Commission Act 1989 (Cth) and s 995 of the Corporations Law. Additionally, they say that the procedure for replacement of postal votes announced to the members on 6 September 1999 is not permitted by law and consequently the postal ballot is void and should be cancelled. They seek declarations on these matters, and orders restraining the defendants from proceeding with the postal ballot and the meetings. 10 On 20 September 1999 the plaintiffs applied for an order for the expedited final hearing of all or part of the proceedings. The defendants applied for orders having the effect that the proceedings be heard concurrently with the hearing of any motion to approve the schemes of arrangement in proceedings 2882/99. In my judgment delivered ex tempore on 21 September 1999 and subsequently revised (Cleary v Australian Co-operative Foods [1999] NSWSC 973) I decided that it was appropriate to grant leave to the plaintiffs to apply under Pt 31 of the Supreme Court Rules for the determination of some separate questions, and to expedite the hearing of that determination. I stood over the defendants’ notice of motion for further hearing after determination of the separate questions, since my conclusion would not prevent that application from succeeding with respect to matters raised in the present proceedings but not included in the separate questions for expedited determination. As is clear from my reasons of 21 September 1999, my orders assumed that the closing date for the postal ballot would be extended again, and the meetings would be further adjourned, for sufficient time to enable the expedited hearing and determination of the separate questions prior to the closing of the ballot and prior to any consideration of matters of substance at the meetings. Eventually Dairy Farmers decided that the closing date for the ballot would be extended to 3 November 1999, the time of the annual convention, and the meetings would be adjourned to be held at that time. 11 My order for the determination of separate questions was as follows:
The proceedings
12 Broadly there are five issues arising out of these separate questions, namely · whether the postal ballot procedure, as altered by the 6 September Materials, is lawful (‘the Ballot Construction Issue’); · whether that procedure affects the secrecy of the process so as to invalidate it (‘the Secret Ballot Issue’); · whether the dispatch of the 6 September Materials amounted to engaging in conduct which was misleading or deceptive or likely to mislead or deceive (‘the Conduct Issue’); · identification of the statutory regime or regimes which govern the determination of the Conduct Issue (‘the Jurisdiction Issue’); · identification of the most appropriate form of relief (‘the Relief Issue’).
‘1. Order that the following questions be determined pursuant to Pt 31 r 2 separately and before any other issue in the proceedings:
1.1 Whether the procedure set out in materials sent to members and MCU Holders of the first defendant on or about 6 September 1999 with respect to the retrieval of postal ballot papers and the casting of fresh votes is a lawful procedure having regard to the Co-operatives Act 1992, the Co-operatives Regulation 1997 Schedule 2 and the rules of the first defendant.
1.2 Whether the information supplied to members and MCU Holders of the first defendant in the materials sent to them on or about 6 September 1999 and in the press release of 6 September 1999 constitutes engaging by any defendant in conduct which is misleading or deceptive or involvement by any defendant in such conduct for the purposes of any of the following Acts which may be relevant, namely:
(1) s 52 of the Trade Practices Act 1974 (Cth);
(2) s 42 of the Fair Trading Act 1987 (NSW);
(3) s 995 of the Corporations Law;
(4) s 12DA of the Australian Securities and Investments Commission Act 1989 (Cth).
1.3 If the answer to question 1.1 is no or 1.2 is yes, what relief should be granted at this time?
1.4 Without limiting 1.3, if the answer to question 1.1 is no, can the court in granting relief order the holding of a further postal ballot of all or some of the first defendant’s members?
1.5 Without limiting 1.3, if the answer to 1.2 is yes, can the court in granting relief order the dispatch of supplementary material to the first defendant’s members?’
13 The 6 September Materials set out a procedure for members to change their votes in the postal ballot, and for members and MCU holders to change proxies which have already been lodged for the meetings. There is no challenge to the procedure so far as it related to change of proxies, nor any challenge to the power of Dairy Farmers to extend the closing date for the postal ballot. The procedure for change of votes was as follows:
The Ballot Construction Issue
14 The first question is whether it is lawful, having regard to the Act and the Co-operatives Regulation 1997 (‘the Regulation’) and the Rules of Dairy Farmers, to permit members to change their vote in the postal ballot by obtaining and submitting a new voting paper which would cancel the previous vote. 15 Voting is the subject matter of Part 8 of the Act. Section 176 gives effect to the co-operative principle that ‘in primary co-operatives members have equal voting rights (one member, one vote)’ (s 6), by providing that the right to vote attaches to membership rather than shareholding and that each member has only one vote (subject to exceptions which are not presently relevant). Sections 188 and 189 set out the majorities required at a meeting and in a postal ballot for the passing of an ordinary resolution and a special resolution. Section 190(2) states:
‘ Change of vote …
Members who wish to change their vote in the postal ballot … may do so by calling 1800 064 386 any business day from 7.30am to 9.30pm. A new voting paper ... will be sent to you and, on receipt of your instructions, your previous vote … will be cancelled.
If you wish to change your vote, you will need to contact us by 18 September 1999 (for ballot papers) … to ensure that there is sufficient time for you to receive, complete and return your new ballot paper … .
Members … who have already voted … and do not wish to change their vote … need do nothing. Your existing vote … will be effective for the deferred postal ballot … .
If you have not already voted in the Special postal ballot and you wish to do so:
you can vote using your existing ballot paper and you should ignore the closing date shown on it, however, you must lodge the existing ballot paper so that it is received by the Returning Officer before noon on 23 September 1999.’
16 Sections 193 and 194 govern the conduct of postal ballots and special postal ballots respectively. Relevantly they provide:
‘A resolution is passed by a particular majority in a postal ballot if that majority of the members of the co-operative who, being entitled to do so, cast formal votes in the postal ballot vote in favour of the resolution.’
17 The only provision of the Rules of Dairy Farmers dealing with the conduct of postal ballots is Rule 36B, according to which postal ballots are to be conducted in the manner set out in Schedule 2 to the Co-operatives Regulation 1997. Rule 30 states that at least 14 days notice must be given of any meeting of members. 18 In my opinion s 193(1) provides a definition of ‘postal ballot’ for the purposes of the Act, and consequently a postal voting procedure is invalid unless it is authorised by the Regulation or the rules. The provision that a postal ballot ‘may be held as provided by the rules’ means that subject to the Act and Regulation, an authorising rule is sufficient to permit a postal voting procedure. It does not mean or imply that a postal voting procedure may be authorised by some means other than by the Regulation or the rules. Further, the obvious contrast between the provision that the postal ballot ‘may be held’ as provided by the rules and the provision that the postal ballot ‘is to be conducted’ (ie, must be conducted) in accordance with the regulations is intended to make it clear that the regulations override the rules, rather than to assert that while compliance with the regulations is mandatory, the rules are merely directory. Were the latter to be the case, s 193(1) would be at odds with the binding nature of the rules of a co-operative under s 106. 19 Regulation 13 states that for the purposes of s 193, a postal ballot must be conducted in accordance with Schedule 2. Clause 1 of Schedule 2 empowers the board to cause the details of the proposal on which a ballot is to be held to be set out in a statement, and to fix dates for the forwarding of ballots to members and the closing of the ballot, and to appoint a returning officer for the ballot. Clause 3(5) requires the returning officer to send to every member entitled to vote in the ballot a set of materials comprising a ballot paper, an ‘outer envelope’ addressed to the returning officer, a ‘middle envelope’ on which the member’s name and address is to be printed, and an ‘inner envelope’ in which the ballot paper is to be enclosed. Clauses 4 and 5 provide:
‘193(1)A postal ballot may be held as provided by the rules of a co-operative and is to be conducted in accordance with the regulations.
(2) On the declaration by the returning officer of the result of the ballot, the secretary of the co-operative is to make an entry in the minute book of the co-operative showing:
(a) the number of formal votes cast in favour of the proposal concerned, and
(b) the number of formal votes cast against the proposal, and
(c) the number of informal votes cast.’
‘194(1)A special postal ballot is a postal ballot that is conducted as required by this section.
(2) The ballot must not be held less than 21 days after notice of the ballot is given to members so as to enable sufficient time for a meeting to discuss the proposal that is the subject of the ballot to be convened and held (whether by the Board or on the requisition of members).
(3) The co-operative must send to each member (along with any other material required to be sent in connection with the postal ballot) a disclosure statement approved by the Registrar and containing information concerning:
(a) the financial position of the co-operative, …
(d) such other matters as the Registrar directs.’
20 The returning officer is required by clause 6 to place the outer envelopes in a locked ballot box not later than noon on the date fixed for the closing of the ballot. As soon as practicable after noon on that date, the returning officer must open the ballot box and deal with the contents in the manner specified by clause 7. If a duplicate outer envelope has been issued and the original outer envelope is received, the returning officer must reject the original envelope (clause 7(3)(b)). After following prescribed procedures for checking and rejection of ballot papers, the returning officer must ‘count all votes cast’ (clause 8(1)). 21 Sections 190(2), 193 and 194 use the concept of ‘formal votes cast’, and clause 5 of Schedule 2 explains how a member casts a vote in a postal ballot, making it clear that the process of casting votes is completed when the outer envelope is sent to the returning officer. However, it is not correct that once the outer envelope is sent to the returning officer, the voting process has been exhausted once and for all and the voter is unable to change the vote which has been cast in that manner. Clause 7(3)(b) contemplates that a vote may be changed, since it requires that the original outer envelope must be rejected if it is received after a duplicate outer envelope has been issued. Clause 7(3)(b) is not expressly confined to a case where a duplicate ballot paper has been issued under clause 4 and indeed, if the returning officer is properly satisfied of the matters set out in clause 4 the original outer envelope should not subsequently be received. The breadth of clause 7(3)(b) suggests that circumstances may arise in which a duplicate outer envelope is issued, other than those specified in clause 4. That suggestion is reinforced by clause 4 itself, which merely says that the returning officer ‘may send’ a duplicate ballot paper in the circumstances stated in the clause, without expressly stating that these are the only circumstances in which a duplicate ballot paper may be sent. There are no other such circumstances set out in the Act or the Regulation, but s 193(1) makes it plain that the requirements of the Regulation may be supplemented by the rules of the co-operative, provided that the rules are not inconsistent with the Regulation. 22 It therefore seems to me that a properly drafted rule of a co-operative, provided that it is consistent with the Regulation, may authorise the returning officer to send a duplicate ballot paper and envelopes to a voter in circumstances other than those set out in clause 4. If the co-operative issues a duplicate ballot paper and envelopes under such a rule then the procedure which clause 7(3)(b) prescribes for rejecting the original envelope must be followed. It would therefore have been open to Dairy Farmers to adopt a rule, prior to sending the 6 September Materials to its members, which would have authorised the returning officer to issue duplicate ballot papers and envelopes, on the basis that if a duplicate outer envelope is issued to a member and the original outer envelope is received, the latter will be rejected. 23 However, in my view the board of Dairy Farmers had no power under the Act and Regulation to establish a procedure for change of postal votes in the absence of such a rule. By requiring that a postal ballot be conducted in accordance with Schedule 2 without any supplement, the Rules of Dairy Farmers made no provision for the issue of duplicate ballot papers and envelopes in the circumstances referred to in the 6 September Materials. Section 193(1) left no room for the directors to adopt a procedure for the issue of duplicate ballot papers and envelopes going beyond what was authorised by the Regulation and the Rules. 24 My conclusion, therefore, is that in the absence of an authorising rule, the procedure adopted in the 6 September Materials for members to change their votes in the postal ballot was invalid. 25 This conclusion receives further support from s 107 and Schedule I to the Act. Section 107(1) requires that the rules of a co-operative must set out or make provision for the matters in Schedule I. By item 22 of clause 1 of Schedule I, one of those matters is ‘the method of conducting postal ballots, including special postal ballots, including the sending and lodgment of information and votes by facsimile or electronic means.’ Thus, for example, the rules could make provision, subject to s 183, for a person to cast a member’s postal ballot under power of attorney. And they could make provision, subject to the requirements of the Act and Regulation, for change of votes. 26 The defendants’ principal submission on this subject began with the proposition, asserted in many cases including Fraser v NRMA Holdings Ltd (1995) 55 FCR 452, that directors of a corporation who seek the approval of its members must provide such material information as will fully and fairly inform the members of what is to be considered. At least in the context of the scheme of arrangement under the Corporations Law, the directors’ duty continues until the members have taken their decision and the Court has approved it, in the sense that they must bring to the attention of the members and the Court any change of circumstances which is material to the members’ decision: Re MB Group plc [1989] BCLC 672, 680; Re Jessel Trust Ltd [1985] BCLC 119; Re Minster Assets plc [1985] BCLC 200; Re Australian Foundation Investment Co Ltd [1974] PR 331, 338; Sengate Pty Ltd v Southern Equity Holdings Ltd [1998] SASC 6993 (FC). The same principle applies to a scheme of arrangement under Part 13 of the Act, having regard to s 368, according to which the Court’s jurisdiction under Part 13 is intended to complement its jurisdiction under the Corporations Law and should be exercised in harmony with that jurisdiction. 27 I accept these propositions. The defendant then says that Schedule 2 must be construed in a manner which allows voters to respond to disclosure of a material change in circumstances. The construction which I have adopted allows the members, or the board in the limited circumstances referred to in s 112 of the Act, to adopt a rule which would permit a duplicate ballot paper and envelopes to be issued in the event that it becomes necessary to sent supplementary disclosure materials to the members during the course of a postal ballot. Therefore this construction would allow voters to respond to supplementary disclosure, provided that an authorising rule is in place. The requirement for an authorising rule serves the useful purpose of allowing the members to review the procedure for a change of vote, because either the rule will have been adopted by a special resolution of the members or it must be disclosed to the members under s 112(2) soon after it has been adopted by the board (in event that the Registrar permits the board to adopt the rule under s 112(1) (b)).
‘4. The returning officer may send a duplicate ballot paper to any voter if the returning officer is satisfied:
(a) that the voter has not received a ballot paper; or
(b) that the ballot paper received by the voter has been lost, spoilt or destroyed and that the voter has not already voted.
5. A member casts a vote in a ballot by:
(a) completing the details on the reverse side of the middle envelope, and
(b) marking his or her vote on the ballot paper according to the instructions on the ballot paper, and
(c) sending the ballot paper, in the envelopes provided, to the returning officer.’
28 A supplementary point raised by the plaintiffs arises out of s 194(2). That provision, which was extracted above, stipulates that the ballot must not be ‘held’ less than 21 days after notice of the ballot is given to members, so as to enable sufficient time for a meeting to discuss the proposal. The 6 September Materials stated that the closing date for the postal ballot would be extended to a date less than 21 days after the time when the Materials would be received by members. The plaintiffs say that this contravenes s 194 (2). 29 I disagree with this submission. Section 194 (2) prescribes a minimum period between the giving of notice of the ballot and the holding of the ballot. The concept of holding a postal ballot is not defined, and it is not entirely clear whether a ballot commences to be held when members first have the opportunity to vote, or is held only when the closing date arrives. But it is tolerably clear as a matter of construction that s 194(2) is directed only to the time between the initial notice of the ballot and its holding, and does not apply to a notice of supplementary information given subsequently. In its terms s 194(2) refers only to ‘notice of the ballot’ and to discussion of ‘the proposal that is the subject of the ballot’, and it would be straining the language to extend it to a notice of new information and a discussion of the effect that the new information may have on a proposal previously advanced. 30 The directors’ obligation to disclose material new information implies that the disclosure must be timely. In any event the Court would be unlikely to exercise its discretion in favour of approving an arrangement which has been affected by material new information if the members had not had the opportunity to consider and respond to it. But in my opinion it was not unreasonable for Dairy Farmers to expect members to respond by 23 September to materials sent to them on 6 September.
Did the 6 September Materials give the members sufficient time to change their votes?
31 It will be seen that the procedure which the board had adopted for change of postal votes required members who wished to change their vote to make a telephone call to obtain a new voting paper. In following this procedure, they would be required to identify themselves so they could be sent a new ballot paper and envelopes. The original ballot paper and envelopes were coloured pale blue, whereas the replacements were coloured mauve. 32 The members of Dairy Farmers were sent a voting guide, which included a pale blue postal ballot paper and envelopes, with the Restructure Booklet in August 1999. In accordance with the procedures prescribed by Schedule 2, members were asked to mark their vote on the ballot paper, which did not contain any information which could be used to identify the member, then seal the ballot paper inside the envelope marked ‘ballot paper’ (which was the inner envelope for the purposes of Schedule 2), and then seal the inner envelope inside a bigger envelope (the middle envelope) and complete the outside of the middle envelope by filling in the member’s name and address and signing it, and then seal the middle envelope in a larger envelope (the outer envelope) which was pre-addressed to the returning officer, and finally send the outer envelope with its contents by reply paid post to the returning officer. 33 The returning officer gave evidence that when they were received, the outer envelopes were date-stamped and placed in the locked ballot box. He was the only person with a key to the ballot box. Telephone calls for replacement ballot papers were answered by casual employees of Dairy Farmers, who referred calls to the returning officer or the company secretary. The company secretary was primarily responsible for responding to member queries on Wednesdays, Thursdays and Fridays and the returning officer was primarily responsible on Mondays and Tuesdays. 34 After 6 September 1999 the returning officer began to receive a small number of mauve outer envelopes, which he place in a separate ballot box. Members who requested a new ballot paper to replace one which they had lost or filled out incorrectly would be sent a new blue ballot paper and envelopes. The returning officer kept a record of the names of all members who were sent a new blue ballot paper and envelopes, and the names of all members who were sent a mauve ballot paper and envelopes. No-one other than the returning officer and his personal assistant had access to that record. As at 27 September 1999 50 mauve and 7 blue replacement ballot papers and envelopes had been issued, while 5097 voting guides were initially issued to active members. 35 The plaintiffs say that the change of vote procedure was defective because it affected the secrecy of the process. They assert that the procedure prescribed by clause 5 of Schedule 2, involving as it does the use of multiple envelopes, is a procedure for a secret ballot. In their submission the word ‘ballot’ itself denotes a secret vote in a context such as this (Eyre v Milton PtyLtd [1936] Ch 244, 258 per Lord Wright MR), and secrecy is required to guard the freedom of an election (Kean v Kerby (1920) 27 CLR 449, 459 per Isaacs J). I agree with the plaintiffs that, although neither the Act nor Schedule 2 expressly requires that the ballot be a secret ballot, a requirement of secrecy is implied from the prescriptions for multiple envelopes and a locked ballot box. 36 The plaintiffs submit that in the present case members who believe that the Parmalat Proposal might affect their votes must come forward in order to obtain a new ballot paper. It is likely that a member who seeks to vote again would be in favour of the Parmalat Proposal and therefore against the directors’ view. Consequently, say the plaintiffs, the procedure for change of votes requires members to identify themselves, with no assurances as to the protection of their privacy, as persons who do not want to follow the directors’ line. 37 I agree in substance with this submission. While the returning officer has gone to pains to ensure the secrecy of the record of names of members who have received mauve ballot papers and envelopes, there is a good chance that members who call to change their votes will need to make arrangements with the company secretary, who can be presumed to have close contact with directors. In the circumstances the inference which would be drawn from a request for a replacement ballot paper is that the requesting member is at least considering that the Parmalat Proposal warrants a change of vote, contrary to the directors’ strong recommendation. To this extent the arrangements infringe the secrecy of the ballot process. Moreover, they do so in a way which created a real disincentive for members to change their votes, and therefore they are unfair and potentially oppressive upon members who disagree with the directors, and so the infringement is not minor or technical. The unfairness of the arrangements is enhanced by the fact that the body concerned is a co-operative, whose members are linked together by business interests and relationships, rather than merely by a common investment. 38 At least in the present context, the requirement for a secret ballot does not mean that the procedure must make it impossible to link the vote with the identity of the voter. It is probably inevitable, and at any rate unobjectionable, that the procedure is such that the returning officer and his staff have or have access to this information. I can see no objection, per se, to using a different colour for replacement ballot papers and envelopes (indeed, in the United Kingdom the Ballot Act 1872 prescribed that a different colour be used for replacement ballot papers, although the ballot was a secret ballot: see Halsbury’s Laws of England (1910), Vol XII paragraph 616). In Woods v Sullivan (1993) 30 NSWLR 586, 597, Hodgson J expressed the view that for a returning officer in a parliamentary election to record a group of postal votes separately might be contrary to provisions of the electoral legislation which were designed to preserve the secrecy of the ballot, by limiting the circumstances in which ballot papers could be marked for identification. In my opinion his Honour’s observation was directed to the particular legislation before him, and should not be taken to imply or suggest a universal rule that separate identification of a group of ballot papers destroys the secrecy of the ballot. 39 There is, however, an overriding requirement implied by Schedule 2, that the ballot be kept secret in the sense that information linking the vote with the identity of the voter must be confined to those who have an obligation to maintain secrecy. In the present case the problem arises not because of the procedure as such, but because some participants in it (including, in particular, the company secretary) are able in the circumstances to make inferences as to voting intentions without having any obligation to keep those inferences secret. 40 The problem about secrecy could have been avoided by sending a mauve ballot paper and envelopes to every member with the 6 September Materials, or by ensuring that requests for new ballot papers were received only by staff who were, and were known by the members to be, subject to an obligation to maintain secrecy - provided, in either case, that what was done was authorised by an appropriate rule.
The Secret Ballot Issue
41 The defendants submitted that if the Court were to find that the change of vote procedure was unlawful, the deficiency would be automatically cured, or would and should be cured the Court, under s 1322 of the Corporations Law. In my opinion this submission should be rejected, for several reasons. 42 Section 8(1) of the Act states that the provisions of the Corporations Law, other than the provisions mentioned in sub-section (2), are excluded from applying under their own force to co-operatives. By sub-section (2), the provisions which are not excluded from applying under their own force to a co-operative include ‘(n) provisions relating to powers of Court to cure procedural irregularities and to make other orders’. Thus, s 8 of the Act allows s 1322 of the Corporations Law to apply to a co-operative under its own force - that is, to apply to a co-operative to the extent that it literally applies in its own terms. 43 Section 1322(2) states that a proceeding under this Law is not invalidated because of a procedural irregularity, unless the Court forms a contrary opinion. This case is about ‘proceedings’ by schemes of arrangement and transfer of incorporation, and associated meetings, under the Co-operatives Act rather than the Corporations Law. Therefore s 1322(2) does not apply here under its own force. Section 1322(3) is irrelevant because the question before me relates to validation of a postal vote rather than a meeting. 44 Section 1322(4) gives the Court the power to make orders of various kinds. Most of those orders relate to matters under the Corporations Law, and to that extent s 1322(4) has no application to the present case, for the reason already given. It is true that s 1322(4)(a) empowers the Court to make an order declaring that something purporting to have been done in relation to a corporation is not invalid by reason of any contravention of a provision of the constitution of the corporation, words which are wide enough to empower the Court to make an order with respect to a co-operative. However, in my opinion the invalidity in the present case cannot be said to be ‘by reason of any contravention of … a provision of the constitution’ of Dairy Farmers. The problem arises because of the absence of any authority under Act, the Regulation and the Rules of Dairy Farmers to conduct the change of vote procedure which the directors adopted. 45 Even if I could persuade myself that a curative order could be made under s 1322(4)(a) in the present circumstances, I would not make such an order in the exercise of my discretion. As I have explained, the change of vote procedure, in its operation, violated the secrecy of the ballot process in a manner which was unfair and potentially oppressive, and no order should be made which would validate it.
Court’s power to cure procedural irregularities
46 It has occasionally been observed, correctly in my respectful opinion, that the Court has a supervisory jurisdiction with respect to schemes of arrangement under companies legislation: Re The City Bank of Melbourne Ltd (1897) 3 ALR 220, 227-8; Re Archaean Gold NL (1997) 23 ACSR 143, 146. An example of the way in which that jurisdiction may be exercised is found in Re MB Group plc [1989] BCLC 672, esp at 681-682, which confirms that after the members have met to approve the scheme and before making its approval order, the court may direct a further meeting to be held if it is not satisfied that the will of the members has been expressed in light of full disclosure of all material information. 47 In an ingenious argument, counsel for the defendants submitted that in exercising its supervisory jurisdiction over a scheme which involves a postal vote, the Court should apply by analogy some case law with respect to parliamentary and other elections (including union elections). He referred to Pettit v Atkinson (1994) 50 FCR 174, 180, for the proposition that the object of the Court should be to give effect, as far as possible, to the will of the electorate, and Australian Electoral Commission v Towney (1994) 51 FCR 250, 255 for the proposition that the protection of the integrity of the franchise is the Court’s primary role. In Bowen v Hinchcliffe (1924) 24 SR 262, 267, a case involving the election by ballot of a union official, Street CJ in Eq applied the common law relating to parliamentary and municipal elections, and also made useful observations (at 266) with respect to the role of the returning officer. Counsel for the plaintiffs submitted that schemes of arrangement affect private interests and property rights, and no analogy should be drawn between the present circumstances and a parliamentary or other public election. But counsel for the defendants contended that the cases, especially Bowen v Hinchcliffe, go beyond the sphere of public law and should be applied to a postal ballot in a co-operative as well. He submitted that the object of the postal ballot provisions of the Act, by analogy with Chanter v Blackwood (No 2) (1904) 1 CLR 121, 123, is to enable the members to exercise their franchise, not to frustrate it. 48 For present purposes, I am prepared to assume that the cases relied on by the defendants are relevant to the exercise of the Court’s supervisory jurisdiction in the present circumstances. My difficulty with the defendants’ argument is that the principles which emerge from those cases do not appear to me to assist the Court to exercise its supervisory jurisdiction in a curative way in the present case. It cannot be doubted that in exercising its supervisory jurisdiction, the Court must yield to the express requirements of the relevant legislation: Re Dorman Long & Co Ltd [1934] Ch 635, 655. In the present case an express requirement of Part 13 of the Act is that in the case of a members’ scheme of arrangement, the members must agree to the arrangement by special resolution passed by means of a special postal ballot. The supervisory jurisdiction does not empower the Court to disregard the specific statutory requirements for a valid special postal ballot. It is not a power to cure defects or irregularities. Therefore, having concluded that the change of vote procedure was invalid, the Court cannot proceed to approve the scheme under s 344 on the assumption that the procedure was authorised and can be taken into account. That does not mean that the Court is deprived of all relevant discretion. As I shall point out when I come to consider the question of relief, there is an issue as to whether, in exercising its supervisory jurisdiction, the Court should allow original postal votes cast prior to the dispatch of the 6 September Materials to stand, but that is a somewhat different point. 49 The cases on which the defendants rely assume that the electorate has expressed its will on the basis of full disclosure of all material information. To the extent that the members have been misinformed or not adequately informed in the present case, it would be inappropriate for the Court to exercise a ‘supervisory jurisdiction’ to disregard the informational deficiencies.
The Court’s supervisory jurisdiction over schemes of arrangement
50 The Plaintiffs complain that by distributing the 6 September Materials to members and MCU holders, Dairy Farmers and its directors engaged in conduct which was misleading or deceptive or likely to mislead or deceive, contrary to some or all of four statutory regimes dealing with misleading or deceptive conduct. For reasons which I shall explain, my opinion is that s 52 of the Trade Practices Act 1974 (Cth) does not apply in the present case, but each of the s 12DA of the Australian Securities and Investments Commission Act 1989 (Cth), s 995 of the Corporations Law and s 42 of the Fair Trading Act 1987 (NSW) is applicable. 51 Before turning to the jurisdictional problems raised by these various statutory regimes, I shall consider whether the defendants engaged in conduct which was misleading or deceptive or likely to mislead or deceive for the purposes of any of the relevant provisions. The meaning of ‘misleading or deceptive or is likely to mislead or deceive’ is the same in each provision and neither party has submitted otherwise. 52 I shall first consider whether Dairy Farmers and each of its directors engaged in the conduct of distributing the 6 September Materials, and then note the specific complaints about the 6 September Materials and deal with each of them in turn. My overall conclusion is that Dairy Farmers and each of its directors engaged in the conduct of distributing the 6 September Materials, and that conduct was misleading or deceptive or likely to mislead or deceive, because the 6 September Materials were seriously misleading in ways highly material to the decisions by Members and MCU holders on the Restructure Proposal.
The Conduct Issue
53 The draft minutes of a meeting of the board of directors of Dairy Farmers held on 3 September 1999 record that it was unanimously resolved ‘that the Chairman be authorised to work with Dairy Farmers’ advisers and management team to approve the final wording and dispatch documentation to be sent to Members and MCU holders as soon as possible’. The 6 September Materials comprising Mr Langdon’s Letter, the Response and the Media Release were prepared and sent pursuant to that authority. 54 It is clear that two of the Directors, Mr Langdon as Chairman and Mr Tooth as part of the ‘management team’ referred to in the board resolution, engaged in the conduct of preparing and distributing the 6 September Materials. I accept the plaintiffs’ submission that Dairy Farmers also engaged in that conduct, by virtue of s 12GH(2) of the ASIC Act, s 762(4) of the Corporations Law and s 70(2) of the Fair Trading Act. The conduct was engaged in on its behalf by directors (Mr Langdon and Mr Tooth) and by its servants and agents (the management team and the advisers) within the scope of the actual authority conferred by the board’s resolution of 3 September, and so by those provisions it was conduct taken to have been engaged in also by the body corporate. 55 The position of the remaining directors of Dairy Farmers is less straightforward. They were not separately represented at the hearing and their position was not the subject of comprehensive submissions. The plaintiffs submit that the directors should also be taken to have engaged in the conduct by virtue of the same statutory provisions. Section 12GH(4) of the ASIC Act, s 762(6) of the Corporations Law and s 70(4) of the Fair Trading Act attribute to a principal any conduct engaged in by his or her servants or agents within the scope of their actual or apparent authority. Servants and agents of a corporation are not the servants and agents of each individual director merely by virtue of the fact that the directors, acting as a corporate organ on the corporation’s behalf, have engaged them or authorised them to act. In the present case, however, it was clear that the 6 September Materials, when prepared, would communicate to members and MCU holders the opinions of each of the directors individually, just as the Restructure Booklet had done. At the board meeting of 3 September there were resolutions that the board would continue the existing Restructure Proposal and ‘reconfirm’ its recommendation to proceed with it as the best available option to satisfy the stated objectives, and to provide members and MCU holders with details of the directors’ recommendation. Those resolutions were recorded to be unanimous. The directors must have realised that the materials that they then authorised the Chairman and the management team to prepare would attribute unanimous views to the board, and in that way would purport to express the individual views of each director. 56 This was not a case where the directors acted merely as a corporate organ, binding the corporation but not binding themselves individually. By passing the resolutions which were passed on 3 September, each director individually authorised the Chairman and management team to communicate to the members and MCU holders on his behalf. Therefore, when Mr Langdon and the management team engaged in the conduct of preparing and distributing the 6 September Materials they did so on behalf of each director as a principal and as the agent of each director, within the scope of their actual authority. Consequently by force of the statutory provisions to which I have referred, each director is taken to have engaged in that conduct. 57 It follows that if the conduct of distributing the 6 September Materials gave rise to a contravention of the relevant statutory provisions as to misleading and deceptive conduct, it was a contravention by Dairy Farmers and each of its directors. Having reached this conclusion I find it unnecessary to consider the statutory provisions about accessory liability for involvement in a contravention. Nor need I consider whether the conduct would be attributed to each director on general law principles of the kind explained by Isaacs J in Webb v Bloch (1928) 41CLR 331, 365.
Did Dairy Farmers and its directors engage in the conduct of distributing the 6 September materials?
58 At the hearing of the application for expedition, the plaintiffs handed up a document headed ‘Plaintiffs’ Particulars of Conduct Complained Of as to the 6 September Press Release Information’. By that document they contended that the 6 September Materials were misleading or deceptive in eight ways. Subsequently one of those points of contention was abandoned. In submissions at the hearing for determination of the separate questions, the plaintiffs reduced the remaining contentions to five headings, and said that the defendants’ misleading and deceptive conduct encompassed providing information that was misleading or deceptive, and also a misleading lack of information. The five headings, which I shall consider in turn, are: · flawed valuation information;
Particulars of misleading or deceptive conduct
· expert opinion unaltered;
· Palmalat Proposal can be considered later;
· lack of financial information;
· Palmalat Proposal highly conditional. 59 Although consideration of the plaintiff’s submissions necessarily requires that I concentrate on small parts of the 6 September Materials, the submissions must be assessed in light of the context provided by the Materials as a whole, and the overall impression which the Materials create in the mind of the reader, matters discussed earlier in these reasons for judgment.60 Mr Langdon’s Letter says:
Flawed valuation information
61 The Response says:
‘The Parmalat proposal is based on a valuation approach which is flawed in favour of Parmalat, including calculations on financial information 15 months out of date thus failing to recognise the substantial changes in the marketplace during that period.’
62 The Media Release says:
‘The Parmalat Valuation is flawed in favour of Parmalat. Parmalat have used year-end June 1998 results, which are 15 months out of date. Those results do not include the negative impact of deregulation in Queensland, Parmalat’s loss of market share in milk and yoghurt and the loss of the Danone business. The June 1998 results for ACF do not include the full year results from the Kraft and Dairy Vale acquisitions yet Parmalat conveniently deducts the full amount of debt associated with those acquisitions.’
63 Mr Langdon’s Letter and the Media Release, by using the word ‘including’, imply that the flaws in the valuation approach go beyond making calculations on the basis of financial information which is 15 months out of date. However, the Response does not suggest that there are any flaws in the valuation approach beyond the matters which it sets out. In my opinion a reader of Mr Langdon’s letter would realise that its criticisms of the Parmalat Proposal were a summary of the fuller assertions contained in the Response. When the two documents are read together they do not suggest, to my mind, that there are some additional flaws in the valuation approach beyond the criticisms made more fully in the Response. The thrust of those criticisms is to imply that the enterprise value placed upon Pauls Ltd by the use of June 1998 figures is too high because of post-balance date developments, namely the negative impact of deregulation in Queensland, Parmalat’s loss of market share in milk and yoghurt and the loss of the Danone business; and further to imply that the enterprise value of Dairy Farmers is too low, because its June 1998 results do not include full year results for the Kraft and Dairy Vale acquisitions, and yet the full amount of the debt associated with those acquisitions is deducted (since, as appears from Attachment 3 to the Parmalat Proposal, the calculation of the enterprise value of Dairy Farmers deducts net debt as at 30 May 1999). 64 The plaintiffs complain that the 6 September Materials should have dealt with the correct valuation of Pauls and Dairy Farmers, or expressed the directors’ opinion on it, and should have explained the methodology which Parmalat should have used. There may have been some substance to the plaintiffs contentions if, contrary to my view, the 6 September Materials had conveyed the impression that there were flaws in Parmalat’s valuation approach without giving any indication as to what those flaws were. In fact the flaws alleged by Dairy Farmers become apparent when the Response is carefully read. The members of Dairy Farmers were not being asked to vote on the Parmalat Proposal, but merely to consider whether its existence should affect their vote on the Restructure Proposal. It was enough for that purpose for the directors to express their view that Parmalat’s valuation approach was flawed in the manner indicated, with the overall implication that in the directors’ view the Parmalat Proposal undervalued Dairy Farmers shares and overvalued Pauls. I therefore reject the plaintiffs’ submission. 65 Much of the argument at the hearing for determination of the separate questions was directed towards whether in the circumstances of this case, the directors had an obligation to obtain for members a full valuation of the Parmalat Proposal. The evidence of Mr Gibson of E&Y and Mr Jephcott of Merrill Lynch was that a full valuation would involve valuation of Pauls Limited, since transfer of the shares in Pauls was offered by Parmalat as consideration for its acquisition of a controlling interest in Dairy Farmers. In my opinion the directors had no such duty, even though (as I shall explain) the Parmalat Proposal was in my view material to the decision of members on the Restructure Proposal because implementation of the Restructure Proposal would affect proposals such as Parmalat’s. While the directors’ duty of disclosure under the general law is not confined to information actually known by them, and can imply a duty to take reasonable steps to ascertain relevant information (see Fraser v NRMA Holdings Ltd (1995) 55 FCR 452, 466), the Court will take into account the time and cost of acquiring and preparing such information, and the delay involved in doing so. Such an approach was taken, admittedly in a somewhat different context, by Emmett J in GIO Australia Holdings Ltd v AMP Insurance Investment Holdings Pty Ltd (1998) 30 ACSR 102, in that His Honour took into account such considerations in declining to require that supplementary material in a takeover context must include a profit forecast. In the present case, it is relevant that a full valuation would require access to and examination of extensive information relating to Pauls (effectively, a ‘due diligence’ investigation), a procedure which would require the co-operation of Pauls. But this is not to say, as I shall point out, that the directors were entitled to provide no, or no useful, expert opinion as to the impact which the Parmalat Proposal might have on the decision of members on the Restructure Proposal - particularly as they chose to provide the members with a fresh opinion by the independent expert.
‘Flawed valuation: The Parmalat Proposal is based on a valuation approach which is flawed in favour of Parmalat, including calculations using financial information which is 15 months out of date. It fails to take account of the impact of deregulation in Queensland, and of the substantial market gains made by Dairy Farmers in milk and yoghurt at the expense of Parmalat’s business’.
66 Of the three documents which comprise the 6 September Materials the Response is clearly the central disclosure document. Early in the Response members are told that the board continues unanimously to recommend the Restructure Proposal. That statement is followed immediately by a statement that the board has reviewed the Parmalat Proposal ‘with the assistance of specialist financial and legal advice’. The board’s key reasons for confirming its commitment to the Restructure Proposal are then set out, and then the following paragraph appears:
Expert opinion unaltered
67 In its Report dated 28 July 1999, which appears as part of Volume 2 of the Restructure Booklet, Ernst & Young Corporate Finance Pty Ltd (‘E&Y’) referred to the restructuring alternatives considered by the directors of Dairy Farmers. They included the following:
‘Ernst & Young Corporate Finance Pty Ltd, the Independent Expert on the Restructure Proposal has been provided with a copy of the Parmalat proposal. While it has not performed an evaluation of the Parmalat proposal, it has reviewed its Independent Experts’ Report in light of the Parmalat proposal. Ernst and Young Corporate Finance Pty Ltd has advised the Board that its opinion that ‘the proposed restructure is fair and reasonable and in the best interest of existing [Dairy Farmers] Members and MCU Holders’ is not altered by the Parmalat proposal.’
68 Of the alternatives considered by the board, these two come closest to the Parmalat Proposal. But the ‘stategic investor’ alternative seems to assume a sharing rather than a ceding of control, and does not appear to contemplate cash payments to Dairy Farmers members, while the ‘reverse takeover’ alternative contemplates a takeover by listed Australian company which would issue shares, giving the members of Dairy Farmers control of or a substantial interest in the acquiring entity. Evidently the directors concluded, after widespread consultation with members, that only two alternatives should be evaluated and analysed in depth, namely the Restructuring Proposal as it eventually emerged and an ‘open model’ in which Dairy Farmers would simply convert to a company and be listed on the Stock Exchange. At section A33 of their Report, E&Y said that the restructure alternatives were tested against the ‘key restructuring objectives of effective control by dairy farmer members, retention of supply channel for members, effect on gearing levels and access to external non farmer equity at a reasonable cost’, and ‘the issues of dairy farmer control and milk supply were of paramount importance in the consultative process’. 69 The concept of ‘farmer control’ was addressed by the evidence and submissions. Perhaps not surprisingly, ‘farmer control’ means different things in different contexts and, apparently, to different people. Mr Cochrane, one of the plaintiffs, gave evidence that in insisting on farmer control, members wanted only to have a reasonable degree of say of what happened to their business. Clearly, however, the concept of farmer control used in the Restructure Booklet is different, and relates to the power to determine the outcome of a postal ballot or meeting of members. Extreme care would need to be taken by the directors and management, in taking the opinion of members on this subject, to make the latter concept clear to the members. The Restructure Booklet does so (see, for example, Volume I p55). 70 At section A65 E&Y expressed their own views of restructure alternatives. They mentioned the strategic investor and reverse takeover alternatives, but they noted that those options would require the identification of a strategic investor or a reverse takeover opportunity, ‘which have not been done as at the date of this report’. E&Y said that in their view the directors had considered the merits and demerits of the various alternatives in reasonable depth, having regard to the specific requirements of Dairy Farmers - assuming, one infers, the paramount importance of retaining farmer control. E&Y expressed their opinion that the alternatives set out by the directors were a reasonable list of realistic alternatives, even though (as earlier mentioned) they did not quite cover an alternative such as the Parmalat Proposal. They observed that ‘any proposal which involves control passing from Dairy Farmers is unlikely to be acceptable to the existing members and existing MCU holders.’ I infer that E&Y took the view that there was no point in giving fuller consideration to the strategic investor and reverse takeover options, or any variant of them, because an interested party had not been identified and the members of Dairy Farmers would not countenance loss of farmer control. E&Y’s overall conclusion was that the Restructure Proposal was ‘fair and reasonable and in the best interest of existing [Dairy Farmers] members and MCU holders.’ 71 That was the state of the members’ information about E&Y’s opinion when the Parmalat Proposal emerged. Given the views already expressed by E&Y, and given also that the issues raised by the Parmalat Proposal were complex and well outside the probable experience of Dairy Farmers, it is likely that E&Y’s expert opinion on whether the Parmalat Proposal made any difference to the members’ assessment of the Restructure Proposal would be a matter of considerable importance to the members. 72 John Gibson was one of the directors of E&Y who were responsible for preparation of the independent expert’s report. His evidence is that after the board meeting of 3 September 1999, he was contacted by Dairy Farmers and its lawyers and financial advisers (Merrill Lynch) and was asked to express an opinion as to whether the Parmalat Proposal made any difference to the conclusion which had been reached in the report. By letter to the directors of Dairy Farmers dated 6 September 1999, he authorised the statement which became the paragraph of the 6 September Materials which is set out above. However, the letter which gave that authority made a number of important points which were not disclosed in the 6 September Materials. First, the letter reiterated E&Y’s understanding that the issues of Diary Farmer control and milk supply were of paramount importance in the consultative process, and that each of the potential restructure alternatives had been tested against a number of objectives which included the object of effective control by dairy farmer members. Secondly, the letter said:
‘3. Strategic Investor (without listing)
A strategic investor could include an existing milk processor (Australian or international) or a financial investor. Control of the Business will in this case, be shared by members and the strategic investor in proportion to their investment in [Dairy Farmers]. [Dairy Farmers] is unlikely to be able as a co-operative to attract a strategic investor on account of the one vote - one member principle. Accordingly it would be necessary for [Dairy Farmers] to convert to a company before a strategic investor could be sought.
5. Reverse Takeover
A listed Australian company acquires the business of [Dairy Farmers] from members. [Dairy Farmers’] shareholders would receive shares in the acquirer in return for their existing shareholding interests in [Dairy Farmers]. The balance of ownership and control would depend on the relative values of the respective businesses.’
· has not been mandated to evaluate and provide an opinion on the Parmalat proposal; and · is consequently not in a position to evaluate and compare the advantages and disadvantages of the Restructure and Parmalat proposal without assessing in detail the Parmalat proposal.’
‘Ernst & Young Corporate Finance:
73 The plaintiffs say that the 6 September Materials were misleading with respect to E&Y’s opinion in two ways: namely, they did not disclose important qualifications to that opinion which were set out in E&Y’s letter of 6 September 1999; and they implied that E&Y had assisted the board by providing specialist financial advice and therefore was a supporter of the board’s views. I agree with both points. 74 As to the first point, it is true that E&Y’s original report had already drawn the members’ attention to the significance of preservation of farmer control as an objective of restructuring. However, E&Y’s opinion of 6 September was a different opinion directed towards the effect of a specific proposal which would remove farmer control. In the new context, E&Y’s expression of ‘understanding’ of the importance of dairy farmer control to the members had a new significance. If the object of preserving dairy farmer control is taken to be a given, then the Parmalat Proposal is necessarily excluded from further consideration. To the extent that E&Y’s opinion of 6 September 1999 was based on assumptions that the preservation of dairy farmer control was of paramount importance and that the members would not consider a proposal which would take it away, their opinion would be axiomatic and unhelpful. Full disclosure of what E&Y said in their letter of 6 September 1999 on the subject of dairy farmer control would have enabled the members to make an assessment of the extent to which this issue determined E&Y’s conclusion, but no such disclosure was made. 75 Additionally, while disclosing that E&Y had not performed an evaluation of the Parmalat Proposal but had reviewed its original report in light of the Parmalat Proposal, the 6 September Materials said nothing to assist the reader to understand the difference between the review which had been performed and the evaluation which had not been performed. In my opinion the difference is by no means self-evident. An understanding of it would have required at least the disclosure (as stated in E&Y’s letter of 6 September) that an evaluation would involve an assessment in detail of the Parmalat Proposal, and in the absence of such an assessment, E&Y were not in a position to compare the advantages and disadvantages of the two proposals. 76 Disclosure of these matters was, in my opinion, fundamental to an assessment of the significance (or more precisely, the relative insignificance) of E&Y’s statement that the Parmalat Proposal did not alter their earlier conclusion. The inclusion in the 6 September Materials of the paragraph containing E&Y’s opinion, without disclosure of these matters, was therefore misleading or deceptive. This defect in the 6 September Materials was a serious one, given the importance which the members and MCU holders of Dairy Farmers would be likely to attach to the opinion of an independent expert as to whether the Parmalat Proposal should affect their decision on the Restructure Proposal. 77 It is helpful to examine what might have been done, in order to identify the deficiencies of what was in fact done. I am inclined to doubt whether a verbatim disclosure of the qualifications contained in E&Y’s letter of 6 September 1999 would have ensured that the 6 September Materials were not misleading. The letter is not clearly expressed. It does not explain with any clarity the relationship between E&Y’s opinion and its ‘understanding’ of the importance to dairy farmers of the preservation of farmer control, and does not clearly explain what E&Y did to ‘review’ its earlier opinion in light of the Parmalat Proposal. To prevent disclosure of E&Y’s new opinion from being misleading, it may have been necessary for Dairy Farmers to have given a substantial explanation of E&Y’s reasoning and assumptions, going beyond the text of the letter, so that farmers could assess the degree of significance of the opinion. 78 This leads to another question: since a proper explanation of E&Y’s opinion would have provided a basis for concluding that the opinion was of very little value, would it have been better to exclude E&Y’s opinion entirely? 79 It is possible that the directors of a corporation may be in possession of relevant information, even information which is arguably material to the members’ decision on a proposal which the directors have put forward, and yet be entitled not to disclose that information. As the Full Federal Court remarked in Fraser v NRMA Holdings Ltd (1995) 55 FCR 452, 468, ‘the need to make full and fair disclosure must be tempered by the need to present a document that is intelligible to reasonable members of the class to whom it is directed, and is likely to assist rather than confuse’, and therefore ‘in complex cases it may be necessary to be selective in the information provided, confining it to that which is realistically useful.’ There is room for doubting whether E&Y’s opinion of 6 September 1999 was realistically useful in this sense, and further, given the limitations inherent in their opinion, there may well be grounds for concluding that it would be impossible to present the opinion to members in a fashion which would not be objectively misleading. 80 Was it necessary for the directors of Dairy Farmers to provide members with a useful opinion by the independent expert on whether the Parmalat Proposal affected the members’ consideration of the Restructure Proposal? The answer to that question depends partly upon whether the directors were right in believing that the Parmalat Proposal could happen with or without the Restructure Proposal, and that the Restructure Proposal would not interfere with the Parmalat Proposal being considered at a later date. If that were in fact true, I cannot see why there would be any need to ask the independent expert to consider whether the Parmalat Proposal altered its opinion that the Restructure Proposal was fair and reasonable and in the best interest of members. But if the directors’ view was wrong or doubtful, then the position would be substantially different. If one assumes, for example, that the implementation of even the first stage of the Restructure Proposal would cause the Parmalat Proposal to be withdrawn, or would make it impossible or harder for the Parmalat Proposal to be achieved, then the making of the Parmalat Proposal would be material to the members’ consideration of the Restructure Proposal. The members would need to consider whether it was in their best interest to proceed with the Restructure Proposal knowing of its impact on the Parmalat Proposal, or reject the Restructure Proposal so that the Parmalat Proposal and any other alternatives could be brought forward. For the reasons given under the next heading in this judgment, my view is that the directors’ claim, that the implementation of the Restructure Proposal did not interfere with consideration of the Parmalat Proposal, was wrong. It follows, in my view, that in the circumstances the directors were obliged to provide the members with a supplementary opinion from the independent expert. 81 This conclusion is reinforced by the contents of the Restructure Booklet. Volume 1 p 53 ff and the Independent Expert’s Report make it clear that in the view of the directors of Dairy Farmers and E&Y, it is relevant for members to consider alternatives when assessing the Restructure Proposal, and appropriate for the independent expert to consider alternatives before forming a view as to whether the directors’ proposal is in the best interest of members. The alternatives which were in fact considered by E&Y and the directors were described by E&Y (volume 2 section A65) as ‘a reasonable list of realistic alternatives’. When, therefore, another alternative comes forward, which is indubitably realistic because it is ‘on the table’, it must be appropriate for the independent expert to consider the new alternative, at least to the same degree as the hypothetical alternatives were considered. The discussion of alternatives in the Restructure Booklet and the Independent Expert’s Report therefore provides a context which, in my opinion, implies that when another alternative arises which was not previously being considered by the directors and the expert, the directors’ obligation is not only to form and report to members their own view on the new alternative, but to procure a useful opinion of the expert as to whether the directors’ proposal remains in the best interest of members. 82 In the present case, it was unnecessary for E&Y to make a valuation of Pauls. I need not accept any specific evidence (some of which was contradictory) in order to conclude that such a valuation would be costly and time-consuming, and would therefore entail a significant delay in consideration of the original proposal - and this at a time when the restructure must inevitably have caused management instability for Dairy Farmers. Moreover, the evidence indicates that neither Dairy Farmers nor E&Y had the time or opportunity to engage in a ‘due diligence’ investigation of Pauls of the kind which a reliable valuation would enquire. However, it would have been useful to members, and in my view sufficient for the discharge of the directors’ duty of disclosure, for E&Y to have offered specific comments from an expert point of view on Parmalat’s valuation of Pauls, and the directors’ criticisms of it, without any necessity for them to conduct a full valuation. Further, as a result of the investigation which it had already conducted, E&Y was in a position to express a detailed opinion on Parmalat’s valuation of Dairy Farmers. It is hard to see that a full valuation of Dairy Farmers would be needed for that purpose, assuming that E&Y had properly performed its mandate when it had prepared the original report. 83 The second criticism of the presentation of E&Y’s opinion in the 6 September Materials is that the paragraph authorised by E&Y appears soon after the expression of the board’s opinion and the assertion that the board was assisted by specialist financial advice. Consequently, it is said, the Response implies that E&Y assisted the board to form its views and supports them. If that implication is present, the Response is undoubtedly misleading, since the evidence demonstrates that although the board received specialist financial advice, principally from Merrill Lynch, E&Y did not provide such advice and did not form an opinion to support the board’s conclusions. 84 The defendants say that the Restructure Booklet clearly distinguishes between the financial adviser to Dairy Farmers, named on page 1 of Volume 1 as Merrill Lynch International (Australia) Ltd, and the independent expert, named on the same page as E&Y. They say that a member of Dairy Farmers, having read the Restructure Booklet, would understand that the reference to ‘specialist financial advice’ in the Response would be a reference to Merrill Lynch rather than E&Y. 85 In assessing this issue I must take into account that dairy farmers were the principal class of readers to whom the 6 September Materials were directed. They would be unlikely to be familiar with the roles characteristically adopted by the advisers who congregate around a transaction of this kind. In objective terms, E&Y would accurately be described as a specialist financial adviser, therefore qualified to be the independent expert for the Restructure Proposal. In my view the principal audience of the Response would be likely to infer that E&Y had assisted the board and supported the board’s strongly expressed opinions. Therefore, the Response was likely to mislead, and those who distributed it engaged in conduct which was likely to mislead. 86 Before leaving this point, I should note another aspect of it, which emerged from the evidence of Mr Jephcott of Merrill Lynch and was taken up in the plaintiffs’ closing submissions. Mr Jephcott was very actively involved in providing specialist financial advice to the board during and in preparation for its meeting of 3 September 1999, and in the subsequent drafting of the 6 September Materials. He said his advice to the board was that the Parmalat Proposal could not be assessed because of the absence of financial information about Pauls and the lack of any opportunity to conduct due diligence investigations. I accept that he gave this advice to the board. However, for all their attacks on the Parmalat Proposal, the 6 September Materials do not assert that the Proposal cannot be assessed due to lack of information. Instead, the reader is told that the valuation approach is defective and the Parmalat Proposal is highly conditional. It may be that a critique of the Parmalat Proposal based on the proposition that there was inadequate information about it, would not be appealing to the authors of the 6 September Materials. Parmalat might respond by offering access to the information reasonably needed for that purpose, and this would make it difficult to maintain the negative and combative approach which had clearly been adopted in the drafting of the 6 September Materials. But having been advised by Mr Jephcott that there was inadequate information to assess the Parmalat Proposal, it was incumbent on the board either to convey that advice to the members or to reject it on proper grounds. There is no evidence that Mr Jephcott’s advice was rejected - indeed Mr Langdon’s evidence is that he accepted it. Far from asserting that there was insufficient information to assess the Parmalat Proposal, the 6 September Materials implied that the directors had made a negative assessment of it. By authorising the sending out of the 6 September Materials, Dairy Farmers and its directors engaged in misleading or deceptive conduct in this respect.
The letter concluded that, ‘based on a consideration of the above factors’ E&Y continued to believe that its opinion that the Restructure Proposal was fair and reasonable and in the best interest of existing members and MCU holders was not altered by the Parmalat Proposal, and consent was given for the inclusion in the 6 September Materials of the paragraph set out above.
87 Mr Langdon’s Letter stated that ‘the restructure proposal does not interfere nor prevent proposals such as that from Parmalat being considered at a later date’ [sic]. The Response states:
Parmalat Proposal can be considered later
· the Parmalat proposal can happen with or without the Restructure Proposal; · the Restructure Proposal will strengthen [Dairy Farmers’] financial position and negotiating strength in dealing with the Parmalat proposal or any other proposal; and · the Restructure Proposal achieves the fundamental objectives of retaining control by Farmer Members at the same time as allowing external equity to be raised.’ 88 These statements are somewhat surprising on their face, since the objective of the Restructure Proposal was, in part, to improve the competitive position of Dairy Farmers against Parmalat and National Foods, by enhancing its funding flexibility. Purely as a commercial matter, one would expect that if the Restructure Proposal were implemented, Dairy Farmers would be less vulnerable to a takeover offer of the kind made by Parmalat and its board would be in a stronger position to resist the Parmalat Proposal. Another commercial consideration relates to whether the Parmalat Proposal would remain on the table if the Restructure Proposal were implemented, given the time that would be consumed by the later process. There must be at least a prospect that a participant in a highly competitive Australian industry, which also participates in similar industries in other countries, might withdraw its commitment to such a proposal and pursue an alternative strategy if it appears that there are obstacles in the path of the proposal. But the plaintiffs challenged the statements more from the structural and legal points of view than from a commercial prospective. 89 The Parmalat Proposal contemplates an arrangement under Part 13 of the Act by which, with the approval of the Court, each Dairy Farmers member would be required to sell 25% of the member’s shares in Dairy Farmers to Parmalat for $4.02 per share. One of the conditions precedent to the Parmalat Proposal is that the board of Dairy Farmers confirms its intention to proceed and to recommend the Proposal to the members. If the Restructure Proposal was not in train, the board of Dairy Farmers would have a fiduciary duty to assess the Parmalat Proposal and make a recommendation to the members concerning it. In a sense, the condition precedent would give the board a power of veto over the Parmalat Proposal, but that would be tempered by their duty. 90 After the implementation of Stage 1 of the Restructure Proposal, 75% of the former shareholding interest of each active member of Dairy Farmers would be vested in the Supply Co-operative and the members of Dairy Farmers would be members of the Supply Co-operative. The directors of Dairy Farmers would have the authority of the members to convert it into a company within the ensuing three years. Assume, first, that Dairy Farmers were to remain a co-operative after implementation of Stage 1. In that case, although the Supply Co-operative would hold 75% of the shares of Dairy Farmers, it would have only one vote at a meeting or postal vote of members of Dairy Farmers. If the Parmalat Proposal were still on the table, the board of Dairy Farmers would still have a power of veto over the Parmalat Proposal as before. The single vote attaching to the Supply Co-operative’s membership of Dairy Farmers would be controlled by the board of directors of the Supply Co-operative. If the Supply Co-operative were a separate class of member for the purpose of considering a scheme of arrangement, it would effectively have a veto over the arrangement, exercisable by its board. If the Supply Co-operative did not constitute a separate class, it would be substantially correct to say that the implementation of Stage I would not of itself interfere with the respective control positions of the Dairy Farmers board and the members voting in a meeting or by postal vote. 91 If the directors of Dairy Farmers, having been authorised by the members’ approval of the Restructure Proposal, were to convert Dairy Farmers into a company before the Parmalat Proposal was put to the members, then any scheme of arrangement to permit Parmalat to compulsorily acquire 25% of the shares of each member would be a scheme under the Corporations Law. There would be a potential issue as to whether the Parmalat scheme had been proposed to avoid the operation of Chapter 6 of the Corporations Law. Further, the board of the Supply Co-operative would control 75% of the votes to be cast on the scheme, and would therefore be in a position of strength, so that as a practical matter their co-operation as well as the co-operation of the board of Dairy Farmers would be needed for the scheme to go forward to members. It appears to me that the conversion of Dairy Farmers to a company would make a difference to the Parmalat Proposal and may lead to its being reformulated - for example, to become a takeover bid which would not be dependent on board co-operation, or a bid for an acquisition of the whole or part of the Supply Co-operative’s shares, for which the approval of the other shareholders would presumably be required. In these circumstances, it is misleading to assert that the Parmalat Proposal can happen with or without the Restructure Proposal, and that the Restructure Proposal will not interfere with a proposal such as that from Parmalat being considered at a later date - at any rate, without a fuller and more precise explanation to justify such a summary conclusion. If Stage II of the Restructure Proposal were to be fully implemented so that Dairy Farmers became a listed entity before the Parmalat Proposal was considered, the same considerations would apply and in addition, the liquidity of Dairy Farmers’ shares would entail that Parmalat would be dealing with market investors as well as dairy farmers - a circumstance which would surely be highly material to Parmalat. Mr Jephcott gave evidence of various ways in which the Parmalat Proposal could proceed after the implementation of the Restructure Proposal. While I accept that evidence, my view is that the 6 September Materials were misleading because they gave no indication that such variations to the proposal would be needed. 92 The implementation of the Restructure Proposal would affect the members’ consideration of the Parmalat Proposal in another way, in my opinion. If a scheme concerning the Parmalat Proposal were to be put to the members now, before the implementation of either stage of the Restructure Proposal, the members would be in a position to dispose of more than 25% of their existing shareholdings in Dairy Farmers. They could sell their entire shareholdings. If a scheme to consider the Parmalat Proposal were brought forward after the introduction of Stage I of the Restructure Proposal, 75% of the members’ former shareholding interest in Dairy Farmers would be held through the Supply Co-operative, and the Parmalat Proposal (unless amended) would involve the compulsory acquisition of only 25% of the remaining 25% interest. Members would be free to chose individually to sell additional shares, but only up to 25% of their original shareholding interest. Subject to the Act, the decision to dispose of the remaining 75% of the original shareholding interest would be a decision for the board of the Supply Co-operative. While that board would be ultimately accountable to the members, an individual member would not have any power of disposition over the 75% shareholding interest. It seems to me that this change was a highly material one for individual members, and the statements in the 6 September Materials misleadingly implied that no such change would occur. 93 In their submission under this heading the plaintiffs included a specific complaint about the Media Release. It attributes the following to Mr Langdon:
‘After proper consideration, your board has unanimously confirmed its commitment to continue with the Restructure Proposal currently before Members as the best available option for these reasons:
94 Mr Langdon’s statement is directed to the position of members after they have voted in favour of the Restructure Proposal. It is not a statement that the Restructure Proposal is better than the Parmalat Proposal, but rather it asserts that members will be in the best position to consider any bid which may come forward, including the Parmalat Proposal, if the Restructure Proposal is implemented. If it were true that the implementation of the Restructure Proposal would not interfere with consideration of the Parmalat Proposal at a later date, then it seems to me Mr Langdon’s statement would be supportable. Since, however, I have found that proposition to be false, my opinion is that Mr Langdon’s statement is misleading to the same extent as the statements in various parts of the 6 September Materials to the effect that the Restructure Proposal does not interfere with proposals such as the Parmalat Proposal.
‘Dairy Farmers’ impressive commercial success and market leadership has led to considerable interest in the organisation from several outside parties. By voting in favour of the Restructure Proposal, members will ensure that Dairy Farmers is in the best possible position going forward, both from a market and shareholder position.’
The plaintiffs say that Mr Langdon was in no position to make this statement, since he was aware that there had been no proper or adequate evaluation of the Parmalat Proposal by any expert. In the circumstances, say the plaintiffs, to say that the Restructure Proposal would ensure the best possible position is uninformed and leaves the members in a half light (citing Fraser v NRMAHoldings Ltd (1995) 55 FCR 452, 487).
95 The Response contains the following statement:
Lack of financial information
96 The plaintiffs say there is no basis for that statement, which (they say) is not supported by any expert analysis. The Parmalat Proposal itself says:
‘Certain key protections which will be available to farmers as part of the Restructure Proposal, such as a limitation on [Dairy Farmers] purchasing milk directly from farmers and the establishment of a financially sound Supply Co operative, will not be available under the Parmalat proposal.’
97 The Parmalat Proposal also says:
‘The farmer members of Dairy Farmers will continue to be members of a new Supply Co-operative and will have continued security for milk supply through contractual arrangements to be entered into with the merged entity. We propose that the principles of the milk supply contract will be largely the same as proposed to farmer members as set out in Section 7 of the Dairy Farmers Restructure Proposal subject to consultation with Dairy Farmers regarding such changes as are appropriate to reflect the Parmalat merger proposal.’
98 It was proper for the 6 September Materials to raise the question of the financial viability of the Supply Co-operative under the Parmalat Proposal. In my opinion, the 6 September Materials were not misleading in this respect, because the full text of the Parmalat Proposal was sent to members with the 6 September Materials. Having been alerted to the question of financial viability of the Supply Co-operative by the comment in the Response, it would be an easy matter for the reader to turn to the Parmalat Proposal in order to discover what financial arrangements were proposed. While dairy farmers would no doubt be assisted by an expert opinion on the point, they could make a rational assessment without such an opinion, having regard to the information which was supplied.
‘It is anticipated that the Supply Co-operative will not trade and Dairy Farmers will provide infrastructure and fund the cost of its operations (including directors’ fees and administrative costs) of the Supply Co-operative to a maximum of $400,000 per annum adjusted annually for inflation.’
99 Mr Langdon’s Letter says:
Parmalat Proposal highly conditional
100 The plaintiffs say that it is misleading to use such graphic language, suggesting a level of uncertainty that is simply not sustainable in the light of the expert evidence. They draw attention to the evidence of Mr Bryant, their financial expert witness, who said that conditions precedent of the kind found in the Parmalat Proposal are normal and not exceptional for a merger proposal. 101 I agree, to a degree, with this submission. It appears to me to have been misleading for the 6 September Materials to describe the Parmalat Proposal as ‘highly’ conditional, although it would have been acceptable to draw attention to the conditions and the consequence of non-compliance with any of them. It was also misleading to say that it was ‘highly uncertain’ that the conditions could be met, as opposed (say) to setting out some reasons why regulators may refuse to grant the requisite approvals. Mr Jephcott gave evidence of the difficulties which Parmalat would face in obtaining regulatory approvals. Had the 6 September Materials explained the difficulties which would arise, they may have avoided the charge that they were misleading, but in my opinion those difficulties do not overcome the charge that it was misleading to assert, without reasons, that attainment of the conditions was ‘highly uncertain’.
‘You can observe that the Parmalat proposal is little more than an invitation to discuss an offer; it is highly conditional upon a number of approvals.’
The first sentence of the Response labels the Parmalat Proposal as ‘a highly conditional proposal’. Later the Response sets out the conditions precedent to the Parmalat Proposal and then says:
‘The Parmalat proposal is highly conditional on approval from regulatory authorities, members, MCU holders and the Board approvals of both [Dairy Farmers] and Parmalat (Italy). It is highly uncertain that these conditions can be met.’
The Media Release says:
‘ Uncertain outcome : The Parmalat proposition is highly conditional on a number of approvals, and is likely to require over nine months to finalise terms and implement even if these approvals were to be achieved’.
102 In my opinion, Dairy Farmers and its directors engaged in conduct which was misleading or deceptive or likely to mislead or deceive by sending the 6 September Materials to members and MCU holders, since the 6 September Materials: · were misleading or deceptive by including E&Y’s opinion without an explanation of the qualifications to that opinion expressed in E&Y’s letter of 6 September 1999; · were likely to mislead or deceive by implying that E&Y had given specialist financial advice to assist the board and that E&Y supported the board’s stance; · were misleading or deceptive in failing to include Merrill Lynch’s advice that insufficient information was available to assess the Parmalat Proposal, and by including statements inconsistent with that advice; · were misleading or deceptive in claiming that the Parmalat Proposal could happen with or without the Restructure Proposal, and that the Restructure Proposal did not interfere with proposals such as Parmalat’s being considered at a later date; · were misleading in describing the Parmalat Proposal as ‘highly conditional’ and claiming that it was ‘highly uncertain’ that the conditions could be met.
Conclusion on misleading or deceptive conduct
103 I have mentioned that there are four statutory regimes dealing with misleading or deceptive conduct which may potentially be relevant to the present case. In my judgment on the plaintiff’s application for expedition (Cleary v Australian Co-operative Foods [1999] NSWCS 973) I expressed the preliminary view that s 52 of the Trade Practices Act was not applicable here, but the other three statutory regimes were all applicable. I directed that the proceedings be brought to the attention of the Australian Securities and Investments Commission, in case it saw any need to intervene. The Commission intervened by counsel at the hearing for determination of the separate questions, confining its submissions to the issue of jurisdiction. 104 I shall set out my views as to the application of each of the statutory regimes, and then I shall deal with the consequences of my conclusions on that matter. 105 Until the enactment of the Financial Sector Reform (Consequential Amendments) Bill 1998, which came into force on 1 July 1998, s 52 of the Trade Practices Act 1974 (Cth) applied to misleading or deceptive conduct with respect to shares in a corporation, provided that the conduct was in trade or commerce. Fraser v NRMA Holdings Ltd (1995) 55 FCR 452 was a case in which s 52 was applied to a prospectus and notice of meeting which proposed that memberships in companies limited by guarantee be replaced by shares in a new holding company. 106 The Financial Sector Reform (Consequential Amendments) Bill 1998 was part of a legislative package which constituted the first stage of the Commonwealth Government’s response to the recommendations of the Financial Systems Inquiry, 1997 (‘the Wallis Committee Report’). One of the Government’s intentions, according to the Treasurer’s Second Reading Speech (Hansard, 23 June 1998, p 5160 - 5161) was to remove regulatory overlap between the Australian Securities and Investments Commission (‘ASIC’) as it came to be known under the legislation) and the Australian Competition and Consumer Commission (ACCC), which has regulatory responsibility for the Trade Practices Act. The objective was for ASIC to become the specialist regulator for consumer protection in the financial system. That intention was set out more fully in the Supplementary Explanatory Memorandum to the Bill, paragraph 1.3 of which says that the relevant amendments will implement Recommendation 3 of the Financial System Inquiry, which was that ASIC should have ‘sole responsibility for administering consuming protection regulation within its jurisdiction over the financial sector’. 107 This was achieved, inter alia, by introducing s 51AF into the Trade Practices Act, and Part 2 Division 2 into the Australian Securities and Investments Commission Act 1989 (Cth). Section 51AF creates an exception to Part V of the Trade Practices Act, which includes s 52. According to s 51AF(1), Part V does not apply to the supply, or possible supply, of services that are financial services. Section 51AF(2) provides, without limiting subsection (1), that s 52 does not apply to conduct engaged in ‘in relation to financial services’. Part 2 Division 2 of the ASIC Act legislates for consumer protection with respect to financial services by adopting provisions closely similar to Part V of the Trade Practices Act, except that they are confined by reference to financial services. In particular s 12DA(1) is identical with s 52(1) of the Trade Practices Act except that the conduct proscribed must be ‘in relation to financial services’. 108 The Trade Practices Act adopts the relevant definitions with respect of financial services found in the ASIC Act. ‘Financial services’ is defined in s 12BA (1) of the ASIC Act as a service that ‘consists of providing a financial product’. ‘Financial product’ is defined in s 12BA (1) as including ‘a security’. Section 5(3) of the ASIC Act provides that, except is so far as a contrary intention appears in the Act, Parts 1.2 and 1.3 of the Corporations Law apply as if the provisions of the ASIC Act were part of the Corporations Law. Section 92 of the Corporations Law defines a security as including ‘shares or debentures in a body’. ‘Body’ is defined in s 9 of the Corporations Law as ‘including a body corporate, an unincorporated body and includes for example a society or association’. Section 29 of the Co-operatives Act refers to a co-operative as a body corporate, and s 33 of that Act provides that a co-operative has the capacity of a natural person. The effect of these definitions, when read with s 51AF of the Trade Practices Act and s 12DA of the ASIC Act, is that conduct ‘in relation to’ the provision of shares in a New South Wales co-operative is governed by s 12DA of the ASIC Act and is not governed by s 52 of the Trade Practices Act. 109 The words ‘in relation to’ are well recognised as words of expansive meaning (eg Tooheys Ltd v Commissioner of Stamp Duties (1960) 105 CLR 602). The fact that conduct is in relation to other maters does not prevent it from being in relation to financial services as well. Once it is so classified, the Trade Practices Act is inapplicable and the matter falls within legislation for which ASIC has sole responsibility, namely the ASIC Act and the Corporations Law. 110 Was the conduct which comprised sending the 6 September Materials to members and MCU holders conduct in relation to the provision of shares? The provision of shares in two bodies was part of the subject matter of the 6 September Materials. Enclosed with the 6 September Materials was the Parmalat Proposal, which dealt with the transfer of all of the shares in Pauls Ltd to Dairy Farmers, and the acquisition by Parmalat of the shares of members of Dairy Farmers. Additionally the 6 September Materials were sent to members to provide information relevant to the Restructure Proposal, which dealt with the provision of shares of Dairy Farmers to the new Supply Co-operative and the ultimate listing of Dairy Farmers on Stock Exchange, so as to permit members to sell their shares in the market. It may also be correct to view the MCUs as debentures and if so, the 6 September Materials related to the provision of debentures as well as shares, but it is unnecessary for me to rely on that point. In my opinion both the Parmalat Proposal and the Restructure Proposal were so obviously related to dealings in shares, and hence the provision of shares to the party acquiring them, that the conduct of sending the 6 September Materials to members to inform them of the Parmalat Proposal and to comment in light of the Restructure Proposal was clearly conduct ‘in relation to financial services’. Hence s 52 of the Trade Practices Act had no application to it and s 12DA of the ASIC Act was potentially applicable. 111 Counsel for ASIC drew my attention to ss 109J and 109L of the Corporations Law, which are applicable to the construction of s 12DA of the ASIC Act by virtue of s 5(3) of the latter Act. Those provisions allow the use of extrinsic material (including explanatory memoranda and second reading speeches) as an aid to interpretation in circumstances of ambiguity and require the Court to prefer a construction that promotes the purpose or object of the relevant provision. I regard the question of construction in the present case as so plain that it is unnecessary to call these provisions in aid. However the Second Reading Speech and Supplementary Explanatory Memorandum provide strong support for the view which the literal construction dictates. They indicate that the intention of the amendments which took effect on 1 July 1998 was to make ASIC the sole regulator of consumer protection with respect to financial services. Misleading conduct in a circular with respect to a restructuring proposal and a competing offer, such as in the present case, is manifestly a matter for surveillance by the regulator which is exclusively responsible for consumer protection in the financial services industry. 112 Section 995 of the Corporations Law deals with misleading or deceptive conduct in connection with any dealings in securities. It is not confined to dealing in the securities of any particular kind of body, and therefore it is capable of applying to dealings in the securities of a New South Wales co-operative. The word ‘deal’ is defined in s 9 in the manner in which encompasses acquiring or disposing of securities under a scheme of arrangement, including an arrangement under Part 13 of the Co-operatives Act. Since the sending of the 6 September Materials its conduct in connection with dealing in Dairy Farmers shares under the Restructure Proposal, and conduct in connection with dealing with those shares under an alternative arrangement proposed to implement the Parmalat Proposal, as well as conduct in connection with the shares in Pauls Ltd, s 995 is potentially applicable. 113 Section 42 of the Fair Trading Act 1987 (NSW) has not been amended so as to exclude conduct in relation to financial services. If, therefore, the conduct of sending out the 6 September Materials was engaged in trade or commerce, then s 42 is also applicable. This result seems to be confirmed, as far as Part 2 Division 2 of the ASIC Act is concerned, by s 12AE of the latter Act. The application of s 42 to conduct in relation to financial services is out of line with the Commonwealth Government’s intention to give ASIC sole responsibility for consumer protection in the financial services industry, and it may be that the Fair Trading Act will be amended in due course. 114 I have concluded that s 995 of the Corporations Law applies because the relevant conduct was in connection with dealing in securities. That section does not require that the conduct be in trade or commerce, but both s 12DA of the ASIC Act and s 42 of the Fair Trading Act contain that requirement. In Fraser v NRMA Holding Ltd (1995) 55 FCR 452, 464 the Full Federal Court held that the conduct of sending a ‘prospectus’ for demutualisation of the two NRMA companies to their members was in trade or commerce, but the point is not elaborated. In NRMA Ltd v Yates [1999] NSWSC 859 Santow J held, for the purposes of s 42, that the conduct of a director of NRMA in publishing a misleading advertisement which alleged that the NRMA board was guilty of ‘great waste and mismanagement’ was engaged in for the purpose of promoting a campaign for the election of like-minded directors to the board of NRMA in order to avoid further waste and mismanagement, and in that way to influence the future trade and commerce of NRMA by changing its corporate governance. In Yates v Whitlam [1999] NSWSC 976 Windeyer J held that the conduct of the defendants in publishing advertisements seeking support for their re-election to the board was not conduct in trade or commerce, on the ground that it was part of the conduct involved in standing for election and such conduct is not intrinsically a business or professional activity. Assuming both of those cases to be correctly decided, the point of distinction appears to be that in the first case the advertisement was by a director seeking to influence the future commercial conduct of the board, while in the latter the advertisement was purely an election advertisement. In the present case I regard it as beyond doubt that the conduct of sending to members a proposal for a merger of their corporation with another, and commenting on it by reference to a restructure proposal which would lead to the listing and trading of shares in the corporation, is conduct in trade or commerce. It follows that ss 12DA and 42, as well as s 995, are applicable in the present case. 115 The remedies for contravention of s 12DA of the ASIC Act and s 42 of the Fair Trading Act are very similar to the remedies for contravention of s 52 of the Trade Practices Act. As the Full Federal Court noted in Fraser v NRMA Holding Ltd 55 FCR at 464, the scope of the remedies available under the Corporations Law in the event of a contravention s 995 may be greater than in the case of s 52. The difference may be significant in a case where the Court is asked to make an order requiring disclosure of information or the publication of advertisements. Section 12GE of the ASIC Act, which appears to be based on s 80A of the Trade Practices Act, empowers the Court to make such an order on the application of the Minister or ASIC. In the case of the Fair Trading Act s 67 refers to an application by the Minister or the Director-General of the Department of Fair Trading. It may be that an order of that specific kind cannot be made on the application of a private litigant. That would not necessarily prevent the Court from granting an injunction to restrain continuance or repetition of misleading conduct, with liberty to apply, which could be exercised if the risk of continuation of misleading conduct was removed by corrective disclosure: see Fraser v NRMA Holdings Ltd (1994) 14 ASCR 656, 685 per Gummow J. The remedial provisions of the Corporations Law are in a rather different form, but one obvious source of jurisdiction to make an order requiring corrective advertising, s 1114, is available relevantly only on the application of ASIC. Moreover, if an application is made by ASIC for an order for publication under s 12GE, the jurisdiction to deal with it is confined to the Federal Court under s 12GJ, while there is no equivalent restriction on this Court’s jurisdiction to make an order under s 1114.
The Jurisdiction Issue
116 Counsel for the defendants submitted that if the Court concludes, as I have, that the 6 September Materials were misleading or deceptive or likely to mislead or deceive, I should allow further submissions to be made as to the most appropriate form of relief. I agree that this is the proper course. However, it is appropriate that I should make some observations on the general question of relief. 117 I have concluded that the change of vote procedure was not authorised by the Act, the Regulation and the Rules of Dairy Farmers, and additionally, that the procedure which was used was incompatible with the implied requirement that the ballot process be a secret ballot process. It seems to follow that the replacement votes cast pursuant to the defective procedure must be disregarded. 118 A more difficult question is whether the original votes which have already been cast must also be disregarded. Subject to being persuaded otherwise by submissions of the parties, it seems to me that there are essentially two alternatives. One is to take the view that in the events which have happened, the original votes cannot be relied upon as a true expression of the will of the members, because they were either cast without knowledge of the material information relating to the Parmalat Proposal, and therefore were uninformed votes, or they were cast after misleading information about the Parmalat Proposal was supplied in the 6 September Materials. The other alternative (assuming an appropriate rule change can be made) is to take the view that votes which have been cast should be regarded as valid, provided that all members are given the opportunity to replace their votes in a procedure which complies with all relevant legal requirements including the requirement for a secret ballot. 119 The second alternative raises an important issue of fairness, along the lines of the issue discussed by Santow J in Re Advance Bank Australia Ltd (1997) 22 ACSR 513, 533 ff. In His Honour’s words (at 535), the question is whether management should be allowed to ‘conscript the benefits of shareholder apathy’, as they would if votes, which have already been cast by members who do not bother to replace them after full disclosure is made, are treated as valid and effective. Another question, not wholly separate from the ‘inertia’ question, is whether I should take the view that the defects in the 6 September Materials are so serious and fundamental that, in effect, the well has been poisoned and that supplementary, corrective disclosure cannot reverse the misleading impression created by the 6 September Materials. If I were to take that view, it may follow that the entire disclosure process should be re-commenced. 120 My present inclination is to hold that the statutory procedure for approval of a scheme of arrangement under Part 13 of the Act involves giving the proponents of the scheme the benefit of the inertia factor. This is because Part 13 envisages that the postal voting procedure will be conducted over a period of time. Given that, as I have held, the directors’ duty to disclose material new information continues during that time, the view that the proponents of the scheme should not have the benefit of the inertia of members who have already voted would mean that if a disclosable material change occurs during the postal voting process, the postal vote must start again, whatever be the cost and disruption that may follow. That seems to me to be a conclusion not required by the law, and one which should be avoided if possible. Consequently, in a case where a postal ballot is involved, one may have to accept that the proponents of the scheme should have the benefit of the inertia of members who have already voted before supplementary disclosure is made and do not subsequently bother to vote again. 121 As to whether the defective 6 September Materials have poisoned the well to such a degree that one must start the entire disclosure process again, my present inclination is to say that though the deficiencies in the Materials are serious, the most serious problem relates to E&Y’s opinion, and it could probably be overcome if an informative and reasoned opinion could be produced, and supplied to members, with a statement which expressly negatives the other misleading aspects of the 6 September Materials. But I assume the parties will have submissions to make on that point. 122 This leads me to the view, a very provisional one at the moment, that it may be possible for the existing scheme procedure to be saved by supplementary disclosure and the adoption of a procedure which validly permits all members to cast replacement votes in a secret ballot process. Such an outcome assumes that it will be possible for Dairy Farmers to adopt an authorising rule to permit the change of vote procedure. As I have mentioned, s 112 of the Act permits the rules of a co-operative to be altered by resolution passed by the board if, inter alia, the Registrar is satisfied that the approval of the alteration by the members of the co-operative is not necessary and alteration by the board would be appropriate. Without wishing to pre-empt or interfere with the Registrar’s discretion, it may be helpful for me to say that if an application were made for the Registrar’s approval for the adoption of a change of vote rule which reflects the principles in this judgment, the Registrar could have regard to all of the special circumstances which I have set out and having done so, may find it not unreasonable to approve such a rule without requiring a special resolution of the members. 123 Once these matters have been addressed, a question may arise as to the power of the Court to make an order requiring corrective disclosure or advertising, on the application of a private litigant. The Court will be assisted by the submissions of the parties on this question, in light of the observations made above.
The Relief Issue
124 I answer the separate questions as follows:
Conclusion
1.1 The procedure with respect to change of votes was not a lawful procedure.1.2 The information supplied to members and MCU holders in the 6 September Materials was misleading or deceptive or likely to mislead or deceive, and consequently by sending the 6 September Materials to members and MCU holders the first and second defendants engaged in conduct in contravention of s 12DA of the Australian Securities and Investments Commission Act 1989 (Cth), s 995 of the Corporations Law and s 42 of the Fair Trading Act 1987 (NSW).
1.3, 1.4 and 1.5 The proceedings will be adjourned to enable the parties to make submissions with respect to relief having regard to these reasons for judgment.
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Last Modified: 10/13/1999
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