Clements Marshall Consolidated Limited v ENT Limited
[1988] TASSC 17
•7 January 1988
TASSC A1/1988
CITATION: Clements Marshall Consolidated Limited v ENT Limited [1988] TASSC 17; A1/1988
PARTIES: CLEMENTS MARSHALL CONSOLIDATED LIMITED
v
ENT LIMITED
TITLE OF COURT: SUPREME COURT OF TASMANIA
FILE NO/S: M536/1987
DELIVERED ON: 7 January 1988
JUDGMENT OF: Neasey J
Judgment Number: 1/1988
Number of paragraphs: 29
Serial No 1/1988
List "A"
File No M536/1987
CLEMENTS MARSHALL CONSOLIDATED LIMITED (Applicant)
v ENT LIMITED (Respondent)
REASONS FOR JUDGMENT NEASEY J
7 January 1988
On 17 December 1987 an interim injunction was granted ex parte on the application of Clements Marshall Consolidated Limited ("Clements") against ENT Limited ("ENT"), restraining the latter company until 23 December 1987 from dispatching to shareholders of Clements offers referred to in a Part A statement purporting to constitute a take–over scheme. The Part A statement was registered by the Commissioner for Corporate Affairs for Tasmania as delegate of the National Companies and Securities Commission ("the Commission") on 3 December 1987. On 23 December the parties agreed that I should hear and dispose finally of Clements' originating application filed on 16 December. In that application, Clements sought declaratory and injunctive relief against ENT upon a number of grounds, alleging that the Part A statement contravenes certain provisions of the Companies (Acquisition of Shares) (Tasmania) Code ("the Code") and, further or in the alternative, contains false information.
At the same hearing on 23 December 1987, ENT, the respondent in the first proceeding, produced its own originating application, which had been filed in the court on that day, seeking a declaration that its Part A statement registered on 3 December does comply with the Code; and alternatively, a declaration pursuant to s48 of the Code that the Part A statement and offer by the applicant have full force and effect and be treated as complying with the Code, if the court should find that they contravene provisions of the Code in certain respects. The parties further agreed that the two applications should be heard together, and that both be determined finally. It was also agreed that the evidence before the court in the application by Clements should be taken to be evidence in the application by ENT for relief under s48.
Clements is a company incorporated in Tasmania, having an authorised share capital of $10,000,000, divided into 20 million shares or "stock units" of 50 cents each. The issued share capital of Clements consists of 18,055,990 ordinary shares of 50 cents each, fully paid up, and 225,000 "employee shares" of 50 cents each, paid to 1 cent. ENT is also a company incorporated in Tasmania, and is a major shareholder in Clements. By its Part A statement registered on 3 December 1987, ENT proposes to make offers constituting a take–over scheme under the Code to all holders of shares in Clements, offering to purchase 25 per cent of each holding respectively.
The Part A statement registered by the Commission and served on Clements on 3 December last is accompanied by a copy of one of the proposed offers. ("Clements" is referred to therein as "CMC"). Relevant parts include the following:–
"1 Offer
ENT offers to purchase 25 per cent of the shareholder’s CMC shares upon the terms and conditions set out in this offer.
2 Consideration
(a)The consideration for the purchase of the shareholder‘s fully paid CMC shares the subject of this offer shall be the payment of $2.50 cash per such share.
(b)The consideration for the purchase of the shareholder’s partly paid CMC shares the subject of this offer shall be the cash amount per such share arrived at by deducting, in the case of partly paid CMC shares with an issue price of less than $2.50, the issue price of such partly paid CMC shares from the amount of $2.50. The consideration for the purchase of the share– holder‘s partly paid CMC shares the subject of this offer with an issue price of more than $2.50 shall be the payment of $2.50 cash per such share. Full details of the partly paid CMC shares and of the consideration being offered for the shareholder’s partly paid CMC shares the subject of this offer are set out in Appendix I."
Clements seeks relief against ENT upon three grounds. I shall deal with each of these in turn.
The "class of shares" question
As indicated above, the proposed offer relates both to ordinary shares of 50 cents, all of which are fully paid up and constitute the great bulk in number of the issued share capital in Clements, and 225,000 "employee shares" of 50 cents each, paid to 1 cent. The consideration offered for ordinary shares is different from that offered for most of the employee shares. In respect of the latter, the consideration offered differs also as between those taken up at different issue prices. Clements argues that the proposed offers are not made under a valid take–over scheme for the purposes of the Code because, in the first place, the offers relate to more than one class of shares, whereas subs 16(2) of the Code requires that in order to constitute a valid take–over scheme under the Code the offers must relate to one class of shares only. It is submitted that the ordinary shares and employee shares constitute at least two classes.
Article 8 of the Articles of Association of Clements provides:–
"EMPLOYEE SHARES
8The Directors shall have power from time to time (subject to the provisions of Article 105) to issue to any employee by way of remuneration or participation in profits any shares which may be known as Employee Shares and may be issued with and subject to such rights privileges conditions and restrictions as the Directors may prescribe but so far as may not be prescribed any such share shall have the same rights and privileges as Ordinary Shares."
Article 105 is not presently material. In January 1982 the board of directors of Clements proposed to their shareholders that an "executive share plan" should be set up as an incentive scheme upon the following lines. The directors should be empowered to issue up to 7.5 per cent of the issued capital of the company in the form of employee shares, and should in the first place offer approximately 5 per cent of the issued capital to a number of senior executives. The shares were to be paid initially to 1 cent only, the unpaid amount being payable at the election of the executive, or on resignation or within five years after retirement or death. They were not to be listed, would not carry dividend entitlement until fully paid, but were to participate in any future bonus and new issues by the company. The issue price at which the shares were to be offered was to be determined by the directors after taking independent advice, and was to be not less than 90 per cent of the stock market price of the company‘s shares on the day on which the respective offers were made.
With the approval of shareholders, the directors made several issues of such shares to various executives, as follows –
(a)In June 1982, 240,000 shares were issued in various parcels to nine executives, each paid up to 1 cent, at an issue price of $1.05, being 50 cents capital and 55 cents premium. Two of those executives subsequently paid for their shares in full, whereupon in accordance with the plan they became identical with other fully paid up shares. As at the date of these proceedings, the remaining 185,000 of that allotment were still paid up to 1 cent only.
(b)In December 1983 Mr. R.G. Wilkinson was allotted 15,000 shares at an issue price of $1.32, being 50 cents capital and 82 cents premium, paid up to 1 cent. Mr. Wilkinson subsequently died, and these shares were transferred to his widow and remain paid up to 1 cent.
(c)In February 1987, 25,000 shares were issued to Mr V S Younger at $2.85 each, being 50 cents capital and $2.35 premium, and these remain paid up to 1 cent.
The application forms by which the executives applied for employee shares offered to them recorded the terms upon which the issue would be made. In addition to those already set out, these included a term that such shares should not be subject to any call for the unpaid portion of the issue price other than a call made (in substance) at the request of the holder, and that such request might be for a call to be made for any part of the unpaid portion of the issue price. It was also provided that the executive or transferee of the shares might request that the call be made in respect of part only of the shares held by him under the plan. Other terms related to the rules which should apply in respect of such shares in the event of the dismissal or resignation of the executive, or the lapse of five years after the death or retirement of the owner of a share issued under the plan.
Two questions arise under the "class of shares" issue. They are –
(1)Whether subs 16(2) of the Code requires that offers to acquire shares, in order to constitute a valid take–over scheme under the Code, shall relate to one class of shares only? There is no doubt that it does. That is the plain meaning of the introductory words of subs 16(2), and it is carried through in the remaining provisions of that lengthy and detailed subsection. See also, the Minister’s Explanatory Memorandum, circulated by the Honourable R V Garland MP, Minister for Business and Consumer Affairs, concerning the Companies (Acquisition of Shares) Bill 1980, and the Companies (Acquisition of Shares – Fees) Bill 1980, 11544/80 – L CAT No 8036882, para 13(d)(i), to which I am entitled to refer – Acts Interpretation Act 1901 (Cth), s15AB (inserted by Acts Interpretation Act 1984, No 27 of 1984, s7); also H A J Ford, Principles of Company Law, 4th edn, p569, para 2014, n62.
(2)Whether the "employee shares" constitute a different class from the ordinary shares? In my opinion they do. The expression "class of shares" has no special meaning in subs 16(2) of the Code. It is a simple English expression, commonly used by text writers in company law. It refers to a category of shares which differs sufficiently in respect of rights, benefits, disabilities, or other incidents, as to make it distinguishable from any other category of shares, if there are any, in the capital structure of the company. The treatment of the subject "classes of shares", in, for example, Ford, op cit, chap 9, and in Gore–Brown on Companies, 42nd edn, pp 302–315, illustrates the meaning of this expression in subs 16(2). (Note that Gore–Brown, ibid, at p 310, mentions employees' shares as a class). In the present case the employee shares are a class separate from the ordinary shares, because they differ from them in respect of voting rights (pursuant to Article 83), dividend rights, liability to calls, and other aspects. Consequently, the offers proposed to be made under this take–over scheme do not comply with subs 16(2) of the Code because they do not relate to one class of shares only.
I must then consider whether an order should be made under subs 48(1) of the Code, which provides –
"Where a person has contravened or failed to comply with a provision of this Code and the Court is satisfied that the contravention or failure was due to inadvertence, mistake or circumstances beyond his control and that the contravention or failure ought to be excused or is satisfied on any other grounds that the contravention or failure ought to be excused, the court may, on the application of an interested person, make such order as it thinks fit declaring any act or matter not to be invalid by reason of the contravention or failure and declaring any act or matter to have force or effect as if there had been no such contravention or failure".
The originating application by ENT seeks in the first place a declaration that the Part A statement and offer by ENT registered on 3 December 1987 comply with the Code; but since on the basis of the foregoing such a declaration cannot be made, I turn to this applicant's alternative application that a declaration should be made under s48 that the Part A statement and offer have full force and effect and comply with the Code, and should be deemed to be and at all times to have been a Part A statement and offer pursuant to the Code, notwithstanding that they relate to all the shares in Clements, and not to one class only of those shares.
In support of its application, ENT has filed an affidavit by solicitor Mr D J Simpson which states in some detail the course of his consideration as a solicitor in the legal firm advising the applicant of the form which the Part A statement and offer should take, and of his applications to the Commission for orders under s58 of the Code modifying or varying its application in certain respects so as to accommodate the possibility that the employee shares in Clements constituted a separate class or classes. The course of this communication is put forward by the applicant as being relevant to the Court's consideration of an order under s48. I agree that it is relevant. Mr. Simpson deposes in his affidavit that, having been instructed by ENT to prepare a bid for the fully paid shares only in the capital of Clements, his firm then considered whether the partly paid (ie employee) shares in Clements formed different classes of shares, inter se and also from the fully paid shares. Consequently, his firm wrote to the Commission on 11 November 1987, setting out arguments which indicated that to be a probability, and, on the basis that ENT wished to offer for the fully paid shares only, seeking a modification or variation from the Commission under s58 which would have had the effect of declaring the fully paid shares as being a "class", distinct from shares not fully paid up. An officer of the Commission informed the deponent orally that this application would not be granted. Thereupon, Mr Simpson's firm was instructed by ENT to prepare a bid for all the shares in the capital of Clements.
The Part A statement was registered on December 3, and later in December, ENT's legal advisers made further applications to the Commission. The first of these was an application to the Commission under s58 for a modification to s16 which would have had the effect if granted of deeming all of the partly paid (employee) shares to constitute one class of shares, irrespective of the price at which they had been issued. The Commission apparently responded to that application, because the second of the communications referred to was a letter by Mr. Simpson's firm to the Commission, dated 21 December 1987, referring to the Commission‘s response and suggesting some further amendments to the declaration which the Commission was apparently considering. Mr Simpson's affidavit concludes by saying that at the time it was sworn on 23 December, the Commission had as yet executed no instrument of declaration, and that the only reason why the Part A statement and offer related to all the shares was that in the light of the Commission‘s refusal to accede to its first application, his firm considered that registration would not occur if they did otherwise.
The court’s power to excuse under s48 a contravention or failure to comply with a provision of the Code depends upon the court being satisfied that the contravention or failure was due to inadvertence, mistake or circumstances beyond its control, and ought to be excused; or that on any other grounds the contravention or failure ought to be excused. In the first place, I am not satisfied that the contravention or failure to observe the provisions of subs 16(2) was due to inadvertence, mistake, or circumstances beyond the control of ENT. The contravention or failure was certainly not due to inadvertence. The correspondence with the Commission shows that ENT by its legal advisers was well aware of all relevant aspects of the subs 16(2) question. No "mistake" was made about any relevant matter, nor was the course taken by ENT beyond its control. It shaped its conduct on the basis of a fully informed decision as to what constituted its best interest, in circumstances which it may have seen correctly as posing something of a dilemma. Consequently, it would not be right to excuse the contravention or failure under the first arm of subs 48(1).
Further, I am not persuaded that there are any other grounds upon which the contravention or failure to comply should be excused. It was submitted in argument that no sound commercial purpose of any kind would be served by a decision of this Court which would have the effect of preventing the offers being sent out in the form indicated by the Part A statement, in that the offers as they stand are fair to all offerees, whether they are holders of fully paid up or partly paid up shares, that there is no undue complexity or tendency to confuse or mislead offerees imported by the fact that the offer seeks to deal with more than one class of shares (if it does), and accordingly that it would be proper to exercise the power to excuse under s48. I am not persuaded by that argument. If these propositions are correct, which I think they might well be, they are matters which it may be proper for the Commission to take into account in deciding whether it is prepared to accede to an application to modify or vary under s58; but they are not matters which, in my view, would persuade the court to excuse a contravention. It is a basic and important requirement of the Code that a take–over offer should relate to one class of shares only, for reasons which have to do with avoidance of undue complexity or any tendency to confuse or mislead offerees. I am not expressing a view that there could never be a breach of subs 16(2) by way of offering for more than one class of shares which the court might excuse, but I am not satisfied in this case that there is any ground on which the contravention ought to be excused.
The consideration question
Para 16(2)(b) requires in substance that offers to acquire shares are made under a take–over scheme for the purposes of the Code if, and only if:–
"the offers are the same disregarding –
(ii)any differences in the considerations specified for each share in the offers that are attributable only to the fact that the offers relate to shares having different accrued dividend entitlements or relate to shares on which different amounts are paid up".
There are no differences in accrued dividend entitlements here; and so, in relation to the present take–over scheme, the offers must be "the same", except that any differences in the consideration specified for each share may be disregarded if such differences are attributable only to the fact that they relate to shares on which different amounts are paid up. There are differences in the considerations specified in the offer. The differences relate to employee shares, which as indicated earlier were issued in three groups. Those which were issued at a price of $1.05 are offered $1.45 per share; those issued at $1.32 are offered $1.18 per share, and those issued at $2.85 are offered the same amount as is offered in respect of the ordinary shares, namely $2.50. The question is whether those differences are attributable only to the fact that the offers relate to shares on which different amounts are paid up. It is plain that they are not. The differences in the consideration specified are attributable mainly to the respective issue prices. The differences appear to have some relation to the amount paid up on the employee shares, which in every case is 1 cent, because that amount is so small as to have been disregarded, no doubt intentionally, in the arithmetical calculation by which the offer prices were fixed. But the differences in consideration offered are not attributable "only" to the fact that the offers relate to shares on which different amounts are paid up, and consequently those differences may not be disregarded.
Thus on the consideration issue there is a contravention of subs 16(2)(b), and ENT applies under s48 that such contravention should be excused by the court. This contravention or failure to comply bears some relation to the class of shares question; in the sense that, where the offer is not confined to one class of shares, it is difficult to eliminate further contraventions of this kind. This is in my view a not inconsequential contravention of the schematic design of the Code, even if the offers for the employee shares themselves accord with commercial sense and fairness, and for reasons which are in substance the same as those given in respect of the class of shares question, I am not satisfied that the contravention ought to be excused by the court.
The false or misleading information question
The issue arises in this way. Paragraph 16(2)(d) provides in effect that in order for a take–over scheme to be valid under the Code, the offeror must, not earlier than 28 days and not later than 14 days before the offers are dispatched, serve on the target company a Part A statement relating to the offers. "Part A statement" is defined by s6 as meaning "a statement in writing that complies with the requirements of Part A of the Schedule and of subsection 16(2A)". Subsection 44(1) provides, inter alia, that where a statement which purports to be a Part A statement served under para 16(2)(d) in a take–over offer contains matter which is false in a material particular or is materially misleading in the form or context in which it appears, that is an offence by a person to whom the subsection applies. (See subs 44(5)).
The Schedule to the Code sets out many detailed requirements as to the contents of Part A statements. One of those requirements, by paragraph 1(c) of Part A of the Schedule, is that the statement shall set out full particulars of the shares in the target company to which the offeror is entitled or, if there are no such shares, set out a statement to that effect. Subsection 48(3) applies the remedial powers of the court to Part A statements because it provides, in part, that where a document purporting to be a Part A statement is served on a company, does not comply with all the requirements of Part A of the Schedule, and the court is satisfied on application by the person by whom or on whose behalf the document was served that the non–compliance was due to inadvertence, mistake or circumstances beyond his control, and that the non–compliance ought to be disregarded, or is satisfied on any other grounds that the non–compliance ought to be disregarded, the court may make an order directing that the document shall be deemed to be, and at all relevant times to have been, a Part A statement.
The Part A statement served by ENT on the target company, Clements, on 3 December 1987 contains in paragraph 5 thereof, under a heading, "ENT Entitlement to CMC Shares or Marketable Securities", and after setting out ENT‘s entitlement for the purposes of the Code to shares in Clements, the following averment:–
"In addition to the above (but not included in ENT’s entitlement), 'The Examiner' Executives Provident Fund Management Company holds 551,932 fully paid CMC Shares, being 63,040 fully paid CMC Shares held as custodian trustee of the ENT Limited Staff Superannuation Fund and 488,892 fully paid CMC Shares as custodian trustee for 'The Examiner' Executives Provident Fund. Fully paid CMC Shares held by 'The Examiner' Executives Provident Fund Management Company are not included in ENT's entitlement because although the only members of 'The Examiner' Executives Provident Fund Management Company are wholly owned subsidiaries of ENT, the articles of 'The Examiner' Executives Provident Fund Management Company require three members of the Board of Directors of 'The Examiner' Executives Provident Fund Management Company to be selected by the employees who are the members of 'The Examiner' Executives Provident Fund. ..."
It is now common ground that this statement contains an error, in that "the only members" of "The Examiner" Executives Provident Fund Management Company ("the Examiner Company") are not wholly owned subsidiaries of ENT, as stated therein. However, it was submitted at the hearing that the statement is otherwise false and misleading because ENT is "entitled" under the Code to the shares in Clements held by the Examiner Company.
That submission depends upon the following propositions. The evidence before me indicates, and it is common ground, that there are six directors on the Board of the offeror, ENT, and six on the Board of the Examiner Company, and that five of the six are common to both. Subsection 7(3) of the Code provides in substance that, for the purposes of the Code, shares in a company to which a person is entitled include shares in which that person has a relevant interest, and shares in which a person who is an associate of that person has a relevant interest. Subsection 7(5) provides in effect that an "associate" includes, if the "person" is a corporation, a director of that corporation.
Subsection 9(1) then provides that a person has a relevant interest in a share in a corporation for the purposes of the Code if that person has power, where the share is a voting share, to exercise, or to control the exercise of, the right to vote attached to that share; or to dispose of, or to exercise control over the disposal of that share whether or not it is a voting share. Subsection 9(2) provides that it is immaterial for the purposes of the section whether the power of a person to exercise, or to control the exercise of, the right to vote attached to a voting share, or to dispose of, or to exercise control over the disposal of, a share, is express or implied or formal or informal, is exercised alone or jointly with another person or persons, cannot be related to a particular share, or is, or is capable of being made, subject to restraint or restriction, and any other such power exercisable by a person jointly with another person or other persons shall, for those purposes, be deemed to be exercisable by either or any of those persons. Subsection 9(3) then provides, inter alia, that a reference in s9 to power or control includes a reference to power or control that is direct or indirect. There are further detailed provisions in s9 as to relevant interests in shares which may be applicable, but I need not examine them in detail.
The memorandum and articles of the Examiner Company are in evidence before me, and I have no doubt, and it is not suggested otherwise, that the five members of the Board of Directors of the Examiner Company who are also Directors of ENT, each of whom is therefore an "associate" of ENT, together have power to exercise or control the exercise of the right to vote attached to shares in Clements held by the Examiner Company, and to dispose of, or to exercise control over the disposal of, any shares in Clements held by the Examiner Company which are not voting shares. That being so, each of those five directors has, pursuant to subss 9(2) and 9(3), the same power to exercise or control the exercise of the right to vote attached to such shares, or to dispose of or exercise control over the disposal of such shares, respectively, as they together have. Thus, ENT has, for the purposes of the Code, a relevant interest in the shares in Clements held by the Examiner Company, and so is "entitled" to those shares for the purposes of the Code; and such entitlement should have been set out in the Part A statement, pursuant to para 1(c) of Part A of the Schedule.
There is, therefore, a contravention of or failure to comply with para 16(2)(d), and such contravention or failure may be the subject of an order under s47, as is sought by Clements. Such non–compliance or failure may, however, be, in effect, excused by the court under s8, by way of directing that the Part A statement shall be deemed to be, and at all relevant times to have been, a Part A statement within the terms of the definition in s6. Such an order is sought in the application made by ENT.
If this were the only non–compliance or failure in respect of which I had to consider whether an order should be made under s48, I would make the order. The material information is in fact disclosed in the Part A statement, perhaps pursuant to the requirement in para 4(f) of Part A of the Schedule to disclose "any other information material to the making of a decision by an offeree whether or not to accept an offer, ........"; but in any event, is disclosed. That those shares were not stated to be part of the entitlement of ENT was I am satisfied due to inadvertence, and "mistake" as to the necessity of including those shares as part of ENT’s entitlement. However, since in relation to the other two instances of non–compliance I am unable in either case to make the order sought under s48, I cannot see that any purpose would be served by making an order under subs 48(3) in respect of this non–compliance.
The remaining question is, what orders should be made under s47, pursuant to the application by Clements? In general terms, I shall make orders in favour of Clements granting the declaratory and injunctive relief which it seeks, on the grounds of the failure to comply in respect of the class of shares question, and the consideration question, but I shall give both parties leave to speak to the minutes of the order.
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