Re Australian Co-operative Foods Ltd

[2008] NSWSC 1221

CITATION:	Australian Co-operative Foods Ltd [2008] NSWSC 1221
HEARING DATE(S):	08/10/08, 18/11/08
JUDGMENT DATE :	18 November 2008
JURISDICTION:	Equity Division Corporations List
JUDGMENT OF:	Barrett J
EX TEMPORE JUDGMENT DATE:	18 November 2008
DECISION:	Arrangement approved subject to amendment.
CATCHWORDS:	CORPORATIONS - bodies corporate other than companies and associations - co-operative registered under Co-operatives Act 1992 - application under s 344 for order approving arrangement with members - arrangement agreed to by special resolution passed by special postal ballot - all shares in co-operative to be transferred to acquiring party pursuant to arrangement - inactive members' shares affected even though they have no voting rights - whether "plebiscite" of inactive members desirable - whether arrangement proposed for avoidance purpose referred to in s 353 - function of court under that section discussed - power under s 344(3) to approve subject to amendment - whether amendment should be accepted - CORPORATIONS - companies registered under Corporations Act 2001 (Cth) - proposed registration of co-operative as such a company - continuity of existence of legal entity - continuity of existence of shares and interests in shares - CORPORATIONS - regulation and control of takeovers - acquisitions beyond 20% takeover threshold - where party has "relevant interest" in 100% of shares before body becomes a Corporations Act company - whether subsequent transfer of 100% of shares to that party involves breach of 20% threshold
LEGISLATION CITED:	Companies Act 1961, s 181 Companies Act 1981 (Cth), s 318 Co-operatives Act 1992, ss 29, 188, 190, 289, 298, 316, 317, 318, 321, 344, 353 Corporate Law Economic Reform Program Act 1999 (Cth) Corporations Act 2001 (Cth), Chapter 6, Division 2 Part 11, Division 1 Part 13, Division 3 Part 13, ss 9, 119, 411, 601BA, 601BC, 601BD, 601BN, 606, 608, 610
CATEGORY:	Principal judgment
CASES CITED:	Australian Securities and Investments Commission v Medical Defence Association of Western Australia Inc (2005) FCAFC 173 Australian Securities and Investments Commission v Yandal Gold Pty Ltd [1999] FCA 799; (1999) 32 ACSR 317 North Sydney Brick and Tile Co Ltd v Darvall (No 2) (1986) 5 NSWLR 681 Re Australian Co-operative Foods Ltd [2001] NSWSC 382; (2001) 38 ACSR 71 Re Herald and Weekly Times Ltd; TVW Enterprises Pty Ltd and Queensland Press Ltd (1983) 7 ACLR 821 Re Independent Practitioner Network Ltd (No 2) [2008] FCA 1593 Re Investorinfo Ltd [2005] FCA 1848
PARTIES:	Australian Co-operative Foods Ltd - Plaintiff
FILE NUMBER(S):	SC 5035/08
COUNSEL:	Mr M B Oakes SC/Mr R M Foreman - Plaintiff Mr B F Katekar - Registrar of Co-operatives Mr T F Bathurst QC - National Foods Ltd by leave
SOLICITORS:	Allens Arthur Robinson - Plaintiff Crown Solicitor - Registrar of Companies Freehills - National Foods Ltd

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
CORPORATIONS LIST

BARRETT J

TUIESDAY, 18 NOVEMBER 2008

5035/08 AUSTRALIAN CO-OPERATIVE FOODS LTD

JUDGMENT

1 I have before me an application under s 344 of the Co-operatives Act 1992 for an order approving an arrangement between Australian Co-operative Foods Ltd (or “ACF”) and its members as a whole. Section 344 is in these terms:

“(1) A compromise or arrangement is binding if and only if it is approved by order of the Court and it is agreed to:
(a) if the compromise or arrangement is between the co-operative and any of its creditors—at a court ordered meeting by a majority in number of the creditors concerned who are present and voting (in person or by proxy), being a majority whose debts or claims against the co-operative amount to at least 75% of the total of the debts and claims of all those creditors who are present and voting (in person or by proxy), or
(b) if the compromise or arrangement is between the co-operative and any of its members—by the members concerned, by special resolution passed by means of a special postal ballot.


(2) The court ordered meeting referred to in subsection (1) (a) is a meeting convened in accordance with an order of the Court under this Part.

(3) The Court may grant its approval to a compromise or arrangement subject to such alterations or conditions as it thinks just.

(4) An order of the Court approving a compromise or arrangement does not have any effect until an office copy of the order is lodged with the Registrar. On the copy being lodged, the order takes effect from the date of lodgment or such earlier date as the Court specifies in the order.”

2 As envisaged by s 344(1)(b), the proposed arrangement was submitted to members for approval by way of a special postal ballot. In fact, several elements of the overall transaction requiring approval in that way were submitted together. Some 88 percent of the members of ACF entitled to vote exercised their voting rights upon the ballot. Of those who voted, 96.3 percent cast positive votes. Approval sufficient to satisfy the requirements under s 189 and s 190 for a special resolution upon a special postal ballot (in essence, approval by at least 75 percent of the members voting) was therefore forthcoming.

3 The outcome of the proposed arrangement, as it takes effect in the context of pre-existing contractual provisions, will be that every member's shares in ACF are transferred to National Foods Limited and each member receives a cash consideration. The cash consideration will be provided by National Foods and, as to part, will take the form of a special dividend payable by ACF but funded by National Foods.

4 There are four matters to which it is appropriate to make special reference upon this application. The first matter concerns the so-called inactive members of ACF. They hold shares in ACF but they are no longer producers of milk, so that their shares are subject to forfeiture upon the expiration of a particular period.

5 These inactive members will participate under the arrangement along with the active members and their shares will be dealt with as the arrangement envisages. But the inactive members have no voting rights. They have therefore not participated in the special postal ballot which has been held and which has, by the very significant majority I have mentioned, indicated agreement to the arrangement.

6 For reasons given by Santow J in Re Australian Co-operative Foods Ltd [2001] NSWSC 382; (2001) 38 ACSR 71, I am satisfied that an arrangement binding on both active and inactive members may be produced under s 344 by a combination of a special resolution carried upon a special postal ballot and an approving order of the court; and that this is so even though the active members alone have voted on the ballot.

7 The concept of classes of members that plays a part in the generally analogous provisions of s 411 of the Corporations Act 2001 (Cth) finds no place in the Co-operatives Act. In the 2001 case Santow J raised the question whether what he called a plebiscite of inactive members should be held. In the result, there was no plebiscite and the matter was disposed of by means of a special postal ballot in which active members only participated.

8 Indeed, the purpose that the plebiscite might have served is unclear in the particular statutory context where the voting members have power to bring about various outcomes binding on the members as a whole, both voting and non-voting. The plebiscite possibility is one best left to one side for the future.

9 The second matter I wish to mention arises from an aspect of the overall plan under which ACF will become a Corporations Act company before the whole of the shares in ACF are actually transferred to it. This raises a question under Chapter 6 of the Corporations Act.

10 The shares held by each member of ACF will be transferred to National Foods on the implementation date. The effect of the arrangement as between ACF and each member will be to invest ACF with the member’s authority to transfer the member’s shares to National Foods. The arrangement will oblige ACF to exercise the member’s authority in that way. By separate covenants outside the four corners of the arrangement itself, National Foods has undertaken to pay the cash consideration to the holders of the ACF shares and ACF has agreed to procure the transfer of all the shares to National Foods using the authority of members derived from the arrangement.

11 Ownership of all shares in ACF by National Foods will contravene s 289 of the Co-operatives Act which imposes a 20 percent limit - or at least there would be a contravention of that section were it not for an exemption granted under s 298 by the Registrar. The exemption is expressed to be subject to two conditions: first, that the members and the court approve the scheme; and, second, that ACF is registered as a company under the Corporations Act within 3 months after the court's approval. In fact, the proposal as a whole contemplates such a conversion within a much shorter period.

12 The s 289 prohibition which has been relaxed in this case is a prohibition upon holding a "relevant interest" in more than 20 percent of the shares in a co-operative. Schedule 2 to the Co-operatives Act defines "relevant interest" in conceptually the same way as s 608 of the Corporations Act, although in words more reminiscent of those found in the corporations legislation before the commencement of the Corporate Law Economic Reform Program Act 1999 (Cth).

13 In essence and in over-simplified terms, a person has a “relevant interest” in a share in a co-operative if they have a power to dispose of or to control the disposal of the share or a power to exercise or control the exercise of the voting rights attached to the share. The basic approaches under the Corporations Act are, of course, the same.

14 The framework in which the arrangement is to become binding involves a fundamental change to the corporate status of ACF. The Co-operatives Act by s 316 allows a co-operative to apply to become registered as a company under the Corporations Act if that step is approved by special resolution by means of a special postal ballot. The ballot conducted for the purposes of the s 344 requirement included such a special resolution. The conversion of ACF to a Corporations Act company approved upon the ballot is an integral part of the overall proposal.

15 The Corporations Act in turn allows registration as a company under that Act of a body corporate that is not a company or a corporation sole. This is provided for in s 601BA. Registration must be in one of the established categories of company under that Act. The appropriate category in this case is that referred to in s 601BA(1)(c) - a public company limited by shares.

16 ACF is, by virtue of s 29 of the Co-operatives Act, a body corporate. It thus has the character upon which s 601BA of the Corporations Act is predicated.

17 The Corporations Act requires, in s 601BC(8)(b), that transfer of the incorporation of the body seeking registration as a company be authorised by the law of the place of its incorporation. That element is supplied in the case of a cooperative by s 316(5) of the Co-operatives Act:

“For the avoidance of doubt, a co-operative is authorised for the purposes of section 601BC (8) (d) of the Corporations Act to become registered as a company under that Act if the co-operative applies for the transfer in accordance with the provisions of this Division.”

18 There is no reason to doubt in this case that all substantive prerequisites for the making of an application under s 601BC of the Corporations Act have been satisfied. It may therefore be expected that, if the application actually made by ACF complies as to form and content with the detailed requirements of that section, registration as a company will be forthcoming.

19 By s 601BD(1) of the Corporations Act, ASIC is empowered to, "register the body as a company of the proposed type specified in the application" if an application is made under s 601BC. Upon registration "as a company", the body falls within the opening words of the definition of "company" in s 9 of the Corporations Act: "a company registered under this Act". Section 601BN makes it clear that the registration does not create a new legal entity – a message reinforced by s 321 of the Co-operatives Act which says that the “new body” is “the same entity as the body corporate constituted by the co-operative”.

20 Upon completion of the registration under the Corporations Act, s 317 and s 318 of the Co-operatives Act cause the status as a co-operative registered under that Act to be terminated. That causes s 29 of the Co-operatives Act to cease being the source of incorporation as a body corporate. The source of incorporation as a body corporate becomes instead s 119 of the Corporations Act. The possibility that that section is concerned only with registration as a company under s 118 is denied by the specific reference in s 119A to registration under s 601BC.

21 In summary, therefore, the parallel operation of the two enactments is that the body corporate existing by virtue of registration under the Co-Operatives Act becomes a body corporate existing by virtue of registration under the Corporations Act but no new legal entity is created and the body corporate existing after the transition is the same entity as the body corporate existing before the transition. After the transition, the body is a "company" as defined by s 9 of the Corporations Act. Before the transition it is not.

22 The two enactments have a complementary operation that avoids the complications that could otherwise arise as discussed in the judgment of Emmett J in Australian Securities and Investments Commission v Medical Defence Association of Western Australia Inc (2005) FCAFC 173 at [23]. The two pieces of legislation - one a State Act and the other a Commonwealth Act - operate together in a harmonious way.

23 It is made clear by necessary implication from s 601BC(2) of the Corporations Act that, in the case of a body seeking registration as a company limited by shares, the persons who hold shares in the body at the time of registration as a company continue to hold those shares thereafter. Shares as items of property and as units of the capital of a body corporate are recognised by the Corporations Act as existing before such registration and as continuing in existence in unchanged form despite the transition of the continuing entity from a body corporate owing its existence as such to one Act to a body corporate owing its existence as such to the other Act.

24 I mention the continuity of shares and shareholdings because it is relevant to the issue to be addressed under Chapter 6 of the Corporations Act. The issue arises because the conversion of ACF to a Corporations Act company will occur before transfers of shares in ACF are made to National Foods by ACF in exercise of the authority of each member to transfer. But the transfers will, of course, occur after the members' authority has become vested in ACF by the arrangement and after the creation of the contractual rights and obligations sourced in the implementation agreement.

25 The question is whether, by taking the transfers of shares in ACF after it has become a Corporations Act company, National Foods will contravene s 606 of the Corporations Act. That section prohibits the acquisition of a relevant interest in voting shares in an unlisted company with more than 50 members (which ACF will become upon conversion) if, as a result the acquisition, the acquiring person’s or someone else's voting power in the company increases from below 20 percent to more than 20 percent or from a point above 20 percent but below 90 percent.

26 Under s 610, a person's "voting power" is the percentage of the votes attached to all the voting shares in the company that is represented by the votes attached to the voting shares in which the person and the person’s associates have a relevant interest.

27 It is submitted on behalf of both ACF and National Foods that there will be no contravention of s 606 in this case. I accept that submission.

28 The power that National Foods will have in respect of the whole of the shares in ACF immediately before the conversion to a Corporations Act company includes a power to require ACF to exercise in its favour the authority (created by the arrangement) of each ACF member to transfer the member’s ACF shares and a power to require that ACF not exercise the member’s authority in any other way. That power will exist because of a combination of the statutory effect of the arrangement under the Co-operatives Act and the rights and obligations of ACF and National Foods created by the implementation agreement. The power will be both a positive power and a negative power to control disposal of each and every share in ACF.

29 That power on the part of National Foods will exist before and at the point at which ACF ceases to owe its existence as a body corporate to the Co-operatives Act and begins to owe its existence as a body corporate to the Corporations Act. Immediately before that point, the shares in ACF will be "voting shares" as defined by s 9 of the Corporations Act. The voting share definition refers to a "body corporate" (not a "company") and therefore extends to shares in a co-operative. Immediately after that point, the shares will continue to be “voting shares”. But they will then be “voting shares” in a “company”; and from that moment onwards, s 606 of the Corporations Act will regulate the acquisition of relevant interests in them.

30 Immediately before the transition, the power that National Foods has will amount to a "relevant interest" as defined by s 608 of the Corporations Act. That section defines "relevant interest" by reference to "securities", a term defined by s 92 in relation to "a body" not a "company". At that antecedent point, therefore, the situation will be one in which National Foods has a "relevant interest", in Corporations Act terms, in each and every share in ACF for the purposes of the Corporations Act (being a “relevant interest” that also exists under the Co-operatives Act definition but is the subject of the s 298 exemption).

31 At the point of ACF’s transition, the shares in its capital will continue in existence as will the powers of National Foods in relation to them and the “relevant interest”, in Corporations Act terms, of National Foods arising from or represented by those powers. The status of the shares as "voting shares" (as defined by the Corporations Act) will also continue. The only new factor relevant to s 606 of the Corporations Act will be that the shares, which are already "voting shares", will become voting shares in a "company".

32 At the subsequent point at which National Foods actually takes a transfer of all the shares in the newly existing Corporations Act company, National Foods will not acquire a relevant interest in those shares. This is because it will already have the relevant interest in them to which I have just referred.

33 It might be said that a new and different relevant interest will accrue to National Foods when it takes the transfers and again later when the transfers are registered. But I do not think that any such argument is supportable. Although relevant interests may arise from different circumstances and may be direct and indirect, some change or shift which causes a person's pre-existing power in relation to shares to alter its nature (although still of such a kind as to constitute a relevant interest) does not, I think, mean that a new relevant interest arises. The person had a relevant interest because of the original power and has a relevant interest because of the altered power. The person is throughout a person who has a relevant interest and the change or shift I have hypothesized does not mean that the person acquires something distinct from that which he or she already has.

34 This approach is, I think, consistent with that taken by O’Bryan J in Re Herald and Weekly Times Ltd; TVW Enterprises Pty Ltd and Queensland PressLtd (1983) 7 ACLR 821 and approved by Merkel J in Australian Securities and Investments Commission v Yandal Gold Pty Ltd [1999] FCA 799; (1999) 32 ACSR 317 at [96] and [97]; and also with the observations in the Court of Appeal in the case of North Sydney Brick and Tile Co Ltd v Darvall (No 2) (1986) 5 NSWLR 681 to which Mr Bathurst has referred.

35 I am satisfied that there will be no contravention of s 606 of the Corporations Act by reason of the effectuation of the arrangement and the overall proposal of which it forms part.

36 I turn now to the third matter I wish to mention briefly. Section 353 of the Co-operatives Act is as follows:

“(1) The Court need not approve a compromise or arrangement unless:
(a) it is satisfied that the compromise or arrangement has not been proposed for the purpose of enabling any person to avoid the operation of any of the provisions of Division 2 of Part 11 (Restrictions on certain share offers), and
(b) there is produced to the Court a statement in writing by the Registrar stating that the Registrar has no objection to the compromise or arrangement.

(2) The Court need not approve a compromise or arrangement merely because a statement by the Registrar stating that the Registrar has no objection to the compromise or arrangement has been produced to the Court.”

37 As was pointed out by Santow J in Re Australian Co-operative Foods Ltd (above), this provision differs from s 411(17) of the Corporations Act. Apart from anything else, paragraphs (a) and (b) of s 353(1) are joined by "and" not by "or". The "unless" specification is therefore not satisfied unless the court is both satisfied in terms of paragraph (a) and in receipt of a written statement of no objection by the Registrar as is envisaged by paragraph (b).

38 The court is, in this case, in receipt of a written statement by the Registrar in terms of paragraph (b). It is exhibited to Mr Langdon's affidavit. That leaves for consideration the question posed by paragraph (a). Before addressing that question, however, it is useful to dwell for a moment on the opening words of s 353(1): "The Court need not approve a compromise or arrangement unless". These also differ from the corresponding words in s 411(17) of the Corporations Act.

39 If the two conditions in paragraphs (a) and (b) of s 353(1) are found to be satisfied, what is the position in which the court is placed by the legislation? As I read the opening words, satisfaction of the two conditions removes the "need not" directive. But it does not, I think, convert "need not" into "need" or some other form indicating a duty or requirement. Rather, it seems to me, the court's discretion to give or withhold approval remains, but the matter of possible avoidance of Division 2 of Part 11 is removed from the matters to be taken into account when considering how the discretion should be exercised.

40 If, on the other hand, one or each of the paragraph (a) and (b) conditions is not satisfied the "need not approve" provision still confers a discretion but a discretion, I think, in which consideration of the ramifications of the perceived purpose of avoiding Division 2 of Part 11 must be predominant in the first instance.

41 Looking at paragraph (a), the court's task is to make a finding about the purpose for which the arrangement is being proposed, with reference to the possibility that the purpose is to enable someone to avoid the operation of a provision of Division 2 of Part 11, that is, ss 299 to 308.

42 There can be no doubt that National Foods could have approached its desire to attain 100 percent ownership of ACF shares by making an offer to purchase the shares of all members. Such an offer would be an offer to which Division 2 of Part 11 applies by virtue of s 299. The requirements to be observed in relation to such an offer are spelt out in s 300 and following.

43 There is, however, no need to go into these requirements because the evidence shows quite clearly why it is that the transaction has been structured as an arrangement under Division 1 of Part 13 rather than an offer under Division 2 of Part 11. The simple reality is that an acquiring party who proceeds by an offer under Division 2 of Part 11 (being an offer to purchase the shares of all members) has no means of compelling disposition by those members who do not accept the offer. There are compulsory acquisition provisions in Division 3 of Part 13. These are similar to the former s 414 of the Corporations Law (also s 318 of the Companies Act 1981 (Cth) and s 181 of the Companies Act 1961). They are based on approval of a scheme or contract by the holders of at least 90 percent of relevant shares. However, Division 3 of Part 13 is made by s 359(2) not to apply to a scheme or contract arising out of an offer to which Division 2 of Part 11 applies.

44 It is clear in the present context – particularly from the affidavits of Mr Langdon, the chairman of ACF, and Mr Lambert of National Foods – that both ACF and National Foods, as well, no doubt, as the overwhelming majority of ACF members who cast positive votes on the ballot, are approaching the present transaction on an all or nothing basis. An element of legitimately created compulsion or coercion is needed. Division 2 of Part 11 cannot supply that element. Resort to the process under Division 1 of Part 13 - a process that can produce compulsion or coercion - is therefore motivated by a desire to obtain something that is simply unavailable under Division 2 of Part 11, not a desire to avoid something that Division 2 of Part 11 creates or requires. I should add that the absence of a compulsory acquisition mechanism from Division 2 of Part 11 cannot be regarded as part of the “operation” of that division. It follows that I do not consider meaningful any concept of seeking, by resort to Division 1 of Part 13, to “avoid” that absence.

45 I am satisfied that there is, in the present case, no avoiding purpose of the kind contemplated by paragraph (a) of s 353(1) of the Co-operatives Act.

46 The fourth matter to be mentioned is that the court is asked to approve the arrangement subject to a minor variation. By this I mean that the arrangement submitted for the court's approval differs in one small respect from the arrangement that received the approval of members on the postal ballot by special resolution.

47 As I have said, a special dividend payable by ACF but funded by National Foods will form part of the consideration, in an overall sense, to be received by ACF members whose shares are transferred pursuant to the arrangement. The proposal placed before members specified as the record date for determining entitlements to the special dividend a date defined as the “scheme record date”, being the second business day after conversion of ACF to a Corporations Act company. The alteration brings that date forward by one day. The change is desired because it fits with a taxation ruling that has been received. The record date will still be after conversion to a Corporations Act company.

48 There cannot possibly be any prejudice or disadvantage to anyone concerned, given that the shareholdings in ACF will remain static pending effectuation of the arrangement and the acquisition by National Foods. The possibility that the change by one day might affect any person adversely is non-existent.

49 I have referred to the terms of s 344 of the Co-operatives Act. The court has jurisdiction under s 344(3) to approve an arrangement subject to an alteration. The principles that guide the analogous discretion under s 411(6) of the Corporations Act have been discussed in a number of cases including, in particular, the decision of Gyles J in Re Investorinfo Ltd [2005] FCA 1848. The most recent treatment of the subject is by Lindgren J in Re Independent Practitioner Network Ltd (No 2) [2008] FCA 1593. It is clear that, while established categories of circumstances for the approval of amendments may be identified from the case law, the power to approve subject to amendment is broad. I respectfully adopt what was said by Lindgren J in the last-mentioned case at [16] and [17]:

“[16] I do not purport to define or circumscribe the circumstances in which the Court may properly exercise the discretion to approve subject to alterations. The circumstances in which the Court may be asked to exercise the power vary. For example, the purpose may be to overcome minor technical errors or oversights present in the scheme as agreed to by the shareholders (see, for example, Re H Craig Pty Ltd ); to bring the scheme as agreed to by them into line with the explanatory statement that was sent to them (see, for example, Re Permanent Trustee Co Ltd ); or to protect creditors (see, for example, Re Evandale Estates Ltd ). The alterations may be suggested by the plaintiff or by the Court. Apparently, however, the plaintiff would be entitled, if faced with alterations on which the Court insisted but to which it did not agree, to withdraw its application for approval.

[17] At least one thing is clear: the Court will not approve subject to alterations unless it is satisfied that the scheme as proposed to be altered would still have been agreed to by the requisite statutory majorities.”

50 A minor adjustment of a non-prejudicial kind such as that involved here is clearly within the power to approve subject to alteration and I will grant approval subject to that alteration. The members would still have approved the scheme by precisely the same majority had the alteration been included.

51 All procedural matters necessary to satisfy the court that the approval sought under s 344 of the Co-operatives Act should be given have been established by appropriate evidence.

52 I make orders 1 to 3 in the short minutes of order which I initial and date.

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