Re Capilano Honey Ltd

Case [2018] FCA 1568

FEDERAL COURT OF AUSTRALIA

Capilano Honey Limited, in the matter of Capilano Honey Limited [2018] FCA 1568

File number(s): NSD 1786 of 2018
Judge(s): FARRELL J
Date of judgment: 18 October 2018
Catchwords: CORPORATIONS – application to convene a meeting of shareholders pursuant to s 411(1) of the Corporations Act 2001 (Cth) – scheme designed to effect a takeover of the target company by a consortium – where scrip consideration is shares in a proprietary company which is the holding company of the bidder – where a person who accepts scrip consideration may also subscribe for further shares in the same class – where money subscribed is used for payment of cash consideration alternative – whether capital raising is part of the “arrangement” for the purposes of s 411 Corporations Act – whether the offer of shares for subscription is exempted from disclosure under Chapter 6D of the Corporations Act by reason of s 708(17) or breaches s 113(3) – whether the use of a custodian to ensure that the company remains a proprietary company is fair and consistent with public policy – whether shareholders are “absolutely entitled” to any shares held by a custodian for the purpose of capital gains tax roller relief – application granted
Legislation:

Corporations Act 2001 (Cth) Chs 6, 6D, Pt 5.1, ss 113, 411, 708, 741, 1020F, 1319,

Federal Court (Corporations) Rules r 2.15

Insolvency Practice Rules (Corporations) 2016 (Cth) r 75-12

Cases cited:

Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485

Centrebet International Limited [2011] FCA 870

In the matter of Unity Mining Limited [2016] VSC 831

Re Abacus Funds Management Ltd (2006) 24 ACLC 211; [2005] NSWSC 1309

Re CSR Limited (2010) 183 FCR 358; [2010] FCAFC 34

Re Foundation Healthcare Limited (2002) 42 ACSR 252; [2002] FCA 742

Re International Harvester [1953] VR 669

Re Opes Prime Stockbroking Ltd (No 2) (2009) 179 FCR 20; [2009] FCA 813

Re Timor Sea Petroleum NL (2000) 35 ACSR 186; [2000] VSC 337

Re NFU Development Trust Ltd [1972] 1 WLR 1548

Re St James Court Estate Ltd [1944] Ch 6

Date of hearing: 10, 11 October 2018
Registry: New South Wales
Division: General Division
National Practice Area: Commercial and Corporations
Sub-area: Corporations and Corporate Insolvency
Category: Catchwords
Number of paragraphs: 57
Counsel for the Plaintiff: Mr P Brereton SC & Mr J R Williams
Solicitor for the Plaintiff: Herbert Smith Freehills
Counsel for Bravo HoldCo Pty Ltd:  Mr M Oakes SC
Solicitor for Bravo HoldCo Pty Ltd:   Minter Ellison
Counsel for ASIC:  M D Barnett & Mr S Dametto
Solicitor for ASIC:  Australian Securities & Investments Commission 

ORDERS

IN THE MATTER OF CAPILANO HONEY LIMITED
NSD 1786 of 2018
BETWEEN:

CAPILANO HONEY LIMITED

Plaintiff

JUDGE:

FARRELL J

DATE OF ORDER:

11 OCTOBER 2018

THE COURT ORDERS THAT:

1.The Court orders pursuant to s 411(1) and s 1319 of the Corporations Act 2001 (Cth) (Corporations Act) that:

(a)the Plaintiff convene a meeting (Scheme…

Continue reading Re Capilano Honey Ltd

Sign in free to access the full text

Details
AGLC
Re Capilano Honey Ltd [2018] FCA 1568
Case
[2018] FCA 1568
Decision Date

CaseChat Overview and Summary

Capilano Honey Limited applied to convene a meeting of its shareholders to consider a proposed takeover scheme, which was opposed by certain minority shareholders. The court was required to decide whether the scheme complied with the statutory requirements and if the disclosure provided to shareholders was adequate. The court examined the terms of the takeover, including the capital raising component and the use of a custodian to maintain the status of the holding company as a proprietary entity. Additionally, the court considered whether the scheme breached specific sections of the Corporations Act and whether it was fair and consistent with public policy.

The court found that the scheme met the necessary statutory requirements and that the disclosure provided to shareholders was sufficient. The court determined that the capital raising was part of the arrangement and that the use of a custodian did not breach any provisions of the Act. The court also concluded that the offer of shares for subscription was not subject to disclosure requirements under Chapter 6D of the Corporations Act and did not breach section 113(3) of the Act. The court held that the use of a custodian was fair and consistent with public policy and that shareholders were "absolutely entitled" to any shares held by a custodian for capital gains tax purposes. Therefore, the application to convene the meeting was granted.

The court made orders convening a meeting of the shareholders to consider the scheme and for the despatch of the scheme booklet and related documents to shareholders. The court also ordered that notice of the hearing to approve the scheme be published in The Australian newspaper. The scheme was to be approved by a majority vote of the shareholders, excluding those with a disqualifying interest, and subject to certain conditions being met.

Orders

Orders of the court

1. The Court orders pursuant to s 411(1) and s 1319 of the Corporations Act 2001 (Cth) (Corporations Act) that:

(a) the Plaintiff convene a meeting (Scheme Meeting) of the holders of ordinary shares in the Plaintiff (Scheme Participants) for the purpose of considering and, if thought fit, agreeing (with or without modification) to approve the scheme of arrangement (Scheme) proposed to be made between the Plaintiff and the Scheme Participants the terms of which are set out in Annexure C of the Scheme Booklet, which is Exhibit B in the proceedings (Scheme Booklet);

(b) the Scheme Meeting be held on 15 November 2018 at the Spring Lake Hotel & Function Centre, 1 Springfield Lakes Boulevard, Springfield Lakes, Queensland, Australia at 11am (Brisbane time);

(c) the chairperson of the Scheme Meeting be Trevor Morgan, or failing him, Phillip McHugh;

(d) the chairperson appointed to the Scheme Meeting has the power to adjourn or postpone the Scheme Meetings in his absolute discretion for such time and to such date as he considers appropriate;

(e) at the Scheme Meeting, the resolution to approve the Scheme be decided by way of a poll;

(f) the explanatory statement substantially in the form or to the effect of the Scheme Booklet be approved for distribution to Scheme Participants.

2. Documents substantially in the form of:

(a) the Scheme Booklet; and

(b) the Proxy form at Annexure 'RMS-4', page 1,

be approved for dispatch to Scheme Participants.

3. Documents substantially in the form of:

(a) the Election From at Annexure ‘RMS-4’, page 3; and

(b) the Subscription Form at Annexure ‘RMS-4’, page 5,

be approved for dispatch to Scheme Participants other than Ineligible Foreign Shareholders (as defined in the Scheme Booklet).

4. The documents approved for dispatch in Orders 2 and 3 above be dispatched as follows:

(a) in the case of Scheme Participants who have nominated an electronic address for the purpose of receiving communications from Capilano, by sending to that address emails containing links to a website at which the Scheme Booklet and online portals can be accessed for submitting a proxy, making an Election and applying for shares under the HoldCo Share Offer, in the form of Annexure 'RMS-4', pages 7 and 12 for Scheme Participants who are Ineligible Foreign Shareholders and Annexure 'RMS-4', pages 7 and 9 for other Scheme Participants;

(b) in the case of Scheme Participants whose registered address is in Australia (excluding those Scheme Participants with a registered address in Australia who will receive an electronic copy of the documents in accordance with subparagraph (a) above and any “lost shareholders” as described in the affidavit of Robert Neville Newey dated 8 October 2018 (Newey Affidavit)), by ordinary post (including a reply paid envelope addressed to Market Services Limited); and

(c) in the case of Scheme Participants whose registered address is outside Australia (excluding those Scheme Participants whose registered address is outside Australia who will receive an electronic copy of the documents in accordance with subparagraph (a) above and any “lost shareholders” as described in the Newey Affidavit), by prepaid airmail or courier (including a self-addressed envelope to Market Services Limited).

5. Notice of the hearing of the application for orders approving the proposed Schemes be published once in “The Australian” newspaper, by advertisement substantially in the form of Appendix A to these Orders, such advertisement to be published on or before 15 November 2018.

6. Compliance with r 2.15 of the Federal Court (Corporations) Rules be dispensed with to the extent necessary, except for r 75-15(2) of the Insolvency Practice Rules (Corporations) 2016 (Cth).

7. The proceeding be stood over to 22 November 2018 at 10:15am before Justice Farrell for the hearing of any application to approve the Scheme.

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

APPENDIX A

CAPILANO HONEY LIMITED

ABN 55 009 686 435

NOTICE OF HEARING TO APPROVE COMPROMISE OR ARRANGEMENT

TO all members of Capilano Honey Limited ABN 55 009 686 435 (Capilano) other than the holder of the foundation share:

TAKE NOTICE that at 10.15am on 22 November 2018, the Federal Court of Australia at Law Courts Building, Queens Square, Sydney, New South Wales will hear an application by Capilano seeking the approval of an arrangement between Capilano and its members other than the holder of the foundation share as proposed by a resolution to be considered and, if thought fit, passed (with or without modification) by a meeting of the Scheme Shareholders to be held on 15 November 2018.

If you wish to oppose the approval of the arrangement, you must file and serve on Capilano a notice of appearance, in the prescribed form, together with any affidavit on which you wish to rely at the hearing. The notice of appearance and affidavit must be served on Capilano at its address for service at least one day before the date fixed for the hearing of the application.

The address for service of Capilano is C/- Herbert Smith Freehills, ANZ Tower, 161 Castlereagh St, Sydney NSW, 2000 (Attention: Luke Hastings).

Luke Hastings, Herbert Smith Freehills

Solicitor for Capilano Honey Limited

Background

Background to the litigation

Full text does not contain this section.

Evidence

Evidence Before The Court

The scheme will be implemented as follows, assuming that it progresses in accordance with the “Key Dates” set out at the front of the scheme booklet:(1)Capilano shareholders must make an election before 5 November 2018 by completing and returning to Capilano an election form. If they elect to receive the scrip consideration they must also return a subscription form by that date. If, having elected to receive the scrip consideration, they also wish to participate in the HoldCo Share Offer, they must also pay $20.06 for each HoldCo share for which they wish to subscribe.(2)Capilano will announce indicative scale back (if any) based on the elections that it has received on 6 November 2018. This announcement will also confirm, on an indicative basis, whether a custodian will be required to hold shares issued as scrip consideration and pursuant to the HoldCo Share Offer.(3)Eligibility to vote at the scheme meeting will be determined on 13 November 2018.(4)The scheme meeting is scheduled to be held on 15 November 2018. The Chairman of the board, Trevor Richard Morgan, or failing him, the Deputy Chairman, Philip Francis McHugh, both independent directors, have agreed to act as chair of the scheme meeting.(5)The second court hearing will be held on 22 November 2018.(6)If the Court approves the scheme, the effective date of the scheme will be 23 November 2018.(7)The Record Date for determining entitlements to scheme consideration will be 28 November 2018. (8)Capilano is expected to announce the final result of the elections and any final scale back, if that is applicable, on 29 November 2018. This announcement will also confirm whether a custodian will be required to hold HoldCo shares upon implementation of the scheme. (9)The implementation date will be 5 December 2018.(10)Not less than two business days before the implementation date, BidCo must deposit cleared funds in a trust account operated by Capilano as trustee for Capilano shareholders who elected to receive cash consideration, who made no election or who are entitled to receive cash consideration by reason of scale back arrangements applied to the scrip consideration. (11)On the implementation date, Capilano must pay the cash consideration to shareholders entitled to receive it from moneys subscribed for HoldCo shares under the HoldCo Share Offer and as provided by the Consortium. HoldCo will issue HoldCo shares to Capilano shareholders who made a valid election to receive scrip consideration and to those who elected to subscribe for HoldCo shares in the HoldCo Share Offer, subject to scale back arrangements. Ordinary shares in Capilano will be transferred to BidCo. If any subscriptions for shares in the HoldCo Share Offer are scaled back, subscription moneys for the scaled back shares will be refunded to the subscribers as soon as practicable after the implementation date. EVIDENCE The affidavits of:(1)Luke Bradshaw Hastings affirmed on 20 September 2018; (2)Deanne Conway affirmed on 5 October 2018;(3)Robert Neville Newey, Annette Maree Zbasnik, Trevor Morgan, Philip McHugh, Mark Whitaker each affirmed on 8 October 2018; (4)Milorad Gajic affirmed on 9 October 2018; and(5)Rebecca Maslen-Stannage sworn on 8, 9 and 11 October 2018.

Decision

Reasons for decision

ASIC had advised Capilano of other concerns, but those concerns were addressed by the disclosure discussed during the first court hearing and by:(1)Capilano’s agreement to tag votes by shareholders with an interest in more than 3.67% of Capilano’s share capital so that any influence they exert on the outcome of the vote at the scheme meeting can be the subject of submissions at the second court hearing. This relates to a concern of ASIC that such shareholders may end up holding more than 5% of HoldCo’s fully diluted share capital which would, under the shareholders deed, confer greater rights on them than other Capilano shareholders who elect to receive the scrip consideration. (2)Capilano’s agreement to disclose – under the heading “ASIC and ASX” in the boilerplate disclosures at the front of the scheme booklet – a summary of ASIC’s primary concerns which caused it to make submissions at the first court hearing and the fact that it intended to make submissions at the second court hearing. The issues were: (1) its public policy concerns deriving from the fact that HoldCo is a proprietary company, not a public company, and it will be able to maintain that status by means of the custodian arrangements even if more than 48 Capilano shareholders elect to take the scrip consideration; and (2) the fairness issues on the basis of which it sought to have tagged the votes of Capilano shareholders (as discussed above). This disclosure was sought by ASIC having regard to comments made by Robson J in In the matter of Unity Mining Limited [2016] VSC 831 and because those issues would not necessarily otherwise be disclosed to the market. In my view, the need for such disclosure should be considered on a case by case basis. In this case it was unnecessary for me to decide whether such disclosure was required to put shareholders in an appropriately informed position to vote for or against the scheme approval resolution because Capilano was willing to accommodate ASIC’s request. CONCLUSION Based on the evidence and having regard to the matters discussed above, I was satisfied that it was appropriate to make orders convening a scheme meeting to consider whether to approve the scheme and for the despatch of the scheme booklet materially in the form of Exhibit B with proxy forms, election forms and subscription forms, as well as emails by which those documents would be conveyed to shareholders.

Ratio Decidendi

Legal Principle Established

The number of HoldCo shares to be issued following election for the scrip consideration and subscriptions under the HoldCo Share Offer will be subject to scale back arrangements to ensure that the Consortium maintains at least 50.1% of the diluted share capital of BidCo. Scale back will be applied first to those Capilano shareholders who do not participate in the HoldCo Share Offer and after that to the Capilano shareholders who do participate in the HoldCo Share Offer. This may result in some Capilano shareholders who elected to receive scrip consideration receiving some cash consideration and in the need to refund to Capilano shareholders who elected to participate in the HoldCo Share Offer: see sections 7.4 and 9.2 of the scheme booklet. Source of funds for cash consideration Moneys subscribed under the HoldCo Share Offer will (to the extent that the entitlement to HoldCo shares is not scaled back or the number of Capilano shares held by a person who subscribes for HoldCo shares is fewer at the Record Date than they were when the election and subscription forms were returned to Capilano) be used to pay cash consideration under the bid: section 9.2(d) of the scheme booklet. That cash will not be used to fund working capital of BidCo or HoldCo. The balance of the cash consideration will be provided by subscription for equity in HoldCo by the Consortium members equally pursuant to a commitment letter dated 27 September 2018. The maximum amount which the Consortium will be required to provide (taking into account the condition referred to at [20] below) is $161,259,509. This obligation is subject to the conditions precedent to the scheme being satisfied: see section 9.5 of the scheme booklet. Deed poll and performance risk The scheme is subject to the usual arrangements with respect to performance risk. BidCo and HoldCo have entered into a deed poll for the benefit of Capilano shareholders under which they covenant to provide the scheme consideration in accordance with the terms of the scheme and undertake all other actions attributed to them under the scheme. A copy of the deed poll is in Annexure D to the scheme booklet. This may be regarded as fulfilling a formal requirement of binding BidCo and HoldCo to perform their obligations as they (not being shareholders of Capilano) would otherwise not be bound by the scheme. As BidCo and HoldCo have no assets it is likely to be difficult to effect meaningful recovery against them should it be necessary for Capilano shareholders to seek to enforce the deed poll. The Consortium is not a party to the deed poll. Nonetheless, the terms of the scheme of arrangement provide for the performance of the payment of the cash consideration to a trust account operated by Capilano and the issue of HoldCo shares before the transfer of Capilano shares to BidCo takes effect which affords protection to the Capilano shareholders.Recommendations The directors unanimously recommend that Capilano shareholders vote in favour of the scheme in the absence of a superior proposal and subject to the independent expert continuing to conclude that the scheme is fair and reasonable and in the best interests of the Capilano shareholders. Five of eight directors hold Capilano shares directly or indirectly. They include the Chairman (Trevor Morgan) and the Deputy Chairman (Philip McHugh) who will be the chair or alternate chair of the scheme meeting, and the Managing Director/CEO Dr McKee. They intend to vote their shares in favour of the scheme, subject to the same qualification as the directors’ recommendation: see sections 5.1(a) and 12.1(a) of the scheme booklet.