Re Capilano Honey Ltd (No 2)

Case [2018] FCA 1925

FEDERAL COURT OF AUSTRALIA

Capilano Honey Limited, in the matter of Capilano Honey Limited (No 2) [2018] FCA 1925

File number(s): NSD 1786 of 2018
Judge(s): FARRELL J
Date of judgment: 23 November 2018
Date of publication of reasons:  30 November 2018
Catchwords: CORPORATIONS – application to approve a scheme pursuant to s 411(4)(b) of the Corporations Act 2001 (Cth) – scheme designed to effect a takeover of the target company – where there are cash and scrip alternatives as scheme consideration – where the scrip consideration is shares in a proprietary company which is the holding company of the bidder – where proposal described as a “stub equity” proposal by a private equity consortium which will hold a majority of the shares issued by the bidder’s holding company – where acceptances for scrip consideration are received from more than 50 members of the target company – where scrip consideration will be issued to a custodian for target company shareholders who elected to receive scrip consideration – where ASIC refused to provide a “no objection” letter under s 411(17)(b) of the Corporations Act – whether the scheme was proposed for the purpose of enabling a person to avoid the operation s 606 or s 650C of the Corporations Act – whether the use of the custodian structure was contrary to public policy – application granted
Legislation:

Companies (Acquisition of Shares) Act 1981 (Cth) s 11 (repealed)

Corporations Act 2001 (Cth) Ch 2E, 6, 6D, Pt 5.1, ss 113, 165, 169, 195, 201A, 201E, 249H, 250N, 411, 602, 606, 609, 650C, 708, 1072H, 1319

Companies Act 1961 (Vic) s 181 (repealed)

Explanatory Memorandum for the Companies and Securities Legislation (Miscellaneous Amendments) Bill 1981 (Cth)

Explanatory Memorandum to the Companies (Acquisition of Shares) Bill 1980 (Cth)

Explanatory Memorandum to the Companies Bill 1981 (Cth)

Cases cited:

CSR Limited, in the matter of CSR Limited (2010) 183 FCR 358; [2010] FCAFC 34

In the matter of Capilano Honey Limited [2018] FCA 1568

Re ACM Gold Ltd (1992) 34 FCR 530

Re Bank of Adelaide (1979) 4 ACLC 393

Re Central Pacific Minerals NL [2002] FCA 239

Re Coles Group Ltd (No 2) [2007] VSC 523; (2007) 65 ACSR 494

Re eircom Holdings Limited [2009] FCA 1418

Re Mincom Ltd (No 3) (2007) 213 FLR 364; [2007] QSC 207

Re oOh!Media Group Limited [2012] FCA 26

Re oOh!Media Group Limited(No 2) [2012] FCA 176

Re Permanent Trustee Company Limited (2002) 43 ACSR 601; [2002] NSWSC 1177

Re Rusina Mining NL (No 2) (2010) 78 ACSR 615; [2010] FCA 609

Re Seven Network Limited (No 3) [2010] FCA 400

Re Solution 6 Holdings Ltd (2004) 50 ACSR 113; [2004] FCA 1049

Re Stockbridge Ltd (1993) 9 ACSR 637

Re Wallace Dairy Co Ltd [1980] VR 588

Dates of hearing: 22 and 23 November 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: 78

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Details
AGLC
Re Capilano Honey Ltd (No 2) [2018] FCA 1925
Case
[2018] FCA 1925
Decision Date

CaseChat Overview and Summary

In the case of Re Capilano Honey Ltd (No 2), the plaintiff, Capilano Honey Ltd, sought approval for a scheme of arrangement under section 411(4)(b) of the Corporations Act 2001 (Cth). The scheme aimed to facilitate a takeover, offering shareholders either cash or scrip consideration, with the latter being shares in the bidder's holding company. The Australian Securities and Investments Commission (ASIC) had refused to provide a "no objection" letter, raising concerns that the scheme might enable avoidance of certain provisions of the Corporations Act and that the use of a custodian structure could be contrary to public policy. The primary legal issue was whether the scheme should be approved despite ASIC's objections, considering the fairness to shareholders and adherence to public policy.

The court addressed the fairness of the scheme by examining whether the scheme was proposed for the purpose of avoiding certain sections of the Corporations Act, specifically sections 606 and 650C. It found that the scheme was not intended to circumvent these provisions and that the use of a custodian structure was a legitimate commercial decision, not contrary to public policy. The court emphasised that the interests of shareholders, creditors, and future investors were adequately protected by the fairness and reasonableness of the scheme. ASIC's concerns about public policy did not outweigh the commercial judgement exercised by the shareholders.

The court concluded that ASIC's refusal to issue a "no objection" letter did not preclude the approval of the scheme. Given the full disclosure provided to shareholders and the absence of any oppressive conduct, the scheme could proceed. The court granted the application, approving the scheme and directing Capilano to lodge the orders with ASIC promptly. The orders also exempted Capilano from compliance with certain provisions of the Corporations Act concerning the scheme. These orders were to be entered forthwith, as per Rule 39.32 of the Federal Court Rules 2011.

Orders

Orders of the court

1. Pursuant to s 411(4)(b) of the Corporations Act 2001 (Cth) (the Act), the scheme of arrangement between the plaintiff and its members set out in Tab 4, page 6 of exhibit RMS-1 (the Scheme) be approved.

2. The plaintiff lodge these orders with the Australian Securities and Investments Commission as soon as practicable.

3. Pursuant to s 411(12) of the Act, the plaintiff be exempt from compliance with s 411(11) of the Act in relation to the Scheme.

4. These orders be entered forthwith.

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

Background

Background to the litigation

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Evidence

Evidence Before The Court

As noted by Jacobson J in Re Seven Network Limited (No 3) at [40] a further consideration has been said to be whether the scheme offends public policy: see, for example, CSR Limited, in the matter of CSR Limited (2010) 183 FCR 358; [2010] FCAFC 34 at [51]-[56] (per Keane CJ and Jacobson J), although it must also be noted that Finkelstein J considered this issue at [79]-[82] and concluded at [82] as follows:There has crept into Australian jurisprudence the view that a court will not confirm a scheme if it is contrary to “public policy” or is not consistent with “commercial morality”. A consideration of what is contrary to “public policy” cannot extend beyond considering the interests of members, creditors and persons who in the future might deal with the scheme company or invest in its shares. Their interests are, however, adequately protected by an inquiry whether the scheme is fair or reasonable. So, considerations of public policy seem to add nothing to existing principles.EVIDENCE Further affidavits filed in these proceedings are as follows. The affidavit of Trevor Richard Morgan was affirmed on 15 November 2018. Mr Morgan acted as Chairman of the scheme meeting and deposes to the proceedings at the meeting and the votes cast. The affidavit of BeeYen Nah was affirmed on 20 November 2018. Mr Nah is a client relationship manager at Link Market Services Limited. He gave evidence relevant to the despatch of the scheme booklet and related documents, the receipt of elections and subscriptions for HoldCo shares, the receipt and recording of proxies, registration of attendance at the scheme meeting and voting at the scheme meeting. The affidavit of Michael Buttigieg was sworn on 21 November 2018. Mr Buttigieg is the general manager of Link DigiCom Pty Ltd which was engaged to arrange for printing and despatch of the scheme booklet and related forms. The affidavit of Rebecca Maslen-Stannage was sworn on 21 November 2018. Ms Maslen-Stannage is a partner at Herbert Smith Freehills, the solicitors for Capilano in this matter. She gave evidence in relation to: registration of the scheme booklet in substantially the form of exhibit B with ASIC on 11 October 2018; the increased cash consideration (from $20.06 to $21.00) and the supplementary disclosure approved by the Court for despatch on 2 November 2018; elections to receive scrip consideration and notification of withdrawal rights; the announcement to the Australian Securities Exchange (ASX) that there would be no scale back and the number of shareholders who had elected to receive scrip consideration; the custodian arrangement; and why the proposed acquisition of Capilano proceeded by way of scheme of arrangement. A further affidavit of Rebecca Maslen-Stannage was sworn on 21 November 2018. She gave evidence in relation to the publication of an advertisement in The Australian newspaper on 12 November 2018 advising of the time and date of the second court hearing in accordance with orders made by the Court on 11 October 2018 and that no notice (formal or informal) had been received as at 5 pm on 21 November 2018 from any member of Capilano of any intention to attend the second court hearing to oppose the scheme.

Decision

Reasons for decision

However, having regard to the matters set out in [75], I am ultimately not satisfied that, as a matter of fairness, the public policy basis of ASIC’s concerns outweighs the commercial judgement applied by shareholders of Capilano. Those shareholders made their judgement with the benefit of full disclosure and without oppression. CONCLUSION Where, as here, ASIC refuses to issue the “no objection” letter, it is entirely appropriate that it appear at the second court hearing. The Court was considerably assisted by ASIC’s submissions, notwithstanding its decision that orders should be made under s 411(4).

Ratio Decidendi

Legal Principle Established

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