Re James Hardie Industries Limited

[2001] NSWSC 888

Reported Decision: (2001) 39 ACSR 552
[2001] NSWSC 888
[2001] ACL Rep 120 NSW 134

New South Wales

Supreme Court

CITATION:	Re James Hardie Industries Limited [2001] NSWSC 888 revised - 11/10/2001
CURRENT JURISDICTION:	Equity
FILE NUMBER(S):	SC 3967/01
HEARING DATE(S):	08/10/01
JUDGMENT DATE:	8 October 2001
PARTIES :	In the matter of JAMES HARDIE INDUSTRIES LIMITED (ACN 000 009 263) and the Corporations Law JAMES HARDIE INDUSTRIES LIMITED (ACN 000 009 263) (Plaintiff)
JUDGMENT OF:	Santow J

COUNSEL :	T F Bathurst, QC (Plaintiff) K Cuneo (Sol) (ASIC - amicus)
SOLICITORS:	Allens Arthur Robinson (Plaintiff)
CATCHWORDS:	CORPORATIONS - Scheme of Arrangement - subsequent change in circumstances just before second approval meeting - Effect on approval of scheme - Necessary safeguards - Short opportunity for further objection.
CASES CITED:	Re Adams International Food Traders Pty Limited [1988] 13 ACLR 586 Cleary and Another v Australian Co-operative Food Ltd and Ors (Nos 2 and 3) (1999) 32 ACSR 701 Re Minster Assets plc [1985] BCLC 200 Re Telford Inns Pty Limited (1985) 10 ACLR 312
DECISION:	Scheme approved.

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

No. 3967/01

In the matter of JAMES HARDIE INDUSTRIES LIMITED (ACN 000 009 263) and the CorporationsLaw

JAMES HARDIE INDUSTRIES LIMITED (ACN 000 009 263)
Plaintiff


Judgment ex tempore
8 October 2001 (REVISED 11 October 2001)

INTRODUCTION

1 The short point before me concerns the effect on the Court’s anticipated approval of a share scheme of arrangement of an announced tax change. That tax change requires new legislation in Australia as well as US formalities, whereby both countries adopt a varied US/Australia tax treaty. That is anticipated to take place by 1 July 2003 though that outcome cannot be wholly certain. This treaty change would remove US withholding tax on dividends paid by US companies which are held as to 80% or more by an Australian holding company, being in this case James Hardie Industries Limited (“JHIL”). The salient matters concerning the scheme and the effect of these tax changes are set out in the narrative of facts below. Importantly, they include that the scheme document actually made reference to the possibility of tax changes of the kind now announced. So if there were thereby brought about a material change of circumstances, it was a change not unanticipated. Moreover, it was thought even then unlikely to make sufficient difference to render the scheme restructure no longer the preferred option.

NARRATIVE OF FACTS

2 The following is the Agreed Narrative of Facts:

“On 23 August 2001, the Supreme Court of New South Wales ordered that a meeting of shareholders of JHIL be convened on 28 September 2001 at 11.00am to consider the scheme (see Re James Hardie Industries Limited [2001] NSWSC 741).
On 28 August 2001, the Information Memorandum, dated and registered with ASIC on 27 August 2001, was dispatched to all shareholders.
The scheme is part of a proposal to establish a new corporate structure for JHIL, involving the exchange by JHIL shareholders of their existing investment in JHIL for an investment in a new parent company, James Hardie Industries NV, which is incorporated in The Netherlands. The Information Memorandum disclosed that one of the significant benefits of having a new parent company incorporated in The Netherlands was that the existing 15% withholding tax imposed on dividends paid out of the United States (where approximately 80% of JHIL's earnings are generated) to Australia would be reduced to 5%, being the rate imposed on dividends paid from the United States to The Netherlands.
At approximately 4.00pm on 27 September 2001 (the day before the scheme meeting), the Australian Federal Treasurer announced that he had signed a protocol with the US Ambassador to Australia under which changes are proposed to the US-Australia Double Tax Treaty. One of these changes is a proposed reduction in the rate of withholding tax on dividends paid from the US to Australia from 15% to 0%, provided all relevant conditions are met (the Proposed Change ). The new Treaty will not come into force until at least 1 July 2003. The Treaty must first be ratified by both houses of the Australian Parliament and the US Senate. US Senate approval involves, in summary, assessment by two committees prior to consideration by the US Senate.
The Treasurer's announcement was made after the expiry of the deadline for submitting proxy forms for the scheme meeting (that deadline was 11.00am on 26 September 2001).
At the outset of the scheme meeting on 28 September 2001, the Chairman noted the Proposed Change and broadly explained its effect. The Chairman’s address was simultaneously released to ASX. The Chairman also noted that the directors of JHIL had met before the meeting and confirmed that, in their view, the Proposed Change did not alter the merits of the proposed scheme. The Chairman confirmed that the directors intended to vote unanimously in favour of the scheme and recommended that all shareholders do the same.
At the scheme meeting, 99.64% of the total votes cast were cast by proxy prior to 11.00am on 26 September 2001.
A resolution in favour of the scheme was passed at the scheme meeting by 92.38% of the shareholders voting and 97.66% of the votes cast on the resolution (thereby satisfying the requirements of subparagraph 411(4)(a)(ii) of the Corporations Act 2001 (Cth)).
Of the shares voted at the meeting (as opposed to voted prior to the meeting by proxy), 98.9% were voted in favour of the resolution.
No shareholder had objected to the scheme at the proposed date for the second court date on 2 October 2001. The second court date was ultimately adjourned to 8 October 2001. The purpose of this adjournment was to enable JHIL and ASIC to consider the impact of the Proposed Change on the scheme.
On 5 October 2001, JHIL announced the adjournment of the second court hearing to ASX. In that release the company also discussed the impact of the Proposed Change on the merits of the scheme.
On 8 October 2001, JHIL produced affidavit evidence showing, among other things:
(a) the Proposed Change will not change the result as discussed in the Information Memorandum that the effective corporate tax rate applicable to the James Hardie group as restructured by the scheme would be 25%-30%;
(b) in comparing the relative merits of the alternatives available to the company – being the scheme proposal, restructuring the James Hardie group to take advantage of the Proposed Change (assuming it becomes effective by 1 July 2003), and doing nothing – the scheme proposal is the only cashflow positive option;
(c) since the Treasurer's announcement and scheme meeting, the independent expert has stated:
"While the effect of the [Treasurer's] announcement is to reduce the relative advantage of the proposed restructure over alternatives, the differential … is still significant and would, on balance, outweigh the costs, disadvantages and risks of implementing the proposed restructure and shifting to The Netherlands.";
(d) the independent expert has reconfirmed its view, which is stated in the Information Memorandum, that the proposed structure would still give a more favourable outcome in tax terms even if withholding tax was reduced to zero or franking credits were granted;
(e) the independent expert has also confirmed its opinion that the proposed restructure was still in the best interests of shareholders;
(f) significant cost, inconvenience and risks of not providing all of the scheme benefits would be incurred by JHIL if Court approval of the scheme was deferred for a number of weeks to enable some further process to be undertaken (eg dispatch of a letter by JHIL to its shareholders attaching supplementary disclosure materials and permitting them to change their vote on the scheme resolution).
(g) any deferral of Court approval of the scheme for a number of weeks to enable some further process to be undertaken may put at risk the ability of the James Hardie group to take advantage of favourable rulings it had obtained from authorities in the Netherlands relating to corporate tax rates, which favourable tax rates it will be able to take advantage of if the scheme is implemented.”

RESOLUTION OF ISSUES

3 I have to consider the effect of this subsequent change of circumstance in relation to a scheme of arrangement approved by an overwhelming majority (98% approximately) of those present and voting at a shareholders’ scheme meeting for JHIL. Does the Court still approve the scheme, or should shareholders have the opportunity to alter their vote in light of the further circumstantial change? This is where the Company and independent expert both assert, and support with detailed analysis, that the scheme is still substantially more advantageous, though less so than before, than an alternative restructure; one that took advantage of the tax change, by leaving JHIL the top holding company in Australia.

4 The announced tax change was announced the evening before the scheme meeting was to take place. Were it the day after, this debate would not be taking place. The possibility of such a change appears in two places in the scheme documents. The first is at page 26 of the Memorandum and subsequently in the summary of the Independent Expert’s Report at page 8. The Expert foreshadows that, were such tax change to occur, the proposed restructure would still give a more favourable outcome in tax terms compared to the option of taking advantage of that tax change.

5 ASIC appears as amicus but not as intervenor. After some debate ASIC accepted on the affidavit evidence now before the Court that to require the Scheme in effect to go back before members, by giving them the opportunity to alter their affirmative vote, would risk jeopardising the scheme altogether. This is because delay could mean that the existing Dutch tax rulings may not be forthcoming, for reasons explained in the affidavit dated 8 October 2001 of Mr Clemens, of PriceWaterhouseCoopers, the international tax adviser.

6 That left the alternatives which I foreshadowed to the Court. These were either approving the Scheme forthwith on the basis that it took immediate effect, or as ASIC then preferred, have the Scheme come into effect by the last practical date which would still leave the rulings intact, namely 1 pm this Thursday 11 October 2001. The latter alternative would allow leave to any objectors to put to the Court

(a) whether they would have voted against the Scheme had the proposed tax changes been announced well in advance of the scheme meeting, rather than the day before and, if so,

(b) with what consequence that would likely have had for the passing of the Scheme.

7 Though the time allowed is necessarily short, it is necessary to safeguard the prospect of the scheme, which could be lost altogether by any greater delay. Moreover, this is not a bolt from the blue, entirely unanticipated, requiring greater time for shareholders to come to grips with. The possibility was always there, as the scheme documents recognised.

8 In addition the second alternative will require such publicity as is practicable in the short time available, of that opportunity to object, by way of a Stock Exchange announcement. There will also be made available both at the Stock Exchange and on the company’s website as well as at the company’s registered office a copy of the supplementary Expert’s Report confirming that the present re-structure remains the best option in the Expert’s opinion, taking into account the proposed tax changes. There will also be available a statement from the directors as to their recommendation in relation to this further possibility of objection.

9 In determining, as I have done, that this is the proper course, I am conscious that undue delay might well frustrate the wishes of an overwhelming majority of JHIL shareholders. Moreover, the test which has been applied in relation to subsequent events of this sort can be expressed, though with one refinement, in the terms used by Harman J in Re Minster Assets plc [1985] BCLC 200 at 201. It was subsequently adopted by Young J in Re Adams International Food Traders Pty Limited [1988] 13 ACLR 586. Re Minster plc was cited with approval in Cleary and Another v Australian Co-operative Food Ltd and Ors (Nos 2 and 3) (1999) 32 ACSR 701. A variation of the formulation was used by Young J in an earlier case as follows: “after the meeting of creditors nothing should have occurred that had it been known to the creditors at the time of the meeting might have induced them to vote differently”: Re Telford Inns Pty Limited (1985) 10 ACLR 312 at 315.

10 Applying that test as I would refine it to the present circumstances and, I should emphasise, on the material presently before me, I would conclude that reasonable shareholders would not alter their decision as to how to act on the Scheme if the changes had been disclosed, at least to such degree as to be likely to alter the result of the meeting.

11 It is desirable that I express the test in the way I have done with the emphasised refinement. This is in order to avoid the suggestion that the Court can necessarily be dogmatic about what every hypothetical reasonable shareholder might do individually, as distinct from the safer generalisation about what the collective outcome is likely to be, in a situation where 98% favour the Scheme. However, I would in the present clear-cut circumstances consider even the more stringent test likely to be satisfied.

12 I should also emphasise that the purpose of providing the opportunity for objectors is this. It is conceivable that some further material might be put before the Court which might alter the conclusion I have reached on the material presently before me and I remain open to consider such material if it is forthcoming.

No objectors have come before the Court with any sustainable objection. The Scheme’s approval is now in full effect.

Last Modified: 10/22/2001