William James Caldwell Hedley v Kiwi Co-Operative Dairies Limited

IN THE COURT OF APPEAL OF NEW ZEALAND

CA104/02

BETWEEN	WILLIAM JAMES CALDWELL HEDLEY AND PAULINE HOWITT HEDLEY AND ORS
Appellants

AND	KIWI CO-OPERATIVE DAIRIES LIMITED
First Respondent

AND	CRAIG NORGATE
Second Respondent

AND	JOHN YOUNG
Third Respondent

AND	IAN SILVER AND DAVID CULLWICK
Fourth Respondents

AND	PETER JENSEN
Fifth Respondent

AND	PAUL SIMON GUY BAILEY AND ORS
Sixth Respondents

Hearing:	18-19 November 2002
Coram:	Gault P Keith J Glazebrook J
Appearances:	B P Henry and K M Elcoat for Appellants J E Hodder and J C Holden for First, Second, Third and Sixth Respondents A A Lusk QC and T M Johnstone for Fourth Respondents P J Crombie for Fifth Respondent
Judgment:	18 December 2002

JUDGMENT OF THE COURT DELIVERED BY GLAZEBROOK J

Introduction

In April 1996 the boards of the Tui and Kiwi co-operative dairy companies entered into negotiations for the two companies to merge and on 26 June 1996 they signed a conditional merger agreement. The merger of the companies was governed by s24A of the Co-operative Dairy Companies Act 1949 (now repealed).
On 16 July the merger agreement was approved in principle, as required by s24A(3)(b), at an extraordinary general meeting (EGM) of Tui’s shareholders (by a 74.34% majority). Kiwi’s shareholders then, in accordance with s24A(3)(e), approved the merger by extraordinary resolution. Tui held another EGM on 20 August for the purpose of having its shareholders approve the merger by extraordinary resolution (75%) as required by s24A(3)(g). The resolution failed as there was only a 67.01% vote in favour of the merger. Tui’s board then notified shareholders on 30 August 1996 that a further EGM would be held on 27 September so that they would have another chance to approve the merger by extraordinary resolution. An 80.11% majority was obtained, and the merger proceeded.
Under s24A the merger proceeded by means of the liquidation of Tui and the transfer of its assets by the liquidator to Kiwi. Under the merger agreement Kiwi agreed to issue to the Tui shareholders shares in Kiwi in return for Tui’s assets. As Kiwi and Tui’s directors expected Tui’s shareholders to benefit to a greater degree from the merger than Kiwi’s in terms of increased payout (i.e. dollar return for milk product supplied) the merger agreement provided that, following the merger, those shareholders of the merged entity who had previously been shareholders of Tui would receive a lower payment per unit of milk product supplied to the merged entity than those shareholders who had been Kiwi shareholders before the merger. The difference between the rates of payment for milk products supplied was referred to as the “differential”.
Various directors of the two companies and independent advisors engaged by them had recommended to the companies’ shareholders that they vote in favour of the merger. Ernst & Young (the fourth respondents being former senior partners in that firm) and Mr Jensen, a dairy industry expert, were commissioned on 29 August to provide an independent review of the merger terms. The report concluded that the merger was fair and in the best interests of Tui shareholders.
There was also a very strong anti-merger group of Tui shareholders of which Mr and Mrs Hedley were part. They and 288 other ex-Tui shareholders were the plaintiffs in the High Court action, the subject of this appeal. At trial they advanced eleven causes of action. Goddard J in a judgment of 21 December 2001 found against them on every cause of action. The argument before us has been refined since the High Court case and was confined to three heads.
The first was that the second EGM at which the merger was approved was held unlawfully and that therefore the tort of conversion was committed when the appellants’ shares were cancelled. The appellants submit that a second meeting was not able to be held under s24A(3)(g) after the resolution in favour of the merger was not passed at the first meeting. They rely primarily on the use of the singular (“calls a meeting of all members”) and policy considerations. The prospect of a minority opposed to a merger being progressively worn down by a series of meetings under s24A(3)(g) is invoked. On behalf of Kiwi, Mr Norgate, Mr Young (respectively CEO and Chairman of Kiwi at the relevant time) and the sixth respondents (the former Tui directors), it is argued that the appellants’ interpretation of s24A(3)(g) is not justified either by the statutory language or policy.
The second head is that Kiwi, Mr Norgate, Mr Young and the former Tui directors hatched and executed a “plan” to induce Tui’s shareholders to pass the merger resolution by extraordinary resolution by knowingly making false representations and knowingly withholding material information. In particular it is alleged that they withheld the information that the greater historical payout achieved by Kiwi was attributable to differing accounting policies and falsely and knowingly explained the historical payout differential as being caused by economies of scale available to Kiwi. Mr Hodder submits inter alia that the finding of Goddard J that the differing accounting policies were disclosed should be upheld.
The third allegation is that Ernst & Young (EY) and Mr Jensen breached a duty of care when they prepared their report by failing to restate the accounts of Kiwi and Tui on a consistent basis and failing to take into account the potential of the domestic market which was brought to the merger by Tui.

The Legislation

Section 24A of the 1949 Act provided in relevant part that:
24A     Power of liquidator to accept shares, etc., as consideration for sale of property or company to another co-operative dairy company
(1)     If a company is proposed to be, or is in the course of being, wound up altogether voluntarily, and the whole or part of its business or property is proposed to be transferred or sold to another co-operative dairy company within the meaning of this Act (in this section called the transferee company), the liquidator of the first-mentioned company (in this section called the transferor company) may, with the sanction of a special resolution of that company, conferring either a general authority on the liquidator or an authority in respect of any particular arrangement, receive (in compensation or part compensation for the transfer or sale) shares, policies, or other like interests in the transferee company for distribution among the members of the transferor company, or may enter into any other arrangement whereby the members of the transferor company may, in lieu of receiving cash, shares, policies, or other like interests, or in addition thereto, participate in the profits of or receive any other benefit from the transferee company.
(2)     Subject to subsection (3) of this section, every transfer, sale, or arrangement made by a transferor company and a transferee company pursuant to this section shall be binding on all members of the transferor company.
(3)     No transfer, sale, or other arrangement mentioned in this section shall be binding on any member of the transferor company unless, before proceeding with the transfer, sale, or other arrangement,—
(a)     The transferor company forwards to each member of the company a detailed statement of the proposed transfer, sale, or other arrangement, and calls a meeting of all members by giving not less than 14 clear days' notice to each member specifying the time, place, and the object of the meeting which shall be to vote on the proposed transfer, sale, or other arrangement; and
(b)     A resolution is passed at the meeting, by a majority of the members entitled to vote at the meeting, that the proposed transfer, sale, or other arrangement proceed in accordance with the proposal or in such amended form as may be resolved; and
(c)     The transferor company notifies the transferee company of the resolution passed in accordance with paragraph (b) of this subsection in its proposed or amended form; and
(d)     The transferee company forwards to each of its members a copy of the detailed statement mentioned in paragraph (a) of this subsection in such amended form as may be resolved in accordance with paragraph (b) of this subsection, and calls a meeting of all members of the transferee company by giving not less than 14 clear days' notice to each member specifying the time, place, and the object of the meeting which shall be to vote on the proposed transfer, sale, or other arrangement; and
(e)     An extraordinary resolution is passed at the meeting called in accordance with paragraph (d) of this subsection that the proposed transfer, sale, or other arrangement proceed in accordance with the terms of the resolution passed by the members of the transferor company in accordance with paragraph (b) of this subsection; and
(f)     The transferee company notifies the transferor company of the extraordinary resolution passed in accordance with paragraph (e) of this subsection; and
(g)     Within one month after the passing of the extraordinary resolution mentioned in paragraph (e) of this subsection, the transferor company, by giving not less than 14 clear days' notice to each member of the company, calls a meeting of all members at which the resolution passed by the transferor company in accordance with paragraph (b) of this subsection is confirmed by extraordinary resolution.

Invalid Meeting

The resolution put at the first Tui EGM of 20 August 1996 failed to obtain the requisite majority. This meant, say the appellants, that the merger was at an end as s24A(3)(g) allows only one meeting to be held. It is submitted that the natural interpretation of the words “a meeting” is one meeting and any interpretation that allows multiple meetings until an extraordinary resolution is passed is a mandate to oppress a minority who in every cooperative company lack the resources to match the power of the company management. In addition, the appellants argue that any meeting had to have been held within one month of the Kiwi extraordinary resolution – i.e. by 1 September 1996.
As set out above s24A(3)(g) provides as follows:
Within one month after the passing of the extraordinary resolution mentioned in paragraph (e) of this subsection [the Kiwi resolution of 1 August 1996] the transferor company, by giving not less than 14 clear days' notice to each member of the company, calls a meeting of all members at which the resolution passed by the transferor company in accordance with paragraph (b) of this subsection is confirmed by extraordinary resolution.
We consider that the words “a meeting” cannot be interpreted in the manner contended for by the appellants. The words cannot be divorced from the phrase that follows. There must be a meeting at which the extraordinary resolution is passed for this to constitute the final step in s24A(3). Section 24A(3)(g) thus merely sets out what a meeting must achieve if the merger is to be binding on the members of Tui. It neither requires a meeting to be held nor restricts the number of meetings (subject to the time limits in the section). All it means is that, if all the other steps in s24A(3) have been completed and the requisite majority is obtained at a s24A(3)(g) meeting, the merger is binding – see s24A(2). We note too, as Mr Hodder points out, that the time limits in s24A(3)(g) prevent a series of meetings designed to wear down opposition.
The appellants’ argue that the EGM had to be held within one month of the Kiwi resolution. They submit that the word “calls” has to be interpreted as denoting the actual date of the meeting and that it cannot refer to “notice”. This is because the draughtsman has deliberately chosen to use this word in the phrase “by giving not less than 14 clear days notice to each member of the company”. In the alternative it is submitted that the provision is ambiguous and that it must be construed so as to give effect to what the appellants submit is the policy of the provision i.e. to allow one meeting only so that a minority cannot be oppressed by multiple meetings.
We see no ambiguity. The provision is perfectly plain. There is no reason to distort the plain language to read “calls” as “holds”. The appellants’ argument on this head therefore fails.

Deceit

The appellants abandoned on appeal most of the allegations contained in the statement of claim in relation to deceit. The only remaining allegations were that the Tui directors had knowingly withheld from shareholders the information that Kiwi had achieved a higher payout only through aggressive accounting policies and that the Tui and Kiwi directors silenced local accountants who wanted to set out the true position for shareholders. A true profitability comparison between Tui and Kiwi would, say the appellants, have shown that the differential was not justifiable.
Mr Henry accepted that the appellants could not succeed on this head if the judge’s finding that Kiwi’s differing accounting policies were made known to the Tui shareholders was upheld. He also accepted that a factual finding resting on credibility can be challenged on appeal only where there was no evidence to support it or where the judge was plainly wrong in the conclusion reached.
In our view there was clearly evidence that supported the judge’s conclusion on this point. In the minutes of the EGM of Tui shareholders held on 20 August 1996 the following passage appears:
The accounts have been subject to review by Kiwi’s auditors in accordance with the terms and conditions of merger. Detail of that review and also of Tui’s auditors’ review of Kiwi’s accounts was presented.
The minute went on to detail that there were some differences of opinion between the auditors but the Chairmen had agreed to offset the matters in dispute. It continued as follows
There are however, some aspects of treatment in the accounts of Kiwi which were outside the scope of the review but which required noting. These included re-lifting, re-birthing and revaluation of assets, share premium and goodwill on acquisition on South Canterbury and Hawkes Bay Milk.
We were also referred to a hard copy of what appears to be a Powerpoint presentation headed Tui–Kiwi Merger Proposal, Extraordinary General Meeting, 20 August 1996. There are a series of slides starting with one headed “Review of Financial Accounts” which appear to mirror the topics set out above. We note also that the secretary’s hand-written notes of that meeting have a heading “Review of Audit of Acc’s” which appears just before a heading “Mailing by Action Group”, which was the next topic covered at the meeting according to the typewritten minutes.
We also record that, even had we found that the differing accounting policies had not been explained to shareholders, the matters pointed to by the appellants would not have given us any cause to differ from the judge’s conclusions in relation to the causes of action based in deceit (apart from those in paras [126]-[130] of the judgment – since the appellants were not parties to the merger contract, the deceit causes of action were not affected by s6 of the Contractual Remedies Act with regard to any of the respondents).
We note that Mr Hagen, the Chairman of Deloitte Touche Tohmatsu, who gave evidence for the respondents at trial, said that the differential was justified in large part by payout projections and not on historical payout figures. Normalisation of accounting policies would not have had a substantial effect on the payout projections for Tui and the merged entity although it would have done on historical payout figures. The evidence of Mr Davies, a senior partner at Deloitte’s, was to the same effect.

Negligence

As indicated above, Mr Jensen and EY were commissioned after the first EGM to provide a report on the proposed merger. The appellants’ case in relation to this report has been refined in the oral argument before this Court (Mr Jensen and EY would say in a manner not foreshadowed in the pleadings). The allegations reduced to the following: that EY and Mr Jensen were negligent by failing to normalise the accounting policies of Tui and Kiwi and also by ignoring those accounting policies and, more importantly, the domestic market in relation to their assessment of Tui’s future profitability. The appellants argue that the domestic market largely belonged to Tui and was projected to provide a larger payout to the merged company than the manufacturing operations. They also point to the fact that Tui owned the hugely valuable Tararua brand.
The first point as to normalisation of accounting policies is largely answered by the evidence of Mr Hagen referred to above that normalisation of accounting policies would not have made any significant difference to the forward projections. The judge, as she was entitled to do, accepted the evidence of Mr Hagen on this point.
Mr Lusk also argues that the concern the appellants have in relation to normalisation shows a misunderstanding of the nature of the task EY undertook. The differential was a negotiated figure that represented a balance between what Kiwi executives believed Kiwi shareholders would accept and what the Tui directors might consider acceptable. There was evidence that the 60c differential agreed upon was Kiwi’s “bottom line”. In that case the choice facing Tui shareholders was to merge on those terms or not to merge. The analysis therefore to be undertaken was a comparison between the position of the Tui shareholders in a merged company and their position if Tui stood alone. It was on that basis (rather than on a comparison with Kiwi shareholders) that the review team concluded the differential was fair.
Even so, Mr Lusk submits that the report did address the relative benefits to be enjoyed by Kiwi and Tui shareholders. For example the executive summary recorded that the Tui shareholders accessed an additional revenue stream with a present value of 141.39 cents per kg/ms (milk solids) while the Kiwi shareholders would only gain access to an additional revenue stream of 33.7 cents per kg/ms. It also recognised that in the short term (i.e. 1996-2000) the advantage was with Kiwi suppliers but in the long term the Tui suppliers were predicted to gain significantly more. Mr Crombie’s submissions on behalf of Mr Jensen were to similar effect and we accept these submissions.
We note too that the judge accepted the evidence of Mr Hagen and Mr Davies that Tui shareholders were to receive a greater gain than the Kiwi shareholders from the merger and that Kiwi was the stronger entity. Again this was evidence she was entitled to accept.
In terms of whether the report ignored the potential of the domestic market we note first that the Tui projections EY and Mr Jensen were working from did include projections for the domestic market – and in fact showed the company moving from a $2.8M loss in the 1995/1996 year to a $3.8M profit for the 1996/1997 year. To the extent that the report relied on the Tui projections therefore the domestic market was taken into account.
The appellants argue, however, that these projections were unduly conservative, especially in the light of the assumptions in the merger model, which showed the large contribution of the domestic market to the merged company. They were also unduly conservative in that they did not show growth in the $3.8M profit projected and indeed that profit was in itself lowered by extraordinary expense items related to restructuring. In addition, the figures should have been reworked after it became clear to the Tui directors that the restructuring of Tui’s domestic operations had succeeded in returning that market to profitability. They point to the Board minutes of April where the benefits from the restructuring project were thought to be only at 60% of the targeted level and those of August where the project was considered to have attained its full potential.

The appellants submit that EY and Mr Jensen should have reviewed the Tui projections upwards in the light of those factors and in light of the fact that the Tui directors were always very conservative in their projections, unlike the Kiwi directors.
EY and Mr Jensen do not dispute that they owed a duty of care to the appellants. They say that the duty was, however, defined and limited by the terms of their engagement and respective expertise. The conclusion in the report was further subject to the disclaimers and qualifications expressed in the report. In particular it is to be noted, they say, that it had been agreed with Tui that neither a due diligence, valuation or audit was required and that they would be relying on the executives of the companies to supply them with the necessary accurate information as requested. Goddard J found (on the basis of evidence from the EY witnesses and Mr Hagen) that the EY respondents had no reason to doubt and were thus entitled to rely on the figures received from Tui executives. Those projections clearly took into account the domestic market.
In addition EY and Mr Jensen point to the evidence of Mr Gough to the effect that Tui Foods (the domestic market company) made significant losses in 1995 and 1996 and had a history of substantially under performing against its budget. Mr Crombie also drew attention to the evidence of Mr McConnon of Mainland, with which Tui had had failed merger discussions in 1995, who said that Mainland at that stage had considered Tui’s expectations of future profitability excessively optimistic. This evidence therefore directly contradicts the appellants’ assertion that the Tui projections were unduly conservative.
In our view the appellants have a number of other problems with their submissions, even without taking into account Mr Lusk’s and Mr Crombie’s submissions as to the scope of the duty owed by their respective clients. The first point, as noted above, is that the domestic market was taken into account in the Tui projections. The second problem is that there was evidence by Mr Hagen (which the judge appears to have accepted) that the assumption of a 4-4.5% growth in supply in the Tui projections was overly optimistic. This means that any increase in the projections for the domestic market may have been offset by an adjustment of that growth rate.
The final point is that there was evidence that the projections for the merged company and the actual results in the domestic market post merger were related to factors that would not have been achievable by Tui as a standalone entity – e.g. through cost efficiencies arising out of economies of scale, product mix efficiencies and reduced competition. Indeed Tui as a standalone entity risked loss of supply. The judge appears to have accepted that evidence (and she was entitled to do so). The judge also accepted the evidence (as again she was entitled to do) of Mr Hagen that the special nature of co-operative companies rendered the net value of assets, including brand names, of no relevance to an assessment of whether the merger was fair and in the best interests of Tui shareholders. This is because assets are only relevant to the generation of future payout and, apart from a return of their contribution plus interest if shares are surrendered, payout is the only return a shareholder in a co-operative dairy company receives.
EY and Mr Jensen also say that reliance on the report was not proved by the appellants and that there is no evidence that the report caused the change in vote. They also contend there was no loss suffered by the appellants.
Goddard J found that it was essential for the appellants to establish individual reliance on the EY/Jensen report and that it was not enough to allege a general reliance on the representations by unidentified shareholders who did not give evidence at trial. She found that there was insufficient evidence of reliance by the appellants on the representations. Mr Hedley had disavowed any reliance on the EY report (he voted against the merger and thought the report was “rubbish”). Only a single witness gave evidence that he had been induced by the EY report to vote in favour of the merger. The only other appellant who gave evidence about changing his vote said that he did so because of a personal approach from one of the directors and through concerns about the polarisation of Tui shareholders.
It is possible, however, to interpret the statement of claim as asserting that EY and Mr Jensen owed the appellants a duty to take care not to cause other shareholders to vote in favour of the merger by means of false representations and thereby harm the appellants financially. The issue then is not whether the appellants themselves relied on the negligent misrepresentations but whether the misrepresentations affected the decisions of a group of shareholders sufficiently large to be able to change the result of the vote.
Mr Henry submitted that it is unreasonable in such circumstances for the appellants to have been to be expected to call all 1200 shareholders to give evidence as to why they changed their votes (it not being known who in fact changed their vote and indeed some who otherwise may have changed their vote perhaps maintained their pro-merger votes because of the EY/Jensen report). He suggested that, where a report is prepared in order that it be relied upon, reliance can be inferred. The inference can be displaced, he argues, but the onus is on the respondents to do so. It is in any event clear, he submits, that the report was a real and substantial cause of the appellants’ loss. He pointed to the evidence of Mr Bailey, one of the former Tui directors, to the effect that the report would have had a substantial effect on the decision made by the voters at the second EGM, as well as to the surrounding circumstances, such as the fact that it was sent to every shareholder with a letter from the directors emphasising the authority and significance of the report’s conclusion.
Goddard J did go on to examine this contention. She found it impossible on the evidence before her to infer from the numbers alone what caused the relatively small shift in vote at the second EGM. She pointed to the fact that there had been intensive lobbying between the two meetings by both the anti-merger and the pro-merger groups. At the second EGM there was increased shareholder turnout as well as an increase in proxies. The voting was on a weighted basis whereas it may have been simply on a show of hands at the first EGM. She also accepted Mr Lusk’s submission that shareholders may have voted for the merger in reliance on other factors such as risk of supply loss and concern at being left behind industry trends if Tui were to remain stand-alone. Indeed, of the two shareholders who gave evidence of changing their vote, one did not rely on the EY/Jensen report.
We consider that it was open for Goddard J on the evidence to come to the conclusion that she could not draw the inference that the EY/Jensen report caused the change in vote. As this is the case we make no comment on Mr Henry’s submissions as to the reverse onus he submitted existed or as to the correct test to be applied.
In terms of whether the appellants suffered loss we note first that the cause of action is in tort and not contract. Thus any loss must be calculated to put the appellants in the same position as if the tort had not been suffered. It is not, as it would be if the damages were for breach of contract, to put the appellants in the position they would have been in had the contract been carried out.
In this case Goddard J concluded that the payout received by the former Tui shareholders from the merged entity was greater than the payout they would have received from Tui had it remained independent. She therefore concluded that they had suffered no loss. Mr Hagen and Mr Davies both gave evidence, which she accepted, that the Tui suppliers are better off after the merger, even after the differential has been deducted. This was based on a comparison between the Tui standalone projections (which, as indicated above, Mr Hagen considered were in any event unduly optimistic in that they assumed a constant growth in supply) and the merger projections. Indeed in the result the payouts achieved since the merger have exceeded the merger projections.
The appellants appear to be submitting that their loss is the difference between what they paid (for Kiwi shares in a merged entity justifying a 60c differential) and what they received (Kiwi shares in a merged entity not justifying a 60c differential because Tui’s financial position was just as good, as, if not better than, Kiwi’s). This appears to assume that the merger would have still occurred albeit on different terms. Goddard J held that this suggestion not only pre-supposed that such an option were truly open but ignored the evidence to the contrary. She held (and there was ample evidence from which she was entitled to draw such a conclusion) that the 60c differential was “the absolute bottom line” for Kiwi.
This means that the true comparison must be between the position of the shareholders with Tui standing alone and that with Tui as part of the merged entity. Regarded in this light there was, as the judge held, no loss. This would have been sufficient in itself for the appeal to fail.

Result and Costs

For the reasons given above the appeal is dismissed.
Mr Hodder seeks an increased award of costs for his client on the same basis as awarded in the High Court (85% of actual costs) on the basis that the allegations of deceit (always very serious allegations) against his clients were held in the High Court to be without foundation and this has been upheld on appeal. We accept that an increased award of costs is appropriate and award his clients costs of $30,000 plus reasonable disbursements to be set by the Registrar if necessary.
Mr Lusk and Mr Crombie also argued for an increased award of costs in favour of their clients. While they could not put the same argument as Mr Hodder because their clients did not face unwarranted allegations of deceit, they did submit that the appeal was without merit and thus an increased award was appropriate for their clients too. We accept that submission and award costs of $20,000 to the fourth respondents and $15,000 costs to Mr Jensen plus in each case reasonable disbursements (including travel and accommodation costs of counsel) to be set by the Registrar if necessary.

Solicitors:
Innes Dean, Palmerston North for Appellants
Chapman Tripp, Wellington for First, Second, Third and Sixth Respondents
Buddle Findlay, Auckland for Fourth Respondents
Cooney Lees Morgan, Tauranga for Fifth Respondent

[2002] NZCA 327

18 December 2002