FEDERAL COURT OF AUSTRALIA Choiseul Investments Limited, in the matter of Choiseul Investments [2010] FCA 1189 Citation: Choiseul Investments Limited, in the matter of Choiseul Investments [2010] FCA 1189 Parties: CHOISEUL INVESTMENTS LIMITED (ABN 36 000 005 041) File number(s): NSD 1143 of 2010 Judge: JACOBSON J Date of judgment: 21 October 2010 Catchwords: CORPORATIONS – scheme of arrangement – first Court hearing – whether certain Scheme participants constitute a separate class of shareholders – issue of performance risk considered Legislation: Corporations Act 2001 (Cth) s 411 Cases cited: CCI Holdings Limited [2007] FCA 832 followed Re Hills Motorway Limited (2002) 43 ACSR 101 referred to Re KAZ Group Limited [2004] FCA 738 cited Re SFE Corporation Limited [2006] FCA 670 followed Sovereign Life Assurance Company v Dodd [1892] 2 QB 573cited Date of hearing: 21 October 2010 Date of last submissions: 21 October 2010 Place: Sydney Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 33 Counsel for the Plaintiff: Mr M Oakes SC Solicitor for the Plaintiff: Norton Rose Australia Counsel for Milton Corporation Limited (with leave): Mr B Coles QC IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1143 of 2010 IN THE MATTER OF CHOISEUL INVESTMENTS LIMITED (ABN 36 000 005 041) CHOISEUL INVESTMENTS LIMITED (ABN 36 000 005 041) Plaintiff JUDGE: JACOBSON J DATE OF ORDER: 21 OCTOBER 2010 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. Pursuant to section 411(1) of the Corporations Act 2001 (Cth) ("the Act"): (a) the Plaintiff, Choiseul Investments Limited ("Choiseul") convene a meeting ("Scheme Meeting") of the ordinary shareholders of Choiseul other than Milton Corporation Limited or any of its related bodies corporate as defined in section 50 of the Act (Excluded Shareholders), for the purposes of considering and, if thought fit, approving a Scheme of Arrangement (with or without modification) proposed to be made between Choiseul and its ordinary shareholders, other than Excluded Shareholders, the terms of which are contained in Annexure 1 to the scheme booklet which is Exhibit 1 in this proceeding ("Scheme Booklet"); (b) the Scheme Meeting be held on Friday, 26 November 2010 at 12:15pm at the Macquarie Graduate School of Management at Level 6, 51-57 Pitt Street, Sydney in the state of New South Wales. (c) Richard England, or failing him John Bryson, act as Chairman of the Scheme Meeting; (d) The Chairman have the power to adjourn the Scheme Meeting for such a time that the Chairman considers appropriate; and (e) The Explanatory Statement compromising the Scheme Booklet be approved for distribution to ordinary shareholders of Choiseul other than Excluded Shareholders. 2. Rule 2.15 of the Federal Court (Corporations) Rules 2000 (Cth) shall not apply to the Scheme Meeting, except in so far as that rule applies Regulation 5.6.13 of the Corporations Regulations 2001 (Cth). 3. Notice of the hearing of any application for an order approving the Scheme be published once in The Australian newspaper by an advertisement substantially in the form of Annexure A to these Orders, such advertisement to be published on or before 24 November 2010. 4. The proceedings be adjourned to 1 December 2010 at 10:15 am for hearing of any application to approve the Scheme. 5. These Orders be entered forthwith. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. The text of entered orders can be located using Federal Law Search on the Court's website. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1143 of 2010 IN THE MATTER OF CHOISEUL INVESTMENTS LIMITED (ABN 36 000 005 041) CHOISEUL INVESTMENTS LIMITED (ABN 36 000 005 041) Plaintiff JUDGE: JACOBSON J DATE: 21 OCTOBER 2010 PLACE: SYDNEY REASONS FOR JUDGMENT introduction 1 This is the first Court hearing of an application to approve a scheme of arrangement ("Scheme") between Choiseul Investments Limited ("Choiseul") and its shareholders, other than Milton Corporation Limited ("Milton") and its related bodies corporate as defined in s 50 of the Corporations Act 2001 (Cth). outline of scheme 2 The Scheme was announced on 20 August 2010 when Choiseul and Milton announced that they were in discussions to merge. Following the initial announcement, Choiseul and Milton entered into a Merger Implementation Agreement on 7 September 2010 under which Choiseul and Milton agreed that the merger is to be implemented by way of a scheme of arrangement. 3 Under the terms of the Scheme, Scheme participants (other than ineligible foreign holders) will receive new shares to be issued in Milton in return or in exchange for their Choiseul shares. The number of new Milton shares to be issued to Scheme participants will be calculated by reference to the formula contained in the Merger Implementation Agreement. It is defined in the Scheme documents as the "Exchange Ratio". Corporate structure of Choiseul and Milton 4 Choiseul was incorporated nearly 100 years ago and has been listed on the official list of the Australian Securities Exchange since 1971. Choiseul is a listed investment company that invests in a diversified portfolio of Australian shares, unit trusts and interest bearing securities. 5 The day-to-day management functions of Choiseul, including the management of its investments, have been provided by Milton since 1992 under an agreement entered into on 4 March 1992 between those companies. Milton conducts the management and administration of Choiseul, subject at all times to the directions of the Choiseul Board. Choiseul does not have any employees. The company secretary of Choiseul is also an executive of Milton and Milton pays his remuneration. There are no other executives of Choiseul. 6 Both Choiseul and Milton have cross-holdings in the other. Milton holds 11,485,134 shares in the capital of Choiseul which comprises nearly 12% of the issued capital of Choiseul. That company in turn holds 1,700,000 shares in the capital of Milton. 7 The Choiseul Board comprises three directors, Mr Robert Millner, Mr John Bryson and Mr Richard England. Mr Millner is the non-executive chairman of both Choiseul and Milton. 8 The Board of Directors resolved to delegate the powers in connection with the Scheme to a committee comprised of the independent directors, that is to say, Mr Bryson and Mr England. The merger has been considered and approved by Mr Bryson and Mr England rather than by the entire Board of Choiseul. Scheme consideration 9 The Exchange Ratio to which I referred earlier provides that the number of new Milton shares to be issued to each Scheme participant as the Scheme consideration will be calculated in accordance with a formula by reference to the relative net tangible assets per share of each company, determined in the same manner used for each company's monthly net tangible asset backing announcement to the ASX. 10 The net tangible asset ("NTA") is to be adjusted for a proposed dividend, described in the Scheme documents as the Choiseul Special Dividend, and also for interim dividends to be declared before the Scheme meeting in respect of each of Milton and Choiseul. 11 An illustration of the calculation of the Scheme consideration as at 30 September 2010 is set out in the Scheme documents. It shows that as at that date, based on the NTA per share values of each of Choiseul and Milton, the Exchange Ratio would produce a figure of 0.2789 Milton shares for each Choiseul share. 12 The Scheme Booklet seems to me to make it sufficiently clear that this is no more than an illustrative example and that the final Scheme consideration to which Scheme participants will be entitled is to be determined prior to the date of the proposed Scheme meeting. 13 It also seems to me to be sufficiently clear that the precise number of shares to be produced pursuant to the formula will be announced shortly prior to the Scheme meeting. 14 If the Scheme is approved, the effect of it will be that Choiseul will become a subsidiary of Milton. Independent expert's report 15 The documents to which I have been taken this morning include an independent expert's report prepared by Messrs Lonergan, Edwards and Associates Limited. 16 The independent expert has expressed the opinion that the consideration for the Scheme is fair and reasonable and in the best interests of Choiseul shareholders. 17 The basis upon which this opinion is expressed is set out in full in the report. The essence of the opinion is that the value of the Scheme consideration as at 30 September 2010 was in the range of $4.53 to $4.77 per share, whereas the value of 100% of the shares in Choiseul determined on a net tangible asset basis was in the range of $4.45 to $4.62. 18 Accordingly, the value of the Scheme consideration is said to exceed the value of the shares in Choiseul in a range of 8 cents to 15 cents per share. 19 The independent expert expresses the opinion, in paragraph 120 of the report, that since the value of the Scheme consideration is slightly higher than the independent expert's assessed value of 100% of the shares in Choiseul, the Scheme is fair when assessed based on the ASIC guidelines set out in Regulatory Guide 111 – Content of Expert Reports. 20 It follows that, as the independent expert says in paragraph 123, in its opinion the Scheme is also reasonable and in the best interests of Choiseul shareholders. 21 I have been provided with written submissions prepared by Mr Oakes SC. I will mark the written submissions as MFI1. Issues arising on the application 22 Two issues arose this morning in relation to the application. Separate class of shareholders 23 The first issue is whether certain persons who are associates of Milton who are Scheme participants ought to be considered to be a separate class. 24 These persons are, in particular, the Milton directors, including Mr Millner, who through his family company owns approximately 17 million shares in Choiseul. 25 This issue has been considered in a number of cases, including a decision of Barrett J in Re Hills Motorway Limited (2002) 43 ACSR 101, in particular at [9] – [10]. In that case, his Honour was considering the question of whether there was a special class constituted by ineligible foreign shareholders. However, the observations that his Honour made in that context are equally applicable to the issue which arose this morning. 26 It seems to me that the principle which has been applied for approximately 100 years, stated in Sovereign Life Assurance Company v Dodd [1892] 2 QB 573, is applicable here, so that the associates of Milton are treated in the same manner as all Scheme participants. They are, in those circumstances, able to consult in common with all other Scheme participants with a view to determining where their common interest lies. I therefore do not consider that it is appropriate or necessary to order a separate Scheme meeting to be attended by those persons. 27 However, it seems to me that the approach which I ought to adopt is that to which Mr Oakes referred this morning, namely, that there will be a separate tally of votes cast at the Scheme meeting by the holders of those shares, so that this issue can be considered at the second Court hearing on the question of fairness. That was the approach which was adopted by Emmett J in CCI Holdings Limited [2007] FCA 832 at [19]. 28 For reasons similar to those referred to by his Honour, I would be disposed to conclude that there is no separate class constituted by the associates of Milton. However, as Mr Oakes indicated, it will be possible to establish at the second Court hearing what shares have been voted in favour and what shares have been voted against the proposal to agree to the Scheme. Accordingly, to the extent necessary, I can take this into account on the issue of fairness. Performance risk 29 The only other issue which arose was the issue of performance risk. That is an issue which has been considered in a number of decisions of the Court, including the decisions of Gyles J in Re KAZ Group Limited [2004] FCA 738 at [4] – [5] and Re SFE Corporation Limited [2006] FCA 670 ("SFE") at [4]. 30 In SFE at [4] his Honour made the observation that he did not see why shareholders whose shares are divested pursuant to a Scheme should run any performance risk as far as the quid pro quo is concerned. 31 The procedure which is often adopted in Schemes where the consideration is payable in cash is for the necessary funds to be deposited prior to the divestiture. 32 In the present case, the consideration is the issue of new Milton shares. I was taken to the relevant provision of the Merger Implementation Agreement this morning, and Mr Oakes obtained instructions to make an amendment designed to ensure that the issue to which Gyles J referred was sufficiently dealt with. 33 I am otherwise satisfied, for the reasons referred to in the written submissions, that I ought to make orders convening the Scheme meeting in accordance with the draft short minutes of order that I have signed. I certify that the preceding thirty-three (33) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jacobson. Associate: Dated: 2 November 2010