Reported Decision : 40 ACSR 319 New South Wales Supreme Court CITATION : McMillan Properties Pty Ltd v W C Penfold Ltd & Anor [2001] NSWSC 1173 CURRENT JURISDICTION: Equity Division Corporations List FILE NUMBER(S) : SC 5792/01 HEARING DATE(S) : 10/12/01 JUDGMENT DATE : 11 December 2001 McMillan Properties Pty Limited (P) PARTIES : W C Penfold Limited (D1) Penfold Printing Limited (D2) JUDGMENT OF : Young CJ in Eq COUNSEL : P M Wood (P) M Walton SC (D) SOLICITORS : Atanaskovic Hartnell (P) Dibbs Barker Gosling (D) CATCHWORDS : CORPORATIONS [156]- Takeover- Reverse takeover-Prohibitions- Resolution to lift prohibition- Entitlement of holding company to vote. LEGISLATION CITED : Corporations Act 2001 ss 606, 611, 659B Corporations Law (pre-1999), ss 615, 623 Australian Sescurities Commission v Burns (No 2) (1994) 51 FCR 496 Baden Pacific Ltd v Portreeve Pty Ltd (1988) 14 ACLR 677 Congreve v Inland Revenue Commissioners [1946] 2 All ER 170 Exicom Pty Ltd v Futuris Corp Ltd (1995) 18 ACSR 404 Federal Commissioner of Taxation v St Helens Farm (ACT) Pty Ltd (1981) 146 CLR 33 CASES CITED : Mackenzie v Allardes [1905] AC 285 National Companies and Securities Commission v Consolidated Gold Mining Areas NL (No 2) (1985) 1 NSWLR 622 Ord Forrest Pty Ltd v Commissioner of Taxation (1974) 130 CLR 124 Pilmer v Duke Group Ltd (2001) 75 ALJR 1067 Re VGM Holdings Ltd [1942] Ch 235 Re Wragg [1897] 1 Ch 796 DECISION : See para 49. IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST 5792 of 2001 YOUNG CJ in EQ Tuesday 11 December 2001 McMILLAN PROPERTIES PTY LTD v W C PENFOLD LTD & ANOR Judgment 1 His Honour: The plaintiff holds 11.45 percent of the issued shares in the second defendant, Penfold Printing Ltd. The first defendant, W C Penfold Ltd, holds 54.36 percent of the issued shares in the second defendant. It is proposed by the directors of the second defendant that an extraordinary general meeting be held on 28 December 2001, for the purpose, inter alia, of passing an ordinary resolution that will overcome the barrier to a reverse takeover erected by s 606 of the Corporations Act 2001. 2 The proposal of the directors of the second defendant involves a "merger", to use a loose term, between the enterprise carried on by the second defendant and that carried on by Buscombe Ltd. The result will be that the shareholding of the second defendant will be drastically altered in the manner that I will outline shortly, and the name of the second defendant will become Penfold Buscombe Ltd. In other words, to effect this merger the proposal is essentially that, apart from two shares, the shares in Buscombe Ltd will be cancelled, and the shareholders in Buscombe Ltd will be allotted shares in the second defendant in roughly the same number as they presently hold in Buscombe Ltd. 3 The facts of this matter are not in contention and I adopt the simplification of the proposed process which is set out in the written submissions of Mr P M Wood, counsel for the plaintiff, and with which Mr Matthew Walton SC, for the defendants, concurred. 1. The second defendant will issue 16,866,646 ordinary shares, representing 50 percent of its then issued capital, to the nine shareholders of Buscombe Group. 2. Buscombe Group will allot two shares to Penfold Printing, and cancel all other existing shares. 3. Penfold Printing will offer 2,529,998 options to the shareholders of Buscombe Group ("the Buscombe Shareholder Options"). 4. Penfold Printing will change its name to Penfold Buscombe Limited. 5. The board of Penfold Printing will be reconstituted so that it comprises four directors nominated by the shareholders of the Buscombe Group, three existing directors and one further director nominated by Penfold Printing. 6. The constitution of Penfold Printing will be amended to remove the chairman's casting vote in relation to decisions of the board. 4 Following completion of the merger it is also proposed that the second defendant issue 150,000 ordinary shares to ANZ Investment Bank. 5 This is, of course, an over-simplification of what is going to occur, but it is sufficient for present purposes. A major effect of the proposal will be to dilute the plaintiff's shareholding to six percent and, indeed, after the issue of the further shares to the ANZ Investment Bank down to 5.32 percent. 6 The holding of the first defendant will, after the second transaction, be reduced to 25.26 percent, and the Buscombe shareholders will hold 53.11 percent. The plaintiff seeks declarations that at the proposed meeting of 28 December any vote cast by the first defendant on the resolution is to be disregarded. 7 Ordinarily, the court would be most reluctant to make any declaration as to what might happen at a meeting to be held in the future. The court almost always waits until the meeting is held because experience shows that what is threatened often when the chips are down does not actually occur, and there is often no utility in dealing with declarations for future events. However, both sets of parties urged the court to decide the question. 8 Mr Wood says that, in particular: (1) the defendants have made it abundantly clear that the first defendant will vote in the way indicated; (2) the fact is that the resolution must pass when that occurs; and (3) the meeting is on 28 December and it is logistically very awkward indeed to bring matters before the court at that time of year. By way of digression, I have said before, that meetings held between Christmas and New Year are prima facie vexatious, in the sense that the court always looks very closely to see whether the timing of itself makes the meeting unfair. 9 In the instant case, it seems to be accepted that whilst it is unfortunate that the meeting will be held on 28 December, that is what must happen. I believe in the circumstances that they are sufficiently special to warrant the court making a declaration and that the declaration will have utility. 10 I should also mention that there are very few cases involving takeovers that come before the court these days. This is principally because of the existence of a takeover panel. However, both counsel agree s 659B of the Corporations Act 2001 which precludes the court being involved in takeovers at certain times, has no application to the present case and the court does have jurisdiction to decide the present issue. 11 The present issue really involves a very narrow point of statutory construction. The key statutory matter is s 611, item 7 of the Corporations Act. However, it is necessary to go back a little in time and to look at the statutory scheme of the old Corporations Law before the amendments that were made in 1999. 12 Before 1999, the then s 615 provided a prohibition and said that: "… a person shall not acquire shares in a company if: (a) any person who: (i) is not entitled to any voting shares in the company; or (ii) is entitled to less than the prescribed percentage of the voting shares in the company; would, immediately after the acquisition, be entitled to more than the prescribed percentage of the voting shares in the company ... ". 13 Section 623 then provided: "Section 615 does not apply in relation to an acquisition of shares in a company by virtue of an allotment or purchase if the company has agreed to the allotment or purchase by a resolution passed at a general meeting at which no votes were cast in relation to the resolution in respect of any shares held by, or by an associate of, the person to whom the first-mentioned shares were to be allotted, or by whom or from whom the first-mentioned shares were to be bought, as the case may be. 14 In the present legislation the prohibition occurs in s 606. Section 606(1), so far as relevant, provides: "A person must not acquire a relevant interest in issued voting shares in a company if: (a) the company is: (i) a listed company ... ; and (b) the person acquiring the interest does so through a transaction in relation to securities entered into by or on behalf of the person; and (c) because of the transaction, that person's or someone else's voting power in the company increases: (i) from 20% or below to more than 20% ... However, the person may acquire the relevant interest under one of the exceptions set out in section 611 without contravening this subsection." 15 Section 606(6) extends the meaning of the expression "acquiring a relevant interest" and provides: "A person is taken ... to acquire a relevant interest in voting shares in a company if: (a) securities in which the person already had a relevant interest become voting shares in the company; or (b) there is an increase in the number of votes that may be cast on a poll attached to voting shares that the person already had a relevant interest in. The acquisition occurs when the securities become voting shares or the number of votes increases." 16 Section 610 also expands the normal meaning of "acquisition"; see particularly section 610(3), which I do not think it is necessary to set out. 17 Section 611 is headed "Exceptions to the prohibition" and contains a table which sets out a series of acquisitions that are exempt. The seventh item in the schedule under the heading "Approval by resolution of target" is as follows: "7. An acquisition approved previously by a resolution passed at a general meeting of the company in which the acquisition is made, if: (a) no votes are cast in favour of the resolution by: (i) the person proposing to make the acquisition and their associates; or (ii) the persons (if any) from whom the acquisition is to be made and their associates..." 18 It is also of interest to note item 8 under the heading "Target newly formed", which says: "8. An acquisition that results from an issue of securities of the company in which the acquisition is made if the company has not started to carry on any business and has not borrowed any money". 19 Item 8 is obviously inapplicable, but the contrast between 8 and the key provision that I have to consider, 7(a)(ii), is of interest in construing 7(a)(ii). 20 It is conceded that 7(a)(i) would prevent Buscombe from voting on the relevant resolution. However, the contest is whether the first defendant is prevented from voting on it because of 7(a)(ii). 21 I should digress by saying that one interesting question of construction of item 7 was not argued, and that is whether, if a person who is specified in 7(a) purports to vote, that means (1) that the barrier has not been lifted (because item 7 has not been fulfilled, in that votes were cast in favour of the resolution); or (2) whether, if votes by an unauthorised person are cast, they should merely be disregarded. 22 The way the summons is framed tends to suggest that both sides take the second interpretation. I, myself, would have favoured the first, but in view of the difference in viewpoint, and as the matter has not been argued, I merely mention the matter and pass on. 23 Mr Wood submitted that there is no question that the first defendant is an associate of the second defendant for the purposes of s 611. That follows, he says, from the definitions in ss 10 and 11(b) of the Act, making related bodies corporate associates and from s 50 which dictates when bodies corporate are related to each other relevantly when they are holding company and subsidiary. As the first defendant holds a 54.36 percent of the second defendant, they are a holding company and subsidiary by reason of the definitions in s 9 and s 46 of the Act. 24 Equally, he says, there can be no question that the proposed share issue of 16,866,646 shares in the second defendant to the shareholders of the Buscombe Group will constitute acquisitions for the purposes of s 606(1). It follows, he says, that the second defendant is the person "from whom the acquisition is to be made" by each of the shareholders of the Buscombe Group. As the first defendant is an associate of the second defendant, then item 7(a)(ii) dictates that the first defendant is disentitled from voting in favour of the relevant resolution. 25 He submitted that the conclusion is in conformity with the general approach that courts have taken to the width of the exemption in the predecessors to s 611, and he cites Baden Pacific Ltd v Portreeve Pty Ltd (1988) 14 ACLR 677, 683 and National Companies and Securities Commission v Consolidated Gold Mining Areas NL (No 2) (1985) 1 NSWLR 622, 625-6. 26 Mr Walton SC does not dispute any of those propositions. He does not argue that the relevant parties are not associates. However, he says that when one looks at the history of the legislation, and when one sees the actual wording of (a)(ii), particularly the words "if any" in parenthesis, the clear message that the legislature is sending is that where there is an acquisition by subscription, rather than by purchase, then there is no person from whom the acquisition is to be made, and accordingly, (a)(ii) may be disregarded. Thus the only person who is prevented from voting, if it were eligible, was the Buscombe Group. 27 Both counsel agree that I should adopt the purposive approach to the construction of the Act, so long as that construction does not lead to absurdity. 28 What Mr Walton means by "the history of the legislation" is, essentially, that if one goes back and analyses the old s 623, one can see that it commences by referring to an acquisition of shares by virtue of an allotment or purchase, but later on talks about the person to whom the shares were allotted, or the person by whom or from whom the shares were to be bought, making it quite clear that when there is an allotment, as opposed to a purchase, one disregards the company which allotted the shares. 29 Mr Wood recognises that, but says there was a clear intention in the 1999 Act to expand the situations in which there was to be prohibition of a takeover, and that one cannot place too much on the history of the legislation. 30 I think there is some substance in that argument, but, as always, the history of the legislation is of some value when construing the legislation as it presently exists. 31 It is useful to consider juristically what occurs when a company issues new shares. The classic statement of the position was made by Lord Greene MR, with whom Luxmoore and Goddard LJJ agreed, in Re VGM Holdings Ltd [1942] Ch 235, 241. He said: "A share is a chose in action. A chose in action implies the existence of some person entitled to the rights which are rights in action as distinct from rights in possession, and, until the share is issued, no such person exists. Putting it in a nutshell, the difference between the issue of a share to a subscriber and the purchase of a share from an existing shareholder is the difference between the creation and the transfer of a chose in action." 32 That passage has never been gainsaid. Indeed, I adopted it and expounded it in Exicom Pty Ltd v Futuris Corp Ltd (1995) 18 ACSR 404 (the Court of Appeal refused leave to appeal at p 413 of the same volume) and the Federal Court came to a similar view in Australian Securities Commission v Burns (No 2) (1994) 51 FCR 496. More importantly, it has been twice approved by the High Court of Australia; see Ord Forrest Pty Ltd v Commissioner of Taxation (1974) 130 CLR 124, 148 and Federal Commissioner of Taxation v St Helens Farm (ACT) Pty Ltd (1981) 146 CLR 336, 356; in each case by Gibbs J. 33 The juristic nature of a share itself is strangely uncertain. In the 6th edition of Gower's Principles of Modern Company Law (Sweet & Maxwell, London, 1997) p 299 (a similar passage appears in earlier editions by Professor Gower himself), the learned author shows that the term "share" derives from the time when corporations were just partnerships under a Royal charter, so that a share denoted a share in the assets of the enterprise. However, from the mid-nineteenth century, the basal distinction between a share and other securities, such as a debenture, is that a share is an interest in a company, whereas a debenture is an interest against a company. However, the share does not exist at all until it is issued and the share contains no right to any equitable interest in the assets of the company at all. 34 This proposition, and also the proposition in VGM, was developed by the High Court in the two gift duty cases to which I have already referred. In each of them Barwick CJ was in the minority, and Gibbs J in the majority. 35 In each of the gift duty cases, the scheme used by the taxpayer was to subscribe for shares in a cash rich company at the face value of $1 a share, so that by paying $1 for a $1 share the subscriber really became entitled to millions of dollars of equity. The cases involved construction of the Gift Duty Assessment Act 1941, which included in the definition of gift, the allotment of a share in a company and so the actual decision in the cases is of little value for present purposes. 36 However, what Barwick CJ and Gibbs J said about the issue of shares is important. 37 In the Ord Forrest case at 143 Barwick CJ said, apart from the statutory definition: "There are circumstances in which, in association with other transactions, an allotment of shares may effect an alienation of property from one person to another, neither being the company of whose capital the shares form part . But, as indicated, every allotment does not involve an alienation or transfer of property. ... An allotment of shares ... does not transfer any property from one person to another although by the allotment rights are created in the allottee which are themselves, when created, property." 38 Gibbs J said at 148: "An allotment of shares cannot be described as a disposition of property in the ordinary meaning of that expression. When a share is allotted, nothing is transferred or conveyed from the company to the shareholder. The person who becomes a shareholder by the allotment and issue of the share does not acquire any property in the asset of the company ... . What he acquires is the share, which is a separate right of property: Bradbury v English Sewing Cotton Co Ltd [1923] AC 774, at p 767. Moreover, the share does not pass from the company; before allotment the share does not exist as a piece of property; it is only when it is allotted and issued that the rights which it confers are created: In re VGM Holdings Ltd ". 39 Because the Ord Forrest case was an equally divided High Court, which affirmed Stephen J, the taxation industry took the question up to the High Court again in the St Helens Farm case. Both Barwick CJ and Gibbs J maintained their previous views, but expanded them. At 349 Barwick CJ said: "Until allotment and issue ... there is no property in the unissued shares; and, in particular, there is not then, or for that matter at any other time, any property or proprietorial right in or of the company in the unissued shares in its capital. The company has the capacity to allot and issue shares in the capital up to the amount of that capital, its nominal capital. But that capital is not property of the company. Indeed, when allotted and issued, the nominal amount of the issued share or shares constitutes in accounting terms a liability of the company. But, upon allotment and issue, the allottee has property in the shares allotted, the extent of that property being determined by the constitutional instruments of the company. But it is not property which comes to the allottee from, or by transfer from, the company . It is property which comes into existence by the allotment and issue or, more precisely, which is the consequence of such allotment and issue. ..." [The underlining is mine] 40 Gibbs J at 356 accepted up to a point, the argument of Mr Handley QC, as he then was, based on VGM Holdings and there is probably no need to go any further. 41 Both counsel in argument before me focussed on the recent decision of the High Court of Australia in Pilmer v Duke Group Ltd (2001) 75 ALJR 1067. The majority (McHugh, Gummow, Hayne and Callinan JJ) did refer to the law as to the issue and allotment of shares from para 26 onwards, but the main thrust of their discussion was to the effect that one cannot go behind the company's assessment of the value it was receiving in a transaction where shares were issued, otherwise than for cash, and it affirmed what the English Court of Appeal said in Re Wragg [1897] 1 Ch 796, particularly at 850. The majority turned their minds to what loss a company incurred by issuing and allotting shares in that company. The conclusion is at para 64, p 1081, that: "If a claim had been made, it may well be that some allowance would be made for the consequential effect on its capacity to raise other equity or debt finance. Otherwise, however, it gave up, or lost nothing by the issue of its shares." 42 With respect, I did not think that decision was as significant as the earlier decisions of the High Court, but it is significant in two particular respects; first, it moves in exactly the same direction as the previous decisions of the High Court, even though they are not cited (which is understandable because the point did not have to be explored in depth) but, secondly, it saves me from analysing whether the recent alteration in the concept of what is a share brought about by no par value shares, and by companies being able to purchase their own shares, has affected the basic concept of what is an allotment of shares because the decision, having been made this year, shows that it has not. 43 The reasoning in cases from VGM down to Pilmer indicates to me that when an acquisition is made by the issue of new shares, there is no person from whom the acquisition is made. I also think that this is reinforced by the inclusion of item 8 of s 611, which talks about securities of the company in which the acquisition is made, and that is to be contrasted with the words "the persons from whom the acquisition is to be made" in item 7(a)(ii). 44 I have looked to see if the word "acquisition" in its ordinary sense has any special significance. It seems to me that it does not. The word "acquisition" in its ordinary sense can cover the situation of a thief who takes the property of another. He or she obtains a good title as against all the world, other than the true owner, but his or her title is not derived from another. Similarly, a person who finds something. We get the same concept in possessory title of land. 45 Indeed, if one looks at some of the cases on the word "acquire" or "acquisition" one finds it often just means "received"; see Congreve v Inland Revenue Commissioners [1946] 2 All ER 170, 183 (reversed on other grounds [1947] 1 All ER 168) and a person who takes the transfer of property may be said not to have acquired property, where she has to account for any property that she has acquired against what she will receive from her former husband under her divorce settlement; see, for instance Mackenzie v Allardes[1905] AC 285, 293. 46 Mr Wood argued that provisions such as s 606(6) show that the term "acquisition" is being used in an extended sense and that the scheme of the 1999 Act is to be read as embracing all forms of acquisition, so that one must not be too pedantic about expressions such as that used in item 7(a)(ii), but be purposive. 47 I think the answer to that is twofold. First, passages such as from Gibbs J in the Ord Forrest case at 147, (though the word there was not "acquisition" but "disposition"), show that that argument really does not extend very far and, secondly, when one looks at the history, and when one looks at the old law as to issue of shares, and to item 8, Mr Wood's argument becomes weaker and weaker every time. 48 It follows then that, in my view, there is nothing which would affect any vote that might be cast by the first defendant at the meeting on 28 December 2001 from being efficacious. This may mean that I should dismiss the originating process with costs. However, I think in view of the fact that counsel have been unable to be present this morning I should merely deliver these reasons and stand the matter over to later in the week in case someone wishes to submit that I should make some sort of reverse declaration. I stand the matter over to Wednesday 12 December 2001 at 9.50 am. 49 NB. On 12 December 2001 counsel agreed that in the light of the above reasons, the following reverse declaration should be made: The Court declares that: 1. A resolution passed at a general meeting of Penfold Printing Limited in terms of the proposed resolution No 3, notice of which has been given to shareholders in a notice of meeting dated 28th November 2001 will not be an invalid resolution of Penfold Limited, by reason of: (a) W C Penfold Limited casting a vote on such resolution; or (b) W C Penfold Limited voting in favour of the resolution. The Court orders that: 2. The proceedings be otherwise dismissed; 3. The plaintiff pay the first and second defendants' costs. ********* Last Modified: 12/17/2001 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. 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