In the matter of Green's Foods Limited [2007] NSWSC 43

New South Wales Supreme Court

CITATION : In the matter of Green's Foods Limited [2007] NSWSC 43

HEARING DATE(S) : 19 January 2007

JUDGMENT DATE : 9 February 2007

JUDGMENT OF : McDougall J at [1]

DECISION : See paras [18] and [19] of reasons for judgment

CATCHWORDS : CORPORATIONS - scheme of arrangement - convening of scheme meeting - statutory disclosure requirements - whether scheme one that shareholders would approve - credit risk - whether risk to security holders whose securities are divested by virtue of the scheme - Corporations Act 2001 (Cth) s 411 - WORDS AND PHRASES - "scheme of arrangement" and "explanatory memorandum" - Corporations Law s 411(1)

LEGISLATION CITED : Corporations Act 2001 Corporations Regulations

CASES CITED : Re NRMA Limited (2000) 33 ACSR 595 Re Tempo Services Limited (2005) 53 ACSR 523

PARTIES : Green's Foods Limited (Plaintiff)

FILE NUMBER(S) : SC 1011/07

COUNSEL : K L Andronos (Plaintiff) K Mills (appearing for the acquiring party)

SOLICITORS : Baker & McKenzie (Plaintiff)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

McDOUGALL J

9 February 2007

1011/07 IN THE MATTER OF GREEN'S FOODS LIMITED REASONS FOR JUDGMENT 1 HIS HONOUR: On 19 January 2007, I made an order pursuant to s 411(1) of the Corporations Act 2001 (the Act) that the plaintiff (GFL) convene a meeting of its members to consider, and if thought fit, agree to a Scheme of Arrangement. I made consequential and facultative orders. I reserved my reasons for doing so. These are my reasons. Background 2 GFL is a listed public company. It has two principal operating divisions: the pet foods division and the consumer foods division. 3 The scheme provides for Nestlé Australia Limited (Nestlé) to acquire the entire issued share capital of GFL for a consideration of 90 cents per share. If the share is implemented (ie, if the members agree to it and the Court approves it), GFL will divest itself of the consumer foods division and an investment in a company known as Bestcare Pet Foods Pty Limited (I shall refer to those proposed transactions together as the related party transaction). The counterparty to the related party transaction is to be a company associated with two of GFL's major shareholders, Guinness Peat Group (Australia) Pty Limited (GPG) and CVC Limited (CVC). 4 In substance although not in law, the outcome of the scheme, from Nestlé's perspective, would be that Nestlé will acquire the pet foods division of GFL. Formal matters 5 I am satisfied that GFL is a "Part 5.1 body". I am satisfied that the proposed scheme is "a compromise or arrangement … proposed … between [GFL] and its members". Thus, what is proposed falls within s 411(1). 6 A draft, in the form of a draft "Scheme Booklet", of the explanatory statement required by s 412(1) to be sent to members was tendered. I am satisfied that it complies with the requirements of s 412(1) and, to the extent that they are applicable, of the regulations. Accordingly, pursuant to s 411(1), the orders that I made included an order approving the explanatory statement (as constituted by the scheme booklet). 7 I am satisfied that appropriate notice of the application made on 19 January 2007 was given to the Australian Securities and Investments Commission (ASIC) and that ASIC had had a reasonable opportunity to consider the terms of the proposed scheme and the draft scheme booklet, and to put submissions. In fact, ASIC provided a letter (dated 16 January 2006) stating that it did not propose to appear at the hearing of any application pursuant to s 411(6) to approve the scheme, and that its present intention was to furnish, for the purposes of any such second hearing a statement pursuant to s 411(17)(b), to the effect that it had no objection to the scheme. The scheme booklet 8 The scheme booklet, which as I have said constitutes the explanatory memorandum required by s 412(1) of the Act, is a detailed document. It gives full details of the proposed scheme and the related party transaction. It states the consequences both if the scheme proceeds and if the scheme does not proceed. 9 The scheme booklet gives reasons in favour of the scheme, and reasons against it. There are two matters which I regard as particularly significant in the former. The first is that the consideration (90 cents per share) is a significant premium to the range of prices at which shares in GFL had traded at various times prior to suspension of trading when GFL made an announcement relating to the proposed transaction. The second matter is that (as appears both from the reasons themselves and from other material in the scheme booklet) the proposal was negotiated after a competitive "due diligence" process, in which a number of interested parties had the opportunity to consider whether to make an offer for part or all of the business of GFL. No superior proposal emerged from this process. 10 The scheme booklet contains an independent expert's report, although no such report was required because the transaction did not fall within Schedule 8 clause 8303 to the Corporations Regulations. The independent expert's report was prepared by Mr Vincent John Fayad of PKF Corporate Advisory Services (NSW) Pty Ltd. It is, on its face, a careful and comprehensive review of the transaction. It deals, among other things, with the likely advantages and disadvantages of the proposed scheme. Relevantly, Mr Fayad concludes that the consideration per share "exceeds our assessed range of values" of GFL's shares "and, accordingly, is considered to be "fair"." The basis upon which Mr Fayad derived his assessed range of values is set out in detail, and appears on its face to be reasonable. 11 I am satisfied that the scheme booklet complies with the disclosure requirements set out in Part 3 of Schedule 8 to the Corporations Regulations, to the extent that those requirements are applicable. 12 Thus, I conclude, the scheme booklet provides sufficient information to members to enable them to evaluate the proposed scheme and to make an informed decision, whether or not to support it. Scheme likely to be approved? 13 It is not the task of the court hearing an application for an order pursuant to s 411(1) of the Act to consider in detail whether or not the scheme, if agreed by members, would be approved. That is a matter for a hearing under s 411(6). Nonetheless, as Santow J put it in Re NRMA Limited (2000) 33 ACSR 595 at 605, the Court should consider whether the "scheme on its face is so blatantly unfair that it should be stopped in its tracks before even the meeting stage." 14 There is no basis for thinking that the scheme proposed in this case is so obnoxious that it is not one proper to be put to members. On the contrary, the independent expert's report suggests that the scheme could well be regarded as one that is in the best interests of members, and that members might be likely to accept. In any event, there is certainly nothing in the substance or detail of the scheme which suggests to my mind that it should not be put to members for their consideration. 15 The evidence demonstrates that, although GFL's businesses have performed poorly in recent times, nonetheless it has a substantial surplus of assets over liabilities, and is able to pay its debts as they fall due. There is no evidence of any risk to creditors should the scheme be approved. "Credit risk" 16 In Re Tempo Services Limited (2005) 53 ACSR 523, Gyles J identified as a matter to be considered whether shareholders "should … have to bear any credit risk occasioned by the mechanism chosen so far as payment is concerned." That risk is addressed in the draft scheme. By clause 4.3, GFL is to procure Nestlé to pay the "Scheme Consideration" to each "Scheme Shareholder". By cl 4.4, GFL may satisfy that obligation "by procuring Nestlé, on or before the Implementation Date, to deposit the aggregate amount of the Scheme Consideration … in cleared funds in a trust account jointly operated by [GFL] and Nestlé, to be held on trust for the Scheme Shareholders". By clause 5.5, cheques drawn on that trust account will be sent to each shareholder for the amount of the Relevant Scheme Consideration. 17 In my view, this mechanism addresses adequately the issue of credit risk. Conclusion 18 The scheme is one that may properly be put before shareholders for their consideration, and the material contained in the scheme booklet gives shareholders adequate information to enable them to assess and make up their minds on the offer. 19 It was for these reasons that on 19 January 2007 I made the orders to which I have referred.