New South Wales Supreme Court CITATION : In the matter of Dairy Farmers Milk Co-operative Ltd [2009] NSWSC 627 HEARING DATE(S) : 3 July 2009 JUDGMENT DATE : 3 July 2009 JURISDICTION : Equity JUDGMENT OF : Austin J DECISION : Order made approving scheme of arrangement under s 344(1) of Co-operatives Act CATCHWORDS : CORPORATIONS - bodies corporate other than companies and associations - co-operatives registered under Co-operatives Act 1992 (NSW) - application under s 344 for order approving arrangement with members - arrangement agreed to by special resolution passed by special postal ballot - 7 out of each 10 shares to be cancelled in consideration of return of capital - inactive members' shares affected although they have no voting rights Co-operatives Act 1992 (NSW), ss 181, 189, 299, 300, 344, 353, 355 LEGISLATION CITED : Co-operatives Regulation 2005 (NSW), Schedule 2 Corporations Act 2001 (Cth), s 411 CATEGORY : Principal judgment Australian Co-operative Foods Ltd [2008] NSWSC 1063 CASES CITED : Australian Co-operative Foods Ltd [2008] NSWSC 1221 Re Namoi Cotton Co-operative Ltd (1998) 26 ACSR 694 PARTIES : Dairy Farmers Milk Co-operative Ltd (Plaintiff) FILE NUMBER(S) : SC 2929/09 COUNSEL : I M Jackman SC (Plaintiff) SOLICITORS : Addisons Lawyers (Plaintiff) IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST AUSTIN J FRIDAY 3 JULY 2009 2929/09 IN THE MATTER OF DAIRY FARMERS MILK CO-OPERATIVE LTD JUDGMENT 1 HIS HONOUR: The plaintiff ("DFMC") seeks approval of a scheme of arrangement with its members pursuant to s 344(1) of the Co-operatives Act 1992 (NSW) ("the Act"). 2 Section 344 is as follows: "(1) A compromise or arrangement is binding if and only if it is approved by order of the Court and is agreed to: (a) if the compromise or arrangement is between the co-operative and any of its creditors - at a court ordered meeting by a majority in number of the creditors concerned who are present and voting (in person or by proxy), being a majority whose debts or claims against the co-operative amount to at least 75% of the total of the debts and claims of all those creditors who are present and voting (in person or by proxy), or (b) if the compromise or arrangement is between the co-operative and any of its members - by the members concerned, by special resolution passed by means of a special postal ballot. (2) The court ordered meeting referred to in subsection (1)(a) is a meeting convened in accordance with an order of the Court under this Part. (3) The Court may grant its approval to a compromise or arrangement subject to such alterations or conditions as it thinks just. (4) An order of the Court approving a compromise or arrangement does not have any effect until an office copy of the order is lodged with the Registrar. On the copy being lodged, the order takes effect from the date of lodgement or such earlier date as the Court specifies in the order." 3 In Australian Co-operative Foods Ltd [2008] NSWSC 1063 it was held that under s 344 the initial court appearance is merely for the appointment of a hearing date and does not involve a preliminary assessment of the proposed scheme, in contrast with the procedure under s 411 of the Corporations Act 2001 (Cth). On that basis, on 25 May 2009 the court appointed 3 July 2009 at 10 a.m. as the time and date for the hearing of the plaintiff's application, subject to the scheme of arrangement being agreed to by the plaintiff's members by special postal ballot in the meantime. A special postal ballot of active members was conducted under s 344(1)(b) in the period from 1 to 30 June 2009. The evidence indicates that the ballot was conducted in accordance with the procedure laid down by s 194 and Schedule 2 of the Co-operatives Regulation 2005 ("the Regulation"). An explanatory statement dated 1 June 2009 was sent to the members, including inactive members, after first being approved by the Registrar pursuant to s 355(1). 4 Under s 189(1)(c) a special resolution is a resolution of a co-operative that is passed by a three-quarters majority in a special postal ballot of members (this is replicated in rule 63(1)(c) of DFMC's rules). Section 190(2) says that a resolution is passed by a particular majority in a postal ballot if that majority of the members of the co-operative who, being entitled to do so, casts formal votes in the postal ballot vote in favour of the resolution. 5 In the present case 97.6% of the members who cast formal votes in the special postal ballot voted in favour of the scheme. No one has appeared at today's hearing to oppose the application for the court's approval, and there is no evidence that any opposition was voiced to the scheme during the postal ballot. 6 In written submissions in support of the application for the court's approval of the scheme, senior counsel for the plaintiff has provided a checklist of the evidence establishing compliance with the items required by the Act and the Regulation. I have reviewed that checklist and the evidence to which it relates and I am satisfied that all the matters required to be attended to according to the Act and Regulation have been satisfied. 7 The scheme is in substance the second stage of distributing to members the net proceeds of sale of DFMC's investment in Australian Co-operative Foods Ltd ("ACF"). The sale of all of the shares in ACF to National Foods Ltd was achieved by means of another scheme under s 344 of the Act, approved by the court in Australian Co-operative Foods Ltd [2008] NSWSC 1221. Under that scheme, the shares of every member of ACF, including DFMC (which held about 20% of the shares), were transferred to National Foods Ltd in exchange for a cash consideration. Part of the cash consideration took the form of a special dividend payable by ACF but funded by National Foods. 8 DFMC, in turn, has set about distributing to its own members the net proceeds of sale of its holding in ACF. The first stage of DFMC's distribution was a special dividend of $1.6879 per share, declared at DFMC's 2008 AGM and paid to DFMC members in December 2008, a total payment of about $56.9 million. That stage did not need any scheme of arrangement. 9 The second stage is a payment in return for a compulsory cancellation of shares, and so a scheme of arrangement, the present scheme, is needed to give effect to that cancellation. Subject to members retaining sufficient shares to satisfy the Minimum Shareholding Requirement, and with an exception noted below, each participating member will have 7 out of every 10 shares held by the member cancelled, and will receive the amount paid up in respect of each cancelled share, that is $1.00, a total payment of approximately $22.3 million. The Minimum Shareholding Requirement is 2000 shares for each DFMC member, reflecting rule 23 of the DFMC Rules. 10 No distribution will be made to some former members who have been reinstated as DFMC members in the circumstances set out section 9 of the Explanatory Memorandum for the scheme. Section 9 explains that in December 2008, 32 former members of DFMC, whose shares had been forfeited, applied to the Co-operatives Council under s 129 of the Act for reinstatement as members, so that they could participate in the special dividend. In February 2009 the Co-operatives Council ordered their reinstatement for that purpose, on the basis that their memberships would be cancelled 24 hours after the payment was made. According to the Explanatory Memorandum, the Council's orders did not cause any amount to be paid up in respect of the reinstated shares, and therefore former members whose shares were reinstated by force of the Council's order will not receive any payment by operation of the scheme, although 70% of their reinstated shareholdings will be treated as cancelled under the scheme. 11 DFMC has lodged an appeal to this court from the decision of the Co-operatives Council. If the appeal is unsuccessful and the decision stands, the 32 former members will participate in the special dividend and will receive a total of approximately $1.7 million. If all former members who had their shares forfeited in the 12 months prior to the sale of DFMC's shares in ACF to National Foods were reinstated and became entitled to participate in the special dividend, the amount to be paid would be $6,043,318. DFMC's appeal is due to be heard in early August 2009. While its board of directors believes the appeal will succeed, nevertheless $6,043,318 has been retained to be used to satisfy the former members' claims in the event that the appeal fails. If the appeal is successful the board currently intends to recommend the declaration of a further dividend to distribute the retained amount. 12 Under the scheme, DFMC's capital will be reduced from approximately $31.9 million to approximately $9.7 million. After it expends the $6,043,318 by payment either to the former members or to members generally as a further special dividend, it will have retained earnings of approximately $11.1 million as well as share capital of approximately $9.7 million, totalling approximately $21 million. According to the Explanatory Memorandum, the DFMC board believes that the retention of approximately $21 million is important because DFMC must have adequate funding to undertake its obligations under its Milk Supply Agreement with ACF, and to secure the position of DFMC members. Under the Milk Supply Agreement DFMC acquires milk from its members, which it supplies to ACF at negotiated prices. The board will monitor the level of required future funding on a continuing basis, and if it considers there are surplus funds, it will seek to return them to DFMC members. 13 The Explanatory Memorandum sets out what the board considers to be the reasons for and against the scheme on page 6. The main reasons for supporting the scheme should be noted. One of the principal reasons for the restructuring is said to be to ensure that DFMC's capital structure will no longer operate as an incentive to DFMC members to cease to supply it. DFMC members who cease to supply DFMC have their share capital returned to them approximately 12 months later. DFMC's board does not want its competitors to be able to exploit the potential liquidity available to DFMC members who cease to supply DFMC, by encouraging those members to enter into supply contracts with the competitors. It also wants to reduce the inequality between DFC members based upon capital contributions, and to reduce the liabilities on DFMC's balance sheet. This latter point needs further explanation. Because members are entitled to be paid out their capital when they cease to be active members and their shares are forfeited, DFMC accounts for members' share capital as a non-current liability (Explanatory Memorandum, pages 18 and 46). Reducing share capital will improve the balance sheet (and specifically, it will avoid the risk of having to record negative net assets). The scheme will also reduce the future financial risk to DFMC associated with DFMC members becoming inactive. 14 Possible arguments against the scheme, according to the Explanatory Memorandum, partly address the question whether there should be a greater distribution than proposed. But that would involve rejecting the directors' unanimous view as to the management of DFMC's funding requirement. It is also noted that the cancellation of shares may affect the position of members in the event that DFMC is taken over, becomes a company, is wound up having a surplus or makes a distribution from reserves within 5 years of the implementation of the scheme. Those are, however, inevitable consequences of a capital return by cancellation of shares. 15 According to the Explanatory Memorandum, the directors believe the advantages of the scheme outweighed the reasons to vote against it. I can see nothing in the Explanatory Memorandum to suggest that the issues have not been fairly presented to the members or that the directors were not entitled to take the view they have expressed. 16 In written submissions, senior counsel for the plaintiff drew my attention to two matters. The first relates to s 353 of the Act, which is in the following terms: "(1) The Court need not approve a compromise or arrangement unless: (a) it is satisfied that the compromise or arrangement has not been proposed for the purpose of enabling any person to avoid the operation of any of the provisions of Division 2 of Part 11 (Restrictions on certain share offers), and (b) there is produced to the Court a statement in writing by the Registrar stating that the Registrar has no objection to the compromise or arrangement. (2) The Court need not approve a compromise or arrangement merely because a statement by the Registrar stating that the Registrar has no objection to the compromise or arrangement has been produced to the Court." 17 This section was considered by Barrett J in Australian Co-operative Foods Ltd [2008] NSWSC 1221. His Honour observed that, unlike s 411(17) of the Corporations Act, s 353(1) requires both that the court be satisfied of the matters stated and that a statement by the Registrar be produced. Therefore, where a statement by the Registrar is produced, the court must still consider whether it is satisfied that the scheme of arrangement has not been proposed for the purpose of avoidance of Division 2 of Part 11. If it is so satisfied, the directive that it "need not" approve the scheme is removed, but that does not mean the court is required to approve the scheme; the discretion to give or withhold approval remains (at [39]). 18 In the present case, as in that case, the Registrar has provided a statement that he has no objection to the scheme of arrangement. 19 Part 11 Division 2 deals with certain offers to purchase shares in a co-operative, such as an acquisition as part of a proposal for sale of the undertaking of the co-operative as a going concern. Division 2 stipulates that the offer is not to be made unless the making of the offer has been approved by special resolution by means of a special postal ballot approved by the Council (s 300(1)). Certain offers are prohibited on the grounds that they would operate to discriminate between active and non-active members. 20 I am satisfied that Part 11 Division 2 can have no application to the offer in the present case, because this is a scheme to achieve a distribution to members by way of reduction of capital and cancellation of shares, and there is no offer to purchase shares in any of the circumstances of s 299(1). Although the scheme proposes a reduction of capital, the doctrine of maintenance of capital has never been part of the law relating to co-operatives: Re Namoi Cotton Co-operative Ltd (1998) 26 ACSR 694 (Santow J). As that case establishes, a reduction of capital of a co-operative may be affected by way of scheme of arrangement. 21 For these reasons, I am satisfied for the purposes of s 353(1)(a) that the scheme has not been proposed for the purpose of avoidance of Part 11 Division 2. 22 It is necessary to comment on the position of inactive members. The requirements for active membership are set out in rule 13.2 of the DFMC Rules. Section 181 of the Act states the member is not entitled to vote if the member is not an active member of the co-operative (see also rule 54(4) of the DFMC Rules). The position of active members was considered by Barrett J in the Australian Co-operative Foods case, at [5]-[6]. His Honour said he was satisfied that an arrangement binding both active and inactive members may be produced under s 344 by a combination of a special resolution carried upon a special postal ballot and an approving order of the court; and that this is so even though the active members alone have voted on the ballot. There is no concept of classes in a scheme of arrangement under the Co-operatives Act, as Barrett J observed at [7]. 23 I am satisfied that the inactive members have been appropriately dealt with under the scheme and in the voting process. They will be entitled to participate in the distribution under the scheme, provided their shares have not already been forfeited and paid out, though they were not entitled to vote in the postal ballot. That seems to me to be in accordance with the requirements of the legislation and DFMC's rules, and to be fair. 24 I am also satisfied that the former members reinstated by order of the Co-operatives Council, in the circumstances explained above, had been fairly and appropriately dealt with. They will be bound by the scheme of arrangement but they will not receive any payment since their capital has already been paid to them. 25 I am therefore satisfied that the court should make an order approving the scheme of arrangement under s 344(1) of the Act. ********** 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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