Supreme Court New South Wales Medium Neutral Citation: McBain v Bellamy's Australia Ltd; Bellamy's Australia Ltd v McBain [2018] NSWSC 1152 Hearing dates: 9 July 2018 Decision date: 26 July 2018 Jurisdiction: Equity - Commercial List Before: Stevenson J Decision: Summons to be dismissed Catchwords: CORPORATIONS – listed public company - termination payment to executive officer – whether member approval obtained under s 200E of the Corporations Act 2001 (Cth) – whether members provided with sufficient information to approve termination payment – whether notice to members set out manner in which benefit to be calculated and any matter which was likely to affect calculation of value Legislation Cited: Corporations Act 2001 (Cth) Cases Cited: Bulfin v Bebarfalds Ltd (1938) 38 SR (NSW) 423 Buttonwood Nominees Pty Ltd v Sundowner Minerals NL (1986) 10 ACLR 360 Devereaux Holdings Pty Ltd v Pelsart Resources NL (No 2) (1985) 9 ACLR 956 Residues Treatment and Trading Co Ltd v Southern Resources Ltd (1988) 14 ACLR 375 Tiessen v Henderson [1899] 1 Ch 861 Texts Cited: R P Austin and A J Black, Austin & Black's Annotations to the Corporations Act (looseleaf, LexisNexis Butterworths) W Lonergan, The Valuation of Businesses, Shares and Other Equity (4th ed, 2003, Allen & Unwin) Category: Principal judgment Parties: Laura McBain (Plaintiff/Cross-Defendant) Bellamy's Australia Limited (Defendant/Cross-Claimant) Representation: Counsel: J K Kirk SC with N D Oreb (Plaintiff/Cross-Defendant) I M Jackman SC with V Brigden (Defendant/Cross-Claimant) Solicitors: Allens Arthur Robinson (Plaintiff/Cross-Defendant) Herbert Smith Freehills (Defendant/Cross-Claimant) File Number(s): SC 2017/385034 Judgment 1. Bellamy's Australia Limited is a listed public company. 2. In 2014 Ms Laura McBain was appointed Managing Director and Chief Executive Officer of Bellamy's. 3. Ms McBain had been Bellamy's' General Manager from 2006 and CEO from 2011. 4. At Bellamy's' 2014 Annual General Meeting, held on 30 October 2014, shareholders passed Resolutions approving: 1. a Long Term Incentive Plan pursuant to which Bellamy's would issue to certain employees options to acquire fully paid shares in Bellamy's; and 2. the issue to Ms McBain of up to 2,550,000 options pursuant to that Incentive Plan. 1. On 19 June 2015 Bellamy's invited Ms McBain to participate in the Incentive Plan and apply for up to 825,877 options at an exercise price of $1.30 per option. 2. Ms McBain or Bellamy's were entitled to terminate Ms McBain's employment at any time on six months' notice. 3. By letter dated 11 January 2017 Bellamy's exercised that right and: 1. terminated Ms McBain's employment with six months' notice; 2. stated that Ms McBain's last day of employment would be 31 March 2017; 3. told Ms McBain she was not required to attend for work or perform any duties between 11 January and 31 March 2017; and 4. told Ms McBain she would receive "payment in lieu of the balance of your notice period". 1. On 6 April 2017 Bellamy's paid Ms McBain $224,723.20 in lieu of notice ("the Payment in Lieu"). 2. It is common ground that, at the date of termination of her employment, Ms McBain was, as a matter of contract, entitled to exercise 504,870 of the 825,877 options referred to at [5]. 3. Bellamy's decided that "it was necessary to scale back" the options available to Ms McBain by 388,522 options to avoid breaching the statutory cap in s 200G of the Corporations Act 2001 (Cth) (to which I will return). 4. Ms McBain exercised the remaining 116,348 options (504,870 less 388,522) in November 2017. There is no dispute that she was entitled to do so. 5. Ms McBain now claims the benefit of the remaining 388,522 options. 6. What divides the parties is whether Bellamy's may permit Ms McBain to exercise those 388,522 options by reason of the combined effect of ss 200B, 200E and 200G of the Corporations Act. 7. In particular, the question is whether to do so would, when considered together with the Payment in Lieu, result in Bellamy's giving Ms McBain a "benefit in respect of [her] retirement" in excess of the cap provided for in s 200G. 8. It is common ground that the s 200G cap for Ms McBain was $594,471.64. 9. Resolution of the issue requires consideration of the provisions of ss 200B, 200E and 200G and the matters put to members at the 30 October 2014 AGM. The legislation 1. Division 2 of Part 2D.2 of the Corporations Act deals with restrictions on "Termination Payments". 2. The effect of s 200B(1) is that, as Ms McBain held a "managerial" or "executive office" at Bellamy's, Bellamy's could not give her "a benefit in connection with [her] retirement from…office" "unless there is member approval under s 200E for the giving of the benefit". 3. Section 200A(1)(e) provides that "retirement from an office" includes "loss of the office". It thus includes termination of employment, as occurred here. I shall refer to Ms McBain's benefits on termination as her "termination benefits". 4. Section 200E provides that three conditions must be satisfied for there to be member approval. 5. The first condition contained in s 200E(1B) is that "the giving of the benefit be approved by resolution passed at a general meeting" of Bellamy's. 6. Section 200E(4) provides that "member approval under this section does not relieve a director from any duty to the body corporate", including any fiduciary duty, "in connection with the giving of the benefit". 7. The second condition (contained in s 200E(2)) is that "details of the benefit" be set out in the notice of the general meeting and that those details "must include", relevantly to this dispute: "…the manner in which [the value of the proposed benefit] is to be calculated and any matter, event or circumstance that will, or is likely to, affect the calculation of that value". See 200E(2)(b)(ii): relevant because the "benefit" in question is not a monetary amount and is one the value of which could not be ascertained at the time of the meeting; rendering ss 200E(2)(a) and (b)(i) irrelevant. 1. The third condition (contained in s 200E(2A)) is that "the retiree" could not cast a vote in the resolution. It is common ground that Ms McBain did not vote on the resolution in question. The 30 October 2014 AGM 1. The notice of the 30 October 2014 AGM included notice of the following proposed Resolutions: "5 Long Term Incentive Plan To consider, and if thought fit, to pass the following as an ordinary resolution: That for the purpose of ASX Listing Rule 7.2 Exception 9, and for all other purposes, approval is given to the Directors of the Company to issue options or rights to acquire fully paid shares in the Company on and subject to the terms and conditions of the Long Term Incentive Plan, which are summarised in the Explanatory Notes to this Notice. Please refer to the voting exclusion statement in the general information that follows. 6 Grant of Options to Managing Director To consider and, if thought fit, to pass the following resolution as an ordinary resolution: That for the purposes of Australian Securities Exchange Listing Rule 7.2 Exception 14 and Rule 10.14, and for all other purposes, the Company issue to Ms Laura McBain, the Managing Director and CEO, up to 2,550,000 options to acquire an equivalent number of ordinary shares in the capital of the Company in 2014, 2015 and 2016 in accordance with the Company's Long Term Incentive Plan as more particularly described in the Explanatory Notes to this Notice. Please refer to the voting exclusion statement in the general information that follows." (Emphasis in original.) 1. The Explanatory Notes provided to shareholders gave the following information concerning the proposed resolution concerning the Long Term Incentive Plan: "Unless an exception in ASX Listing Rule 7.2 applies, Rule 7.1 provides that an ASX listed entity must not issue equity securities that total more than 15% of its fully paid ordinary shares in a 12 month period without shareholder approval (15% Rule). … The Remuneration and Nomination Committee (RNC) has undertaken a review of the Company's incentive arrangements for senior executives and agreed in principle to proceed with a new, more comprehensive, long term incentive plan. The Board has since approved the adoption of the Bellamy's Long Term Incentive Plan, subject to shareholder approval. If approved by shareholders, under Listing Rule 7.2 Exception 9 as an exception to the 15% Rule, the Board intends to issue future securities under the [Incentive Plan] rather than the [Employee Share Option Plan]. … The [Incentive Plan] is the Company's principal vehicle to grant long term incentive awards and forms what the Board considers to be a key element of the Company's total remuneration strategy for [key management personnel] and other eligible senior managers. Awards under the [Incentive Plan] will be in the form of options or rights that, subject to vesting conditions being met, will each allow the participant to acquire a fully paid ordinary share in the Company (respectively Options and Rights). The primary objectives of the Plan are to: - provide eligible employees with an additional incentive to work to improve the performance of the Company; - promote and foster the loyalty and support of eligible employees for the benefit of the Company; - enhance the relationship between the Company and eligible employees for the long term mutual benefit of all parties; and - attract, maintain and motivate [key management personnel] and other employees essential for the growth and development of the Company." (Emphasis in original.) 1. In relation to the proposed resolution to grant options to Ms McBain, the Explanatory Notes stated: "Under ASX Listing Rule 10.14, shareholder approval is required in order for a director to be issued securities under an employee incentive scheme. Accordingly, in addition to the information at Note 5 above, the following information is provided under Listing Rule 10.15A. Approval is sought for the Board to grant Ms Laura McBain up to 2,550,000 options to acquire ordinary fully paid shares in the Company (with no more than 850,000 options to be granted in any one year), as follows: Tranche Proposed Date of Grant Number of Options Vesting Date Exercise Period 1 Immediately following the AGM, but in any event on or before 31 October 2014 Up to 850,000 1 November 2017 2 years … The number of options for Tranche 1 has been calculated with consideration to the Black-Scholes valuation methodology and equates in value with 80% of Ms McBain's fixed remuneration. Vesting Conditions Service Condition Ms McBain must be employed on the Vesting Date. Performance Hurdles Performance hurdles will consist of earnings per share on an absolute or compound basis…and share price growth on a compound basis... For the purpose of calculating the [share price growth on a compound basis], the Board has resolved that the opening share price for Tranche 1 will be $1.30". 1. The Explanatory Notes then set out details of the "performance measures" required to be achieved in order that Ms McBain have the right to exercise the options. 2. The Explanatory Notes made the following statement under the heading "Termination of Employment": "In the circumstances that Ms McBain ceases to be employed for any reason in any circumstance (other than for serious misconduct), then Ms McBain is entitled to retain all vested but unexercised Options and a pro-rata proportion of any granted but unvested Options, equal to the portion of the performance period that has elapsed and tested against the performance hurdles to that date, will vest immediately." 1. The Explanatory Notes concluded: "Ms McBain is the only executive director of the Company, and therefore the only director who is entitled to participate in the [Incentive Plan]. No other person who requires the approval of shareholders under Listing Rule 10.14 will be allowed to participate until such approval is obtained. If approval is given by shareholders under ASX Listing Rule 10.14, the approval of shareholders for the issue of securities is not required under Listing Rule 7.1. The Board (with the exception of Ms McBain) recommends that shareholders vote in favour of this resolution." The Listing Rules 1. The Resolutions proposed for the AGM of 30 October 2014 were expressed to be for the purposes of ASX Listing Rule 7.2 (Exceptions 9 and 14) "and for all other purposes". 2. As the Explanatory Notes explained, the effect of the relevant Listing Rules was that shareholder approval was required for the issue of "equity securities" the subject of the Incentive Plan and, relevantly to Ms McBain, for the issue of such securities to a director. 3. I will return to the significance, if any, of the reference to "all other purposes". Result of the AGM 1. At the 30 October 2014 meeting shareholders voted to pass Resolution 5 (concerning the Incentive Plan) and Resolution 6 (concerning the grant of options to Ms McBain). Was there member approval for the purpose of s 200E? 1. The accelerated vesting of the options came about by reason of the termination of Ms McBain's employment. It was therefore a benefit Ms McBain received in connection with her "retirement" which, as I have mentioned, includes her "loss of office" (see [19] above). 2. The conferral of retirement benefits requires membership approval under s 200E. 3. The issue is whether there has been compliance with the relevant requirements of s 200E. Did Bellamy's' shareholders "approve" termination benefits for Ms McBain in excess of her statutory entitlement for the purposes of s 200E(1B)? 1. The first condition specified in s 200E is, as I have said, that the "benefit be approved by resolution passed at a general meeting of" Bellamy's. 2. This gives rise to the question of whether there was an "approval" by shareholders for the purposes of the subsection. 3. Of course, there was "approval" on 30 October 2014 in the sense that the requisite majority of members gathered at the appointed venue voted in favour of the Resolutions. 4. However, the issue is whether the members were given sufficient information about that proposal to enable their vote to be characterised as an "approval" for the purposes of the section. 5. By reason of s 200E(4) directors must act in accordance with their duties in connection with "member approval" for the giving of a termination benefit. 6. In order for the approval to be effective, it was necessary for Bellamy's directors to "make a full disclosure of all facts within their knowledge which are material to enable the members…to determine upon their action": Bulfin v Bebarfalds Ltd (1938) 38 SR (NSW) 423 at 440 (Long Innes CJ in Eq). 7. The question is one of equitable duty about which it has been said: 1. "…one asks what effect will the information provided have on the ordinary shareholder who scans or reads the document quickly, not as a lawyer, but as an ordinary man or woman in commerce or as an ordinary investor. One asks, viewed in such a way, will the information fully and fairly inform and instruct the shareholder about the matter upon which he or she will have to vote?": Devereaux Holdings Pty Ltd v Pelsart Resources NL (No 2) (1985) 9 ACLR 956 at 958 (Young J); 2. "…this does not require the directors of a company to give to the shareholders every piece of information which might conceivably affect their voting. The obligation is to indicate the information which they consider the shareholders should have, plus that information which it would be obvious to the average commercial man [or woman] in the street that they should have": Buttonwood Nominees Pty Ltd v Sundowner Minerals NL (1986) 10 ACLR 360 at 362 (Young J); and 3. "…the person to be protected by the rules is 'not the dissentient, but the absent shareholder — the man [or woman] who is absent because, having received and with more or less care looked at the circular' considers that he [or she] can leave the matter to the majority": Residues Treatment and Trading Co Ltd v Southern Resources Ltd (1988) 14 ACLR 375 at 377 (White J, citing Tiessen v Henderson [1899] 1 Ch 861 at 870). 1. Bellamy's contends that Resolutions 5 and 6 were not directed to the termination benefits to be made available to Ms McBain and that therefore the information provided to members did not satisfy the disclosure requirements. That is because neither the Resolutions nor the Explanatory Notes disclosed that the passage of Resolutions 5 and 6 would confer termination benefits on Ms McBain in excess of the cap in s 200G: that is, in excess of her statutory entitlement. 2. Ms McBain contends that shareholders were sufficiently informed because "the AGM notice expressly contemplated and addressed her entitlements in the event that Ms McBain's employment was terminated". 3. Resolutions 5 and 6 were expressed to be for the purposes of the relevant Listing Rule "and for all other purposes". 4. But the Explanatory Notes directed members' attention only to the Listing Rules and explained that these rules contained restrictions relating to the issue of "equity securities" generally and of "securities under an employment incentive scheme" to directors in particular. 5. The Explanatory Notes did not direct members' attention to the restrictions in Div 2 of Pt 2D.2 of the Corporations Act relating to termination benefits. 6. I do not consider that words "and for all other purposes" were sufficient to alert a reasonable shareholder to these matters. In my opinion, a reasonable shareholder would understand these words to be a "boilerplate" expression designed, to adopt the words of Bellamy's' submissions, to "[cover] off any ancillary matters in relation to the specific purpose for which they understood approval was sought, here, the issue of securities as an exception to the ASX Listing Rules". 7. Members were informed that if Ms McBain ceased to be employed, she would be entitled to retain vested but unexercised options, and that "unvested options…would vest immediately". 8. But members were not told that: 1. the acceleration of the unvested options would constitute a termination benefit under Pt 2D.2 Div 2 of the Corporations Act; and 2. s 200G limits the benefits that, absent shareholder approval, may be given to executives in connection with their termination or retirement. 1. For those reasons, my conclusion is that the information conveyed to members was insufficient for the purposes of obtaining their approval to confer termination benefits on Ms McBain. Accordingly, it cannot be concluded that there was "member approval" for the purposes of s 200E(1B). 2. It may well be that an explanation for this is, as was submitted on behalf of Bellamy's, that the Resolutions and Explanatory Notes were not intended by the directors to be directed to the question of Ms McBain's termination benefits at all, but only to the issue of the options. However that may be, they were not sufficient for the purposes of s 200E(1B). Did the notice of the AGM set out "details of the benefit" for the purposes of s 200E(2)? 1. Section 200E(2) requires that members be given "details of the benefit" including, relevantly, details of "the manner in which that value is to be calculated and any matter, event or circumstance that will, or is likely to, affect the calculation of that value": s 200E(2)(b)(ii). 2. During submissions, and without objection, Bellamy's drew my attention to W Lonergan, The Valuation of Businesses, Shares and Other Equity (4th ed, 2003, Allen & Unwin). 3. In that work, Mr Lonergan describes the various ways that options can be valued (at pp 174ff). The simplest method is the "Intrinsic Value" method, which simply compares exercise price with share price. Other methods include the "Black-Scholes" formula and the "Fundamental Value" method. 4. It is true, as was pointed out on behalf of Ms McBain, that the various "integers" seemingly relevant to the calculation of the value of the "benefit" to Ms McBain of accelerated vesting of the options, other than share value at the date of termination which obviously could not then be known, were stated in the Explanatory Notes. 5. Thus, the following matters are revealed in the Explanatory Notes: 1. the nature of the benefit to be given (options to acquire fully paid shares in Bellamy's); 2. the number of options that might be available to Ms McBain ("up to 850,000"); 3. the exercise price of the options ($1.30); 4. the vesting date of the options (1 November 2017); 5. the period during which the options might be exercised thereafter (two years); and 6. the performance measures that had to be met for the options to vest. 1. But that is not what s 200E(2)(b)(ii) calls for. 2. It calls for details of the manner in which the value is to be calculated. That is, by what manner or methodology the various integers would be used to calculate value. 3. If (and I am speculating here) it was proposed that the value of the benefit to Ms McBain of accelerated vesting of the options was to be calculated by reference to its "Intrinsic Value", it would have been relatively simple to give relevant details. This could be done by saying something to the effect that the manner in which the value to Ms McBain of the benefit was to be calculated would be the difference between the option price and the value of the shares at the date of exercise of the options. That may have been a matter obvious to some or even most shareholders. 4. But no such details were given. 5. The Black-Scholes valuation methodology was referred to in the Explanatory Note (see [27] above) but only to explain how the number of options was to be calculated; not their value. 6. Section 200E(2)(b)(ii) also calls for a statement of any matter, event or circumstance that may affect calculation of value. Two such matters would be the date of Ms McBain's retirement from Bellamy's and the then share price of Bellamy's. Obviously, that actual date and share price could not be known as at the date of the Explanatory Notes. But those matters, stated in general terms as matters likely to affect value, were not included. 7. Again, it may be, as Bellamy's submits, that the reason for the omission of these matters from the Explanatory Notes was not an oversight on the part of the directors, but because the Resolutions and Explanatory Notes were not intended to be directed to the question of Ms McBain's termination benefits at all; but only to the issue of the options. 8. Whether that is so or not, my conclusion is that the requirements of s 200E(2)(b)(ii) were not satisfied. Conclusion concerning s 200E 1. For these reasons, my conclusion is that the relevant requirements of s 200E have not been met. 2. Accordingly, there has been no valid shareholder approval of Ms McBain's termination of retirement benefits. 3. For that reason, the Summons must be dismissed. The cross-claim 1. In its cross-claim, Bellamy's contends that, assuming that there was s 200E approval to Ms McBain's termination benefit, and that Ms McBain was therefore entitled to exercise the remaining 388,522 options, it would follow that she was liable to repay the Payment in Lieu because: 1. the benefit represented by Ms McBain's ability to exercise the remaining options should be counted towards the cap in s 200G; 2. Ms McBain would in those circumstances have received termination benefits in excess of the s 200G cap to the extent of the amount equal to the Payment in Lieu; and 3. by reason of the combined effect of ss 200B and 200J of the Corporations Act Ms McBain held the excess on trust for Bellamy's. 1. In view of the conclusions to which I have come concerning s 200E approval it is not necessary for me to decide this issue. 2. It is not an easy one. 3. Section 200G provides that s 200B does not apply (to require member approval under s 200E) if the "value of the benefit" in question when added "to the value of all other benefits…already given in connection with the person's retirement" does not exceed the statutory cap (s 200G(1)(c)). 4. The precise question is whether a benefit "already given" for the purpose of s 200G(1)(c) is any benefit already given, whether or not subject to s 200E approval (as Bellamy's submits), or only benefits already given that have not been the subject of s 200E approval (as Ms McBain submits). 5. A literal reading of s 200G(1) favours Bellamy's' position, as the section refers to "all other benefits…already given"; without qualification. 6. A purposive reading of s 200G(1) gives support to Ms McBain's position, as it is hard to see why Parliament would have intended that the benefit, removed from the general prohibition in s 200B by reason of being the subject of a s 200E approval, would nonetheless be subject to the cap in s 200G. 7. This is the view favoured by Dr Austin and the Hon Justice Black in Austin & Black's Annotations to the Corporations Act (looseleaf, LexisNexis Butterworths). 8. The learned authors say at [2D.200G]: "What if a benefit has been approved by shareholders under s 200E? On balance, it appears that a member-approved benefit is not to be taken into account in calculating the value of benefits for the purposes of the s 200G cap. This is on the basis that s 200G operates as an exemption to the prohibition in s 200B(1), and therefore assumes that the benefits to which it applies are benefits that would otherwise be prohibited. A member-approved benefit complying with s 200E is not prohibited by s 200B because of the terms of s 200B(1). Therefore when s 200G(1)(c) refers to the 'value of the benefit', it is referring to the benefit that is to be permitted under s 200G, which is necessarily a benefit that would otherwise be prohibited. By extension of that reasoning, when subpara (c) goes on to refer to the value of other benefits already given, it is referring to benefits that would otherwise be prohibited, and therefore is not referring to member-approved benefits. That is confirmed by the direction to disregard payments to which s 200F applies. The contrary outcome, in which member-approved benefits would be counted towards the cap, would be obviously unfair." 1. Were it necessary for me to decide this issue, I would have come to the same conclusion as the learned authors. Conclusion 1. The proceedings must be dismissed. 2. I invite the parties to confer and agree on the orders necessary to give effect to these reasons, including as to costs. 3. If there is to be any argument as to costs, I invite the parties to agree on a timetable for written submissions. I will determine any such dispute on the papers unless either party seeks a hearing. ********** Amendments 26 July 2018 - Typographical errors in [23], [24], [38] heading, [39], [40], [49], [71(b)] and [76] corrected DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 26 July 2018