Re Westland Co-operative Dairy Co Ltd [2019] NZHC 1683

Re Westland Co-operative Dairy Co Ltd [2019] NZHC 1683IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYCOMMERCIAL PANELI TE KŌTI MATUA O AOTEAROATĀMAKI MAKAURAU ROHECIV-2019-404-000924[2019] NZHC 1683UNDER Part 15 of the Companies Act 1993ANDIN THE MATTER OF a scheme of arrangement under Part 15 ofthe Companies Act 1993ANDIN THE MATTER OF WESTLAND CO-OPERATIVE DAIRYCOMPANY LIMITEDApplicantHearing: 18 July 2019Appearances: T G H Smith, S J Leslie and A E Buchly for ApplicantJ C Caird, J C Dickson, and V Anderson for Hongkong JingangTrade Holding Co LtdJudgment: 18 July 2019ORAL JUDGMENT OF VENNING JSolicitors: Bell Gully, WellingtonSimpson Grierson, WellingtonIntroduction[1] Westland Co-operative Dairy Company Limited (Westland) seeks orders fromthe Court that:(a) the scheme of arrangement described in the Scheme Plan attached tothe application dated 16 May 2019 is approved and binding upon:(i) Westland;(ii) Hongkong Jingang Trade Holding Co Ltd (Hongkong Jingang);(iii) every person who is a scheme shareholder in terms of theScheme Plan (as defined); and(b) Westland is granted leave to apply for approval of any amendment,modification, or supplement to the Scheme as may be required.[2] On 26 June 2019 this Court made initial orders for the holding of ashareholders' meeting on 4 July 2019 to enable shareholders to consider, and if theysupported it, to approve the Scheme. The initial orders also set out the information tobe provided to shareholders in advance of the meeting and the steps any party wishingto oppose the application was to take.[3] The following filed affidavit evidence in support of the initial orders:(a) Peter Hugh Morrison – chairperson of Westland board of directors;(b) Michael John Lorimer – a director of Grant Samuels, a provider ofcorporate advisory services;(c) Philip Edward Leightley – a solicitor acting for Westland; and(d) Shuang Zhang – the legal director of Inner Mongolia Yili IndustrialGroup Co Ltd (Yili) which owns the shares in Hongkong Jingang.[4] In support of the application for final orders further affidavits have been filedby:(a) a second affidavit from Mr Morrison;(b) Xuguang Zhang of Hongkong Jingang; Ms Zhang is the mergers andacquisitions director in the Strategic Management Department of Yili;(c) two affidavits of William Henry Malan of Link Market Services (Link),the scrutineer from the shareholders' meeting;(d) two affidavits of Tara Jane Wylie, solicitor at Simpson Grierson,solicitors for Hongkong Jingang; and(e) five affidavits of Jack Adam Gordge, a solicitor, as to service andprocedure.Westland and the background to the Scheme[5] Westland is a co-operative dairy company that purchases raw milk from itsshareholders and manufactures dairy products for sale. It is incorporated in NewZealand under the Companies Act 1993 and the Co-operative Companies Act 1996.Its registered office is at 56 Livingstone Street, Hokitika, New Zealand. Westland'saudited financial statements for the year ended 31 July 2018 disclosed net assets of$123,154,000. From a revenue in excess of $692,000,000 it earned a profit of$560,000. It employs 573 individuals and exports approximately 87.5 per cent of itsdairy product.[6] As at 16 May 2019 Westland had over 72,008,605 fully paid ordinary sharesin six different classes. The nominal value of each class of share was the considerationpayable to the shareholder if the shares were redeemed by Westland. Shares areredeemed in accordance with its constitution, following a shareholder ceasing tosupply milk to Westland.[7] Voting rights are based on the volume of milk solids supplied by theshareholder to Westland in the previous year. Each shareholder receives one vote per10,000 kg or part thereof, of milk solids supplied, up to a maximum of 10 votes pershareholder or group of shareholders (controlled by the same persons). Voting rightsare identical across share classes.[8] As at 16 May 2019 Westland had 334 shareholders and 413 supplying farms.There were no majority or controlling shareholders. Most of the shareholders haveaddresses in Canterbury and Westland, although it has shareholders with addressesrecorded in the share register from other parts of New Zealand. There are noshareholders with addresses recorded in the share register outside New Zealand. AllWestland's directors are non-executive directors.[9] Westland commenced a strategic review of its situation in late 2017. Thestrategic review determined that Westland was constrained by its high debt levelswhich would likely require shareholders to commit to ongoing retentions to enable itto fund its operational needs, service and reduce existing debt and to fund theimplementation of its planned five year business strategy. The review also concludedWestland's existing debt levels limited its financial flexibility to pursue growth andadded financial risk in relation to its ability to absorb market shocks.[10] The strategic review process identified and evaluated three options:(a) merger or sale;(b) introduction of a cornerstone investment;(c) status quo.[11] The Board was concerned that status quo would not enable Westland to receivethe same milk supply as in previous years because of the level of Westland's milk pay-out in recent seasons compared to competitors.[12] Westland approached over 25 parties on a confidential basis to seek indicationsof interest to participate in either a cornerstone investment or a full acquisition of, ormerger with, Westland. It received a number of indicative non-binding confidentialproposals, and prepared a shortlist. Ultimately the Board resolved to progress a finalproposal received from Hongkong Jingang, which it then negotiated during March2019.[13] On 18 March 2019, Westland and Hongkong Jingang entered into a SchemeImplementation Agreement (SIA), which provided for the parties to have a period toimplement the Scheme, during which time Westland agreed not to solicit, initiate, orencourage competing proposals, and during which time Hongkong Jingang wouldhave rights to match any competing proposals. The parties agreed reciprocal break-fee arrangements should either not proceed with the Scheme in certain circumstancessubject to agreed exceptions.The Scheme[14] The effect of the SIA is to provide for Hongkong Jingang to purchase all theshares in Westland. In exchange for their shares, each Westland shareholder willreceive $3.41 per share. Westland will cease to be a co-operative company.Westland's current shareholders will also be entitled to receive from Westland(guaranteed by Hongkong Jingang) milk supply commitments in accordance with theterms of a Milk Supply Commitment Deed entered into for the benefit of shareholdersprior to the date of the initial orders. The Milk Supply Commitment Deed will takeeffect from the Implementation Date as defined in the SIA. Hongkong Jingang hascommitted to Westland accepting and collecting milk from each qualifying farm for aperiod of 10 years from the Implementation Date, on terms and conditions of supplywhich, taken as a whole, are no less favourable than those set out in the AmendedSuppliers' Handbook which is calculated to be no less than the Fonterra Farm GateMarket Price.[15] The implementation of the Scheme is conditional on:(a) Overseas Investment Office consent;(b) no regulatory intervention;(c) shareholder approval;(d) Court approval;(e) no target prescribed occurrence occurring.[16] The implementation of the Scheme is also conditional upon:(a) any other conditions imposed by the Court and approved in writing byWestland and Hongkong Jingang; and(b) none of the SIA, the Deed Poll, or Milk Supply Commitment Deedbeing cancelled by the Implementation date.Statutory framework[17] The application is made under ss 236 and 237 of the Companies Act 1993 (theAct). As relevant the sections provide:236 Approval of arrangements, amalgamations, and compromises(1) Notwithstanding the provisions of this Act or the constitution of acompany, the court may, on the application of a company or anyshareholder or creditor of a company, order that an arrangement oramalgamation or compromise shall be binding on the company andon such other persons or classes of persons as the court may specifyand any such order may be made on such terms and conditions as thecourt thinks fit.(2) Before making an order under subsection (1), the court may, on theapplication of the company or any shareholder or creditor or otherperson who appears to the court to be interested, or of its own motion,make any 1 or more of the following orders:(a) an order that notice of the application, together with suchinformation relating to it as the court thinks fit, be given insuch form and in such manner and to such persons or classesof persons as the court may specify:(b) an order directing the holding of a meeting or meetings ofshareholders or any class of shareholders or creditors or anyclass of creditors of a company to consider and, if thought fit,to approve, in such manner as the court may specify, theproposed arrangement or amalgamation or compromise and,for that purpose, may determine the shareholders or creditorsthat constitute a class of shareholders or creditors of acompany:(c) an order requiring that a report on the proposed arrangementor amalgamation or compromise be prepared for the court bya person specified by the court and, if the court thinks fit, besupplied to the shareholders or any class of shareholders orcreditors or any class of creditors of a company or to any otherperson who appears to the court to be interested:(d) an order as to the payment of the costs incurred in thepreparation of any such report:(e) an order specifying the persons who shall be entitled to appearand be heard on the application to approve the arrangement oramalgamation or compromise.(3) An order made under this section has effect on and from the datespecified in the order.237 Court may make additional orders(1) Without limiting section 236, the court may, for the purpose of givingeffect to any arrangement or amalgamation or compromise approvedunder that section, either by the order approving the arrangement oramalgamation or compromise, or by any subsequent order, providefor, and prescribe terms and conditions relating to,—(a) the transfer or vesting of real or personal property, assets,rights, powers, interests, liabilities, contracts, andengagements:(b) the issue of shares, financial products, or policies of any kind:(c) the continuation of legal proceedings:(d) the liquidation of any company:(e) the provisions to be made for persons who voted against thearrangement or amalgamation or compromise at any meetingcalled in accordance with any order made under subsection(2)(b) of that section or who appeared before the court inopposition to the application to approve the arrangement oramalgamation or compromise:(f) such other matters that are necessary or desirable to giveeffect to the arrangement or amalgamation or compromise.[18] As Westland is a code company for the purposes of the Takeovers Act 1993 anorder approving the arrangement cannot be made unless Westland shareholderssupport the arrangement by resolution approved by the requisite majority and eitherthe Court is satisfied the shareholders will not be adversely affected by the use of thePart 15 proceeding instead of the Takeover Code or the Takeovers Panel confirms ithas no objection.[19] The Court has a discretion whether or not to approve a scheme of arrangementunder s 236(1) of the Act.[20] On an application for approval of a Scheme under Part 15 the Court must besatisfied:1(a) the relevant statutory provisions have been complied with;(b) the proposed arrangement has been fairly put to the relevantshareholders who had all information reasonably necessary so that theycould make an informed decision;(c) the shareholders were fairly represented by those attending the meetingand the statutory majority acted in good faith without coercing anyminority in order to promote interests adverse to shareholders; and(d) the arrangement might reasonably be approved by a reasonable andintelligent business person acting in their own interests.[21] In Weatherston v Waltus Property Investments Ltd the Court of Appeal alsoheld it was appropriate to consider whether overall the agreement was fair andequitable.21 Re CM Banks Ltd [1944] NZLR 248 (SC); and Re Methven Ltd [2019] NZHC 608.2 Weatherston v Waltus Property Investments Ltd [2001] 2 NZLR 103 (CA).Compliance with statutory provisions[22] Since the initial orders were made on 29 May 2019 Westland has compliedwith the requirements under the Initial Orders. In summary:(a) all documents filed in the proceedings have been served on theTakeovers Panel;(b) Westland has advertised the Scheme Meeting and rights of oppositionas directed;(c) the Scheme Booklet was distributed to shareholders. The onlysubstantive changes, apart from correcting typing errors, the insertionof dates, and updating shareholder percentages to reflect shareholdersurrenders and cancellation, were –(i) additional wording was included to reflect additionalconsequences of the Scheme not completing and no alternativeproposal conferring similar financial benefits for Westland andits shareholders being received. That followed a regularmeeting between Westland and its banks on 27 May 2019. Theconsequences are that retentions would be required to bewithheld from milk pay-outs and adjustments would be requiredto the projected advance payment rate and Westland may berequired to undertake significant asset sales; and(ii) the removal of wording stating directors had not received anyapproaches in the period since 18 March 2019 to reflect anunsolicited email received by Westland purporting to offer analternative transaction;(d) in addition to distributing the Scheme Booklet to shareholders it wasmade available for inspection and download on the shareholder portalon Westland's website;(e) the Scheme Booklet was distributed to directors, auditors and also toshareholders more than 10 working days before the Scheme Meeting asrequired. In addition copies of the Scheme Booklet were madeavailable at Westland's offices in Hokitika and Rolleston;(f) Westland did not receive any requests for the Scheme Booklet frompeople who became shareholders after the Scheme Booklet record date,(5.00 pm, 7 June 2019) but arranged for its share registrar, Link, to senda copy of the Scheme Booklet to every person who became ashareholder after the Scheme Booklet Record Date up to 4 July 2019.There was one new shareholder as a result of a share transfer from afarm sale. That shareholder was sent the Scheme Booklet and votingpack on 28 June 2019.[23] Mr Morrison's first affidavit in support was affirmed on 15 May 2019. In hissecond affidavit sworn on 12 July 2019 he deposes that on 22 May he became awareof an email sent to a Westland staff member seeking to contact one of Westland'sindependent directors, Keith Smith, on behalf of an entity "New Zealand Gold". Theemail suggested an alternative to the proposed sale to Hongkong Jingang. The emailwas passed onto Mr Smith and Hongkong Jingang were notified of the approach.Westland itself did not reply to the email.[24] The SIA defines a superior proposal as a written bona fide qualifyingtransaction. Qualifying transaction is itself defined in the SIA. Mr Morrison did notconsider the communication from New Zealand Gold met the criteria for a superiorproposal. I agree with Mr Morrison's assessment. It is not possible to understand theexact nature of the proposed transaction New Zealand Gold was suggesting from theemail which was in very general and non-specific terms. It did not provide anyinformation to suggest that New Zealand Gold was in a position to undertake thenecessary qualifying transactions much less one that would be superior to the proposedsale to Hongkong Jingang.Amendment[25] In the initial orders the Court reserved leave to Westland to make any suchamendments to materials contained in the Scheme Booklet as it may determine in itsbest interests or the best interests of its shareholders or other affected or properlyinterested persons.3[26] Westland amended the Scheme Booklet after it became aware of an additionalmatter that it needed to disclose under cl 12 of Schedule 2 of the Takeovers Code,namely details of an incentive plan for certain of its senior employees, known as theManagement Incentive Plan. The Management Incentive Plan applies to six managers,who may receive total aggregate payments of $1,648,053.20 if the Scheme proceeds.The amounts are to be paid in three instalments, subject to certain conditions beingmet, with the third instalment falling six months after implementation of the Schemeand also being subject to the relevant senior manager remaining employed byWestland.[27] Although the Management Incentive Plan was not referred to in the originalScheme Booklet, it received a certain amount of publicity once it became publicknowledge. The Takeovers Panel engaged in correspondence with Westland'sadvisers seeking to clarify why the Management Incentive Plan had not been initiallydisclosed, either to the Panel or to the Court.[28] Westland accepted that the Management Incentive Plan should have beeninitially disclosed to the Takeovers Panel and the Court, but submits that when theerror was identified it was remedied and the Takeovers Panel immediately advised.Relevantly, as appears from the correspondence, the Westland Management IncentivePlan was put in place at the time Westland commenced its broad strategic reviewprocess. Discussions were had with the relevant senior managers regarding theirparticipation in it and the proposed terms of the Plan commenced early August 2018.The Management Incentive Plan was not put in place specifically in respect of theparticular Scheme now before the Court for approval.3 Re Westland Co-operative Dairy Company Ltd [2019] NZHC 1196 at [19].[29] The Takeovers Panel advised Westland's solicitors, Bell Gully, on 2 July 2019that, having met to consider the matter it had decided, based on the informationprovided to it, and in light of all the relevant circumstances, that it would not take thefailure to initially disclose the Management Incentive Plan any further at that stage.The Panel gave significant weight to the prompt and proactive action taken to correctthe incorrect disclosure in the Scheme Booklet once the error was identified. ThePanel asked for the opportunity to review the draft affidavits and submissions filedwith the Court on this application for final orders.[30] After receiving those documents the Panel has provided a further letter of 12July in which it confirms that, based on the information provided, it has no objectionto an order being made under s 236(1) of the Companies Act 1993 in respect of thescheme of arrangement. In providing that no objection statement the Panel wassatisfied that:(a) all material information relating to the Scheme proposal had beendisclosed;(b) the standard of disclosure of all shareholders has been equivalent to thestandard that would be required by the code in a code regulatedtransaction;(c) the interest classes of shareholders had been adequately identified; and(d) the other matters referred to in the Panel's Guidance note on schemesof arrangement have been addressed and there were no other reasonsfor the Panel to object to the proposed Scheme.[31] For completeness, I record that the Court need not approve the Scheme merelybecause the Panel has no objection.44 Companies Act 1993, s 236A(3).Other developments[32] One shareholder, So Big Dairies Ltd, tendered a late proxy form. Theshareholder advised it had not received the relevant voting forms. There was someconfusion as to the correct form to be completed. Westland determined it was in theinterests of shareholders to waive the proxy deadline and allow that shareholder tovote.[33] Westland has received correspondence from a solicitor on behalf of a numberof former shareholders. They take issue with the fact that a shareholder that issued a2020 season cessation notice on or before 31 March 2019 and who consequentlysurrendered their shares will be paid the nominal value of their shares on theImplementation Date but that other former shareholders will remain unsecuredcreditors and may have to wait up to five years from the surrender date to be paid. Asat 31 January 2019 approximately $11.1 million was said to be owed to the formershareholders who fell into that category.[34] Mr Morrison confirms that the former shareholders are and will remainunsecured creditors of Westland. The financial statements of Westland record theliability to the former shareholders as a non-current liability. Mr Morrison and theother directors are of the view the Scheme will have no effect on those formershareholders' entitlements. They remain unsecured creditors due to receive theirunsecured debt no later than five years after the date of surrender (and cancellation)of their shares.[35] I note the former shareholders also made a submission to the OverseasInvestment Office opposing consent by that Office until this issue was resolved. TheOffice advised that it had taken into account the former shareholders' views to theextent it was able to but that it was a matter for the former shareholders to look toresolve with Westland Board and, if the transaction went ahead, the new owners. Thatremains the position.[36] Finally, as Mr Morrison has disclosed to the Court, three days before theScheme Meeting, Westland received a request from six shareholders seekinginformation under s 178 of the Companies Act about the proposals received byWestland from third parties as part of the initial process following the strategic review.Mr Morrison and other members of the Board did not consider it was in Westland'sinterests to disclose that information (apart from a conflicts register and informationabout how the directors voted, which was provided) because the information may havebeen a breach of the exclusivity obligations under the SIA and could have exposedWestland to a liability to pay a reimbursement fee of $5,880,000 plus GST. It couldalso have caused Westland to be in breach of confidentiality obligations to third partyparticipants in the process who had made proposals on a confidential basis.[37] The Scheme Meeting took place. Mr Malan of Link, the meeting scrutineer,has confirmed that the resolution put to the meeting:That the Scheme under which all of the shares in Westland are transferred to[Hongkong Jingang] for $3.41 per Share (the terms of which are described inthis Scheme Booklet) is approvedwas passed by a majority of 93.79 per cent of the vote of the shareholders entitled tovote and voting, and was passed by a majority of 89.87 per cent of the total number ofvotes of those shareholders entitled to vote.[38] Westland has subsequently served written notice of the results of the SchemeMeeting on the Takeovers Panel and Hongkong Jingang as required.[39] Westland has not been served with any notice of opposition or notice ofappearance. No opposition has been filed to the application.[40] In summary to this point, there has been no adverse regulatory intervention.The shareholders have approved the Scheme, and there has been no target prescribedoccurrence. The Overseas Investment Office (OIO) has recently confirmed itsapproval.[41] In her first affidavit Ms Wylie confirmed that Hongkong Jingang had nocomments on the conditions proposed by the OIO and that it had provided final signedcopies of the OIO application and investment plan. All that remained outstanding atthe time was for Hongkong Jingang to complete statutory declarations as to goodcharacter and to confirm that the OIO application was true and correct.[42] Subsequently, Ms Wylie has filed a second affidavit. She confirms that on 16July 2019 the OIO confirmed it had granted consent. The OIO was satisfied theindividuals who will control the investment have relevant business experience andacumen and are of good character. The applicant had demonstrated financialcommitment to the investment and the OIO was satisfied the residential land in issueis likely to continue to be used for its current purpose.[43] Mr Zhang has confirmed that Hongkong Jingang has executed the Deed Polland Milk Supply Commitment Deed.[44] Returning to the considerations for the Court, the Court is satisfied that:(a) the relevant statutory provisions have been complied with;(b) the proposed arrangement has been fairly put to the relevantshareholders who had all the information reasonably necessary in orderto make an informed decision;(c) on the evidence of the conduct of the meeting from Mr Morrison andMr Malan the shareholders were fairly represented by those attendingthe meeting. The statutory majority acted in good faith and withoutcoercing any minority in order to promote interests adverse to existingshareholders. There was no suggestion otherwise;(d) the arrangement is the type which might reasonably be approved by areasonable and intelligent business person acting in their own interests.[45] The takeover purchase price of $3.41 per share is well above the currentvaluation range for the shares in Westland as set out in the Independent Advisers'Report which places the value in the range of $0.88 to $1.38 per share. There is alsothe additional advantage to shareholders of the Milk Supply Commitment Deed. TheDeed confirms the Scheme has the unanimous support of the Board. The Board'sjudgment ought to be given weight as well.55 Re Nuplex Industries Ltd [2016] NZHC 1677.[46] Also Westland has a clear need for new capital to become competitive and isnot able to raise that capital from shareholders and has a related and clear need toaddress its low milk pay-out, which has been below the Fonterra FGMP for the lastthree seasons. If the Scheme is not approved there is no certainty that HongkongJingang or another bidder would make another offer for the shares.[47] Only two questions were raised at the meeting. Neither of those questions, northe additional matters referred to above, suggest the proposal is unfair. The formershareholders who are unsecured creditors have not been disadvantaged. Their positionremains the same as it was prior to the Scheme. Their entitlement to be repaid is basedon the provisions of the Co-operative Companies Act 1996 and the constitution ofWestland operative when they surrendered their shares.6 From the effective date ofthe surrender of their shares they became unsecured creditors. That remains theposition. They were and remain unsecured creditors.[48] There are two further issues for particular consideration which counselproperly drew the Court's attention to: first, the no encumbrance clause in cl 6.1(a)and the warranties as to title clause, cl 6.1(b) of the Scheme Plan. I record counsel'sadvice that Westland does not seek orders the Scheme be binding on secured creditorsof its shareholders, rather it intends the clause to operate by confirming the position atlaw. I also note similar clauses have been included in approved schemes in NewZealand in the past.7[49] The clause providing warranty as to title has been held an appropriateprotection against the risk of a shareholder receiving the scheme consideration withoutany obligation to reimburse the acquirer for the amount required to discharge theencumbrance over the shares.8[50] The deemed warranty was explicitly highlighted at ss 7.3 and 7.4 of theScheme Booklet. Again, similar clauses have been applied in the past.96 Co-operative Companies Act 1996, s 22(4).7 Re Methven [2019] NZHC 608 at [9].8 Re APN News & Media Ltd (2007) 62 ACSR 400.9 Re Methven, above n 7, at [9].[51] Standing back and considering the Scheme overall the Court is satisfied it isgenerally fair and equitable. The Scheme is not dissimilar to other cases where theprovisions of the Companies Act have been used in this way. Overall the proposalappears in the interests of the shareholders in this particular case. For those reasonsthe Court is satisfied it is appropriate to make the orders sought in the application.[52] There will be orders as sought in the application dated 16 May 2019 and inaccordance with the draft order submitted to the Court this morning.__________________________Venning J