Allgas Energy Ltd, Re [1998] QSC 73 [1999] 1 Qd R 472

IN THE SUPREME COURT OF QUEENSLAND Brisbane Application No. 2261 of 1998 [Re: Allgas Energy Ltd] IN THE MATTER OF the Corporations Law - and - IN THE MATTER OF ALLGAS ENERGY LTD ACN 009 656 446 REASONS FOR JUDGMENT - THOMAS J. Judgment delivered 24 April 1998 CATCHWORDS:CATCHWORDS: Companies - Shares - Share capital - Reduction of capital - Discretion of court on application for confirmation of reduction of capital - Alteration of class rights - Validity of special resolution - Whether voters fully informed - Corporations Law, ss. 195(1), 195(5). Counsel: Mr P. Dutney QC with him Mr J.K. Bond for the Applicant Mr J.V. Gooley for the Respondent Mr G.B. Elkington in person, an Objector Mr A.J. Willis in person, an Objector Ms D.M. Binstead, Australian Securities Commission Solicitors: Minter Ellison for the Applicant Hearing date: 16 April 1998 -- 1 of 14 -- -- 2 of 14 -- IN THE SUPREME COURT OF QUEENSLAND Brisbane Application No. 2261 of 1998 [Re: Allgas Energy Ltd] IN THE MATTER OF the Corporations Law - and - IN THE MATTER OF ALLGAS ENERGY LTD ACN 009 656 446 REASONS FOR JUDGMENT - THOMAS J. Judgment delivered 24 April 1998 The applicant “Allgas”, a listed public company, seeks an order confirming a reduction of its capital under s.195(5) of the Corporations Law. The reduction was authorised by a special resolution passed on 27 March 1998 for the cancellation of 200,000 preference shares upon payment by the company of $7.50 per share to the holders of such shares. The Court’s confirmation is sought under s.195(1) of the Corporations Law. The application is opposed by a number of preference shareholders who between them own about 38 percent of the preference shares. Allgas, which was incorporated in Queensland in 1885, now has a share capital of 10,883,000 ordinary shares and 200,000 preference shares. The latter comprise only 1.8 percent of the total capital. Most of these (180,722) were issued in 1925, and the balance in 1940. They carry a guaranteed 6 percent dividend, with provision for an extra 2 percent if the dividend on -- 3 of 14 -- 2 ordinary shares in a particular year exceeds 10 percent. There is of course also a preferential right to return of capital on a winding up. These returns are seemingly nowhere near as attractive as those of the ordinary shares. The background to the company’s attempt to cancel all the preference shares is a series of takeover offers by other companies such as Texas Utilities Australia (“TU”) and Boral. The catalyst was a takeover offer from TU to acquire ordinary shares at $17.25 each. Its offer included a further increase of $1.30 per share if TU became entitled to at least 90 percent of the ordinary shares and Allgas cancelled all its preference shares by a capital reduction. The directors of Allgas then took steps which led to the present attempt to cancel all the preference shares. They proposed to achieve this by offering payment by Allgas to the holders of such shares of $7.50 per share. The ordinary shares and the preferential shares are traded separately on the Stock Exchange, with preferential shares trading at a considerably lower level. At material times their price ranged between $1.33 and $1.99, while over a similar period the ordinary shares traded in the vicinity of $12.50. Takeover offers have led to increased prices. As noted above TU’s offer was at $17.25 per share, with provision for increase to $18.55 if the preferential share holdings were eliminated. Against this background the directors decided to call two meetings of shareholders on 17 March 1998. The first was a general meeting of all shareholders (including preference shareholders) and the second was a separate meeting of the preference shareholders. The Allgas Board obtained the advice of independent experts with respect to the price that should be paid to the preference shareholders for the cancellation of their shares and recommended acceptance of TU’s offer. It supported the proposed capital reduction at the proposed price of $7.50 per share. The notice of meeting presented for consideration the following as a special resolution: “That approval be given to the variation and abrogation of rights of holders of preference shares and to the reduction of capital which will occur on the coming into effect of a resolution by the company to reduce its capital by the cancellation of 200,000 preference shares (being all of the preference shares currently on issue) on the payment of $7.50 per preference share to the holders of those preference shares with the reduction to be effected by debiting the Company’s issued capital as to $1 per preference share and debiting the Company’s general reserve as to $6.50 per preference share.” -- 4 of 14 -- 3 The notice advised that the meeting of preference shareholders would be held immediately following the general meeting and that only holders of preference shares would be entitled to attend and vote at the meeting of preference shareholders. Many proxy votes were received by the chairman before the meeting, almost 5 million of them being directed proxy votes and almost 1 million being undirected proxy votes which the chairman could use at his discretion. In one of its circulars the board had indicated that regardless of whether or not the takeover succeeded, it would proceed with the capital reduction in respect of the preference shares. Objective reasons for such a step are hard to find. Counsel for Allgas submitted that it was “inconvenient to the company in a modern context” to have two classes of shares, but in an age of computer facilities I find the submission unconvincing. There can be little doubt that the procedures to cancel the preference shares were initiated in order to satisfy TU’s condition and enable ordinary shareholders to obtain the benefit of the extra price offered. It is perfectly obvious that this was a strong and persuasive financial incentive that would be likely to induce ordinary shareholders to vote in favour of such a cancellation. I infer that those who sent their proxies to the chairman prior to the meeting were likely to have been so motivated. Approximately one hour before the meeting TU gave notice to the Allgas Board that it was withdrawing the condition that the preferential shares be cancelled. That is to say it declared that it was prepared to pay the higher price simply if it was successful in obtaining 90 percent of the ordinary shares. It would seem that Allgas’s board or the chairman then decided to attempt to proceed with the first meeting but to adjourn the second to another day. At the commencement of the general meeting, the chairman announced the effect of the TU letter and stated that it was his intention to adjourn the meeting of preference shareholders. That meeting proceeded to carry the resolution by votes (in value) 6,130,767 in favour, and 188,047 against. Of the votes in favour, 5.77 million were the result of proxies, of which 4.8 million were -- 5 of 14 -- 4 directed by the proxy-giver in favour of the resolution and .97 million were exercised by the chairman as undirected proxies in favour of the resolution. The necessary 75 percent majority was thus achieved both in relation to numbers of votes and value of votes. At the conclusion of the general meeting the chairman declared that he intended to open and immediately adjourn the meeting of preference shareholders. Thereupon he said “I declare the meeting of preference shareholders open, and I adjourn it to 27 March 1998.” A representative of Winpar Holdings Ltd said from the floor, “I object, Mr Chairman. A meeting of preference shareholders has been called and this is not such a meeting. There are ordinary shareholders and other persons present. We are entitled to have a meeting at which only preference shareholders are present and you must ensure that other persons leave the room so that the meeting can commence.” The chairman responded, “That is very inconvenient for everyone. I overrule you. I have already adjourned the meeting, the proceedings are at an end and I thank you all for coming.” In due course the second meeting was held on 27 March, and on this occasion a vote was taken. It was declared that the resolution was carried as a special resolution. The votes in favour (value) were 105,119 (88 percent) and those against 14,489 (12 percent). However those results were achieved by special counting pursuant to a curious Queensland enactment of 1972 (the Gas Suppliers (Share Holdings) Act). Under s.14 of that Act a shareholder in a gas supply company is not entitled to exercise voting rights beyond an aggregate of 5 percent of the voting rights that attach to all the voting shares of that class in the gas supplier. The Act was apparently passed to forestall an early takeover bid by Boral. The legislation remains, and the company’s articles recognise it in article 4.4. It is common ground before me that the limitations imposed by the Act were lawfully applied in reaching the above results. The fact remains however that a voter such as Winpar which was opposed to the resolution and which held 75,000 preference shares could only cast a vote to a value of 10,000. Indeed, but -- 6 of 14 -- 5 for the Gas Suppliers (Share Holdings) Act the objectors who have appeared before me, who own about 38 percent of the preference shares, could always prevent the passage of a special resolution at a meeting of such shareholders. The legal reality is that a special resolution was passed at that meeting approving the cancellation of the shares; but the factual reality is that a significant minority of such shareholders, sufficient under normal circumstances to prevent such a resolution being carried, opposed it. There is evidence to suggest that had the “second” meeting proceeded on 17 March, the requisite three quarter majority might not have been obtained. Mr Elkington has submitted a reconstruction to demonstrate that according to evidence of votes which changed between the two meetings and those of directed and undirected proxies, there were then 70,802 proxies in favour of the resolution and 29,626 against. That would probably have led to the defeat of the resolution had the second meeting been held on the appointed day. It is Mr Elkington’s submission that the directors, by the time the decision was made to adjourn the second meeting, must have known of this. This founds a further submission that the directors have aligned themselves with the ordinary shareholders and with TU and have been prepared to sacrifice the interests of the preference shareholders. He submits that the determination to proceed with the first meeting and to defer the second was based on tactics to achieve a pre-determined goal rather than the interests of the respective shareholders. The Australian Securities Commission (ASC) has been provided with relevant material, and having been given notice of the present application, appeared before me. Whilst neither consenting to nor opposing the application, it made submissions which raise certain concerns in relation to the validity or value of the decision made at the first meeting. In particular it adverted to the fact that the shareholders whose proxy votes were used to carry the resolution could not have known of the change to the terms of TU’s takeover offer. -- 7 of 14 -- 6 A considerable number of points were raised by the objectors in the proceedings before me. The points with which I shall deal will be those necessary for the disposition of the present application and those which would inevitably cloud further proceedings involving the present parties if not dealt with now. WERE TWO MEETINGS NECESSARY? Section 195(1) includes the following: “Subject to confirmation by the Court, a company may, if so authorised by its articles, by special resolution reduce its share capital in any way . . .” The company memorandum contains the following clause: “V. The capital is $200,000,000.00 divided into 200,000,000 shares of $1.00 each, with power to increase such capital to such extent as may be deemed necessary, and with power, on increase of capital, to issue preference and guaranteed shares, or preference or guaranteed shares as part of as the whole of the increased capital, and of such amounts as may from time to time be determined.” The articles of association contains the following article, under the wider heading of “Powers and Authorities”: “3.1 Authorisations Where the Corporations Law provides that a company or its officers may do a thing, or decline to do a thing, if authorised or otherwise permitted by its articles, that authority and permission is given.” No other article deals with relevant subject matter. The articles do not incorporate Table A. The preliminary point was taken that Allgas is not authorised by its articles to reduce its share capital in any way. The memorandum and articles of course have the effect of a contract inter alia between the company and members (s.180). Article 39 of Table A was referred to as exemplifying the ordinary express power that will permit a company to reduce its share capital. A contrast was drawn between this and the somewhat circular and non-informative content of article 3.1. It was submitted that the word “so” in the phrase “if so authorised by its articles” in -- 8 of 14 -- 7 s.195(1) must be given some effect, and that the appropriate effect would be to require a positive expressly stated authorisation of such a step. The argument has its attractions, but I consider that the combination of article 3.1 and s.195(1) of the Corporations Law is sufficient to permit the company (subject to s.195) to reduce its share capital. Section 195(1) does provide that a company may by special resolution reduce its share capital “if so authorised by its articles”, and the article authorises the company to do something “where the Corporations Law provides that a company . . . may do a thing . . . if authorised by its articles”. I do not think that the inclusion of the word “so” excludes articles that adopt powers specified in another instrument such as the Corporations Law, or that it prevents the effect of combination of these two provisions. Article 3.1 is a blanket adoption of all things that the Corporations Law says a company or its officers “may do . . . if authorised or otherwise permitted by its articles”. In all such instances article 3.1 gives that necessary authority and permission. It is common ground that subject to the existence of the necessary power discussed above, a special resolution was required under s.195(1) and that the Court’s confirmation thereof is now necessary under s.195(5). Submissions however were made that the second meeting was unnecessary and should not have been held. Seemingly the Allgas Board (or its advisers) saw the need for a second meeting under s.197(2), which provides “Where: (a) rights are attached to shares included in a class of shares; (b) no provision is made by the memorandum or articles for the variation or abrogation of those rights; and (c) neither the memorandum nor the articles declares or declare those rights to be unalterable; the company may, with the consent in writing of the holders of three-quarters of the issued shares included in that class or with the sanction of a special resolution passed at a meeting of the holders of those shares, vary or abrogate those rights or alter the memorandum or articles so as to authorise the variation or abrogation of those rights.” -- 9 of 14 -- 8 Like s.195(1), s.197(2) provides that a company “may” do certain things with appropriate consent or with the authority of a special resolution. Earlier legislation provided that class rights could not be varied or abrogated without the consent of class members or special resolution (cf. Cumbrian Newspapers v Cumberland Co [1987] 1 Ch. 1). However the result in the present case is the same, as the company has no power to vary or abrogate such rights except by combination of article 3.1 and ss.195 and 197. Mr Gooley referred to House of Fraser v ACGE Investments Ltd (1987) 3 BCC 201 where it was held that it was unnecessary for a separate class meeting of preference shareholders to be held for the purpose of achieving a reduction of capital which involved the cancellation of all existing preference shares. That decision however turned upon the articles which required a meeting only when special rights attached to shares were “modified, commuted, affected or dealt with”. The House of Lords considered that a proposal involving the complete cancellation of the shares did not fall within those words and that accordingly a separate meeting was unnecessary. That is distinguishable from the present case where the proposed cancellation will plainly abrogate such rights. The proposal involves both the reduction of share capital and the alteration of class rights. In order to achieve these things it is necessary that the company satisfy the requirements of both s.195 and s.197. Accordingly it was necessary that meetings of each kind be held. WAS THE SECOND MEETING INVALID? It was submitted by Mr Elkington (an objector) that the second meeting was invalid because it was not properly adjourned on the occasion that followed the conclusion of the first meeting. Reference was made to Carruth v Imperial Chemical Industries Ltd [1937] AC 707, 761, 767-768 for the proposition that a class meeting is prima facie invalid if held in the presence of other shareholders. It is true that some ordinary shareholders were present when the adjournment was announced, and that someone objected (after the chairman announced the adjournment) to the -- 10 of 14 -- 9 meeting being conducted in the presence of the others. It was submitted that this made the procedure a nullity. Even if this be so, it by no means follows that when the meeting was reconvened on 27 March on what would seem to be adequate notice to those concerned, those further proceedings were null and void. The adjournment of course afforded the opportunity to the givers of proxy votes to review their proxy directions in the light of the additional information concerning TU’s withdrawal of its condition. In these circumstances it seems to me that any irregularity alleged with respect to the reconvening of the second meeting on 27 March would be potentially curable under s.1322 of the Corporations Law (Re Vanfox Pty Ltd [1995] 2 Qd R 445, 452). It is not necessary however that I proceed further with this question on the present application which is primarily concerned with confirmation of the resolution passed at the first meeting. It is enough to indicate that I do not regard the second meeting as a nullity. SHOULD THE SPECIAL RESOLUTION BE CONFIRMED? In determining whether to confirm a company’s reduction of its share capital under s.195(1) the Court is concerned with overall fairness and recognises that in most rearrangements there will be some who dissent and some who may be less favourably served than others. However as far as possible the Court endeavours to determine whether the reduction “is fair and equitable to all concerned” (Nicron Resources Ltd v Catto (1992) 10 ACLC 1186 at 1,193). Ordinarily the Court is slow to dissent from the decision of an informed shareholders’ meeting (Re Rancoo Ltd (1995) 13 ACLC 880 at 881). The Court’s task was described by Needham AJ in Ramsay Health Care Ltd v. Elkington (1992) 10 ACLC 421, as “. . . essentially, to ensure that that decision was taken validly, that the members were fully informed and that the resolution is not prejudicial to some class of members. It is not for the Court to determine the merits of the reduction except in that context. The word ‘confirm’ implies approval of the decision of the members. . . .” -- 11 of 14 -- 10 Mr Dutney QC for Allgas submitted that the evidence showed the purchase of the preference shares at $7.50 to be the fair equivalent in money of the value of the cancelled shares, and that the shareholders concerned would thereby receive fair and equitable treatment. He referred to other factors including the absence of any problems affecting creditors, and the absence of any suggestion that the reduction would be detrimental to the public. The explanatory memorandum forwarded to the shareholders in connection with the meeting stated “the increased price will not be available unless the proposed capital reduction is approved”, and other letters or notices made it clear to shareholders that the capital reduction had to occur if they were to obtain the maximum price. A large number of proxies resulted. Indeed the number of votes authorised by proxy considerably exceeded those of persons who arrived at the meeting and voted in person. Only the latter persons were made aware of the significant alteration of TU’s position when the meeting was held. It is difficult to understand why a decision was taken to adjourn the second meeting so as to permit preference shareholders to lodge fresh proxies, but not to do so in the case of the first meeting. Mr Dutney’s suggestion that the relevance of the further information was “more marked” in the case of the preference shareholders than the ordinary shareholders is not persuasive. It may well be that the price offered to the preference shareholders for the extinction of their rights was fair, but that does not mean that the reduction of capital is fair and reasonable, especially if shareholders have been asked to make a commercial judgment without being provided with all relevant facts prior to the making of the decision (Re Albert Street Properties Ltd (1997) 23 ACSR 318, 329; Re Prime Group Holdings Ltd (1994) 12 ACLC 308, 316). The information of TU’s change of position was very relevant to the voting decision of the shareholders who were entitled to vote. The financial incentive would be likely to have induced a substantial majority of ordinary shareholders to vote in their own interests in favour of such a -- 12 of 14 -- 11 resolution. However once that financial incentive was removed, it would by no means follow that they would vote the same way. Those whose proxies were used were not informed of the new information or given any opportunity to redirect their proxies. Mr Dutney submitted that the only effect of the information might be to induce some of such voters to abstain from voting at all, but that it would not induce them to vote against the resolution. I do not agree. The resolution would require a capital expenditure by the company of approximately $1.5 million, and no significant benefits have been referred to as flowing from the elimination of the preference shareholdings. Mr Dutney referred to the very large majority of votes cast in favour of the resolution and submitted that upon a further informed vote it was inevitable that there would still be the necessary three- quarter majority. I am not satisfied that this is so. Now that the financial incentive offered by TU to the ordinary shareholders has disappeared, it will be possible for the shareholders to address the question objectively and assess what are the benefits if any of cancelling the preference shares and buying out their holders at the stated price. It is by no means inconceivable that the initial enthusiasm will have evaporated and that the necessary majority might not be obtained. More factors are involved in a decision to proceed to cancel an existing category of shares than the mere fixation of a fair price. It may be that some of the actions of the directors were more calculated to obtain a special benefit for the ordinary shareholders than to achieve what was fair and equitable to all concerned. However it is not necessary to proceed to specific findings on these questions and I am satisfied that the failure to adjourn the first meeting deprived the proxy-givers of the opportunity of fairly considering how their votes should be applied. Accordingly I am not satisfied that the special resolution was the decision of fully informed members. I have reached the view that in all the circumstances it would not be appropriate for the Court to confirm the special resolution that was carried at the meeting of 17 March 1998. OTHER ISSUES -- 13 of 14 -- 12 In view of this conclusion I do not find it necessary to address the many other points of objection raised on behalf of the objectors. ORDERS The application will be dismissed. The company should pay the costs of the objectors to be taxed. -- 14 of 14 --