The case provides some useful guidance on the difference between fairness and reasonableness of an offer under a scheme of arrangement, as well as the circumstances in which a Court may be willing to convene a meeting of a company’s shareholders to consider a scheme which an independent expert has determined is not fair, but is reasonable and in the best interests of shareholders.
Peet Limited (Peet) held 86.05% of the shares in CIC Australia Limited (CIC) which it acquired during an off-market takeover in around April 2013 (at which time the share price was 60 cents per share). CIC applied under section 411(1) of the Corporations Act 2001 (Cth) for an order convening a meeting of its members (other than Peet) for the purposes of considering a scheme of arrangement (Scheme). The Scheme was initiated by the non-Peet shareholders and the effect of it was that CIC would buy back the shares of all non-Peet shareholders at 82.7 cents per share so that CIC would then be a wholly owned subsidiary of Peet.
In considering whether there was any fundamental objection to the Scheme that would likely preclude its approval at the second meeting, Brereton J in the Supreme Court of New South Wales noted that the independent expert had expressed the conclusion that the Scheme was not fair to shareholders, but was reasonable, and in the absence of a superior offer, was in the best interests of the shareholders. One of the reasons identified by the expert for the Scheme not being ‘fair’ was that Peet should be prepared to pay a substantial premium for obtaining control and as such, a substantial premium should be applied to the market price for the shares over the last year (which varied from a low of 69 cents to a high of about 83 cents). Brereton J in the Supreme Court of New South Wales held that:
- fairness is concerned with a comparison of the consideration for the offer and the true value of the shares and reasonableness is concerned with other factors that may make it reasonable to accept an offer that is less than fair (and such distinction is reflected in ASIC Regulatory Guide 111 – Content of Expert reports);
- while Courts should adopt a cautious approach to the approval of any scheme that the expert considers ‘not fair’, Courts have made orders convening meetings and approving schemes where the independent expert has concluded that the scheme was reasonable although not fair;
- as Peet already owned 86% of the shares, it already controlled a general meeting so there was little for which it would pay a premium except ridding itself of the inconvenience of having a small minority. In those circumstances, if any premium at all was appropriate, it was doubtful that it would exceed 10%, let alone approach the 40% spoken of by the expert;
- the fact that only 0.1% of CIC’s shares had been traded over the last 12 months significantly decreased the reliability of a quoted market price valuation;
- in circumstances where the minority shareholders could not bring about a winding up to realise value and the directors had indicated that they did not intend to declare a dividend; the independent expert’s view that the Scheme was reasonable although not fair, and in the best interests of shareholders, was an open one;
- so long as the non-Peet shareholders were properly appraised that the independent expert considered the Scheme not to be fair and why, it was for the shareholders to decide whether to accept the offer; and
- it was material that the proposal for the Scheme emanated from the non-Peet shareholders in the wake of a takeover at a much lower price.