Dispute Resolution Partner, Tom Griffith and Corporate Lawyer, Vasyl Nair review the Full Federal Court’s recent decision in CSR’s appeal from earlier orders withholding the Court’s consent for the convening of a shareholders meeting to consider a demerger of CSR’s sugar and building products divisions. At the heart of both decisions was concern over CSR’s future asbestos-related liabilities.
On 8 October 2009, CSR Limited (CSR) sought orders in the Federal Court of Australia for the convening of a meeting of its shareholders. The purpose of the meeting was for the shareholders to:
- consider a scheme of arrangement (Scheme); and
- approve an explanatory statement summarising the Scheme.
The Scheme involved the demerger of CSR’s sugar and renewable energy business to create:
- Sucrogen (a sugar and renewable energy company); and
- CSR (a building products company) (New CSR).
Implementation of the Scheme would leave New CSR with substantially less capital than CSR. On 17 December 2009, a number of objectors to the Scheme (and the Australian Securities & Investments Commission (ASIC)) sought leave to intervene in the proceedings on the basis that the Scheme would prejudice asbestos claimants who have, or may have, a claim against CSR (or New CSR as the case may be) for injuries sustained from asbestos exposure. The matter was adjourned to allow the objectors and ASIC to obtain expert evidence in relation to the Scheme.
CSR’s application to convene the Scheme meeting came before the Federal Court of Australia on 29 January 2010. On 3 February 2010 the Court (Justice Stone) handed down judgment withholding consent for the scheme meetings.
Decision at First Instance
Upon review of expert material produced by CSR, ASIC and the objectors, the Court concluded that there was a great degree of uncertainty:
- involved in the actuarial estimates of future asbestos related claims; and
- surrounding New CSR’s provision for asbestos claimants after the demerger.
As a consequence, Justice Stone declined making the orders sought by CSR for the Scheme meeting on the basis that:
- she could not be satisfied that the Scheme, if implemented, would not involve an unfair or oppressive result; and
- the material in the explanatory statement could not provide adequate disclosure to the shareholders of CSR of New CSR’s ability to meet its future liabilities in relation to asbestos claimants.
Reasons for decision
A scheme of arrangement is implemented in three stages pursuant to part 5.1 of the Corporations Act 2001 (Cth):
- There is a first Court hearing (or convening hearing) at which the Scheme company seeks orders for the convening of a meeting of shareholders to consider the scheme and if appropriate, resolve to approve the Scheme;
- secondly, the meeting of the shareholders is held and a vote on the proposal; and
- finally, there is a second Court hearing at which the Scheme company seeks approval from the court for the implementation of the future scheme.
Justice Stone held that the statement of principle by Justice Emmett in Re Central Pacific Minerals NL was applicable to the role of the court at a first court hearing:
At the stage of convening a meeting, the Court will give consideration to compliance with such preliminary matters as are relevant to the holding of the meeting. Of paramount importance is the need to ensure that there will be sufficient disclosure, to those who will be affected by the arrangement, of its details and effect…In considering whether to convene a meeting the Court will take into account questions of public policy as well as commercial morality.
CSR attempted to limit the scope of the preliminary matters to be considered at the first meeting by relying on a comments made by Justice French in Re Foundation Healthcare Limited. Specifically, CSR asserted that it was inappropriate for the court to consider issues associated with the proposed capital reduction on asbestos claimants at the first court hearing.
Justice Stone disagreed with this interpretation on the basis that the capital reduction was a condition precedent to the Scheme and held that:
If at the first hearing the Court has a concern about the fairness of an element of a scheme such that the Court would not be prepared to approve the scheme without that issue being resolved, it would, in my view, be entirely inappropriate (to use French J’s language) for the issue not to be raised at the earliest opportunity.
Employing this approach, Justice Stone was satisfied that the impact of the capital reduction on asbestos claimants should be considered in the context of the Scheme at the first court hearing as a matter of public policy, commercial morality and fair disclosure to shareholders. Upon consideration of the capital reduction on asbestos claimants in the context of the Scheme, Justice Stone declined to make the orders sought by CSR.
The issues on Appeal
CSR’s raised 3 main arguments on appeal.
First, it contended that her Honour erred in proceeding on the evident assumption that CSR’s projections and actuarial estimates did not encompass the category of claims in the future by persons who have not yet been adversely affected by exposure to asbestos – it said that the actuarial estimates did not omit that category of claims.
The Full Court (Chief Justice Keane and Justice Jacobson) appear to have accepted this contention.
Second, CSR contended that her Honour acted on a broad view of “public policy” or “commercial morality” without articulating the particular aspects of public policy or commercial morality relevant to the discretion under section 411(1) of the Act.
Third, CSR contended that the evidence before the Court negatived any material prejudice to New CSR’s ability to pay all its creditors, which would have been the only consideration that might justify a negative exercise of the discretion under section 411(1).
Both Justice Stone and the Full Court were unable to conclude that it was more likely than not that persons with asbestos-related claims would be unable to satisfy those claims against New CSR if the demerger were to be implemented.
Ultimately the Full Court majority concluded that the inquiry under section 411(1) was not intended to resolve difficult questions on which reasonable minds might differ. Instances where it was appropriate to decline to order the convening of a meeting would be those where the order would be futile because the scheme as proposed was unlikely to be finally approved. The Majority of the Full Court held that
- the consideration that the reduction in capital would increase the risk of non-payment of New CSR’s creditors in a theoretical rather than a material way is not a consideration which would warrant blocking the demerger as a matter of public policy or commercial morality by refusing to order the first meeting; and
- the prospect that the reduction in capital associated with the demerger of CSR may materially prejudice the ability of New CSR to pay all its creditors including asbestos claimants is not so clear as to warrant the conclusion that the scheme could never be approved and justify the order made below on this basis.
By reference to some of the disparate statements about the level of scrutiny to be applied to a proposed scheme at the first Court hearing, Justice Finkelstein reinforced the majority’s conclusion, and by particular reference to Justice Santow’s decision in Re NRMA Insurance Limited (No 1,) observed that the majority’s approach:
properly reflects the two stage nature of the scheme hearing process, where convening hearings often take place on limited notice, and where issues and objectors regarding a scheme may only emerge after the scheme meeting. As such, instead of saving costs and court time, hearing the merits at the convening stage may achieve the opposite. Thus an enquiry into the merits at the convening stage will only be warranted if there is a clear indication that the scheme will not be approved. The indication may appear from the terms of the scheme. Or it may arise out of an incontrovertible fact (which is the basis upon which I would qualify what is said in Re Foundation Healthcare).
The significance of the decisions seem at first glance limited to scheme companies that have significant future contingent liabilities such as companies with asbestosrelated liabilities. This view is supported by Justice Stone’s statement:
I do not accept that the position of future asbestos claimants is to be equated with every category of current and future creditor of New CSR. Their interest arises not from some future dealing with CSR but from their involuntary exposure to asbestos products.
Justice Stone also observed that a capital reduction by definition reduces a company’s ability to meet the claims of its creditors does not of itself indicate unfairness or conflict with public policy. Bearing in mind some other recent high profile schemes (such as Seven’s proposed merger with WesTrac) it does seem that Courts are applying more scrutiny to the terms of the proposed schemes, in order to protect shareholders’ (and potentially other stakeholders’) interests. As the Appeal Court judgments in the CSR case show however, the time for detailed consideration of the proposal will be at the second Court hearing, when the issues are more defined and any objector’s arguments will be more focussed, rather than at the convening hearing.