TP04/020
The Panel announces that it has made declarations of unacceptable circumstances in the Mildura Co-operative Fruit Company Limited proceedings. The Panel has concluded the proceedings as a result of the applications made by Mildura Investment Company Pty Ltd (MIC) and the application made by Mildura Co-operative Fruit Company Limited (MCFC) following acceptance by the Panel of undertakings to the Panel provided by MIC and MCFC.
Background
The Panel received two applications from MIC (the MIC Applications) pursuant to sections657A, 657E and 657D of the Corporations Act 2001 (Cth) (the Act) in relation to MIC’s takeover bid for all of the ordinary shares in MCFC (the Bid). In MIC’s first application dated 27 January 2004 (the First Application), MIC applied to the Panel for a declaration of unacceptable circumstances and interim and final orders. In MIC’s second application dated 28 January 2004 (the Second Application), MIC applied to the Panel for a declaration of unacceptable circumstances and final orders.
On 30 January 2004, the Panel received an application by MCFC (the MCFC Application) under sections 657A and 657D of the Act for a declaration of unacceptable circumstances and final orders in relation to the Bid.
On 2 February 2004, the Panel decided to conduct proceedings (the Proceedings) in relation to the issues raised in the MIC Applications and MCFC Application.
It should be noted that the Panel also received an application by MIC on 11 February 2004 under section 657A for a declaration of unacceptable circumstances and final orders. This application was withdrawn before the Panel commenced proceedings in relation to it.
MIC Applications
MCFC has sent a copy of its target’s statement (the Target’s Statement) to each holder of ordinary shares and each holder of preference shares in MCFC.
The Target’s Statement refers separately to the existence of provisions in MCFC’s constitution which provide for limits (the Takeover Restrictions) on the number of ordinary shares which one person may hold or vote, which the directors of MCFC have a discretion to vary.
On 23 January 2004, MIC wrote to MCFC alleging that the Target’s Statement failed to meet the disclosure requirements under the Act, contained statements that were misleading or deceptive and that various statements contravened section 638(5) of the Act. On 27 January, MCFC wrote to MIC responding to the allegations raised by MIC.
Also on 23 January 2004, MIC wrote to MCFC asking MCFC to confirm that it did not receive any advice (whether written or oral, formal or informal) from any qualified person (such as KPMG) as to the value of MCFC’s ordinary shares or as to the adequacy, reasonableness or fairness of the Bid.
On 25 January, MCFC wrote to MIC stating that it had not received any opinion from any qualified person as to the value of MCFC’s ordinary shares or to the adequacy, reasonableness or fairness of the Bid. However, in their response, MCFC stated that its directors had engaged in preliminary discussions with KPMG concerning the value of MCFC shares (the KPMG Advice).
The Target’s Statement assessed the adequacy of the consideration offered by MIC under the Bid by reference to (among other things) a comparison between the bid price and the net asset backing of MCFC according to MCFC’s most recent financial statements; and comparisons between the price/earnings ratio and dividend multiple derived from the bid price and price/earnings ratios and dividend multiples for companies included in a stock exchange index (the S&P/ASX Small Ordinaries Index) (the Bid Price Comparisons).
The First Application concerned the use in the Target’s Statement of statements by Mr Armour and his solicitors and statements based on statements made by them in contravention of section 638(5) of the Act. Details of the First Application are contained in the Panel’s Media Release TP 04/07.
The main issues in the Second Application concerned whether MCFC should disclose details of the KPMG Advice in its Target’s Statement; whether or not the Target’s Statement should have been dispatched to preference shareholders; whether the Target’s Statement was misleading by statements and omissions regarding the Takeover Restrictions; whether the Bid Price Comparison was misleading; and whether statements in the Target’s Statement about Mr Armour and MIC’s expertise in running MCFC’s business were misleading.
MCFC Application
MIC published newspaper advertisements, and Mr Armour made statements to the media, stating that, should MIC obtain control of MCFC under the Bid, it would cause MCFC to review the prices MCFC pays to suppliers for produce (Grower Payments) with a view to ensuring that Grower Prices are at least at market level and endeavouring to ensure that, wherever possible, Grower Prices are above the rate that would otherwise be set by the market. MIC made no specific statement about intentions in relation to Grower Payments in the Bidder’s Statement.
In the MCFC Application, MCFC alleged that Mr Armour’s statements regarding Grower Payments did not explain what the review would entail or how the increased rates would be achieved.
The Panel’s Decision
Section 638(5) – Consent
The Panel has accepted an undertaking from MCFC that, among other things, it will send to each shareholder a supplementary target’s statement (the Supplementary Target’s Statement) which prominently at the beginning of the document states that by including Mr Armour’s statements in the Target’s Statement without his consent, MCFC failed to comply with subsection 638(5) of the Act.
Nevertheless, the Panel decided to make a declaration of unacceptable circumstances, as MCFC breached subsection 638(5). That provision is an important part of the machinery of Chapter 6, it creates an offence of strict liability, and is basic to the incidence of civil and criminal liability for statements made in takeover documents. MCFC did not obtain the consent of Mr Armour to use his statements in the Target’s Statement, nor the form and context in which he was quoted. In addition, the Target’s Statement did not state that Mr Armour had consented to the use of the quotations, as the section requires.
The Panel considered that the obligation to provide all material information in subsection 638(1) does not prevail over the prohibition on using a person’s statement without their consent in subsection 638(5) because the specific prohibition in that subsection overrides the general obligation in subsection (1). The Panel noted that MCFC made no attempt to seek the consent of Mr Armour to the use of the quotations.
The Panel considered an appropriate course of action would have been for MCFC to consult with Piper Alderman to seek Mr Armour’s consent to include the relevant quotations in the Target’s Statement prior to releasing the Target’s Statement. If that consent was not forthcoming, MCFC could then have applied to ASIC for an exemption from subsection 638(5) on the basis that those statements were material to shareholders and would assist them in making an informed decision whether to accept MIC’s offer.
Preference Shareholders
The Panel did not make a declaration on this issue. The Panel formed the view that the terms of the covering letter sent to preference shareholders with the Target’s Statement were such as to ensure that MCFC’s preference shareholders were not misled by having been sent the Target’s Statement into believing they could accept the bid for their preference shares. That letter also made it clear that it was highly unlikely that any of the preference shares would be converted into ordinary shares during the offer period.
These matters having been made clear, the Panel saw no harm in MCFC having provided copies of the Target’s Statement to its preference shareholders, whether or not it was required to do so.
Bid Price Comparisons
The Panel found that the use of the Bid Price Comparisons analysis was misleading on the basis that the Target’s Statement did not explain with sufficient clarity that the Bid Price Comparisons were only presented on the basis of an assumed proposal to acquire a controlling interest in MCFC and were not appropriate to the assessment of a bid for a minority interest in MCFC.
The Panel decided not to make a declaration of unacceptable circumstances following acceptance by the Panel of undertakings provided by MCFC that it would set out in the Supplementary Target’s Statement limitations to the use by offeree shareholders of the Bid Price Comparisons in responding to the Bid, in particular that they only related to the valuation of the company as a whole and not to a minority interest in it.
Takeover Restrictions
The Panel found that the Target’s Statement did not disclose with sufficient clarity the MCFC’s directors’ views and intentions regarding the Takeover Restrictions and the effect of the Takeover Restrictions on the Bid Price Comparisons analysis.
The Panel decided not to make a declaration of unacceptable circumstances following acceptance by the Panel of undertakings provided by MCFC that it would, among other things, set out in the Supplementary Target’s Statement how the directors of MCFC would exercise their powers under the Takeover Restrictions in relation to the Bid, and whether the directors would restrain transfers and voting of shares for which acceptances of offers under the Bid are accepted under the Takeover Restrictions.
MIC’s Expertise in running MCFC
The Panel did not find the statements in the Target’s Statement regarding MIC’s expertise in running MCFC were misleading or deceptive, taken in context, or that they created an impression that MIC would run MCFC’s business, without necessary expertise.
KPMG Advice
The Panel reviewed the KPMG Advice (which included a paper titled “Indicative Pricing Analysis” dated 15 January 2004), a letter from KPMG to MCFC, and a witness statement from KPMG that the result of the valuation exercise in their analysis supported the MCFC directors’ assessment of the bid price in the Target’s Statement.
On the basis of that information, the Panel was satisfied that KPMG’s analysis did not attract the principle in Ridley MI v Joe White Maltings (1996) 22 ACSR 319 that an expert valuation report in the hands of a target board may be material information which subsection 638(1) requires the board to disclose in the relevant target’s statement.
Grower Payments
The Panel found that Mr Armour’s comments concerning MIC’s intentions about Grower Payments were misleading as they tended to induce a belief that if MIC obtained control of MCFC, it was probable that Grower Payments would increase for which there appeared to be no reasonable basis, and also had the potential to cause confusion among shareholders. However, the Panel decided not to make a declaration following acceptance by the Panel of undertakings provided by MIC that it would send shareholders a supplementary bidder’s statement (the Supplementary Bidder’s Statement) stating whether the review of Grower Payments would apply to dried fruits, citrus or other produce, stating whether MCFC has power to increase relevant Grower Payments unilaterally and setting out its grounds for believing that MCFC could sustainably make Grower Payments above the rate that would otherwise be set by the market (or that it has no grounds for such a belief).
However, the Panel decided to make a declaration of unacceptable circumstances because MIC did not formulate and disclose intentions regarding the Grower Payments in its bidder’s statements (the Bidder’s Statement) on the basis that this constituted a serious departure from the policy of paragraphs 602(a) and (b)(iii).
In making these decisions, the Panel considered the special nature of a co-operative and formed the view that the ongoing trading relationship between suppliers and the co-operative is generally a critical issue when supplier-members decide whether to accept a takeover bid for an agricultural or trading co-operative. In that context, details of the intentions of MIC in relation to Grower Payments were material to shareholders to enable them to make an informed and critical assessment of the offer.
In his reported comments, Mr Armour did not make sufficiently clear the distinction between increases to Grower Payments to dried fruit suppliers and citrus suppliers. Accordingly, they implied that MCFC had the unilateral power to control the Grower Payments in relation to dried fruits, as well as citrus.
Given MIC’s acknowledged lack of expertise regarding MCFC’s business, its stated concern to maintain the profit level of MCFC, its stated concern about MCFC’s existing profit level and the magnitude of the Grower Payments relative to MCFC’s profit, as disclosed by MCFC’s financial statements, the Panel was concerned that MIC’s and Mr Armour’s reported statements about Grower Payments appeared to lack a reasonable basis.
Undertakings
As mentioned earlier, the Panel has accepted undertakings offered by both MIC and MCFC. The Panel has required MIC and MCFC to prepare supplementary statements and to provide them to the Panel for its review. The Panel invited comments from the parties on the supplementary statements.
The Panel has approved the supplementary statements for distribution, on the basis that they give effect to the parties’ respective undertakings. In accepting the supplementary statements as complying with the undertakings, the Panel is not endorsing them in any other way.
George Durbridge
Director, Takeovers Panel
Level 47 Nauru House
80 Collins Street
Melbourne VIC 3000,
Ph: +61 3 9655 3553
george.durbridge@takeovers.gov.au
