National Foods Limited - Panel Accepts Undertakings and Declines to Make a Declaration of Unacceptable Circumstances

TP05/032

The Panel announces that it has accepted undertakings from Fonterra Foods Pty Limited, Sodima SAS and Yoplait SAS in relation to the application by San Miguel Foods Australia Holdings Pty Ltd (San Miguel) for a declaration of unacceptable circumstances on 7 March 2005. The application concerned a proposed joint venture (the JV) which Fonterra Foods, Yoplait and Sodima announced on 2 March 2005. The JV would be between National Foods Limited and Sodima and may be implemented if Fonterra Foods acquires 100% of the shares in National Foods. In light of the undertaking, the Panel has declined to make a declaration of unacceptable circumstances at this stage.

Summary

San Miguel and Fonterra Foods are rival bidders for National Foods. San Miguel's application alleged that unacceptable circumstances existed in relation to the affairs of National Foods in that:

  • Fonterra Foods had not made adequate disclosure of the terms of the JV and its intentions in light of the JV; and
  • Sodima and Yoplait had not lodged substantial holding notices which they were required to lodge because in entering the JV they had become associates of Fonterra Co-operative Group Limited (Fonterra) or had a relevant interest in shares owned by the Fonterra Group;
  • Sodima and Yoplait consequently had not attached copies of the JV agreement between Fonterra, Sodima and Yoplait (the Fonterra/Yoplait Deed) to any substantial holding notice.

Disclosure by Fonterra Foods

Fonterra Foods made some disclosure in relation to the JV in a supplementary bidder's statement which it published at the same time as its 2 March announcement. However, the Panel considered that Fonterra Foods had not given National Foods shareholders adequate information about certain matters in relation to the JV and required Fonterra Foods to make corrective disclosure addressing the following matters:

  1. the material effects of an obligation (the JV Preparation Obligation) originally contained in the Fonterra/Yoplait Deed under which Fonterra was required to use all reasonable efforts (without being required to act against its own interests) to be in a position to implement (and to be in a position to cause National Foods to implement) the JV, following Fonterra achieving majority control of National Foods and pending Fonterra acquiring all of the shares in National Foods;
  2. further detail in relation to Fonterra Foods' intentions with respect to the conduct of National Foods' yoghurt, Petit Suisse, fromage frais, fresh dairy desserts and similar products' (Fresh Cultured Products and Fresh Dairy Desserts) business (being that part of National Foods' business to be included in the JV):
    1. in the case of Fonterra Foods owning 50% to 100% of National Foods.

      The Panel considered that the corrective disclosure should address how Fonterra Foods will procure the conduct of National Foods' Fresh Cultured Products and Fresh Dairy Desserts business pending satisfaction of the conditions precedent to the formation of the proposed JV in light of the JV Preparation Obligation and what that conduct might entail in preparing the National Foods businesses for entry into the JV; and

    2. in the case of Fonterra Foods ultimately owning 100% of National Foods.

      The Panel considered that the disclosure should address the following:

      1. the fact that Fonterra Foods may establish a 50/50 joint venture with Sodima (as distinct from a joint venture of undisclosed or undetermined equity interests);
      2. the fact that National Foods may provide intercompany services to the JV;
      3. the fact that Fonterra will procure the transfer to the JV vehicle, in which Sodima holds a 50% equity interest, of sufficient assets of National Foods and Fonterra to meet an agreed level of financial performance;
      4. the fact that National Foods' Fresh Cultured Products and Fresh Dairy Desserts employees will be engaged in the business of the JV;
      5. arrangements with respect to the appointment of existing executives of National Foods to senior executive appointments in the JV;
      6. the fact that both Fonterra and National Foods will contribute business units to the JV; and
      7. the fact that Yoplait will provide licences and technical and other expertise and services to the JV;
    1. the fact that the parties have agreed detailed and (subject to the satisfaction of certain conditions) binding terms for the proposed JV;
    2. the fact that the JV arrangements will contain terms dealing with certain specific matters (for example, the governance, funding and winding up of the JV);and
    3. the fact that Fonterra Foods has no discretion as to whether the proposed JV will proceed (that is, that Fonterra Foods must proceed with the JV if Fonterra Foods acquires 100% of National Foods and Sodima chooses to proceed with the JV).

Fonterra Foods prepared a corrective supplementary bidder's statement addressing the above matters which the Panel has reviewed, and has undertaken to release that supplementary bidder's statement to ASX immediately following the release of this announcement. Fonterra Foods has also undertaken to dispatch the supplementary bidder's statement to National Foods shareholders within 14 days and, in any event, at least 11 days prior to the close of Fonterra Foods' offer.

Fonterra Foods has also undertaken to extend withdrawal rights (exercisable for a period of five business days) to shareholders who accept or have accepted Fonterra Foods' offer between 2 March 2005 (when the JV was first announced) and receipt by them of the supplementary bidder's statement.

Substantial holding notices by Sodima and Yoplait

The Panel considered that entering into the Fonterra/Yoplait Deed caused Fonterra (on the one hand) and Sodima and Yoplait (on the other hand) to become associates in relation to National Foods.

On balance, it seemed that the JV Preparation Obligation reflected an agreement for the purpose of controlling the conduct of the affairs of National Foods. The Panel considered that the JV Preparation Obligation required Fonterra to manage National Foods (from the time it acquired control until the JV is set up) in a way which, at the least, does not impede setting up the JV. Further, the Panel considered that the JV Preparation Obligation required Fonterra Foods to prepare National Foods' businesses for transition into the JV. For instance, subject to Fonterra not being adversely affected, the JV Preparation Obligation would prevent Fonterra from causing or allowing National Foods to close down or sell off its Fresh Cultured Products and Fresh Dairy Desserts business.

Given that Fonterra had a relevant interest in at least 19.03% of the shares in National Foods, the Panel therefore considered that Sodima and Yoplait had voting power in National Foods of at least 19.03%. Accordingly, the failure by Sodima and Yoplait to lodge a substantial holding notice by 9.30 a.m. on the next business day after they entered into the Fonterra/Yoplait Deed constituted unacceptable circumstances.

The Panel considers that Sodima and Yoplait should lodge a substantial holding notice. Each of Sodima and Yoplait has undertaken to lodge a substantial holding notice (but not undertaken to annex the Fonterra/Yoplait Deed), if they are successful in obtaining relief from the obligation to annex the Deed to the notice1.

If such relief is not forthcoming, the Panel may still make a declaration of unacceptable circumstances and orders in relation to the failure by Sodima and Yoplait to lodge substantial holding notices upon entering into the Fonterra/Yoplait Deed.

However, pending the outcome of the application for relief, the Panel did not believe it was necessary to require Sodima and Yoplait to release a copy of the Fonterra/Yoplait Deed. It considers that Sodima and Yoplait would not cause unacceptable circumstances to result if they do not publish the Deed. This is because (amongst other things) all information about the Deed which is material to National Foods shareholders will be disclosed in Fonterra Foods' supplementary bidder's statement.

Background

Fonterra's bid

On 28 October 2004, Fonterra announced a conditional takeover bid for National Foods at $5.45 per share ($5.35 after the National Food's dividend of 10 cents per share). The takeover bid is being conducted through Fonterra's wholly owned subsidiary, Fonterra Foods.

On 4 November 2004, Fonterra Foods lodged the bidder's statement in relation to Fonterra's bid. Subsequently, Fonterra Foods lodged supplementary bidder's statements on 15 November 2004, 29 November 2004, 2 March 2005 and 11 March 2005. Fonterra's bid was conditional, among other things, on the release or waiver of any rights to terminate material contracts with National Foods in the event of Fonterra acquiring shares in National Foods.

On 6 December 2004, National Foods lodged its target's statement in response to Fonterra's bid. The target's statement disclosed that Sodima (a company controlled by Yoplait) has the right to terminate certain agreements signed in 1998 and 2000 between Sodima and National Foods (under which National Foods is granted an exclusive licence to produce, distribute and sell Yoplait products in Australia and New Zealand) if a competitor of Sodima's Yoplait products anywhere in the world acquires control of National Foods without Sodima's consent (Sodima's Termination Rights).

San Miguel's bid

On 30 December 2004, San Miguel Corporation and National Foods jointly announced that San Miguel Corporation intended to make a conditional takeover offer for all of the issued shares in National Foods at $6.00 cash per share ($5.90 after the National Food's dividend of 10 cents per share). The takeover bid is being conducted through San Miguel, a wholly owned subsidiary of San Miguel Corporation. The National Foods board unanimously recommended that shareholders accept San Miguel's bid in the absence of a superior proposal. The bidder's statement in relation to San Miguel's bid was lodged on 24 January 2005. The offer period under San Miguel's bid opened on 1 February 2005. San Miguel has received acceptances for just over 1% of National Foods shares.

National Foods' interim dividend

On 30 January 2005, National Foods paid an interim dividend of $0.10 per share. The effect of that interim dividend was to reduce the offer consideration payable under the bids of each of San Miguel and Fonterra by $0.10 per share.

Fonterra's 2 March announcement

On 2 March 2005, Fonterra made an ASX announcement (the 2March Announcement) that Fonterra Foods proposed to increase the consideration offered under its takeover bid for National Foods to $6.00 per share. Fonterra's bid will be increased to $6.20 per share if Fonterra has a relevant interest in at least 90% of the shares in National Foods. Both of these amounts are "ex" the interim dividend paid by National Foods on 31 January 2005. Fonterra also announced that it would waive all of the conditions to Fonterra's bid other than the 50% minimum acceptance condition.

Fonterra also announced that Fonterra's bid would include an option for National Foods shareholders to accept redeemable preference shares in lieu of cash (so that National Foods shareholders could receive entirely cash, entirely redeemable preference shares or a mixture of cash and redeemable preference shares).

The 2 March Announcement contained the following statements in relation to a waiver of the Sodima Termination Rights and possible entry into a joint venture:

"Fonterra also confirmed that Yoplait has agreed to continue to support National Foods under Fonterra ownership. Fonterra will waive all of the conditions of its offer, other than the 50% minimum acceptance condition.".

"If Fonterra ends up owning 100% of National Foods, Mr Ferrier [Fonterra 's CEO] said that Fonterra and Yoplait may establish a joint venture in Australia and New Zealand, but that decision would be taken at a later date".

On 2 March 2005, National Foods made an ASX announcement that the Board of National Foods unanimously recommended that National Foods shareholders accept Fonterra's revised bid in the absence of a superior proposal.

National Foods advised the Panel that prior to recommending Fonterra's revised bid, the National Foods board obtained some information about the arrangements between Sodima/Yoplait and Fonterra and, on the basis of that information, assessed how those arrangements might affect minority shareholders in National Foods if Fonterra acquired control, but not 100%, of National Foods. National Foods advised that the information provided by Fonterra included confirmation that the waiver of Sodima's termination rights referred to below was irrevocable. However, full details of the Fonterra/Yoplait Deed were not released by Fonterra to National Foods.

Fonterra's third supplementary bidder's statement (the Third Supplementary Bidder's Statement) which accompanied the 2March Announcement contained the following statements in relation to the waiver of the Sodima Termination Rights:

"Sodima and Yoplait have now consented to any acquisition by [Fonterra Foods] of shares in National Foods and waived any rights which may accrue as a result of that acquisition including the right to terminate the manufacturing, distribution and franchise agreements for Yoplait products in Australia and New Zealand."

The Third Supplementary Bidder's Statement also referred to the proposed JV in the following terms:

"The schedule to this Third Supplementary Bidder's Statement contains disclosure in relation to … an agreement which has been reached with Yoplait SAS and Sodima SAS (a company controlled by Yoplait SAS) regarding the franchise, distribution and manufacturing agreements relating to the Yoplait brand".

The schedule to the Third Supplementary Bidder's Statement referred to the proposed JV in the following terms:

"Fonterra, Yoplait SAS and Sodima SAS have agreed that, if Fonterra is able to acquire all of the shares in National Foods, then Sodima SAS and National Foods may create a joint venture company for the production and sale of yoghurt, Petit Suisse, fromage frais, fresh dairy desserts and other similar products in Australia and New Zealand."

National Foods' Fresh Cultured Products and Fresh Dairy Desserts business (being that part of National Foods' business to be included in the contemplated JV) comprise a material part – but not all– of National Foods' business.

Interests in National Foods

Prior to announcing its takeover bid, Fonterra Investments Limited (Fonterra Investments) (a wholly owned subsidiary of Fonterra) was the beneficial owner of 19.03% of the shares in National Foods. Since then, no member of the Fonterra group of companies has announced a movement of at least 1% in its voting power in National Foods.

During the Proceeding, Yoplait and Sodima represented to the Panel that they do not have a relevant interest in any shares in National Foods.

Declaration and orders sought

San Miguel applied to the Panel for a declaration under section 657A to the effect that the following circumstances (or one or more of the following circumstances) constituted unacceptable circumstances in relation to the affairs of National Foods:

  1. Fonterra Foods' failure to give National Foods shareholders adequate information in the Third Supplementary Bidder's Statement in relation to:
    1. the change in its intentions in relation to the continuation of the business of National Foods, the redeployment of National Foods' fixed assets or the future employment of any present employees of National Foods; and
    2. the detailed terms of arrangements connected with the JV (the JV Connected Arrangements) and a summary of any unwritten terms of the proposed JV Connected Arrangements between Sodima and National Foods,

      in that:

    3. acquisition of control over National Foods shares was not occurring in an efficient, competitive and informed market; and
    4. National Foods shareholders had not been provided with sufficient information to assess the value of their National Foods shares, being information as to the implied value that Yoplait and Sodima place upon a material part of National Foods' business through the terms of the JV (including the amount of any payment or other consideration received for agreeing to waive Sodima's Termination Rights) and, hence, did not have enough information to assess the merits of Fonterra's bid; and
  2. Sodima's and Yoplait's failure to lodge a notice of initial substantial holding as required under Part 6C. 1 of the Act in relation to their voting power in National Foods and association with Fonterra, including disclosing:
    1. a copy of the JV Connected Arrangements (where the arrangements had been reduced to writing); or
    2. a statement giving full and accurate details of any JV Connected Arrangements (where they had not been reduced to writing) and a summary of any unwritten terms of the proposed JV Connected Arrangements.

San Miguel also sought final orders to the effect that:

  1. Fonterra Foods must, as soon as practicable, issue a supplementary bidder's statement under section 643 (in a form acceptable to the Panel) to:
    1. update its intentions in relation to the continuation of National Foods' business, any major changes to be made to National Foods' business and the future employment of National Foods' employees having regard to the JV Connected Arrangements; and
    2. disclose the detailed terms of the JV Connected Arrangements and a summary of any unwritten terms of the JV;
  2. Fonterra Foods must permit any shareholder in National Foods who accepts or has accepted Fonterra Foods' offer between the period starting on 2 March 2005 and ending on the date on which Fonterra Foods provides the information referred to in paragraph (a) to withdraw their acceptance within a period of 14 days after disclosure of all the information referred to in paragraph (a); and
  3. Sodima and Yoplait must, as soon as practicable, give a notice of initial substantial holding as required under Part 6C. 1 of the Act in relation to their voting power in National Foods and association with Fonterra, including disclosing:
    1. a copy of the JV Connected Arrangements (where the arrangements had been reduced to writing); or
    2. a statement giving full and accurate details of any JV Connected Arrangements (where they had not been reduced to writing) and a summary of any unwritten terms of the proposed JV Connected Arrangements.

Process

San Miguel submitted that it had made its application because the acquisition for control of National Foods was not taking place in an efficient, competitive and informed market. However, the Panel was concerned at the prospect that San Miguel 's application might result in the publication of commercially sensitive information (in the form of the JV Connected Arrangements) with tactical effects during the takeover bid. Similarly, disclosure to San Miguel of a copy of the JV Connected Arrangements during the course of the Panel proceedings might have unintended commercial consequences if the Panel ultimately determined that the full terms of the JV Connected Arrangements were not required to be disclosed to the market.

At the same time, the Panel recognised that it would be essential for it to have reliable information concerning the detail of the JV Connected Arrangements in order for it to consider San Miguel's application. In particular, the Panel would need detail concerning those aspects of the JV Connected Arrangements pertaining to whether or not an association existed between Fonterra (on the one hand) and Yoplait or Sodima (on the other hand).

The Panel was also concerned that the requirements of natural justice should be met in that San Miguel (and National Foods) should have the opportunity to comment on the aspects of the JV Connected Arrangements which were relevant to the proceedings and to National Foods shareholders.

Taking all of those considerations into account, the Panel adopted the following procedure:

  1. the Panel sought submissions on the issues set out above;
  2. the Panel accepted submissions to the effect that the only relevant document was the Fonterra/Yoplait Deed;
  3. two members of the Panel Executive reviewed a copy of the Fonterra/Yoplait Deed with particularly sensitive information blacked out and a summary of the Fonterra/Yoplait Deed (the Summary) prepared by Fonterra Foods. The Summary addressed matters relating to the questions whether Fonterra was an associate of Yoplait or Sodima, whether Yoplait or Sodima had a relevant interest in Fonterra Investments' shares in National Foods and whether Fonterra Foods had made appropriate disclosure of the JV or its intentions in light of the JV;
  4. the Panel members considered a list of issues prepared by San Miguel which San Miguel submitted that the Summary should address;
  5. the two members of the Panel Executive reported to the Panel on whether the Summary represented an accurate and complete summary of the Fonterra/Yoplait Deed in relation to the issues which the Panel considered relevant; and
  6. on receiving a positive report from the Panel Executive, the Panel directed that the Summary be provided to it and all parties to the Proceeding.

The parties then made submissions and rebuttal submissions as would occur in normal proceedings, and the Panel reached its decision, on the basis of those submissions and the Summary.

The Summary

So far as relevant, the Summary disclosed that:

  1. Under the Fonterra/Yoplait Deed, the parties agree to create a JV to own and operate the business of manufacturing, distributing and selling Fresh Cultured Products and Fresh Dairy Desserts in New Zealand and Australia. The JV will include assets currently owned by Fonterra as well as assets of National Foods.
  2. The Fonterra/Yoplait Deed includes a detailed and binding set of terms for the establishment of a JV between National Foods (as a wholly owned subsidiary of Fonterra) and Sodima.
  3. If:
    1. Fonterra has completed compulsory acquisition of all of the issued shares in National Foods; and
    2. Sodima is satisfied with a due diligence that it and its financiers will undertake in relation to National Foods,

    the parties will form a 50/50 JV.

  4. The JV arrangements will only come into effect when Fonterra owns all of the shares of National Foods. If implemented, the JV will relate to the production and sale of Fresh Cultured Products and Fresh Dairy Desserts and other similar products in Australia and New Zealand.
  5. Fonterra/National Foods will transfer to the JV sufficient assets to enable the JV to achieve an agreed level of financial performance. Yoplait will contribute to the JV a perpetual licence in relation to the Yoplait brand, as part of its contribution to the JV. The JV will include assets of Fonterra as well as assets of National Foods.
  6. The JV arrangements include provisions for:
    • establishment of the JV;
    • provision of services to the JV;
    • governance of the JV;
    • brands and know how;
    • non-competition;
    • standstill;
    • deadlock;
    • change of control;
    • funding of the JV;
    • default and unwinding the JV.
  7. The JV arrangements include provision for senior appointments to be agreed by the JV partners prior to establishment of the JV. The Fonterra/Yoplait Deed also contemplates that all other employees directly related to the production, sales, marketing, distribution and administration of the Fresh Cultured Products and Fresh Dairy Desserts business will be part of the business of the JV.
  8. The Fonterra/Yoplait Deed includes arrangements for parties to end their participation in the JV in a number of different circumstances and for the JV to be terminated. In the event of such a termination, some parties will have rights to the transfer of some specific assets. The JV will provide for the distribution of those and other interests to the parties for amounts determined under the agreement.
  9. Yoplait and Sodima agree not to do anything or deal with the Yoplait brands in a manner which would negate the effect of their consent or the ability of Sodima to enter into the JV arrangements described above. (This obligation is referred to in this media release as the Preservation Obligation.)
  10. Following Fonterra achieving majority control of National Foods and pending Fonterra acquiring all of the shares in National Foods, Fonterra shall use all reasonable efforts (without being required to act against its own interests) to be in a position to implement (and to be in a position to cause National Foods to implement) the JV in accordance with the Fonterra/Yoplait Deed. (This obligation, which the parties to the Fonterra/Yoplait Deed have since agreed to delete, is referred to in this media release as the JV Preparation Obligation.)

Disclosure of intentions

Paragraph 636(1)(c) requires a bidder to disclose its intentions with respect to the business, fixed assets and present employees of the target company. Section 643 requires that a bidder include in any supplementary bidder's statement information on any matter which would have been required to be included in the bidder's statement if it had arisen before the bidder's statement was lodged, provided that the information is material from the point of view of a target shareholder.

The information requirements of section 636(1)(c) are not subject to a materiality threshold at the time of preparing a bidder's statement or a confidentiality carve-out. They reflect an underlying policy that the intentions which are addressed in section 636(1)(c) will generally be material to investors in a target company. Accordingly, the Panel proceeded from the starting point – for the purposes of section 643 - that matters pertaining to those intentions will generally be material from the point of view of a target shareholder.

The Panel considered that unacceptable circumstances existed in that the bidder's statement and the various supplementary bidder's statements issued by Fonterra Foods did not, between them, adequately disclose intentions of Fonterra and Fonterra Foods which the Summary revealed that Fonterra and Fonterra Foods hold in relation to the three specified areas. The Panel considered that those intentions are material to target shareholders.

The relevant intentions are set out below.

Business

  1. In the case where Fonterra Foods acquires between 50% and 100% of National Foods, that Fonterra Foods will use reasonable efforts to be in a position to implement the JV, and thus, impliedly, maintain the Fresh Cultured Products and Fresh Dairy Desserts businesses of National Foods and make such changes as are reasonable and necessary in order to implement the JV (subject to such maintenance or changes not being contrary to the interests of Fonterra).
  2. In the case where Fonterra Foods acquires 100% of National Foods and the JV proceeds:
    1. that Fonterra will:
      • transfer to Yoplait or Sodima a 50% equity interest in a significant proportion of National Foods' Fresh Cultured Products and Fresh Dairy Desserts business;
      • provide intercompany support services to the JV vehicle;
      • contribute, and procure that National Foods will contribute, business units to the proposed JV;
    2. that Yoplait will provide licences and technical and other expertise and services to the proposed JV; and
    3. that the JV arrangements will contain terms dealing with the matters set out in paragraph (f) under the section headed 'The Summary'.

Assets

  1. In the case where Fonterra Foods acquires 100% of National Foods and the JV proceeds, that Fonterra will ensure the transfer to a JV vehicle, in which Sodima holds a 50% equity interest, of sufficient assets of National Foods and Fonterra to meet an agreed level of financial performance.

Employees

  1. In the case where Fonterra Foods acquires 100% of National Foods and the JV proceeds, that:
    1. National Foods' Fresh Cultured Products and Fresh Dairy Desserts employees will be engaged in the business of the JV; and
    2. Fonterra and Yoplait will agree arrangements with respect to the appointment of existing executives of National Foods to senior executive appointments in the JV.

Disclosure of material terms of the Fonterra/Yoplait Deed

The Panel also considered that corrective disclosure was required to address the following misleading impressions created by the disclosure in the Third Supplementary Bidder's Statement and the 2 March Announcement:

  1. That the JV proposal is not particularly developed.

    The minimal statements concerning the JV in the Third Supplementary Bidder's Statement and 2 March Announcement conveyed the impression that the JV proposal was at an embryonic stage. In fact, the Summary disclosed that '[t]he Fonterra/Yoplait Deed contains a detailed and binding set of terms for the establishment of a joint venture between National Foods and Sodima.'

  2. That Fonterra Foods has some discretion as to whether to proceed with the JV.

    This impression was conveyed by the omission from the Third Supplementary Bidder's Statement and 2 March Announcement of the precise conditions to which the JV proposal is subject. (Disclosure that Fonterra Foods has no such discretion was also necessary in order to properly explain the circumstances in which Fonterra Foods has the intentions described in paragraphs (b) to (d) of the section titled 'Disclosure of intentions' above). In fact, the Summary disclosed that (if Fonterra acquires 100% of National Foods) only Sodima has a discretion not to proceed with the JV.

Except in relation to the intentions discussed above and based on the Summary, the Panel did not consider that any other aspects of the Fonterra/Yoplait Deed would be material to the making of a decision by a National Foods shareholder as to whether to accept Fonterra's bid.

Disclosure of issues pertaining to value

Based on the Summary and the additional information concerning the content of the Fonterra/Yoplait Deed set out in submissions from the parties, the Panel did not consider that Fonterra Foods' failure to disclose information contained in the Fonterra/Yoplait Deed relating to questions of value, if indeed there is discernable information relating to current assets of National Foods in the Fonterra/Yoplait Deed, constituted unacceptable circumstances.

The Panel did not consider that such information would be material to a shareholder's decision as to whether or not to accept Fonterra Foods' bid. In particular, the Panel was mindful that:

  1. Fonterra, Fonterra Foods, Yoplait and Sodima all submitted that the Fonterra/Yoplait Deed does not ascribe a value to National Foods as an entity, the assets of National Foods or those assets of National Foods which might be contributed to the proposed JV.
  2. Any material information relating to value in the Yoplait/Fonterra Deed would have been agreed for the purposes of a joint venture following commercial negotiations conducted in the context of:
    1. Change of control provisions which applied to Fonterra and Fonterra Foods, but not San Miguel, and under which (as a practical matter) consent was required if Fonterra was to proceed with its bid.
    2. An apparent attempt by Yoplait and Sodima to generate pricing tension between San Miguel and Fonterra (including by holding out the prospect that Sodima and Yoplait might enter into exclusive arrangements with San Miguel to 'lock-out' Fonterra from the bidding contest for National Foods).

      Accordingly, any value information in the Fonterra/Yoplait Deed would be of doubtful utility to National Foods shareholders. Indeed, disclosure of that information might have misled such shareholders as such shareholders might have regarded it as Fonterra's assessment of the value of some assets, rather than as Fonterra's assessment of the value which it was prepared to agree to in negotiations in exchange for various other concessions and the continued opportunity to acquire National Foods.

  3. The Panel understood from Sodima's rebuttal submissions that the Fonterra/Yoplait Deed does not disclose the agreed level of financial performance of the JV (which San Miguel submitted to be material to an analyst's ability to ascribe a value to National Foods' Fresh Cultured Products and Fresh Dairy Desserts business) and addresses questions of value in relation to parties' contributions on the basis of formulae.
  4. Based on the Summary, the Fonterra/Yoplait Deed only concerns part of National Foods' business (so that any information relating to value would relate only to that part of National Foods' business rather than National Foods as an entity) and also concerns part of Fonterra's business.
  5. No submissions were made as to why such information would be material to a shareholder's decision in relation to Fonterra's bid. (San Miguel's submissions merely stated that they would enable a shareholder or analyst to ascribe a value to material parts of National Foods' business, without stating whether the ability to ascribe such a value would be material. For instance, even if that value were disclosed, it might not be material having regard to the fact that the shareholder would not know Fonterra's valuation of the other assets of National Foods not to be included in the JV to determine whether those valuations correlate with the offer price under the takeover bid.)

The Panel was also conscious that there is no current requirement under the Act, or in market practice, that a bidder must disclose its views as to the value of the target or the target's assets, other than through the price which it offers for securities in the target. The Panel was concerned that to require the details of the Fonterra/Yoplait Deed to be disclosed in a supplementary bidder's statement might set such a precedent.

Should Yoplait or Sodima have lodged a substantial holding notice?

The question whether Yoplait or Sodima should have lodged a substantial holding notice in relation to National Foods depended on whether either of them was an associate of Fonterra or Fonterra Foods (and thus had voting power of greater than 5% by reason of the relevant interests in National Foods shares held by Fonterra and Fonterra Foods), or whether either of them had a relevant interest in the National Foods shares beneficially owned by Fonterra Investments.

Is or was Yoplait or Sodima an associate of Fonterra or Fonterra Foods?

The Panel considered that Yoplait and Sodima were associates of Fonterra in relation to National Foods.

Paragraphs 12(b) and (c) of the Act contain the relevant definitions of associates. A and B are associates in relation to company C if they have a relevant agreement for the purpose of controlling or influencing the composition of the board of C, or the conduct of the affairs of C, or if they are acting in concert in relation to the affairs of C.

Based on the Summary, there is no overt mention in the Fonterra/Yoplait Deed of the composition of the board of National Foods, and any implied agreement about the board must be by inference from the terms of the Fonterra/Yoplait Deed concerning the conduct of the affairs of National Foods.

The affairs of a company, on ordinary concepts and without reliance on section 53, include its business and its internal affairs, such as board and company meetings and its dealings with its subsidiaries. Accordingly, an agreement to control or influence the conduct of a company's affairs must be aimed at exerting pervasive control or influence over the company's direction and management.

The concept used in paragraph 12(2)(c) of acting in concert in relation to a company's affairs is of similar generality, as "acting in concert" implies an ongoing course of conduct and the subject-matter of the concert is the affairs of the company in general, as in paragraph 12(2)(b).

This reading not only takes into account the wording of the provisions, it fits with the repeated observation of the Courts that association is used in the tracing provisions as an extension of the concept of control over shares defined as a relevant interest. It does not, however, require that the agreement or concerted action relate expressly to shares in any way, or to the exercise of votes attached to shares. Rather, the legislature has decided to aggregate the voting power of people who are cooperating in ways which might be advanced by the use of such power.

Paragraphs 12(2)(b) and (c) should not be read unduly widely, as many agreements relate to the conduct of a company's affairs, which should not ordinarily be treated as within the policy of the association provisions, and which have never been held to be associations. For instance, covenants in an arm's length loan agreement may intrude into the conduct of a borrower company's business and intellectual property agreements commonly intrude into the conduct of the licensee's business. At the same time, an agreement or concerted action in relation to a company's affairs may amount to an association, although it is not intended to confer total control over the conduct of the company's affairs: an agreement for the purpose of influencing the conduct of the company's affairs is enough, and the role of association is to extend the concept of a relevant interest in shares, which itself requires only imperfect control over their voting or disposal.

On balance, it seemed that the JV Preparation Obligation reflected an agreement for the purpose of controlling the conduct of the affairs of National Foods. The Panel considered it likely that the JV Preparation Obligation required Fonterra to manage National Foods (from the time it acquires control until the JV is set up) in a way which, at the least, does not impede setting up the JV. Further, the Panel considered that the JV Preparation Obligation required Fonterra Foods to prepare National Foods' businesses for transition into the JV. For instance, subject to Fonterra not being adversely affected, the JV Preparation Obligation would prevent Fonterra from causing National Foods to close down or sell off its Fresh Cultured Products and Fresh Dairy Desserts business.

The National Foods Fresh Cultured Products and Fresh Dairy Desserts business is a material part of National Foods' operations. Although association under paragraphs 12(2)(b) and (c) involves matters of degree, it was not decisive for the purpose of considering whether or not Yoplait and Sodima were associates of Fonterra, that the JV Preparation Obligation did not relate to the whole of those operations.

It was similarly not decisive that the JV agreement would only have full operation when and if Fonterra had 100% of the shares in National Foods, and that there would then be no other shareholders in National Foods. The JV Preparation Obligation may have begun to operate much sooner and may have affected National Foods while it still had other shareholders. In any event, the Fonterra/Yoplait Deed existed already, although these obligations had yet to be enlivened and the concept of association in paragraphs 12(2)(b) and (c) includes proposals to enter into relevant agreements and to act in concert.

LV Living

In reaching its decision, the Panel considered the decision in LV Living Limited. The Panel considered its decision in this matter to be consistent with the LV Living decision.

The LV Living Panel considered that a Cooperation Agreement between certain persons (including LV Living Limited) evidenced a common purpose or plan in relation to the establishment of a joint venture (the LVL JV). However, the LV Living Panel was not convinced that the Cooperation Agreement evidenced a common purpose or plan to control the operations or composition of the board of LV Living which was to continue once the LVL JV was established. The Panel considered that the Cooperation Agreement was equally consistent with parties being free to pull in opposite directions once the LVL JV was established and to seek to protect their interests even when they diverged. Further, the Cooperation Agreement did not require the exercise of, or the threat of the exercise of, voting power in LV Living in order for it to be effective. In this respect, the operative agreement controlling or influencing the affairs of LV Living was the Cooperation Agreement, which bound LV Living itself.

Similar to the circumstances in LV Living, the Panel considered that Yoplait and Fonterra were associates in relation to National Foods because of a common purpose or plan in relation to the establishment of a joint venture. Although the JV will not involve only National Foods assets, or all National Foods assets, it nevertheless relates to the affairs of National Foods (and a material part of those affairs). The Panel was entitled to infer from the Summary that the parties were co-operating to achieve a shared goal, namely to enable the JV to be implemented (the JV Preparation Obligation was a manifestation of that from the perspective of Fonterra, the Preservation Obligation i.e. Sodima obligation to maintain its ability to enter into the JV is a manifestation of that from the perspective of Yoplait). On that basis, the Panel considered that section 12(2)(c) applied so that the parties were associates.

Further, unlike the circumstances after the establishment of the LVL JV where the LV Living Panel found that the association between the parties had fallen away, in this case National Foods is not a party to the central agreement, that is the Fonterra/Yoplait Deed. The consequence of this is that the shared goal cannot be achieved by contractual obligations of National Foods, and is dependent on Fonterra exercising, or threatening to exercise, voting power in relation to National Foods. Accordingly, the Panel considered that section 12(2)(b) applied because the Fonterra/Yoplait Deed could be characterised as an agreement for the purpose of influencing (and perhaps controlling) the conduct of the Fresh Cultured Products and Fresh Dairy Desserts related affairs of National Foods through the exercise of (or threat of exercise of) voting power and that agreement must continue to operate for the JV to be brought into operation.

The unlinking of the association, which occurred when the LV Living parties entered into the Cooperation Agreement, will not occur in relation to National Foods until Fonterra has acquired 100% of National Foods and is in a position to cause National Foods to enter into contractual agreements with Yoplait and Sodima. In the LV Living case, the corresponding unlinking had already occurred before the application was brought before the Panel. In the present proceedings, the association is still in existence. On that basis, the decisions in LV Living and the current proceedings are essentially consistent, having regard to the fact that each association has been found to exist over a more or less definite time span.

Does or did Yoplait or Sodima have a relevant interest in any of Fonterra Investments' shares in National Foods?

The Panel has considered the appropriate construction of the JV Preparation Obligation. In light of that construction, the Panel was inclined to think that Yoplait and Sodima had a relevant interest in Fonterra Investments' shares in National Foods consisting of a power to control the exercise of voting rights attaching to shares in National Foods. However, in light of its conclusions in relation to the question of association, it was not necessary to reach, and the Panel did not reach, a concluded view on this question.

Based on the Summary the Panel considered that the JV Preparation Obligation should properly be characterised as an obligation – which subsisted only while the Fonterra group held shares in National Foods- to use reasonable efforts to take such steps (or not take steps) with respect to the operations of National Foods and the Fonterra group as would ensure that Fonterra and National Foods were in a position to implement the JV when the Fonterra group acquired 100% of National Foods.

Such an obligation may well have conferred on Yoplait and Sodima a power to control the exercise of the voting rights attached to National Foods securities. The obligation would have been materially weakened unless it required (in a case of last resort) the Fonterra group to replace the board of National Foods if National Foods did not act in accordance with the Fonterra group's wishes with respect to preparing for the implementation of the JV. The Panel considered that it was also likely that the JV Preparation Obligation conferred on Yoplait a power to require that (while the Fonterra group held shares in National Foods) the Fonterra group give any shareholder approvals necessary in order to implement the JV. Again, the JV Preparation Obligation would have been materially weakened if this were not the case.

However, having regard to the following the Panel considered that the Fonterra/Yoplait Deed did not confer on Yoplait or Sodima any power or control in relation to the disposal of Fonterra Investments' shares in National Foods. In particular, it did not fetter Fonterra Investments' ability to dispose of shares in National Foods. Nor did it enable Yoplait or Sodima to require Fonterra Foods to prosecute its takeover bid for National Foods in any particular manner.

  1. The JV Preparation Obligation was subject to the twin qualifications that:
    1. Fonterra was expressly not 'required to act against its own interests'; and
    2. only 'reasonable' efforts were required of Fonterra.
  2. If it were truly intended that the JV Preparation Obligation constrain the Fonterra group's ability to dispose of its shares in any situation, it is likely that the Fonterra/Yoplait Deed would have addressed the issue specifically – especially given the level of detail in which the Fonterra/Yoplait Deed addressed a wide range of other issues.
  3. Instead of constraining Fonterra's conduct of the bid, the Fonterra/Yoplait Deed dealt with that issue by making it a precondition of the formation of the JV that Fonterra achieve 100% ownership of National Foods.
  4. The submissions by Fonterra, Fonterra Foods, Yoplait and Sodima that the JV Preparation Obligation was not intended to give Sodima or Yoplait any control over shares in National Foods.

Disclosure of full agreement pursuant to Part 6C.1 of the Act

Given that Fonterra Investments has at all relevant times beneficially owned 19.03% of National Foods and Fonterra has a relevant interest in Fonterra Investments' shares, it follows from the above analysis that each of Yoplait and Sodima, as an associate of Fonterra, had voting power in National Foods of at least 19.03% upon entering into the Fonterra/Yoplait Deed. On that basis, each of Yoplait and Sodima acquired a substantial holding in National Foods at the time it entered into the Fonterra/Yoplait Deed. Therefore, the terms of Part 6C.1 of the Act required each of Yoplait and Sodima to lodge a substantial holding notice by 9.30 a.m. on the next business day after entering into the Fonterra/Yoplait Deed, with a copy of the Fonterra/Yoplait Deed attached (the Deed being attached because it is the document from which the association arises).

The Panel considers that unacceptable circumstances exist in that no such substantial holding notices have been lodged. The Panel considered that this should be rectified, including so that the market would be informed that Yoplait or Sodima had no interest in shares independently of Fonterra.

Yoplait and Sodima have offered, without admission, and the Panel has accepted, undertakings to lodge a substantial holding notice on the basis of the Panel's finding that they have a substantial holding. Their undertaking is to lodge a notice (but not to attach a copy of the Fonterra/Yoplait Deed), when and if they are exempted from the obligation to annex a copy of the Deed to the notice. The Panel has advised them that it will suspend its proceedings pending the outcome of that application for relief.

Yoplait and Sodima have advised the Panel that they are not aware of having relevant interests or voting power over any other National Foods shares.

In considering whether any substantial holding notice lodged should annex the Fonterra/Yoplait Deed, the Panel was mindful that:

  1. any relevant interest which existed would be limited in scope and reasonably remote;
  2. the association which it had found to exist did not pertain to the manner in which a takeover bid would be executed and was limited in scope to preparations for a JV which would only proceed if National Foods becomes a wholly owned subsidiary of Fonterra. Even though these latter considerations were not decisive in relation to the question of whether an association existed, the Panel considered them relevant to the question of whether unacceptable circumstances existed by virtue of the Fonterra/Yoplait Deed not being attached to a substantial holding notice pursuant to the association. The Panel considered that the latter considerations related to the extent to which information concerning the circumstances surrounding the association is material to the market.

    In relation to both paragraph (a) above and this paragraph (b), it is relevant that the JV Preparation Obligation would have required very different interventions in relation to the affairs of National Foods depending on whether there was a prospect of Fonterra acquiring 100% of National Foods: for instance, efforts which might be reasonable where there is a prospect of the Fonterra group acquiring 100% of National Foods may not be reasonable where there is no such prospect. That is, the Panel considered that the main aspects of the Fonterra/Yoplait Deed underlying the need for substantial holding disclosure were unlikely to have material relevance to the market for National Foods shares outside the bid context;

  3. the Panel had been told that the Fonterra/Yoplait Deed contains considerable detailed confidential information and both Fonterra and Yoplait will suffer considerable commercial detriment if the whole of the Fonterra/Yoplait Deed is disclosed publicly;
  4. the need to comply with the disclosure requirements of Chapter 6 will ensure that all information in the Fonterra/Yoplait Deed which is material to target shareholders will be disclosed in a supplementary bidder's statement (see above);
  5. the apparent policy objective behind the requirement to attach the documentation underlying an association to a substantial holding notice is to ensure an informed market in securities in a company (in particular, in so far as it indicates that one or both associates will behave in a certain way in relation to the conduct of the bid). The Panel did not consider that, based on the Summary, the terms of the Fonterra/Yoplait Deed contained information which would be material to the market in National Foods' shares which would not be disclosed in the supplementary bidder's statement required by the Panel);
  6. ASIC is granted power, under Part 6C.3 of the Act, to grant exemptions from, or modifications of, the requirement to attach a document which causes a person to be a substantial shareholder to a substantial holding notice. It has exercised that power in the past to allow persons to excise parts of a document from, provide a summary of, or not attach, a document which would otherwise be required to be attached to a substantial holding notice. However, the Panel notes that it received submissions from ASIC that ASIC is generally reluctant to grant relief of this nature, and has only granted such relief infrequently2; and
  7. requiring publication of unnecessary detail of collateral transactions which are necessary to allow bids to proceed might have a chilling effect on bids for companies with change of control clauses in material customer, supplier or joint venture arrangements (because such arrangements may lead to complex negotiated arrangements requiring that the bidder procure that the target do certain things).

ASIC was granted the modification power to take into account the sort of considerations outlined above, and it is regrettable that none of Fonterra, Yoplait and Sodima sought a modification from ASIC to modify the terms of Chapter 6C prior to entering into the Fonterra/Yoplait Deed.

Nevertheless, it was open to the Panel to exercise a similar discretion by deciding that the failure to attach the Fonterra/Yoplait Deed to the substantial holding notices (once lodged) would not constitute unacceptable circumstances.

Having regard to the various considerations outlined in paragraphs (a) to (g) above, the Panel was inclined to exercise its discretion to require the lodgement of a substantial holding notice, but not to require that the Fonterra/Yoplait Deed be annexed to it. The Panel has such a discretion as its role is to determine whether circumstances are unacceptable and, if so, any appropriate remedy, and it is directed not simply to enforce the terms of the Act. Further, in framing orders, the Panel is required to avoid inflicting unfair prejudice on any party.

The Panel cannot relieve Yoplait from its obligations under Chapter 6C, however, and it does not want to be taken as excusing a breach of Chapter 6C, which is an important part of the legislative framework relating to takeover transactions.

Further, the Panel emphasised that ASIC is the body with the primary role of granting or withholding exemptions. The Panel wanted there to be no incentive for entities to fail to comply and take their chances on being challenged without asking ASIC first. At least during a takeover bid, it will then always be open to parties to ask the Panel to review ASIC's decision under section 656A of the Act.

Accordingly, the Panel gave considerable thought to making a declaration of unacceptable circumstances at this stage even though undertakings were forthcoming. The Panel has, however, decided (albeit with some hesitation and having regard to the undertakings which it has received) that it would not be in the public interest to make a declaration of unacceptable circumstances before the final resolution of the application which Yoplait has made to ASIC for exemption from the requirement to annex a copy of the Deed to a substantial holder notice. In coming to this decision, the Panel bore in mind the limited impact of the voting power to be disclosed in the notice, that Yoplait has no additional voting power to be aggregated with the shares controlled by Fonterra and that there was no evidence to support an inference that Yoplait was consciously avoiding or failing to comply with Part 6C.1 of the Act.

The Panel also bore in mind that San Miguel's application sought the disclosure of information which relates to the commercial arrangements between Yoplait and Fonterra, beyond what the Panel regards as necessary to achieve the policy objectives of ensuring that:

  1. the directors and shareholders of National Foods have the information they require to make their decisions on Fonterra's bid; and
  2. that the market in shares in National Foods is informed.

The Panel was concerned not to make a declaration or order, or solicit undertakings, in the present proceeding which inflicted collateral damage beyond what was necessary to inform the market in shares in National Foods.

Removal of the JV Preparation Obligation

After the Panel advised the parties of its preliminary decision, Fonterra, Sodima and Yoplait decided to remove the JV Preparation Obligation from the Fonterra/Yoplait Deed. This decision was not reached in response to a Panel request or suggestion.

Regardless of whether the removal of the JV Preparation Obligation had the effect of terminating the association which the Panel had found to exist, it does not affect the fact that unacceptable circumstances existed by reason of the failure of Yoplait and Sodima to lodge substantial holding notices in relation to the period when the association did exist.

Accordingly, it was not necessary for the Panel to decide, and the Panel did not decide, whether the association between Fonterra, Sodima and Yoplait survived the removal of the JV Preparation Obligation. However, the Panel was inclined to the view that the mere removal of the JV Preparation Obligation after being advised of the Panel's preliminary views did not affect the substance of the relations between the parties. Further, the Panel was mindful that a similar obligation might be implied into the Fonterra/Yoplait Deed in any event by reason of the common objective to establish the JV.

Form of corrective disclosure

Given its conclusions concerning disclosure, the Panel considered it appropriate for Fonterra Foods to issue the corrective disclosure described in the Summary.

Fonterra Foods provided a draft of a supplementary bidder's statement to the Panel and the Panel gave National Foods and San Miguel an opportunity to make submissions regarding it. The Panel decided that the supplementary bidder's statement provided by Fonterra Foods would address the deficiencies identified by the Panel.

The Panel accepted undertakings from Fonterra Foods to:

  • lodge the supplementary bidder's statement with ASIC, ASX and National Foods promptly;
  • send a copy of the supplementary bidder's statement to each National Foods shareholder within 14 days, provided that it must be sent at least 11 days before the end of the offer period for Fonterra Foods' bid;
  • offer withdrawal rights to each shareholder (an Affected Shareholder) who has accepted or accepts the Fonterra Foods offer between 2 March 2005 and the business day after the supplementary bidder's statement is sent to each National Foods shareholder. Such withdrawal rights are to be exercisable for five business days after the later of notices concerning them being dispatched to each Affected Shareholder and the supplementary bidder's statement being sent to each Affected Shareholder; and
  • notify each Affected Shareholder of their withdrawal rights

Fonterra Foods obtained from ASIC a modification of the Act to facilitate the withdrawal rights.

As noted above, the Panel also accepted undertakings from Sodima and Yoplait. Sodima and Yoplait each undertook, without admission to lodge a substantial holding notice, without annexing a copy of the Fonterra/Yoplait Deed, when and if they obtain relief to allow them not to attach the Fonterra/Yoplait Deed to a substantial holding notice. The Panel accepted that they could await the outcome of that application prior to lodging their substantial holding notice.

If the application is successful, the notice, when lodged, will be one which complies with the Act except for being lodged late, and the Panel proposes to dismiss the remainder of the application without making a declaration or order.

If the application is unsuccessful, the notice will not comply with the substantial holding notice provisions of the Corporations Act putting to one side the fact that there had not been non-compliance with the time requirements of the provisions. In that case, the Panel will need to decide, having regard to the outcome of the application to ASIC and to any substantial holder notices Yoplait and Sodima may have lodged, whether to make a declaration or order.

Based on those undertakings, the Panel:

  1. concluded its proceedings in relation to Fonterra Foods on the basis that it was not in the public interest to make a declaration of unacceptable circumstances and that no order was required; and
  2. has suspended its proceedings in relation to Yoplait and Sodima pending the outcome of the application for relief from the requirement to attach the Fonterra/Yoplait Deed to a substantial holding notice. If the relevant relief is forthcoming, the Panel will conclude proceedings. If the relevant relief is not forthcoming, the Panel will reconvene proceedings and consider whether to make a declaration and orders.

The Panel will publish its reasons on its website www.takeovers.gov.au in due course.

The sitting Panel in these proceedings was Kevin McCann, Mark Paganin and Michael Ashforth.

Nigel Morris
Director, Takeovers Panel
Level 47, 80 Collins Street
Melbourne, VIC 3000
Ph: +61 3 9655 3501

1 ASIC has advised that it has declined Yoplait and Sodima's application for such relief and they have advised the Panel that they intend to lodge an application for review of that decision by ASIC.

2 The Panel also notes ASIC's advice that it has refused the application by Yoplait and Sodima for a modification and Yoplait and Sodima's advice that they intend to seek review of ASIC's decision.

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