RE INDUSTRIAL EQUITY (PACIFIC) LTD.

MP NO. 873 of 1991

HEADNOTE

Companies Ordinance (Cap. 32) s.166. Scheme of arrangement - majority shareholding company seeking to privatise petitioner on basis of share exchange - Proposals approved by overwhelming majority of petitioner's shareholders at single meeting - petition for Courts sanction - opposed by sole objector.

Held (i) "member or class of member" under section 166 to be determined by dissimilarity of rights and not dissimilarity of interests, following dictum of Bowen L.J. in Sovereign Life Assurance Co. v. Dodd (1892) 2 Q.B. 573; 583.

       (ii) notwithstanding that some of the 10 complaints of failure by the petitioner to disclose necessary information and to present the Scheme fairly, were not devoid of substance, the Court's sanction would be granted in the exercise of discretion having particular regard to the overwhelming approval at the shareholders' meeting.

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

MISCELLANEOUS PROCEEDINGS NO. 873 OF 1991

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J U D G M E N T

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1. The petition in this matter seeks the Court's sanction to a Scheme of Arrangement under section 166 of the Companies Ordinance (Cap. 32) and also confirmation by the Court of the reduction of the capital of the petitioner, Industrial Equity (Pacific) Limited ("IEP").

2. IEP, which is now a company incorporated under the Laws of Hong Kong, was originally incorporated in Shanghai on 1st June 1936. It was then known as Shanghai Dockyards Ltd. Subsequently, it was registered in Hong Kong on 9th August 1946 under Proclamation No. 27 (Emergency Registration of China Companies) as a company incorporated under the Laws of Hong Kong by the Law Amendment (Transitional Provisions) Ordinance (Cap. 257). It was converted into a public company on 19th December 1939 and its issued share capital is listed on The Stock Exchange of Hong Kong Ltd., The New Zealand Stock Exchange and The Australian Stock Exchange Ltd. The majority of its shareholders reside in New Zealand.

3. IEP became a subsidiary of Brierley Investments Ltd. ("BIL"), in 1975. BIL's primary listing is on the New Zealand Stock Exchange. In March 1991, it had the second largest market capitalisation of any company on the New Zealand Stock Exchange. IEP was subsequently developed as the BIL group's vehicle for investment in the Northern Hemisphere. However various events and changes in the past few years have made it in the opinion of the BIL Board an increasingly inappropriate structure for minority public shareholder participation. BIL therefore proposed to effect by a Scheme of Arrangement ("the Scheme") a merging of interests between the IEP minority shareholders and the BIL shareholders, whereby the minority IEP shareholders would receive 3 BIL shares for every 2 IEP shares. A joint announcement to that effect was made by BIL and IEP on 7th March 1991. It added that the directors of IEP had appointed an Independent Board Committee to examine the proposal, and Jardine Fleming to act as independent financial advisers to the Independent Board Committee.

4. On 22nd March, IEP took out an Originating Summons for liberty to convene a meeting of shareholders other than certain excluded persons ("the excluded persons") to consider and approve the Scheme under section 166 of the Companies Ordinance (Cap. 32), and for directions as to the method of convening the meeting and for the appointment of a chairman of the meeting. The excluded persons were directors of BIL, of Stuart Investments Ltd. (IEP's holding company) and directors of seven specified BIL subsidiaries.

5. On 25th March 1991, Jones, J. made the order sought, inter alia, providing for the period and publication of notice of the meeting, the obtaining of printed copies of the Scheme, and forms of proxy.

6. A circular incorporating the Scheme document was issued and dispatched on 28th March 1991 ("the Circular"), giving notice that the meeting authorised by Jones, J. ("the Court Meeting") was to be held on 23th April 1991 in Hong Kong. The Circular stated that Jardine Fleming "concludes that in financial terms the Proposal is fair and reasonable but is not sufficiently generous to support an unequivocal recommendation that the Minority Shareholders vote in favour of the Scheme.".

7. On 19th April 1991, IEP announced an increase of interim dividend from HK$0.15 to HK$0.90 per share. On the next day, 20th April 1991, the Chairman of the Independent Board Committee announced in the press that Jardine Fleming had informed the Committee that the increased dividend represented a significant change to one of the principal factors taken into consideration, and that in the light of the change, Jardine Fleming's advice had changed and was that the minority shareholders of IEP should vote in favour.

8. The Court Meeting was held on 23rd April 1991 as notified, and a resolution approving the Scheme without modification carried by a very substantial majority as can be seen from the Table exhibited to the affidavit of the Chairman, Mr. Reginald Frank Heath ("Mr. Heath"):

There were four persons who voted a certain number of shares of their shareholding for the resolution and a certain number against the resolution. Such persons have been counted in both columns (2) (a) and (3) (a) of the above table, the number of shares represented by their votes "For" have been recorded in column (2) (b) and the number of shares represented by their votes "Against" in column (3) (b)."

No point is taken in regard to the excluded persons, nor to the rejected proxy votes.

9. On 24th April 1991, IEP presented its petition seeking the sanction of the Court to the Scheme under section 166 of the Companies Ordinance, and confirmation of the reduction of the capital of IEP, which had also been approved in Extraordinary General Meeting immediately after the Court Meeting.

10. On 29th April, there was a further hearing for directions before Jones, J. Thereafter the petition came on for hearing before Jones, J. on 6th May 1991 when a shareholder, Mr. P.H. Cockle, a solicitor, resident in New Zealand objected to the Scheme. As a result, the hearing was adjourned to 13th June 1991 with directions as to filing of affidavits.

11. For the petitioner, Mr. Richard Sykes, Q.C., who represents in addition, BIL, Stuart Investments Ltd and the excluded persons submitted, in terms of a commonly accepted formulation of the duty or function of the courts in section 166 - type petitions for sanction, that

(i)    the provisions of the Companies Ordinance have been complied with;

(ii)    the statutory majority were acting bona fide and were not coercing the minority in order to promote interests adverse to those of the class; and

(iii)    the Scheme is such as an intelligent and honest person, a member of the class concerned, and acting in respect of his interest, might reasonably approve.

He added that Mr. Cockle was the odd man out, holding only 0.006% of shares, and apparently not joined by any other shareholders.

12. For Mr. Cockle, Mr. Anthony Dicks contends that the Scheme should not be sanctioned on two broad grounds:

(1)    That the Court lacks jurisdiction under section 166 because the class of shareholders constituted for the purposes of the Court Meeting was not properly constituted.

The material provisions of section 166, and of section 166A, which is also relevant, are as follows:-

    (2)  If a majority in number representing three-fourths in value of the creditors or class of creditors, or members or class of members, as the case may be, present and voting either in person or by proxy at the meeting, agree to any compromise or arrangement, the compromise or arrangement shall, if sanctioned by the court, be binding on all the creditors or the class of creditors, or on the members or class of members, as the case may be, and also on the company or, in the case of a company in the course of being wound up, on the liquidator and contributories of the company.

    166A. (1) Where a meeting of creditors or any class of creditors or of members or any class of members is summoned under section 166 there shall -

(a)    with every notice summoning the meeting which is sent to a creditor or member, be sent also a statement explaining the effect of the compromise or arrangement and in particular stating any material interests of the directors of the company, whether as directors or as members or as creditors of the company or otherwise, and the effect thereon of the compromise or arrangement, in so far as it is different from the effect on the like interests of other persons; and

(b)    in every notice summoning the meeting which is given by advertisement, be included either such a statement as aforesaid or a notification of the place at which and the manner in which creditors or members entitled to attend the meeting may obtain copies of such a statement as aforesaid.

(2) ....

(3)  Where a notice given by advertisement includes a notification that copies of a statement explaining the effect of the compromise or arrangement proposed can be obtained by creditors or members entitled to attend the meeting, every such creditor or member shall, on making application in the manner indicated by the notice, be furnished by the company free of charge with a copy of the statement.

..."

I     Whether the class was correctly constituted.

13. It is common ground that under section 166 of the Companies Ordinance, if the class of shareholder was not correctly constituted the Court would not have jurisdiction to sanction the Scheme; likewise that, apart from the excluded persons, all the shareholders were placed in a single and sole class of shareholders. Mr. Cockle's first point, shortly stated, is that those IEP shareholders who were also shareholders in BIL should have been excluded from the class. In particular, it is contended by Mr. Dicks on his behalf that a group of corporate shareholders ("the institutional shareholders") which by reason of the size and relative importance of their holdings of both IEP and BIL shares constitute a separate class of shareholders in IEP for the purpose of section 166. He refers to the following part of the IEP Board's announcement in the press on 19th April 1991:-

"Industrial Equity (Pacific) Limited ("IEP")

The Board of IEP has resolved to increase the interim dividend announced on 7th March 1991, from 15 Hong Kong cents per share (15%), to 90 Hong Kong cents per share (90%) payable, as previously announced, on 21st May 1991.

....

Discussions have been held between Brierley Investments Limited ("BIL") and the major institutional shareholders in IEP who, whilst supporting the rationale for the Scheme of Arrangement (the "Scheme"), believe that it would be appropriate if, before implementation of the Scheme, IEP declare an increased interim dividend. Based on these representations, the Board of IEP, with the approval of BIL, has agreed to the increase in the interim dividend referred to above.

On the basis of proxies received, and discussions which have taken place with institutional investors, the Directors of BIL and IEP believe that there will be a broad spread of support for the Scheme at the meetings to be held on 23rd April 1991 for the purpose of considering the Scheme.

Dated this 18th day of April 1991.

For and on behalf of the Board P.R. Forrester Director"

14. Mr. Dicks submits that the class of "major institutional shareholder" has been sufficiently identified by the IEP Board itself. Mr. Cockle in his affidavits identifies in particular four of these major institutional shareholders, i.e. National Provident Fund, AMP Investments (N.Z.) Ltd., National Mutual Life Association, and Norwich Union. He claims that they must have consulted together and with other institutional shareholders with a view to their common interest in BIL instead of or as well as in IEP.

15. The extensive reference to the authorities made by counsel, and their associated submissions in support of their conflicting contentions as to whether all the shareholders constituted one class, resolved itself ultimately in the question of whether classes were to be determined by reference to the rights of shareholders or on the one hand, or to their interests on the other.

16. Turning then to the authorities, in re Alabama, New Orleans, Texas and Pacific Junction Railway Co. (1891) 1 Ch. 213, all the creditors met as one class and by a majority of over the requisite three-fourths, approved a Scheme which was subsequently sanctioned by North, J. despite the opposition of two objectors. On appeal, Lindley, L.J. said:-

"... some of the majority were shareholders holding a considerable amount of shares; and it is urged that they voted not simply as first debenture-holders, and were not looking at the matter from the point of view of first debenture-holders, but from the point of view of second debenture-holders, and of interested shareholders. That state of complicated interest would not prevent them from voting, but it would necessarily induce the Court to look with caution and care at the effect of what was done at that meeting."

17. It is clear from those words and what immediately followed that Lindley, L.J. accepted that the provisions of the statute in that case in relation to "creditors of such company or any class of creditor", which are in principle the same as the parallel provisions of section 166, had been complied with. Equally clear is the implication that the creditors did not constitute different classes because of their diverging interests.

18. Bowen, L.J. said at p. 242 "I am of the same opinion", and later at pages 243 and 244:-

"    Now, it is very important to observe that creditors of the company may have other interests besides those of creditors, and that there may be a class of creditors composed of many individuals - some of whom have only interests as members of that class but others of whom may have interests of a predominant kind which they hold, not as members of that class, but because they belong also to some other class of creditors, or because they also belong to the body of shareholders of the company. Therefore, although in a meeting which is to be held under this section it is perfectly fair for every man to do that which is best for himself, yet the Court, which has to see what is reasonable and just as regards the interests of the whole class, would certainly be very much influenced in its decision, if it turned out that the majority was composed of persons who had not really the interests of that class at stake."

19. It is in my view clear from the foregoing, a fortiori in the general context of his judgment that he accepted that all the creditors constituted one class notwithstanding their diverging interests, and that after the voting it was the Court that would ultimately see to what was fair and just as regards the interest of the whole class.

20. Fry, L.J. at page 246 concurred entirely in the two judgments.

21. In Sovereign Life Assurance Co. v. Dodd (1892) 2 QB 573, the Court of Appeal held that insured persons whose policies had matured formed a distinct class from those whose policies had not. Lord Esher, MR at pages 579 and 580 said:

"    Now, as to the meeting, we have to consider the persons who must be summoned to it, and who are to be dealt with as different classes; that is, we must consider the state of affairs at the date of the meeting, for the persons to attend it are those who have a right to attend it at that time, and it is that state of affairs, and not the position of things at the date of the original contract, that we must look at. The Act says that the persons to be summoned to the meeting (all of whom, be it said in passing, are creditors) are persons who can be divided into different classes - classes which the Act of Parliament recognises, though it does not define them. This, therefore, must be done: they must be divided into different classes. What is the reason for such a course? It is because the creditors composing the different classes have different interests; and, therefore, if we find a different state of facts existing among different creditors which may differently affect their minds and their judgment, they must be divided into different classes."

22. From the foregoing, it might appear that Lord Esher differentiated the classes by reference to their different interests. But he immediately went on to say:

"    In the present case, the persons who had notice of the meeting were policy-holders - that is to say, policy-holders whose policies had to be dealt with. But the defendant was not a policy-holder at all; his policies had been fulfilled, and he was a creditor for the amount of the policies, and could have sued the company for money due; he had a vested cause of action, the policy-holders had none; and it is obvious that he could not consider the matter with the same mind and from the same point of view as the policy-holders who were summoned to the meeting. I do not say that, when there is nothing left to be done but the payment of the money, a person in the defendant's position may not be said properly to be in the same class as others who are creditors of the society; but, at any rate, he cannot fall within the same class as those whose policies have not matured. The defendant, therefore, belongs to a different class from those persons who were summoned as policy-holders, for his policies had not to be dealt with in any way; they had already matured: ..."

So that while Lord Esher did stress the different interests of different classes, he decided the classes by reference to their rights.

23. Bowen, L.J. who again was a member of the court, began by saying at p. 580 "I am of the same opinion". But even if, contrary to the view I have taken, Lord Esher regarded interests as an alternative or even sole determinant of class, that cannot mean acceptance of those of Lord Esher's words which cannot be reconciled with what Bowen, L.J. stated, e.g. at p. 583:

"    The word "class" is vague, and to find out what is meant by it we must look at the scope of the section, which is a section enabling the Court to order a meeting of a class of creditors to be called. It seems plain that we must give such a meaning to the term "class" as will prevent the section being so worked as to result in confiscation and injustice, and that it must be confined to those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest. If that be so, in considering the deed of arrangement made with the company which took over the business of the Sovereign, we must so construe it as not to include in one class those whose policies had already ripened into debts, and those whose policies might not ripen into debts for years to come; ..." (emphasis supplied)

In that same part of his judgment, Bowen, L.J. referred also to interests; in my view those must be references to interests arising from the dissimilar rights.

24. Kay, L.J. also began his judgment by saying "I am of the same opinion". To the extent that the preceding judgments diverge, that observation can hardly support Mr. Dicks' contention that interests are determinative, a fortiori having regard to the concluding words of Kay, L.J. at p. 586:-

"... the defendant ... ought not to have been mixed up with those whose policies had not matured. It is not contested that his policies had matured; the sum secured by them was due ...".

25. It is convenient to add at this point, with reference to a submission of Mr. Dicks to the contrary, that generally in the canvassing of the constitution of classes in the Alabama, Sovereign and for that matter the Hellenic and General Trust cases (I shall come to the latter), it is clear that the matter was being addressed not prospectively in seeking to constitute classes, but in the context of proceedings in which the sanction of the courts was sought for resolutions passed at class meetings already held.

26. That it is the different rights of shareholders and creditors that should determine whether they constitute different classes is consistent with other authority, see in particular the decision of Chitty, J. in re Madras Irrigation and Canal Co. (1881) W.N. 172 in the light of the additional facts given in the 14th Edn. of Buckley on the Companies Acts at p. 473; that of Swinfen Eady, J. in re United Provident Assurance Co. Ltd. (1910) 2 Ch. 477 at 480, in which the holders of partly paid shares and holders of fully paid shares who were held to constitute different classes, clearly had different rights in relation to the company; Australian authority with which I would concur, i.e. In the Matter of Chevron (Sydney) Ltd. (1963) VR 249 at 255, in which Adam, J. having had regard to the Alabama case concluded that "by virtue of their common rights as debenture holders, all debenture stockholders despite the different considerations which may influence them are properly to be treated as a single class for the purposes of a meeting... (at p. 255 lines 40-45); notwithstanding that no reference is made to the Alabama case, also re Jax Marine Pty. Ltd. v. Companies Act 1961 (1967) 1 NSWLR 145 at 148 in which Street, J. having considered the Sovereign case, in particular the judgment of Bowen, L.J. concluded that:-

"    The test is not similar to that applied to a person in a fiduciary position who is suggested to have some conflicting interest. The test is rather one of whether or not the persons who, prima facie, appear to constitute the class of unsecured creditors should be dissected into separate classes by reason of some particular matter so affecting the rights of some as to render it impossible for them to pursue their own interests concurrently with their participating in the pursuit of the interests of the class of which they appear to be members." (emphasis supplied);

and finally the South African case of Borgelt v. Millman No (1983) 1 SALR 757 in which Vivier, J. following an impressive review of the authorities stated at p. 769A that:-

"    It appears from the above review of the decided cases that in deciding what is a class of creditors for purposes of s 311 of the Act, the weight of authority is in favour of adopting the test laid down by Bowen LJ in Sovereign Life Assurance Co v Dodd. According to this test the distinction between separate classes is based on the dissimilarity of their rights to such an extent "as to make it impossible for them to consult together". The essence of the distinction is dissimilarity of rights, and not dissimilarity of interests. Dissimilar interests alone, not arising from legal rights, cannot be regarded as sufficient ground for the separation of classes of creditors."

His omission to refer to the Alabama case, criticised by Mr. Dicks, does not, in my view, weaken his conclusions.

27. I turn now to the authorities relied upon by Mr. Dicks. First re Hellenic and General Trust Ltd. (1976) 1 WLR 123, in which Templeman, J. (as he then was) dismissed the company's petition for the Court's sanction holding that the interests of a wholly owned subsidiary were different from those of other ordinary shareholders. Templeman, J. did not refer to the Alabama case, in which contrary to his approach, both Lindley, L.J. (at pages 239, 240) and Bowen, L.J. (at pages 243, 244), Fry, L.J. concurring (at page 246) contemplated interests being addressed at the subsequent sanctioning stage and not in the constitution of classes. It is also of interest that the two authorities relied upon by Templeman, J. immediately before, in the different context of the responsibility of the petitioner to properly constitute class meetings, also both contemplate the contrary; i.e. Swinfen Eady, J. in re United Provident Assurance Co. Ltd. proceeding upon rights, and Eve, J. in his Practice Note drawing a distinction between the constituting of classes and, after class meetings, the resolution of competing interests.

28. Moreover, in the Sovereign case, upon which he primarily relied, although Lord Esher did refer to interests in the passage Templeman J. quotes, as I have said, that reference in my view must be construed as a reference to interests arising out of rights in the company. But the passage from the judgment of Bowen, L.J. also quoted does not in its reference to rights support the course adopted by Templeman, J. In truth, the significance of constituting classes by reference to rights as opposed to interests did not emerge and was not addressed. I therefore do not find myself assisted by re Hellenic Trust.

29. Mr. Dicks relied also upon the New Zealand case of re The National Dairy Association of New Zealand Ltd. (1987) 2 NZLR 607. I cannot say I find it of any assistance. The question identified before me, likewise did not emerge and was not addressed. The passages that I have referred to in both the Alabama and Sovereign cases are quoted and the Jax Marine and Chevron cases considered. But in the end, the learned judge reached his conclusion by "giving the word 'class' a liberal interpretation and bearing in mind Bowen, L.J.'s warning that provisions, such as [our section 166] must not be allowed to result in 'confiscation and injustice'". The latter in my view apply to the sanctioning stage. As to liberal interpretation, it was derived from a passage in the judgment of Baker, J. in re Stewart and Sullivan Farms Ltd. (1981) NZLR 712 at 719 lines 10-15, in which no precise authority is cited for the proposition; it may be that a liberal approach to the weighing of conflicting interests at the sanctioning stage was intended.

30. I conclude therefore that the meaning of a class of members in section 166 is that given by Bowen, L.J. in the sovereign case at page 583, i.e. such "as will prevent the section being so worked as to result in confiscation and injustice, and that it must be confined to those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest"; that is to say, it is to be determined by dissimilarity of rights not dissimilarity of interests.

31. Applying that meaning of class to the shareholders in question, I can see no reason why it was not possible for all the shareholders to consult together, not only the minority IEP shareholders without BIL shares, but also those shareholders whose BIL shareholdings exceeded their IEP shareholdings, and the major institutional investors whose inclusion was opposed by the objector. All of them had the same rights in IEP. If the interests of the minority were overborne by a majority with extraneous interests, that on the authorities would be a matter for the Court in addressing the petition for sanction.

32. In my judgment therefore the class meeting on the 23rd April was properly constituted, and I reject Mr. Cockle's first ground. However, before I leave it, I think I should indicate briefly the serious difficulties that determination of class by reference to interests would have encountered.

33. Common shareholders' holdings of BIL shares could conceivably range in value from a minute, totally insignificant fraction of their IEP shares, to a totally overwhelming quantity, many times the latter. At which point would a conficting or different interest to that of an IEP shareholder without BIL shares arise? Is every different interest to constitute a different class? Clearly not, but where then is the line to be drawn? The difficulties in identifying shareholders with such interests, as in the present case, could raise in terms of practicality virtually insuperable difficulties. It is determination by reference to rights of shareholders that meets such difficulties, while leaving any conflict of interest which may result in a minority being overborne or coerced to be dealt with by the courts when their sanction is sought. As an aside, I would add that the difficulties Templeman, J. considered manageable in Hellenic, appear to have been concerned with shares in subsidiary companies and to have presented difficulties of a wholly different and minor order.

II. Alleged Failure To Disclose Necessary Information And To Present The Scheme Fairly

The Law

34. I have already touched upon a commonly used formulation of the duty or function of the courts in terms of which Mr. Sykes put his submission for the Court's sanction. Mr. Dicks however, in particular regard to his second broad ground contends for a somewhat more explicit and specific formulation relied upon in Re The National Dairy Association of New Zealand Ltd., in which it was said:-

"    The leading authority in New Zealand is Re C M Banks Ltd [1944] NZLR 248. In that case Smith J conducted a careful survey of the leading English authorities which he then summarised at p 253 line 18 as follows:

"In the light of the cases cited, the duty of the Court may be summarized as follows: The duty of the Court is to see (1) that there has been compliance with the statutory provisions as to meetings, resolutions, the application to the Court, and the like; (2) that the scheme has been fairly put before the class or classes concerned; and that if a circular or circulars have been sent out, as is usual, whether before or after the making of the application to the Court, they give all the information reasonably necessary to enable the recipients to judge and vote upon the proposals; (3) that the class was fairly represented by those who attended the meeting and that the statutory majority are acting bona fide and are not coercing the minority in order to promote interests adverse to those of the class whom they purport to represent; and (4) that the scheme is such that an intelligent and honest man of business, a member of the class concerned and acting in respect of his interest, might reasonably approve."

The authorities upon which the foregoing rest are indeed given at p. 252 of the report. The formulation seems to me to be little different in principle from what I have referred to as that more usual, e.g. see Buckley on the Companies Acts, 14th Ed. Vol. 1 p. 473, 474. I did not understand Mr. Sykes to oppose it, but in relation only to item (2), in rebuttal of Mr. Dicks' reliance upon the apparently higher onus upon the petitioner contemplated in In re The Commercial Bank of Australia Limited (1893) XIX VLR 333 at 368, 369, contended for the effectively lower onus in the more recent case of Re Australian Foundation Investment Co. Ltd. (1974) VR 311 at 337, particularly the following passage at 333:-

"The concern of the Court should be whether by reason of absence of information of the kind described, "reasonable information", "some important or substantial class or item of information", there has been no "real conclusion", no "determination because they had not the means of determining", and whether the event which has supervened, "some important event", was such that it had "very materially altered the effect and operation of the scheme". It is not "any" information which is relevant to the subject-matters dealt with in the scheme or "any" event relevant thereto that would influence the exercise of the discretion. But it is also clear that apart from matters that go to the character and content of the scheme itself - its being founded on honesty of purpose; its not showing any fraudulent or wrongful proposal; the absence of the effect of injuring or unduly oppressing some class, and (of course nowadays) a proper explanatory statement with respect to the scheme and its incidents - the focal point for consideration is the meeting and the choice then made, the reality of the determination made, and the preservation of the effect and operation of the subject-matter of the determination thereafter between that time and the Court's survey."

It places, in my view, a helpful emphasis on the character and circumstances of what I shall refer to as the "information reasonably necessary" in terms of item (2). I should add that item (2) can be readily seen to have been derived from the following words of Maugham, J. in re Dorman, Long & Co. Ltd. (1934) 1 Ch. 635 at 657:-

"... it is essential to see that the explanatory circulars sent out by the board of the company are perfectly fair and, as far as possible, give all the information reasonably necessary to enable the recipients to determine how to vote."

35. Mr. Dicks submits that neither of the two limbs of (2) was satisfied, i.e. the Scheme was not fairly put, and that the Circular did not give all information reasonably necessary; and that accordingly the requirements of section 166A have not been satisfied. He makes the following particular complaints:-

1.    Failure to disclose adequate information to judge the relative values of the shares in IEP and BIL for the purposes of the proposed exchange.

36. Since the essence of the Scheme is to exchange 2 IEP shares for 3 BIL shares, clearly the judgment of the IEP shareholders materially depends upon the value of the two shares, regardless of whether the IEP shareholders also held BIL shares. There is no reason to doubt the statement of BIL's Chairman in the Circular that IEP has become dominated by its 100% holding of Tozer Kemsley & Milbourn (Holdings) Plc ("TKM") and 30% of Mount Charlotte Investments Plc ("MCI"); such evidence as there is supports that view. Consequently, in my view, the asset value of those shares could be of material importance in assessing the asset value of IEP shares. It follows from the legal principles I have accepted that it was not necessary for the petitioner to furnish all information that might bear upon the asset value, but only such information as was reasonably necessary to make an assessment of value. There is no direct evidence that asset value is reasonably necessary to assess the value of the shares, but I have had no difficulty in reaching that conclusion from the manner in which the assessment of share values has been approached in the considerable indirect evidence before me.

37. It is submitted on Mr. Cockle's behalf that the explanatory documents fail to disclose sufficient information and/or explanation to enable an IEP shareholder –

(i)     to know the asset values attributed by the directors of IEP to IEP shares in TKM and MCI, and

(ii)    to assess the reasonableness or otherwise of such asset values.

And furthermore that the explanatory statements fail to disclose sufficient information or provide sufficient explanation to enable a shareholder to know the basis on which IEP and BIL "Adjusted Net Tangible Asset Values" referred to in the Explanatory Statement in the Circular and taken into consideration by Jardine Fleming were calculated in relation to TKM and MCI, and assess the reasonableness of such calculations.

(a)  TKM share - asset backing

38. What value TKM shares represented in the IEP net tangible asset value was not shown as such in the explanatory statement or proforma accounts; nor was any adjusted value. Analysts in the trade arrived at vastly different results in assessing the value of TKM. Two of them made assessments significantly higher than in the IEP books. Another commented that the Jardine Fleming analysis was based on a value for TKM that was patently ridiculous. The position as to TKM goodwill as far as I can see was left uncertain and ambiguous, rendering even more difficult the external assessment of the net asset value of TKM. No note was included in the explanatory statement of the sort given by BIL itself when certain IEP shares were previously purchased by BIL, setting out the assessment of its financial advisers of the market value and the figures for net tangible asset values as a component of the IEP share value. For Mr. Cockle, it is submitted that the omission should be viewed in the light of the Independent Board Committee's unequivocal recommendation to shareholders to vote for the Scheme, while Jardine Fleming advised that they were unable to make such a recommendation. Thus, it is submitted, the minority shareholders were placed by the explanatory document in a dilemma without being furnished sufficient information or explanation to resolve the dilemma or assess the reasonableness of the recommendation; and that likewise, the information and explanation in the explanatory documents did not put the shareholders in a position to assess the reasonableness of the Scheme in the light of the additional dividend of 75 cents paid to IEP shareholders.

(b)    MCI asset backing

39. No assumed value of MCI was shown in the explanatory documents. Mr. Forrester, a director of IEP affirmed that "the adjusted net tangible asset backing of BIL and IEP as set out on page 11 of the Scheme document includes the investment in Mount Charlotte at an amount of GPB 1.10 per share in the case of BIL and at an amount of GPB 1.24 per share in the case of IEP." However, on 6th May 1991, BIL announced its sale of 30% of MCI at 85 pence per share following discussions that commenced on 6th April 1991, nine days after the date of issue of the explanatory statement and Jardine Fleming's advice. Early in April, two analysts expressed the opinion that MCI shares were worth no more than 80 p. per share.

40. On Mr. Cockle's behalf, it is similarly submitted that IEP shareholders were not given all information reasonably necessary to assess the values at which MCI were included in the assets of IEP and BIL. They were not even given the book value. Trade analysts made widely differing assessments.

(c)   "Adjusted accounts"

41. I find that there is no real substance in Mr. Cockle's contention that there is no proper explanation given of the adjustments made.

Whether the information given was adequate.

42. For the petitioner, it is said that –

(i)  since the market prices of IEP and BIL were standing at a substantial discount to their net tangible asset value, it would have been highly irresponsible to attempt to attribute to the businesses of BIL and IEP or to any components of those businesses a value greater than that of the net tangible assets;

(ii)  the proforma balance sheet is a consolidated balance sheet and shows the tangible assets and liabilities of TKM, and similarly in respect of MCI the assets being shown at fair value in accordance with IEP's accounting policies;

(iii) the affidavit evidence on behalf of the petitioner as to TKM and the MCI net tangible asset value cannot be challenged as the objector did not seek to cross-examine the deponents concerned; also that it is not open to the objector to contend for a goodwill value for TKM and MCI to have been included.

43. As to (iii), I will say at once that in my view that what is contended there does not preclude the Court from realistically appraising such evidence as is properly before it, indeed the Court is obliged to do so.

44. On the other hand, it is plain that the IEP balance sheet at page 58 of the Circular is a consolidated balance sheet showing IEP's capital funds and liabilities, i.e. including those of its subsidiaries. In the ordinary way that I think would probably have been adequate information. It is in the light of the several matters raised by Mr. Cockle, which obtained at the time of the Court Meeting, that it seems to me necessary to carefully address the question of whether sufficient information was disclosed, and to do so in the context of the several other particular complaints Mr. Cockle makes and the general points that arise. I will accordingly return to the matter having addressed those complaints.

2.  Failure to disclose or explain IEP's future dividend policy in the explanatory documents.

45. Over the years, there has been a marked difference in the percentage of earnings paid out as dividends to shareholders of BIL, which averaged 60% of profits (including 60% of its 70% share of IEP's profits), and that paid to shareholders of IEP which averaged 16%. In the Circular there were indications that IEP had little scope for further entrepreneurial investment activity and profit implying, it is submitted on Mr. Cockle's behalf, that its future income would consist of less of entrepreneurial profit and more from TKM and MCI, thereby raising questions about the optimistic expectations mentioned in Mr. Hancox's letter to IEP shaeholders of increased dividends and values. Accordingly, it is further submitted that IEP shareholders should have been given an unequivocal statement of future dividend policy to enable them to make an informed assessment of the Scheme proposals.

3.  Failure to draw attention to possible effect of tax changes

46. In his letter dated 28th March 1991 to IEP shareholders, the BIL chairman alluded to the negative changes for IEP shareholders made by the Foreign Investment Fund ("FIF") tax regime in New Zealand, evidently meaning a capital gains tax on certain IEP shareholdings which was announced on 23rd January 1991. However, he made no mention of the subsequent announcement that the FIF regime would be reviewed and its introduction deferred until 1st April 1991. That announcement was made on 6th March 1991 after the market in New Zealand had closed, and consequently its impact was not reflected in the IEP and BIL share prices. Mr. Cockle submits this fact should have been notified to IEP shareholders given the possible effect on the IEP and BIL share prices, so that they could take it into account. Having heard the submissions, not least as to the difficulty of determining the effect of the FIF regime and the likelihood of changes, I am unable to accept that of itself the matter was information reasonably necessary; but again its absence may be of significance in the overall context, to which I shall come.

4. Failure to give notice of intention to issue 120 million BIL shares

47. On 6th May 1991, BIL issued 120 million shares to Singapore Government interests at NZ$1.05 per share in connection with the disposal of 30% of BIL's shares in MCI. The price was below the market price on the previous Friday, 3rd May 1991, and substantially below the adjusted net tangible asset value per share given in the explanatory statement dated 29th March 1991, and in consequence likely, Mr. Cockle suggests, to be regarded as a substantial dilution of the asset backing of BIL shares. Accordingly, it is submitted on his behalf, the directors' intention to make such issue was information reasonably necessary.

48. However, the evidence for the petitioner, which I must say could have been more helpful, is that informal discussions were held on 3rd April 1991; one is left to assume that those were the first discussions as submitted. Therefore no information could have been incorporated in the Circular. But Mr. Cockle contends that the information could have been made available to the Court on the 6th May 1991. I am not sure what purpose that would have served that it does not do now. It seems unlikely that the information could have been made available at the Court Meeting on 23rd April 1991, though again this could also have been made a little clearer than suggested in the relevant affidavit. In these circumstances I do not think it could be safely held that of itself the information was information reasonably necessary.

5. Failure to appraise IEP shareholders of the implications of the indebtedness of BIL.

49. Assuming the BIL directors did not at the date of the explanatory statement have knowledge of the impending share issue and sale of shares in MCI, then, it is submitted on Mr. Cockle's behalf that they could not have had any immediate prospect of achieving their intention of reducing BIL's indebtedness in respect of the MCI acquisition to NZ$4,000m. Accordingly, it is submitted the possible implication of failure to reduce the MCI indebtedness by the end of June 1991 should have been drawn to the attention of IEP shareholders as information reasonably necessary, and also that BIL shares would bear a much greater exposure to debt than their IEP shares.

50. In fact there is a reference to current and term liabilities totalling some NZ$7,000m in the BIL proforma 1991 balance sheet in Appendix IV to the explanatory statement. Also the 1991 proforma balance sheets of the two companies reveal very similar liability to asset ratios. I do not therefore that there was failure to provide information reasonably necessary in this respect.

6. Failure to call attention to the position of major institutional IEP shareholders which also owned substantial holdings of BIL shares.

51. For Mr. Cockle, it is submitted that the attention of IEP shareholders should have been drawn to the special position of major institutional shareholders which were also major shareholders in BIL as "information reasonably necessary". I will say at once that I cannot see how such information would enable IEP shareholders to assess and vote on the proposals. I reject the submission that it was information reasonably necessary.

7. Failure to mention disposal of BIL's Magnum Corporation shares

52. Along with TKM and MCI, Magnum Corporation Ltd. was one of the major subsidiaries of the BIL/IEP Group. On 19th April 1991, the same day as the 75 cent increase in the IEP interim dividend was announced, BIL announced the placement of 40 million Magnum shares, which in fact produced NZ$132m, representing some 2.4% of BIL's total capital funds. It is said by Mr. Forrester that the IEP directors did not consider the matter was sufficiently significant in terms of the value of the group to warrant specific reference at the Court Meeting. This does not sit well with the prominence given to Magnum as one of the BIL Group's principal companies. Nevertheless, I am not persuaded that information of the Magnum placement was on its own information reasonably necessary. It seems to me that it probably was not.

8. Failure to draw attention to the substantial reduction in Sir Ron Brierley's shareholding in BIL.

53. There is evidence that suggests some importance was attached by BIL shareholders or some of them to Sir Ron Brierley's personal participation in the affairs of BIL. One analyst described his anticipated departure as a "serious blow". In BIL's September 1990 statistics, he was shown as BIL's fourth largest shareholder with about 73 million shares. However, he does not appear in the list of BIL's 20 largest shareholders appended to one of Mr. Forrester's affidavits, from which Mr. Cockle infers that there has been a significant drop in his shareholding. Mr. Sykes submits that the list is of the largest registered shareholders. I do not feel able to conclude that there was a significant drop in Sir Ron Brierley's shareholding, which disposes of the complaint.

9.   Failure to draw attention to the limited scope of Jardine Fleming's repert.

As already mentioned, the Chairman of the Independent Board Committee on the 20th April published an announcement in the press that Jardine Fleming's advice had changed and was that the minority shareholders of IEP should vote in favour of the proposals.

54. What was not mentioned in the Circular was Jardine Fleming's disclaimer in the final paragraph of their report, which was in the followings terms:

It is also clear from the affidavit of one of the Jardine Fleming directors in charge of the overall supervision of the "affairs of Jardine Fleming in connection with the scheme", that all the information given to Jardine Fleming came from IEP, BIL and their subsidiaries. It is fair to infer that Jardine Fleming were retained upon that basis.

55. For Mr. Cockle it is submitted that the limited nature of Jardine Fleming's investigation should have been brought to notice and was information reasonably necessary. It seems to me, viewing the matter in the realistic way I consider I should, that many of IEP's approximately 17,000 investors, would attach weight to what prestigious financial advisers stated and advised, a fortiori given the manner and extent to which reliance is placed on Jardine Fleming's advice in the Circular. It is submitted by Mr. Sykes that it is not to be expected of such advisers that they should have undertaken enquiries more extensive than stated in Jardine Fleming's letter. That may well be so. Likewise the shareholders may have well assumed that audit-type investigations would not be made by financial advisers; regrettably no evidence was available. In any case, I think there probably would be some IEP shareholders who would give Jardine Fleming's advice less weight if they had an indication of the extent of the disclaimer. Upon that basis I do not feel able to hold that the information of the disclaimer was not information reasonably necessary. That is not to say that in the circumstances its omission may not be of limited weight in the exercise of my discretion to sanction the Scheme.

10.    Failure sufficiently to disclose the true nature of what is held out in the circular as the Independent Committee of the Board.

56. As I have already indicated, the appointment of an "independent" committee of the Board for the purpose of giving independent advice to minority IEP shareholders is an important part of the presentation of the Scheme to which prominence is given in the Circular.

57. No biographical information of the directors of IEP or BIL (other than Sir Ron Brierley) is given in the Circular. The ordinary occupations of Mr. Heath and Mr. Sutherland are not stated. The only information supplied is that Mr. Heath's shareholding in BIL is 100,000 shares and in IEP 50,000 shares. Also that Mr. Heath "has a service contract with TKM.", from which it is not unreasonably submitted on Mr. Cockle's behalf it may be inferred that Mr. Heath is an employee of TKM, a subsidiary of IEP. And as to Mr. Sutherland, the circular discloses that he holds 62,000 BIL shares and that he has options to purchase a total of 856,000 shares in IEP under various staff option schemes dating from 1987 to 1989. Again it is submitted that it may be inferred from the latter that Mr. Sutherland is an executive within the BIL/IEP Group.

58. For the petitioner it is submitted that the two members were independent because they held no positions within the BIL Group outside the IEP sub-group, that they took no part in the formulation of the proposals and that, as regards IEP positions, since IEP was not a wholly owned subsidiary of BIL, they were, on legal authority, independent. I do not think independence in the present context falls to be construed in that technical legal way, but rather whether the two would be influenced consciously or sub-consciously by their allegiance or indeed deference to the BIL camp. In my view they clearly could not be regarded as independent, being officers of a BIL subsidiary, albeit not wholly owned. Majority control, which enabled IEP, in BIL's Chairman's own words, to be used as BIL's vehicle for investment, could not be without the sort of control and influence that would be incompatible with independence. Moreover, if, as is conceded, a position in a wholly-owned subsidiary would mean the holder was not independent, then in my view it must follow that the prospect of IEP becoming a wholly owned subsidiary, which Messrs. Heath and Sutherland supported and advanced, must in my view equally mean that they could not have been independent.

59. Furthermore, it was stated on behalf of the petitioner that the procedure adopted was the conventional thing and also probably in accordance with the U.K. Takeover Code. But no attempt was made to demonstrate either, or that they would be an answer to Mr. Cockle's complaints in this regard. The latter as advanced by Mr. Dicks are, first, that the connections of Mr. Heath and Mr. Sutherland to the other companies in the BIL/IEP Group should have been disclosed to the shareholders in the explanatory documents with the same prominence as the fact that they had been appointed as an independent committee, as information reasonably necessary for the recipients to assess the Scheme and vote on it. And second that to hold out Messrs. Heath and Sutherland as independent directors in the circumstances of the Scheme without disclosing with reasonable prominence the extent to which they may be subject to a conflict of interest by virtue of their salaried employment, is misleading and unfair.

60. As in the case of the Jardine Fleming report, there would be some reliance upon the views of a committee that was independent. Indeed at the Court Meeting Mr. Heath was actually asked about and in reply confirmed that he and Mr. Sutherland were independent.

61. Having regard to the foregoing, in my view, information of the connections with the BIL Group was in the nature of information reasonably necessary, and the holding out of Messrs. Heath and Sutherland as an independent committee in the circumstances without disclosing with reasonable prominence the extent to which they may have been subject to a conflict of interest was misleading and unfair, notwithstanding that their impact would have been minor.

Conclusions

62. I turn now to some general points which I have fully borne in mind in arriving at the conclusions and views I have mentioned on the several individual particulars relied upon by Mr. Dicks.

63. As pointed out by Mr. Sykes, it was open to the shareholders to seek professional assistance. Indeed they were invited to do so on the cover of the Circular. Likewise no investment professional appears to have joined or associated himself with Mr. Cockle. The majority in favour at the Court Meeting was very substantial, i.e. 85.74% in value and 90.27% in number. As to the latter, since Lindley, L.J. observed in Re English, Scottish and Australian Chartered Bank (1893) 3 Ch. 385 at 409 that "If the creditors are acting on sufficient information and with time to consider what they are about, and are acting honestly, they are I apprehend, much better judges of what is to their commercial advantage than the court can be", the courts have been slow to overrule a clear majority.

64. To proceed, Mr. Sykes submits first that Mr. Cockle was not misled by the matters he complains about; second that most of those matters were not raised in his affidavit and therefore the petitioner has had no opportunity to submit evidence upon them; and third that, in the words of Stuart, J. in re Landmark Corporation Ltd. (1968) 1 NSWR 759 at 768 "many of the criticisms made of [the Explanatory Statement] are ... criticisms which flow from the hindsight of the exhaustive knowledge gained during [the] days of hearing. There is no basis for concluding that any creditor has been misled by the terms of the [section 166A] statement", (adaptation in parenthesis). In my view, these submissions are not without merit. Nevertheless it must be said that it comes ill from those who have been economical with information particularly with the sort of information that would be readily understood to say that those who should have received it have not been misled. Equally, most of Mr. Cockle's submissions had enough substance to them as to require much careful and anxious consideration by the court and lengthy submissions by counsel, notwithstanding that he may have raised some of the matters relatively late. In that regard it is well to recall Maugham, J.'s words in Dorman Long & Co.:

In a sense, in all these cases, the dice are loaded in favour of the views of the directors: the notices and circulars are sent out at the cost of the company, the board have plenty of time to prepare the circulars, all the facts of the case are known to them, ..."

65. It seems to me also necessary to have regard to the fact that the Scheme is intended not primarily to benefit the shareholders, but rather BIL's strategy, although it is stated almost as an afterthought that as future BIL shareholders, the IEP shareholders would receive increased dividends and a better reflection of value.

66. In the light of all the foregoing including the dicta on the function of the Court, I return to the question of whether information reasonably necessary was not disclosed. I have already stated my conclusion that most of the items of information considered individually were not reasonably necessary. Cumulatively their tendency must be to increase the likelihood of other information being reasonably necessary. Having regard to that and all that is before me, the information that it is claimed was not provided and should have been provided as information reasonably necessary was the asset backing of the TKM and MCI shares. I earlier indicated that the capital funds and the liabilities of IEP shown in its proforma consolidated balance sheet would in that particular respect in my view ordinarily be all the information reasonably necessary. The matters I have subsequently addressed have not led me to alter that view. The actions of the shareholders themselves strongly support that conclusion. Notwithstanding press comments and the views of analysts which might have been expected to provoke requests, demands or dissent, there is no evidence of such apart from that of Mr. Cockle. Nor is there any evidence that Mr. Cockle's letter seeking the support of other shareholders resulted in any response or concern. Having given careful consideration to the matter and notwithstanding the critical view I have taken of aspects of the petitioner's unhelpful conduct, I am driven to the conclusion that the asset backing of TKM and MCI was not information reasonably required to enable the shareholders to judge and vote upon the proposals. It follows that, in my view, all information reasonably necessary was provided notwithstanding that other information, e.g. the TKM and MCI asset values would have been of assistance or preferred. Had I come to a contrary view, I do not think that for the purposes of the exercise of my discretion, I could in all the circumstances have attached much weight to information of TKM and MCI asset backing not being provided.

67. Turning to the failure to draw attention to the limited scope of the Jardine Fleming report and the connections of the members of the so-called Independent Board Committee, likewise the evidence, particularly the actions of the shareholders, suggests that the shareholder would not have acted any differently. The position is not dissimilar to that of information of TKM and MCI asset backing. Therefore regrettable though that failure is, there is no evidence that it had a significant effect on the shareholders. The huge majority that voted for the Scheme has implications not only in respect of information necessary but also in the present respect and indeed of whether the minority was overborne. In my view, therefore it would not be a proper exercise of my discretion to withhold the Court's sanction on account of the foregoing matters.

68. That disposes of the grounds and particulars of objection, and it remains for me to say in terms of the three-fold duty of the court that I am satisfied –

(i)    that the provisions of the Companies Ordinance have been complied with. My view of how a class of members should be determined and my conclusions on the individual particulars on Mr. Dicks' second ground dispose of the objection in this respect;

(ii)    that the statutory majority were acting bona fide and not coercing the minority to promote interests adverse to those of the class. There is no real evidence to the contrary; and

(iii)    that the Scheme is such that an intelligent and honest person, a member of the class concerned and acting in respect of his interest, might reasonably approve.

69. In the light of the overwhelming approval of Scheme by the shareholders themselves, in particular, I do not think in the circumstances that I could take a different view even if I were so disposed.

70. I am satisfied having regard to all the circumstances that in the proper exercise of my discretion the Court's sanction to the Scheme should be granted.

71. Lastly, there is the matter of the confirmation by the Court of the reduction of the capital of IEP that is also sought. Counsel have helpfully and rightly agreed that the decision on this should follow that on the Court's sanction to the Scheme. Accordingly the petition is granted on both respects.

72. Before I leave the matter, I have to thank counsel for their very comprehensive and helpful submissions; if I have not made mention of aspects of them it is only because this judgment is already overlong.