BPESAM IV M Ltd & Anor v DRA Global Ltd  FCA 738 (29 May 2020)
On 29 May 2020, Justice McKerracher of the Federal Court of Australia issued an urgent injunction restraining DRA Global Ltd from acting upon a resolution (Resolution 12) previously passed by shareholders supporting a selective share buy-back (SBB) scheme. The applicants, 2 related shareholders together holding 35% of the shares in DRA, were not eligible SBB shareholders. The eligible SBB shareholders were not parties to the proceeding but did have a limited opportunity to be heard.
The case is of particular interest because:
- share buybacks are rarely considered by the Courts;
- they are a significant event being an exception to the principle of maintenance of capital; and
- selective share buybacks are an even more significant because not all shareholders are treated equally.
The case illustrates the point that companies looking to undertake a buyback must be scrupulous to ensure members are kept properly informed and the buyback is conducted transparently and strictly in accordance with the resolution in general meeting.
DRA was an unlisted public company with many of its shares acquired by management via limited recourse loans. The SBB scheme was designed to extinguish these loans which were an impediment to listing. There had been shareholder resistance to the idea because some shareholders would have been able to realize their equity before others so a condition precedent was introduced that the SBB scheme would proceed only after a successful listing, with a power to waive the condition given to the independent non-executive directors only upon consideration of the likelihood and timing of the contemplated listing.
The shareholders voted in favour of the SBB scheme on 19 May 2019 after receiving DRA’s end of 2018 calendar year financial statements showing an operating profit of AUD$25,451,479.
The listing did not take place after DRA’s financial statements were restated to show an operating loss of AUD$52,711,138, a discrepancy in the order of AUD$78m. The reasons behind the restatement were not examined by the Court and no findings of negligence or impropriety were made.
However, despite no immediate prospect of a listing, with the approach of the deadline for completion of the SBB scheme, the independent non-executive directors waived the condition precedent.
The injunction was granted restraining the completion of the SBB scheme because:
- the discrepancy in the financial statements in the order of AUD$78m rendered them misleading and deceptive contrary to s 1041H of the Corporations Act and s 12DA of the ASIC Act. These provisions require strict compliance so the absence of any evidence of negligence or impropriety on the part of the directors or the company was not to the point;
- the misleading and deceptive nature of the financial statements which were relied upon by the shareholders rendered Resolution 12 invalid;
- the applicants had supported Resolution 12 only on the basis of the inclusion of the condition precedent;
- once the true financial position had been discovered, if DRA wished to proceed with the SBB scheme, it should have sought further shareholder approval and in fact in a letter sent prior to the May 2019 general meeting, the shareholders were told they would be advised “of any subsequent events that will have the effect of rendering any previously disclosed information misleading or deceptive and that it would seek further shareholder approval in relation to the buy-back where required”; and
- had the condition been waived, participating shareholders would have gained a benefit – to which they were not presently entitled given the Court’s construction of their SBB agreements – which was not available to other shareholders such as the applicants, which had been the very reason the condition was added in the first place.
This article is for general information purposes only and does not constitute legal or professional advice. It should not be used as a substitute for legal advice relating to your particular circumstances. Please also note that the law may have changed since the date of this article.