Any shareholder in Burger Fuel is likely to be aware of the challenge received to the company’s proposed capital return by Burger Fuel’s founder (and 5% shareholder) Chris Mason. The parties (including NZSA) had their day in Court on May 8th; while there was universal agreement on the key tests required to achieve a capital return, there was clear disagreement surrounding the extent to which these tests had been satisifed.
The case had attracted other attention: the Takeovers Panel appeared to highlight the purpose of the a particular section of the Companies Act (s.236A, just in case anyone is interested) while a total of five other Burger Fuel shareholders had filed a Notice of Appearance to indicate their concerns as to how the capital return had been portrayed to shareholders.
Of course, its not appropriate for NZSA to opine as to whether Burger Fuel has met the key tests. That decision will be down to Justice Andrews (who has reserved his decision).
So what do we mean by the ‘tests’?
They had it right back in 1943…
The case was C M Banks Limited. This was a Scheme of Arrangement proposing the return of capital to preference shareholders who had not received their stipulated dividends for a period, with the company subsequently proposing this Scheme as trading conditions improved. However, the information sent to preference shareholders made no mention that the dividend arrears would not be recoverable under the Scheme.
The Scheme was subsequently approved by a majority of preference shareholders – but was not sanctioned by the Court. The four tests determined at that time are still used today to determine whether a Scheme should proceed.
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 reeipients 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.
In C M Banks, the Court held that test (2) was not met, as the information was not fairly put to shareholders. Consequently, tests (3) and (4) could also not have been met as the majority lacked information to make a decision – and therefore could not reasonably represent the class of shareholders.
Fast forward to 2024
From the perspective of Burger Fuel’s KC, Stephen Hunter, “this should have been a simple Scheme“, with all of the tests met to support the Court sanctioning a capital return. Burger Fuel noted that the nature of Chris Mason’s opposition had changed over time, with plenty of ‘back and forth’ surrounding the communications between Mason and Burger Fuel CEO/Shareholder/Director Josef Roberts.
For Mason Trustees, however, this was far less clear cut, with gaps in compliance, information put to shareholders and a challenge to the assumption that the 66.3% shareholding of Josef Roberts should be treated in the same class as minority shareholders.
Mason Trustees highlighted that the scheme appeared to have been presented as a “fait accompli” to shareholders, with materials focused on the mechanics of the capital return rather than a more detailed discussion on the options considered by the Board. This was supported by NZSA in its submissions, evidenced by a pattern of a lack of engagement and the Board’s comments in previous Annual Reports highlighting a lack of strategy. NZSA also highlighted a focus on “technical compliance” in how the initiating court orders were originally notified to shareholders, which sidelined the role of the NZX announcements site. This meant that shareholders who wanted to raise an objection to the Scheme would not have known how to do so.
From NZSA’s perspective, it is difficult to determine whether a capital return is in the best interests of the company when there the company offers no insight as to its capital management plans or future dividend policies.
Implications
The first key message is that the proceedings mean that BFG shareholders have to wait a little bit longer for any decision. That’s simply down to the mechanics of our justice system.
For NZSA, the hearing offered an opportunity to actually meet the Board of Burger Fuel for the first time. We hope that there is some opportunity for an expanded relationship in future. Interestingly, there have been two new Directors appointed to the BFG Board over the last few months; we would hope that signals some intent for a different governance approach for the company.
While the Banks tests described above continue to govern the boundaries of capital return Schemes, we will be interested as to the whether the judgement offers further insight into the nature of information to be provided in future schemes.
Last, NZSA has noted other examples recently where the interests of controlling shareholders may differ from those of minority shareholders. Regardless of any outcome in this example, NZSA will continue to advocate for practical solutions that recognise shareholder interests (as well as classes of shares) in corporate governance structures.
Oliver Mander