Judge refuses injunction against C.F.M.

Press, 3 June 1981, Page 4

Judge refuses injunction against C.F.M.

An injunction to stop the Canterbury Frozen Meat Company,’ Ltd. from issuing any further shares pending an extraordinary meeting of shareholders on’June 16. has been refused by Mr Justice Roper in a reserved decision given in the High Court yesterday. The injunction was sought by Primary Producers Cooperative Society, Ltd, of Dunedin. The application was heard on May 22. Mr N. S. Marquet, of Dunedin, appeared for the applicant company, P.P.C.S., and it was opposed by Mr R. E. Wylie for C.F.M.

The P.P.C.S. case was based on a desire to prevent an issue of shares for which the motive, or substantial motive, w;as to decrease the percentage of P.P.C.S. shareholding, his Honour said.

If such an allotment was made P.P.C.S. had its remedy in that the exercise of the directors’ power to allot

u’ould then have been exercised invalidly. Any damage likely to arise would not be irreparable. In his decision his Honour said that the principal business of P.P.C.S. was meat processing and exporting which was carried out on its behalf by 13 freezing works in the South Island. All of its 10.000 shareholders were South Island farmers who were either present or former suppliers of P.P.C.S. In 1976 the directors of P.P.C.S. decided that the company should acquire interests in other companies engaged in meat processing in the South Island, not so much as an investment but with the intention of influencing the policy of such companies and so protecting their own primary producing shareholders.

In pursuit of that policy P.P.C.S. acquired shares in C.F.M., which had a substan-

tial involvement in the meat processing industry in Canterbury. By November, 1980, P.P.C.S. held a 24. fr per cent shareholding in C.F.M. Its present holding was 38 per cent and it had apparently received the approval of the Examiner of Commercial Practices to increase its shareholding up to 50 per cent. The directors of C.F.M. had no knowledge of the application to, and the approval of the Examiner. Although C.F.M. had substantial involvement in the meat processing industry only a small percentage of its 3500 shareholders were farmers.

The first intimation the directors of P.P.C.S. received that its scheme to influence the future policy ,of C.F.M. to the advantage of its own shareholders might be frustrated came at a meeting on November 24, 1980, when the future of C.F.M. was discussed.

Present at the meeting were Mr I. H. Jenkinson, chief executive of P.P.C.S., Mr J. O. Acland, one of its directors, Messrs I. E. G. McKellar and D. Morten, chairman of directors and managing director of C.F.M. Mr McKellar had expressed the view that C.F.M.’s future lay in diversification and that the company’s future investment should be in the directions, whatever they might prove to be, that provided the greatest financial return to the company. At the meeting Messrs Jenkinson and Acland expressed their disagreement with the view and maintained that any business or interest acquired by C.F.M. in the future should be within its; “mainstream activity’” and declared that P.P.C.S. would do its best to ehsure that the business of C.F.M. remained within the “mainstream” — the processing of meat.

In C.F.M.’s annual report for 1980 the directors proposed that at the annual general meeting the company's authorised capital should be increased from $19.9 million to $4O million, although the issued capital at that time was only $8.4 million.

The reason advanced for that proposal was that it was desirable for the company to have a reserve of unissued shares which could be dealt with by the directors in accordance with ' article seven of C.F.M.’s Articles of Association, which in short authorised the directors to allot shares in payment for property acquired. . P.P.C.S. opposed the proposal but after discussions agreed to an increase of $5 million, and at the annual general meeting the authorised caital was increased to $25 million without opposition, a factor which Mr Wy-

lie submitted was relevant to the application for the injunction. Although P.P.C.S. might have seen the proposed increase in capital to $4O million as a deliberate counter to its scene to control C.F.M.’s future loans, Mr Morten had deposed that the proposal was influenced by the prospect that C.F.M. could acquire the business of Thos Borthwick and Sons (A’asia). Ltd. which his Honour said as he understood it would be a "mainstream activity.”

Mr Jenkinson had challenged Mr Morten's explanation and deposed that by the time of the annual general meeting the Borthwick purchase was a dead issue.

According to Mr Jenkinson's affidavit he had a discussion with Mr Morten in February, 1981. when, according to Mr Jenkinson, he was told that the business of C.F.M. would be diversified and that substantial assets would be acquired which would have a significant effect on the company’s revenue; and as an aside was told that C.F.M. wished to dilute the P.P.C.S. shareholding to 15 per cent.

Mr Morten had denied making such a statement in the context, or with the sinister intention attributed to him, his Honour said.

According to Mr Morten, the reference to “dilution to 15 per cent” was made when he was explaining to Mr Jenkinson the effect on P.P.C.S.’s shareholding if C.F.M. was to proceed with the purchase of the Ocean Beach Freezing Works, an acquisition which would have met with the approval of P.P.C.S. as, a “mainstream” activity but which in fact did riot proceed. : ’X. ■ ' In his answering affidavit Mr- Jenkinson claimed that Mr Morten had confused two conversions and that the “dilution” threat was not made in connection with C.F.M.’s interest in Ocean Beach. The next sinister move in the eyes of P.P.C.S.’s directors involved the purchase by C.F.M.’ of R. B. Shackel, Ltd.

“As I read the affidavit of Mr Jenkinson P.P.C.S. does not -complain that the Shackel purchase was a case of diversification, but really complains that there was ah attempt by C.F.M. to ensure that P.P.C.S. did not get its hands on any of the 350.000 shares allocated to the shareholders of Shackels as part of ■ the deal and which the Shackel shareholders wished to sell,” said his Honour.

It appeared from Mr Jenaffidavit that the sharebrokers entrusted with the sale of the C.F.M. shares allotted to the Shackel shareholders were entrusted to see that the shares were placed in “friendly hands.”

Mr Jenkinson understood that expression to mean that

the shares were to be sold to those who would support the C.F.M. directors and would be opposed to P.P.C.S. and its policy. It Was explained by Mr Morten that the term "friendly hands” as the term was used, meant no more than that the shares should not be placed in the hands ol those whose interests might be directly opposed to those of C.F.M", or who might come within the description of a “corporate raider" According to Mr Morten, C.F.M. was never in the position where it could have dictated the terms as to the ultimate disposal of the Shackel-held shares. In the result P.P.C.S. actually purchased 30.000 of the Shackelheld C.F.M. shares. The resolution P.P.C.S. sought to have passed at the extraordinary general meeting were: (1) to increase the maximum number of . directors from seveh to eight; (2) to remove Mr McKellar and a Mr Satterthwaite from the board of directors and replace them with Mr Acland and Mr Jenkinson; (3) to restrict the present almost unfettered power of the C.F.M. directors to allot shares in payment for property acquired by the company, with effect that such powers might only be exercised "with the sanction of an ordinary resolution.” "The case of P.P.C.S. in short is that all future acquisition of property should cease until the shareholders have decided whether C.F.M.’s future lies in ’mainstream activity’ ’diversification’ or, put more bluntly, whether P.P.C.S.’s policy of influencing other companies to the best advantage of its own primary producing shareholders should prevail,” .his Honour said.

It had been deposed Mr Morten that there was no present intention of the directors of C.F.M; to issue shares but they were not prepared to give an undertaking that they would slay their hand should a suitable commercial opportunity arise, even though the meeting was but a few days off. In short they will ’not abandon principle for expediency. The directors of C.F.M. considered themselves under no obligation to give an undertaking which would amount to an abdication of their powers and could result in a breach of duty to th general body of their shareholders. "The C.F.M. directors are certainly not enthusiastic about,P.P.C.S. obtaining control but in that they are considering the wellbeing of their company as a whole as they see it. On the other hand P.P.C.S. appears to be looking to the wellbeing of its own shareholders and seeking to enforce a special interest,” said his Honour.