McBain v Bellamy’s Australia Ltd; Bellamy’s Australia Ltd v McBain

1. [1]

   Bellamy’s Australia Limited is a listed public company.

2. [2]

   In 2014 Ms Laura McBain was appointed Managing Director and Chief Executive Officer of Bellamy’s.

3. [3]

   Ms McBain had been Bellamy’s’ General Manager from 2006 and CEO from 2011.

4. [4]

   At Bellamy’s’ 2014 Annual General Meeting, held on 30 October 2014, shareholders passed Resolutions approving:

5. [5]

   On 19 June 2015 Bellamy’s invited Ms McBain to participate in the Incentive Plan and apply for up to 825,877 options at an exercise price of $1.30 per option.

6. [6]

   Ms McBain or Bellamy’s were entitled to terminate Ms McBain’s employment at any time on six months’ notice.

7. [7]

   By letter dated 11 January 2017 Bellamy’s exercised that right and:

8. [8]

   On 6 April 2017 Bellamy’s paid Ms McBain $224,723.20 in lieu of notice (“the Payment in Lieu”).

9. [9]

   It is common ground that, at the date of termination of her employment, Ms McBain was, as a matter of contract, entitled to exercise 504,870 of the 825,877 options referred to at [5].

10. [10]

    Bellamy’s decided that “it was necessary to scale back” the options available to Ms McBain by 388,522 options to avoid breaching the statutory cap in s 200G of the Corporations Act 2001 (Cth) (to which I will return).

11. [11]

    Ms McBain exercised the remaining 116,348 options (504,870 less 388,522) in November 2017. There is no dispute that she was entitled to do so.

12. [12]

    Ms McBain now claims the benefit of the remaining 388,522 options.

13. [13]

    What divides the parties is whether Bellamy’s may permit Ms McBain to exercise those 388,522 options by reason of the combined effect of ss 200B, 200E and 200G of the Corporations Act.

14. [14]

    In particular, the question is whether to do so would, when considered together with the Payment in Lieu, result in Bellamy’s giving Ms McBain a “benefit in respect of [her] retirement” in excess of the cap provided for in s 200G.

15. [15]

    It is common ground that the s 200G cap for Ms McBain was $594,471.64.

16. [16]

    Resolution of the issue requires consideration of the provisions of ss 200B, 200E and 200G and the matters put to members at the 30 October 2014 AGM.

The legislation

1. [17]

   Division 2 of Part 2D.2 of the Corporations Act deals with restrictions on “Termination Payments”.

2. [18]

   The effect of s 200B(1) is that, as Ms McBain held a “managerial” or “executive office” at Bellamy’s, Bellamy’s could not give her “a benefit in connection with [her] retirement from…office” “unless there is member approval under s 200E for the giving of the benefit”.

3. [19]

   Section 200A(1)(e) provides that “retirement from an office” includes “loss of the office”. It thus includes termination of employment, as occurred here. I shall refer to Ms McBain’s benefits on termination as her “termination benefits”.

4. [20]

   Section 200E provides that three conditions must be satisfied for there to be member approval.

5. [21]

   The first condition contained in s 200E(1B) is that “the giving of the benefit be approved by resolution passed at a general meeting” of Bellamy’s.

6. [22]

   Section 200E(4) provides that “member approval under this section does not relieve a director from any duty to the body corporate”, including any fiduciary duty, “in connection with the giving of the benefit”.

7. [23]

   The second condition (contained in s 200E(2)) is that “details of the benefit” be set out in the notice of the general meeting and that those details “must include”, relevantly to this dispute:

8. [24]

   The third condition (contained in s 200E(2A)) is that “the retiree” could not cast a vote in the resolution. It is common ground that Ms McBain did not vote on the resolution in question.

The 30 October 2014 AGM

1. [25]

   The notice of the 30 October 2014 AGM included notice of the following proposed Resolutions:

2. [26]

   The Explanatory Notes provided to shareholders gave the following information concerning the proposed resolution concerning the Long Term Incentive Plan:

3. [27]

   In relation to the proposed resolution to grant options to Ms McBain, the Explanatory Notes stated:

4. [28]

   The Explanatory Notes then set out details of the “performance measures” required to be achieved in order that Ms McBain have the right to exercise the options.

5. [29]

   The Explanatory Notes made the following statement under the heading “Termination of Employment”:

6. [30]

   The Explanatory Notes concluded:

The Listing Rules

1. [31]

   The Resolutions proposed for the AGM of 30 October 2014 were expressed to be for the purposes of ASX Listing Rule 7.2 (Exceptions 9 and 14) “and for all other purposes”.

2. [32]

   As the Explanatory Notes explained, the effect of the relevant Listing Rules was that shareholder approval was required for the issue of “equity securities” the subject of the Incentive Plan and, relevantly to Ms McBain, for the issue of such securities to a director.

3. [33]

   I will return to the significance, if any, of the reference to “all other purposes”.

Result of the AGM

1. [34]

   At the 30 October 2014 meeting shareholders voted to pass Resolution 5 (concerning the Incentive Plan) and Resolution 6 (concerning the grant of options to Ms McBain).

Was there member approval for the purpose of s 200E?

1. [35]

   The accelerated vesting of the options came about by reason of the termination of Ms McBain’s employment. It was therefore a benefit Ms McBain received in connection with her “retirement” which, as I have mentioned, includes her “loss of office” (see [19] above).

2. [36]

   The conferral of retirement benefits requires membership approval under s 200E.

3. [37]

   The issue is whether there has been compliance with the relevant requirements of s 200E.

4. [38]

   The first condition specified in s 200E is, as I have said, that the “benefit be approved by resolution passed at a general meeting of” Bellamy’s.

5. [39]

   This gives rise to the question of whether there was an “approval” by shareholders for the purposes of the subsection.

6. [40]

   Of course, there was “approval” on 30 October 2014 in the sense that the requisite majority of members gathered at the appointed venue voted in favour of the Resolutions.

7. [41]

   However, the issue is whether the members were given sufficient information about that proposal to enable their vote to be characterised as an “approval” for the purposes of the section.

8. [42]

   By reason of s 200E(4) directors must act in accordance with their duties in connection with “member approval” for the giving of a termination benefit.

9. [43]

   In order for the approval to be effective, it was necessary for Bellamy’s directors to “make a full disclosure of all facts within their knowledge which are material to enable the members…to determine upon their action”: Bulfin v Bebarfalds Ltd (1938) 38 SR (NSW) 423 at 440 (Long Innes CJ in Eq).

10. [44]

    The question is one of equitable duty about which it has been said:

11. [45]

    Bellamy’s contends that Resolutions 5 and 6 were not directed to the termination benefits to be made available to Ms McBain and that therefore the information provided to members did not satisfy the disclosure requirements. That is because neither the Resolutions nor the Explanatory Notes disclosed that the passage of Resolutions 5 and 6 would confer termination benefits on Ms McBain in excess of the cap in s 200G: that is, in excess of her statutory entitlement.

12. [46]

    Ms McBain contends that shareholders were sufficiently informed because “the AGM notice expressly contemplated and addressed her entitlements in the event that Ms McBain’s employment was terminated”.

13. [47]

    Resolutions 5 and 6 were expressed to be for the purposes of the relevant Listing Rule “and for all other purposes”.

14. [48]

    But the Explanatory Notes directed members’ attention only to the Listing Rules and explained that these rules contained restrictions relating to the issue of “equity securities” generally and of “securities under an employment incentive scheme” to directors in particular.

15. [49]

    The Explanatory Notes did not direct members’ attention to the restrictions in Div 2 of Pt 2D.2 of the Corporations Act relating to termination benefits.

16. [50]

    I do not consider that words “and for all other purposes” were sufficient to alert a reasonable shareholder to these matters. In my opinion, a reasonable shareholder would understand these words to be a “boilerplate” expression designed, to adopt the words of Bellamy’s’ submissions, to “[cover] off any ancillary matters in relation to the specific purpose for which they understood approval was sought, here, the issue of securities as an exception to the ASX Listing Rules”.

17. [51]

    Members were informed that if Ms McBain ceased to be employed, she would be entitled to retain vested but unexercised options, and that “unvested options…would vest immediately”.

18. [52]

    But members were not told that:

19. [53]

    For those reasons, my conclusion is that the information conveyed to members was insufficient for the purposes of obtaining their approval to confer termination benefits on Ms McBain. Accordingly, it cannot be concluded that there was “member approval” for the purposes of s 200E(1B).

20. [54]

    It may well be that an explanation for this is, as was submitted on behalf of Bellamy’s, that the Resolutions and Explanatory Notes were not intended by the directors to be directed to the question of Ms McBain’s termination benefits at all, but only to the issue of the options. However that may be, they were not sufficient for the purposes of s 200E(1B).

21. [55]

    Section 200E(2) requires that members be given “details of the benefit” including, relevantly, details of “the manner in which that value is to be calculated and any matter, event or circumstance that will, or is likely to, affect the calculation of that value”: s 200E(2)(b)(ii).

22. [56]

    During submissions, and without objection, Bellamy’s drew my attention to W Lonergan, The Valuation of Businesses, Shares and Other Equity (4th ed, 2003, Allen & Unwin).

23. [57]

    In that work, Mr Lonergan describes the various ways that options can be valued (at pp 174ff). The simplest method is the “Intrinsic Value” method, which simply compares exercise price with share price. Other methods include the “Black-Scholes” formula and the “Fundamental Value” method.

24. [58]

    It is true, as was pointed out on behalf of Ms McBain, that the various “integers” seemingly relevant to the calculation of the value of the “benefit” to Ms McBain of accelerated vesting of the options, other than share value at the date of termination which obviously could not then be known, were stated in the Explanatory Notes.

25. [59]

    Thus, the following matters are revealed in the Explanatory Notes:

26. [60]

    But that is not what s 200E(2)(b)(ii) calls for.

27. [61]

    It calls for details of the manner in which the value is to be calculated. That is, by what manner or methodology the various integers would be used to calculate value.

28. [62]

    If (and I am speculating here) it was proposed that the value of the benefit to Ms McBain of accelerated vesting of the options was to be calculated by reference to its “Intrinsic Value”, it would have been relatively simple to give relevant details. This could be done by saying something to the effect that the manner in which the value to Ms McBain of the benefit was to be calculated would be the difference between the option price and the value of the shares at the date of exercise of the options. That may have been a matter obvious to some or even most shareholders.

29. [63]

    But no such details were given.

30. [64]

    The Black-Scholes valuation methodology was referred to in the Explanatory Note (see [27] above) but only to explain how the number of options was to be calculated; not their value.

31. [65]

    Section 200E(2)(b)(ii) also calls for a statement of any matter, event or circumstance that may affect calculation of value. Two such matters would be the date of Ms McBain’s retirement from Bellamy’s and the then share price of Bellamy’s. Obviously, that actual date and share price could not be known as at the date of the Explanatory Notes. But those matters, stated in general terms as matters likely to affect value, were not included.

32. [66]

    Again, it may be, as Bellamy’s submits, that the reason for the omission of these matters from the Explanatory Notes was not an oversight on the part of the directors, but because the Resolutions and Explanatory Notes were not intended to be directed to the question of Ms McBain’s termination benefits at all; but only to the issue of the options.

33. [67]

    Whether that is so or not, my conclusion is that the requirements of s 200E(2)(b)(ii) were not satisfied.

34. [68]

    For these reasons, my conclusion is that the relevant requirements of s 200E have not been met.

35. [69]

    Accordingly, there has been no valid shareholder approval of Ms McBain’s termination of retirement benefits.

36. [70]

    For that reason, the Summons must be dismissed.

The cross-claim

1. [71]

   In its cross-claim, Bellamy’s contends that, assuming that there was s 200E approval to Ms McBain’s termination benefit, and that Ms McBain was therefore entitled to exercise the remaining 388,522 options, it would follow that she was liable to repay the Payment in Lieu because:

2. [72]

   In view of the conclusions to which I have come concerning s 200E approval it is not necessary for me to decide this issue.

3. [73]

   It is not an easy one.

4. [74]

   Section 200G provides that s 200B does not apply (to require member approval under s 200E) if the “value of the benefit” in question when added “to the value of all other benefits…already given in connection with the person’s retirement” does not exceed the statutory cap (s 200G(1)(c)).

5. [75]

   The precise question is whether a benefit “already given” for the purpose of s 200G(1)(c) is any benefit already given, whether or not subject to s 200E approval (as Bellamy’s submits), or only benefits already given that have not been the subject of s 200E approval (as Ms McBain submits).

6. [76]

   A literal reading of s 200G(1) favours Bellamy’s’ position, as the section refers to “all other benefits…already given”; without qualification.

7. [77]

   A purposive reading of s 200G(1) gives support to Ms McBain’s position, as it is hard to see why Parliament would have intended that the benefit, removed from the general prohibition in s 200B by reason of being the subject of a s 200E approval, would nonetheless be subject to the cap in s 200G.

8. [78]

   This is the view favoured by Dr Austin and the Hon Justice Black in Austin & Black’s Annotations to the Corporations Act (looseleaf, LexisNexis Butterworths).

9. [79]

   The learned authors say at [2D.200G]:

10. [80]

    Were it necessary for me to decide this issue, I would have come to the same conclusion as the learned authors.

Conclusion

1. [81]

   The proceedings must be dismissed.

2. [82]

   I invite the parties to confer and agree on the orders necessary to give effect to these reasons, including as to costs.

3. [83]

   If there is to be any argument as to costs, I invite the parties to agree on a timetable for written submissions. I will determine any such dispute on the papers unless either party seeks a hearing.