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Burger Fuel recently received Court approval for a contested scheme of arrangement to return $4.077m to its shareholders. There have been very few New Zealand proceedings where schemes have been opposed. The decision provides valuable insight into the Court’s discretion to approve a scheme, despite a company’s process failures, and highlights the importance of adequate disclosure in scheme materials.
Context
A scheme of arrangement is a Court-approved procedure that allows the re-organisation of the rights and obligations of shareholders and companies. The company applies for initial orders, which prescribe a process to send information about the proposed scheme to shareholders and convene a meeting for shareholders to vote on it.
If shareholders approve the scheme, the company returns to Court for final approval of the scheme.
Burger Fuel founder and shareholder Chris Mason opposed the scheme via his company, Mason Trustee Ltd, arguing that it was not in shareholders’ interests and that Burger Fuel had failed to comply with Court orders requiring disclosure of information to shareholders.
The New Zealand Shareholders' Association (NZSA) also appeared at the hearing, having held longstanding concerns about Burger Fuel’s governance and lack of an articulated strategy. While the NZSA did not oppose the scheme, it raised issues about the quality of information provided to shareholders and procedural matters, such as Burger Fuel’s failure to include the Court’s initial orders in the shareholder materials and to inform shareholders about Mr Mason’s opposition at the scheme meeting. Other shareholders also opposed the scheme.
High Court judgment
The Court accepted there had been “process failures” and that the scheme had not been fairly put to shareholders because Burger Fuel had not provided adequate information on alternative uses of the company’s excess cash. It concluded, however, that this was not a disqualifying factor as there were no viable alternative uses of the cash.1
In a departure from the usual position that the unsuccessful party pays the successful party’s costs, the Court ordered Burger Fuel to pay costs to Mason Trustee Ltd, on the basis that Mr Mason’s objections were properly and justifiably advanced.2
On 5 June 2024, Burger Fuel implemented its return of capital to shareholders. Payments will be processed by 18 June 2024.
Chapman Tripp comment
The Court contrasted Burger Fuel’s conduct with previous schemes (such as the Sky TV scheme) where there was adequate disclosure, and considered whether to adopt a “further process” (such as a ratification vote), as recently occurred in Australia.
However, it decided this was unjustified given that there was no plausible alternative use for the surplus capital so the outcome would be the same even if shareholders were appropriately consulted.3
The Court’s decision to award costs to the unsuccessful opposing party on the basis that the opposition was properly and justifiably advanced is also noteworthy. We expect this will encourage shareholder activism in scheme proceedings, and increase the pressure on companies to comply with disclosure and other procedural requirements.
Chapman Tripp acted for the New Zealand Shareholders’ Association in this proceeding.
1. Burger Fuel Group Ltd v Mason Trustee Ltd [2024] NZHC 1352 at [64]–[75] and [90]–[92].
2. At [96]–[98].
3. At [93].
