ACCC wins one, loses one

Whichever way you look, you cannot escape the fact that the ACCC is out there trying to enforce the Trade Practices Act

Whichever way you look, you cannot escape the fact that the ACCC is out there trying to enforce the Trade Practices Act

Late in August the ACCC lost – and yet won – an important case involving the music industry. The Full Federal Court while it doubled the fines imposed by Justice Hill at first instance on the corporations involved in the ACCC prosecution of certain exclusive dealing conduct, ie. – Warner Music and Universal Music – nevertheless overturned his decision that those companies had breached section 46 of the TPA.

The ACCC was clearly "chuffed" at the finding by the Full Federal Court that section 47 of the TPA had been breached (exclusive dealing) but would have been disappointed (as small business) at the fact that the court held that there was no breach of section 46.

Essentially, Hill J, had held that Warner and Universal had breached the TPA by threatening to refuse to supply certain Australian retailers who stocked parallel imported CDs. They later refused to supply their own labels to retailers who stocked such parallel imported CDs. The ACCC sued these companies alleging that they were misusing their market power in breach of section 46 of the TPA as well as engaging in exclusive dealing.

Exclusive dealing can arise in a number of different circumstances but critically for a finding of breach of section 47 to be held to exist the ACCC (or in the case of a civil claim) the plaintiff must show that the alleged conduct (or it can be an agreement in appropriate circumstances) has the effect of substantially lessening competition in a relevant market.

Justice Hill had held that by both threatening to refuse to supply retailers, and in fact refusing to supply them because they had sourced copies of music from sources which were not controlled by Warner or Universal (in other words parallel imported those CDs) the two companies had acted in a way which had the effect of lessening competition in the market.

Justice Hill also held that both Universal and Warner had market power because they controlled a significant percentage of the market but most importantly, they had a temporary monopoly in effect with respect to high profile CDs which they may have refused to supply. In those circumstances section 46 had been breached.

Justice Hill imposed penalties totalling more than $1 million but the ACCC argued that these were inadequate.

The majority of the Full Federal Court ruled that it could not maintain the finding of a breach of section 46 because of the Boral case in which the High Court of Australia had ruled that unless a company had substantial market power the ACCC (or a civil plaintiff) could not establish the first element in showing that section 46 was breached. For the section to be triggered a company must be shown to have a substantial degree of market power, must take advantage of that market power and must do so for an improper purpose.

On the basis of the Boral case, and because the court held that it was not difficult for companies to enter the broader market for CDs if they could obtain relevant artists etc, there was no monopoly power and therefore the companies could not be in breach of section 46.

However, it is not necessary to show that a company has a substantial degree of market power for a breach of section 47 of the TPA to be established.

As indicated earlier, one needs to show that there has been a substantial lessening of competition. Substantial does not constitute a very high threshold – it has been defined by the courts to mean something of substance or not insignificant. But it falls short of the concept of substantial degree of market power in evaluating a misuse of market power case. In the views of both Justice Hill and the majority of the Full Federal Court Warner and Universal did engage in conduct which substantially lessened competition.

However, the Full Federal Court held that the penalties imposed by Hill J were inadequate. It was necessary for the court to send a message to the community that breaches of the TPA should not be tolerated. Accordingly, the penalties were increased so that Warner and Universal were each fined $1 million. Individual penalties were also imposed by Hill J but these were only varied slightly by the Full Federal Court.

The Dawson Committee has recommended that penalties for breaches of the TPA should be increased significantly. It has also recommended that certain criminal sanctions be imposed on persons who engage in price fixing and cartel behaviour. It will be interesting to see how these matters are reviewed and assessed in light of this decision. An appeal is likely to be sought both by Universal and Warner to the High Court to challenge the section 47 finding. It is, however, unlikely that the ACCC will seek to appeal the finding on section 46 in view of Boral and the quite recent Safeway decision which was noted in last month's Reporter treating the company as different from its shareholders.

In criminal law the one-man company will be no help to you

Of late the courts have been prepared to "lift the corporate veil" to determine who are responsible for the activities of a company. But when it comes to the criminal law, the courts are generally more reluctant to treat the corporation and its directors as one person for the purposes of ascertaining the result – especially if this enables the directors to escape liability.

This particular approach was highlighted by a unanimous decision of the High Court of Australia in McLeod v The Queen ((2003) 77 ALJR 1047).

In many respects this case should not surprise readers today (although a similar case nearly 20 years ago had a different result). It does send a chilling reminder to all directors who are responsible for the activities of companies not to think that they can use the corporate form as a way of avoiding obligations and perhaps of escaping liability in appropriate circumstances.

The facts of the case are taken from the Law Book Company's report. Relevant charges arose out of an "enterprise" conducted by Mr McLeod. That enterprise involved three different companies. It was alleged that the different companies were established and pursued by McLeod in order to take advantage of certain tax concessions. These concerned investment opportunities in a film production scheme.

Primarily the enterprise involved the acquisition of copyright and primary works, the production and marketing of films and the sharing of profits with investors from the joint ownership of the copyright from the films.

At all relevant times McLeod was the relevant director of each company. The Crown argued that the enterprise was in fact a sham. Several thousand investors accepted invitations to invest in various films produced by the three companies and they contributed a total of more than $6 million. Of this sum only $718,000 was in fact used to make films. It was alleged by the Crown that more than $2 million was applied for the benefit of the appellant.

It was further argued by the Crown that investors were given certain information, in the form of income statements, which created an illusion that films were being made and were returning certain profits. The appellant was prosecuted in the New South Wales Supreme Court before a jury and he was convicted of fraudulently applying the property of the company in breach of section 173 of the Crimes Act of New South Wales. This section provides that:

"Whosoever, being a director, officer or member of any body corporate ...:fraudulently takes or applies, for his own use or benefit, or any use or purpose other than the use or purpose of such body corporate, or company, or fraudulently destroys any of the property of such a body corporate or company, shall be liable ..."

This provision, while more specific, is not unlike in thrust to sections 182 and 183 of the Corporations Act.

On appeal the New South Wales Court of Criminal Appeals upheld the conviction and the appellant sought leave and was granted leave to appeal to the High Court of Australia.

Before the High Court the appellant argued that a director of a company cannot be guilty of fraudulent application of the property of the company where, being the controller of the company, the director in effect consents to the transfer of the relevant property to himself. He relied on the Victorian Full Court decision in R v Roffel [1985] VR 511. It was also argued that the trial judge had misdirected the jury in dealing with the relevant issues.

(Generally speaking of course these days ASIC will bring proceedings against directors for alleged breaches of the law by pursuing civil remedies under the Corporations Act. This case, however, because it involved alleged defrauding of the company's property, was brought under the criminal law.)

The High Court, in three separate judgments (Gleeson CJ, Gummow and Hayne JJ delivered one judgment, McHugh and Callinan JJ delivered separate judgments) held that appeal should be dismissed. Many interesting criminal law cases other than Roffel were discussed.

Each of the three judgments considered the question of the separate legal personality of the company and the role of the directors of the relevant company. In doing so they returned to the very earliest formulation of the corporate form enunciated in the landmark decision of Salomon v Salomon & Co decided in 1897.

In the joint judgment of Gleeson CJ, Gummow and Hayne JJ, the judges indicated that the conduct or the state of mind of the directors, officers or members of a company is not always to be attributed to the company. This is particularly so where companies become insolvent.

In their view the development of the criminal law (and one assumes the corporate law) left no room for the proposition which had been argued in common law cases, that a limited expression of consent on the part of the owner (for example the shareholders) of a company provided an answer to any charge of fraudulent dealing. In their view, the company and the shareholders or owners should be treated separately and the same applied to the company and its directors.

McHugh J agreed with the proposition of a company as a separate person owning property of the company in its own right. Even when the shares of the company are held by one person, the purposes or interests of the company are not regarded as synonymous with the intentions of the persons in control. Even if all the shareholders or officers of the company consent to the taking of the company's property, all of them or one of them, can in fact be guilty of offences not only under the provisions of the Crimes Act of New South Wales but presumably under other provisions of the law.

The appellant argued that the Victorian Supreme Court decision, R v Roffel, was authority for the proposition that where the consent of all the shareholders is obtained for a particular course of conduct then this is a defence to any charge including a charge brought under the criminal law.

In Roffel a husband and wife were the sole shareholders of the company whose stock and machinery were destroyed in a fire. Despite assuring the creditors that they would be paid, the Roffels used much of the insurance payments for their own benefit.

Mr Roffel was charged with theft of the company's funds. He defended the actions by asserting his belief that he was entitled to the moneys as a creditor of the company as the company had received the entire business assets from him and his wife in exchange for the shares issued.

The jury convicted him, but on appeal a majority of the Full Court of the Supreme Court of Victoria held that when Roffel had taken the money the company had intended him to have it. Accordingly, the court ruled that there was no appropriation of property by Mr Roffel. This quite extraordinary decision was described by McHugh J as having been met with disbelief from many commentators (including the author). McHugh J ruled that the case was wrongly decided.

In the current case McHugh J ruled that the officer of a company can be guilty of misappropriation even if he is the only shareholder and receives the so-called consent of the company to the particular activity. In his view there was abundant evidence that the jury was correct in reaching its decision.

Callinan J reached a similar view. In delivering his judgment he noted that a director or an officer acting in breach of his obligations under the statute (or in breach of the company's constitution) by using "the money of the company for his own purpose is no more the voice or the amanuensis of the company, as between himself and the company than a thief who gains access to its treasury and steals money from it ..." (para 127). In his view section 173 of the Crimes Act makes it clear that a director should be liable in these circumstances (see paragraph 128).

All the judges in the High Court indicated that the courts should look behind the circumstances in a case such as this and rule against a person who takes advantage of the fact that a company is a separate legal person from its shareholders to confiscate its property.

Directors and others involved in companies should no longer be prepared to use the separate legal personality of a company as the basis for seeking to avoid specific provisions of the legislation, especially where property of the company is the subject of misappropriation or misuse.

One would suggest that the provisions of the Corporations Act (sections 182 and 183) which call for directors and officers not to misuse their position or property of the company would be interpreted in a similar fashion.

No more unnecessary reforms please

Should schemes of arrangement be subject to the takeover code or should they be subject to separate company law administration?When the takeovers legislation was amended in 1999 and the Takeover Panel established, the Eggleston principles were again affirmed as being critical to the fair operation of takeover law.

The aim of the legislation was to ensure that shareholders received appropriate information about a takeover, that equal opportunity was given to the members of the company in relation to the takeover, they should be given time to consider the offer, and that there be no advantage given to some shareholders as opposed to others.

However, the legislation does recognise that the control of companies can be changed in other ways. Schemes of arrangement etc are possible under the Corporations Act.

Where it is appropriate to do so, the creditors and shareholders of a company should not shirk from the ability to use a scheme of arrangement to achieve a similar result, but in such a case the relevant scheme is to be "confirmed" by a court.

The recent successful acquisition by Xstrata Holdings Pty Ltd of all of the shares in MIM Holdings Ltd is an illustration of this alternative scenario. In Re MIM Holdings Ltd ((2003) 45 ACSR 554) Justice White of the Supreme Court of Queensland clearly accepted the argument by MIM (in effect on its own behalf and on behalf of Xstrata), to permit all of the MIM shares to be acquired by Xstrata so that MIM would become a wholly owned subsidiary of that company.

Where a scheme of arrangement is pursued, it is not necessary for ASIC to be made a party to the relevant proceedings. It is in effect an internal arrangement that is regarded as a matter for the shareholders and creditors. In a particular case, however, and where the court deems it appropriate, ASIC is given leave to appear. In this particular matter both ASIC and Xstrata sought and obtained permission to address the court in relation to the arrangement.

Another company, Platinum Asset Management Ltd, a funds manager which held 2.5 percent of the issued share capital of MIM opposed the orders. In essence what Platinum was arguing was that the particular scheme should be treated as a takeover and therefore governed by the Takeover Code contained in Chapter 6 of the Corporations Act and not by the scheme of arrangement provisions contained in Chapter 5. It argued that the true market value of MIM shares would only be achieved if a proper takeover was pursued.

However, MIM and Xstrata protected their position by arranging for a share valuation of MIM to be prepared by an independent expert. This report valued the shares within a range that was covered by the offer price of Xstrata and a range regarded as fair and reasonable by relevant persons and authorities. (The majority of directors recommended the scheme to the shareholders although the managing director of the company opposed it.)

In the course of his judgment delivered on the day of the application White J considered the relevant provisions of the Corporations Act. He recognised that in such a court hearing, which is required to approve a compromise or scheme of arrangement, the scheme appeared to be on its face "so blatantly unfair or otherwise inappropriate", the court could and would in those circumstances not allow the matter to proceed. Otherwise, he agreed, that the court will not usually go very far into the question of whether a scheme or an arrangement is one which warrants the "approval" of the court.

The court's aim is to ensure that it is a scheme which the court would be likely to approve if the shareholders voted for it (approving the observations of Santow J in Re NRMA Insurance Ltd (2000) 156 FLR 349).

In the view of White J the Corporations Act by offering shareholders (together with creditors) to proceed by way of a scheme of arrangement, was offering "a true alternative to the way in which acquisitions may occur". The judge was in effect rejecting the suggestion that he should disregard this clear distinction offered by the two different chapters of the Corporations Act to order that the current matter proceed by of a scheme of arrangement.

Since this decision there has been a call by some merchant bankers and others for the law to be re-examined and for the availability of company acquisitions to occur through a scheme of arrangement to be reassessed in light of the purpose of Chapter 6 of the Corporations Act. But such a request, in my view, is not warranted or appropriate at this time.

As the relevant court in a scheme of arrangement scenario does have a discretion and can consider all of the issues involving a scheme at the appropriate time, and as there was a separate and independent valuation provided in this case, this call for reassessment of the provisions of the Corporations Act should not be pursued by the government.

We have experienced more than enough corporate law reform in Australia at this time and do not need any more unnecessary reforms.

A split decision is called for

When will the court examine share-splitting as a method for avoiding the provisions of the Corporations Act?

The MIM Holdings scheme of arrangement which is the subject of a separate note in this month's Law Reporter also produced another interesting judgment in the Queensland Supreme Court.

In Re MIM Holdings Ltd ((2003) 45 ACSR 559) Ambrose J considered arguments in relation to alleged share splitting which had occurred among the shareholders of MIM Holdings Ltd.

As noted in the other note, MIM initiated a members scheme of arrangement under Chapter 5 of the Corporations Act. Pursuant to the scheme Xstrata Holdings Pty Ltd (Xstrata) would, if approved, become the sole shareholder of MIM. The scheme meeting had been convened by the court and a resolution adopting the scheme had been approved by 58.5 percent in number of the shareholders voting at the relevant meeting. These shareholders, however, held in fact 89.1 percent of the value of the votes cast.

The transaction had received an enormous amount of press publicity. It became apparent prior to the meeting at which the scheme of arrangement would be considered, that while the scheme was likely to be approved by a 75 percent majority of shareholders in value required by the relevant provisions of the Corporations Act, it might not be approved by a majority in number of the members as required by different provisions of the Corporations Act (it is unnecessary to consider the technical details of these provisions).

Suffice it to say that the anomaly of a resolution being approved by a majority in value but not a majority in number was recognised as a factor which might result in the scheme being defeated. Indeed, an argument suggesting the opposite could also be put in an appropriate case – that the increase in numbers would increase the likelihood of persons voting in favour of a particular proposition.

Evidence was produced before the Queensland Supreme Court that a small amount of share-splitting activity had occurred in this matter. The evidence in this case indicated that some 574 parcels of shareholding, each of 375 shares, had been created. MIM had a very significant number of shareholders.

In the circumstances the court was asked to consider whether to refuse to approve the scheme in view of this share splitting. ASIC, however, had delivered a certificate to the court indicating that it had no objection to the scheme itself (ASIC is required to provide such a certificate to the court – see section 411 of the Corporations Act).

The court approved the scheme. In dealing with the question of vote splitting and the issues thrown up by that particular matter, the court was influenced by the fact that the number of new shareholders that had been created would not have affected the outcome of the meeting. However, this warning was issued by Ambrose J which is worth noting in the context of future schemes.

"Undoubtedly, had vote splitting occurred to such an extent to make it likely or even possible that a majority in number voting either for or against adoption of the scheme had been achieved by share splitting that may arguably at least have been a reason to decline to approve the scheme. It is difficult to envisage how share splitting to achieve merely a numerical advantage in the voting could have had much effect on the value of the shares held by the shareholders who became entitled to vote only by reason of the share splitting exercise." (para 21 of the judgment)

The court felt that there was inadequate evidence to suggest that there had been any manipulation at the time that should lead it to examine the issue of the share splitting and related matters more closely. And in the circumstances the court felt that the evidence was insufficient to warrant its rejection of the scheme. Accordingly the scheme was approved.

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The purpose of this database is to provide a full-text record of all articles that have appeared in the CDJ since February 1997. It is aimed to assist in the research and reference process. The database has a full-text index and will enable articles to be easily retrieved.It should be noted that information contained in this database is in pre-publication format only - IT IS NOT THE FINAL PRINTED VERSION OF THE CDJ - therefore there might be slight discrepancies between the contents of this database and the printed CDJ.