Performance rights
41 Mr Ingram deposes that A-Cap also has 30,000,000 performance rights on issue all of which are held by the directors of A-Cap. The performance rights were issued pursuant to offers of performance rights made to the directors under the terms of A-Cap's Director Long Term Incentive Plan Rules (LTIP Rules). The performance rights are subject to performance measures connected to the share price of A-Cap shares. The performance rights are not vested or remain unvested rights until the performance measure is met. When met, the unvested right converts into a vested right and the holder of the vested performance right is entitled to convert that right into an A-Cap share for no consideration.
42 A-Cap has 22,500,000 unvested performance rights and 7,500,000 vested performance rights on issue. A condition precedent to the Share Scheme becoming effective is that all the performance rights (vested or unvested) are either converted into A-Cap shares or cancelled before the Record Date (SID cl 3.1(q), cl 6.2).
43 Clause 6.2(a) of the SID contemplates that where performance rights have vested A-Cap must take steps to ensure that the A-Cap shares are issued for those vested performance rights before the Record Date. Where performance rights have not vested cl 6.2(a) contemplates two alternative courses of action. First, the A-Cap Board may determine in accordance with any discretion to do so under the LTIP Rules to vest the unvested performance rights, in which case A-Cap must then issue A-Cap shares for those then vested performance rights before the Record Date. Second, if the A-Cap Board does not determine to vest the unvested performance rights, the performance rights must be cancelled or extinguished pursuant to an irrevocable binding deed entered into between Lotus, A-Cap and the holder of the performance right before the first court hearing such that the performance rights are replaced with Lotus shares on the Record Date. Further, cl 6.2(a) contemplates that there will be no outstanding performance rights as at the Record Date other than those subject to cancellation deeds and that the holders of performance rights will otherwise be entitled to participate in the Share Scheme as participants in that scheme.
44 Clause 6.2(b) contemplates Lotus entering into cancellation deeds and that it must approve and execute such deeds. It also provides that no consideration or benefit is to be given under a cancellation deed other than shares in Lotus and that no obligation is imposed on Lotus in a cancellation deed other than the requirement for Lotus to issue Lotus shares to the holder of performance rights representing not more than fair value for the relevant performance rights.
45 Clause 9.4 of the LTIP Rules provides that if a Change of Control event occurs (defined to include an order of the Court convening a meeting for the purposes of the Share Scheme) all unvested rights will vest and convert into a vested right notwithstanding that the performance measures have not been met if the A-Cap share price is equal to or greater than 9.25 cents on the date the Change of Control event occurs. If the share price is less than 9.25 cents on that date then the Board (defined to include the board of directors of A-Cap) must as soon as practicable after the Change of Control event occurs determine, in its absolute discretion, the number of unvested rights of a participant that will vest and convert into a vested right notwithstanding that the performance measures have not been satisfied, unless the Board in its sole and absolute discretion determines otherwise. Mr Dixon deposes, on information and belief, that although the LTIP Rules refer to 9.25 cents, when shareholders approved the plan, it was approved subject to an increase of the threshold to 10 cents. While expressed as an absolute discretion, it is implicit that the Board must act honestly (or honestly and reasonably) in the exercise of that discretion. That is, there must be a reason that is not arbitrary for determining to vest all or a proportion of unvested performance rights in the circumstance of a Change of Control event (as defined in the LTIP Rules).
46 A circular resolution of the A-Cap directors records that they voted in favour of a resolution that had the effect of vesting all unvested performance rights of each director on the Record Date subject to the shareholders approving the Share Scheme by the statutory majorities. The proposed Scheme booklet records that the intended effect of that resolution was that the performance rights would vest on the Record Date subject to the Share Scheme becoming effective, not to shareholders approving the Share Scheme. As the proposed Scheme booklet has been verified by the A-Cap directors, I accept that the intention of the directors is that the performance rights will only vest on the Record Date if the Share Scheme becomes effective and will not vest merely on shareholders voting in favour of the Share Scheme by the statutory majorities.
47 The circular also records that each director abstained from voting on that resolution to the extent it related to that director's performance rights. It also records:
I. In light of this and having considered all of the circumstances, each Director (except in relation to their own Unvested Rights, in which they have an interest as disclosed) believes it is necessary and desirable in the context of the Share Scheme that they exercise his or her discretion under the Director LTIP to vest all of the Unvested Rights held by each other Director (but not in respect of their own Unvested Rights in which they have a personal interest as disclosed) in accordance with rule 9.4(b)(iii) of the Director LTIP, subject to A-Cap Shareholders resolving to approve the Share Scheme by the requisite majorities of A-Cap Shareholders under the Corporations Act at the Scheme Meeting.
48 The proposed Scheme booklet runs to 448 pages. The booklet discloses, to a reader with sufficient stamina, the following information.
(1) In Section 6.8d (p 95), that A-Cap has 30,000,000 performance rights issued in four tranches of 7,500,000 each of which expire on 17 January 2025. The tranches of the performance rights vest if the volume weighted average price of A-Cap shares for 10 consecutive trading dates meets the following thresholds: 14 cents; 18 cents; 22 cents; and 26 cents. The first tranche of 7,500,000 performance rights has vested because the performance measure (14 cents) was satisfied. The other tranches of the performance rights are unvested.
(2) In Section 6.14 (p 103), for the last 12 months A-Cap shares have been trading at levels significantly below each of the thresholds for the unvested performance rights to vest. The highest price in that period was 11 cents in September 2022 and the lowest 4.1 cents in July 2023. At the time the proposed Schemes were announced the share price was 4.3 cents.
(3) In Section 3.5q. (p 64) that it is a condition precedent that binding deeds are in place with holders of the performance rights or the performance rights have vested such that there will be no performance rights on issue on the Record Date.
(4) In Section 1.5 (pp41-44), that 5,000,000 performance rights have been issued to six directors of which 1,250,000 have vested and 3,750,000 remain unvested. Further, if the Share Scheme is approved and implemented, that each of those directors will be issued A-Cap shares that will be acquired under the Share Scheme in exchange for 1,412,429 new Lotus shares. (Additional details of the interests of each director in A-Cap and implementation of the Scheme were provided in Section 12.1 (pp 184-185)).
(5) In Section 12.2b. (pp186-187), a more detailed description of the condition precedent in cl 3.1(q) and cl 6.20 of the SID is provided. It also records that the A-Cap Board determined to exercise its discretion under the LTIP Rules to vest the remaining three (unvested) tranches of the performance rights with effect on the Record Date subject to the Share Scheme becoming effective.
49 In the form in which A-Cap requested the Court's approval of the proposed Scheme booklet, Section 12.2b. did not contain an explanation of the reason(s), if any, for the A-Cap directors determining that it was 'necessary and desirable' for the Board to exercise its discretion under the LTIP Rules to vest all unvested performance rights. The proposed Scheme booklet also provided no explanation for the reason(s), if any, that the directors preferred to vest all performance rights rather than negotiate with Lotus for cancellation deeds in respect of those rights. In circumstances in which the performance rights would expire in January 2025 and the performance of the A-Cap share price was well short of that which would result in the remaining performance rights vesting, it might be thought that the 'fair value' of the performance rights was significantly less than the value of an A-Cap share. Acting rationally, Lotus would not - and was not permitted in accordance with cl 6.2(b) of the SID - to provide consideration more than the fair value of the performance rights. A-Cap tendered no evidence on the hearing of the application of the fair value of the performance rights.
50 It follows that the decision of the directors to vest all unvested performance rights under the terms of the LTIP Rules raises the possibility that, by so doing, they have conferred upon themselves a benefit that exceeds the fair value of those performance rights. As that was a possibility that was contemplated by the terms of cl 6.2(a) of the SID that is a benefit the directors would receive in connection with implementation of the Share Scheme that will not be received by shareholders which do not also hold performance rights.
51 While the performance of the A-Cap share price may have rendered the performance rights of less value than A-Cap shares, in the context of a change of control transaction in which the directors were to lose office, there may be rational and legitimate reasons for considering that the value of the cancellation of those rights, as contemplated in the SID, was greater than the fair value of those rights absent a change of control transaction. Accordingly, there may be rational and legitimate reasons for Lotus to provide consideration, in the form of Lotus shares, equivalent to the shares that would be received if the performance rights vested and A-Cap shares issued before the Record Date.
52 Having regard to these matters, I am satisfied that there is no obvious reason for considering that vesting of all performance rights will confer on the directors a benefit that exceeds the value of those rights in the context of the Schemes and terms of the SID. Further, if and to the extent the directors may receive consideration for performance rights that exceeds the fair value of those rights, it is doubtful that the excess would be material or be likely to induce the directors to vote in favour of the Share Scheme or recommendations in favour of the Schemes. Each director will receive 1,412,429 new Lotus shares (of a value of approximately $160,000) in exchange for the unvested performance rights upon implementation of the Share Scheme. That consideration is to be viewed in a context in which each director will be removed from office. Further, that any amount by which the consideration for the performance rights may exceed fair value (premium for performance rights) will be a portion, not the whole, of the Lotus shares issued as consideration for performance rights. In that context, for at least three directors any premium for performance rights would be a small portion of the total Scheme Consideration that would receive. For three other directors any premium would be a greater proportion, but nonetheless unlikely, in context, to be an inducement.
(a) Mr Jiandong has a relevant interest in 467,751,682 shares and 4,000,000 unlisted options in respect of which 132,299,911 new Lotus shares would be received upon implementation of the Share Scheme independently of the performance rights;
(b) Mr Ingram has a relevant interest in 10,454,758 shares and 6,000,000 unlisted options in respect of which 3,203,321 new Lotus shares would be received upon implementation of the Share Scheme independently of the performance rights;
(c) Mr Michael Liu has a relevant interest in 15,595,939 shares and 3,500,000 unlisted options in respect of which 4,551,465 new Lotus shares would be received upon implementation of the Share Scheme independently of the performance rights;
(d) Mr Jijing Niu has a relevant interest in 2,250,000 shares and 3,500,000 unlisted options in respect of which 781,426 new Lotus shares would be received upon implementation of the Share Scheme independently of the performance rights;
(e) Mr Mark Syropoulo has a relevant interest in 505,524 shares and 3,500,000 unlisted options in respect of which 288,636 new Lotus shares would be received upon implementation of the Share Scheme independently of the performance rights;
(f) Mr Zhenwei Li has a relevant interest in 3,500,000 unlisted options in respect of which 145,833 new Lotus shares would be received upon implementation of the Share Scheme independently of the performance rights.
53 Otherwise, I do not consider the issue of new Lotus shares for performance rights to be class-creating even though it may create a different interest (or reason) for directors to vote in favour of the Share Scheme and Option Scheme in respect of their shares. The rights that the directors will receive for their performance rights (new Lotus shares) although received in connection with the Schemes are not rights that are, in substance, additional to rights of other shareholders. To the extent that there may be a premium for performance rights, for the reasons already given, I do not consider it to result in 'rights' so dissimilar that the directors (as shareholders) cannot meet with other shareholders in the same class.
54 While I am satisfied on the evidence tendered and on the assumption that A-Cap has properly discharged its duty and responsibility of full and frank disclosure on the hearing of the application that vesting of all performance rights does not raise an obvious reason for refusing to approve the Schemes, I am not satisfied that the explanatory statement, in the form in which A-Cap requested approval, provided adequate disclosure of the directors' interests in the implementation of the proposed Schemes. Having regard to the connection between the directors' recommendations to shareholders and optionholders and disclosure of their interests (including the facts that underpin the potential for payment of a premium for the performance rights), I consider it reasonable and necessary for the explanatory statement to include an explanation of the directors' reason(s), if any, for determining to exercise the discretion to vest all unvested performance rights under the terms of the LTIP Rules. The explanation now given and included in the Scheme booklet as approved is to the effect that 'because the terms of the transactions required that all rights be vested and converted or cancelled on terms to be agreed and the Board did not consider that substantially different terms would be reached by agreement'. That is, the directors considered the consideration that Lotus would pay under the cancellation deed would be the same. It will be a matter for the shareholders and optionholders to consider whether that explanation together with the other matters disclosed in the Scheme booklet has any influence on the manner in which they vote on the resolutions at the meetings. With the amendments to the draft Scheme booklet recorded in the annexure to the orders made on the application, I consider that the disclosure of the directors' interests in the proposed Share Scheme is adequate.