Relevant principles
25 I have been referred to the relevant principles, which are well known, in relation to the convening of a meeting for the purpose of considering a proposed scheme of arrangement.
26 Broadly, the procedure under Pt 5.1 of the Act involves three main steps:
(1) an application to the Court for an order that the company convene a meeting of its members;
(2) if such an order is made, the convening of such a meeting at which a resolution agreeing to the scheme is considered, and perhaps passed; and
(3) if the resolution is passed by the necessary majority (see s 411(4)), an application to the Court for approval of the scheme.
27 This application concerns the first stage, being an application to the Court for an order to convene a scheme meeting. At this first stage, ABR must satisfy the Court of two key matters. First, that it has satisfied the statutory prerequisites to the making of orders to convene and hold a scheme meeting. Second, that it is appropriate for the Court to exercise its discretion in favour of making those orders.
28 The statutory prerequisites of the convening of a scheme meeting are contained in s 411(1) of the Act and I am satisfied they have been met in this instance.
29 In relation to the first stage, s 411(1) of the Act confers a discretion on the Court to make such an order only if certain statutory pre-requisites are met. ABR submits that these pre-requisites have been satisfied in this case.
30 First, as required by s 411(1) of the Act, ABR has made an application in relation to an arrangement that is proposed between a Pt 5.1 body and its members. It is well established that a scheme to effect an acquisition of shares may be an 'arrangement' within the meaning of that section.
31 Second, as required by r 2.4(2) of Federal Court (Corporations) Rules 2000 (Cth), the evidence relied upon by ABR includes an ASIC company extract recording the results of a search of the records of ASIC in relation to ABR carried out no earlier than 7 days before the Originating Process was filed.
32 Third, as required by s 411(2), 14 days' notice of the hearing has been given to ASIC, and ASIC has had a reasonable opportunity to examine the terms of the proposed Scheme and the draft explanatory statement, and to make submissions to the Court.
33 Fourth, as required by r 3.2 of the Rules, the evidence about the proposed chairperson and alternate chairperson of the Scheme Meeting required has been provided.
34 Fifth, and finally, as required by r 3.3(1) of the Rules, the orders I have made annex a copy of the Scheme.
35 Accordingly, the Court's discretion to make the convening orders is enlivened. There are quite a number of authorities that have described and encapsulated the function of a Court at this stage in relation to a proposed scheme of arrangement between members of a company.
36 The Court's function was helpfully summarised, for instance, by Beach J in Re Healthscope Limited [2019] FCA 542; 139 ACSR 608 at [45]:
My function on an application to order the convening of a meeting is supervisory. At this stage I should generally confine myself to ensuring that certain procedural and substantive requirements have been met including dealing with adequate disclosure, with limited consideration of issues of fairness. But having said that, it is appropriate to consider the merits or fairness of a proposed scheme at the convening hearing if the issue is such as would unquestionably lead to a refusal to approve a proposed scheme at the approval hearing, that is, the proposed scheme appears now to be on its face "so blatantly unfair or otherwise inappropriate that it should be stopped in its tracks before going any further" (Re Foundation Healthcare Ltd (2002) 42 ACSR 252 at [44] per French J). But in the present case, in my view there is no issue arising from the Scheme which would unquestionably lead to a refusal to approve the Scheme at the approval hearing. It cannot be said that the Scheme on its face is "so blatantly unfair or otherwise inappropriate that it should be stopped in its tracks before going any further". Put another way, the Scheme is not of such a nature and cast in such terms that if it receives the support of the statutory majorities at the meeting, nevertheless I would not be likely to approve it at the second court hearing.
37 In the recent decision of Re Youfoodz Holdings Ltd [2021] FCA 1081, Middleton J also referred to the principles relevant for consideration at this stage of the scheme process. His Honour referred to the passage I have just extracted and added:
36. It is appropriate to also recall the comments of Hayne J (as a judge of the Supreme Court of Victoria, as his Honour was then) in Re Sonodyne International Ltd (1994) 15 ACSR 494 at 499-500:
…in the end the question that is presented at this stage of the process of a company propounding and implementing a scheme of arrangement is whether the scheme is such that it could reasonably be supposed by sensible business people to be for the benefit of the class concerned. That is, the test in the present case is whether it is reasonable to suppose that sensible business people might consider that the arrangement proposed by the company is of benefit to its members.
I do not consider that that question requires, or in the circumstances of this case permits the court to embark upon a nice analysis of whether the chance that is now offered to members to derive some benefit from their shareholding is likely or unlikely to occur. Of course, there may be cases in which the appearance of benefit to members or creditors is properly classified as illusory but I do not consider that that is this case. It has often been said both in the context of schemes of arrangement and elsewhere that the court is not to substitute its judgment on affairs of business for the judgment of the business people concerned. If the members of this company consider that the chance is worth pursuing then they may choose to vote for it. If they do not, or for some other reason they consider that the scheme should not be approved, then they will vote against it. At the stage of determining whether or not to permit the matter to be put to members, I do not consider that it is right for the court now to conclude that what is proposed is not an arrangement because there is no sufficient prospect of benefit to members. In saying that I am not to be taken as expressing any view of any kind on the matters of business judgment that have been raised and debated in the course of argument beyond saying that I consider that the arrangement is one which could reasonably be supposed by sensible business people to be for the benefit of members as a whole. Even if the requisite majority of members vote in favour of the scheme that will still leave wholly open the question whether the court should in all the circumstances approve of it.
37. Therefore, it is clear that the Court at this stage is not considering whether it will approve the scheme: the enquiry is far more limited to considering whether sensible business people could consider the arrangement to be for the benefit of members as a whole. The Court should be careful not to preclude the members of the company from having the opportunity to consider the scheme.
38 I am satisfied that there is no matter to which my attention has been drawn, or which is revealed by the material, that would justify stopping the process in its tracks. Further, there are no reasons why the discretion should not be exercised favourably to ABR.
39 The detailed, well-structured and thorough written submissions of the Plaintiff are helpful in this respect as the key elements of the discretion are clearly explained. They are, first, whether the Scheme is fit for consideration by members. That is whether the Scheme is of such a nature and cast in such terms that if agreed to at the scheme meeting the Court would be likely to approve the Scheme at the second court hearing. And, secondly, whether the members are to be properly informed as to the nature of the Scheme.
40 I am satisfied for the reasons that are advanced in relation to each of those core elements affecting the discretion of the Court that orders should be made to convene a meeting of ABR shareholders. ABR submitted, and I accept, that the Scheme is fit for consideration by its members and there is no issue which would obviously lead to a refusal by the Court to approval the Scheme at the approval hearing.
41 ABR specifically referred to the following matters for consideration in relation to the discretion:
(1) performance risk;
(2) deemed warranties by ABR shareholders;
(3) Ineligible Foreign Shareholders;
(4) rights attaching to HoldCo securities;
(5) the treatment of ABR options; and
(6) the proposed treatment of Advisory Board share rights.
42 In relation to performance risk, ABR submitted that although HoldCo is not a party to the Scheme and is not directly bound by it, the Court can be satisfied that it will perform its obligations because:
(1) the terms of the Scheme require the provision of the Scheme Consideration before there is any obligation upon Scheme Shareholders to transfer the Scheme Shares to HoldCo; and
(2) as noted above, HoldCo has executed a Deed Poll in favour of Scheme Shareholders binding HoldCo to perform the actions attributed to it under the Scheme, including the provision of the Scheme Consideration
43 In relation to deemed warranties, cl 8.4 of the Scheme provides that each Scheme Shareholder is taken to have warranted to ABR that:
(1) all of their Scheme Shares that are transferred under the Scheme will, at the date of transfer, be fully paid and free from all encumbrances; and
(2) they have full power and capacity to sell and transfer their Scheme Shares to HoldCo.
44 ABR submitted that deemed warranty clauses are commonly found in schemes of arrangement and are acceptable provided they are sufficiently disclosed to shareholders: see, eg, Re Amcor at [56].
45 Further, as I have alluded to above, Ineligible Foreign Shareholders will not receive HoldCo Shares or HoldCo CDIs as Scheme Consideration. Instead, the HoldCo CDIs to which they otherwise would have been entitled will be issued to the Sale Agent and sold. ABR will in turn distribute the net proceeds of the sale to Ineligible Foreign Shareholders in Australian dollars within 10 Business Days after the settlement of the sale of the last of the HoldCo CDIs by the Sale Agent, in full and final satisfaction of the Ineligible Foreign Shareholders' entitlements to the Scheme Consideration.
46 ABR explained that essentially the same mechanism has been considered in a number of cases and held to be appropriate. As Barrett J said in Re Hills Motorway Ltd [2002] NSWSC 897; 43 ACSR 101 at [12]-[13]:
The test is thus not one of identical treatment. It is one of community of interest. The court must ask itself whether the rights and entitlements of the different groups, viewed in the totality of the scheme's context, are so dissimilar as to make it impossible for them to consult together with a view to their common interest. The focus is not on the fact of differentiation but on its effects. The extent and nature of the differentiation must be measured in terms of the effect on the ability to consult together in a common interest or, in other words, the ability to come together in a single meeting and to debate the question of what is good or bad for the constituency as a whole and where the common good lies. Only if the differentiation destroys that ability - the word used by Bowen LJ is "impossible" - does class distinction come to prevail.
In this case, neither of the differentiations can be said at this point to have any such effect. Intrinsic value assured to members if the scheme is approved and implemented is the same for those specially singled out as it is for all others. There are also practical considerations underlying the differentiations that give them a rationale that would be readily understood and accepted in the single forum to which the Sovereign Life test directs attention. As things now stand, I am sufficiently content with the notion that there is no class distinction to see it as appropriate that the scheme go forward for members' consideration in its present form.
47 In Re Amcor, Beach J also considered a similar mechanism and held at [41]:
In my view this proposed treatment of Ineligible Foreign Shareholders under the Scheme accords with common practice adopted in schemes of arrangement where scrip comprises or is a component of the proposed scheme consideration. Moreover, the issuing to a sale agent under a scheme of arrangement of scrip that would otherwise have been issued to ineligible foreign shareholders does not require those shareholders to meet together as a separate class for the purposes of considering the proposed scheme of arrangement.
48 Similarly, in Re Orica Ltd [2010] VSC 231, Davies J held as follows at [14]:
I accept the submission that the proposed treatment of the ineligible shareholders under the scheme does not constitute those shareholders as a separate class for the purposes of s 411 of the Act. I am satisfied that there will be the requisite community of interest, despite the differential treatment. The difference is that ineligible shareholders although entitled to DuluxGroup shares paid for out of the capital reduction and demerger dividend, will receive the proceeds of the sale of those shares on their behalf instead of receiving the shares in specie.
49 In relation to the rights attaching to HoldCo securities, ABR submitted that on implementation of the Scheme, Eligible Shareholders will become holders of HoldCo Shares or HoldCo CDIs (together, HoldCo Securities). As HoldCo is a company incorporated in the State of Delaware, it will not be subject to all of the provisions of the Act to which ABR is currently subject. The rights of holders of HoldCo Securities will instead be governed by the laws of the State of Delaware, including the Delaware General Corporation Law (Delaware Corporation Law), US federal securities laws, the NASDAQ Listing Rules and HoldCo's certificate of incorporation and by-laws.
50 Eligible Shareholders receiving HoldCo Securities in exchange for their ABR Shares may have reduced takeover protection under Delaware and US laws, compared to the protection available under Australian law. However, ABR shareholders resident in Australia may take action to enforce the ABR Constitution or securities laws applicable to ABR in Australian courts, applying Australian law. Such matters have been disclosed to shareholders in the Scheme Booklet.
51 In relation to the treatment of ABR Options under the Scheme, ABR explained that ABR Options will be cancelled in consideration of the grant of equivalent rights to acquire HoldCo Shares (HoldCo Options) on the basis of 1 HoldCo Option for every 10 existing ABR Options held (Option Exchange). There are two issues which can arise for consideration in the scheme context when arrangements of this kind are proposed: first, whether the proposed treatment of the incentives gives rise to the need for separate classes to be created to vote on the resolution to agree to the Scheme; and, second, the appropriateness of any directors who might receive a benefit from such arrangements making a recommendation to shareholders in relation to the proposed Scheme.
52 As to the first issue, ABR submitted that separate class meetings are not necessary or desirable as a result of the proposed treatment of the ABR Options: see, eg, similar approaches in Re Healthscope at [107] and Re Amcor at [86].
53 As to the second issue, ABR submitted that the nature and extent of any additional benefits that it might be said that the ABR directors who are also ABR Option holders may become entitled to if the Scheme is implemented are not such as to make it inappropriate for them to make a voting recommendation to members. Further, and in any event, such arrangements are adequately disclosed in the Scheme Booklet.
54 For the reasons advanced by ABR in relation to each of these matters relevant to the exercise of the Court's discretion to convene the meeting, I am satisfied with the explanations given in the context of this Scheme on behalf of the Plaintiff.
55 A further important element relevant to the exercise of the Court's discretion is whether the members are to be properly informed as to the nature of the scheme. In this regard, I am satisfied that the Scheme Booklet and the notice provisions are adequate for the purposes of allowing the meeting to be convened and for the Scheme to be considered by the members at the meeting to be called.
56 It is significant in that regard that ASIC, having had the opportunity to consider the proposed Scheme and Scheme Booklet, has indicated, as is clear from their correspondence to the directors which is annexed to the Third Duffy affidavit, that it does not seek to raise, at this stage at least, any matters of concern nor to oppose the holding of a meeting for the purpose of considering the Scheme.
57 As the ASIC correspondence makes clear, that is not an endorsement or approval on the part of ASIC of the proposed Scheme. However, it does indicate that ASIC, having been involved in the process and having been consulted, has not expressed any concerns as to matters which might have a bearing upon the exercise of the Court's discretion. In my view, it is therefore relevant in relation to this aspect of the Court's discretion.
58 For those reasons, I have concluded that I should exercise the discretion to make the orders sought in relation to convening a meeting of ABR shareholders. Further, in view of present restraints arising from the COVID-19 pandemic in relation to in-person meetings, particularly large meetings, it is appropriate that the meeting be held virtually via an online platform. I note that there have been some recent examples where the Court has permitted this approach for the convening of a virtual meeting for the purposes of considering and, if thought fit, approving a proposed scheme: see, eg, Re Sienna Cancer Diagnostics Limited [2020] FCA 899 at [110] (Moshinsky J) and GetSwift Limited, in the matter of GetSwift Limited [2020] FCA 1382 at [8] (Yates J).
59 Finally, it is open to me to approve the Scheme Booklet. I do not propose to do so. It seems to me the weight of authority is against that and further, given the nature of the orders that were sought, which are simply to allow for the convening of the meeting, and having regard to the principles I have already expressed about the role of the Court at this point, it seems to me unnecessary to express a view about the adequacy of the explanatory statement contained within the Scheme Booklet. Of course, impliedly I do so by having concluded that the Scheme Booklet, and the information and process to be followed as revealed by the materials filed by the Plaintiff, is sufficient to satisfy the Court that proper and adequate notice and explanation will be given to shareholders for the purposes of their consideration of whether or not to approve the Scheme.
60 Further matters may arise at the second court hearing that bear upon the merits of the Scheme itself. Those matters can be considered at the second court hearing.