DuluxGroup employee incentive arrangements
39 DuluxGroup operates a number of incentive schemes pursuant to which DuluxGroup shares can be issued to executives and employees (Incentive Plans). Under the Implementation Deed, DuluxGroup and Nippon Paint have agreed that all outstanding rights to be issued shares in DuluxGroup will be exercised or deemed to be exercised so as to be able to be voted and participate in the Scheme, and the DuluxGroup directors will exercise their discretions under the Incentive Plans such that, subject to the Scheme becoming effective, shares subject to the plans will vest in the holders and be able participate in the Scheme. A question arises whether there is a need for those shareholders who will receive shares and associated benefits under the Incentive Plans to meet separately as a separate class from those shareholders who do not hold such rights, in order to consider and vote on the proposed Scheme in accordance with the requirements of s 411 of the Act.
40 Sub-sections 411(1) and (4) refer to a compromise or arrangement between, relevantly, members or a class of members. The word "class" is not defined in s 411. As observed by Bowen LJ in Sovereign Life Assurance Co v Dodd [1892] 2 QB 573 at 583:
The word 'class' is vague, and to find out what is meant by it we must look at the scope of the section, which is a section enabling the court to order a meeting of a class of creditors to be called. It seems plain that we must give such a meaning to the term 'class' as will prevent the section being so worked as to result in confiscation and injustice, and that it must be confined to those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to a common interest.
41 In so far as the executive and employee beneficiaries of the Incentive Plans will see their share entitlements vest to enable them to vote on and participate in the Scheme, in my view s 411 does not require them to be treated as a separate class. The shares to which they are or will become entitled are not of a different type than those of other shareholders and they will receive a common benefit from the Scheme. While it might be argued that certain of the benefits under the Incentive Plans will be accelerated if the Scheme is approved, in my view this outcome is not of itself sufficient to place the recipients into a different class, when the Incentive Plans pre-dated the Scheme and were part of the agreed executive and employee remuneration by the company: see for example Re Skilled Group Ltd (No 1) (2015) 113 ACSR 525.
42 There is one aspect of the Implementation Deed which requires further consideration. One of the Incentive Plans is the Long Term Executive Incentive Plan (LTEIP). Under the rules of that plan, the directors may invite eligible employees to acquire shares in the company and receive a loan to finance the acquisition. The recipient of such shares must apply dividends towards repayment of the loan. The directors may include performance or service conditions as a term of the loan which, if satisfied, will result in the forgiveness of a proportion of the loan. The directors also have the discretion to alter such conditions. Further, if a transaction is proposed that may result in a change in control of the company, the directors may decide to forgive an amount or percentage of the loan.
43 The number of shares that are currently subject to the LTEIP is approximately 7.5 million, which represents about 1.9% of the company's shares. Under the Implementation Deed, and exercising its discretion under the rules of the LTEIP, DuluxGroup will forgive 30% of each LTEIP loan, subject to the Scheme becoming effective. The Scheme Booklet discloses that the value of the loan forgiveness is approximately $12.2 million, which represents about $1.60 per LTEIP share. One way of viewing the arrangements is that, if the Scheme becomes effective, the holders of the LTEIP shares will receive the Scheme Consideration ($9.37 per share) plus the loan forgiveness of $1.63 per share. Thus, a question arises whether that additional benefit is such as to constitute the holders of the LTEIP shares a different class to other members.
44 The relevant question is whether the legal rights and obligations of members are so dissimilar as to prevent them consulting together with a view to a common interest. Divergent commercial interests extrinsic to share membership do not warrant separate class meetings: Re NRMA Insurance Ltd (No 1) (2000) 156 FLR 349 at [79] per Santow J; 33 ACSR 595; Re Opes Prime Stockbroking Ltd (2009) 179 FCR 20 at [64] per Finkelstein J. Even if members receive different treatment or benefits under or as a result of the Scheme, it does not necessarily follow that separate class meetings are required. It is a question of degree. As observed by Barrett J in Re Hills Motorway Ltd (2002) 43 ACSR 101 at [12]; (2003) 21 ACLC 35:
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.
45 The courts have also recognised that the "splitting" or "fracturing" of classes into smaller groups can undermine the object of obtaining decision by a large majority, by giving one group an effective veto over the wishes of the majority: Nordic Bank Plc v International Harvester Australia Ltd [1983] 2 VR 298 at 302; Re NRMA Insurance Ltd (No 1) (2000) 156 FLR 349 at [80]; 33 ACSR 595; Re Opes Prime Stockbroking Ltd (2009) 179 FCR 20 at [66].
46 Circumstances not dissimilar to the present were considered by the court in Re Cashcard Australia Ltd (2004) 48 ACSR 738; [2004] FCA 223 and Re Foster's Group Ltd (No 2) [2011] VSC 547. In each case the court concluded that additional benefits to be received by executives of the scheme company if the scheme was approved were not sufficient to constitute those executives as a separate class. The same conclusion is warranted in the present case. In forming that view, I have taken into account the facts that: the LTEIP pre-dated the Scheme and is an ordinary part of the remuneration arrangements for eligible executives; under the rules of the LTEIP, the directors had a pre-existing discretion to forgive a percentage of the share loans and on a number of previous occasions had forgiven up to 30% of the loans; the rules of the LTEIP also anticipated that the directors may exercise their discretion to forgive loans if there was a change in control of the company; the shares the subject of the loans constitute a relatively small proportion of the company's issued share capital; while the additional benefit that will accrue to holders of the LTEIP shares is not immaterial, it is a modest amount in comparison to the Scheme Consideration.
47 Although I do not consider it necessary to order separate class meetings, the fact that the holders of LTEIP shares receive an additional benefit (loan forgiveness) if the Scheme is approved can be taken into account in deciding whether to approve the Scheme at the second court hearing: Re Chevron (Sydney) Ltd [1963] VR 249 at 255; Re Cashcard Australia Ltd (2004) 48 ACSR 738 at [8]; [2004] FCA 223. Counsel for DuluxGroup indicated that the company would track the voting by holders of LTEIP shares so that the Court can take this factor into account should it become necessary at the second court hearing. The issue will become irrelevant if the Scheme achieves strong support at the meeting.