Ashton Millson Investments Ltd & Ors v Colonial Ltd & Anor [2003] VSCA 188

12. On 10 March 2000, the first-named respondent ("Colonial") and the second-named respondent ("Commonwealth Bank") agreed to merge. Schemes of arrangement were subsequently made and approved dealing with ordinary shares, preference shares and options. The effect of the schemes was that Colonial was to become a wholly owned subsidiary of Commonwealth Bank.

15. This proceeding is concerned with the scheme relating to ordinary shares ("the ordinary scheme"). The ordinary scheme proposed that all the ordinary shares in Colonial would be transferred to Commonwealth Bank in exchange for Commonwealth Bank shares. The holders of Colonial shares were to receive seven Commonwealth Bank shares in exchange for 20 Colonial shares. On 12 April 2000, Commonwealth Bank executed a deed poll offering to acquire Colonial shares in

accordance with the provisions of the ordinary scheme.

19. Clause 1.1 of the ordinary scheme provided that the consideration for each Colonial share was 0.35 of a Commonwealth Bank share. Clause 5.2 provided:

"5.2 If the number of Scheme Shares held by a Scheme Shareholder is such that the aggregate entitlement of that Scheme Shareholder to Commonwealth Bank Shares is less than one whole Commonwealth Bank Share, the entitlement of that Scheme Shareholder will be rounded up to one whole Commonwealth Bank Share."

Clause 6 provided for the registration of transfers of Colonial shares to Commonwealth Bank. The relevant provisions of the clause were:

"6.1 For the purpose of establishing who are Scheme Shareholders, dealings in Colonial Ordinary Shares will only be recognized if: (a) in the case of dealings of the type to be effected using CHESS, the transferee is registered in the Register as the holder of the relevant Colonial Ordinary Shares by the Merger Record Date; and (b) in all other cases, if registrable transmission applications or transfers in respect of those dealings are received on or before the Merger Record Date at the place where the Register is kept. 6.2 Colonial must register registrable transmission applications or transfers of the kind referred to in clause 6.1(b) by the Merger Record Date. 6.3 Colonial will not accept for registration or recognize for any purpose any transmission application or transfer in respect of Colonial Ordinary Shares received after the Merger Record Date. ... 6.5 All statements of holding for (Colonial) Shares will cease to have effect from the Merger Record Date as documents of title in respect of such shares. As from the Merger Record Date, each entry current at that date on the Register relating to Scheme Shares, will cease to be of any effect other than as evidence of entitlement to Commonwealth Bank Shares pursuant to this Scheme in respect of the Scheme Shares relating to that entry."

The "Merger Record Date" became 5 p.m. on 8 June 2000.

26. Clause 7 of the ordinary scheme contemplated that trading in Colonial shares would cease soon after the Court approved the scheme. The clause provided, in part:

"7.1 It is expected that suspension of trading on ASX in Colonial Ordinary Shares will occur from the commencement of the Business Day following the day on which Colonial notifies ASX of the approval of the Scheme by the Court. 7.2 On the first Business Day after the Effective Date, Colonial will apply for termination of the official quotation of Colonial Ordinary Shares on ASX."

The "Effective Date" was the date upon which the order of the Court approving the ordinary scheme was lodged with the Australian Securities Commission. On 1 June 2000 the ordinary scheme was approved by the Supreme Court of Victoria. A copy of the order was lodged with the Commission on the same day. On 5 July 2000 Colonial requested the Australian Stock Exchange to de-list its shares and the exchange complied with the request on the following day.

31. Clause 3.2 of the deed poll provided that in consideration of the transfer of each Colonial share, Commonwealth Bank would issue and allot to each transferee "the ordinary scheme Consideration", a term defined in the glossary to the scheme booklet as:

"... 7 New Commonwealth Bank Shares for every 20 Colonial Ordinary Shares, provided that if this results in a Scheme Shareholder being entitled to a fractional entitlement to a Commonwealth Bank Share, that fractional entitlement will be rounded up if it is 0.5 or greater or rounded down if it is less than 0.5 (unless the number of Scheme Shares held by a Scheme Shareholder is such that the aggregate entitlement of that Scheme Shareholder is less than one whole Commonwealth Bank Share, in which case the entitlement of that Scheme Shareholder will be rounded up to one whole Commonwealth Bank Share)."

35. In May 2000, the price of one Colonial share was approximately $8 and the price of one Commonwealth Bank share was approximately $27. One Justin Sykes, a young college lecturer in electronics in London, learned of the ordinary scheme and thought that he could profit from its terms by acquiring a large number of Colonial shares, splitting them into holdings of single shares, and exchanging each $8 Colonial share for a $27 Commonwealth Bank share. He enlisted the aid of Bradley Maguire, a computer programmer in Western Australia, to translate the thought into action. Maguire's company, Gothic Software Pty. Ltd., purchased 120,000 Colonial Shares. Sykes incorporated 91 companies in New Zealand. The shares were transferred by Gothic Software Pty. Ltd. to the New Zealand companies and to three individuals in 120,000 separate combinations of joint shareholdings so that no two shares were held in the same interest. The transfers were effected by 120 instruments each containing a schedule listing 1,000 share transferees.

38. On 1 June 2000, the duly stamped instruments of transfer were lodged at the share registry of Colonial for registration. Notwithstanding that the transfers were registrable[1], on 6 June 2000 the directors of Colonial refused to register the transfers, relying on article 5.6 of Colonial's constitution and ASX Listing Rule 8.10.1(h), which provided:

"5.6 The Directors may request SCH to apply a holding lock to prevent a transfer of CHESS Approved Securities or decline to register any transfer of shares if the Listing Rules permit the Company to do so." "8.10 An entity must not in any way prevent, delay or interfere with the generation of a proper SCH transfer or the registration of a paper-based transfer in registrable form of quoted securities. 8.10.1 However, the entity may apply, or ask SCH to apply, a holding lock to prevent a proper SCH transfer, or refuse to register a paper-based transfer, in any of the following circumstances. ... (h) If the transfer is paper-based, registration of the transfer will create a new holding which at the time the transfer is lodged is less than a marketable parcel."

The term "marketable parcel" was defined as a parcel of shares valued at not less than $500.

43. The transferees brought proceedings in the Supreme Court for orders pursuant to ss.175 and 1094 of the Corporations Law requiring Colonial to register the transfers nunc pro tunc as at the Merger Record Date and requiring the Commonwealth Bank to issue and allot Commonwealth Bank shares. The appellants contended that clause 6.2 of the ordinary scheme obliged Colonial to register the transfers and excluded the power of the directors to refuse to register a transfer of less than a marketable parcel which was conferred by the articles and listing rules. Clause 6 of the ordinary scheme was described as an exclusive code for dealing in Colonial shares in the short period before dealings ceased. The word "must" in clause 6.2 of the ordinary scheme imposed a mandatory obligation on Colonial to register transfers that complied with clause 6.1(b), an obligation which was inconsistent with article 5.6 and listing rule 8.10.1(h). The inconsistency was to be resolved in favour of the provisions of the ordinary scheme.

46. The trial judge rejected these contentions. Her Honour held that clause 6.2 of the scheme was not inconsistent with the articles and listing rules. The word "must" in clause 6.2 required Colonial to register transfers by a particular date, but otherwise was not intended to override the provisions of the articles and listing rules governing registration of transfer.

49. The main thrust of the appellants' case on appeal was that the provisions of clause 6 of the ordinary scheme solely determined entitlement to registration of transfers of Colonial shares in the period between the date of approval of the ordinary scheme and the Merger Record Date, some seven days: there was no room for the continued existence of a power to refuse registration. The appellants relied upon the absence of any reference in clause 6 to a power to refuse registration and the imposition in clear terms of a duty to register registrable transfers. According to the appellants, article 5.6 was inconsistent with clause 6.2 of the ordinary scheme. A scheme of arrangement will override articles of a company where there is inconsistency.[2] The provisions of the ordinary scheme thus ousted article 5.6, and listing rule 8.10 no longer applied once the Colonial shares ceased to be securities quoted on the stock exchange.

52. The appellants' argument assumed that the purpose of clause 6.2 of the ordinary scheme was to remove from the constitution of Colonial and the listing rules the power of the directors to reject the registration of transfers. The context in which the sub-clause appears, however, suggests that it was concerned rather to create a duty to register transfers by a particular time. Clause 6.1 established the Merger Record Date as the date from which registrable dealings in Colonial shares would not be recognized. Clause 6.3 emphasized the requirement by prohibiting Colonial accepting for registration any transfers of Colonial shares received after the Merger Record Date.

55. The position that existed prior to the approval of the ordinary scheme was that Colonial was required to register a transfer within three business days after the date upon which the transfer was lodged. Article 5.3 provided only that upon the lodging of an executed transfer accompanied by certain information Colonial "must ... register the transferee as a shareholder." The article did not require registration to be effected within a particular period of time. Listing rule 8.21 and Appendix 8A to the rules filled the gap by requiring registration "within three business days after the transfer is lodged." This leisurely procedure did not suit the ordinary scheme. Clause 1.1 defined Scheme Shareholders as those registered in Colonial Share Register as the holder of shares "as at the Merger Record Date", and by clause 3.1 of the deed poll Commonwealth Bank offered to acquire all Colonial Ordinary Shares "on issue as at the Merger Record Date". Under the regime established by the articles and listing rules, a person who lodged a registrable transfer on the Merger Record Date might not achieve the status of a Scheme Shareholder, for registration might occur within three business days after the Merger Record Date.

58. In my opinion, clause 6.2 of the ordinary scheme was intended to alter that position by obliging Colonial to register all transfers lodged on or before the Merger Record Date by that date, but otherwise was not intended to affect the operation of the articles and listing rules by ousting the provisions in respect of the registration of transfers of shares. Although "'must' is a word of absolute obligation"[3], the obligation inherent in the word in clause 6.2 was limited to the time within which transfers were to be registered. Unless Colonial chose to exercise its power to refuse to register a transfer or the transfer was caught by some other provision of the articles or rules, Colonial was obliged to register it by the Merger Record Date.

61. A similar use of the word "must" was employed in article 5.5 of Colonial's constitution. The article provided:

"5.5 The Company must register all registrable transfer forms, split certificates, renunciations and transfers, issue certificates and transmission receipts and mark or note transfer forms without charge except where the issue of a certificate is to replace a lost or destroyed certificate."

The word "must" in this article did no more than create an obligation in Colonial to register instruments without charge, and did not oust the power to refuse registration contained in article 5.6. In my view, clause 6.2 of the ordinary scheme was no more inconsistent with article 5.6 than was article 5.5.

66. If clause 6.2 of the ordinary scheme is construed in the manner contended for by the appellant, the result is that transferees of less than marketable parcels of Colonial shares employing either the electronic system for clearing and settling of transactions known as the CHESS system or the services of brokers could not achieve registration, while transferees of like parcels employing the relatively unusual paper-based system would be entitled to registration.

69. The SCH Business Rules took effect as a contract under seal between the securities clearing house and each issuer, between the clearing house and each participant (relevantly, a broker), between each issuer and each participant and between participants.[4] Business Rule 5.7.1 provided:

"5.7.1 Unless expressly permitted under an Issuer's constitution, a Participant shall not initiate a Transfer of Securities if, by giving effect to that Transfer, a new CHESS, Issuer Sponsored or Certificated Holding of less than a marketable parcel will be established."

The rule would have prevented the appellants turning a holding of 120,000 Colonial ordinary shares into 120,000 individual holdings of Colonial ordinary shares. The ASX Business Rules would have produced the same result if Colonial ordinary shares had ceased to be CHESS approved securities prior to the Merger Record Date. ASX Business Rule 4.15.1 provided:

"(1) For the purposes of this Rule: `transfers' or `renunciations' are in relation to non CHESS Approved Securities and shall include `split transfers' and `split renunciations'. ... (4) Unless permitted by an Issuer's constitution, a Broker shall not in respect of a purchase of Securities lodge a transfer of Securities which, if registered, would result in a buying client holding less than a Marketable Parcel of those Securities."

75. Accordingly, a dealing contemplated by clause 6.1(a) of the ordinary scheme by the CHESS system could not have produced a transfer of shares which would result in the transferee holding less than a marketable parcel. Similarly, if Colonial ordinary shares ceased to be CHESS approved securities prior to the Merger Record Date, a broker would have been prohibited from lodging a transfer of a non-marketable parcel of Colonial ordinary shares, although the transaction was contemplated by clause 6.1(b) of the ordinary scheme. Yet, so the appellants contended, a paper-based transfer of less than a marketable parcel of Colonial ordinary shares for which a broker was not employed was permitted. In my view, clause 6.2 of the ordinary scheme should not be construed so as to produce such a result in the absence of clear and unmistakable language which compels it.

78. The shares comprised a collection of rights and obligations relating to an interest in Colonial.[5] The content of those rights and obligations depended upon the provisions of the Corporations Law, including s.180[6], which made Colonial's constitution terms of a contract between Colonial and its members. The restrictions on transfer contained in the articles[7] in part defined the property represented by the shares rather than being something external that was imposed on a pre-existing item of property.[8] In my opinion, clause 6.2 of the ordinary scheme was not intended to abrogate the rights and obligations which defined the property constituted by the shares.

81. For the foregoing reasons I agree with the trial judge that clause 6.2 of the ordinary scheme did not override article 5.6 or listing rule 8.10.1(h), and accordingly, the directors of Colonial were entitled to refuse to register the transfers lodged by the appellants.

[1] The transferor held the shares at the time of transfer and the transfers were in a proper form executed by the registered proprietor, were stamped and complied with Colonial's articles.

[2] Re Glendale Land Development Ltd (In Liq.). [1982] 2 N.S.W.L.R. 563 at 568 per McLelland, J. Cf. Re International Harvester Co. of Australia Pty. Ltd. [1953] VicLawRp 90; [1953] V.L.R. 669 at 675 per Martin, J.; Australian Securities Commission v. Marlborough Gold Mines Ltd. [1993] HCA 15; (1993) 177 C.L.R. 485 at 501-2 per Mason, C.J., Brennan, Dawson, Toohey and Gaudron, JJ.; Re Theatre Freeholds Ltd. (1996) 132 F.L.R. 235 at 243 per Young, J.; Re NRMA (No.2) Ltd [2000] NSWSC 408; (2000) 34 A.C.S.R. 261 at 289-90 per Santow, J.

[3] Posner v. Collector for Interstate Destitute Persons (Victoria) [1946] HCA 50; (1946) 74 C.L.R. 461 at 490 per Williams, J. Williams, J. dissented, but his difference of opinion with the majority did not involve the meaning of the word "must". See also Keller & Anor. v. Bayside City Council [1996] VicRp 23; [1996] 1 V.R. 356 at 382-3 per Batt, J.

[4] Section 779G(1) of the Corporations Law. See now s. 822C of the Corporations Act 2001.

[5] Archibald Howie Pty. Ltd. v. Commissioner of Stamp Duties (N.S.W.) [1948] HCA 28; (1948) 77 C.L.R. 143 at 156 per Williams, J.

[6] Now s.140 of the Corporations Act 2001.

[7] In addition to article 5.6, see also articles 5.7(a), (b) and (c), 5.13, 5.16 and 11.31. See also ASX Listing Rules 8.10(a) to (g) and 8.12, s.1091D of the Corporations Law (now s.1071B of the Corporations Act 2001.)

[8] Ford's Principles of Corporations Law Vol 1, para. 17.220.