Australian Pharmaceutical Industries Limited, in the matter of Australian Pharmaceutical Industries Limited [2022] FCA 103

BEACH J: 1 Australian Pharmaceuticals Industries Limited (API) has applied for orders under ss 411(1) and 1319 of the Corporations Act 2001 (Cth) to convene and hold a meeting of its shareholders to consider a proposed scheme of arrangement. The commercial purpose of the Scheme is to effect the acquisition of API by Wesfarmers Limited via its wholly-owned subsidiary, WFM Investments Pty Ltd (WFM). The Scheme shares are API shares held at the Scheme record date, other than those held by any excluded shareholder, being Wesfarmers Limited and any subsidiary of Wesfarmers. The Scheme record date is anticipated to be 29 March 2022. 2 If the Scheme is implemented, all of the Scheme shares will be transferred to WFM and, in consideration, each Scheme shareholder will receive a cash payment of $1.53 per Scheme share, less the amount of any special dividend declared and paid by API. 3 The directors of API have unanimously recommended that API shareholders vote in favour of the Scheme, and all API directors intend to vote any API shares held or controlled by them in favour of the Scheme, in the absence of a superior proposal, as defined in the Scheme Implementation Deed entered into by API, Wesfarmers and WFM on 8 November 2021 (SID). 4 WFM currently holds 19.3% of the shares in API. These shares are not Scheme shares and will not participate in the Scheme or be voted at the Scheme meeting. 5 An independent expert report has been prepared by Grant Thornton Corporate Finance Pty Ltd. In that report, Grant Thornton has concluded that the Scheme is fair and reasonable and in the best interests of API shareholders, in the absence of a superior proposal. The basis for this conclusion is that the value of the Scheme consideration is within the assessed value range of API shares of between $1.48 and $1.78 per share. 6 A draft of the Scheme Booklet was lodged with ASIC on 28 January 2022. The Scheme Booklet includes the explanatory statement required by ss 411(2)(b)(i) and 412(1). 7 On 11 February 2022, ASIC provided the relevant s 411(17)(b) letter to the directors of API. Also on that day, the ACCC stated that it would not intervene in the proposed acquisition.

API, Wesfarmers and WFM 8 API is a public company limited by shares that are listed on the ASX. It is an Australian pharmaceutical distribution, health and beauty services company. API supplies health and beauty retail products and services to consumers. API operates a retail and franchise business through its Priceline and Priceline Pharmacy network. API also provides wholesale distribution of pharmaceutical, medical, health, beauty and lifestyle goods to pharmacies. 9 API has 492,656,035 ordinary shares together with 6,611,351 performance rights (API performance rights). 10 Wesfarmers is a public company limited by shares that are listed on the ASX. Wesfarmers has diverse business operations, including various retail businesses, and it is a manufacturer and distributor of chemicals and fertilisers, a producer and distributor of gas, and a distributor of industrial and safety products. 11 WFM was incorporated on 25 June 2021 and is a wholly-owned subsidiary of Wesfarmers. As noted, WFM has 19.30% of the shares in API. 12 As I have said, on 8 November 2021, API, Wesfarmers and WFM entered into the SID, whereby WFM agreed to acquire all of the Scheme shares by means of a scheme of arrangement. The SID provides that API is to propose and implement the Scheme, and that WFM will assist API to propose and implement the Scheme on the terms of the SID.

Scheme consideration 13 The Scheme provides that the Scheme consideration payable by WFM to each Scheme shareholder is $1.55 cash per Scheme share, as adjusted in accordance with the SID. 14 The SID provides that the Scheme consideration will be reduced by the cash amount of any "Permitted Dividend", defined as a final dividend in respect of the financial year ended 31 August 2021 (ordinary dividend), and any other dividend (special dividend), in each case such dividend being declared by API and paid to API shareholders on or before the implementation date of the Scheme, and provided that the maximum aggregate amount payable per API share in respect of all such dividends is $0.05 per share. 15 On 28 October 2021, the API board announced that it had decided to pay an ordinary dividend, being a fully franked final dividend of $0.02 per API share in relation to the financial year ended 31 August 2021. The ordinary dividend was paid on 15 December 2021 to those API shareholders on the register on 12 November 2021. The ordinary dividend was not conditional on the Scheme and was paid irrespective of whether the Scheme proceeds. 16 Accordingly, the Scheme consideration per Scheme share payable by WFM to Scheme shareholders will be $1.53 per Scheme share, less the amount of any special dividend declared and paid before the implementation date. 17 The API board intends to pay a fully franked special dividend of $0.03 per API share prior to the implementation of the Scheme, if the Scheme is approved by API shareholders and the Court. The final decision will depend upon a number of factors, including the availability of franking credits, the requirements of the Act and API having obtained a draft class ruling from the ATO in relation to the tax implications of the Scheme. The decision of the API directors in relation to a special dividend will be communicated to API shareholders by way of an ASX announcement before the second court hearing. 18 If the Scheme becomes effective, those Scheme shareholders who received the ordinary dividend, any special dividend that the API Board decides to pay and the Scheme consideration will, in aggregate, receive $1.55 per Scheme share. 19 The Scheme provides that by no later than the business day before the implementation date, WFM is to deposit an amount equal to the aggregate amount of the Scheme consideration into the relevant trust account. Now WFM is not a party to the Scheme, and so its obligations cannot be directly enforced against it by API shareholders. But under the SID, WFM agreed that, subject to the Scheme becoming effective, it will provide or procure the provision of the Scheme consideration in accordance with the Scheme and a deed poll. WFM has now executed a deed poll in the required form in which it has undertaken in favour of each Scheme shareholder to deposit, or procure the deposit, of an amount equal to the aggregate amount of the Scheme consideration payable to all Scheme shareholders into a trust account operated by API by no later than the business day before the implementation date. So, in summary, there is no performance risk. 20 Now there are a number of conditions precedent to the SID and to the Scheme. There is only one that I need mention concerning regulatory approvals. The condition requiring ACCC approval or at least a statement of non-intervention has now been satisfied.

Relevant principles 21 The principles which apply at this first stage are well-known. They were recently summarised by me in Re RXP Services Limited [2021] FCA 38 at [18]: Now as I have said on more than one occasion, 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, but 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). 22 It is not the Court's role to usurp the shareholders' decision whether to agree to a scheme by attempting to intrude its own commercial judgment. The question whether or not to accept particular consideration for shares is quintessentially a commercial matter for the members to assess, and they ought not be prevented from having the opportunity to do so, provided that the Court can be satisfied that they are acting on sufficient information and with time to consider what they are voting on. 23 Therefore, if the arrangement is one that seems fit for consideration by the meeting of members, and is a commercial proposition likely to gain the Court's approval if passed by the necessary majorities, then orders should be made to convene the meeting. 24 The Court's task at this first hearing is to assess, first, whether the statutory prerequisites to the making of orders convening a meeting have been met and, second, whether it is appropriate for the Court to exercise its discretion in favour of making those orders. 25 Now in my view all relevant statutory prerequisites have been satisfied in this case. Further, the information in the Scheme Booklet has been subject to thorough verification processes, such that I can be satisfied that it is accurate, that no material facts or considerations have been omitted, and that it is not misleading or deceptive. Moreover, it is necessary for the Scheme Booklet to be registered by ASIC before being sent to API shareholders. 26 In summary, my discretion to make the convening orders has been enlivened.

Exercise of discretion 27 The relevant discretionary considerations involve two main questions being, first, whether the Scheme is fit for consideration by the members and second, whether the members are to be properly informed as to the nature of the Scheme. 28 In my view, the Scheme is fit for consideration by API's members. 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. There is no issue arising from the Scheme which would unquestionably lead to a refusal by the Court to approve the Scheme at the approval hearing. And it cannot be said that the Scheme is on its face so blatantly unfair or otherwise inappropriate that it should be stopped in its tracks before going any further. It is relevant to note that the Scheme Booklet contains a recommendation from the API directors that API shareholders vote in favour of the Scheme, and a statement that all directors of API intend to vote any API shares they hold in favour of the Scheme. In addition, the Scheme Booklet annexes the independent expert report stating that the Scheme is fair and reasonable and in the best interests of shareholders. 29 Now in the context of addressing this first question of whether the Scheme is fit for consideration by the members, API has raised particular features being: (a) performance risk; (b) exclusivity arrangements; (c) break fee; (d) performance rights and director benefits; (e) special dividend; (f) shareholder warranties; and (g) the purpose of the Scheme. 30 In my view none of these matters gives rise to any concern that the Scheme is not fit for consideration by API's members in the requisite sense. I do not propose to discuss issues (a) to (c) and (f) save to say that the break fee of $7.738 million may be a little higher than 1% of the relevant equity value. If the API performance rights are not counted as equity securities in calculating the equity value of API, then the equity value is approximately $763.3 million and the break fee is marginally more than 1% of this equity value. But this does not concern me. Let me address issues (d), (e) and (g).

Performance rights and director benefits 31 API operates incentive plans under which performance rights are offered to senior executives and key employees. As at or shortly prior to 11 February 2022, API had a total of 6,611,351 API performance rights on issue, comprising: (a) 1,487,711 unvested API performance rights under the 2019-2022 LTIP; (b) 2,483,900 unvested API performance rights under the 2020-2023 LTIP; (c) 352,510 unvested API performance rights under the 2021 STIP; and (d) 2,287,230 unvested API performance rights under the 2021-2024 LTIP. 32 Each API performance right entitles the holder to receive one API share after vesting, or a cash payment in lieu of an API share in certain circumstances, subject to the satisfaction of certain conditions. 33 Under the SID, API must ensure that all API performance rights have either lapsed or vested and converted into API shares such that there are no outstanding API performance rights on issue as at the Scheme record date. In order to comply with this obligation, API must cause all of the unvested API performance rights to vest and, following such vesting, cause the relevant number of API shares to be issued or transferred to each of the relevant former holders of API performance rights in sufficient time to allow the relevant former holders of the API performance rights to participate in the Scheme in respect of those API shares. Alternatively, API must make a cash payment to the relevant holders of API performance rights for an amount that does not exceed the Scheme consideration for the number of API shares to which those API performance rights relate, and ensure that all such API performance rights are cancelled prior to the effective date. Alternatively, API must take any action as may otherwise be necessary to cancel the API performance rights in respect of which WFM consents in writing. 34 In accordance with these obligations, the API board has determined that in respect of all API performance rights except for those which may be granted under the 2022 STIP, subject to and with effect from the Scheme becoming effective, all unvested API performance rights will be cancelled in exchange for a cash amount equivalent to the Scheme consideration, up to a maximum cash amount of $1.53 per share which would have been issued had the relevant performance right issued, less the amount of the special dividend that the API directors decide to pay. Further, the API board has determined that in respect of any API performance rights which may be granted under the 2022 STIP, the API board retains the discretion to make awards to senior executives and key employees of the API group in respect of awards under the 2022 STIP in the ordinary course, provided such discretion is exercised in compliance with the relevant plan rules and other terms governing the relevant awards. In the event that a change of control in API occurs, any 2022 STIP outcomes will be satisfied by a cash payment with no deferred share component. No API performance rights have as yet been granted under the 2022 STIP. 35 Mr Richard Vincent, the Chief Executive Officer and Managing Director, holds 2,213,741 API performance rights, which were issued under various LTIP and STIP, but not under the 2022 STIP. So, subject to the Scheme becoming effective, all of his API performance rights will be cancelled for cash consideration of up to $3,431,298.55. 36 Other than those API performance rights, there are no other payments or benefits proposed to be made or given to any of the API directors in connection with, or conditional on the outcome of, the Scheme, including no payment as compensation for the loss of, or consideration for or in connection with his or her retirement from, office in API as a result of the Scheme, other than as set out in their existing employment agreement or as a result of them participating in the Scheme as a Scheme shareholder. 37 Further, other than Ms Janine Allis, who holds 1,000 Wesfarmers shares, none of the API directors has any interest in securities of Wesfarmers or any member of the Wesfarmers' group. 38 Now the proposed treatment of the API performance rights gives rise to two potential issues. The first issue concerns classes, and the second concerns the appropriateness of Mr Vincent making a recommendation to shareholders in relation to the Scheme. 39 As to the first issue, I have consistently held that members with existing performance rights which are to be cancelled in return for a cash payment or converted into shares which will participate in the Scheme do not constitute a separate class for the purposes of voting on the Scheme. In Re Healthscope Ltd (2019) 139 ACSR 608, I engaged in a review of the relevant authorities on classes at [105] to [120] and said (at [106]): The well-established test for identifying a class for the purposes of a scheme of arrangement is that expressed by Bowen LJ in Sovereign Life Assurance Co v Dodd [1892] 2 QB 573 at 583. Sovereign Life Assurance concerned a creditors' scheme of arrangement, but the test enunciated by Bowen LJ has been adopted ever since in members' schemes (Re Foster's Group Limited [2011] VSC 93 at [15] per Ferguson J). Bowen LJ expressed the class test in the following terms: …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 their common interest… 40 I also expressed the relevant question as being whether the rights of the relevant shareholders there under consideration were "so dissimilar from the rights of the other Healthscope shareholders as to make it impossible for them to consult together with a view to their common interest" (at [107]). 41 In Re Amcor Limited [2019] FCA 346, I considered the proposed treatment of employee incentive arrangements under the relevant transactions and held that no separate class meetings were necessary or desirable. I noted that this was because (at [86]): [t]he holders of incentives who are also Amcor shareholders will participate in the Scheme on the same basis and receive the same consideration as Amcor shareholders who are not holders of incentives. That is, all shareholders are being treated equally under the Scheme. There is no additional benefit being offered by New Amcor to these shareholders under or in connection with the Scheme. 42 I applied these principles in Re Citadel Group Limited [2020] FCA 1580 in relation to performance rights, in Re DWS Limited [2020] FCA 1590 in relation to a potential benefit to a director in the form of a consultancy agreement, and in Re RXP in relation to performance rights and proposed cash payment incentives. In each case I held that the authorities do not support any requirement for a separate scheme meeting in respect of the matters raised. The considerations discussed apply with equal force to the Scheme, such that separate class meetings are not necessary or desirable as a result of the proposed treatment of the API performance rights. 43 As to the second issue, in a number of recent decisions I have considered whether a director who is to receive an additional benefit if a Scheme is approved should make a recommendation to members about voting in favour of the Scheme. 44 Now in some cases, other judges have taken the view that, as a general rule, a director who will receive such a benefit should decline to make a recommendation to shareholders as to how they should vote. But in other cases, some judges have taken a different approach, holding that the interests of directors ought not prevent them from making a voting recommendation to shareholders where that interest is sufficiently disclosed in the scheme booklet. 45 The second approach is to be preferred for the reasons discussed in Re DWS. In my view the interests of directors ought not prevent them from making a voting recommendation to shareholders where that interest is sufficiently disclosed in the scheme booklet. 46 In the present case, the interests of Mr Vincent and the API directors are not of such a nature that they ought to preclude Mr Vincent or any API director from making a voting recommendation to members. In any event, the interests are fully and prominently disclosed in the Scheme Booklet. Accordingly, disclosure has been more than adequate and preclusion from making a recommendation is unnecessary.

Special dividend 47 As I have indicated, the SID provides that API may in its absolute discretion declare and pay a "Permitted Dividend", defined to mean a final dividend in respect of the financial year ended 31 August 2021 (ie, the ordinary dividend) and any other dividend (ie, the special dividend) declared or determined by API and paid by API in accordance with the SID, provided that, inter-alia, the maximum aggregate amount paid or payable by API per API share in respect of all such dividends is $0.05 per API share. The SID provides that if API announces, declares or pays a permitted dividend, the permitted dividend may be franked to the maximum extent possible, and the permitted dividend is to be paid from profits, retained earnings or distributable reserves (or a combination of all or some of them) of the API group existing prior to the declaration of such permitted dividend and otherwise in accordance with the Act. 48 The SID provides that the scheme consideration will be reduced by the cash amount of any permitted dividend. As noted above the ordinary dividend of $0.02 per API share was paid on 15 December 2021, was not conditional on the Scheme and was paid irrespective of whether the Scheme proceeds. Accordingly, the Scheme consideration per Scheme share payable by WFM to Scheme shareholders will be $1.53 per Scheme share, less the amount of any special dividend that the API board decides to pay and pays before the implementation date. The API board currently intends to pay a fully franked special dividend of $0.03 per API share prior to implementation of the Scheme, if the Scheme is approved by API shareholders and the Court. 49 Now if the special dividend is declared and paid by API, there may arise a question as to whether financial assistance is being given by API to WFM to acquire the Scheme shares. However, the payment of the special dividend would not amount to financial assistance. 50 Section 260A(1)(a) provides that a company may financially assist a person to acquire shares in the company only if, relevantly in this case, giving the assistance does not materially prejudice (i) the interests of the company or its shareholders or (ii) the company's ability to pay its creditors. In considering the effect of this provision in relation to the special dividend, two questions arise. First, would the special dividend if declared and paid constitute financial assistance within the meaning of the Act? Second, if payment of the special dividend would constitute financial assistance, is it nevertheless permitted by s 260A(1)(a)? 51 In my view payment of the special dividend would not constitute financial assistance, but if it did, it would nevertheless be permitted by s 260A(1)(a). 52 As to the first question, the words "financial assistance" have no technical meaning. The task is to examine the commercial realities of the transaction to determine whether it can properly be described as the giving of financial assistance by the company. In my view there is no such financial assistance. The effect of the payment of the special dividend is merely to reduce the consideration payable for the Scheme shares pursuant to the Scheme in a manner that reflects the cash outflow from API and the consequential reduction in its net assets. Further, whilst the SID anticipates the payment of the special dividend, the Scheme does not require the dividend to be paid. Declaration of the dividend is in the discretion of the API board. Properly characterised, these arrangements are not financial assistance within the meaning of the Act. The proper characterisation of these arrangements is that the consideration for the acquisition of the Scheme shares will be reduced to reflect the reduction in net assets of API resulting from payment of the dividend. 53 In any event, the payment of the special dividend would not prejudice API, its shareholders or its ability to pay its creditors for the purposes of ss 260A(1)(a)(i) and (ii). 54 In Re RXP, I held that the payment of the special dividend would not prejudice RXP, its shareholders or its ability to pay its creditors for the purposes of ss 260A(1)(a)(i) and (ii), and I referred to the evidence of its chief financial officer that the net asset position of the company was more than sufficient to meet the payment of the special dividend, and that the payment would not prejudice the interests of RXP or its members or the ability of RXP to pay its creditors. I also noted that the independent expert had opined that the Scheme was fair and reasonable and therefore in the best interests of RXP shareholders, in the absence of a superior proposal. Further, s 254T would not be infringed. By analogy, in the present case, the chief financial officer of API has given evidence that the net asset position of API will be more than sufficient to meet the payment of the special dividend, and the payment would not materially prejudice the interests of API or its members or the ability of API to pay its creditors. In addition, Grant Thornton has opined that the Scheme is fair and reasonable and, therefore, in the best interests of API shareholders, in the absence of a superior proposal. Further, the API directors have recommended that shareholders vote in favour of the Scheme. Further, s 254T(1)(b) forbids a company from paying a dividend unless it is fair and reasonable to the company's shareholders as a whole. The CFO has also given evidence that, in his view, the financial position of API generally and its asset and liability position in particular are such that the payment of the special dividend is fair and reasonable to API shareholders as a whole.

Purpose of the Scheme 55 My jurisdiction to approve a scheme is restricted by s 411(17), which is a matter which affects the discretion ultimately to approve the Scheme, rather than the discretion to order a meeting. At the approval stage, the Court must be satisfied there is no proscribed purpose as described in section 411(17)(a) or there must be provided a statement in writing by ASIC that it has no objection to the arrangement (s 411(17)(b)). 56 Section 411(17) does not present a bar to a meeting being convened if it seems likely that ASIC will produce the relevant statement at the second court hearing. In the present context, ASIC indicated by its letter of 11 February 2022 to API that it would not oppose the application for convening the meeting. Accordingly, it is appropriate to proceed on the basis that any subsequent approval would be unopposed by ASIC, and that ASIC will in due course provide a statement for the purpose of s 411(17)(b). Accordingly, in circumstances where it seems likely that ASIC will produce such a statement and there are no indications suggesting an inference that there is any proscribed purpose, the requirements of s 411(17) do not present a bar to a meeting being convened. 57 Finally, on the second principal aspect relevant to the exercise of the Court's discretion being the adequacy of the information to be provided to shareholders. I am satisfied that there is no inadequacy in this regard.

Conclusion 58 I am satisfied that the Scheme is of such a nature and cast in such terms that, if it achieves the statutory majorities at the Scheme meeting, I would be likely to approve it. It is therefore appropriate to make the orders sought convening the Scheme meeting. The terms of the Scheme are in a conventional form for an acquisition scheme in the nature of a takeover, and the Scheme is straightforward in its application. Further, there is no reason why the Scheme, if considered and agreed to by the API shareholders, is not of such a nature as would be likely to be approved by me at the second hearing. Further, API shareholders are to be presented with an appropriately detailed and clear explanation of the Scheme in the Scheme Booklet, as well as an analysis of the Scheme by an independent expert. They also have the benefit of the recommendation of the API directors. Further, the Scheme Booklet appears to meet the statutory requirements, has been prepared and verified by API and Wesfarmers, and has been examined by ASIC. 59 Now s 411(1) provides that if the Court has made an order convening a meeting of members, the Court may approve the explanatory statement that is contained in the Scheme Booklet. But in Re RXP at [70], I said: Now s 411(1) provides that if I have made an order convening a meeting of members, I may approve the explanatory statement. But I do not propose to formally do so. In view of the requirement for registration by ASIC and the criteria that ASIC must apply, it is more appropriate that the explanatory statement for a members' scheme be dealt with in that fashion. But I should stress that not to so formally approve should not be seen as casting any doubt on the accuracy or adequacy of the Scheme Booklet which comprises the explanatory statement or that it is not suitable for registration by ASIC. 60 API has not sought the approval of the explanatory statement by me. 61 Finally, it cannot be said that the Scheme appears on its face so blatantly unfair or otherwise inappropriate that it should be stopped in its tracks before going any further. 62 Accordingly, this is an appropriate case for the exercise of the discretion to make orders convening a meeting of API shareholders to enable the Scheme to be considered. 63 For these reasons, yesterday I made the necessary orders to convene the Scheme meeting. I certify that the preceding sixty-three (63) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Beach.