Directors' benefits and recommendations
50 ThinkSmart pointed out that Mr Montarello, the Chair of ThinkSmart, has abstained from making any recommendation to shareholders in relation to the Scheme, given his central role in the proposed transaction.
51 In Re Japara Healthcare Limited [2021] FCA 1150 at [71]-[72] Moshinsky J said:
Differing views have been expressed on the question whether a director who is entitled to receive an additional benefit should make a voting recommendation:
(a) in some cases, the court has taken the view that, as a general rule, a director who will receive a substantial benefit should decline to make a recommendation to shareholders as to how they should vote, but that the making of such a recommendation may not preclude the court making orders convening a meeting if the benefits are adequately disclosed in the scheme booklet - see, eg, Re Gazal Corporation Ltd [2019] FCA 701 at [27]-[34], Re Ruralco Holdings Ltd [[2019] FCA 878;] (2019) 136 ACSR 628 at [26]-[28]; Re Navitas Ltd; Ex parte Navitas Ltd (No 2) [2019] WASC 218 at [31]-[32]; and
(b) in other cases, the court has taken a different approach, holding that it will ordinarily be appropriate for a director who is to receive a financial benefit to make a recommendation, but to fully and prominently disclose the benefit in the Scheme Booklet - see, eg, Re SMS Management & Technology Ltd [2017] VSC 257 at [24]-[26]; Re Kidman Resources Ltd [[2019] FCA 1226;] (2019) 139 ACSR 122 at [104]-[115]; Re QMS Media Ltd [2019] FCA 2172 at [85]-[88]; Re DWS Ltd [[2020] FCA 1590;] (2020) 148 ACSR 616 at [42]-[49]; Re RXP Services Ltd [2021] FCA 38 at [41]-[48]; Re BINGO Industries Ltd [2021] NSWSC 798 at [14]-[16]; Re Villa World Ltd [[2019] NSWSC 1207;] (2019) 139 ACSR 550 at [27]-[40]; Re ERM Power Ltd [2019] NSWSC 1502 at [16]-[18]; Re Isentia Group Ltd [2021] NSWSC 910 at [19].
It has been observed that the divergence in the authorities on this question 'may be more apparent than real': see Re Wellcom Group Ltd [2019] FCA 1655 at [51], [59].
In my view, for the reasons set out in the cases referred to in paragraph (b) above, ordinarily the preferable approach is for a director who is to receive a financial benefit to make a recommendation, but to disclose the benefit in the Scheme Booklet.
52 With respect, these observations provide helpful guidance. But they do not lay down any rigid rule. The issue is fact sensitive: Re Mod Resources Ltd [2019] WASC 326 at [86] (Vaughan J). Each case will turn on its circumstances. It is important to appreciate that this is not a case where the relevant director will merely receive some additional benefit such as a bonus payment if a scheme of arrangement is implemented. Mr Montarello is the central proponent of the Scheme and, if it is successful, will end up holding all of the shares in ThinkSmart (via BidCo), and ThinkSmart will hold the legacy businesses, some cash and such shares in Block attributable to the Excluded Shareholders as Mr Montarello elects to retain. ThinkSmart's board has, appropriately, appointed a committee of independent directors, not including Mr Montarello, to oversee the scheme. In those circumstances, the following observations of O'Bryan J in Re Wellcom Group Limited [2019] FCA 1655 at [59] are apposite:
There may be circumstances in which a director of the company ought not to make a voting recommendation to members about a proposed scheme because of the nature and extent of additional benefits that will be received by the director if the scheme is implemented. The circumstances may be such that it is unrealistic to consider that a director can bring an unbiased mind to the voting recommendation, and it would be unfair to members to sanction such a recommendation being made in the context of a scheme meeting. In some circumstances, disclosure of the additional benefits may not be sufficient. As Vaughan J observed in Re Mod Resources, the question is fact sensitive.
53 Given the nature and extent of Mr Montarello's interest in the outcome of the Scheme, it is appropriate here that he abstain from making a recommendation in his capacity as a director. There is a statement in the scheme booklet to the effect that because he is the sole shareholder in BidCo and because of BidCo's role in the Scheme as disclosed in the scheme booklet, he abstains from giving a recommendation as to how ThinkSmart shareholders should vote on the Scheme. That is effective compliance with the requirements of cl 8301(a) in Part 3 in relation to director recommendations, to the extent that it requires the explanatory statement to set out 'that the director does not desire to make, or does not consider himself or herself justified in making, a recommendation and, if the director so requires, his or her reasons for not wishing to do so': cl 8301(a)(iii).
54 The other directors, comprising the Independent Board Committee, recommend in the scheme booklet that shareholders vote to approve the Scheme. Leaving Mr Montarello aside, ThinkSmart submitted that the directors do not have any interest in the scheme other than interests they hold in ThinkSmart shares or options as applicable. In the case of Mr Gammell the shareholding is significant, at about 11.8% of ThinkSmart's issued shares. All these interests are disclosed in the scheme booklet. I accepted that this was appropriate.