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[2022] FCA 1314
Federal Court of Australia
2022-10-21
Jackson J
Original judgment source is linked above.
ina Mining NL, in the matter of Rusina Mining [2010] FCA 517 Sovereign Life Assurance Co v Dodd [1892] 2 QB 573 Spark Infrastructure Holdings No 1 Limited [2010] NSWSC 1497; (2010) 79 NSWLR 756
Division: General Division
Registry: Western Australia
National Practice Area: Commercial and Corporations
Sub-area: Corporations and Corporate Insolvency
Date of hearing: 21 October 2022
Solicitor for the Plaintiff: Herbert Smith Freehills
Solicitor for the Interested Party: Becketts Lawyers
ORDERS WAD 206 of 2022 IN THE MATTER OF THINKSMART LIMITED (ACN 092 319 698) THINKSMART LIMITED (ACN 092 319 698) Plaintiff
TUSCAN EQUITY PTY LTD Interested Party
order made by: JACKSON J DATE OF ORDER: 21 OCTOBER 2022
ORDERS WAD 206 of 2022 IN THE MATTER OF THINKSMART LIMITED (ACN 092 319 698) THINKSMART LIMITED (ACN 092 319 698) Plaintiff
TUSCAN EQUITY PTY LTD Interested Party
order made by: jackson j DATE OF ORDER: 24 October 2022
JACKSON J: 1 On 21 October 2022 I made orders convening shareholder meetings to consider a scheme of arrangement proposed by the plaintiff, ThinkSmart Limited (Scheme), and approving the dispatch of explanatory material for the Scheme. These are the reasons for making those orders, and for orders made on 24 October 2022 approving a call campaign.
An overview of the Scheme 2 On 29 July 2022, ThinkSmart announced that it had entered into a Scheme Implementation Deed (SID) with Tuscan Equity Pty Ltd (BidCo) under which it is proposed that BidCo will acquire all of the shares in ThinkSmart. BidCo is a company wholly owned and controlled by Natale (Ned) Montarello, ThinkSmart's Executive Chairman and CEO. 3 ThinkSmart is a public company limited by shares, registered in Western Australia. Its shares are listed on the Alternative Investment Market of the London Stock Exchange under the ticker 'TSL'. ThinkSmart's main asset is a shareholding in Block, Inc. Block, formerly known as Square Inc, is a global technology and payments group listed on the New York Stock Exchange. ThinkSmart acquired its shares in Block as a result of the sale of its Clearpay digital payments business to Afterpay Ltd, which itself was then later acquired by Block. Based on recent market prices on the New York Stock Exchange, the value of the shareholding is substantial, being in the order of A$55 million. As well as its holding of Block shares, ThinkSmart operates legacy businesses of leasing finance for consumers and businesses and support for the Clearpay business. The leasing business is no longer writing new business, so it is in wind down mode. The Clearpay support contract can be terminated on three months' notice by either party. 4 In broad terms, if the Scheme is approved and implemented, ThinkSmart will sell some or all of its shares in Block on market, and distribute the cash to shareholders in proportion to their shareholdings in ThinkSmart. In return, their shares in ThinkSmart will be transferred to BidCo. But a group of shareholders, being Mr Montarello and entities related to him, are designated as Excluded Shareholders. They will have an election to receive some or all of the consideration for the transfer of their ThinkSmart shares to BidCo by way of cash or by way of scrip in BidCo. They will receive one share in BidCo for every one share in ThinkSmart which is not the subject of an election to receive cash consideration, and the Block shares attributed to those ThinkSmart shares will not be sold. 5 That is why at this stage it can only be said that ThinkSmart will sell 'some or all' of its shares in Block. Essentially, all shares in Block attributable to non-Excluded Shareholders will be sold and the cash distributed to those shareholders, and shares in Block that are the subject of the relevant election by Excluded Shareholders will also be sold and the cash distributed. The outcome will be that Mr Montarello and his related entities will, through BidCo, own ThinkSmart. ThinkSmart will in turn own whatever Block shares are not sold because the Excluded Shareholders have elected to receive some of their consideration in scrip. It will also own the legacy leasing and Clearpay support businesses, and hold cash which is expected to be approximately £2.2 million after implementation of the Scheme. 6 Given Mr Montarello's interest in the proposal, the Board of ThinkSmart has formed an Independent Board Committee comprised of all directors other than him to consider and deal with the Scheme. The Chair of that committee has outlined the commercial rationale for the proposal in a letter to shareholders to be included in the scheme booklet. According to the letter, the Scheme is the culmination of a strategic review of ThinkSmart's shareholding in Block which involved consideration of a number of options to maximise shareholder value. The letter says that ThinkSmart shares have historically traded at a 31% average discount to the market value of the Block shareholding. The Independent Board Committee considers the Scheme to be the preferred commercial mechanism for shareholders to exit their investment in ThinkSmart, rather than stay on during what might otherwise turn out to be a wind down and liquidation of the company. While the Scheme will not result in shareholders realising value for the other 'residual' components of the ThinkSmart business, the committee considers that those assets are immaterial 'compared to ThinkSmart's holding in Block Shares'. 7 At the first hearing, ThinkSmart sought orders convening separate meetings of two classes of shareholder, namely the Excluded Shareholders, and all other shareholders. The meetings are proposed to be held on 16 November 2022, at the same time as the Annual General Meeting of ThinkSmart. ThinkSmart also sought approval of the scheme booklet to be distributed to shareholders.
Materials relied on 8 In support of its application for orders under s 411(1) of the Corporations Act 2001 (Cth) (Act), ThinkSmart relied on the following affidavits: (a) the affidavit of Paul Bentley Branston affirmed on 29 September 2022 - Mr Branston is a partner in Herbert Smith Freehills, ThinkSmart's solicitors; (b) the affidavit of Andrea de Cian sworn on 19 October 2022 - Mr de Cian is a partner in the firm providing the independent expert report, Grant Thornton; (c) the affidavit of Peter Joshua Thomas Gammell sworn on 19 October 2022 - Mr Gammell is a director of ThinkSmart and the Chair of the Independent Board Committee; (d) the affidavit of Robert Andrew Feiner sworn on 19 October 2022 - Mr Feiner is a principal of Becketts Lawyers, BidCo's solicitors; (e) the affidavit of Jasper William Charles Johnson affirmed on 20 October 2022 - Mr Johnson is a solicitor at Herbert Smith Freehills; and (f) the affidavit of Paul Bentley Branston affirmed on 21 October 2022.
The prerequisites for the orders sought at the first hearing 9 Under s 411(4) of the Act, a scheme of arrangement is only binding on (relevantly) members if a resolution in favour of it has been passed by the statutory majority at a meeting of members or at meetings of relevant classes of members, and it has been approved by order of the Court. The section envisages three procedural steps in the process of approving a scheme: first, (in this case) the calling of a meeting of members; second, a vote by those persons; and third, a further application to the Court for approval of the arrangement: see Re CSR Ltd [2010] FCAFC 34; (2010) 183 FCR 358 at [7] (Keane CJ and Jacobson J, Finkelstein J agreeing). For the purposes of the first of those steps, s 411(1) empowers the Court to order the necessary meetings to be convened and to approve the explanatory statement to shareholders that is required by s 412(1)(a). 10 In Re Xplore Wealth Limited [2020] FCA 1868 at [23]-[24] Markovic J summarised the requirements that must be satisfied at the first Court hearing for approval of a scheme as follows: At the first court hearing, the Court will order the convening of a scheme meeting and approve a draft explanatory statement to be sent to scheme members if it is satisfied of the following matters: (1) the plaintiff is a Pt 5.1 body; (2) the proposed scheme is a compromise or (relevantly) an arrangement within the meaning of s 411(1) of the Act; (3) the scheme booklet will provide proper disclosure to shareholders; (4) the scheme is bona fide and properly proposed; (5) the Australian Securities and Investments Commission (ASIC) has had a reasonable opportunity to examine the terms of the scheme and the scheme booklet and make submissions to the Court, and has had 14 days' notice of the date of the first court hearing; and (6) the procedural requirements of the Federal Court (Corporations) Rules 2000 (Cth) (Corporations Rules) have been met. … In addition, 'the court will not ordinarily summon a meeting unless the scheme is of such a nature and cast in such terms that, if it receives the statutory majority at the … meeting the court would be likely to approve it on the hearing of a petition which is unopposed': F T Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 at 72. 11 Section 411(2) of the Act provides that the Court must not make an order convening scheme meetings or approving a scheme booklet unless 14 days' notice of the first hearing has been given to the Australian Securities and Investments Commission (ASIC) and the Court is satisfied that ASIC has had a reasonable opportunity to examine the terms of the proposed scheme and a draft explanatory statement, and to make submissions to the Court.
The prerequisites for convening meetings are satisfied here 12 On the basis of the evidence provided I was satisfied that the threshold requirements for convening scheme meetings and approval of the explanatory statement were satisfied in this case.
ThinkSmart is a Part 5.1 body 13 A Part 5.1 body is relevantly defined as a company in s 9 of the Act, and an ASIC search verifies that ThinkSmart is an Australian public company.
The scheme is an arrangement within the meaning of s 411(1) 14 As to the requirement that there be a compromise or arrangement, the scope of the latter word is wide. In Re NRMA Ltd [2000] NSWSC 82 at [20] Santow J said: Generally speaking, unless the arrangement is ultra vires the company or seeks to deal with a matter for which a special procedure is laid down by the Corporations Law or to evade a restriction imposed by the Corporations Law, almost any arrangement otherwise legal which touches or concerns the rights and obligations of the company or its members or creditors, and which is properly proposed, may come under s411; compare Re International Harvester Co of Australia Pty Ltd [1953] VLR 669 at 672 per Lowe ACJ. 15 The Scheme in the present case is essentially one for the acquisition of all the shares in ThinkSmart in return for consideration in cash or, if applicable, in shares of BidCo. It is plainly an arrangement within the meaning of s 411(1). 16 Section 411(1) relevantly applies to an arrangement between the Part 5.1 body and 'its members or any class of them'. ThinkSmart proposed that its members be divided into two classes: the Excluded Shareholders and all other shareholders. Approximately 30% of the shares in ThinkSmart are held by Mr Montarello and related entities (the Excluded Shareholders). ThinkSmart proposed to hold two Scheme meetings, one for each of these classes. 17 ThinkSmart submitted that this was appropriate because the Excluded Shareholders can elect to receive their consideration either as scrip consideration or cash consideration, while the other shareholders may only receive cash consideration if the Scheme is implemented. For this reason, ThinkSmart submitted that the rights of Excluded Shareholders are sufficiently dissimilar to the rights of the other shareholders that they should meet as a separate class. 18 There are also a number of options for the issue of ThinkSmart shares held by various parties. ThinkSmart submitted that these options do not give rise to a further class of members. 19 I accepted that it is appropriate for the Excluded Shareholders and all other shareholders to vote as separate classes. In Sovereign Life Assurance Co v Dodd [1892] 2 QB 573 at 583 Bowen LJ put the test for the constitution of a class as follows: 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. 20 The rights in question include the rights that persons have against the company that are to be varied or released under the Scheme and also the new rights that the Scheme will give in their place: Re Opes Prime Stockbroking Ltd (No 2) [2009] FCA 813; (2009) 179 FCR 20 at [66] (Finkelstein J). The Court should adopt a practical businesslike approach to the issue of whether the difference in interests is such as to create separate classes: Re Aston Resources Limited [2012] FCA 229 at [34] (Jacobson J). Splitting 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 301; Re NRMA Ltd at [80]; Opes Prime at [66]. 21 In this case, the mere fact that the Excluded Shareholders are, or are associated with, a director who is proposing the scheme, and so associated with the takeover vehicle, may not be enough to require them to be assigned to a different class. While such shareholders may have particular commercial interests as a result of those matters, those interests do not give rise to any difference in rights, although it may be appropriate to have their votes tallied separately: see e.g. Choiseul Investments Limited, in the matter of Choiseul Investments [2010] FCA 1189 at [26]-[28] (Jacobson J); Re Kumarina Resources Ltd [2013] FCA 549 at [39]-[52] (Gilmour J); Re Absolute Equity Performance Fund Ltd [2022] FCA 933 at [40] (Halley J). 22 Here, however, the Excluded Shareholders will have rights if the Scheme is implemented that will be different to the rights of other shareholders; specifically, they will have the right to choose the extent to which they receive consideration in shares and not in cash. I respectfully agree with the observations on differential consideration which Farrell J made in Re David Jones Limited (No 3) [2014] FCA 753 at [13]: … one of the reasons for the continued existence of the s 411 avenue for effecting mergers is that it is a flexible way of accommodating differences in the treatment of shareholders. It is for this reason that it is not illegal for a collateral benefit to be offered or given. Nor is it necessarily inappropriate for there to be differential consideration or collateral benefits subject to how the related questions of fairness and adequacy of disclosure to shareholders who will not participate in a benefit are addressed. The 'fairness' issue is usually dealt with in one of two ways: first, by deciding whether there are differences which are 'class creating' or, second (and arguably more appropriately where the issue is collateral benefits), by enquiring whether processes have been established by the scheme company to 'tag' votes of interested shareholders or for interested shareholders to abstain from voting. Either approach allows appropriately informed shareholders who will not share in a benefit to determine the outcome of the approval resolution and prevents shareholders with greater bargaining power from being advantaged over shareholders with less bargaining power without the consent of the less powerful shareholders. 23 The first of these two approaches is appropriate here. The different rights to consideration under the Scheme as between Excluded Shareholders and the other shareholders mean that they will not be able to consult together with a view to their common interest. In Re Navitas Ltd [2019] WASC 180 at [69] Vaughan J took the same view when ordering that certain shareholders who were part of a bidding consortium constituted a different class because they could elect to receive consideration of mixed shares and cash rather than purely cash consideration for their shares in the target company. Far from undermining the objective of obtaining a decision by a large majority, it is appropriate to give shareholders who will not have the option of taking consideration in shares the power (as a group) to veto the proposed transaction. 24 I also accepted that the holders of options to receive ThinkSmart shares do not constitute a separate class: see Re Excelsior Gold Limited [2018] FCA 2064 at [32] (McKerracher J). There is evidence in Mr Gammell's affidavit that all the options are presently exercisable and that the ThinkSmart board can, and will, issue a notice to option holders that will effectively require them to exercise the options in advance of Court approval of the Scheme or the options will lapse. If the options are exercised before the relevant milestone dates, the option holders will become shareholders with the same rights as other shareholders in the same class.
The scheme booklet 25 The scheme booklet (draft explanatory statement) must provide proper disclosure and contain the information prescribed to be included by the Act and the Corporations Regulations 2001 (Cth) (Regulations). The Court must be prima facie satisfied that there has been proper disclosure with nothing misleading or deceptive in any material sense; the extent of disclosure required is a question of fact and degree dependent on the nature of the scheme and the context in which it is advanced for consideration, which must be considered in a practical and commercially realistic way having regard to the complexity of the proposed scheme: Re Wesfarmers Ltd [2018] WASC 308 at [54]-[55] (Vaughan J). 26 Specifically, the draft explanatory statement must comply with s 411(3) and s 412 of the Act, and reg 5.1.01(1)(b) and Part 3 of Schedule 8 of the Regulations. The primary requirements are those in s 411(3)(b) and s 412(1)(a) which require the scheme booklet to include an explanation of the effect of the compromise or arrangement, in particular material interests of directors, and any other information that is material to the making of a decision by the member as to whether or not to agree to the compromise or arrangement (if within the knowledge of the directors and not previously disclosed to the member). 27 ThinkSmart provided the draft scheme booklet as annexure PBB-9 to Mr Branston's affidavit of 29 September 2022. The affidavit includes evidence that the draft scheme booklet has been lodged with ASIC. The draft scheme booklet is a detailed document. It describes the effect of the Scheme, identifies the advantages and disadvantages of the Scheme for current shareholders, explains the formulae for cash and scrip consideration, describes implications if the Scheme does not become effective, details business information about both ThinkSmart and BidCo, and gives historical financial information for ThinkSmart. It describes the material interests of the directors. It contains voting information for the members and sets out key considerations, including the Independent Board Committee's recommendation. There are various other matters touched upon, including risks, tax implications and certain enabling resolutions that will be proposed at the annual general meeting (see further below). 28 The booklet annexes an independent expert report in relation to whether the Scheme is in the best interest of ThinkSmart's 'Non-Associated Securityholders' for the purpose of s 411 of the Act, which was issued on 28 September 2022. The expert report concludes that the Scheme is fair and reasonable and hence in the best interests of the 'Non-Associated Securityholders'. 29 The booklet also annexes the terms of the Scheme itself, the Scheme deed poll (ensuring that BidCo is bound by the terms of the Scheme), and the proposed notices of meeting to both the general shareholders and Excluded Shareholders and for the annual general meeting. 30 Part 3 sets out a number of categories of information which must be included in an explanatory statement, some of which are only required in certain circumstances. When read in light of a waiver ASIC provided as to certain requirements found in cl 8302(d) of Part 3, I was satisfied that the draft scheme booklet contained the necessary prescribed information. 31 Mr Branston's affidavit of 29 September 2022 sets out the initial steps taken to produce the scheme booklet. Mr Gammell's affidavit provides evidence as to the steps taken by the members of the Independent Board Committee, and by ThinkSmart's legal representatives, to satisfy themselves as to the verification and due diligence processes undertaken and that the booklet complied with the requirements of the Act and the Regulations and the relevant ASIC Regulatory Guide. The independent directors have approved the booklet and confirmed the statements in it that are attributed to them. Mr Gammell's and Mr Feiner's affidavits contain detailed evidence as to the thorough due diligence and verification processes that have been undertaken. 32 At the hearing I proposed that certain matters should be the subject of specific and express disclosure in the scheme booklet. ThinkSmart adopted those proposed additions. Some of them were prompted by a letter from ASIC dated 21 October 2022 raising various matters, which was received shortly before the hearing. ASIC expressed the view in the letter that those matters would properly be the subject of consideration at the second hearing, and were not necessarily impediments to approval of the scheme booklet at the first hearing. Whether that was correct or not, I took the view that some of the matters raised by ASIC would usefully be the subject of express disclosure, and they were addressed by the additions proposed at the hearing. If the Scheme is approved at the meetings but ASIC nevertheless wishes to make submissions about the adequacy of disclosure as to any given matter, or about the matters themselves, ASIC will need to appear by counsel at the second hearing and make submissions as appropriate. 33 Taking all the above into account, I was satisfied that the scheme booklet incorporating the amendments proposed at the hearing provided proper disclosure to shareholders and met the requirements of the Act and the Regulations.
The Scheme is bona fide and properly proposed 34 The fact that ThinkSmart has entered into the SID, and the substantial steps that have been taken so far under the supervision of the Independent Board Committee, are prima facie evidence that the Scheme is bona fide and has been properly proposed: see Re Staging Connections Group Limited [2015] FCA 1012 at [61] (Gleeson J).
Notice to ASIC 35 Notice of the hearing of the application was given to ASIC on 3 October 2022, so the requirement in s 411(2)(a) for 14 days' notice appears to be satisfied. The draft scheme booklet and the terms of the proposed arrangement were provided to ASIC on 28 September 2022, which in my view has given ASIC a reasonable opportunity to examine the terms of the Scheme and the draft explanatory statement (scheme booklet) and make submissions. The letter from ASIC dated 21 October 2022 just mentioned expresses ASIC's view that these requirements have been met.
Procedural requirements 36 Relevant procedural matters are addressed at the end of these reasons.
No apparent reason not to give court approval if members approve Scheme 37 As Markovic J noted in Xplore Wealth, the Court will ordinarily not convene Scheme meetings unless it is satisfied that it would be likely to approve the Scheme on the hearing of a petition that is unopposed. If the arrangement seems fit for consideration by the meeting of members and is a commercial proposition likely to gain the Court's approval, then leave should be given. But the Court may still intervene in circumstances in which the scheme appears on its face so blatantly unfair or otherwise inappropriate that it should be stopped in its tracks: Re Foundation Healthcare Limited [2002] FCA 742 at [36], [44] (French J). At the s 411(1) stage the Court should be alive to any difficulties that may arise subsequently when it is called upon to decide whether the arrangement should be approved: Australian Securities Commission v Marlborough Gold Mines Limited (1993) 177 CLR 485 at 504 (Mason CJ, Brennan, Dawson, Toohey and Gaudron JJ). 38 In particular, the fairness of the Scheme may, in the end, depend on assessments to be made about the different rights to consideration between the Excluded Shareholders and the other shareholders, and about the fact that the outcome will be that BidCo, a corporate vehicle for Mr Montarello, will emerge from the Scheme with ownership of ThinkSmart. But at the first hearing at least, it is not necessary for the Court to descend into the commercial merits of the proposed scheme: Chevron (TAPL) Pty Ltd v Chevron Australia Pty Ltd, re Chevron (TAPL) Pty Ltd [2022] FCA 220 at [20] (Banks-Smith J). Those assessments are open to be made at the meetings of members that will be convened. It is also important to bear in mind that, by granting leave to convene the meeting, the Court does not give its imprimatur to the proposed scheme: Foundation Healthcare at [36]. 39 ThinkSmart's submissions effectively raised this issue of fairness under the heading 'No collateral benefit to stop the Scheme in its tracks'. But as the submissions said, there was no issue of a collateral benefit here. The issue is more fundamentally about the fairness of the different consideration which Excluded Shareholders may receive compared to other Shareholders. I have quoted above a summary of principles relevant to this issue that was given in David Jones at [13]. It averts to the importance of separate scheme meetings for the different classes of shareholders, and the importance of disclosure. There will be separate scheme meetings here, meaning that the shareholders other than the Excluded Shareholders are in a position to determine whether to approve the Scheme. As for disclosure, some of the additional matters to be disclosed in the scheme booklet as proposed at the first hearing, and taken up by ThinkSmart, concerned the potential differential outcomes as between Excluded Shareholders and other Shareholders. 40 If the approval of the other shareholders to the Scheme is obtained, the issue of whether that adequately addresses any issues of fairness, in view of the disclosure given, may arise at the second hearing. I was satisfied that in the context of the measures taken to date the differential outcomes for different shareholders did not mean that the Scheme was so blatantly unfair or otherwise inappropriate that it should be stopped in its tracks. 41 However, in an essentially ex parte hearing, ThinkSmart was obliged to bring to the Court's attention any other matters that could be considered relevant to the exercise of discretion: Permanent Trustee Company Limited [2002] NSWSC 1177 at [7] (Barrett J). ThinkSmart's written submissions drew the Court's attention to the following matters.
Financial assistance and related party transaction 42 The proposed transaction will be structured so as to include a loan by ThinkSmart to BidCo. BidCo will not be contributing any of its own capital towards the cash consideration for the acquisition of shares in ThinkSmart. Rather, that consideration will be provided as a result of the proposed on-market sale of shares in Block. There is a 'Funds Flow Deed' between ThinkSmart and BidCo which makes provision for this. After ThinkSmart has received the cash from its sale of Block shares (net of brokerage and other fees), it will advance those funds by way of loan to BidCo. BidCo will then convert the funds, which will be received in US dollars, into Australian dollars and Pounds Sterling and remit them to trust accounts in ThinkSmart's name as trustee that will be operated by ThinkSmart's share registry, Computershare. Funds will then be remitted to the shareholders from those accounts. 43 The loan from ThinkSmart to BidCo to assist in BidCo's acquisition of ThinkSmart shares potentially engages the provisions of the Act which regulate financial assistance by a company for the acquisition of shares in the company (s 260A) and the provisions that regulate the provision of financial benefits to related parties (s 208). But those provisions contemplate that shareholder approval may be obtained for transactions of that kind. ThinkSmart's AGM is scheduled to be held immediately before the proposed Scheme meetings on 16 November 2022 and enabling resolutions for approval of the financial assistance and financial benefit will be put to shareholders. Those approvals and the approvals of the Scheme will be conditional on each other. The shareholder disclosure necessary to accompany the meeting materials (as set out in s 260B(4) and s 219 respectively) for the proposed financial assistance and related party transaction approvals will be included with the scheme booklet. I am satisfied that this will be an appropriate way of dealing with the issues of financial assistance and financial benefit to a related party: see Re Clough Limited [2013] FCA 1149 at [4] (Siopis J).
Performance risk 44 If the Scheme is implemented in accordance with its terms, BidCo will receive all the issued shares in ThinkSmart on the implementation date. If Excluded Shareholders have elected to receive some or all of the consideration for that transfer in scrip, they will receive shares in BidCo on the same day. But BidCo will not pay the cash consideration for the shares on that day, whether to Excluded Shareholders or other shareholders. That cash will only be available after the Block shares are sold on market, which the broker charged with the sale is required to do within three days. So if the scheme goes ahead, shareholders who are to receive cash consideration face a risk that BidCo will not provide that consideration. 45 Also, upon implementation of the Scheme if it is implemented, shareholders will appoint BidCo as their proxy to vote their shares prior to, and up until, registration of the transfer. 46 BidCo has executed and delivered a deed poll that permits shareholders to sue it directly if it fails to meet its obligations under the Scheme. However, the Court may still be concerned that shareholders may be left in the position that their shares have been transferred but there is a delay in the provision of the Scheme consideration, if their only remedy is to sue on the deed poll: Re APN News & Media Limited [2007] FCA 770 at [23] (Lindgren J); Re Kangaroo Resources Ltd [2018] WASC 327 at [48]-[49] (Vaughan J). 47 ThinkSmart submitted that it is not necessary for the Court to be satisfied that there is no performance risk, only that the risk is acceptable. It pointed to the following measures it has taken to minimise the risk. First, under the Scheme each shareholder appoints ThinkSmart and each of its directors, officers and secretaries as their attorney and agent for the purpose of enforcing the deed poll against BidCo. I accept that is relevant because it will remove the need for shareholders to act individually. Second, ThinkSmart and BidCo have entered into an agreement with each other and with the broker charged with the sale of the Block shares, Canaccord Genuity Limited, under which the broker is irrevocably appointed to sell the Block shares as soon as practicable after implementation of the scheme and in any event within three trading days. The broker is then required to promptly remit the sale proceedings to an account with an authorised deposit-taking institution, essentially a bank, held for the benefit of ThinkSmart. Third, the funds are then to flow in the manner described above under the Funds Flow Deed, so that they are required to end up (prior to payment to shareholders) in trust accounts in the name of ThinkSmart and operated by Computershare. ThinkSmart must then procure payment to shareholders as soon as practicable. 48 Finally, the SID prohibits ThinkSmart and BidCo from taking any actions to vary the composition of ThinkSmart's board until the cash consideration has been sent to shareholders in accordance with the Scheme and the SID. ThinkSmart submitted that this will mean that the independent directors will remain on its board so that they are able to take steps to enforce the Scheme and other scheme documentation to ensure payment to shareholders. ThinkSmart's cash position gives it the resources to do so. ThinkSmart also submitted that this obligation is an important restriction on BidCo's ability to use the proxy rights mentioned above to vary the composition of ThinkSmart's board. 49 I accepted that the measures described above reduce the performance risk to, at least, a level that is appropriate to put to shareholders. The risk is the subject of specific disclosure in the scheme booklet, including in the letter from the Chair of the Independent Board Committee which is at the start of the booklet. In the end, it is a commercial one which shareholders will be able to assess for themselves. If the shareholders who are not Excluded Shareholders collectively decide that the risk is unacceptable, they will effectively be able to stop the Scheme, as they will be voting in a meeting separate to Mr Montarello and the other Excluded Shareholders who are associated with BidCo.
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.
Reimbursement fee 55 Clause 12 of the SID provides for a 'reimbursement fee', where BidCo may be reimbursed for its actual out-of-pocket costs incurred in pursuing the transaction, up to a maximum of $200,000. The circumstances in which ThinkSmart must pay the reimbursement fee include if one or more of the independent directors change their recommendation, or a competing proposal is announced during the exclusivity period that is of a particular kind, or where a third party acquires more than 50% of ThinkSmart's shares, or if BidCo terminates the SID for material breach or breach of ThinkSmart's representation and warranty obligations. 56 In certain circumstances, a break fee may be considered excessive or otherwise coercive in nature: Re Asaleo Care Limited [2021] FCA 406 at [52] (Banks-Smith J); Rusina Mining NL, in the matter of Rusina Mining [2010] FCA 517 at [51] (Barker J); and see also APN News at [55]. But here, importantly, the break fee is not payable if the shareholders reject the Scheme at the scheme meeting. It also appears to have been the subject of commercial, arms-length negotiations, and there is full disclosure in the scheme booklet. It is modest in amount compared to the value of the subject matter of the Scheme. It is clearly disclosed in the scheme booklet. 57 In similar circumstances, the Court has accepted that a break fee was neither excessive nor coercive: Asaleo Care at [52]-[53]. I am satisfied that the reimbursement fee here will present no impediment to approval of the Scheme.
Exclusivity arrangements 58 The SID contains exclusivity provisions, namely 'no shop', 'no talk' and 'no due diligence' provisions. 59 Exclusivity provisions should: (a) exist for no more than a reasonable period, which is properly defined; (b) be subject to the directors' fiduciary and other duties; and (c) be given adequate prominence when disclosed in the scheme booklet. See Asaleo Care at [55]; APN News at [29]. 60 The exclusivity period here is the period from the date of the SID (29 July 2022) to the earlier of the date of termination of the Deed, the End Date (six months from the date of the Deed), or the Effective Date (the date on which the Scheme becomes effective). In Asaleo Care at [57], Banks-Smith J considered a seven month exclusivity period to be at the upper end of the range of acceptable periods, but within the periods recognised as reasonable. I respectfully agree, and consider that the exclusivity period is acceptable here. Importantly, the exclusivity provisions include an express exception which permits the directors to comply with their fiduciary duties where a potential competing proposal could be reasonably expected to become a superior proposal (cl 11.2). There is evidence that they were negotiated on arms-length terms by the independent directors on behalf of ThinkSmart. And they are disclosed as required in the scheme booklet. They will present no impediment to approval of the Scheme.
Conditions precedent 61 The proposed Scheme provides that it cannot come into effect until the conditions precedent set out in the SID are met: Scheme of Arrangement cl 3.1(a). There are several such conditions in cl 3.1 of the SID and as inserted by cl 2.1 of the Amending Deed. One such condition is the approval of acquisitions effected by the proposed Scheme by the Financial Conduct Authority of the United Kingdom for the purposes of the Financial Services and Markets Act 2000 (UK). While this is not commonly seen in Australia, the need for it is evident from ThinkSmart's listing on the London Stock Exchange. 62 At the first hearing, based on the evidence adduced, there was no reason to think that any of the conditions precedent would not be achieved. Whether they are in fact achieved will be a matter for the second hearing.
Deemed warranties 63 If implemented, the Scheme will have the effect that every shareholder who thereby sells ThinkSmart shares is taken to have warranted to ThinkSmart and to BidCo that the shares are free of all encumbrances, security interests, other third party interests and restrictions on transfer. The prevailing view is that such provisions are not objectionable provided that they have been drawn to the attention of shareholders: Re Atlassian Corporation Pty Limited [2013] FCA 1451 at [36] (Yates J). The warranty is clearly disclosed in the scheme booklet here. 64 The Scheme also provides that the relevant shares will transfer to BidCo free from all such encumbrances and other interests. It is, appropriately, qualified so that it will only operate to the extent permitted by law: see Atlassian at [37].
Headcount test 65 ThinkSmart drew to the Court's attention two potential issues concerning the 'headcount test' for approval of the Scheme. By this it meant the requirement in s 411(4)(a)(ii)(A) of the Act that a resolution in favour of the scheme is, 'unless the Court orders otherwise - passed by a majority in number of the members, or members in that class, present and voting (either in person or by proxy)'. The issues may arise because many of ThinkSmart's shareholders hold shares in the form of depositary interests via a share custodian. The custodian will vote proportions of the shares it holds so as to reflect instructions it receives from the holders of the depository interests to vote for or against the resolution, as the case may be. 66 The first issue to which that may give rise is that although the depositary interest holders are likely to be numerous, when the custodian votes on their behalf it will be doing so as one shareholder only. The second issue concerns the possibility that the custodian casts a split vote, with some shares being voted in favour and some against. There is authority to the effect that while a split vote is effective under s 411(4)(a)(ii)(B) (the requirement for 75% of votes cast to be in favour), it is not effective for the purposes of s 411(4)(a)(ii)(A), so that in this case the custodian cannot be counted as one by whom the resolution was 'passed' and must be included among those by whom the resolution was not 'passed': Spark Infrastructure Holdings No 1 Limited [2010] NSWSC 1497; (2010) 79 NSWLR 756 at [28] (Barrett J). 67 ThinkSmart therefore foreshadowed that at the second hearing it may apply for an order waiving compliance with the headcount test in s 411(4)(a)(i)(A).
Procedural matters 68 ThinkSmart sought directions for the dispatch of the scheme booklet and proxy form using a mixture of electronic communication and post, depending on how shareholders had elected to receive communications, and also taking account of the possibility that in some cases emails might bounce back unreceived. Such an approach has met with the approval of the Court in other schemes of arrangement in recent times: see e.g. Re Dragontail Systems Limited [2021] FCA 834 at [44]-[45] (Halley J); Re Quantum Health Group Limited [2022] NSWSC 26 at [43] (Black J); Japara Healthcare at [84] (Moshinsky J). I was satisfied that the proposed directions were appropriate. 69 ThinkSmart also sought directions for the holding of the meetings by an online platform made available by the company's share registry, Computershare. Holding scheme meetings in that way is now commonplace: see e.g. Re Redflex Holdings Limited [2021] FCA 417 at [41]-[46] (Yates J); Re Vocus Group Limited [2021] NSWSC 630 at [20]-[21] (Black J). Though this approach became more widespread during the COVID-19 pandemic, it remains appropriate: see Re Virtus Health Limited [2022] NSWSC 597 at [38]. Pursuant to r 3.2 of the Federal Court (Corporations) Rules 2000 (Cth), David Adams, a non-executive director of ThinkSmart has been nominated as chair of the general shareholders meeting and Excluded Shareholders meetings, and Mr Gammell, another non-executive director, has been nominated as the alternative chair for those meetings. Those nominations were appropriate and verified by affidavit as required. 70 ThinkSmart also sought directions for both inbound and proactive outbound call centres to be set up to communicate with shareholders. It provided scripts for the call centres to use, and they are not to depart from those scripts. Since the company proposed approval of these measures there was no occasion to consider whether such approval is always necessary or desirable at the first hearing: cf Re Galaxy Resources Ltd [No 2] [2021] WASC 314 at [33] (Hill J). It was appropriate to seek approval here. Subject to some additional disclosure, to reflect the additional disclosure in the scheme booklet, I approved the call campaigns and scripts by orders made administratively on 24 October 2022.
Conclusion 71 For those reasons I was satisfied that it was appropriate to convene scheme meetings and to approve the scheme booklet and other shareholder communications in the terms described, and orders were made accordingly. I certify that the preceding seventy-one (71) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Jackson.
Australian Securities Commission
Marlborough Gold Mines Limited
[2021] WASC 314
[2018] WASC 327
[2019] WASC 326
[2019] WASC 180
[2018] WASC 308
[2019] WASC 218
[2017] VSC 257
(1993) 177 CLR 485
(2010) 183 FCR 358
(2009) 179 FCR 20
(2010) 79 NSWLR 756