Australian Securities Commission v Marlborough Gold Mines Ltd

FARRELL J 1 These are the reasons for making orders under ss 411(1) and 1319 of the Corporations Act 2001 (Cth) in relation to a meeting of the holders of ordinary shares in Capilano Honey Limited to consider approving a scheme of arrangement (scheme meeting) and approving for dispatch a scheme booklet and related documents. 2 Capilano is a public company listed on the Australian Securities Exchange (ASX). Capilano's principal business activities involve packaging and marketing honey to customers in Australia and around the world. It receives honey supply from approximately 600 beekeepers nationally. 3 All of the issued shares are ordinary shares save for one "foundation share" which entitles the foundation shareholder, Capilano Beekeepers Limited, to appoint two beekeeper directors to the Capilano board but it does not carry any right to vote. There are 9,457,481 ordinary shares on issue held by approximately 3,359 shareholders. There are also 60,000 options which were issued to Dr Benjamin McKee, Capilano's Managing Director and CEO, pursuant to a long-term incentive plan. Capilano's substantial shareholders are Wroxby Pty Ltd with 2,049,906 shares (or 21.67%) and Bega Cheese Limited with 1,062,968 shares (or 11.24%). 4 The scheme is designed to effect a takeover of Capilano by Bravo BidCo Pty Ltd, a wholly owned subsidiary of Bravo HoldCo Pty Ltd (referred to in the scheme of arrangement which is Annexure C to the scheme booklet as Bidder Parent). At present, Wattle Hill RHC Fund 1 and ROC Capital Pty Ltd (together the Consortium) each hold 50% of the shares in HoldCo. Wattle Hill is a private equity fund focused on investments in Australian businesses offering products and services to Chinese consumers and ROC is an alternative investment manager specialising in private equity investments across the Asia Pacific region. 5 Capilano, HoldCo and BidCo entered into a Scheme Implementation Agreement on 13 August 2018. It will be included as Annexure B to the scheme booklet. 6 Prior to the hearing on 10 October 2018, the Australian Securities & Investments Commission (ASIC) indicated to Capilano that it had concerns about a number of features of the proposed scheme and that it would not provide the usual letter but rather intended to attend the first court hearing to make submissions. In the ordinary case, it is only the scheme company and the proposed bidder which appear. Having regard to ASIC's concerns, it was appropriate that ASIC appear by counsel so that the Court had the benefit of submissions from a well-informed contradictor on issues which may be controversial.

Scheme consideration 7 If the scheme is implemented, each Capilano shareholder will transfer all of their shares in Capilano to BidCo. The "scheme consideration" is defined in the scheme of arrangement document and in the Chairmen's letter. The scheme consideration is said to be: (1) cash consideration of $20.06 for each Capilano share. A shareholder who elects to receive the cash consideration or fails to make an election to receive the scrip consideration by the "Election Time" (most likely 5 November 2018) and ineligible foreign shareholders will receive the cash consideration; or (2) scrip consideration of one HoldCo share for each Capilano share. To receive the scrip consideration, a shareholder must elect to do so and provide the election form to Capilano by the Election Time; and (3) HoldCo Share Offer. This is only available to Capilano shareholders who elect to receive scrip consideration on or before the Election Time. Under it, such a Capilano shareholder may subscribe for 0.5 HoldCo shares for every Capilano share they hold at the Scheme Record Date at a subscription price of $20.06 cash for every HoldCo share. The subscription form and subscription moneys must also be given to Capilano on or before the Election Time. The subscription moneys will be held in a trust account operated by Capilano pending disbursement in accordance with the scheme. No HoldCo shares will be issued under the Offer if the scheme is not approved by Capilano shareholders and the Court. 8 The election must relate to all Capilano shares held by the shareholder. 9 The number of HoldCo shares to be issued following election for the scrip consideration and subscriptions under the HoldCo Share Offer will be subject to scale back arrangements to ensure that the Consortium maintains at least 50.1% of the diluted share capital of BidCo. Scale back will be applied first to those Capilano shareholders who do not participate in the HoldCo Share Offer and after that to the Capilano shareholders who do participate in the HoldCo Share Offer. This may result in some Capilano shareholders who elected to receive scrip consideration receiving some cash consideration and in the need to refund to Capilano shareholders who elected to participate in the HoldCo Share Offer: see sections 7.4 and 9.2 of the scheme booklet.

Source of funds for cash consideration 10 Moneys subscribed under the HoldCo Share Offer will (to the extent that the entitlement to HoldCo shares is not scaled back or the number of Capilano shares held by a person who subscribes for HoldCo shares is fewer at the Record Date than they were when the election and subscription forms were returned to Capilano) be used to pay cash consideration under the bid: section 9.2(d) of the scheme booklet. That cash will not be used to fund working capital of BidCo or HoldCo. 11 The balance of the cash consideration will be provided by subscription for equity in HoldCo by the Consortium members equally pursuant to a commitment letter dated 27 September 2018. The maximum amount which the Consortium will be required to provide (taking into account the condition referred to at [20] below) is $161,259,509. This obligation is subject to the conditions precedent to the scheme being satisfied: see section 9.5 of the scheme booklet.

Deed poll and performance risk 12 The scheme is subject to the usual arrangements with respect to performance risk. BidCo and HoldCo have entered into a deed poll for the benefit of Capilano shareholders under which they covenant to provide the scheme consideration in accordance with the terms of the scheme and undertake all other actions attributed to them under the scheme. A copy of the deed poll is in Annexure D to the scheme booklet. This may be regarded as fulfilling a formal requirement of binding BidCo and HoldCo to perform their obligations as they (not being shareholders of Capilano) would otherwise not be bound by the scheme. As BidCo and HoldCo have no assets it is likely to be difficult to effect meaningful recovery against them should it be necessary for Capilano shareholders to seek to enforce the deed poll. The Consortium is not a party to the deed poll. Nonetheless, the terms of the scheme of arrangement provide for the performance of the payment of the cash consideration to a trust account operated by Capilano and the issue of HoldCo shares before the transfer of Capilano shares to BidCo takes effect which affords protection to the Capilano shareholders.

Recommendations 13 The directors unanimously recommend that Capilano shareholders vote in favour of the scheme in the absence of a superior proposal and subject to the independent expert continuing to conclude that the scheme is fair and reasonable and in the best interests of the Capilano shareholders. Five of eight directors hold Capilano shares directly or indirectly. They include the Chairman (Trevor Morgan) and the Deputy Chairman (Philip McHugh) who will be the chair or alternate chair of the scheme meeting, and the Managing Director/CEO Dr McKee. They intend to vote their shares in favour of the scheme, subject to the same qualification as the directors' recommendation: see sections 5.1(a) and 12.1(a) of the scheme booklet. 14 The independent expert, BDO, assessed the value of a Capilano share to be in the range of $18.93 to $22.35 per share on a controlling interest basis. As the cash consideration of $20.06 is within this range, BDO concluded that the scheme is fair and reasonable and in the best interests of Capilano shareholders. Unusually, BDO did not refer to the scrip consideration as part of its assessment of the fairness of the scheme: see section 5.1(b) of the scheme booklet and the report at Annexure A. 15 BDO did not make a conclusion in relation to this scrip consideration or the HoldCo Share Offer. However, BDO calculated the value of a HoldCo share to be in the range of $11.36 to $15.65 on a minority interest basis, which is less than the $20.06 subscription price for HoldCo shares and the cash consideration. If BDO had assessed the fairness of the scheme based solely on the scrip consideration, it would have concluded that the scheme is not fair.

Nature of HoldCo and HoldCo shareholding 16 Capilano shareholders who receive scrip consideration or subscribe for shares under the HoldCo Share Offer will become minority shareholders in an unlisted proprietary company. They will become bound by a shareholders deed as a "non-investor party" and HoldCo's constitution: see section 9.4(j) of the scheme booklet and cls 5 and 6.7(f) of the scheme of arrangement and the subscription form. A copy the shareholders deed which will be included in the scheme booklet as Annexure E and rights and liabilities of shareholders are summarised at section 9.9 of the scheme booklet. A copy of HoldCo's constitution will be at Annexure F of the scheme booklet. 17 The fact that the holding of shares in HoldCo is not equivalent to holding shares in a listed company is highlighted in the scheme booklet. The rights, relative disadvantages and risks of being a minority shareholder in a proprietary company, such as HoldCo, are discussed in the scheme booklet in the Chairman's letter and sections 3.2, 5.4, 5.5, 6, 7.11, 9.9 and 10.3 of the scheme booklet. For instance, it is pointed out that HoldCo minority shareholders will receive less information, be subject to a different regulatory regime, they may not have board representation, HoldCo may become highly leveraged and it is the Consortium's intention that no dividends will be declared or paid. It is pointed out that under the shareholders deed, substantial holders (that is, those who hold 5% or more of HoldCo shares) have the right to participate in future capital raisings and have pre-emptive rights in respect of the sale of other shareholders' shares but other former Capilano shareholders will not. A non-investor shareholder with more than 25% of those shares will have the right to appoint a nominee director to HoldCo's board. If there is no such shareholder, the non-investor shareholders who have an aggregate share ownership percentage of 10% or greater together may appoint a nominee director. The lack of liquidity in shares in HoldCo is emphasised and the fact that the Consortium will not provide liquidity is pointed out on more than one occasion. It is also noted that, consistent with usual private equity practice, the Consortium may seek to exit (by trade sale, asset sale or initial public offering) their investment in HoldCo or Capilano at some time in the future and other shareholders may not agree with the timing of that decision or the price achieved.

Possible appointment of a custodian 18 If Capilano shareholders elect to receive scrip consideration with the result that, when HoldCo shares are issued on a fully diluted basis, there would be more than 50 shareholders, HoldCo shares will only be issued directly to substantial holders and the Consortium. Scrip consideration and HoldCo shares taken up in the HoldCo Share Offer in respect of shareholders who would not be substantial holders will be issued to a custodian and they will not receive a share certificate but rather a confirmation that the share certificate has been given to the custodian. This is pointed out in the Chairman's letter and at sections 3.1, 4, 6, 7.2(e), 7.4, 7.5, 7.12(h), 9.1(a), 9.4(e) and (j) and 9.9 of the scheme booklet. 19 As a result, HoldCo's proposed constitution has been amended to provide that all shareholder resolutions must be conducted on a poll at which a proxy or appointment of representative of the custodian may be counted for each person for whom the custodian holds shares.

Conditions of the scheme 20 The scheme will be subject to the conditions in clause 3 of the Implementation Agreement being: approval of the scheme by the requisite majority of shareholders, court approval, the number of HoldCo shares issued pursuant to the scrip consideration and the HoldCo Share Offer comprising at least 15% of the issued share capital of HoldCo on a fully diluted basis, and as at 8 am on the day of the second court hearing, there is no regulatory action restraining or prohibiting the scheme and no Material Adverse Effect occurs before that time. 21 Wroxby and its parent company, Australian Capital Equity Pty Ltd, have indicated that Wroxby intends (in the absence of a superior proposal) to vote in favour of the scheme and elect the scrip consideration. It is therefore likely that the condition requiring that at least 15% of the issued share capital of HoldCo be taken up by shares issued under the HoldCo Share Offer or as scrip consideration will be satisfied in the absence of a superior proposal. 22 HoldCo and BidCo have confirmed that they are aware of recent adverse media coverage in relation to the Allowrie honey brand and honey which Capilano supplies under supermarket brands, including the matters described in the ASX announcement released by Capilano on 3 September 2018 (allegations) and they have confirmed that, to the extent to which they are aware of them, those allegations will not constitute a Material Adverse Effect and they have waived their rights in respect of them.

Foundation share 23 Capilano Beekeepers will not participate in the scheme meeting and it has agreed in principle to transfer the foundation share to BidCo for one dollar. This will result in Capilano becoming a wholly owned subsidiary of BidCo if the scheme is implemented. HoldCo's constitution will not provide for a foundation share or any rights for directors to be appointed to represent beekeepers. However, the shareholders deed will provide for a right to appoint one beekeeper director to the board of HoldCo: see section 9.11 of the scheme booklet.

"Lost" Capilano shareholders 24 Capilano's share registry has advised that previous shareholder communications sent to the registered postal address of 36 shareholders have been returned and these shareholders have been marked as "lost" on Capilano's register of members. Given the size of the scheme booklet (470 pages), Capilano does not propose to dispatch a hard copy of it to those scheme participants. Instead, on 17 September 2018, Capilano sent a letter to shareholders without a nominated electronic address for receiving communications (including the "lost" shareholders) referring to the scheme and inviting them to update their address details and to provide an electronic address to which documents relating to the scheme booklet could be sent. Any "lost" shareholder who provides updated address details in response to the letter in sufficient time will be sent hard copies of the scheme booklet and accompanying forms.

Options 25 Conditional on the scheme becoming effective, Dr McKee will be paid $160,000 for the cancellation of his 60,000 options. Senior counsel for Capilano advised the Court that this price was arrived at by negotiation. I note that 30,000 of the options may be exercised at $21.00 per share and their expiry date is 30 June 2024. The other 30,000 options may be exercised at $15.85 per share and their expiry date is 30 June 2025. The ASX has waived compliance with Listing Rule 6.23 to permit the options being dealt with in this manner: see sections 12.3(c) and 13.3. Having regard to the share price of at least half of the options, it was submitted, and I accept, that $160,000 does not appear to be excessive. It would, however, have been preferable that that be established by valuation evidence. 26 Dr McKee will, if the scheme is implemented, become HoldCo's Group CEO and his remuneration has not yet been determined.

Exclusivity arrangements 27 Clause 10 of the Implementation Agreement contains exclusivity provisions which include "no shop", "no talk" and "no due diligence" restrictions and "notification" and "matching rights" obligations. The "no talk", "no due diligence" and "notification" obligations are subject to the overriding obligation not to breach directors' fiduciary obligations and statutory duties. Consistent with authority, the "no shop" restriction is not subject to a fiduciary carve out. The exclusivity period is nine months from the date of the Implementation Agreement or the earlier termination of the Implementation Agreement. While it is submitted that this is "reasonable", it is a long period and likely tests the outer limits of what might be regarded as reasonably required to effect the proposed transaction. Having said that, these provisions, which are set out at sections 5.6(c) and 13.1(c) of the scheme booklet, are generally consistent with those which have been found to be acceptable in other cases. 28 There is a reimbursement fee which is summarised at sections 5.6(d) and 13.1(e) of the scheme booklet. It is notable that the fee of $1.45 million is not payable merely because the Capilano shareholders or the Court does not approve the scheme. It generally complies with the guidance given by the Takeovers Panel that the fee should not exceed one per cent of the total equity value of Capilano. That is so, having regard to the cash consideration and the condition that the number of HoldCo shares issued pursuant to the scrip consideration and the HoldCo Share Offer comprise at least 15% of the issued share capital of HoldCo on a fully diluted basis.

Implementation steps 29 The scheme will be implemented as follows, assuming that it progresses in accordance with the "Key Dates" set out at the front of the scheme booklet: (1) Capilano shareholders must make an election before 5 November 2018 by completing and returning to Capilano an election form. If they elect to receive the scrip consideration they must also return a subscription form by that date. If, having elected to receive the scrip consideration, they also wish to participate in the HoldCo Share Offer, they must also pay $20.06 for each HoldCo share for which they wish to subscribe. (2) Capilano will announce indicative scale back (if any) based on the elections that it has received on 6 November 2018. This announcement will also confirm, on an indicative basis, whether a custodian will be required to hold shares issued as scrip consideration and pursuant to the HoldCo Share Offer. (3) Eligibility to vote at the scheme meeting will be determined on 13 November 2018. (4) The scheme meeting is scheduled to be held on 15 November 2018. The Chairman of the board, Trevor Richard Morgan, or failing him, the Deputy Chairman, Philip Francis McHugh, both independent directors, have agreed to act as chair of the scheme meeting. (5) The second court hearing will be held on 22 November 2018. (6) If the Court approves the scheme, the effective date of the scheme will be 23 November 2018. (7) The Record Date for determining entitlements to scheme consideration will be 28 November 2018. (8) Capilano is expected to announce the final result of the elections and any final scale back, if that is applicable, on 29 November 2018. This announcement will also confirm whether a custodian will be required to hold HoldCo shares upon implementation of the scheme. (9) The implementation date will be 5 December 2018. (10) Not less than two business days before the implementation date, BidCo must deposit cleared funds in a trust account operated by Capilano as trustee for Capilano shareholders who elected to receive cash consideration, who made no election or who are entitled to receive cash consideration by reason of scale back arrangements applied to the scrip consideration. (11) On the implementation date, Capilano must pay the cash consideration to shareholders entitled to receive it from moneys subscribed for HoldCo shares under the HoldCo Share Offer and as provided by the Consortium. HoldCo will issue HoldCo shares to Capilano shareholders who made a valid election to receive scrip consideration and to those who elected to subscribe for HoldCo shares in the HoldCo Share Offer, subject to scale back arrangements. Ordinary shares in Capilano will be transferred to BidCo. If any subscriptions for shares in the HoldCo Share Offer are scaled back, subscription moneys for the scaled back shares will be refunded to the subscribers as soon as practicable after the implementation date.

Evidence 30 The affidavits of: (1) Luke Bradshaw Hastings affirmed on 20 September 2018; (2) Deanne Conway affirmed on 5 October 2018; (3) Robert Neville Newey, Annette Maree Zbasnik, Trevor Morgan, Philip McHugh, Mark Whitaker each affirmed on 8 October 2018; (4) Milorad Gajic affirmed on 9 October 2018; and (5) Rebecca Maslen-Stannage sworn on 8, 9 and 11 October 2018. 31 Exhibits A and B were tendered. Those exhibits comprise drafts of the scheme booklet and its annexures comprising BDO's independent expert's report, the Implementation Agreement, the scheme of arrangement, a deed poll executed by BidCo and HoldCo for the benefit of Capilano shareholders, a draft shareholders deed, a draft HoldCo constitution, and a draft of the notice of meeting. Also tendered were exhibit C which is a copy of a letter entitled "Project Bravo-Equity Commitment Letter" dated 27 September 2018 by ROC and Wattle Hill to BidCO in relation to the provision of cash consideration up to $161,259,509 and annexures RMS-1 to 4 which include (relevantly) correspondence between ASIC and Capilano's legal advisers, a draft custodian agreement, proposed amendments to HoldCo's constitution and forms of proxy, election and subscription to be included in the scheme booklet when despatched.

Applicable principles 32 The Court will order that a scheme meeting be convened and approve a draft explanatory statement to be sent to shareholders if it is satisfied that: (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. That issue is in contention in relation to the HoldCo Share Offer; (3) The scheme booklet will provide proper disclosure to shareholders; (4) The scheme is bona fide and properly proposed; (5) ASIC has had a reasonable opportunity to examine the terms of the scheme and the scheme booklet and make submissions and it has had at least 14 days' notice of the proposed hearing date; (6) The procedural requirements of the Federal Court (Corporations) Rules 2000 (Cth) have been met; and (7) The scheme is of such a nature and cast in such terms that, if it receives a statutory majority at the meeting, the Court would be likely to approve it on the hearing of a petition which is unopposed. 33 The application for leave to summon a scheme meeting is in the nature of an interlocutory proceeding and is a preliminary to the final determination which is to be made when the matter comes back to the Court for approval after the holding of the meetings which have been directed: Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485 at 504-05. By granting leave, the Court does not give its imprimatur to the proposed scheme. At the stage of ordering a scheme meeting, the Court does not ordinarily go very far into the question of whether the arrangement is one that warrants the approval of the Court; that question is to be answered when the scheme returns to the Court for final approval. That is not to exclude the possibility that a scheme may appear on its face so blatantly unfair or otherwise inappropriate that it should be stopped in its tracks before going any further: see Re Foundation Healthcare Limited (2002) 42 ACSR 252; [2002] FCA 742 at [36] and [44] per French J, cited with approval in Re CSR Limited (2010) 183 FCR 358; [2010] FCAFC 34 at [58] per Keane CJ and Jacobson J. Chief Justice Keane and Jacobson J went on to say (at [59] and [61]) that the adverb "blatantly" and the term "contrary to public policy" emphasise that the enquiry under s 411(1) is not intended to resolve difficult questions on which reasonable minds may differ, although it has long been recognised that a clear want of utility in putting in train the process of s 411(1) is a good reason to decline to order the convening of the first meeting. 34 At the first court hearing, the Court is concerned with whether the proposed scheme is one which is adequately explained to those who have a financial interest in it and whether there is any obvious flaw in the scheme, such that it would be inappropriate even for it to be submitted for consideration: see Re Abacus Funds Management Ltd (2006) 24 ACLC 211; [2005] NSWSC 1309 at [23]. The Court is not required to be satisfied that no better scheme could have been proposed. The question is whether it is reasonable to suppose that sensible business people might consider the arrangement proposed to be of benefit to members: see Centrebet International Limited [2011] FCA 870 at [29] per Emmett J.

ASIC's concerns 35 ASIC has raised concerns about the propriety of the proposed HoldCo Share Offer and the custodian arrangements on the following bases: (1) HoldCo is fundraising without issuing a prospectus containing disclosures under Chapter 6D. This concern is amplified by the fact that HoldCo is a proprietary company, not a public company. ASIC says that the HoldCo Share Offer is not part of an "arrangement" for the purposes of s 411 so that it does not fall within the s 708(17) exemption from disclosure under Chapter 6D. Section 113(3) of the Corporations Act prohibits offers by proprietary companies which require disclosure under Chapter 6D. (2) The use of a custodian to ensure that the number of shareholders in HoldCo does not exceed 50 and thus avoid the need for HoldCo to be a public company raises fairness and public policy concerns. (3) Capilano shareholders who obtain HoldCo shares as scrip consideration and under the HoldCo Share Offer will not have the same rights to disclosure and other regulatory protections (such as those under Chapter 6) as shareholders in a public company and it would be difficult to achieve this outcome by way of a takeover. (4) Despite language used in the custodian agreement that shareholders are "absolutely entitled" to the shares held by the custodian on their behalf, having regard to the constraints in the shareholders deed on the transfer of shares to a person entitled to them if it would breach the 50 shareholder limit, it is not clear that the shareholder is "absolutely entitled" and that may have implications for capital gains tax rollover relief.

Sections 113, 411(17) and 708(17) of the Corporations Act 36 Section 113 relates to proprietary companies and provides as follows: 113 Proprietary companies (1) A company must have no more than 50 non-employee shareholders if it is to: (a) be registered as a proprietary company; or (b) change to a proprietary company; or (c) remain registered as a proprietary company. Note: Proprietary companies have different financial reporting obligations depending on whether they are small proprietary companies or large proprietary companies (see section 45A and Part 2M.3). (2) In applying subsection (1): (a) count joint holders of a particular parcel of shares as 1 person; and (b) an employee shareholder is: (i) a shareholder who is an employee of the company or of a subsidiary of the company; or (ii) a shareholder who was an employee of the company, or of a subsidiary of the company, when they became a shareholder. (3) A proprietary company must not engage in any activity that would require disclosure to investors under Chapter 6D, except for an offer of its shares to: (a) existing shareholders of the company; or (b) employees of the company or of a subsidiary of the company. (3A) An offence based on subsection (3) is an offence of strict liability. Note: For strict liability, see section 6.1 of the Criminal Code. (4) An act or transaction is not invalid merely because of a contravention of subsection (3). Note: If a proprietary company contravenes this section, ASIC may require it to change to a public company (see section 165). 37 Section 411(17) provides as follows: (17) The Court must not approve a compromise or arrangement under this section unless: (a) it is satisfied that the compromise or arrangement has not been proposed for the purpose of enabling any person to avoid the operation of any of the provisions of Chapter 6; or (b) there is produced to the Court a statement in writing by ASIC stating that ASIC has no objection to the compromise or arrangement; but the Court need not approve a compromise or arrangement merely because a statement by ASIC stating that ASIC has no objection to the compromise or arrangement has been produced to the Court as mentioned in paragraph (b). 38 Chapter 6D of the Corporations Act sets out the disclosure requirements for fundraising by way of offers for shares. Section 708 sets out offers that do not need disclosure. Section 708 relevantly provides: 708 Offers that do not need disclosure … Compromise or arrangement under Part 5.1 (17) An offer of securities does not need disclosure to investors under this Part if it is made under a compromise or arrangement under Part 5.1 approved at a meeting held as a result of an order under subsection 411(1) or (1A). ASIC has pointed out that this provision has been modified under s 741 and s 1020F of the Corporations Act by ASIC Instrument 2015/358 as follows: 7 Disclosure relief for Part 5.1 compromises or arrangements: legislative drafting clarification (1) Chapter 6D of the Act applies to all persons as if subsection 708(17) were modified or varied by omitting "approved at a meeting held" and substituting "approved at a meeting held, or to be considered at a meeting to be held,". (2) Part 7.9 of the Act applies in relation to a person making an unsolicited offer to purchase a financial product as if subparagraph 1019D(1)(d)(iii) were modified or varied by omitting "approved at a meeting held" and substituting "approved at a meeting held, or to be considered at a meeting to be held,".

Is the HoldCo Share Offer part of an "arrangement"? 39 The question of whether the HoldCo Share Offer is part of the "arrangement" which is the subject of s 411 is critical to whether s 708(17) exempts the Offer from disclosure under Chapter 6D, and therefore whether or not it would breach s 113(3), since HoldCo is a proprietary company. 40 Mr Barnett submitted that, even though the definition of "scheme consideration" in cl 1.1 of the scheme of arrangement set out in Annexure C to the scheme booklet refers to both consideration for the transfer of Capilano Shares and HoldCo shares subscribed for in the HoldCo Share Offer, there is a very clear bifurcation and it is only the first element which relates to the consideration for the Capilano shares themselves. The definition of "scheme consideration" is as follows: Scheme Consideration means the: (a) consideration payable by BidCo or [HoldCo] for the transfer of the Scheme Shares held by a Scheme Participant to BidCo; and (b) [HoldCo] Shares subscribed for by Scrip and Offer Participants under the [HoldCo] Share Offer, under this document. A "Scrip and Offer Participant" is someone who has both elected to receive the scrip consideration and subscribed for shares in the HoldCo Share Offer. 41 Mr Barnett submitted that, although it is necessary to have elected to receive the scrip consideration and HoldCo shares will only be issued under the HoldCo Share Offer if the scheme is implemented, it is made very clear that the subscription for HoldCo shares under the Offer is not consideration for Capilano shares. He says that that is not surprising since a participant in that Offer must pay $20.06 for each share it is allotted under the Offer. Counsel referred to Re Timor Sea Petroleum NL (2000) 35 ACSR 186; [2000] VSC 337, which had been relied on by Capilano for the proposition that fundraising fell within the relevant exemptions (albeit that s 113 was not in issue in that case). Mr Barnett submitted that there was an important distinction between the proposed HoldCo Share Offer and the trustee stock raising found to be part of the "arrangement" requiring approval under s 411 in Re Timor Sea. The trustee stock raising provided for shares in the scheme company to be allotted to a trustee to be onsold, in effect, to raise working capital for the scheme company. Mr Barnett noted that in Re Timor Sea at [22], Warren J found that the trustee stock scheme and related covenant satisfied the requirements of an "arrangement" because the members were precluded from any complaint or dispute about breach of the statutory contract between them and the company by reason of the issue of shares to the trustee and the abandonment of rights in return for the undertaking to pay the net proceeds of sale as subscription moneys. In contrast, the HoldCo Share Offer will not raise working capital for Capilano but instead raises capital for HoldCo to provide to BidCo to pay cash consideration. 42 As conceded by Mr Barnett, Courts have found the term "arrangement" to be of wide import and it is not subject to the limitations entailed in the word "compromise". "Arrangement" must be construed liberally and implies some element of "give and take" or the provision of some "benefit". In reality, almost any arrangement otherwise legal which touches and concerns the rights and obligations of the company or its members or creditors may come under s 411, but it cannot authorise something that is contrary to law: see Re Opes Prime Stockbroking Ltd (No 2) (2009) 179 FCR 20; [2009] FCA 813 at [29]-[30] per Finkelstein J, citing Marlborough Gold Mines at 501, Re NFU Development Trust Ltd [1972] 1 WLR 1548, Re International Harvester [1953] VR 669 at 672 and Re St James Court Estate Ltd [1944] Ch 6. It is unnecessary to cite authority for the proposition that the term is wide enough to include transactions which effect a change of control of the scheme company. 43 At this stage, I am satisfied that there is a sufficient nexus between the HoldCo Share Offer and the transaction to effect the change of control of Capilano to bring it within the concept of an "arrangement". While it is true that the funds raised by the HoldCo Share Offer will not be used as working capital for Capilano and that distinguishes this proposal from that considered by Warren J in Re Timor Sea, the $20.06 subscription price will be used to fund some part of the cash consideration and therefore provide a benefit to some Capilano shareholders, the Offer will come to nothing if the scheme meeting or the Court does not approve the scheme, the shares offered under the Offer are the same class as those which a Capilano shareholder may elect to receive as scrip consideration and the Offer is only available to those who elect to receive the scrip consideration. 44 On that basis, having regard to s 708(17) as modified by ASIC's Instrument 2015/358, the HoldCo Share Offer will be exempt from the requirement for disclosure under Chapter 6D and the Offer will therefore not be prohibited by s 113(3).

Public policy issue 45 ASIC further submitted that, even if the HoldCo Share Offer is part of the "arrangement" to which orders made under s 411 applied (and it was therefore exempt from the disclosure requirements of Chapter 6D by reason of s 708(17) so that the prohibition in s 113(3) did not apply), there are features of the offering which are not fair. Because it is necessary to limit the number of shareholders in HoldCo to not more than 50, it may become necessary for scrip consideration and shares issued pursuant to the HoldCo Share Offer to be issued to a custodian. Mr Barnett says that, while it may be true that some public company shareholders elect to hold their shares through custodians (as submitted by Mr Brereton), the use of this device is contrary to public policy because it enables the circumvention of protections which Parliament intended to be afforded to shareholders of companies with more than 50 shareholders. For instance HoldCo shareholders will not have the same rights to disclosure and other regulatory protections (such as those under Chapter 6) as shareholders in a public company and it would be difficult to achieve this outcome by way of a takeover. Mr Barnett submitted that disclosure is not a substitute for the substantive protections available to shareholders in public companies and the Court should not sanction offers of shares in a proprietary company being made to over 3300 Capilano shareholders. 46 The use of the custodian arrangement to ensure that HoldCo will have less than 50 shareholders is disquieting in circumstances were it arises from a scheme proposed to over 3300 Capilano shareholders. However, for reasons previously given, the structure is not illegal. I have formed the view that this issue should not prevent the Court from making orders under s 411(1) for the following reasons. 47 There is some force to ASIC's argument that the offer of scrip in a proprietary company together with the custodian structure has the effect of circumventing protections afforded to investors in public companies and that is undesirable from a public policy perspective however good the disclosure is. That argument may well be persuasive if shareholders in a listed company were only being offered shares in a proprietary company. 48 In this case, Capilano shareholders are being offered a cash alternative which the directors have recommended in the absence of a superior offer, and the independent expert has opined that it is fair and reasonable and in the best interests of Capilano shareholders. 49 Capilano has drawn to the Court's attention the fact that there are at least three schemes which have been approved by Courts involving so called "stub equity" offerings in a private equity context. Each of them has involved alternative consideration of cash or scrip offered by a proprietary company and at least two of the transactions involved a custodian or nominee structure to ensure that the 50 member limit was not breached. The companies involved were Pepper Group Limited (2017), Patties Food Limited (2016) and Connect East Group Limited (2011). There are no reasons available in relation to those matters. None of those transactions involved an equivalent of the HoldCo Share Offer but as I have found on a preliminary basis that the Offer is integral to the "arrangement" the subject of the proposal and the shares are of the same class as those offered as scrip consideration, it is my view that that should not make a difference. 50 There is substantial disclosure in the scheme booklet concerning the difference between holding shares in Capilano and holding shares in a proprietary company and the limitations and risks associated with holding shares in the proprietary company with the limited rights set out in the shareholders deed. This disclosure is prominently made in the Chairman's Letter as well as in the body of the scheme booklet. I am satisfied that a reasonable shareholder reading that disclosure would be on notice of the nature of the investment that they would be undertaking if they elected to receive scrip consideration or participate in the HoldCo Share Offer. Depending on the number and profile of those shareholders who elect to receive scrip consideration or subscribe to the HoldCo Share Offer (for instance, if it was only Wroxby and Bega Cheese) there may be few concerns from a public policy viewpoint about approving the scheme. 51 Further, s 708(17) and s 113(3) have long existed in the legislation. The rationale for s 708(17) is that disclosure under Chapter 6D is not required in a context where, in addition to the legislative requirements for disclosure in schemes, the provision of information which is material to the decision of whether and how a shareholder will vote on the scheme is subject to the supervision of the Court and the question of fairness is a relevant consideration in the determination of final orders. It is important to remember that s 411's context is Part 5.1 of the Corporations Act and that the flexibility of that Part is necessary to accommodate reconstruction of distressed companies in the interests of their creditors and shareholders as well as transactions designed for change of control with features which cannot easily be accommodated within Chapter 6. 52 Last, the issue of whether the scheme has been proposed in order to avoid the requirements for takeovers under Chapter 6 is a matter which should be determined at the second court hearing. The fact that ASIC may elect not to issue a letter under s 411(17)(b) is not determinative of whether the Court is in a position to make a final order and it might be expected that further submissions and evidence may be tendered to address ASIC's submission on this point set out at [45] above. 53 It is appropriate that the views of the shareholders be sought in relation to the proposal and the final determination of the "fairness" issue to await the second court hearing. At the second court hearing, the Court will have the benefit of knowing whether the scheme was approved, whether the custodian arrangement will need to be employed, information derived from tagged votes and the benefit of any submissions made by the proponents of the scheme and any shareholder or ASIC who elects to attend to oppose or support final orders being made.

Disclosure concerning capital gains tax rollover relief 54 ASIC submitted that it was not clear that shareholders would be "absolutely entitled" to HoldCo shares in such a manner as to entitle a former Capilano shareholder to capital gains tax rollover relief, the availability of which was discussed in the scheme booklet at section 11.2. That is because the former Capilano shareholder will have bound themselves under the shareholders deed not to call for the transfer of the shares to itself if that would breach the 50 shareholder limit imposed by s 113. ASIC suggested that there should be a disclosure that this issue was not certain and a shareholder should seek independent advice. 55 Capilano has provided evidence from KPMG, its tax adviser. In KPMG's view, shareholders will be "absolutely entitled" to HoldCo shares held by the custodian. In KPMG's experience in similar matters, that is the view taken by the Australian Taxation Office and the disclosure in section 11 of the scheme booklet is accurate. Counsel for ASIC, Capilano and BidCo/HoldCo considered it unnecessary for the Court to determine the issue definitively. The Court formed the view, on the basis of the KPMG advice, that the form of disclosure in section 11.2 was adequate for the purpose of making orders under s 411(1).

Other matters 56 ASIC had advised Capilano of other concerns, but those concerns were addressed by the disclosure discussed during the first court hearing and by: (1) Capilano's agreement to tag votes by shareholders with an interest in more than 3.67% of Capilano's share capital so that any influence they exert on the outcome of the vote at the scheme meeting can be the subject of submissions at the second court hearing. This relates to a concern of ASIC that such shareholders may end up holding more than 5% of HoldCo's fully diluted share capital which would, under the shareholders deed, confer greater rights on them than other Capilano shareholders who elect to receive the scrip consideration. (2) Capilano's agreement to disclose - under the heading "ASIC and ASX" in the boilerplate disclosures at the front of the scheme booklet - a summary of ASIC's primary concerns which caused it to make submissions at the first court hearing and the fact that it intended to make submissions at the second court hearing. The issues were: (1) its public policy concerns deriving from the fact that HoldCo is a proprietary company, not a public company, and it will be able to maintain that status by means of the custodian arrangements even if more than 48 Capilano shareholders elect to take the scrip consideration; and (2) the fairness issues on the basis of which it sought to have tagged the votes of Capilano shareholders (as discussed above). This disclosure was sought by ASIC having regard to comments made by Robson J in In the matter of Unity Mining Limited [2016] VSC 831 and because those issues would not necessarily otherwise be disclosed to the market. In my view, the need for such disclosure should be considered on a case by case basis. In this case it was unnecessary for me to decide whether such disclosure was required to put shareholders in an appropriately informed position to vote for or against the scheme approval resolution because Capilano was willing to accommodate ASIC's request.

Conclusion 57 Based on the evidence and having regard to the matters discussed above, I was satisfied that it was appropriate to make orders convening a scheme meeting to consider whether to approve the scheme and for the despatch of the scheme booklet materially in the form of Exhibit B with proxy forms, election forms and subscription forms, as well as emails by which those documents would be conveyed to shareholders. I certify that the preceding fifty-seven (57) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Farrell.