Australian Securities Commission v Marlborough Gold Mines Ltd

Federal Court of Australia|2019-04-16|Before: Moshinsky J

Introduction 1 The plaintiff (Verdant) applies for orders under s 411(1) of the Corporations Act 2001 (Cth) that, among other things, a meeting (Scheme Meeting) of the holders of ordinary shares in Verdant other than Washington H. Soul Pattinson and Company Limited (Scheme Shareholders) be convened for the purposes of considering and, if thought fit, agreeing to a scheme of arrangement proposed to be made between Verdant and the Scheme Shareholders (the Scheme). 2 If the proposed Scheme is approved by Scheme Shareholders and implemented: (a) all of the ordinary shares in Verdant held by Scheme Shareholders at the "record date" (Scheme Shares) will be transferred to CD Capital Natural Resources Fund III LP (CD Capital); (b) Scheme Shareholders will receive $0.032 per Verdant share as consideration for the transfer of their Verdant shares to CD Capital (Scheme Consideration); and (c) the Scheme will effect the acquisition by CD Capital of approximately 67.6% of the shares in Verdant, with Washington H. Soul Pattinson and Company Limited (WHSP) continuing to hold approximately 33.4% of the shares in Verdant. 3 On 16 April 2019, I made orders substantially in the terms sought by Verdant, including an order that a meeting of shareholders other than WHSP be convened for the purposes of considering and, if thought fit, agreeing to the Scheme. These are my reasons for making those orders.

The application, evidence and hearing 4 The proceeding was commenced by originating process. By that document, Verdant applied for orders including: (a) orders pursuant to s 411(1) of the Corporations Act that Verdant convene and hold a meeting of Scheme Shareholders, such meeting to be held on 29 May 2019 commencing from 9.15 am (or such other time as ordered by the Court) held at Level 26, 181 William Street, Melbourne, Victoria, for the purposes of considering and, if thought fit, agreeing (with or without modification) to the Scheme; and (b) such directions as to the manner in which the Scheme Meeting is to be convened and conducted, the time and place at which the meeting is to be held, the arrangements for voting (in person or by proxy) and the persons authorised to act as chairperson and alternate chairperson at the Scheme Meeting as the Court deems proper. 5 In support of its application for these orders, Verdant relied on the following affidavits: (a) an affidavit of Christopher Neale Tziolis (a director of Verdant) affirmed on 1 April 2019 (First Tziolis Affidavit); (b) an affidavit of Mr Tziolis affirmed on 12 April 2019 (Second Tziolis Affidavit); (c) an affidavit of James Dean Whiteside (a director of Verdant) affirmed on 11 April 2019 (Whiteside Affidavit); (d) an affidavit of Jason Anthony Conroy (a director of Verdant) affirmed on 10 April 2019 (Conroy Affidavit); (e) an affidavit of Carmela Daniele (the Founder and Chief Investment Officer of CD Capital) sworn 11 April 2019 (Daniele Affidavit); (f) an affidavit of Kylie Marie Lane (a partner of Ashurst, the solicitors for Verdant) affirmed on 12 April 2019 (First Lane Affidavit); (g) an affidavit of Ms Lane affirmed on 15 April 2019 (Second Lane Affidavit); and (h) an affidavit of Richard Stewart of PricewaterhouseCoopers Securities Limited (PwC Securities) affirmed on 15 April 2019. Annexed to this affidavit was the independent expert's report prepared by PwC Securities. 6 In addition, admitted into evidence were an updated copy of the Scheme (Exhibit 1) and an updated copy of the scheme booklet for the Scheme (Scheme Booklet) (Exhibit 2). 7 At the hearing on 16 April 2019, Ms E Boros of counsel appeared for Verdant and made submissions in support of the application. Detailed written submissions were also provided in advance of the hearing. Mr B Holmes of counsel appeared, with leave, on behalf of CD Capital. He did not make submissions.

Background 8 Verdant is a public company limited by shares and is listed on the Australian Securities Exchange (ASX) under the ASX ticker symbol "VRM". It is focussed on the discovery, development and operation of fertiliser and industrial mineral projects located in close proximity to existing transport infrastructure, predominantly in the Northern Territory of Australia. 9 Verdant has 1,103,761,492 ordinary shares on issue. As at 11 April 2019, Scheme Shareholders held 761,820,425 Verdant shares. 10 The commercial purpose of the Scheme is for CD Capital to acquire all of the Scheme Shares, and for CD Capital and WHSP to jointly advance the project to develop a significant phosphate fertiliser province in the western Georgina Basin of the Northern Territory (Ammaroo Phosphate Project). Taking into account Verdant's cash requirements, and the significant capital required to advance the Ammaroo Phosphate Project, Verdant considered a number of funding alternatives and strategies over the 12 months prior to agreeing to propose the Scheme. 11 Verdant entered into a scheme implementation agreement with CD Capital (SIA) on 11 March 2019 pursuant to which it agreed to, among other things, propose the Scheme. As noted above, the Scheme provides for the acquisition by CD Capital of approximately 67.6% of the shares in Verdant, with WHSP continuing to hold the remaining (approximately 33.4%) shares in Verdant. 12 Verdant formed a committee of independent directors, comprised of Mr Whiteside, Mr Conroy and Mr Tziolis (Independent Board Committee) to consider the proposed Scheme. The Independent Board Committee was established due to the association of Robert Cooper (the other director of Verdant) with WHSP. Mr Cooper was not involved in Independent Board Committee meetings relating to the proposed Scheme prior to entry into the SIA. 13 The draft scheme booklet for the purposes of s 412(1) of the Corporations Act and reg 5.1.01 of the Corporations Regulations 2001 (Cth) (the Regulations) has been revised to address comments from the Australian Securities and Investments Commission (ASIC). The latest version of the booklet is Exhibit 2 (referred to in these reasons as the Scheme Booklet). 14 The following additional documents relating to the Scheme were executed on 11 March 2019: a loan agreement between CD Capital and Verdant (Loan Agreement), a shareholders' agreement between CD Capital, WHSP and Verdant (Shareholders' Agreement) and a Deed of Irrevocable Undertaking by WHSP in favour of CD Capital (Deed of Irrevocable Undertaking). 15 WHSP provided a letter to Verdant dated 11 March 2019 stating that it intends to consent to the Scheme on the terms and conditions of the SIA and agrees not to make any objection to the Scheme to ASIC or the Court, in the absence of a superior proposal and provided the Deed of Irrevocable Undertaking is not terminated in accordance with its terms. The WHSP letter also states that WHSP will immediately notify Verdant if it changes, or is likely to change, its intentions in respect of the Scheme. No notification of a change to WHSP's intentions has been received. 16 ASIC granted "joint scheme" relief to CD Capital and WHSP in relation to the Shareholders' Agreement and Deed of Irrevocable Undertaking pursuant to instrument 19-0178. The ASIC relief is referred to in section 10.2(c) (Conditions precedent) and section 10.6(b) (ASIC relief) in the Scheme Booklet, and in the First Lane Affidavit and the Second Tziolis Affidavit. The ASIC relief is subject to several conditions. The Second Tziolis Affidavit and First Lane Affidavit provide evidence from Mr Tziolis and Ms Lane, respectively, that each is not aware of any reason why any of those conditions would not be satisfied. 17 PwC Securities, the independent expert appointed by the Independent Board Committee to consider the Scheme, prepared a draft independent expert's report, which was lodged with ASIC on 1 April 2019. The independent expert's report has been revised to address comments from ASIC. The revisions do not affect the opinion expressed in the initial draft report that the Scheme is fair and reasonable to, and in the best interests of, Scheme Shareholders, in the absence of a superior proposal. 18 CD Capital's obligations in respect of the Scheme are secured by entry into a Deed Poll. The Deed Poll is in the usual form. The Deed Poll binds CD Capital in favour of Scheme Shareholders to: (a) perform the steps attributed to it under the Scheme as if it were a party to the Scheme; and (b) provide the scheme consideration in accordance with the terms of the Scheme. 19 The essential mechanism of the Scheme is as follows: (a) if the Scheme is to proceed, all conditions precedent (other than Court approval and any Court-imposed conditions) will be either satisfied or waived by 8.00 am on the date on which the application for approval comes before the Court; (b) if the Scheme is approved by Scheme Shareholders and the Court, it becomes effective on the lodging of an office copy of the Court's order with ASIC, which is currently expected to occur on 3 June 2019 (Effective Date); (c) the Implementation Date is expected to be 18 June 2019. On the Implementation Date, the Scheme Shares will be transferred to CD Capital, and the Scheme Consideration will be paid to Scheme Shareholders; and (d) at that time, it is anticipated that Verdant would be de-listed from the ASX.

Applicable principles 20 Part 5.1 of the Corporations Act provides a procedure whereby an arrangement between a company and its members (a scheme) can be made binding on all members. 21 The procedure involves three main steps: (a) an application to the Court for an order that the company convene a meeting of its members; (b) if such an order is made, the convening of such a meeting at which a resolution agreeing to the scheme is considered, and perhaps passed; and (c) if the resolution is passed by the necessary majority (see s 411(4)), an application to the Court for approval of the Scheme. 22 The hearing on 16 April 2019 was concerned with the first stage of that process. 23 This procedure is regulated by s 412 of the Corporations Act and reg 5.1.01 of, and Sch 8 to, the Regulations, each of which relates to the information about the scheme that is required to be sent to the members. 24 The Scheme is also regulated by the Federal Court (Corporations) Rules 2000 (Cth) (Rules). 25 Section 411(1) of the Corporations Act confers a discretion on the Court to make an order if: (a) a compromise or arrangement is proposed between a Part 5.1 body and its members (or any class of them); (b) an application for the order is made in a summary way by the body; (c) 14 days' notice of the hearing of the application has been given to ASIC (or such lesser period as the Court or ASIC permits); and (d) the Court is satisfied that ASIC has had a reasonable opportunity to: (i) examine the terms of the proposed compromise or arrangement to which the application relates and a draft explanatory statement relating to the proposed compromise or arrangement; and (ii) make submissions to the Court in relation to the proposed compromise or arrangement and the draft explanatory statement. 26 It is well established that a scheme designed to effect an acquisition by one company of the shares in another may be an "arrangement" for the purposes of s 411(1) of the Corporations Act: Re Foundation Healthcare Ltd (2002) 42 ACSR 252 at [39]; Re BigAir Group Ltd [2016] FCA 1296 at [33]. 27 A "Part 5.1 body" is defined in s 9 of the Corporations Act in terms that include a company registered under the Corporations Act. 28 Section 411 of the Corporations Act does not state the criteria that must be satisfied before a meeting is ordered, but it is clear that the court has a discretion to exercise in relation to whether the first meeting should be ordered: Re CSR Ltd (2010) 183 FCR 358 at [8]. 29 As explained by Davies J in Re Cytopia Ltd [2009] VSC 560 at [3], in a passage relied on in Re AXA Asia Pacific Holdings Ltd [2011] VSC 4 at [11]: The authorities make it clear that the Court's role at this stage is not to express a view on whether the proposed scheme should be approved. It is also clear that it is not the Court's role to usurp the shareholders' decision, by attempting to intrude its own commercial judgment. The Court is to be concerned with whether there is adequate disclosure to the shareholders in the Scheme Booklet (or explanatory memorandum), whether the legal requirements otherwise have been complied with and whether the scheme, on its face, is one that is sufficiently "fair and reasonable" to be capable of being put to shareholders for their approval or rejection. (Footnotes omitted.) 30 This requires the Court to be satisfied of two matters: (a) that the scheme is fit for consideration by the proposed meeting in the sense that it is "of such a nature and cast in such terms that, if it achieves the statutory majority at the [members'] meeting the court would be likely to approve it on the hearing of a petition which is unopposed": FT Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 at 72 per Street CJ (see also Re Bank of Adelaide (1979) 22 SASR 481 at 494-495 per Wells J; Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485 at 504; Re Coles Group Ltd (2007) 25 ACLC 1380 at [29]-[36] per Robson J); and (b) that "the members [are to be] properly informed as to the nature of the scheme before the scheme meeting": Re NRMA Ltd (No 1) (2000) 156 FLR 349 at [30] (see also Re Foundation Healthcare Ltd at [38]; Re Skilled Group Ltd (No 1) 113 ACSR 525 at [27]).

The requirements of s 411(1) 31 The evidence establishes that each of the requirements set out in s 411(1) is satisfied. Accordingly, the Court's discretion to make the orders sought is enlivened.

An arrangement is proposed between a Part 5.1 body and its members 32 The ASIC Company Extract at tab 1 of annexure "CNT-4" to the Second Tziolis Affidavit confirms that Verdant, being a company registered under the Corporations Act, is a "Part 5.1 body". Pursuant to cl 2.1 of the SIA, Verdant undertook to propose the Scheme, and it has done so. Accordingly, the requirement that a compromise or arrangement is proposed between a Part 5.1 body and its members has been met.

Application by Verdant 33 The requirement that the application for the order is made in a summary way by the body is met by the making of this application by Verdant.

14 days' notice to ASIC of first Court hearing 34 ASIC was given notice of the first Court hearing on 5 April 2019. In conjunction with providing this notice, an application was made in which it was requested that ASIC permit less than 14 days' notice of the hearing under s 411(2)(a). Verdant has received a letter from ASIC (ASIC Letter) to the effect that ASIC permits less than 14 days' notice of the hearing of the application under s 411(2)(a).

ASIC has had a reasonable opportunity to consider the explanatory memorandum and to make submissions to the Court 35 ASIC was first provided with a draft of the Scheme Booklet and a draft of the independent expert's report on 1 April 2019. The ASIC Letter states that: (a) ASIC does not propose to intervene to oppose the Scheme at the hearing of the application to convene the scheme meeting; and (b) ASIC has had a reasonable opportunity to examine the terms of the proposed Scheme and the Scheme Booklet.

Compliance with the Rules 36 The Second Tziolis Affidavit annexes as tab 1 of "CNT-4" the results of a search of the records maintained by ASIC in relation to Verdant. The search was conducted on 29 March 2019, which was no earlier than seven days before the originating process was filed on 1 April 2019, satisfying the requirements of r 2.4(2) of the Rules. As required by r 3.2 of the Rules, the matters regarding nomination of the Chairperson are to be found in [5]-[11] of the Whiteside Affidavit and [6]-[11] of the Conroy Affidavit. The draft orders identify the Scheme as required by r 3.3(1) of the Rules by reference to the Scheme Booklet, which includes a copy of the proposed Scheme as Annexure C.

Exercise of the Court's discretion 37 The matters relevant to the exercise of the Court's discretion are considered below.

The Scheme is fit for consideration 38 In my view, the Scheme is fit for consideration by the Scheme Shareholders at the Scheme Meeting. 39 It is relevant in this respect that the Scheme Booklet contains: (a) a recommendation from all members of the Independent Board Committee that Scheme Shareholders vote in favour of the Scheme; (b) a statement that all directors intend to vote their Verdant shares in favour of the Scheme; and (c) an independent expert's report expressing the opinion that the Scheme is fair and reasonable to, and in the best interests of, Scheme Shareholders, in the absence of a superior proposal. 40 The Scheme is subject to the satisfaction of certain conditions precedent, which are set out in cl 3.1 of the Scheme and cl 3 of the SIA. Under cl 3.2 of the Scheme, Verdant and CD Capital will, at the second court hearing for approval of the Scheme, each provide to the Court a certificate confirming whether or not all of the conditions precedent in clauses 3.1(a) and 3.1(b) of the Scheme have been satisfied or waived. Mr Tziolis has given evidence that he is not aware of any reason at this stage to suggest that these conditions are incapable of satisfaction or waiver. 41 On the basis of the material before the Court, there does not appear to be any element of unfairness in the terms of the Scheme that would be likely to preclude the approval of the scheme if it comes before the Court for approval. 42 In this case, Verdant raised the following particular features of the Scheme for the attention of the Court: (a) performance risk; (b) exclusivity provisions; (c) the Loan Agreement with CD Capital; (d) option holders; (e) deemed warranties by Scheme Shareholders in relation to their Verdant shares; and (f) section 411(17). 43 I will consider each of these matters in turn.

Performance risk 44 In considering whether to approve a scheme involving the participation of a person other than the plaintiff company and its members (here, CD Capital), the Court will wish to ensure that the other party is bound to perform the role assigned to it, and that its obligations are able to be enforced. This is because the obligations of CD Capital do not depend upon s 411 of the Corporations Act, which is confined to the obligations of the plaintiff company and its members: see, eg, Re Westfield Holdings Ltd (2004) 49 ACSR 734 at [13]-[15]. 45 In this case, the following matters demonstrate that CD Capital is bound to perform the roles assigned to it, and that its obligations are able to be enforced: (a) under cl 6.2(a) of the Scheme, CD Capital is required to deposit the aggregate amount of the scheme consideration to a Verdant trust account no later than two business days before the Implementation Date (when the shares held by Scheme Shareholders will transfer to CD Capital); and (b) CD Capital has entered into a Deed Poll in favour of Scheme Shareholders. Under cl 3 of the Deed Poll, CD Capital undertakes to: (i) observe and perform all steps attributed to it under, and otherwise comply with, the Scheme as if named as a party to the Scheme and do all acts and things necessary to give effect to the Scheme; and (ii) pay the scheme consideration to each Scheme Shareholder in accordance with the terms of the Scheme. 46 It is therefore submitted, and I accept, that any performance risk is negligible.

Exclusivity provisions 47 Clause 9 of the SIA contains exclusivity provisions including: (a) a representation and warranty by Verdant that, as at the date of the SIA, it was not in discussions with any party in respect of a competing transaction; (b) an obligation on Verdant not to solicit, invite, encourage or initiate any enquiries, negotiations or discussions in relation to a competing transaction (no-shop); (c) (subject to a fiduciary carve out) a prohibition on negotiating or entering into a competing transaction, even if Verdant did not solicit it (no-talk); (d) (subject to a fiduciary carve out, and an exception for normal presentations and continuous disclosure obligations) an obligation on Verdant not to facilitate or permit any other party to undertake due diligence investigations, or to make available to any person other than CD Capital any non-public information relating to Verdant (due diligence information); (e) (subject to a fiduciary carve out) an obligation on Verdant to promptly inform CD Capital if it receives an unsolicited approach with respect to any competing transaction, and to disclose the material terms and conditions of such competing transaction (notice of unsolicited approach); (f) an obligation on Verdant not to enter into any legally binding agreement to undertake a competing transaction, unless: (i) a majority of independent directors acting in good faith determine that the competing transaction would be likely to lead to a potential superior proposal; (ii) notice has been given to CD Capital; (iii) CD Capital has had at least three business days to match or provide a superior proposal; and (iv) CD Capital has not submitted a matching or superior proposal (matching right); and (g) an obligation on Verdant to procure that the independent directors consider a proposal by CD Capital made pursuant to its matching right, and if they decided that it would provide an equivalent or superior outcome to the competing transaction, to use its best endeavours to agree to and recommend CD Capital's counterproposal (bidder counterproposal). 48 The no-talk, due diligence information and notice of unsolicited approach provisions do not apply to the extent that they restrict Verdant from taking or refusing to take action with respect to a genuine and unsolicited competing transaction, provided that a majority of Verdant's independent directors has determined, in good faith that: (a) such a genuine competing transaction could reasonably be considered to become a superior proposal; and (b) after receiving written legal advice from external legal advisers, failing to respond to such a genuine competing transaction would be reasonably likely to constitute a breach of their fiduciary or statutory obligations. 49 The exclusivity provisions apply from the date of the SIA (11 March 2019) until the earlier of: the termination of the SIA; and the "End Date", being four months after the date of the SIA. 50 Exclusivity restrictions of this kind have been accepted in many company schemes of arrangement: see, eg, Re Arthur Yates & Co Ltd (2001) 36 ACSR 758 at [9]-[11]; and Re Wridgways Australia Ltd [2010] FCA 1187 at [13]-[25]. The following general principles have emerged from the cases: (a) the exclusivity period should be a reasonable period capable of precise ascertainment (see, eg, Re Toll Holdings Limited [2015] VSC 123 at [38]; Re Skilled Group Ltd (No 1) at [50]; Re Arthur Yates & Co Ltd at [9]; Re Little World Beverages Ltd [2012] FCA 1057 at [19]; Re Consolidated Media Holdings Ltd [2012] FCA 1186 at [13]); (b) there should be fiduciary carve outs in respect of no-talk and no due diligence arrangements (see Re Arthur Yates & Co Ltd at [9]; Re Little World Beverages Ltd at [19]); (c) the exclusivity arrangements and their effect should be adequately disclosed in the scheme booklet (see Re Arthur Yates & Co Ltd at [9]; Re Little World Beverages Ltd at [19]; Re Healthscope Ltd [2010] VSC 367 at [15]); and (d) it is desirable that the scheme proponents tender evidence directed to showing that the exclusivity provisions are the result of a normal commercial negotiation (see Re APN News & Media Ltd (2007) 62 ACSR 400 at [55]). 51 In relation to the above factors: (a) the exclusivity period in this scheme is ascertainable and is similar in duration to the exclusivity periods found to be acceptable in other schemes (see, eg, Re Sino Gold Mining Ltd (2009) 74 ACSR 647 at [20] and [23]; Re AXA Asia Pacific Holdings Limited [2011] VSC 4 at [30]; Re Talent2 International Ltd [2012] FCA 771 at [41]; Re Little World Beverages Ltd at [20]); (b) the no-talk, due diligence information and notice of unsolicited approach provisions are subject to a fiduciary carve out. Although the no-shop restriction is not, this is consistent with authority (see Re Bigair Group Ltd at [21]; Re Hostworks Group Ltd (2008) 26 ACLC 137 at [34]; Re Macquarie Private Capital A Ltd (2008) 26 ACLC 366 at [19]; Re Healthscope Ltd at [19]-[22]; and Re AXA Asia Pacific Holdings Ltd at [29]). The omission from the matching right provision of a fiduciary carve out is also consistent with authority (see Re Healthscope Ltd at [18]-[23]; Re Mitchell Communication Group [2010] VSC 423 at [23]; Re Mantra Group Ltd [2018] FCA 510 at [32]; and Re Watpac Ltd [2018] FCA 656 at [46]); (c) the exclusivity provisions are disclosed in section 10.2 of the Scheme Booklet; and (d) there is affidavit evidence from Mr Tziolis that: (i) the exclusivity arrangements were the result of normal arm's length negotiations; and (ii) the directors believe the exclusivity arrangements do not operate against the interests of Scheme Shareholders and that, in fact, it was in the interests of Scheme Shareholders that the directors agree to the exclusivity arrangements. 52 In addition, the Takeovers Panel considered the potential anti-competitive effects of matching rights in Ross Human Directions Ltd [2010] ATP 8 at [27]-[28] and [53]-[54]. In that case, the Takeovers Panel was prepared to accept a matching right with a duration of five business days. The matching right in this scheme is shorter than that in Ross Human Directions Ltd, being only three business days. 53 For these reasons, I accept that the exclusivity arrangements do not prevent the Court from making an order to convene a meeting of the Scheme Shareholders to vote on the Scheme.

Loan Agreement with CD Capital 54 As noted above, on the same date that the parties entered into the SIA (11 March 2019), Verdant and CD Capital entered into the Loan Agreement, pursuant to which CD Capital agreed to advance an aggregate of $800,000 in three tranches to Verdant for the purposes of funding Verdant's transaction costs in connection with the Scheme and for general working capital purposes. The key terms of the Loan Agreement are disclosed in section 10.3 of the Scheme Booklet, including: (a) interest will be payable on the amount drawn by Verdant under this facility at a rate of 6% per annum, and the facility will mature in 12 months, unless terminated earlier; and (b) the money owing under the Loan Agreement will become immediately due and payable by Verdant to CD Capital on written demand if a default event occurs, which includes the Scheme not being implemented within eight months of the date of the Loan Agreement (ie, by 11 November 2019). 55 Verdant submits, and I accept, that the term of the Loan Agreement referred to in 54 above does not constitute a break fee. The Takeovers Panel in Guidance Note 7 defines a break fee as "consideration however payable by a target if specified events occur which prevent a bid from proceeding or cause it to fail." The Takeovers Panel considered break fees in the context of loans from bidders to targets in Billabong International Ltd [2013] ATP 9 and Moreton Resources Ltd [2013] ATP 14. These cases are distinguishable from the present case. 56 In contrast to Billabong and Moreton, in this case: (a) no financial penalty is payable on the non-completion of the Scheme; (b) the applicable interest rate (of 6%) is unaffected by whether or not the Scheme is approved; and (c) the effect of the term of the Loan Agreement referred to in 54 above is that CD Capital has the option to bring forward the repayment date by, at most, four months. 57 I accept that this potential consequence does not amount to a break fee and that it is unlikely to coerce shareholders into approving the Scheme. 58 The terms of the Loan Agreement, including the potential for early repayment of this loan if the Scheme does not complete within eight months have been highlighted in Key Question 39, and described in section 10.3 of the Scheme Booklet. 59 Further, there is affidavit evidence from Mr Tziolis that the financial position of Verdant and the potential benefits of the Scheme resulted in the independent directors of Verdant determining that the Loan Agreement did not operate against the interests of Verdant shareholders, and that it was in the interests of Verdant shareholders that the Verdant board agree to the terms of the Loan Agreement. 60 For these reasons, I accept that the Loan Agreement does not prevent the Court from making an order to convene a meeting of Scheme Shareholders to vote on the Scheme.

Optionholders 61 As at 31 December 2019, Verdant had 171,216,634 options on issue. Each option, upon exercise, entitles the holder (Optionholder) to receive one fully paid Verdant share, subject to payment of the relevant option exercise price. There is no separate scheme proposed for the Optionholders. 62 Pursuant to cl 4.4 of the SIA, Verdant shall use reasonable endeavours to procure that each Optionholder enters into an Option Cancellation Deed prior to the second court hearing. 63 Under the terms of the Option Cancellation Deeds, each Optionholder agrees, subject to the Scheme becoming effective and the ASX granting a waiver to Verdant from Listing Rule 6.23.2, to the termination and cancellation of all of their outstanding and unexercised options in consideration for a cash amount (Cancellation Consideration) payable on the business day after the Scheme Implementation Date. 64 Alternatively, Optionholders have the right, on notice, to exercise all or any of the options they hold that are vested at any time prior to their cancellation, except Verdant will not accept as valid, nor recognise for any purpose, any notice of exercise of an option that is received after 5.00 pm on the business day before the Scheme Record Date (Option Cancellation Date). 65 In the event that Verdant receives notice from an Optionholder to exercise their options prior to the Option Cancellation Date, Verdant will issue the number of shares which corresponds to the number of options duly exercised by the Optionholder and: (a) if this results in the Optionholder becoming a shareholder in respect of those options prior to 7.00 pm (Sydney time) on Monday, 27 May 2019 (Voting Record Date), they will be entitled to vote at the Scheme Meeting and those shares will be eligible to participate in the Scheme; and (b) if this results in the Optionholder becoming a shareholder in respect of those options after the Voting Record Date, those shares will not be entitled to vote at the Scheme Meeting but will be eligible to participate in the Scheme. 66 The ASX has granted a waiver of Listing Rule 6.23.2 to permit the Verdant options to be cancelled for consideration without requiring Verdant shareholders' approval to be obtained. 67 The arrangements in relation to the Verdant options are similar to arrangements that were considered appropriate in other cases (see, eg, Re Drillsearch Energy Ltd [2015] FCA 1508), and are disclosed in section 5.5 of the Scheme Booklet. 68 I accept that the fact of ownership of options by certain Scheme Shareholders is not class creating, as those Scheme Shareholders are not treated differently under the proposed Scheme on account of their holding of options. Further, the options do not create a "collateral benefit" that could be considered as part of the fairness of the overall scheme at the second court hearing. That is, Scheme Shareholders who also hold options do not receive any special or additional benefit that other Scheme Shareholders do not.

Deemed warranty by Scheme Shareholders 69 Clause 5.6 of the Scheme provides that each Scheme Shareholder is deemed to have warranted to CD Capital that all their shares transferred to CD Capital under the Scheme will, as at the time of transfer, be fully paid and free from all encumbrances and that they have full power and capacity to sell and to transfer those shares together with any rights and entitlements attaching to such shares to CD Capital under the Scheme. 70 Such clauses have been held to be acceptable as long as the warranty is sufficiently disclosed in the explanatory statement to shareholders: see, eg, Re Hostworks Group Ltd at [41]; Re Macquarie Private Capital A Ltd at [13]-[14]; Re Biosceptre International Ltd [2013] FCA 1429 at [22]. 71 Having regard to the disclosure made in section 8.9 of the Scheme Booklet, the deemed warranty clause is acceptable.

Section 411(17) 72 The Court's jurisdiction to approve a scheme is restricted by s 411(17) of the Corporations Act. This is a matter which affects the discretion to approve the scheme, rather than the discretion to order a meeting: see Re Macquarie Private Capital A Ltd at [27] per Barrett J; Re Lonsdale Financial Group Ltd [2007] VSC 394 at [35]-[40] per Robson J. Section 411(17) provides that the Court must not approve an arrangement unless: it is satisfied there is no proscribed purpose as described in s 411(17)(a); or ASIC has provided to the Court a statement in writing stating that ASIC has no objection to the arrangement. ASIC's practice is not to provide such statements until the second court hearing: see ASIC, Regulatory Guide 60 (September 2011) (RG 60) at [60.106]. 73 RG 60 states at [60.104] that ASIC will provide a statement under s 411(17)(b) if: (a) all material information relating to the proposed scheme has been disclosed to ASIC; (b) the standard of disclosure to all members fulfils the requirements under reg 5.1.01 and Sch 8 of the Regulations; (c) the standard of disclosure to, and treatment of, all members is equivalent to the standard that would be required by the disclosure requirements and the principles in s 602 of the Corporations Act relating to the target securities in a takeover bid; and (d) there are no other reasons to oppose the scheme (eg, public policy grounds) and the other matters referred to in RG 60 have been complied with. 74 I was informed that, if this matter proceeds to the second hearing stage, Verdant anticipates relying upon a statement in writing by ASIC under s 411(17)(b) that it has no objection to the Scheme.

Verdant Shareholders will be properly informed 75 The second principal aspect relevant to the exercise of the Court's discretion is the adequacy of the information to be provided to shareholders. 76 The prescription of the contents of the explanatory statement in s 412 of the Corporations Act and Sch 8 to the Regulations ordinarily provides guidance to the Court in assessing this matter, bearing in mind that these applications are made in a summary way: see Re Foundation Healthcare Ltd at [38]; Re Opes Prime Stockbroking Ltd (No 2) (2009) 179 FCR 20 at [94]-[99]. 77 There are three aspects to the requirements of s 412(1): (a) first, the explanatory statement must explain the effect of the compromise or arrangement and, in particular, state any material interest of the directors, and the effect on those interests of the compromise or arrangement so far as it is different from the effect on the like interests of other persons. These matters are addressed in section 5.4 of the Scheme Booklet. The information there makes it clear that the effect of the arrangement on the directors' interests is the same as on the like interests of others; (b) secondly, the explanatory statement must set out the prescribed information. That prescription is in reg 5.1.01 and Pt 3 of Sch 8 to the Regulations. The location in the Scheme Booklet of the prescribed information is identified in a table annexed to Verdant's outline of submissions; and (c) thirdly, the explanatory statement must set out any other information that is material to the making of a decision whether or not to agree with the compromise or arrangement, being information that is within the knowledge of the directors and has not previously been disclosed. The Scheme Booklet is comprehensive. In addition, the independent expert's report contains a detailed evaluation of the proposal, presented in a way that enables a Scheme Shareholder to form his or her own view of the merits of the proposal. 78 The Second Tziolis Affidavit and the Daniela Affidavit set out the verification procedure implemented to ensure that the Scheme Booklet does not contain any misleading or deceptive statements and satisfies the applicable disclosure requirements.

Conclusion regarding exercise of the discretion 79 On the basis of the above matters, I am satisfied that this is an appropriate case for the exercise of the discretion to make orders convening a meeting of the Scheme Shareholders particularly having regard to the following: (a) the terms of the proposed Scheme are in a conventional form for a scheme of arrangement; (b) there is no reason why the Scheme, if considered and adopted by the members, is not "of such a nature" as would be likely to be approved by the Court at the second hearing; (c) the Scheme Shareholders will be presented with a careful analysis by the independent expert of the transaction and its advantages and disadvantages and have the recommendation of the members of the Independent Board Committee; and (d) the Scheme Booklet meets the statutory requirements, has been carefully prepared and verified, and has been examined by ASIC.

Scheme Meeting 80 I accept that there is only one class of shareholder, being all Verdant shareholders other than WHSP. 81 The Scheme Meeting is proposed to be held at 9.15 am on 29 May 2019 at Ashurst Australia, Level 26, 181 William Street Melbourne. It is proposed that Mr Whiteside will chair the Scheme Meeting, unless he is unable to do so, in which case Mr Conroy will chair the meeting.

Proposed orders 82 The draft orders provided by Verdant, as adjusted in the course of discussion during the hearing, deal with the usual matters. The Court's power to give directions is provided by: (a) section 411(1) in relation to orders regarding the manner of convening the meeting and the place or places where it is to be held; and (b) section 1319 in relation to other matters (but this power is expressed to be "subject to this Act"). 83 Proposed order 1 provides for the convening of the meeting. The Scheme Booklet is identified by reference to Exhibit 2. 84 Proposed orders 2-10 are directions for the convening and conduct of the meeting. Draft order 5, presented in square brackets, provides for approval of the explanatory statement in the form of the Scheme Booklet. Practice between Courts varies as to whether it is appropriate for the Court to make orders approving the explanatory statement when making convening orders. Consistently with the approach taken by Robson J in Re IXLA Ltd [2007] VSC 573 at [38], I do not propose to make an order formally approving the explanatory statement in the form of the Scheme Booklet (see also Re Amcor Ltd [2019] FCA 346 at [114]-[115] per Beach J). 85 For these reasons, I made orders substantially in the terms sought by Verdant. 86 I note for completeness, that on 18 April 2019, at the request of Verdant, I made an order varying the terms of paragraph 1 of the orders made on 16 April 2019. The reason for this amendment was that one of the annexures to the independent expert's report had been inadvertently omitted from Exhibit 2. Accordingly, a further affidavit of Ms Lane (affirmed on 17 April 2019) was prepared. This affidavit annexed a complete copy of the Scheme Booklet, including the missing annexure. The order made on 18 April 2019 was in the following terms: Paragraph 1(a) of the orders made on 16 April 2019 be amended such that the following words are deleted: "a copy of which has been tendered and marked Exhibit 2, save that the following amendment is to be made: on page 3 of the booklet, the following words are to be deleted: "has approved the Scheme Booklet required to accompany the notice of the Scheme Meeting" and in their place the following words are to be substituted: "has directed that this Scheme Booklet accompany the notice of Scheme Meeting"," and in their place the following words are substituted: "a copy of which is annexed as tab 1 of KML-3 to the Third Affidavit of Ms Kylie Marie Lane affirmed on 17 April 2019". I certify that the preceding eighty-six (86) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Moshinsky.

CSR 647 Re Skilled Group Ltd (No 1) (2015) 113 ACSR 525 Re Talent2 International Ltd [2012] FCA 771 Re Toll Holdings Ltd [2015] VSC 123 Re Watpac Ltd [2018] FCA 656 Re Westfield Holdings Ltd (2004) 49 ACSR 734 Re Wridgways Australia Ltd [2010] FCA 1187 Ross Human Directions Ltd [2010] ATP 8

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