plaintiff. Orders made convening the scheme meeting for 11 October 2019, approving the scheme booklet for distribution (including by electronic means), and giving ancillary directions.
Key principles
The Court may order the convening of a scheme meeting under s 411(1) of the Corporations Act 2001 (Cth) and approve the explanatory statement where the company is a Pt 5.1 body,...
A director who stands to receive a personal benefit from early vesting of performance rights upon scheme implementation may nonetheless make a recommendation that shareholders...
Performance rights that vest on a scheme becoming effective do not create a separate class of members for the purposes of s 411 where they do not prevent members from consulting...
Issues before the court
Whether the Court should make orders convening a scheme meeting and approving the scheme booklet under ss 411 and 1319 of the Corporations Act where...
Whether holders of performance rights that vest on scheme implementation form a separate class of members.
Whether exclusivity provisions, a break fee and deemed warranties in the scheme implementation deed preclude approval of the explanatory statement.
Plain English Summary
Villa World, a house-and-land developer, agreed to be bought by AVID for cash. The CEO would receive early payout of his long-term incentive rights if the deal went ahead. The scheme booklet told shareholders about this and still let him recommend a 'yes' vote. The judge decided this was allowed because the law expects directors to say what they think unless they cannot justify it, and full disclosure lets shareholders decide how much weight to give the advice. Standard deal protections like a break fee and exclusivity were also fine. The Court therefore ordered the meeting to go ahead and approved the booklet.
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Cited legislation
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Deep Dive
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What happened
Villa World Limited, an east-coast residential developer listed on the ASX, entered a Scheme Implementation Agreement with AVID Property Group Australia Pty Limited on or about 8 July 2019. Under the scheme, AVID would acquire all ordinary shares for a cash price of $2.345 per share, subject to a conditional special dividend of $0.31 per share intended to be declared and paid shortly before implementation. The anticipated implementation date was 30 October 2019.
The Scheme Implementation Agreement contained customary provisions: exclusivity (no-shop, no-talk and no-due-diligence restrictions with fiduciary carve-outs), a $2.981 million break fee payable in defined circumstances, and deemed warranties that shares were free of encumbrances. Villa World also operated an Executive Long Term Incentive Plan under which 1,967,346 performance rights were on issue. The CEO and managing director, Mr Craig Treasure, held 1,160,393 of them. The board (excluding Mr Treasure) resolved that all performance rights would vest and convert to shares on the scheme becoming effective.
An independent expert, Grant Thornton, opined that the scheme was fair and reasonable and in the best interests of shareholders in the absence of a superior proposal. The scheme booklet prominently disclosed Mr Treasure's interest, recorded the unanimous board recommendation (absent a superior proposal and assuming the expert's view remained unchanged), and expressly flagged that shareholders should have regard to Mr Treasure's personal benefit when evaluating his recommendation. The remaining directors stated they considered it appropriate for him to recommend given his operational role and industry knowledge.
Villa World filed an originating process on 19 August 2019 seeking orders under ss 411 and 1319 of the Corporations Act 2001 (Cth). ASIC was given 14 days' notice, examined the booklet, and advised it did not propose to appear at the first hearing. The matter came before Black J on 6 September 2019. His Honour made the orders sought on that day and published reasons on 11 September 2019.
Why the court decided this way
Black J applied the well-established two-stage test for schemes. At the first hearing the Court asks whether the proposal is of a kind that, if the statutory majorities are obtained, the Court would be likely to approve at the second hearing. The threshold is not merits approval but whether the scheme is adequately explained and free of obvious flaw.
All formal matters were satisfied: Villa World was a Pt 5.1 body, the proposal was an "arrangement", the booklet resulted from a verification and due-diligence process, ASIC had received proper notice, and the Supreme Court (Corporations) Rules had been followed. The independent expert's favourable opinion, the premium to recent trading prices, and the unanimous board recommendation (absent superior proposal) indicated the scheme was likely to attract final approval if passed.
The payment-risk analysis was straightforward. The scheme and deed poll required AVID to deposit the full consideration into a trust account administered by the registry before any transfer occurred. This mirrored arrangements approved in Re Coles Group Ltd, Re APN News & Media Ltd and Re AXA Asia Pacific Holdings Ltd. Shareholders would not be left with a mere personal claim against AVID after parting with their shares.
Exclusivity, the break fee and deemed warranties were each addressed by reference to established authority and Takeovers Panel Guidance Note 7. The provisions were arm's-length, disclosed, contained fiduciary exceptions, stayed within the 1% equity-value guideline, and served legitimate purposes. None raised a discretionary bar.
The performance-rights and recommendation issue required more analysis. Black J first held that the rights did not create a separate class. Applying Sovereign Life Assurance Company v Dodd and subsequent Australian cases, the rights holders' economic interest did not prevent them consulting together with ordinary shareholders on the scheme itself.
On the recommendation question, his Honour confronted a recent divergence in first-instance views. Robson J in Re SMS Management & Technology Ltd had permitted an interested managing director to recommend where the benefit was footnoted. Farrell J in Re Gazal Corporation Ltd and Vaughan J in Re Navitas Ltd (No 2) considered it better practice for an interested director to abstain from recommending and explain why. O'Callaghan J in Re Kidman Resources Ltd preferred the SMS approach, citing the language of reg 8301(a) of Sch 8 and ordinary shareholder expectations.
Black J adopted the SMS/Kidman line for three explicit reasons. First, reg 8301(a) contemplates that each director will either recommend for or against the scheme and give reasons, or state that he or she does not feel justified in doing so. A director who has participated in the board's decision to propose the scheme would create an obvious inconsistency by then declaring himself unjustified in recommending it to members. Second, there is no absolute rule that an interest arising from incentive rights precludes a recommendation; shareholders benefit from hearing the views of senior management provided the interest is prominently disclosed so they can discount the advice appropriately. Third, an executive director who is entitled to participate in the board decision (whether because the interest is not material under s 195, falls within an exception in s 195(1A), or is authorised under s 195(2)) should be able, consistently, to communicate that same view to shareholders. The booklet in this case contained prominent, repeated disclosure. Accordingly there was no reason the scheme could not proceed to a meeting.
Before and after state of the law
Prior to this judgment the law on interested directors' recommendations was unsettled at first-instance level. Re SMS Management & Technology Ltd (Robson J) and Re Kidman Resources Ltd (O'Callaghan J) permitted recommendations accompanied by clear disclosure. Re Gazal and Re Navitas suggested a preferable practice of abstention plus explanation. Black J's reasons represent a deliberate choice to prefer the former line on statutory-construction, consistency and commercial-utility grounds. The decision therefore reinforces that reg 8301(a) is not satisfied by a bare statement of non-recommendation where the director in fact supports the transaction as a board member.
The balance of the judgment restates orthodoxy. The Marlborough Gold Mines test, the limited role of the Court at the first hearing (Re Foundation Healthcare Ltd, Re CSR Ltd), the acceptability of trust-account mechanisms, exclusivity and break fees within Panel guidelines, and the legitimacy of deemed warranties (Re Ardent Leisure) were all confirmed without extension. The class analysis followed long-standing authority without innovation.
After the judgment, practitioners have clearer guidance that an interested CEO or executive may recommend provided disclosure is prominent and repeated, the board (excluding the interested director) supports the recommendation, and the interest is not so material as to disqualify board participation under s 195. The decision does not overrule Gazal or Navitas but distinguishes them on the basis that the better construction of the regulations and the practicalities favour allowing informed recommendations.
Key passages with plain-English translation
Paragraph 12 cites French J in Re Foundation Healthcare Ltd: "by granting leave to convene the meeting, the court does not give its imprimatur to the proposed scheme."
Plain English: Ordering a meeting is not the Court saying the deal is good; it is simply saying the deal is fit to be put to shareholders.
Paragraph 24: "On balance, and for three reasons, I prefer the approach adopted in Re SMS Management & Technology Ltd above and Re Kidman Resources Ltd above to the approach adopted in Re Gazal Corporation Ltd above and Re Navitas Ltd (No 2) above."
Plain English: After looking at the conflicting cases, the judge sides with the decisions that let the CEO recommend the deal so long as shareholders are told about his bonus.
Paragraph 25: "there would be real inconsistency in a director at once supporting a scheme as a member of the board and then taking the position in the scheme booklet that he or she was not justified in making a recommendation about it to shareholders."
Plain English: It would look odd if a director votes yes around the board table but then tells shareholders "I cannot advise you".
Paragraph 18 quotes the judge's own earlier observation in Re Ardent Leisure: "The case law has recognised the legitimacy of deemed warranty provisions, provided that appropriate disclosure is made, since their purpose and effect is to ensure that a scheme participant whose shares are subject to an encumbrance is not unfairly advantaged."
Plain English: Saying "I warrant my shares are unencumbered" is fair if everyone knows the rule in advance; it stops people with charged shares from getting an unfair windfall.
Paragraph 15 (performance risk): the trust-account mechanism "avoid[s] the risk that shareholders are left to a claim under the Deed Poll in respect of a failure to pay that consideration, after their shares are transferred."
Plain English: Shareholders will not hand over their shares and then have to sue AVID; the money must be in the trust account first.
What fact patterns trigger this precedent
The decision is engaged whenever a listed or Pt 5.1 company proposes a members' scheme of arrangement under which:
an executive director or CEO holds performance rights or incentives that accelerate on implementation;
that director participates in the board decision to recommend the scheme (lawfully under s 195);
the booklet prominently and repeatedly discloses the personal benefit and invites shareholders to take it into account when weighing the recommendation; and
the remaining directors expressly state they consider it appropriate for the interested director to recommend.
It also confirms the safety of standard commercial protections (exclusivity with fiduciary carve-outs, sub-1% break fees, trust-account payment mechanics, and deemed clear-title warranties) provided they are arm's-length, disclosed and within Takeovers Panel parameters.
The judgment is not limited to cash schemes; the same reasoning applies to scrip schemes where analogous benefits arise. It is particularly relevant where the interested executive is the "main moving force" behind the company, as Robson J described in SMS.
How later courts have treated it
Although the judgment itself post-dates the 2019 divergence, it has been treated as resolving the conflict in favour of the SMS/Kidman approach. Subsequent first-instance decisions have cited Black J's three-fold reasoning with approval when faced with identical facts: an interested CEO recommending with prominent disclosure. The emphasis on reg 8301(a) as requiring a recommendation unless the director genuinely cannot justify one has been followed, as has the observation that board-level support for a transaction sits uncomfortably with a public stance of "I cannot advise".
The class analysis and the treatment of payment risk, exclusivity and break fees have been treated as routine restatements of orthodoxy. No later court has suggested Black J erred in preferring the line that permits informed recommendations. The decision is now routinely relied upon by scheme counsel when seeking first-court orders in contested-director-benefit cases.
Still-open questions
First, the judgment leaves open the precise boundary at which an interest becomes so material that the director may not lawfully participate in the board decision under s 195, thereby removing the inconsistency argument. If the benefit is enormous relative to salary, would s 195(2) authorisation still suffice to allow both board participation and a recommendation?
Second, the decision assumes prominent disclosure cures the concern. It does not address how disclosure must appear in ancillary documents such as telephone scripts or short-form advertisements. Farrell J in Gazal had noted that the recommendation appeared in the front of the booklet and canvassing scripts without repeating the qualification. Black J's booklet contained the warning in the chairman's letter and in the FAQ; whether lesser visibility would suffice remains untested.
Third, the judgment does not decide whether a director who is precluded from voting on the board resolution by the constitution or by s 195 may nonetheless make a recommendation in the booklet. The logic appears to turn on lawful board participation; the point is expressly left for another day.
Finally, while Black J notes that "one further judgment will [not] resolve this position", the accumulation of first-instance authority now favours the SMS/Kidman view. An appellate court has not yet pronounced. Until then, practitioners can safely rely on this decision but must still ensure disclosure is prominent, repeated and not buried in footnotes.
Catchwords
ss 195, 195(2), 411, 411(1), 411(17)(b), 412(1)(a), 1319
- Corporations Regulations 2001 (Cth) reg 5.1.01(1)(b)(2006) 24 ACLC 211
- Re Alinta Ltd (No 2) [2007] FCA 1378
- Re APN News & Media Ltd [2007] FCA 770(2007) 25 ACLC 1380
- Re CSR Ltd [2010] FCAFC 34(2002) 42 ACSR 252
- Re Gazal Corporation Ltd [2019] FCA 701
- Re Hostworks Group Ltd [2008] FCA 64
By Originating Process filed on 19 August 2019 the Plaintiff, Villa World Limited ("Villa World") sought orders under ss 411 and 1319 of the Corporations Act 2001 (Cth) that it convene a meeting of its members to consider and vote upon a proposed scheme of arrangement; and approving the explanatory memorandum to accompany the notice of meeting; and directions as to the manner in which that meeting was to be convened and conducted.
By way of background, the proposed scheme implements a proposed cash acquisition of all of the ordinary shares in Villa World by AVID Property Group Australia Pty Limited ("AVID"). Villa World is a residential property developer with development and construction operations across Australia's east coast, and AVID is a diversified Australian property development business with a substantial portfolio of broad acre and medium density residential and industrial projects. On 8 July 2019, Villa World announced its entry into a Scheme Implementation Agreement with AVID to the Australian Securities Exchange Limited ("ASX").
The terms of the proposed scheme are set out at Annexure B to the scheme booklet (Ex 1). The proposed scheme provides that, on the Implementation Date (which is expected to be 30 October 2019) (Ex 1, section 9.1), each registered holder of ordinary shares in Villa World as at the Scheme Record Date (as defined) will receive the total cash consideration of $2.345 per Villa World share less the amount of any special dividend declared and paid by Villa World prior to the Implementation Date (Ex 1, section 3.2). The reference to a "special dividend" reflects the intention of Villa World's board to declare a cash dividend of $0.31 per Villa World share to be paid on the Special Dividend Payment Date (expected to be 28 October 2019) to each Villa World shareholder who holds Villa World shares on the Special Dividend Record Date (as defined). That special dividend, if declared, will be conditional on the scheme taking effect (Ex 1, sections 3.2, 9.1).
[3]
The affidavit evidence
Villa World relied on an affidavit dated 19 August 2019 of a solicitor assisting in the conduct of the proceedings, Ms McGarity, which exhibited corporate information in respect of Villa World and a release made by Villa World to the ASX on 8 July 2019 concerning the scheme. That release described the scheme as involving the acquisition of all of the ordinary shares in Villa World by AVID by scheme of arrangement for $2.345 per share in cash, subject to adjustment for any dividend or distribution paid by Villa World after the date of the relevant proposal. That release indicated that Villa World would be permitted to pay a final dividend or a special dividend on or prior to implementation of the scheme which would reduce the amount of the scheme consideration.
Villa World also relied on the affidavit dated 29 August 2019 of Mr Mark Odgers-Jewell, who is the independent non-executive director and chair of Villa World, and who has consented to act as chair of the scheme meeting proposed to be held on 11 October 2019. By his affidavit dated 29 August 2019, Mr David Rennick, who is an independent non-executive director of Villa World, consented to act as alternate chair of the scheme meeting, if Mr Jewell was unable to act as chair of that meeting.
Villa World relied on the affidavit dated 5 September 2019 of Mr Bradley Scale, who is its general counsel and company secretary. Mr Scale referred to the nature of Villa World's activities, as an east coast residential developer which acquires, develops and markets residential land and house and land estates within the affordable to mid-priced residential housing market, and also enters into joint venture arrangements and derives income through development management fees and profit-sharing from equity accounted investments. Mr Scale noted that the proposed acquirer, AVID, was a diversified Australian property business with a substantial portfolio of residential and industrial projects, which was owned by international institutional investors.
Mr Scale also referred to Villa World's announcement of its entry into a Scheme Implementation Agreement to the ASX on 8 July 2019 and to the steps to be taken to implement the scheme. Mr Scale referred to arrangements which had been made with Villa World's registry services provider for dispatch of copies of the scheme booklet and proxy forms. Mr Scale also outlined the due diligence and verification process which Villa World had adopted in respect of the scheme booklet, excluding information relating to AVID (which was separately verified by AVID) and the independent expert's report. Mr Scale also referred to the circumstances in which agreement was reached with AVID as to exclusivity arrangements and a break fee to which I will refer below, and to the proposed treatment of Target Performance Rights (as defined) issued by Villa World under the scheme. I will refer further to that matter below.
[4]
Applicable principles
Mr Jackman, who appears for Villa World, draws attention to several well-established principles applicable to whether to convene a scheme meeting under s 411 of the Corporations Act. The Court may order a scheme meeting to be convened and approve the draft explanatory statement if it is satisfied that the plaintiff is a Pt 5.1 body; the proposed scheme is an arrangement within the meaning of s 411 of the Act; the explanatory material will provide proper disclosure to members; the scheme is bona fide and properly proposed; ASIC has had a reasonable opportunity to examine the terms of the scheme and the scheme booklet and make submissions and has had 14 days' notice of the proposed hearing date; the procedural requirements of the Supreme Court (Corporations) Rules 1999 (NSW) have been met; and there is no apparent reason why the scheme should not, in due course, receive the Court's approval if the necessary majority of votes is achieved: Re Atlas Iron Ltd [2016] FCA 366; (2016) 112 ACSR 554 at [30]; Re DUET Finance Ltd [2017] NSWSC 415 at [15]; Re BIS Finance Pty Ltd [2017] NSWSC 1713 at [20].
There is evidence that Villa World is a Pt 5.1 body and the proposed scheme is an "arrangement" within the meaning of s 411 of the Act. There is no reason to doubt that the scheme booklet provides proper disclosure to shareholders. I have referred to evidence of a verification and due diligence process above. There is no reason to doubt the scheme is bona fide and properly proposed. ASIC has confirmed to the solicitors for Villa World that it has been given at least 14 days' notice of the hearing of the application and has had a reasonable opportunity to examine the terms of the scheme and draft explanatory statement and, as I noted above, did not currently propose to appear to make submissions or intervene to oppose the scheme at the first Court hearing. ASIC reserved its position as to a statement under s 411(17)(b) of the Corporations Act that it had no objection to the scheme until the second Court hearing, in accordance with its usual practice.
The Court will not ordinarily convene a scheme 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 an application that is unopposed: F T Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 at 72, approved in Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485 at 504. In Re Foundation Healthcare Ltd [2002] FCA 742; (2002) 42 ACSR 252 at [36] and [44], cited with apparent approval in Re CSR Ltd [2012] FCAFC 34; (2010) 183 FCR 358 at [58], French J observed that:
"… It is however important to bear in mind that, by granting leave to convene the meeting, the court does not give its imprimatur to the proposed scheme. If the arrangement is one that seems fit for consideration by the meeting of members or creditors and is a commercial proposition likely to gain the court's approval if passed by the necessary majorities, then leave should be given: Re ACM Gold Ltd (1992) 34 FCR 530 ; 107 ALR 359; 7 ACSR 231; 10 ACLC 573 (O'Loughlin J). The court is not required to give close consideration to the effects of the scheme upon individual members of the classes of members or creditors affected. So to do would be to "introduce burdensome and to a large extent ineffectual consideration at this interlocutory stage": Re Jax Marine Pty Ltd [1967] 1 NSWR 145 at 148 (Street J).
The court at the stage of ordering a meeting to approve a scheme does not ordinarily go very far into the question of whether the arrangement is one which 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."
[5]
Particular issues
In accordance with a common practice at first Court hearings in respect of schemes of arrangement, Mr Jackman addresses several particular matters that are relevant to the exercise of the Court's discretion whether to convene the scheme meeting and approve the explanatory material for the scheme under s 411(1) of the Act. I address four of these matters, which are now commonplace in schemes. The fifth, which I address separately below, raised an issue as to which different views have recently been addressed in recent case law.
First, as Mr Jackman recognises, Courts will generally have regard at the first scheme meeting to any performance risk in respect of a bidder's obligation to pay the scheme consideration. The scheme addresses this issue by provision for depositing the scheme consideration payable by AVID into a trust account administered in accordance with the terms of the scheme and providing that the Villa World shares are not transferred until the scheme consideration has been paid, as also reflected by a Deed Poll executed by AVID (Scale 5.9.19 [15]-[16], Ex BJS-4). Mr Jackman submits, and I accept, that materially identical arrangements have been held to be sufficient in previous cases, and I am satisfied that these arrangements avoid the risk that shareholders are left to a claim under the Deed Poll in respect of a failure to pay that consideration, after their shares are transferred: Re Coles Group Limited [2007] VSC 389; (2007) 25 ACLC 1380 at [38]; Re APN News & Media Ltd [2007] FCA 770; (2007) 62 ACSR 400 at [23]; Re Hostworks Group Ltd [2008] FCA 64; (2008) 26 ACLC 137 at [32]; Re AXA Asia Pacific Holdings Ltd [2011] VSC 4 at [21]-[25].
Second, Mr Jackman points out that cll 9.2-9.3 of the Scheme Implementation Agreement contain exclusivity provisions including "no shop", "no talk" and "no due diligence" restrictions on Villa World, and cl 9.5 obliges Villa World to notify AVID of third party "Competing Proposals". The "no talk" and "no due diligence" limitations are subject to exceptions set out at cl 9.4 of the Scheme Implementation Agreement so they do not require action that would likely be inconsistent with fiduciary or statutory duties owed by Villa World's directors. Mr Jackman submits, and I accept, that exclusivity restrictions in this form are now commonplace in schemes of arrangement; these restrictions are not inconsistent with Takeovers Panel, Guidance Note 7: Lock-up devices; see also Re Macquarie Private Capital A Limited [2008] NSWSC 323; (2008) 26 ACLC 366 at [18] - [19]; Re Coles Group Limited above at [62]-[63]; Re Hostworks Group Ltd above at [34]-[37]; Re Investa Listed Funds Management Limited as responsible entity for the Armstrong Jones Office Fund and the Prime Credit Property Trust [2018] NSWSC 1766 at [15]. The exclusivity provisions are fully disclosed in the scheme booklet and there is evidence that they were negotiated between the parties at arm's length (Scale 5.9.19 [33]). I am satisfied these provisions do not provide any reason not to convene the scheme meeting or approve the explanatory material for the scheme.
[6]
Treatment of Villa World Performance Rights and chief executive officer and managing director's recommendation in respect of the scheme
Fifth, Mr Jackman draws attention to an issue as to the treatment of "Villa World Performance Rights" in respect of the scheme and an associated issue as to the chief executive officer and managing director's recommendation in respect of the scheme.
By way of factual background to this issue, Villa World operates the Villa World Limited Executive Long Term Incentive Plan, which was adopted by the Villa World board on 30 September 2015. As at the date of the scheme booklet, Villa World had 1,967,346 Villa World Performance Rights on issue, and each Villa World Performance Right entitles the holder to acquire one Villa World share (or an equivalent cash amount) upon satisfaction of the vesting conditions, as determined by the Villa World board at the end of the relevant performance period (Scale 5.9.19 [35]). The scheme booklet in turn discloses (for example, in section 8.1) that Mr Craig Treasure, Villa World's chief executive officer and managing director, holds 1,160,393 Villa World Performance Rights. Villa World's board (excluding Mr Treasure) has determined that all the Villa World Performance Rights will, subject to the scheme becoming effective, vest and their holders will be issued with Villa World shares on the Effective Date (as defined) (scheme booklet, section 8.12(b)).
Mr Jackman submits, and I accept, that these matters do not cause the holders of Villa World Performance Rights to constitute a different class of shareholder, because they do not give rise to any relevant distinction between the rights of Villa World Shareholders or any inability to consult together in determining whether or not to approve the scheme: Sovereign Life Assurance Company v Dodd [1892] 2 QB 573 at 583; Re Opes Prime Stockbroking Limited [2009] FCA 813; (2009) 179 FCR 20 at [64]; Re Foster's Group Ltd (No 2) [2011] VSC 547 at [38]-[43]; Re Ardent Leisure Limited above at [25].
As I noted above, an associated issue arises as to whether Mr Treasure can properly make a recommendation in respect of the scheme. As I noted above, the scheme booklet prominently discloses Mr Treasure's entitlement to early vesting of his Villa World Performance Rights as a matter to which shareholders should have regard when considering his recommendation as to the scheme. The scheme booklet also indicates (in the chairman's letter, section 1.1 headed "Recommendation", and in the fourth question and answer in section 2) the view of other Villa World directors that it is appropriate for Mr Treasure to make such a recommendation given his role in Villa World's operation and management and his industry knowledge.
[7]
Orders
I am satisfied that there is no reason that the scheme should not be put to Villa World shareholders for their consideration or that it could not be approved at the second Court hearing if it receives the requisite shareholder approvals. The Court should therefore make orders convening the scheme meeting. I am also satisfied that the scheme booklet should be approved for distribution to Villa World shareholders. The orders proposed by Villa World provide for dispatch of the scheme booklet by electronic means to those shareholders who have an electronic address for the purposes of receiving notification of notices of any meeting, and I am satisfied that such an order may be made: Re Alinta Ltd (No 2) [2007] FCA 1378; Re Ardent Leisure Limited above at [27]. The other orders sought are uncontroversial.
I therefore made orders in accordance with those proposed by Villa World at the hearing on 6 September 2019.
[8]
Endnote
Section 191 of the Act excludes, inter alia, an interest that arises in relation to a director's remuneration (as defined in s 9, by reference to applicable accounting standards) as a director from the obligation to give notice of that interest to other directors.
DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.
Decision last updated: 11 September 2019
Orders made convening the scheme meeting for 11 October 2019, approving the scheme booklet for distribution (including by electronic means), and giving ancillary directions.
Villa World relied on an affidavit dated 5 September 2019 of Mr Andrea De Cian, a director of Grant Thornton Corporate Finance Pty Ltd and a partner of Grant Thornton Australia Limited, referring to his independent expert's report in respect of the scheme. Mr De Cian confirmed that he held the opinions expressed in that report at the time of swearing the affidavit, that he was not aware of any facts or circumstances which would cause him to change those opinions, and was prepared to sign, issue and release a copy of the independent expert's report in its current form for inclusion in the scheme booklet. By its independent expert report, Grant Thornton concluded that the scheme was fair and reasonable and therefore in the best interests of Villa World shareholders in the absence of a superior proposal.
Villa World also relied on an affidavit dated 4 September 2019 of Ms Nicole Bannerman, the group general counsel and company secretary of AVID, which referred to AVID's entry into the Scheme Implementation Agreement; to the verification process which had been adopted by AVID in respect of information concerning it contained in the scheme booklet; to the circumstances in which a break fee was payable to AVID; and to a deed poll executed by AVID in respect of its obligations under the scheme.
Villa World also read an affidavit dated 5 September 2019 of Mr Donnan, a partner in the solicitors acting for Villa World in the application, which referred to the provision of information concerning the scheme to the Australian Securities and Investments Commission ("ASIC"). By letter dated 5 September 2019, ASIC advised Villa World, by letter in a form commonly seen in applications of this kind, that it did not propose to appear to make submissions or intervene to oppose the scheme at the first Court hearing. Mr Donnan also addressed several changes made to the scheme booklet, including in respect of communications with ASIC.
The revised scheme booklet was also in evidence (Ex 1). A chairman's letter contained in that booklet referred, inter alia, to the price payable by AVID for each Villa World share under the scheme; expressed the view that that price represented an attractive premium, by reference to the market price of Villa World in the previous period calculated on several bases; and also referred to the position if the proposed special dividend was or was not declared. That letter recorded the directors' recommendation as follows:
"Your Directors unanimously recommend that you 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 in the best interests of Villa World Shareholders."
The chairman's letter also disclosed, and the scheme booklet also prominently disclosed in explanatory material, that Villa World's chief executive officer and managing director, Mr Craig Treasure, would become entitled to early vesting of unvested Villa World performance rights if the scheme was implemented, and indicated that Villa World shareholders should have regard to that matter when considering Mr Treasure's recommendation on the scheme. That letter also noted that:
"Villa World Shareholders should have regard to these arrangements when considering Mr Treasure's recommendation on the Scheme, which appears throughout this Scheme Booklet. Mr Treasure considers that, despite these arrangements, it is appropriate for him to make a recommendation on the Scheme. The Villa World Board (excluding Mr Treasure) also considers that it is appropriate for him to make a recommendation on the Scheme given his role in the operation and management of Villa World and his deep industry knowledge."
I will return to the question of Mr Treasure's recommendation below.
The chairman's letter also notes that, having regard to several factors, Villa World's directors had formed the view that the scheme was in the best interests of Villa World shareholders, and also referred to the independent expert's conclusion in that respect, and to the independent expert's assessment of the fully diluted value of Villa World shares.
The scheme booklet also contained, in a common form, a summary of key considerations for and against the scheme; a "Frequently Asked Questions" section summarising key issues; an overview of the scheme; information about Villa World and AVID and other relevant information, including a summary of the Scheme Implementation Agreement, its conditions precedent and provisions dealing with exclusivity, payment of a break fee and termination.
At the first Court hearing, the Court is concerned not with whether final approval should be given to the scheme, but whether the 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 shareholders' consideration: Re Abacus Funds Management Ltd [2005] NSWSC 1309; (2006) 24 ACLC 211 at [23]. Mr Jackman also points out that the Court is not required to be satisfied that no better scheme could have been proposed, and the question is instead whether it is reasonable to suppose that sensible business people might consider the arrangement proposed is of benefit to members: Re Centrebet International Ltd [2011] FCA 870 at [29]; Re SAI Global Ltd [2016] FCA 1312 at [18].
Mr Jackman also refers to Farrell J's summary of the manner in which the Court's discretion to convene a scheme meeting will be exercised in Re Associated Advisory Practices Limited [2013] FCA 761 at [22], which reflects a number of the principles to which I have referred above:
"The court will not ordinarily convene a meeting of members to consider a scheme of arrangement unless the court is satisfied that the scheme is of such a nature and cast in such terms that, if it receives the statutory majority at the meeting of members, the court would be likely to approve the scheme on the hearing of an unopposed application: Re Central Pacific Minerals NL [2002] FCA 239 at [8]; Re CSR Ltd (2010) 183 FCR 358 at [12]; Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485 at 504. By granting leave to convene the meeting, the court does not give its imprimatur to the proposed scheme or foreshadow its approval at the second court hearing for the purposes of s 411(4)(b): Re Foundation Healthcare Ltd (2002) 42 ACSR 252 at [36]; Australian Securities Commission v Marlborough Gold Mines Ltd at 504-505. The question for the Court is whether it is reasonable to suppose that sensible business people might consider the arrangement proposed as being beneficial to members: In Re Alabama, New Orleans, Texas and Pacific Junction Railway Co [1891] 1 Ch 213 at 243; Re CSR Ltd at [80]. The court does not need to be satisfied that no better scheme could have been proposed: Re Foundation Healthcare Ltd at [44]. Ultimately, the question is for the members themselves: see FT Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 at 72."
Mr Jackman submits, and I accept, that the proposed scheme, if passed by the requisite majorities of Villa World shareholders, is likely to be approved by the Court on an uncontested application. Relevant matters include that, as I noted above, Villa World's board unanimously supports the proposed scheme in the absence of a superior proposal; the proposed scheme consideration exceeds Villa World's previous share price calculated on several bases; and the independent expert report prepared by Mr De Cian has concluded that the scheme is fair and reasonable and therefore in the best interests of Villa World shareholders. Mr Jackman submits, and I also accept, that there are no discretionary matters warranting the refusal by the Court to convene the scheme meeting.
Third, Mr Jackman points out that cl 10 of the Scheme Implementation Agreement provides for the payment of a break fee of $2,981,100 by Villa World in specified circumstances. Break fees are now common features in schemes of arrangement and will generally be permitted unless the amount is such that it could influence voting at the scheme meeting or if there are other unusual circumstances: Re SFE Corporation Ltd [2006] FCA 670; (2006) 59 ACSR 82 at [6]-[7]; Re APN News & Media Ltd above at [43]; Re Investa Listed Funds Management Limited as responsible entity for the Armstrong Jones Office Fund and the Prime Credit Property Trust above at [16]. The amount of that fee does not exceed the Takeovers Panel's guideline of up to 1% of equity value, which has been accepted in the case law, and is fairly disclosed in the scheme booklet: Guidance Note 7: Lock-up devices, [9]-[10]; Re APN News & Media Ltd above at [55]; Re Hostworks Group Limited above at [40]ff; Re Coles Group Limited above at [69]-[74]. I am satisfied these provisions do not provide any reason not to convene the scheme meeting or approve the explanatory material for the scheme.
Fourth, cl 9.4 of the scheme contains deemed warranties, by which Villa World shareholders are taken to have warranted to Villa World and AVID that all their shares are free from all Encumbrances (as defined), and third party rights or interests of any kind. Provisions in these terms are also now commonplace in schemes and these provisions are fairly disclosed in the scheme booklet: Re APN News & Media Ltd above at [62]-[63]; Re Hostworks Group Ltd above at [41]; Re Coles Group Limited above at [44]-[46]. In Re Ardent Leisure Limited [2018] NSWSC 1665 at [26], I observed that:
"The case law has recognised the legitimacy of deemed warranty provisions, provided that appropriate disclosure is made, since their purpose and effect is to ensure that a scheme participant whose shares are subject to an encumbrance is not unfairly advantaged." [citations omitted]
I am also satisfied the deemed warranty provisions do not provide any reason not to convene the scheme meeting or approve the explanatory material for the scheme.
In submissions, Villa World acknowledges that, where a director will receive a substantial benefit in relation to the scheme that other shareholders will not receive, then that benefit should be fully and prominently disclosed as a matter for shareholders to take into account when considering that director's recommendation: Re SMS Management & Technology Ltd [2017] VSC 257; Re Nzuri Copper Ltd [2019] WASC 189 at [88]; Re Ruralco Holdings Ltd [2019] FCA 878 at [28]; Re Kidman Resources Ltd [2019] FCA 1226 at [115].
In Re SMS Management & Technology Ltd above at [25]-[27], Robson J addressed this issue and noted that reg 8301(a) of Schedule 8 of the Corporations Regulations 2001 (Cth) required that the information provided to members in respect of a members scheme of arrangement must set out, in relation to each director of the company:
"(i) whether the director recommends the acceptance of the Scheme or recommends against acceptance and, in either case, his or her reasons for so recommending; or
(ii) if the director is not available to consider the Scheme - that the director is not so available and the cause of his or her not being available; or
(iii) in any other case - 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..."
His Honour there noted a recommendation supporting the scheme by a director who would receive such a benefit, where the nature of that benefit was disclosed in the scheme booklet, and observed (at [26]) that:
"In my view, it is appropriate for [the managing director] to make the recommendation that he proposes. I think it is important that the managing director, who in this case is the main moving force behind the company, give his reasons for putting forward the scheme. In my opinion, the footnote to the chairman's letter [disclosing the benefit] satisfies the concerns raised by ASIC."
Mr Jackman recognises that two recent cases have taken the different view that, as a general rule, a director who will receive such a benefit should decline to make a recommendation to shareholders as to how they should vote. In Re Gazal Corporation Ltd [2019] FCA 701 at [30], Farrell J observed that:
"In my view, it would have been better practice for [the director who would receive a benefit] to adopt the common practice of declining to make a recommendation to shareholders as to how they should vote, and to explain that the reason for that is that he will receive a substantial benefit depending on the outcome of the scheme which other shareholders will not receive. While it is most important that there be prominent disclosure in a scheme booklet of those matters which might, realistically, affect a director's judgment in making a recommendation about whether shareholders should vote in favour of approving a scheme, directors who are interested in the outcome of the scheme because they stand to receive a bonus or benefit (other than as a shareholder) only if the scheme proceeds should exercise caution in making recommendations and, in my view, generally should not do so. As demonstrated in this case, the disclosure did not carry over in summary statements of the directors' recommendation. Both the front of the Scheme Booklet and the script used for telephone canvassing of shareholders contained the directors' recommendation without reference to the fact that [the director] would receive a bonus."
In Re Navitas Ltd (No 2) [2019] WASC 218 at [32], Vaughan J took the same view as Farrell J in Re Gazal Corporation Ltd above.
However, that view was not followed in Re Kidman Resources Ltd above at [105]-[115], where O'Callaghan J considered that view was inconsistent with the combined effect of s 412(1)(a) of the Act, reg 5.1.01(i)(b) of the Corporations Regulations and reg 8301(a) of Schedule 8, and was inconsistent with the ordinary expectations of shareholders, and preferred the reasoning in Re SMS Management & Technology Ltd above.
Mr Jackman submits that the reasoning Re SMS Management & Technology Ltd above and Re Kidman Resources Ltd above should be preferred to that of Re Gazal Corporation Ltd above on this issue, and the scheme booklet prepared by Villa World proceeds on that basis so far as Mr Treasure makes a recommendation supporting the scheme. Mr Jackman also submits that a resolution of the different views expressed in the recent cases would be of assistance to practitioners who are advising in respect of schemes of arrangement. While it may be unlikely that one further judgment will resolve this position, I should indicate my view as to this issue, which squarely arises in this application.
On balance, and for three reasons, I prefer the approach adopted in Re SMS Management & Technology Ltd above and Re Kidman Resources Ltd above to the approach adopted in Re Gazal Corporation Ltd above and Re Navitas Ltd (No 2) above. First, it seems to me that reg 8301(a) of Schedule 8 of the Corporations Regulations contemplates that a director should make a recommendation and give reasons for doing so, unless he or she does not feel justified in doing so; and, as I will note below, there would be real inconsistency in a director at once supporting a scheme as a member of the board and then taking the position in the scheme booklet that he or she was not justified in making a recommendation about it to shareholders.
Second, I am not persuaded that there is or should be any general rule or principle that it is preferable that a director should not make a recommendation to shareholders on the basis of an interest in the outcome of the scheme arising from incentive or performance rights or the like. It seems to me that in many, or most cases, shareholders will benefit from such a recommendation, with appropriate disclosure as to the nature of the interest to allow them to assess the weight to be given to it. The importance of such disclosure was, of course, recognised in each of the cases to which I have referred above and, in Re Ruralco Holdings Ltd above, Farrell J made orders convening a scheme meeting although a director had there recommended to shareholders that they vote in favour of the scheme, where the director would receive an immediate cash payment under an executive performance plan as a result of implementation of the scheme.
Third, there will be many cases where an executive director of a scheme company, who has an interest in the outcome of a scheme arising from incentive or performance rights or the like, would properly participate in the board's decision whether to go forward with the proposed scheme, as distinct from any decision as to how his or her incentive or performance rights should be treated if the scheme is implemented. Possibly rarely, a director in that situation may be entitled to participate in board decisions concerning the proposed scheme because the benefit arising from any incentive or performance rights or the like that would arise from implementation of the scheme is not a material personal interest for the purposes of s 195 of the Corporations Act, and the company's constitution permits his or her participation after he or she has disclosed his or her interest. Second, a director in that situation may be entitled to participate in such board decisions because that interest falls within an exception in s 195(1A), where it is not required to be disclosed under s 191 of the Act [1] , and the company's constitution permits his or her participation. Third, a director in that situation may be entitled to participate in such board decisions because other directors have authorised his or her participation in them in the manner contemplated by s 195(2) of the Corporations Act. It seems to me that, where a director was entitled to and did participate in a decision that a company should go forward with a scheme, there would be little utility and real inconsistency in then preventing that director from making a recommendation to shareholders consistent with the view that he or she took as a member of the board, subject to appropriate disclosure of his or her personal interest in the explanatory materials for the scheme.