Proposed treatment of executive incentives
63 Japara operates employee incentive plans under which short-term incentives (STI) and long-term incentives (LTI) are offered to executives and senior employees (Plan Participants) as an incentive and reward.
64 Japara has on issue 3,855,538 unvested LTI Performance Rights relating to the 2021 financial year that are subject to various vesting conditions, including time-based and performance conditions (Performance Rights).
65 The Japara Board has not yet made any decision in respect of the award of 2022 financial year STIs and LTIs, which performance periods measure from 1 July 2021 to 30 June 2022 and 1 July 2021 to 30 June 2025, respectively. Any award of these incentives would be determined by the Japara Board and would have regard to progress against certain hurdles and the elapsed portion of the performance periods.
66 The Japara Board has determined how to treat existing employee incentive arrangements for the purposes of the Scheme. The proposed treatment of these arrangements applies to Plan Participants who hold Performance Rights and/or 2022 financial year STIs and LTIs as at the time the Scheme becomes effective (that is, if the Court makes orders approving the Scheme). The proposed treatment of the employee incentive arrangements is as follows:
(a) Performance Rights: The Japara Board has determined that, absent exceptional circumstances and subject to the Scheme becoming effective, all Performance Rights will vest on the date the Scheme becomes effective; and
(b) 2022 financial year incentives: The Japara Board has determined to exercise its discretion to accelerate the timing for any award and payment (or part payment) of 2022 financial year STIs and LTIs, subject to the Scheme becoming effective. Any incentive award would be determined and paid in cash after the Effective Date (as defined in the Scheme).
67 The proposed treatment of the Japara executive incentive arrangements are summarised in section 8.4 of the Scheme Booklet.
68 There are two issues which can arise for consideration in the scheme context when arrangements of this kind are proposed: first, whether the proposed treatment of the incentives gives rise to the need for separate classes to be created to vote on the resolution to agree to the Scheme; secondly, the appropriateness of any directors who might receive a benefit from such arrangements making a recommendation to shareholders in relation to the proposed Scheme.
69 As to the first issue, a question may arise as to whether those persons with the benefit of Performance Rights who are also current Japara shareholders should form a separate class from those Japara shareholders who do not hold such rights because they will receive a benefit from the Scheme. It is submitted, and I accept, that holders of Performance Rights who are also current Japara shareholders do not constitute a separate class. This is because the legal rights of these shareholders are not so dissimilar from the rights of other shareholders as to make it impossible for them to consult together with a view to their common interest. They will each participate in the Scheme on the same basis and receive the same consideration as all other Japara shareholders: see Re Skilled Group at [60]-[86]; Re Healthscope at [107], [166]-[167]; Re Amcor at [83]-[86].
70 As to the second issue, as noted in section 8.1 of the Scheme Booklet:
(a) Japara's Chief Executive Officer and Managing Director, Mr Chris Price, holds 1,440,000 Performance Rights and, subject to the Scheme becoming effective and the terms of the Performance Rights continuing to be satisfied at that time, Mr Price may be entitled to vesting of his 1,440,000 Performance Rights on or about the Effective Date (as defined in the Scheme of Arrangement), which would have an implied value of $2,016,000 at the Scheme Consideration of $1.40 per share; and
(b) subject to the Scheme becoming effective and the terms of any 2022 financial year incentives awarded to Mr Price continuing to be satisfied, Mr Price may be entitled to cash payments in relation to any 2022 financial year incentives, subject to the Japara Board's determination, and having regard to performance against hurdles and elapsed time.
71 Differing views have been expressed on the question whether a director who is entitled to receive an additional benefit should make a voting recommendation:
(a) in some cases, the court has taken the view that, as a general rule, a director who will receive a substantial benefit should decline to make a recommendation to shareholders as to how they should vote, but that the making of such a recommendation may not preclude the court making orders convening a meeting if the benefits are adequately disclosed in the scheme booklet - see, eg, Re Gazal Corporation Ltd [2019] FCA 701 at [27]-[34], Re Ruralco Holdings Ltd (2019) 136 ACSR 628 at [26]-[28]; Re Navitas Ltd; Ex parte Navitas Ltd (No 2) [2019] WASC 218 at [31]-[32]; and
(b) in other cases, the court has taken a different approach, holding that it will ordinarily be appropriate for a director who is to receive a financial benefit to make a recommendation, but to fully and prominently disclose the benefit in the Scheme Booklet - see, eg, Re SMS Management & Technology Ltd [2017] VSC 257 at [24]-[26]; Re Kidman Resources Ltd (2019) 139 ACSR 122 at [104]-[115]; Re QMS Media Ltd [2019] FCA 2172 at [85]-[88]; Re DWS Ltd (2020) 148 ACSR 616 at [42]-[49]; Re RXP Services Ltd [2021] FCA 38 at [41]-[48]; Re BINGO Industries Ltd [2021] NSWSC 798 at [14]-[16]; Re Villa World Ltd (2019) 139 ACSR 550 at [27]-[40]; Re ERM Power Ltd [2019] NSWSC 1502 at [16]-[18]; Re Isentia Group Ltd [2021] NSWSC 910 at [19].
It has been observed that the divergence in the authorities on this question "may be more apparent than real": see Re Wellcom Group Ltd [2019] FCA 1655 at [51], [59].
72 In my view, for the reasons set out in the cases referred to in paragraph (b) above, ordinarily the preferable approach is for a director who is to receive a financial benefit to make a recommendation, but to disclose the benefit in the Scheme Booklet.
73 In the present case, I consider that the nature and extent of any additional benefits that Mr Price will or may become entitled to if the Scheme is implemented are not such as to make it inappropriate for him to make a voting recommendation to members. Further, I consider that the arrangements are (in light of amendments proposed by ASIC) adequately disclosed in the Scheme Booklet, and shareholders are told to have regard to these arrangements when considering Mr Price's recommendation of the Scheme.