Capilano Honey Limited, in the matter of Capilano Honey Limited (No 2) [2018] FCA 1925

Counsel for ASIC: Mr D Barnett & Mr S Dametto

Solicitor for ASIC: Australian Securities & Investments Commission

ORDERS IN THE MATTER OF CAPILANO HONEY LIMITED NSD 1786 of 2018

BETWEEN: CAPILANO HONEY LIMITED Plaintiff

JUDGE: FARRELL J DATE OF ORDER: 23 November 2018

1. Pursuant to s 411(4)(b) of the Corporations Act 2001 (Cth) (the Act), the scheme of arrangement between the plaintiff and its members set out in Tab 4, page 6 of exhibit RMS-1 (the Scheme) be approved.
2. The plaintiff lodge these orders with the Australian Securities and Investments Commission as soon as practicable.
3. Pursuant to s 411(12) of the Act, the plaintiff be exempt from compliance with s 411(11) of the Act in relation to the Scheme.
4. These orders be entered forthwith. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

FARRELL J: 1 On 11 October 2018, the Court made orders under s 411(1) and s 1319 of the Corporations Act 2001 (Cth) that Capilano Honey Limited convene a meeting of its shareholders on 15 November 2018 for the purpose of considering a scheme of arrangement. The proposed scheme was designed to effect a takeover of Capilano by Bravo BidCo Pty Ltd, a wholly owned subsidiary of Bravo HoldCo Pty Ltd. The scheme consideration was either cash (ultimately $21.00 per Capilano share) or one HoldCo share for every Capilano share and the right (on a one for two basis) to subscribe for further shares in HoldCo at the same price as the cash consideration: see In the matter of Capilano Honey Limited [2018] FCA 1568. At the scheme meeting, the scheme was approved by the requisite majority. The date and time of the second court hearing was advertised in The Australian newspaper on 12 November 2018. 2 No member of Capilano gave notice of an intention to appear to oppose the scheme and no such appearance was made. 3 The Australian Securities & Investments Commission (ASIC) filed submissions opposing the grant of approval under s 411(4)(b) of the Corporations Act and appeared at the second court hearing by counsel. ASIC refused to provide a "no objection" letter under s 411(17)(b) of the Corporations Act. ASIC's primary focus was on the fact that Holdco is a proprietary company and 83 Capilano shareholders elected to receive the scrip consideration resulting in the shares of 82 of the former Capilano shareholders being issued to a custodian if the scheme is implemented. ASIC's attack on this structure was first that the purpose of BidCo, HoldCo and Wattle Hill RHC Fund 1 and Roc Capital Pty Ltd in its capacity as trustee of the ROC B&Y Investment Trust (together the Consortium) in employing a proprietary company as HoldCo was to avoid a provision of Chapter 6 (namely, s 606) with the result that s 411(17)(a) was not satisfied so that the Court did not have jurisdiction to make orders approving the scheme. If the Court did not accept that proposition, ASIC submitted that the use of a proprietary company and custodian arrangement in that way is contrary to public policy such that the Court should exercise its discretion to refuse the application for orders approving the scheme. 4 For the reasons that follow, the Court made orders approving the scheme on 23 November 2018.

Matters to be taken into account 5 The matters the Court must take into account in deciding whether to approve the Scheme include: (1) Whether the orders of the Court convening the scheme meeting were complied with; (2) Whether the resolution to approve the scheme was passed by the requisite majority and whether other statutory requirements have been satisfied; (3) Whether all conditions to which the scheme is subject (other than Court approval and lodgement of the Court's orders with ASIC) have been met or waived; (4) Whether the scheme is fair and reasonable so that an intelligent and honest Capilano shareholder, properly informed and acting alone, might approve it. In considering this question, it is not the role of the Court to usurp the decision of shareholders by imposing its own commercial judgement on the scheme or to consider whether a better scheme might have been proposed; (5) Whether Capilano has brought to the attention of the Court all matters that could be considered relevant to the exercise of the Court's discretion; and (6) Whether there was full and fair disclosure to shareholders of all information material to the decision whether to vote for or against the scheme. See Re Solution 6 Holdings Ltd (2004) 50 ACSR 113; [2004] FCA 1049 at [18]-[24]; Re Permanent Trustee Company Limited (2002) 43 ACSR 601; [2002] NSWSC 1177 at [8]-[10]; Re Central Pacific Minerals NL [2002] FCA 239 at [8]-[14]; Re Seven Network Limited (No 3) [2010] FCA 400 at [35]-[39]. 6 As noted by Jacobson J in Re Seven Network Limited (No 3) at [40] a further consideration has been said to be whether the scheme offends public policy: see, for example, CSR Limited, in the matter of CSR Limited (2010) 183 FCR 358; [2010] FCAFC 34 at [51]-[56] (per Keane CJ and Jacobson J), although it must also be noted that Finkelstein J considered this issue at [79]-[82] and concluded at [82] as follows: There has crept into Australian jurisprudence the view that a court will not confirm a scheme if it is contrary to "public policy" or is not consistent with "commercial morality". A consideration of what is contrary to "public policy" cannot extend beyond considering the interests of members, creditors and persons who in the future might deal with the scheme company or invest in its shares. Their interests are, however, adequately protected by an inquiry whether the scheme is fair or reasonable. So, considerations of public policy seem to add nothing to existing principles.

Evidence 7 Further affidavits filed in these proceedings are as follows. 8 The affidavit of Trevor Richard Morgan was affirmed on 15 November 2018. Mr Morgan acted as Chairman of the scheme meeting and deposes to the proceedings at the meeting and the votes cast. 9 The affidavit of BeeYen Nah was affirmed on 20 November 2018. Mr Nah is a client relationship manager at Link Market Services Limited. He gave evidence relevant to the despatch of the scheme booklet and related documents, the receipt of elections and subscriptions for HoldCo shares, the receipt and recording of proxies, registration of attendance at the scheme meeting and voting at the scheme meeting. 10 The affidavit of Michael Buttigieg was sworn on 21 November 2018. Mr Buttigieg is the general manager of Link DigiCom Pty Ltd which was engaged to arrange for printing and despatch of the scheme booklet and related forms. 11 The affidavit of Rebecca Maslen-Stannage was sworn on 21 November 2018. Ms Maslen-Stannage is a partner at Herbert Smith Freehills, the solicitors for Capilano in this matter. She gave evidence in relation to: registration of the scheme booklet in substantially the form of exhibit B with ASIC on 11 October 2018; the increased cash consideration (from $20.06 to $21.00) and the supplementary disclosure approved by the Court for despatch on 2 November 2018; elections to receive scrip consideration and notification of withdrawal rights; the announcement to the Australian Securities Exchange (ASX) that there would be no scale back and the number of shareholders who had elected to receive scrip consideration; the custodian arrangement; and why the proposed acquisition of Capilano proceeded by way of scheme of arrangement. 12 A further affidavit of Rebecca Maslen-Stannage was sworn on 21 November 2018. She gave evidence in relation to the publication of an advertisement in The Australian newspaper on 12 November 2018 advising of the time and date of the second court hearing in accordance with orders made by the Court on 11 October 2018 and that no notice (formal or informal) had been received as at 5 pm on 21 November 2018 from any member of Capilano of any intention to attend the second court hearing to oppose the scheme. 13 Exhibited to Ms Maslen-Stannage's affidavit sworn on 21 November 2018 was part of the submissions filed in relation to the second court hearing of a scheme between Pepper Group Limited and its members (NSD 1683/2017). This was a "stub equity" transaction in which members of Pepper Group who accepted the scrip consideration would receive shares in a "HoldCo" which was a proprietary company and a custodian arrangement was used to ensure that there would be no more than 50 shareholders. 14 An affidavit of Milorad Gajic was sworn on 21 November 2018. Mr Gajic is a partner of MinterEllison, the solicitors for the Consortium. Mr Gajic has day to day conduct of this matter for the Consortium. He gives evidence about the terms of the Custodian Deed, the proposed parties to which are Perpetual Corporate Trust Limited (as Custodian), HoldCo, the Initial Appointing Beneficiaries and the Consortium. He also gives evidence as to the reasons why the Consortium, HoldCo and BidCo proposed to effect the acquisition of Capilano by way of scheme of arrangement. 15 Affidavits of Shaw Yun Ng, Yuan Fang and Deane Conway each of which was affirmed on 21 November 2018. Mr Ng and Ms Fang are directors of BidCo and HoldCo. Mr Ng is a director of Roc Captial and Ms Fang is a founding partner of Wattle Hill RHC Management Pty Limited which is an advisor to Wattle Hill and Mr Conway is managing director of Wattle Hill RHC Management. They gave evidence as to the purpose of BidCo, HoldCo and the Consortium in proposing the scheme and the reason for using a proprietary company as HoldCo. 16 An affidavit of Benjamin Alexander McKee sworn on 22 November 2018. Mr McKee is the managing director and CEO of Capilano. He gave evidence in relation to the purpose of Capilano's board in proposing a scheme and Mr McKee confirms that there was no purpose of avoiding Chapter 6 of the Corporations Act. 17 Affidavits of Yuan Fang affirmed on 22 November 2018 and Shaw Yung Ng and Deane Conway affirmed on 23 November 2018 in relation to why the Consortium incorporated HoldCo as a proprietary company. 18 Exhibit 2 which is a certificate signed on behalf of Capilano and HoldCo to the effect that all conditions of the scheme (save for Court approval) have been met or waived.

Scheme meeting and conditions 19 Having regard to affidavits filed in support of this application, I was satisfied that: The scheme booklet in the form of exhibit B was registered by ASIC on 11 October 2018. The scheme booklet despatched to Capilano shareholders was in the same form as exhibit B save for removal of the draft stamp and formatting changes. I note the evidence of Michael Buttigieg that, due to time constraints, it was necessary to bind the scheme booklet in three parts comprising (1) the explanatory statement; (2) annexures A to D; and (3) annexures E to H. There were 22 "lost" shareholders representing less than 0.3% of Capilano's issued share capital. There were 1860 members who elected to receive materials electronically and 1365 who elected to receive materials by post. The scheme booklet, proxy form, election form and subscription form were despatched according to how the members elected to receive materials, with the exception that excluded foreign shareholders were not sent a subscription or election form since they were eligible only to receive cash consideration. Procedures also addressed despatch to shareholders who came onto the register after the first mail out. The supplementary disclosure authorised by the Court on 2 November 2018 was despatched in the same way, there being identified 1861 members who elected to receive materials electronically, 1402 members who elected to receive materials by post and 22 "lost" shareholders. The scheme meeting was held at the time and place and the chairman of the meeting was Trevor Morgan, as ordered on 11 October 2018. 20 A total of 5,544,296 votes were cast at the scheme meeting, representing 58.62% of votes which could be cast (there being 9,457,481 shares on issue not including the Foundation Share). 21 I am satisfied that Capilano shareholders approved the scheme by majorities which comfortably exceeded the statutory requirements, being at least 75% of votes cast in favour of the scheme by a majority of shareholders present and voting. The votes were as follows: 5,348,049 (96.46%) of votes were cast in favour of the scheme and 196,247 (3.54%) of votes were cast against it. 279 shareholders present (in person or by proxy) and voting (79.94%) voted in favour of the scheme and 70 shareholders present (in person or by proxy) and voting (20.06%) voted against. 22 Eighty three members validly elected to receive scrip consideration in respect of 2,364,186 Capilano shares. Of these, 27 validly elected to subscribe for additional HoldCo shares, comprising 1,146,790 HoldCo shares. Accordingly, a condition of the scheme that shareholders representing at least 15% of Capilano shares elect to receive the scrip consideration was satisfied. 23 Based on exhibit 2, I was satisfied that all conditions of the scheme (save for Court approval) have been met or waived.

Some other matters of Note 24 There was no scale back of acceptances for scrip consideration or subscriptions for HoldCo shares. 25 Capilano tagged the votes of members of Capilano who held greater than 3.33% of Capilano shares, on the basis that these were the shareholders who potentially might become substantial shareholders in HoldCo. After the following votes are excluded, the scheme would nonetheless have been approved by the requisite majorities: Wroxby Pty Ltd cast 2,229,870 votes in favour. Bega Cheese Limited cast 1,475,289 votes in favour. Citicorp Nominees Pty Ltd cast 85,134 votes in favour and had no instructions in relation to 299,225 shares. National Nominees Limited cast 371,161 votes in favour and had no instructions in relation to 4,757. 26 I was therefore satisfied that the statutory majorities would have been achieved without the tagged votes. 27 Wroxby will be the holder of 3,344,805 (or 95.267%) of the 3,510,976 HoldCo shares issued to former Capilano shareholders. 28 Eighty two other Capilano shareholders accepted the scrip consideration for an aggregate of 134,316 Capilano shares and of these, 26 subscribed for a further 31,855 HoldCo shares in the HoldCo Share Offer. 29 Eighty two of the 83 members who elected to receive scrip consideration will not be substantial shareholders. Accordingly, HoldCo has nominated a custodian to hold the HoldCo shares to which those 82 members are entitled. Wroxby will hold its 3,344,805 HoldCo shares directly. Senior counsel for Capilano, Mr Brereton SC, advised the Court that that would amount to approximately 35% of the issued capital of HoldCo. Accordingly Wroxby will have the right to appoint a director of HoldCo and the other 82 members who are former Capilano shareholders will not.

ASIC's concerns 30 ASIC has declined to provide a "no objection" letter for the purposes of s 411(17) of the Corporations Act. That sub-section provides as follows: The Court must not approve a compromise or arrangement under this section unless: (a) it is satisfied that the compromise or arrangement has not been proposed for the purpose of enabling any person to avoid the operation of any of the provisions of Chapter 6; or (b) there is produced to the Court a statement in writing by ASIC stating that ASIC has no objection to the compromise or arrangement; but the Court need not approve a compromise or arrangement merely because a statement by ASIC stating that ASIC has no objection to the compromise or arrangement has been produced to the Court as mentioned in paragraph (b). 31 Importantly, ASIC submits, and I accept, that if ASIC does not provide a "no objection" letter under s 411(17)(b), the Court's satisfaction that the scheme was "not proposed for the purpose of enabling any person to avoid the operation of any of the provisions of Chapter 6" is a jurisdictional fact. If the Court were to find that it was not so satisfied, the Court would not be in a position to make orders approving the scheme. 32 As the Court understands it, ASIC's concerns were twofold:

Was the scheme proposed for the purpose of avoiding any provision of Chapter 6? 33 The first concern is whether the scheme was proposed for the purpose of avoiding any provision of Chapter 6. ASIC's primary concern is that HoldCo is a proprietary company but 83 entities (relevantly more than 50 members) of Capilano have elected to accept the scrip consideration so that a custodian will be employed to ensure that the number of shareholders of HoldCo remains no greater than 50. With that structure, the Consortium (which will hold more than 50% of the shares in HoldCo upon implementation of the scheme) can acquire shares or sell shares in HoldCo without any obligation being imposed on the Consortium or a purchaser from it to make an offer to all shareholders, thus avoiding the requirements of s 606 which would be imposed if HoldCo were an unlisted company with more than 50 members. 34 Section 606(1) provides as follows: 606 Prohibition on certain acquisitions of relevant interests in voting shares Acquisition of relevant interests in voting shares through transaction entered into by or on behalf of person acquiring relevant interest (1) A person must not acquire a relevant interest in issued voting shares in a company if: (a) the company is: (i) a listed company; or (ii) an unlisted company with more than 50 members; and (b) the person acquiring the interest does so through a transaction in relation to securities entered into by or on behalf of the person; and (c) because of the transaction, that person's or someone else's voting power in the company increases: (i) from 20% or below to more than 20%; or (ii) from a starting point that is above 20% and below 90%. 35 ASIC submitted that, in its terms, s 411(17)(a) is not directed solely to the transaction the subject of the scheme (that is, the acquisition of Capilano shares by BidCo). It says that the language of s 411(17)(a) is equally apt if the purpose of the Consortium (and BidCo and HoldCo) is to insulate persons from the operation of Chapter 6 in future transactions in relation to HoldCo. ASIC argues that the words used in s 411(17)(a) are broad: "for the purpose of enabling any person to avoid the operation of any of the provisions of Chapter 6" and that that language is wide enough to include transactions in HoldCo shares after the scheme is implemented. Section 411(17)(a) does not say "for the purpose of enabling any person to avoid in this transaction the operation of Chapter 6", even though the Parliament could have done so. The words of the section must always be the starting point of any analysis and they do not suggest any limitation. 36 I do not understand the following propositions to be disputed: The Consortium members, BidCo and HoldCo are the true sponsors of the scheme, their purpose is as relevant as the purpose of the plaintiff: see Re Stockbridge Ltd (1993) 9 ACSR 637 at 653. The purpose need only be a significant or substantial purpose: Re Stockbridge at 654; Re ACM Gold Ltd (1992) 34 FCR 530 at 538; Re Mincom Ltd (No 3) (2007) 213 FLR 364; [2007] QSC 207 (Mincom (No 3)) at [42]. The fact that the scheme has a particular outcome or result does not necessarily mean that it was proposed for the significant or substantial purpose of achieving that result. 37 ASIC relied on the decision of Fryberg J Mincom (No 3) at [45]-[49] for the propositions that: (1) The terminology of s 411(17)(a) focuses attention on individual provisions of Chapter 6 and requires the identification of at least one provision as the object of avoidance. (2) Whether the specific purpose exists is a question of fact, and the most important source of that evidence is from the person with the purpose. (3) The mere fact that an arrangement enabled a person to avoid the operation of Chapter 6 would not, by itself, prove the existence of the specified purpose. (4) Inferences of purpose may also be drawn from other evidence and the known facts. (5) Inferences from the wording or structure of an arrangement is a "weak finding" compared to evidence given by individuals who constitute the guiding mind and will of a corporation. I do not understand these propositions to be controversial. 38 ASIC submitted that the evidence of purpose given by the solicitors for Capilano and the Consortium was not sufficient; the evidence from the proponents of the scheme was what is relevant. The evidence given by Mr Ng, Ms Fang and Mr Conway by their affidavits dated 21 November 2018 was to the following effect: During the negotiations relating to the transaction, the Consortium only proposed a scheme structure. That structure was a means of acquiring 100% of the shares in Capilano inexpensively and within a reasonably short timeframe with an "all or nothing" outcome and within the agreed timetable set out in the Scheme Implementation Agreement. Structuring the proposal as a bid under Chapter 6 was not considered by the parties before they received correspondence from ASIC in relation to the need for a prospectus under Chapter 6D in relation to the HoldCo Share Offer. Any future impact of Chapter 6 on HoldCo, BidCo or Capilano following the successful implementation of the scheme was not considered. 39 ASIC appeared to rely on Fryberg J's finding in Mincom (No 3) at [57] that choosing a scheme so that there would be certainty of timing had the purpose of avoiding s 650C of the Corporations Act. ASIC's counsel, Mr Barnett, acknowledged that this issue does not normally arise because ASIC issues "no objection" letters under s 411(17)(b). However, counsel submitted that Fryberg J's finding had not been disagreed with and represents the law. 40 ASIC also submitted that, in this case, the proprietary company and custodian arrangement are devices used to avoid s 606 when the Consortium wishes to sell its shares in HoldCo. Counsel referred to the case of Pepper Group, an example of a "stub equity" scheme referred to in Ms Maslen-Stannage's affidavit of 21 November 2018. In that case, "HoldCo" was a proprietary company and more than 70 people had accepted the scrip alternative. The submissions to the Court concerning the Pepper Group scheme proposal clearly stated that the use of a custodian structure was "intended to ensure that HoldCo has no more than 50 shareholders at all times for the purposes of Chapter 6 of the Corporations Act, so that no party technically breaches section 606". 41 ASIC accepts that the use of the proprietary company also avoids other provisions of the Corporations Act, such as the related party prohibitions in Chapter 2E and the requirement to have an annual general meeting, but ASIC asserts that the statement in the submissions in the Pepper Group case is a statement of the obvious commercial rationale for using a proprietary company and custodian arrangement, objectively speaking. 42 Counsel for ASIC submitted that the evidence given by Mr Conway, Mr Ng and Ms Fang on 21 November 2018 did not address the issue of whether the use of a proprietary company as HoldCo and the custodian arrangement was to avoid s 606 and their evidence was conclusionary. Although the Court accepted that Mr Conway, Mr Ng and Ms Fang gave their evidence honestly, ASIC submitted that the Court should not be satisfied that the evidence adequately addressed the issue raised by ASIC. 43 Ms Fang, Mr Conway and Mr Ng gave further evidence by way of affidavits affirmed on 22 and 23 November 2018 in largely similar terms and to the following effect: While negotiating the Scheme Implementation Agreement and constitution for HoldCo, the strategic objective was to achieve an Exit at a time instigated by the Consortium. That would be at a time which it considered to be optimal to maximise the return for all of the holders of shares in HoldCo having regard to prevailing market conditions, business performance and other factors which might then be considered relevant. To do that, it is necessary to impose restrictions on the transfer of shares in HoldCo. I note that, in the Shareholders' Deed, "Exit" is defined to mean by trade sale, asset sale or initial public offering. In deliberations to which they were a party, each had regard to recent precedent "stub equity" transactions involving private equity utilising entities other than Australian public companies. Mr Conway derived comfort from following such precedents, including a scheme in which Roc Capital recently participated. A proprietary company structure would be appropriate for HoldCo because the consideration of $21.00 had been predicated on the cost base applicable to a proprietary company which avoids the time, cost and complexity of administration involved in a public company structure. There was a commercial desire to minimise regular public reporting requirements by Capilano about its business in order to allow it to develop new products with a view to attaining competitive advantages over its business competitors. The application of Chapter 6 was not considered in determining the structure of HoldCo as a proprietary company or in the utilisation of a custodian arrangement. It was understood that it would be illegal for a proprietary company to have more than 50 shareholders and it was determined that a custodian would be used to hold HoldCo shares should more than 48 Capilano shareholders elect to receive the scrip consideration. 44 I now turn to consider whether ASIC has made out its arguments that s 411(17)(a) is not satisfied on either of the two bases proposed. 45 The first relates to whether the purpose of obtaining certainty of timing was a substantial purpose directed to enabling the Consortium to avoid the operation of s 650C, consistent with Fryberg J's finding in Mincom (No 3) at [57]. 46 I accepted ASIC's submission that the effect of a proposal - which is what ASIC normally considers in deciding whether or not to issue a "no objection" letter under s 411(17)(b) - is a different thing from purpose, and it is to purpose that s 411(17)(a) is directed and that must be the focus of the Court's enquiry. 47 The evidence demonstrates that securing certainty of outcome within a reasonably short timeframe was a substantial purpose of the Consortium in choosing to adopt this scheme proposal. However, in my view that is not a purpose of avoiding s 650C or any other provision of Chapter 6, albeit that it is a reason for preferring a scheme to a takeover. 48 I agree with the observation made by Robson J in Re Coles Group Ltd (No 2) [2007] VSC 523; (2007) 65 ACSR 494 at [22] that the Corporations Act provides a choice as to whether transactions might be carried out under Chapter 6 or s 411 and is generally "neutral as to the choice which is made". I also agree with Barker J's observation in Re Russina Mining NL (No 2) (2010) 78 ACSR 615; [2010] FCA 609 at [38]: The specific intention to avoid the operation of a specific provision of Ch 6, in my view, cannot be inferred from the general intention to prefer the procedure under Pt 5.1 where Pt 5.1 delivers a legal outcome that cannot be achieved under the provision of Ch 6 - here, 100% ownership determined in one procedure - or a legitimate, commercial outcome - for example, the timely and cost effective implementation of a merger. In the latter case, while the distinction may be subtle the purpose is not to avoid Ch 6 (or the operation of a particular provision of it) but to prefer Pt 5.1 generally. 49 I acknowledge that each of Mincom (No 3), Re Coles Group Ltd (No 2) and Re Russina Mining NL (No 2) is a case in which ASIC issued a "no objection" letter. In this case the question of whether there is a purpose of avoidance within s 411(17)(a) is critical to the Court's jurisdiction to make orders under s 411(4)(b). In my view, Barker J's approach is supported by the weight of authority: see the cases cited at Simkiss R et al, Takeovers and Reconstructions in Australia (LexisNexis, subscription service) as at 23 November 2018 at [1604] and Damian T and Rich A, Schemes, Takeovers and Himalayan Peaks (3rd ed, Ross Parsons Centre of Commercial, Corporate and Taxation Law, 2013) at [11.7.12]. That approach is to be preferred to the approach on this issue taken by Fryberg J which I respectfully decline to follow. 50 I will now turn to the claim that the proponents of the scheme had a substantial or significant purpose of avoiding s 606 in relation to HoldCo shares and that is sufficient for the purposes of s 411(17)(a) to deprive the Court of jurisdiction to approve the scheme. 51 As noted in Takeovers and Reconstructions in Australia at [1604], the prohibition which now appears in s 411(17)(a) was introduced following the decisions in Re Bank of Adelaide (1979) 4 ACLC 393 and Re Wallace Dairy Co Ltd [1980] VR 588. In those cases, the courts determined that s 181(1) of the Companies Act 1961 (Vic) (the predecessor of s 411(1)) and the takeovers provisions in Part VIB of that Act are separate codes. 52 Mr Barnett observed that there are circumstances where a statutory provision can be construed by reference to a mischief which was perceived to exist around the time that it was introduced. He accepted that the "core concern" of s 411(17)(a) is preventing avoidance of the provisions of Chapter 6 in relation to an acquisition of shares by scheme. Counsel submitted s 411(17)(a)'s ambit is not limited to that "core concern". Counsel contended that this was because of the express language used in s 411(17)(a) supported by the terms of the Explanatory Memorandum to the Companies Bill 1981 (Cth) which explained the introduction of s 315(21) (s 411(17)(a)'s statutory predecessor) at [775] as follows: There is a new provision designed to prevent use of the scheme of arrangement provisions to effect takeovers CB (CB s-cl 5(21)]. 53 The later Explanatory Memorandum for the Companies and Securities Legislation (Miscellaneous Amendments) Bill 1981 (Cth) provided as follows in relation to the introduction of s 315(21) at [131]: The Court is not able to approve a compromise or arrangement if it considers that the compromise or arrangement has been proposed as a means of avoiding the Share Acquisition Code. (Principal Act s-sec 315(21)). This restriction will be eased so that the Court will be able to approve such a compromise or arrangement notwithstanding that the Court considers that it was proposed for this purpose if the NCSC has no objection to the compromise or arrangement. However, even if the NCSC has no objection to the scheme, the Court will still be able to reject the scheme (Amendment Bill cl. 52). 54 Capilano noted that Explanatory Memorandum to the Companies (Acquisition of Shares) Bill 1980 (Cth) (which preceded the materials relied on by ASIC) provided as follows: 14. S-sec. 11(6) of the Principal Act provides that the provisions of the A.C.T. Companies Ordinance relating to schemes of arrangement (ss. 181, 183 and 185) have effect subject to the take-overs provisions. This was done to overcome the danger that if the take-over provisions were tightened up, companies seeking to effect take-overs would attempt to do so under the guise of schemes of arrangement or reconstructions. S-sec.11(6) of the Principal Act will now be omitted (Bill cl. 3). 15. The effect of the proposed amendment will be that s-secs 181, 183 and 185 of the Companies Ordinance will no longer have effect subject to the general restrictions on the acquisition of shares in s. 11 of the Principal Act. However, certain modifications have been made to provisions in the proposed Companies Bill corresponding to ss. 181, 183 and 185 of the Companies Ordinance to ensure that the provisions of the Principal Act are not avoided. For example, the Court will not be able to approve a compromise or arrangement unless it is satisfied that the compromise or arrangement is not proposed for the purpose of enabling any person to avoid the operation of the Principal Act (Companies Bill s-cls. 315(20); 317(4)). 55 Capilano submitted that this indicates that the amendments were a package - tightening of the circumstances in which a takeover offer must be made (s 11 of the Companies (Acquisition of Shares) Act 1981 (Cth)) together with the introduction of a power of the corporate regulator to issue a "no objection" letter and what is now item 17 in s 611 of the Corporations Act which expressly contemplates the use of schemes to effect takeovers. 56 Senior counsel for Capilano submitted that: (1) This matter is the first time that ASIC has raised the argument that s 411(17) extends to any purpose that BidCo, HoldCo or the Consortium might have in relation to future transactions in shares in HoldCo. No authority deals with that argument. (2) No reasons were issued in relation to the approval of schemes where "stub equity" in a proprietary company was offered and a custodian arrangement employed to maintain shareholder numbers at or below 50. However, it is significant that such orders were made, including in the Peppers Group case. (3) As a matter of construction, s 411(17)(a) does not extend as far as ASIC submits. Rather its focus is the transaction in respect of which orders are now sought - the acquisition of shares in Capilano. (4) In any event, the proponents of the acquisition in this case had no purpose of avoiding any provision of Chapter 6 in proposing the scheme. (5) In interpreting s 411(17)(a), it is necessary to focus on the word "avoid". There must be a transaction in prospect to which Chapter 6 should or naturally would apply for the concept of "avoidance" to operate. The fact that scrip consideration comprises securities in an entity to which s 606 does not apply - for instance, because it is a foreign company or because it is a proprietary company - is not indicative of avoidance of Chapter 6 in the sense contemplated by s 411(17)(a). This Court has approved many schemes in which the scrip consideration was shares in a foreign company. (6) It is not possible to conclude now that the Consortium has a substantial or significant purpose of avoiding s 606 when it is not now known how an "Exit" might be effected and that is dependent on circumstances at the time a decision to "Exit" is made. (7) The evidence given by Mr Ng, Mr Conway and Ms Fang is that they did not take Chapter 6 into consideration in the decision to establish HoldCo as a proprietary company. Their evidence demonstrates good commercial reasons for adopting a proprietary company structure for HoldCo. 57 I was not satisfied that the interpretation of s 411(17)(a) for which ASIC contends is correct. 58 First, the topic of s 411(17) is the Court's power to approve a particular "compromise or arrangement". That context is important in construing the breadth of the language used in paragraph (a). 59 Second, paragraph (a) of s 411(17) focuses on the purpose for which the "compromise or arrangement" was proposed. In this case, the objective of the arrangement is to effect a takeover of Capilano by transferring Capilano shares from its shareholders to BidCo. It is clearly not the case that this arrangement was proposed to achieve the objective of effecting the transfer of or subscription for HoldCo shares. Scheme consideration included a cash alternative and the cash alternative was the subject of the positive recommendation made by the directors and the independent expert. In contrast there was "warts and all" disclosure in relation to the scrip consideration, including the fact that it was presently worth substantially less than the cash alternative. While it is true that there is a condition of the scheme that scrip consideration be accepted in respect of at least 15% of HoldCo shares, that condition would have been satisfied by Wroxby's election for scrip consideration and it had indicated its intention to do so. It was entirely feasible that less than 48 Capilano shareholders might have accepted the scrip consideration such that s 606 would never have had operation. 60 Having regard to the plain language of s 411(17)(a) I am satisfied that this arrangement was not proposed for the purpose of avoiding s 606 or any other provision of Chapter 6. Further, I do not accept that the language of the explanatory materials submitted by ASIC and Capilano is inconsistent with that conclusion. 61 For completeness, I note the evidence of Ms Fang, Mr Ng or Mr Conway that a purpose for adopting a proprietary company and custodian arrangement was to ensure that the Consortium has the maximum flexibility in effecting an Exit. 62 Provision for ensuring maximum flexibility in effecting an Exit is a usual feature of private equity investment vehicles. The Shareholders' Deed is typical in providing drag along rights designed to ensure that the Consortium will be in a position to deliver 100% of HoldCo shares to a purchaser: see clause 13 of the Shareholders' Deed (which is annexure E in the scheme booklet) which sets out the drag along rights in full. This is explained in the following extracts taken from sections 5.4(a) and 9.9 of the scheme booklet: … your ability to maintain your exposure to Capilano through an investment in HoldCo Shares is subject to the provisions of the Shareholders' Deed. Those provisions provide that you may be forced to participate in an Exit at a time determined by the Consortium, for example, HoldCo Shareholders' shares may be compulsorily sold or "dragged" in the context of an asset sale or trade sale under the Shareholders' Deed in the short to medium term. In those circumstances, you will no longer have a continued exposure to Capilano through an investment in HoldCo Shares. The majority holder in HoldCo will be the Consortium. Consistent with usual private equity practice, the Consortium may seek to Exit their investment in HoldCo or Capilano at some time in the future (and are thus unlikely to hold their investment in HoldCo indefinitely). This is subject to prevailing market conditions, the performance of the business and other factors which may be considered relevant by the Consortium at the time. HoldCo Shareholders may not agree with the Exit timing or strategy adopted by the Consortium, may prefer to hold their HoldCo Shares rather than Exit, and may not receive the price and return on investment they expect. Drag along rights Following the pre-emptive rights procedure (see above), if a Consortium Investor wishes to sell all or a proportion of their HoldCo Shares to a Third Party (other than an IPO), they may require the other HoldCo Shareholders to sell all or substantially all of their HoldCo Shares to the Third Party on terms no less favourable than the terms offered by the Third Party to the Consortium Investor. For further details, see clause 13 of the Shareholders' Deed. 63 If Exit were to be effected by sale of the shares in HoldCo, the structure adopted avoided the application of s 606 and that was necessary to afford that maximum flexibility, notwithstanding the evidence that none of Ms Fang, Mr Ng or Mr Conway adverted to Chapter 6. Accordingly, I understand each of them to have had that purpose. 64 Having said that, the use of a proprietary company also avoids other provisions of the Corporations Act (see [68] below) from which the Consortium derives immediate benefit in the cost effective administration of HoldCo and it avoids public disclosures about aspects of Capilano's business which would not be avoided if HoldCo were a public company (on the basis that Capilano is converted to a proprietary company upon implementation of the scheme). That is a substantial purpose for using a proprietary company as BidCo and HoldCo. 65 As submitted by Capilano, there is no transaction for disposal of HoldCo in prospect now. Further, an Exit can be effected for instance, by an initial public offering or asset sale, neither of which needs to have any implications under Chapter 6 or s 606 in particular. 66 In those circumstances it is difficult to see how the purpose of avoiding s 606 can be a substantial or significant purpose, even if I am wrong in my interpretation of s 411(17)(a).

Public Policy 67 ASIC pointed out that we now know that 83 Capilano shareholders have elected to receive scrip and 82 of them are for relatively small holdings. ASIC said that this raises squarely the public policy concerns which it raised at the first court hearing. The Court is being asked to approve a scheme which involves: (1) Offers for scrip (including for additional shares) in a proprietary company to 3,300 or so persons who held shares in Capilano. That is in substance a subset of the public because persons could buy and sell Capilano shares on the ASX until shortly before the scheme meeting. (2) HoldCo taking the benefit of equity investments from 83 of those people. (3) Avoiding the consequences of having a widely held company by using a custodian arrangement to keep the number of shareholders registered below 50. 68 ASIC submitted that, even if the Court finds that s 411(17)(a) is satisfied, the effect of the custodian arrangement is to insulate HoldCo from the following ordinary consequences which flow from a company being widely held: (1) Disclosure obligations and restrictions on dealing in shares under Chapter 6; (2) Restrictions on related party transactions under Chapter 2E; (3) Restrictions on conflicted directors voting under s 195; (4) Rules for the appointment and removal of directors under s 201E and s 249H(3); (5) Australian residency requirements for directors under s 201A; and (6) The requirement to hold an annual general meeting under s 250N. 69 ASIC submitted that the policy that underlies those provisions is that additional protections are required when shares are widely held compared to a closely held company because where shares are widely held there may not be the same degree of knowledge, oversight and involvement by shareholders. That such a policy still guides the Parliament is evident from what happened when it decided that proprietary companies should be able to be involved in crowd sourced funding. While s 113 was amended to provide that persons who hold shares issued under a crowd sourced funding offer should not be counted in determining the number of members, the Parliament also provided for protections designed to increase shareholder engagement and mitigate the occurrence of fraud. Those protections were a minimum of two directors, financial reporting in accordance with accounting standards, audit requirements and restrictions on related party transactions. 70 ASIC submitted that if the scheme is approved, it should be on conditions that HoldCo converts to a public company and the custodian arrangement be unwound. ASIC would not oppose such an order being made. ASIC said that those conditions are appropriate because the structure as set out in the scheme booklet operates to the benefit of the Consortium and possibly Wroxby (which will be a substantial shareholder and have a seat on the board). It is not for the benefit of the other 82 former Capilano shareholders. 71 ASIC accepted that there was adequate disclosure in the scheme booklet of the fact that HoldCo is a proprietary company and the consequences that flow from that. It submitted, however, that disclosure is not a substitute for the substantive protections of which those 82 shareholders would be deprived. It also submitted that it is not to the point that there are proprietary companies where such arrangements exist because that is a matter of private contract rather than being effected through a Court exercising statutory power intended to benefit the members or creditors of the scheme company. 72 ASIC last submitted that the question of whether the custodian arrangement actually complies with s 113 does not fall for determination on this application. Even if HoldCo technically complies with s 113, those public policy objections remain. ASIC submits that the question of who a "shareholder" is for the purposes of s 113 is not straightforward and it should be decided "if and when ASIC decides to act under s 165" of the Corporations Act. 73 Capilano submitted the use of a proprietary company and custodian arrangement does not offend any public policy that might be attributed to s 113 and ASIC's position is unduly paternalistic. It submitted that: (1) Capilano shareholders have had adequate disclosure as contemplated by s 708(17) and without circumventing Chapter 6D. (2) It is not true that there is a policy that widely held companies should have the benefit of the protections identified by ASIC. If that were true, the Corporations Act would provide that only Australian public companies can offer shares to persons in Australia, but it does not and schemes have been approved where the consideration comprises shares in a foreign company where those protections (including Chapter 6) do not apply. The cases of Re eircom Holdings Limited [2009] FCA 1418 and Re oOh!Media Group Limited [2012] FCA 26 and [2012] FCA 176 were cited. (3) The custodian arrangement does not offend any identified public policy. To the contrary, s 169(5A) requires that the register of members identifies shares held non-beneficially and s 1072H(8) is a cognate provision. (4) The Court has approved the same arrangements in at least two other schemes; Patties Foods and Pepper Group. (5) The object of Part 5.1 is to afford companies a flexible procedure to restructure their affairs. (6) The scheme is legal, including in relation to the custodian arrangement. (7) None of the 83 Capilano shareholders who elected to receive scrip consideration was compelled to do so. Where there has been adequate disclosure, public policy is not served by depriving those shareholders, and those who would receive the cash consideration, of the valuable commercial opportunity provided by the scheme. (8) There may be Capilano shareholders who would have accepted the scrip consideration had HoldCo been a public company. If the Court approves the scheme subject to ASIC's proposed conditions, what of them? (9) If this structure cannot be used, then private equity acquirers may not offer shareholders the opportunity of retaining an equity interest in a scheme company because it could not be achieved in a commercial and practical way. Alternatively, they may revert to the use of foreign companies as issuers. 74 I find the use of a proprietary company and custodian arrangement for a transaction of this kind troubling. Where investors in a private equity vehicle are sophisticated investors (both in the sense recognised by the Corporations Act and in fact) it is difficult to see why this model should not be adopted. An investment model which is not problematic where it involves truly sophisticated investors may not be as unproblematic where the investors are greater in number and more diverse in their background, as might be expected when they are former shareholders of a listed entity. In the latter case, there is a much higher prospect that it will be difficult to manage the expectations of the minority holders who have, individually, relatively small holdings and little experience of this model. 75 Having said that: (1) It is true that the Corporations Act contains provisions which apply to public companies which are designed for the protection of shareholders of widely held companies, and those protections mitigate against fraud, conflicted transactions and unequal treatment in control transactions. The Corporations Act also contains provisions which balance considerations concerning when prescribed forms of disclosure are required, when a proprietary company may make an offer of shares and when a scheme may be used as opposed to a takeover. Some of those provisions are item 17 of s 611, s 708(17) and s 113(3). The fact that Parliament made those exemptions and did not prescribe that a public company must be used without exception indicates that the public policy considerations are more complex and flexible than ASIC's submissions suggest. (2) ASIC accepts that there has been full disclosure to Capilano shareholders. (3) I accept that there was full and frank disclosure of the difference between holding shares in a listed entity and holding shares in a proprietary company such as HoldCo and the risks associated with holding those shares. On a fair reading of the Chairman's letter, there is frank disclosure that investment in HoldCo is not today of an equivalent value to the cash consideration by a substantial amount and the rights of a former Capilano shareholder through a custodian are limited and have a different risk profile to holding shares in a listed public company. In particular, Capilano shareholders were told that there will be substantial constraint on disposal of the HoldCo shares unless and until the Consortium determined to effect an Exit of the investment. They have also been told that they will not have the protections of the related party provisions and Chapter 6 (see, for instance, section 10.3(c) of the scheme booklet). (4) Even if HoldCo was a public company, the pre-emptive rights held by "substantial shareholders" (that is, the Consortium and Wroxby) over shares held by former Capilano shareholders do give rise to relevant interests (because the pre-emptive rights arrangements do not fall within s 609(8)). The Consortium could acquire all of the shares in HoldCo without triggering s 606. (5) It is true that s 606 would apply to the sale of HoldCo shares held by the Consortium members to third parties if HoldCo was a public company and it will not because HoldCo is an unlisted company which will not have more than 50 members. However, the Shareholders' Deed contains drag along and tag along provisions designed to ensure that the former Capilano shareholders will obtain the same price as the Consortium in an Exit. While this is not in all respects consistent with other purposes of Chapter 6 set out in s 602, it ameliorates the concerns that the Consortium may benefit disproportionately in the price it achieves in such a sale or that a change of control might occur without the non-Consortium shareholders being given an opportunity to participate. (6) It was agreed at the hearing that HoldCo will be treated as a large proprietary company so it will have financial reporting obligations. (7) Votes were cast at the scheme meeting in respect of approximately 60% of the issued Capilano shares. The scheme was approved by a substantial majority and would, in any event, have been approved by more than the requisite majority without votes cast by entities which would have been substantial shareholders of HoldCo. I accept that that reflects the Capilano shareholders' commercial assessment of the proposal. (8) The cash consideration is in the higher end of the range of the value attributed to Capilano shares by the independent expert on a controlling basis ($18.93 to $22.35) and it will be paid in relation to roughly 75% of the Capilano shares on issue if the scheme is approved. There is no guarantee that the holders of those shares would be able to achieve a price of $21 in the short term if the Court's approval is withheld. I note that the scheme booklet disclosed that, at a cash consideration of $20.06, the cash consideration represented a: 28.2% premium to Capilano's closing share price of $15.65 on 10 August 2018; 25.3% premium to Capilano's VWAP for the 30-day period ($16.01) ended 10 August 2018; 22.8% premium to Capilano's VWAP for the 3-month period ($16.33) ended 10 August 2018; P/E3 multiple of 19.3x (financial year ended 30 June 2018); and EV/EBITDA4 multiple of 12.5x (financial year ended 30 June 2018). (9) Capilano shareholders had the option of receiving cash consideration so that there was no compulsion to take scrip. Excluding Wroxby 82 Capilano shareholders voluntarily accepted the scrip consideration for an aggregate of 134,316. That is less than 1.5% of the Capilano shares on issue. Where those shareholders had a cash alternative open to them of the kind that it was in this case, it is difficult to see why the other shareholders should be deprived of the benefits of the scheme which they voted to approve by comfortable majorities. (10) ASIC accepts that it is open for individuals to enter into such arrangements by contract. It is difficult to see why there is a relevant difference in the Court approving a scheme with a similar feature when Capilano shareholders were fully informed and had the option of taking cash consideration. (11) For reasons given by me in [2018] FCA 1568, I am not satisfied that HoldCo will contravene s 113 of the Corporations Act upon the implementation of the scheme with the custodian arrangement having regard to s 708(17) and s 113(3). (12) A registered trustee company is appointed under the Custodian Deed. The Custodian Deed has been amended to provide that the Consortium will be responsible for all fees, the former Capilano shareholders who accepted scrip consideration will be given a copy of that Deed and upon issue of HoldCo shares to the Custodian, they will be given a confirmation that the Custodian has received the corresponding share certificates. (13) None of the Consortium, HoldCo or BidCo has indicated that it consents to conditions of the kind suggested by ASIC being imposed. (14) Although ASIC's position was disclosed in the scheme booklet, no Capilano shareholder appeared at the second court hearing to oppose the scheme being approved. 76 I accept that it is desirable that shares in a public company be offered as scrip consideration so that protections referred to above are afforded to accepting shareholders. There may well be circumstances where the fact that scrip consideration in an entity which is not an Australian public company will be provided under a scheme may be determinative of how the Court should exercise its discretion under s 411(4). 77 However, having regard to the matters set out in [75], I am ultimately not satisfied that, as a matter of fairness, the public policy basis of ASIC's concerns outweighs the commercial judgement applied by shareholders of Capilano. Those shareholders made their judgement with the benefit of full disclosure and without oppression.

Conclusion 78 Where, as here, ASIC refuses to issue the "no objection" letter, it is entirely appropriate that it appear at the second court hearing. The Court was considerably assisted by ASIC's submissions, notwithstanding its decision that orders should be made under s 411(4). I certify that the preceding seventy-eight (78) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Farrell.