Capitol Health Limited, in the matter of Capitol Health Limited [2024] FCA 1120

Conditions precedent

1. The scheme is subject to the satisfaction or waiver of a number of conditions precedent. These are contained in clause 3.1 of the MID and clause 3.1 of the scheme. Clause 3.1 of the MID provides that the scheme will not become effective and the obligations of the parties with respect to the scheme do not become binding unless and until each condition set out in clause 3.1 of the MID is satisfied or waived where capable of waiver.
2. Now the conditions set out in the MID are quite standard, but there is one that I need to linger on.
3. One of the conditions is that IDX has received informal merger clearance in respect of the scheme, either unconditionally or on conditions that are acceptable to IDX acting reasonably, by notice in writing from the Australian Competition and Consumer Commission stating, or stating to the effect, that the ACCC does not propose to intervene or seek to prevent the acquisition of Capitol shares by IDX and that notice remains in full force and effect in all respects and has not been withdrawn, revoked, suspended, restricted or amended before 8.00 am on the second court date.
4. Let me elaborate further as to this competition approval condition.
5. On 2 September 2024, Capitol announced to the ASX via the ASX announcements platform that:
6. as previously announced, the merger is subject to IDX receiving informal merger clearance from the ACCC;
7. IDX applied for this merger clearance on 25 July 2024;
8. on 30 August 2024, the ACCC informed IDX that the ACCC would shortly publish a market inquiries letter inviting submissions from interested parties;
9. the ACCC will set a provisional date for the ACCC's findings in relation to the merger; and
10. the timing of the ACCC's decision is not yet fixed, but Capitol expects that, subject to the satisfaction of the other conditions, the merger will be implemented in the fourth quarter of calendar year 2024.
11. On 5 September 2024, the ACCC published on its website the market inquiries letter foreshadowed in Capitol's announcement.
12. The ACCC market inquiries letter sought submissions by 5.00 pm on 19 September 2024. Now on its website, the ACCC has referred to 28 November 2024 as the provisional date for the announcement of the ACCC's findings.
13. Following discussions between the ACCC and relevant advisers, there is a reasonable expectation of the ACCC being in a position to provide an indication of the feedback received from its market inquiries by 17 October 2024. Depending on the nature of the feedback, this may enable the proposed scheme meeting to proceed on 31 October 2024 as planned.
14. In this circumstance, Capitol has sought an order for the scheme meeting to be held on 31 October 2024 as this preserves flexibility for the transaction to still proceed in accordance with its current timetable, which includes implementation of the scheme in mid-November 2024.
15. The alternative position of delaying the seeking of a scheme meeting order until later in October or November 2024, with the scheme meeting being held in November or December 2024 and implementation in early 2025, would mean that Capitol would lose the potential opportunity to proceed with the current timetable which a response from the ACCC earlier than 28 November 2024 may facilitate.
16. Now a somewhat analogous situation involving competition approval arose for consideration in Re Tatts Group Limited [2017] VSC 552, which involved the proposed merger of Tatts Group Ltd with Tabcorp Holdings Limited. In that case the decision of the Australian Competition Tribunal to grant authorisation to Tabcorp to acquire the shares in Tatts was the subject of judicial review applications by the ACCC and Crown Bet Pty Ltd. Those applications had been heard by the Full Court of the Federal Court shortly prior to the first court hearing and judgment was expected shortly.
17. Now there were a number of possible outcomes following the judicial review applications as regards the competition condition in that matter, including the waiver or non-satisfaction of that condition prior to the planned scheme meeting depending on the circumstances. But those possible outcomes did not cause the court to refrain from making the scheme meeting orders.
18. In my view, there is presently no compelling reason why the ACCC's market inquiry should result in the timetable being put on hold for some two months or so, and so delaying the proposed implementation of the scheme to early next year, pending the announcement of the ACCC's findings on the provisional date of 28 November 2024. This is particularly so where there is a reasonable expectation of the ACCC being in a position to provide an indication of the feedback received from its market inquiries by 17 October 2024, being two weeks before the scheme meeting planned for 31 October 2024.
19. Further, there is also no compelling reason for holding off seeking first court hearing orders until a date after 17 October 2024, on the assumption that an indication will be given by the ACCC by that date, as such indication might reveal a pathway to merger clearance and Capitol will have, in that circumstance, lost a period of weeks in the timetable for no apparent reason or benefit.
20. Now there are several possibilities or scenarios that could arise from that indication from the ACCC, which could include that there seems to be a pathway to merger clearance, with or without conditions, or that there are potential difficulties which require further consideration or that further steps or inquiries are proposed to be undertaken by the ACCC. It may also be the case, depending on the feedback, that the provisional date of 28 November 2024 is changed, whether that be brought forward or pushed out.
21. However, this is all speculation at this time and subject to receiving an indication from the ACCC by 17 October 2024, Capitol will be able to make a decision regarding whether to proceed with the scheme meeting on 31 October 2024 or whether alternative arrangements or steps should be taken or considered.
22. Now as the potential scenarios include those which would enable the scheme meeting to proceed on the date planned, in my view Capitol should be able to proceed with the present timetable so as to not lose the momentum of this transaction.
23. So, given the range of possible scenarios that might arise from the ACCC's market inquiry and given the costs incurred to date and the work undertaken by both Capitol and IDX in proposing this transaction, the Capitol preferred position of proceeding with the current timetable is a reasonable one.
24. I should make one other point. In terms of transaction timetables and regulatory conditions, courts in more recent times have facilitated transaction flexibility by converting regulatory conditions precedent to conditions subsequent (see Re Afterpay Limited [2021] NSWSC 1640 at [12] to [14] per Black J). Of course it is premature to deal with this matter now, but it demonstrates the options that are potentially open and which have been accommodated to enable parties to maintain timetable momentum in scheme transactions.
25. Let me turn to the question of scheme consideration.

Scheme consideration

1. If the scheme is implemented, each scheme shareholder other than certain ineligible shareholders will receive 0.12849 new IDX shares for each scheme share held by a scheme shareholder as at the scheme record date, which is expected to be 7.00 pm on 7 November 2024. The proposed implementation date of the scheme is 14 November 2024.
2. Now under the scheme, a scheme shareholder will be ineligible to receive the scheme consideration in two categories of case.
3. First, they will be ineligible if they are an ineligible foreign shareholder, being a scheme shareholder with an address outside Australia, its external territories or New Zealand unless IDX determines that it is lawful and not unduly onerous or impracticable to issue new IDX shares to that shareholder.
4. Second, they will be ineligible if they are an unmarketable parcel shareholder, being a scheme shareholder who, based on their holding of scheme shares at the scheme record date, would be entitled to receive less than a marketable parcel (as defined in the ASX listing rules) of new IDX shares.
5. Now under the scheme, if there are any ineligible foreign shareholders, then the new IDX shares which they otherwise would have been entitled to receive will be issued to the sale agent and sold by the sale agent with the net proceeds of the sale being paid to the relevant ineligible foreign shareholder.
6. Further, the same sale agent process applies under the scheme to unmarketable parcel shareholders. If, however, there are no ineligible foreign shareholders, then no sale agent will be appointed and, in that circumstance, unmarketable parcel shareholders will receive under the scheme a cash amount from IDX equal to the market value, being the VWAP of IDX shares traded on the ASX during the five trading days before the implementation date, of the new IDX shares that would have otherwise been issued to them, unless they make an election to receive the scheme consideration.
7. Further, under the scheme, an unmarketable parcel shareholder who is not an ineligible foreign shareholder has the option to elect to receive directly new IDX shares by validly completing and returning before the effective date an election form available on request from Capitol's share registry.
8. As at 20 September 2024 there were 4651 Capitol shareholders on the Capitol share register. And of these 4651 Capitol shareholders, there were 14 Capitol shareholders with an address outside Australia, its external territories or New Zealand, representing 0.3% of Capitol shareholders, holding in aggregate 506,222 Capitol shares, representing 0.047% of the Capitol shares on issue. So, based on the Capitol share register as at 20 September 2024, there is likely to be very few if any ineligible foreign shareholders.
9. And based on the Capitol share register as at 20 September 2024 and based further on the closing share price of IDX shares on that date, there will be approximately 493 unmarketable parcel shareholders on the scheme record date, representing 10.6% of all Capitol shareholders, holding in aggregate 235,983 Capitol shares, representing 0.021 % of the Capitol shares on issue.
10. Let me now identify the source of the relevant principles to be applied on the present application and which I have applied, and then I will address some specific topics relevant to the exercise of my discretion.

Relevant principles

1. In terms of the principles to be applied in ordering the convening of a scheme meeting, I have written on this topic many times (see for example Re Amcor Ltd [2019] FCA 346 at [47] to [50]).
2. I would also endorse the statements on this topic by Moshinsky J (Re Carbon Revolution Ltd [2023] FCA 1081 at [21] to [23]), O'Bryan J (Re Rex Minerals Limited [2024] FCA 1051 at [24] to [27]), Anderson J (Re AWA Mutual Limited [2023] FCA 1551 at [52] to [55]), Button J (Re Probiotic Limited [2024] FCA 298 at [27] to [29]) and Neskovcin J (Re PSC Insurance Group Limited [2024] FCA 946 at [23] and [24]).
3. To those authorities may be added, as O'Callaghan J has pointed out from time to time (see for example Re QMS Media Limited [2019] FCA 2172 at [28]), the endorsement by the plurality in Re CSR Limited (2010) 183 FCR 358 at [12] of Emmett J's analysis in Re Central Pacific Minerals NL [2002] FCA 239 at [8] to [11], and Finkelstein J's comments in Re CSR Limited at [72] to [76].
4. As an aside, my own exposition of the relevant principles has usually been sourced to French J's analysis in Re Foundation Healthcare Ltd (2002) 42 ACSR 252 at [35] to [44], although it could as easily have been sourced to Emmett J's analysis in Re Central Pacific Minerals NL published 3½ months earlier.
5. I am satisfied that the various statutory preconditions to the exercise of power under s 411(1) to convene a scheme meeting have been satisfied. Let me then turn to the question of my discretion in exercising that power.
6. Now various matters have been drawn to my attention in that regard, but I only want to comment on several matters. So, I do not need to dwell on aspects such as the break fee and reverse break fee or the exclusivity arrangements which are well within acceptable parameters whether quantitatively in the case of the former or qualitatively in the case of the latter.

Performance risk and completion risk

1. In considering whether to approve a scheme involving the participation of a person other than the company and its members (in this case, IDX), it is necessary to ensure that the relevant party is bound to perform the role assigned to it and that its obligations are able to be enforced. Its obligations do not depend upon s 411, which is confined in the present context to the obligations of the company and its members; see my observations in each of Re Oz Minerals Limited [2023] FCA 197 at [37] and Re Newcrest Mining Limited [2023] FCA 1080 at [37]).
2. In this context it is necessary to consider the question of performance risk as regards the obligations to be performed by the non-scheme party (see Re Oz Minerals Limited at [37]) including the question of completion risk.
3. In the present context, if the scheme is approved and becomes effective, then the transfer of the Capitol shares to IDX under the scheme is subject to the new IDX shares being issued to the scheme shareholders under the scheme, the new IDX shares being issued to the sale agent in respect of any ineligible foreign shareholder and the unmarketable parcel shareholders under the scheme, and the alternative cash amount (in the event that the sale agent process is not used) being paid out of the trust account to the unmarketable parcel shareholders under the scheme.
4. Now having the transfer of the Capitol shares to IDX subject to the issuing of the new IDX shares to the scheme shareholders and to the sale agent and to the payment out of the trust account of the alternative cash amount to unmarketable parcel shareholders effectively removes any performance risk in so far as the transfer of Capitol shares in return for the issuing of such new IDX shares or the payment of such alternative cash amount to the unmarketable parcel shareholders is concerned (see by analogy Re Oz Minerals Limited at [38] and Re Newcrest Mining Limited at [39]).
5. Further, IDX has entered into a deed poll in favour of the scheme shareholders under which it has undertaken to provide or procure the provision of the scheme consideration to the scheme shareholders in accordance with the terms of the scheme and to undertake all other actions attributed to it under the scheme. Whilst the deed poll is in place, by reason of the terms of the scheme, scheme shareholders and both ineligible foreign shareholders and unmarketable parcel shareholders will likely not need to rely on any of the covenants in the deed poll as far as the issuing of the new IDX shares and the payment of the alternative cash amount to the unmarketable parcel shareholders in return for the transfer of their Capitol shares to IDX is concerned (as noted in Re Oz Minerals Limited at [39] in the context of that scheme).
6. Further, the MID imposes an obligation on IDX to provide the scheme consideration in the manner and amount contemplated by the MID and the terms of the scheme and the deed poll (as noted in Re Newcrest Mining Limited at [40] in the context of that scheme).
7. As to the matter of performance risk in respect of the sale of any new IDX shares by the sale agent and the remittance of the net sale proceeds to the relevant Capitol shareholders, under the relevant sale agent provisions, IDX must procure that as soon as reasonably practicable on or after the implementation date, the sale agent, in consultation with IDX, sells or procures the sale of all of the relevant new IDX shares and then remits the sale proceeds to IDX. Promptly after receiving the sale proceeds, IDX must remit the relevant amounts to the relevant Capitol shareholders. These sale and remittance steps are post the transfer of Capitol shares to IDX and accordingly will take place when Capitol has become a wholly owned subsidiary of IDX.
8. The performance by IDX of these post transfer and post implementation date actions are addressed in the following way. Under the deed poll, in addition to undertaking to provide the scheme consideration to each scheme shareholder in accordance with the scheme, IDX also undertakes in favour of each scheme shareholder to undertake all other actions attributed to it under the scheme, subject to and in accordance with the provisions of the scheme. Further, under the scheme, each scheme shareholder irrevocably appoints Capitol as their agent to enforce the deed poll and Capitol undertakes in favour of each scheme shareholder that it will enforce the deed poll against IDX.
9. Further, as to the matter of completion risk, the undertakings by IDX in the deed poll together with the undertaking by Capitol in the scheme itself to enforce the deed poll against IDX are relevant as is the MID which provides that nothing relevantly affects Capitol's right to specific performance or declaratory or injunctive relief as a remedy for a breach or threatened breach of the MID or the scheme by any party.
10. Let me turn to the question of whether there needs to be separate classes.

Class considerations

1. In Re Oz Minerals Limited at [61] I formulated the class test in the following terms: In Re Healthscope Ltd (2019) 139 ACSR 608, I observed (at [107]) that the relevant question in that context was whether the rights were: … so dissimilar from the rights of the other Healthscope shareholders as to make it impossible for them to consult together with a view to their common interest. Or put another way, do the differences in rights between NWH AssetCo (or its affiliates) and the other Healthscope shareholders mean that any community of interest between them has been displaced for the purposes of them considering and voting upon the proposed Scheme …
2. Now relevantly to the present context, the holders of performance rights and other equity incentives (such as options) who are also shareholders of the scheme company do not constitute a separate class for the purposes of s 411(1).
3. In Re Newcrest Mining Limited I observed (at [60]): … I have consistently held that holders of performance rights or other equity incentives who are also shareholders of the scheme company do not constitute a separate class for the purposes of s 411(1). 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 Scheme consideration as all other shareholders.
4. Now Capitol has a long term incentive (LTI) plan in place to assist in the reward, retention and motivation of certain employees of the Capitol group and directors of Capitol. The LTI plan is governed by the Capitol Plan Rules.
5. The Capitol Plan Rules provide the Capitol board with the discretion to issue options and performance rights to employees and other persons on the terms, and subject to the vesting conditions, set out in the Capitol Plan Rules and the specific letter of offer to the relevant participant. Each performance right and option entitles the holder to receive one new Capitol share, subject to satisfaction of the relevant vesting conditions set out in the relevant letter of offer.
6. Under the terms of the Capitol Plan Rules the Capitol board has a general discretion to determine the treatment of unvested performance rights and options on the occurrence of a trigger event. In the event that I make the scheme meeting orders sought at the first court hearing, that will constitute a trigger event for the purposes of the Capitol Plan Rules.
7. Now the proposed treatment of the performance rights and options in the context of the scheme is set out in the MID. In general terms, the parties have agreed that the Capitol equity incentives, being any right to or option over Capitol shares issued under the Capitol Plan Rules, will be treated in the manner agreed between the parties in writing on the date of the MID. Further, it has been agreed that Capitol must ensure that all Capitol equity incentives which are not Capitol shares have either lapsed or vested and converted into Capitol shares such that there are no outstanding Capitol equity incentives which are not Capitol shares on issue as at the scheme record date.
8. Further, resolutions of the Capitol board were made on 22 May 2024 and 21 August 2024 to give effect to the proposed treatment of performance rights and options.
9. Let me elaborate on these rights, options and other matters.

Performance rights

1. Capitol has 6,376,789 performance rights on issue, all of which are unvested. Mr Walter holds 5,012,530 unvested performance rights. The balance of the unvested performance rights are held by two other senior executives of Capitol, of whom none are also Capitol shareholders.
2. In accordance with the terms of the Capitol Plan Rules, the Capitol board has determined to exercise its discretion to vest all unvested performance rights other than those held by Mr Walter subject to and with effect from the effective date, subject to the Court ordering the convening of the scheme meeting.
3. Mr Walter's unvested performance rights, each of which are subject to FY25 and FY26 vesting conditions, will automatically vest and become immediately exercisable on a change of control (as defined in the Capitol Plan Rules) in accordance with his employment agreement. The scheme becoming effective constitutes a change of control for the purposes of his employment agreement and the terms of his performance rights. Accordingly, his performance rights will automatically vest and become exercisable on the effective date. The Capitol board is not required to exercise any discretion under the Capitol Plan Rules in order for Mr Walter's performance rights to vest and become exercisable.
4. Following vesting and exercise of the performance rights, the holders will be issued with Capitol shares on a one-for-one basis on or before the scheme record date and will, if they retain those Capitol shares as at the scheme record date, receive the scheme consideration in exchange for those Capitol shares in addition to the scheme consideration receivable for any other Capitol shares held by them as at the scheme record date.
5. None of this warrants any separate class treatment.

Options

1. At present, Capitol has 4,905,000 unlisted options on issue. Of these options 3,477,500 have vested and the balance being 1,427,500 options remain unvested. The vested options are held by five other employees of Capitol, of whom at least one is also a Capitol shareholder. Mr Walter does not hold any options.
2. The options, like the performance rights, entitle the holder to receive one new Capitol share, subject to satisfaction of the relevant vesting conditions, exercise of the option and payment of the relevant exercise price applicable to the option.
3. Under the Capitol Plan Rules, on the occurrence of a change of control, the Capitol board has the discretion to determine the date on which any vested options which have not been exercised as at the date of the change of control will lapse. As I have said, the scheme becoming effective constitutes a change of control. The Capitol board has determined to exercise its discretion such that all vested options which have not been exercised by 7.00 pm on the business day after the effective date will automatically lapse.
4. Further, in accordance with the terms of the Capitol Plan Rules, the Capitol board has determined to exercise its discretion such that all unvested options as at the effective date will lapse.
5. If the scheme does not become effective, the Capitol equity incentive arrangements will remain in place subject to their existing terms and conditions.
6. None of this warrants any separate class treatment.

Cash payments or incentives

1. Similarly, cash payments or incentives in connection with a scheme do not require the recipient of those payments or benefits who is also a shareholder to meet as a separate class.
2. No separate class meeting is required where the cash payment or incentive is conditional on the scheme becoming effective. The additional cash payment or incentive does not mean that the rights of the recipients of those cash payments are so dissimilar as to make it impossible for them to consult together with the other shareholders at one meeting with a view to their common interest.
3. The short term incentive payment that Capitol has resolved to pay Mr Walter for the 2025 financial year, which becomes fully payable if the scheme becomes effective, does not require separate classes.
4. Now as to the retention payments, they are being paid to certain employees including Mr Walter as an incentive for those employees to remain with the business to assist with the implementation of the scheme. These payments are not conditional on the scheme becoming effective but are conditional on the relevant employee remaining employed on certain alternate dates.
5. Similarly, as to the exertion fees to be paid to the non-executive Capitol directors and to certain employees, they also are not conditional on the scheme being implemented and are being paid in recognition of the additional workload and time commitment associated with the scheme.
6. Payments in the context of a scheme which are not conditional on the scheme becoming effective do not give rise to the need for separate classes.
7. Further, on the topic of exertion fees payable to non-executive directors, it is convenient to refer here to another dimension. Black J in Re Pacific Smiles Group Limited [2024] NSWSC 812 at [17], Re Genex Power Limited [2024] NSWSC 752 at [17] and [18] and Re MyDeal.com.au Limited [2022] NSWSC 1094 at [41] to [43] addressed the topic of special exertion fees or additional remuneration payable to directors, which did not depend upon the outcome of the scheme. But he was considering this not in the context of class questions but in the context of the directors making a voting recommendation, with Black J noting that such payments, where disclosed, did not prevent the relevant director from making a voting recommendation. Implicitly, no class problem was perceived or exposed for consideration.
8. Further, as to the proposal that two of the non-executive Capitol directors will join the merged group and the proposal that Mr Walter will transition to a new role in the merged entity, in the context of a merger these matters are not relevant to considerations of class composition.
9. In my view none of these arrangements require any of those shareholders who hold the relevant incentives to meet separately as a separate class from those shareholders who do not hold such incentives in order to consider and vote on the scheme.

Ineligible foreign shareholders

1. Further, the treatment of ineligible foreign shareholders in the context of a scrip scheme, where the relevant shares are issued to a sale agent with the relevant proceeds remitted to the relevant shareholder, does not require separate classes. See my observations in Re Amcor Limited [2019] FCA 346 at [39] to [44] and the rationale referred to in those paragraphs, and see also Re Newcrest Mining Limited at [27].

Unmarketable parcel shareholders

1. Further, the treatment of unmarketable parcel shareholders whereby they receive cash rather than scrip does not require separate classes. The treatment of unmarketable parcel shareholders can arise in different scheme contexts, including in an all scrip scheme where the scrip consideration to which they would otherwise have been entitled are issued to and sold by a sale agent (like the position with ineligible foreign shareholders) and a scheme involving a choice between cash consideration or scrip consideration (or a combination of both) and where the unmarketable parcel shareholder only has the option of receiving the cash consideration.
2. The proposed treatment of unmarketable parcel shareholders is now common and there is a proper justification for not burdening registers of public companies with small holdings whilst also enabling a small shareholder to efficiently exit the register. Unmarketable parcel shareholders could nevertheless make an election to opt-in to receive the scrip consideration, and having the ability to opt-in clearly mitigates against any class question arising.
3. In the present case, the proposed treatment of the unmarketable parcel shareholders is the same as that which is to apply to any ineligible foreign shareholder. In the event that there are no ineligible foreign shareholders, then the alternative cash payment mechanism set out in the scheme will apply, where the cash amount is based on the VWAP of IDX shares traded on the ASX during the 5 trading days before the implementation date, (as advised by IDX) (see the definition of "market value" in the scheme). The fact that the cash amount payable to unmarketable parcel shareholders is to be determined by reference to the price of IDX shares at an earlier time than would be the case if the relevant new IDX shares had been issued to the sale agent and sold on or after the implementation date does not change the position from a class perspective. In either case, the cash amount to be received by the unmarketable parcel shareholder reflects the value of the IDX shares at the relevant time.
4. Whether an unmarketable parcel shareholder receives the relevant proceeds of sale from the sale agent process or a cash amount from IDX under the scheme, in both cases the relevant amount reflects the market price of the IDX shares at the relevant time. Accordingly, this aspect of the proposed treatment of the unmarketable parcel shareholders does not require separate classes.
5. In any event, an unmarketable parcel shareholder, who is not an ineligible foreign shareholder, can under the scheme elect that the relevant provisions not be applied to them by validly completing and returning before the effective date an election form available on request from the Capitol's share registry, in which case they will receive the new IDX shares directly on implementation, subject to the terms of the scheme. This ability to receive, through a positive election, new IDX shares mitigates further against any element of differentiation that may otherwise arise for consideration in the context of class composition.
6. Now differing approaches have been adopted regarding the question of elections by unmarketable parcel shareholders, including the approach of no provision for such an election to the approach of the provision by the scheme company of an opt-in notice. But in the present case, under the scheme, an election form is available upon request from the Capitol registry. The ability for an unmarketable parcel shareholder to make such a request is set out in the scheme booklet. Given the relatively small number of unmarketable parcel shareholders on the Capitol register, being some 10.6% of Capitol shareholders by number holding 0.021% of Capitol shares on issue, and the fact that the composition of this group could readily change due to off market sales or transfers of these shares and taking account of the express notice given to such shareholders about the ability to make an election, the approach proposed to be adopted by Capitol is reasonable.

Directors' intention to recommend the scheme

1. The Capitol directors have unanimously recommended that Capitol shareholders vote in favour of the scheme, in the absence of a superior proposal and subject to the independent expert continuing to conclude that the scheme is in the best interests of Capitol shareholders.
2. Subject to these same qualifications, each of the Capitol directors will vote all Capitol shares that they hold or control in favour of the scheme.
3. Now in my view it is not inappropriate for Mr Walter to join with the other directors in making a voting recommendation that Capitol shareholders vote in favour of the scheme, notwithstanding the benefits to be received by him through the treatment of his performance rights and the proposed short term incentive payment and retention payment. These matters are set out in the body of the chairman's letter where reference is made to the voting recommendation of the Capitol directors. Further, in my view it is not inappropriate for each of the non-executive directors to make a voting recommendation notwithstanding that they will be receiving the exertion fees.
4. The topic of a director making a voting recommendation when receiving a benefit in connection with a scheme was addressed by me in Re DWS Limited (2020) 148 ACSR 616, where I observed (at [42]) that I agreed with the approach taken by Robson J in Re SMS Management & Technology Limited [2017] VSC 257 at [26], O'Callaghan J in Re Kidman Resources Limited (2019) 375 ALR 760 at [105] to [113] and Black J in Re Villa World Limited (2019) 139 ACSR 550 at [38] to [40] on this topic (see also my observations in Re RXP Services Limited [2021] FCA 38 at [46] to [48]).
5. More recently, in Re Oz Minerals, I noted (at [18]) that I was satisfied that the managing director and chief executive officer in that case could give a recommendation notwithstanding his interest which had been adequately disclosed.
6. Now in Re Rex Minerals Limited, O'Bryan J (at [70]) observed that, at his request, the scheme company had agreed to amend the front cover of the scheme booklet to include a statement (after the reference to the directors' unanimous voting recommendation) in equally large font to the effect that when considering the recommendation of the directors, shareholders should note that certain directors would receive benefits if the scheme proceeded and referring shareholders to the relevant parts of the scheme booklet.
7. But in the matter before me, what is proposed differs from that in Re Rex Minerals Limited, and is an approach more consistent with the observations made by Black J in Re Beyond International Limited [2022] NSWSC 1649 at [32] to [35].
8. In that matter, ASIC had raised an issue as to whether the director benefit disclosure wording should appear on the front page of the scheme booklet. Black J was not persuaded that such disclosure should be included on the front or title page of the scheme booklet and he did not accept that there was any demonstrated reason to assume that there was a serious likelihood that shareholders generally would not at least read the chairman's letter in respect of a significant corporate decision. His Honour observed at [34] and [35]: I am not persuaded that the Court should require, as ASIC suggested, that that disclosure be included as a footnote on the front, or title page, of the scheme booklet. This Court has, over the years, dealt with many schemes of arrangement, and I am aware of none which contain a disclosure of that kind on the first page of the scheme booklet, even after the question of recommendation by interested directors came under close scrutiny in the Federal Court of Australia and this Court. ASIC's rationale for including a footnote of that kind on the title page, that it is necessary for shareholders who may not read beyond the first page of the scheme booklet, seems to me to prove too much and too little. A concern that a significant body of shareholders does not read beyond the first page of the scheme booklet is wholly inconsistent with the fundamental premises of a disclosure based regime for schemes of arrangement and financial services regulation generally. Rightly or wrongly, Australian disclosure regulation in respect of prospectuses, product disclosure statements and schemes of arrangement has for many years proceeded on the basis that disclosure is desirable, because at least informed shareholders will take the trouble to read material that is significant to their interests, and that the steps taken by informed shareholders to read such information in turn is communicated to other shareholders through the media and broker reports. It seems to me that if that premise is seriously in question, then it cannot be addressed by moving a footnote of this kind to the front page of a scheme booklet and would need to be addressed by much more fundamental legislative reform. I also do not accept that there is any demonstrated reason to assume that there is a serious likelihood that shareholders generally would not at least read the chairman's letter, in respect of a significant corporate decision. If shareholders here read the chairman's letter, they will find the disclosure of Mr Borglund's interest in clear and prominent form. For that reason, I would not, so far as this Court has an approval role in respect of the scheme booklet, require Beyond to adopt the approach that ASIC proposed.
9. I agree with Black J's observations and approach and propose to adopt it.
10. Moreover, having a general statement about director benefits on the front cover of a scheme booklet does not provide the necessary context for shareholders to understand the nature of the benefits proposed to be provided and likely raises more questions than answers. It is of more assistance to shareholders for the benefits to be set out and clearly explained in the chairman's letter in the context of the relevant circumstances and for shareholders to be informed that these are matters they should take into account when considering the relevant directors voting recommendation.

Will Capitol shareholders be properly informed?

1. There are five matters that I should address, being:
2. information for shareholders;
3. the independent expert's report;
4. verification of the draft scheme booklet;
5. ASIC's role; and
6. the Court's approval of the explanatory booklet.

Information for shareholders

1. In Re Amcor Limited, I observed that there were three aspects to the requirements of s 412(1). As to those three aspects, I said as follows (at [91]): There are three aspects to the requirements of s 412(1): (a) First, the explanatory statement must explain the effect of the compromise or arrangement, and in particular state any material interest of the directors and the effect on those interests of the compromise or arrangement so far as it is different from the effect on the like interests of other persons. Now these matters are addressed in the draft Scheme Booklet. And the information in it makes it clear that the effect of the arrangement on the directors' interests is the same as on the like interests of others. (b) Second, the explanatory statement must set out the prescribed information. That prescription is in reg 5.1.01 and Schedule 8 (part 3) of the Regulations. Now a helpful table has been provided to me showing the specific requirements of the Act and the Regulations and the location in the draft Scheme Booklet of the statements by which those requirements are complied with. I am satisfied as to both its accuracy and its comprehensiveness. (c) Third, the explanatory statement must set out any other information that is material to the making of a decision whether to agree with the compromise or arrangement, being information which is within the knowledge of the directors and has not previously been disclosed. In my view the draft Scheme Booklet on its face seems to satisfy that requirement.
2. As to these matters, the scheme booklet sets out the features and effects of the scheme and includes the explanatory statement as required by s 412(1)(a), and as far as the prescribed information is concerned, a schedule 8 table has been prepared.

Independent expert report

1. Capitol appointed KPMG Financial Advisory Services (Australia) Pty Ltd to prepare an independent report in relation to the scheme. The independent expert's report is to be an annexure to the scheme booklet.
2. In the independent expert's report, KPMG concludes that the relevant consideration under IDX's proposal and the scheme is fair and reasonable and therefore in the best interests of Capitol shareholders, in the absence of a superior proposal.

Verification of the draft scheme booklet

1. Various affidavits that have been filed address the verification of the scheme booklet by Capitol and the verification undertaken by IDX. I do not need to descend into the detail, save to say that the verification seems to be adequate.

ASIC's role and approval of the scheme booklet

1. As to the requirement for the scheme booklet to be registered under s 412(6), under s 412(8) ASIC must not register the copy of the explanatory statement unless the statement appears to comply with the Act and ASIC is of the opinion that the statement does not contain any matter that is false in a material particular or materially misleading in the form or context in which it appears.
2. Consistently with the approach that I adopted in Re Oz Minerals Ltd and Re Newcrest Mining Limited, an approval order will not be made regarding the explanatory statement. It is unnecessary given the registration process that must be gone through.

Section 411(17)

1. Now any operation of s 411(17) is a matter for the second court hearing.
2. In Re Amcor Limited (at [88]) I observed that: In my view, s 411(17) does not present a bar to a meeting now being ordered to be convened if it seems likely that ASIC will produce the relevant statement at the second Court hearing. Given that ASIC does not oppose the application for convening the meeting, it is appropriate for me to proceed at this stage on the basis that an application for approval would be unopposed by ASIC, and that ASIC will in due course provide a statement in the form contemplated by s 411(17)(b). …
3. I would make a similar observation in the present case.

Other matters

1. Now an order is sought to address the default position that would otherwise arise under s 249Y(3) of the Act, which provides as follows: A company's constitution (if any) may provide for the effect that a member's presence at a meeting has on the authority of a proxy appointed to attend and vote for the member. However, if the constitution does not deal with this, a proxy's authority to speak and vote for a member at a meeting is suspended while the member is present at the meeting.
2. Capitol's constitution does not address the effect of a member's presence at a meeting on the authority of a proxy to attend and vote for that member and, accordingly, the default position or default rule under s 249Y(3) would apply. Capitol seeks an order overriding this default position so as to reduce the risk that Capitol shareholders might inadvertently preclude their proxy from voting simply because the shareholder wishes to be present in person at the relevant scheme meeting to observe or participate (but not to vote).
3. An example of where this situation could potentially arise, it seems to me, is where a senior employee of the scheme company who has appointed the chair as their proxy then attends the scheme meeting in person either in their capacity as an employee or as an interested observer.
4. Now whilst it may be said that Capitol is adopting a cautious approach in seeking this order, the meeting is not like an annual general meeting but is one to consider a significant proposed corporate transaction and so may well attract more attention or interest.
5. Now such an order was made recently by Neskovcin J in PSC Insurance Group Limited, albeit in the context of a hybrid scheme meeting where the risk of such attendance is more likely to arise. Her Honour, after referring to the default rule in s 249Y(3), observed at [58]: … PSC's Constitution does not specifically address the effect of a member's presence at a meeting on the authority of a proxy to attend and vote for that member and, accordingly, the Default Rule comes into operation. PSC seeks an order overriding the Default Rule so as to reduce the risk that Scheme Shareholders might inadvertently preclude their proxy or attorney from voting simply because the shareholder wishes to be present (either in person or online) at the relevant Scheme Meeting to observe or participate (but not to vote). An order in similar circumstances was made by Justice Jackman in Re Vita Group Ltd (2023) 165 ACSR 576; [2023] FCA 400 at [11]-[12] and I made such an order in this case.
6. And as Jackman J pointed out in Re Vita Group Ltd at [12], such an order can be made under rule 3.3(2) of the Federal Court (Corporations) Rules 2000 (Cth). I will make such an order.

Summary

1. In my view the scheme is fit for consideration by Capitol shareholders and the scheme is of such a nature and cast in such terms that, if agreed to at the scheme meeting, it would likely be approved by the Court at the second court hearing. Further, there is no issue arising from the scheme which would unquestionably lead to a refusal to approve the scheme at the approval hearing and it could not be said that the scheme is on its face "so blatantly unfair or otherwise inappropriate that it should be stopped in its tracks before going any further" (Re Foundation Healthcare Ltd at [44] per French J).
2. Further, in my view Capitol shareholders will be properly informed of the terms and detail of the scheme including its benefits and risks.
3. For the foregoing reasons, this morning I made the necessary convening and ancillary orders. I certify that the preceding one hundred and twenty-eight (128) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Beach.