Other matters
41 Let me deal with some other matters.
42 First, the potential availability of different forms of scheme consideration does not necessarily lead to the creation of more than a single class of shareholders. The question of classes and separate class meetings arises because of the reference in s 411(1) to an arrangement proposed between a company and its members "or any class of them".
43 In Re Healthscope (2019) 139 ACSR 608; [2019] FCA 542 I engaged in a detailed review of the relevant authorities on classes at [105] to [120]. At [106], I said:
The well-established test for identifying a class for the purposes of a scheme of arrangement is that expressed by Bowen LJ in Sovereign Life Assurance Co v Dodd [1892] 2 QB 573 at 583. Sovereign Life Assurance concerned a creditors' scheme of arrangement, but the test enunciated by Bowen LJ has been adopted ever since in members' schemes (Re Foster's Group Limited [2011] VSC 93 at [15] per Ferguson J). Bowen LJ expressed the class test in the following terms:
…The word "class" is vague, and to find out what is meant by it we must look at the scope of the section, which is a section enabling the Court to order a meeting of a class of creditors to be called. It seems plain that we must give such a meaning to the term "class" as will prevent the section being so worked as to result in confiscation and injustice, and that it must be confined to those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest…
44 I also expressed the relevant question as being whether the rights of the relevant shareholders there under consideration were (at [107]):
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.
45 In relation to the specific question of whether different forms of scheme consideration give rise to the need for separate classes, it is appropriate to consider whether the existence of different proportional entitlements to different forms of consideration under a scheme of arrangement would necessitate the creation of separate classes of shareholders for the purpose of voting.
46 Now in the present case the potential availability of different forms of scheme consideration does not lead to the creation of more than a single class of shareholders. Relatedly, the fact that scheme shareholders who receive scrip consideration will be subject to the provisions of the Shareholders' Deed in relation to those shares does not create any class issues. Citadel shareholders who receive Class B shares under the Scheme will only be able to sell or transfer their Class B shares in certain very limited circumstances as permitted under that Deed. However, in relation to the scheme consideration generally, this does not mean that the rights of scheme shareholders who elect to receive the scrip consideration are so dissimilar from the rights of the scheme shareholders who do not make an election as to make it impossible for them to consult together with a view to their common interest.
47 Second, if the special dividend is declared and paid by Citadel, there arises a question as to whether financial assistance is being given by Citadel to PEP BidCo to acquire the scheme shares. But in my view, the payment of the special dividend would not amount to financial assistance.
48 Section 260A of the Act provides that a company may financially assist a person to acquire shares in the company only if:
(a) giving the assistance does not materially prejudice (i) the interests of the company or its shareholders or (ii) the company's ability to pay its creditors;
(b) the assistance is approved by shareholders under s 260B; or
(c) the assistance is exempt under s 260C.
49 The first question is whether the proposal in relation to the special dividend constitutes financial assistance at all within the meaning of the Act. The second question is whether, if it does, it is nevertheless permitted by s 260A.
50 As to the first question, it is well accepted that the term "financial assistance" has no technical meaning. The task is to examine the commercial realities of the transaction to determine whether it can properly be described as the giving of financial assistance by the company.
51 Now whilst there have been a number of decisions which have considered the issue of financial assistance in the context of dividends and schemes of arrangement, most of those decisions have considered whether the requirements of s 260A(a) have been met, without considering or deciding the threshold question as to whether the payment of a special dividend amounts to "financial assistance". But in Re Legend Corporation Limited [2019] FCA 1249, O'Bryan J said (at [75]):
In my view, payment by Legend of the special dividend will not constitute financial assistance to acquire the Scheme shares. BidCo is not currently a shareholder of Legend and therefore will not receive the special dividend. The effect of the payment of the special dividend is merely to reduce the consideration payable for shares pursuant to the Scheme in a manner that reflects the cash outflow from the company and the consequential reduction in the net assets of Legend. While the Scheme Implementation Agreement anticipates the payment of the special dividend, the Scheme does not require the dividend to be paid (declaration of the dividend is at the election of Legend). The proper characterisation of these arrangements is that the consideration for the acquisition of the Scheme shares will be reduced to reflect the reduction in net assets of Legend resulting from payment of the dividend.
52 In my case, those observations apply equally to the Scheme. In particular, I would note that PEP BidCo is not currently a shareholder of Citadel and therefore will not receive the special dividend. Further, the effect of the payment of the special dividend is merely to reduce the consideration payable for the scheme shares in a manner that reflects the cash outflow from Citadel and the consequential reduction in its net assets. Further, whilst the SI Deed (as amended) anticipates the payment of the special dividend, the Scheme does not require the dividend to be paid. Declaration of the dividend is in the discretion of the Citadel Board.
53 Accordingly, the proper characterisation of these arrangements is that the consideration for the acquisition of the scheme shares will be reduced to reflect the reduction in net assets of Citadel resulting from any payment of the special dividend. This is not "financial assistance" within the meaning of the Act.
54 But in any event, in my view the payment of the special dividend will not prejudice Citadel, its shareholders or its ability to pay its creditors. In the present case, I accept the evidence of Citadel's Chief Financial Officer, Ms Jennifer Martin, that in her view the financial position of Citadel generally and its asset and liability position in particular are such that Citadel's net asset position is more than sufficient to meet the payment of the special dividend, and that the payment would not prejudice the interests of Citadel or its members or the ability of Citadel to pay its creditors.
55 Third, Citadel has on issue 388,308 employee share rights that remain outstanding. Citadel's rules relating to its employee share rights plan gives the Citadel Board discretion to accelerate the vesting and lapsing of any or all employee share rights in the event of a proposed change of control of Citadel.
56 In accordance with the terms of this plan, Citadel's Board has exercised its discretion and determined that, subject to the Scheme becoming effective, 179,120 employee share rights will lapse on the effective date, representing the employee share rights issued under Citadel's FY21 long term incentive plan, other than those to be issued to Mr Mark McConnell, a director and the Chief Executive Officer of Citadel, subject to shareholder approval. Further, 209,188 employee share rights will vest on the effective date and will be cash settled in accordance with the terms of the employee share rights plan for an amount equal to $1,216,813.30, representing the employee share rights issued under Citadel's FY19 LTI plan and FY20 LTI plan, other than those to be issued to Mr McConnell, subject to shareholder approval.
57 No Citadel directors have a relevant interest in employee share rights. However, subject to obtaining shareholder approval at its annual general meeting scheduled for 19 November 2020, Citadel proposes to issue Mr McConnell 61,551 employee share rights under the terms of Citadel's FY20 LTI plan pursuant to his employment arrangements, the material terms of which were previously announced to the ASX on 13 November 2019, and 89,148 employee share rights under the terms of Citadel's FY21 LTI plan.
58 If the issue of the employee share rights to Mr McConnell is approved by shareholders, then subject to the Scheme becoming effective, Citadel's Board has exercised its discretion in accordance with the terms of the employee share rights plan and determined that the 61,551 employee share rights issued to Mr McConnell under the terms of Citadel's FY20 LTI plan will vest on the effective date and will be cash settled in accordance with the terms of the employee share rights plan for an amount equal to $350,840.70, and the 89,148 employee share rights issued to Mr McConnell under Citadel's FY21 LTI plan will lapse on the effective date.
59 In addition, Mr McConnell is eligible to participate in Citadel's short term incentive plan for the financial year ending 30 June 2021. The STI plan provides executives with the opportunity to earn an annual incentive award which is delivered in cash subject to the satisfaction of annual performance against key performance conditions set and assessed by the Citadel Board. In accordance with the terms of the STI plan, in the event that a change of control of Citadel occurs during the relevant performance period, which will occur if the Scheme becomes effective, subject to him remaining employed by Citadel, Mr McConnell will be entitled to receive a proportionate amount of his annual incentive award having regard to service completed and performance up until the change of control event. Where such amount is payable, payment will not be made before the effective date, and will not exceed $440,000, being the maximum value of Mr McConnell's annual incentive award under the STI plan for the current performance year. These matters are disclosed in the Scheme Booklet, where it is also stated that Citadel shareholders should have regard to these arrangements when considering Mr McConnell's recommendation of the Scheme, which appears throughout the Scheme Booklet.
60 There are two issues which Citadel has raised for my consideration in relation to the proposed treatment of the employee share rights and short term incentives.
61 A question may arise as to whether those persons with the benefit of existing employee share rights who are also current shareholders should form a separate class from those shareholders who do not hold such rights because they will receive a benefit from the Scheme. In Re Skilled (2015) 113 ACSR 525 Robson J said (at [82]):
I am satisfied that the performance rights or options held by some employees do not give rise to a separate class of members. It is worth noting at the outset that the rights will not vest until after the meeting to approve the scheme is held. Accordingly, the issue of additional shares will not influence the voting at the meeting directly. The question is whether the rights and options themselves (and the prospect of additional shares upon their vesting) gives rise to a divergence of interests with other shareholders. I do not consider that it does. The shares to be issued if the rights or options vest are not of a different type than those of other shareholders. Moreover, it appears to me that the employees with performance rights or options are in no different position from any other employee of the company who would be impacted by the scheme's implementation in different ways on the basis of various interests extraneous to their status as members.
62 These observations have been applied by me in other cases in relation to short term and long term performance rights and cash and equity rewards granted pursuant to employee incentive plans. In Re Amcor [2019] FCA 346, I noted (at [86]):
Accordingly, no separate class meetings are necessary or desirable. The holders of incentives who are also Amcor shareholders will participate in the Scheme on the same basis and receive the same consideration as Amcor shareholders who are not holders of incentives. That is, all shareholders are being treated equally under the Scheme. There is no additional benefit being offered by New Amcor to these shareholders under or in connection with the Scheme.
63 These observations apply with equal force to the Scheme proposed by Citadel, such that separate class meetings are not necessary or desirable as a result of the proposed treatment of the employee share rights.
64 Further, as noted above, if the Scheme becomes effective and Mr McConnell remains employed by Citadel, he may become entitled to receive a proportionate amount of his annual incentive award under the STI plan for the financial year ending 30 June 2021. In my view the nature and extent of any additional benefits that it might be said that Mr McConnell will become entitled to if the Scheme is implemented are not such as to make it inappropriate for him to make a voting recommendation to members. In any event, the arrangements are adequately disclosed in the Scheme Booklet, and shareholders are expressly told to have regard to these arrangements when considering Mr McConnell's recommendation of the Scheme.
65 Fourth, the proposed treatment of foreign scheme shareholders and UK shareholders under the Scheme does not give rise to a requirement for separate class meetings.
66 Foreign scheme shareholders are not entitled to make an election to receive the scrip consideration. If the Scheme becomes effective, foreign scheme shareholders will receive the cash consideration in respect of all their scheme shares. A foreign scheme shareholder is a Citadel shareholder whose registered address as shown on the Citadel share register on the record date is a place outside of Australia, New Zealand or the United Kingdom. As at 23 October 2020 Citadel had 75 foreign scheme shareholders holding in aggregate approximately 1.06% of Citadel's issued shares.
67 In my view, the proposed treatment of foreign scheme shareholders under the Scheme does not require those shareholders to meet together as a separate class for the purposes of considering the proposed scheme of arrangement.
68 It is common practice in schemes of arrangement where scrip comprises the proposed scheme consideration that identified foreign shareholders are not entitled to receive the scrip consideration but instead receive cash as consideration for their scheme shares. This is often achieved via the use of sale facility mechanism. In particular, the scrip to which foreign shareholders would otherwise have been entitled is instead issued to a sale agent on their behalf, who must subsequently sell those shares and remit the cash proceeds of the sale to the foreign shareholder. Such cases do not require the ineligible foreign shareholders to meet together as a separate class for the purposes of considering the proposed scheme of arrangement. The relevant authorities were discussed by me in Re Amcor at [42] to [44]. For present purposes, in my view there is no material difference between the outcome achieved via the sale agent facility just discussed and the payment of cash consideration directly to the foreign shareholders instead of issuing scrip that is contemplated by the Scheme. This is particularly so where, as here, the amount of the cash consideration is the same as the paid up capital amount of the scrip consideration. As such, in relation to the proposed treatment of foreign scheme shareholders under the Scheme, no separate class arises.
69 Further, under the Scheme, holders of scheme shares who are resident in the United Kingdom are not considered to be foreign scheme shareholders. But the Scheme provides an alternate mechanism for the issue of scrip consideration to UK shareholders from other scheme shareholders. This is to facilitate the availability of scrip-for-scrip rollover relief under the tax law of the United Kingdom. The particular mechanism is contained in the Scheme. It provides for UK shareholders who are to receive the scrip consideration to be "rolled up" the chain of holding companies by making a series of irrevocable directions. This will occur simultaneously such that UK shareholders will receive their Class B shares in HoldCo at the same time as other scheme shareholders who have elected to receive the scrip consideration. In my view the rights of UK shareholders are not so dissimilar to other scheme shareholders who will receive the scrip consideration as to require separate class meetings.
70 Fifth, schemes of arrangement are not required to be the subject of a report by an independent expert unless the parties have a common director, or the acquiring company controls 30% of the scheme company, neither of which is the case here.
71 Nevertheless, as I have indicated, Citadel has obtained a report from Mr Edwards as to whether, in his opinion, the Scheme is in the best interests of Citadel shareholders. And as I have said, Mr Edwards concludes that the Scheme is fair and reasonable and hence in the best interests of the scheme shareholders, in the absence of a superior alternative proposal emerging.