Clemenger Group Limited, in the matter of Clemenger Group Limited (No 2) [2023] FCA 974

Background 1 On 18 July 2023, the court made orders convening a meeting of the Class A and Class C shareholders in the plaintiff (Clemenger) (Scheme Shareholders) to consider and, if thought fit, approve the scheme of arrangement set out at pages 318-38 of Exhibit HJM-1 to the affidavit of Hylton John Mackley affirmed on 13 July 2023 (Scheme) (the July Orders). 2 That meeting was held on 10 August 2023 (Scheme Meeting), and the second court hearing was held on 17 August 2023. 3 These reasons are to be read with my reasons convening the Scheme Meeting: Re Clemenger Group Ltd [2023] FCA 815 (Clemenger No 1). Those reasons set out the nature of, and commercial impetus for, the Scheme. 4 At the second court hearing, Clemenger relied on a further affidavit of Hylton John Mackley dated 15 August 2023, and a further affidavit of William Khong dated 17 August 2023. Another affidavit of William Khong dated 17 August 2023 was provided by Clemenger after the second court hearing, addressing one remaining condition precedent.

Principles 5 As O'Bryan J stated in Re Australia & New Zealand Banking Group Ltd (No 2) [2022] FCA 1547 at [10], the matters to which regard will ordinarily be had in deciding whether to grant approval of a scheme of arrangement are as follows: (a) that the orders of the Court convening a meeting of members were complied with; (b) that the meeting of members so convened has approved the Scheme with the requisite majority; (c) that all other requirements of the [Corporations Act 2001 (Cth)] and the Federal Court (Corporations) Rules 2000 (Cth) (Rules) have been satisfied; (d) that the Scheme is fair and reasonable so that an intelligent and honest person who was a member of the relevant class, properly informed and acting alone, might approve it; (e) that there has been full and fair disclosure to members and creditors of all information material to the decision whether to vote for or against the applicable scheme; and (f) that the plaintiff has brought to the attention of the Court all matters that could be considered relevant to the exercise of the Court's discretion.

Dispatch of Scheme materials 6 The Scheme Booklet, including modifications discussed during the first court hearing, and required by the July Orders, was registered with ASIC on 19 July 2023. 7 In accordance with the July Orders, Clemenger sent an email to Scheme Shareholders, which included a link to the Scheme Booklet. 8 Clemenger received a small number (21) of delivery failure notifications. In each instance, Clemenger had a phone number for the relevant shareholder, and was able to obtain a current email address. Additionally, Clemenger received seven automatic replies indicating that the email box was not being monitored (eg due to parental leave), but which also identified an alternative email address for the shareholder. Clemenger re-sent the required email to the updated or alternative email addresses and did not receive any further rejection notifications, or automated responses indicating the email inbox was not being monitored. As such, it did not become necessary for Clemenger to pursue the alternate means of notification (by post) provided for in the July Orders. 9 I am satisfied that the Scheme materials were effectively dispatched to Scheme Shareholders and that Clemenger's actions in relation to the group of recipients referred to above were appropriate and brought the Scheme materials and meeting to the attention of those shareholders.

Additional shareholder communications 10 Clemenger did not issue any further communications with Scheme Shareholders as a group. There were, however, some further communications with a small number of Scheme Shareholders, predominantly former employees, who sent queries to the email address for Scheme-related enquiries that was notified by the email dispatched to Scheme Shareholders. 11 To put those emails in context, it is necessary to explain that, under Clemenger's Constitution, former employees were not permitted to continue to hold Class A or Class C shares, but were required to transfer them. In general, that transfer would be effective on 30 June of each year. However, as detailed in the Scheme Booklet, the transfer of the shares of former employees was capped at 50% of their shares, leaving the remaining 50% available for acquisition by Portview pursuant to the Scheme, if approved. One consequence of this is that former employees continued to hold 50% of their shares beyond 30 June 2023, when they would ordinarily have expected to have transferred them, meaning that any loan balances remained extant past 30 June and incurred the increased interest rate charged under the Clemenger Employee Share Assistance Scheme (CESAS). Under the terms of the CESAS, loans of former employees may only be repaid as at the applicable share transfer date each year (as determined by the Constitution) "or at such other date as the directors of the Share Assistance Company decide". Accordingly, those directors have the ability to determine when departing shareholders' loan balances are reduced. 12 Returning to the email correspondence: (a) six emails made enquiries regarding the timing of when the writers' shares would be transferred; and (b) four emails included queries regarding how and when interest would be charged on the writers' loan balances, two of which expressed some unhappiness at being charged interest at the increased rate when the sale of the second 50% of their shares was being deferred due to the Scheme being proposed. 13 Of the shareholders who wrote in with those queries, two voted in favour of the Scheme, and the others did not vote at all. None of those shareholders (or any other Scheme Shareholder) sought to appear and oppose the making of orders approving the Scheme at the second court hearing. 14 While the implementation of the Scheme will result in Scheme Shareholders who are former employees with outstanding loan balances paying more interest than they otherwise would have had all (instead of 50%) of their shares been transferred on 30 June 2023, the additional interest will be incurred for a limited period (anticipated to be until 25 August 2023). Given that the additional interest is incurred for a limited period, the fact that the CESAS already allows for the timing of the reduction of loan balances of former employees to be controlled by the directors of the Share Assistance Company, and the fact that none of the shareholders who raised those queries voted against the Scheme or sought to appear, I do not consider that the manner in which the Scheme will affect this group of shareholders stands in the way of the court approving the Scheme.

Conduct of the Scheme Meeting and processing of proxies 15 The Scheme Meeting was held on 10 August 2023. Only a few shareholders attended in person (13 Class A shareholders, and 3 Class C shareholders). However, 178 shareholders cast their votes by proxy in favour of the Scheme (only 5 shareholders voted against the Scheme). 16 Of the shareholders present and voting (in person or by proxy), 97.34% cast their votes in favour of the Scheme. The number of votes cast in favour of the Scheme represented 99.30% of the votes cast. 17 As is clear, the Scheme attracted overwhelming support from voting Scheme Shareholders and clearly achieved the voting majorities required by s 411(4)(a)(ii) of the Corporations Act. 18 The number of votes cast represents 88.97% of all Scheme Shares. Approximately 52% of Scheme Shareholders voted. Those figures demonstrate a high level of engagement by Scheme Shareholders with the proposed Scheme.

Advertisement of the approval hearing 19 By the July Orders, the court dispensed with compliance with r 3.4 of the Federal Court (Corporations) Rules 2000 (Cth) (the Rules) (see Clemenger No 1 at [42]), and directed that details of the second court hearing and the process for opposing the approval of the Scheme be notified to Scheme Shareholders by a notice on Clemenger's website, and by email to Scheme Shareholders. That process was followed. No Scheme Shareholder advised Clemenger it wished to oppose the Scheme, and no Scheme Shareholder sought to appear at the second court hearing.

Satisfaction of conditions precedent 20 Clemenger provided certificates (executed by it and by Portview) verifying the satisfaction of various conditions precedent set out in the Scheme Implementation Deed, and the Scheme. Other conditions precedent will be satisfied upon the making of orders approving the Scheme. At the court's request, a further affidavit was provided after the second court hearing, deposing to satisfaction of a further condition precedent, namely that neither the Scheme Implementation Deed nor the Deed Poll had been terminated as at 8.00 am on the day of the second court hearing.

Full and fair disclosure to members 21 Having regard to its contents, I accepted at the first hearing that the draft Scheme Booklet (as amended) was a draft explanatory statement meeting the criteria specified in s 411(3) of the Corporations Act 2001 (Cth) (the Act), and that it was therefore suitable to be approved pursuant to s 411(1): see Clemenger No 1 at [35]. The finalised Scheme Booklet was distributed to Scheme Shareholders in accordance with the July Orders. I am satisfied that the disclosure requirements imposed by s 412(1) have been satisfied.

Whether the Scheme is fair and reasonable 22 It is well accepted that, as Markovic J put it in Re APN Outdoor Group Ltd (No 2) [2018] FCA 1633 (Re APN) at [4], "members are better judges of what is in their own interests than the Court". Where there is no opposition to the order for approval, the commercial judgement of Scheme Shareholders is to be given considerable weight: Re ERM Power Ltd [2019] NSWSC 1672 at [13] (Black J). 23 Where a Scheme is proposed and attracts the requisite statutory majorities, that stands as evidence of a scheme's apparent fairness and reasonableness: Re Amcor Ltd (No 2) [2019] FCA 842 at [11] (Beach J). That is all the more so where, as in this matter, the Scheme has attracted a high shareholder turnout, and voting Scheme Shareholders overwhelmingly supported the Scheme. 24 I accept that the Scheme is fair and reasonable in the sense that an intelligent and honest shareholder, properly informed and acting alone, might approve it: Re APN at [5(4)] (Markovic J).

Whether all necessary matters have been brought to the attention of the court 25 Clemenger brought the court's attention to the correspondence with Scheme Shareholders referred to above. Other matters were brought to the attention of the court at the first hearing, and discussed in Clemenger No 1. There is nothing before the court that indicates the existence of material matters that have not been brought to the court's attention.

Section 411(17) 26 Section 411(17) of the Act provides that the court must not approve a compromise or arrangement 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 … 27 However, the court need not approve a compromise or arrangement merely because a statement by ASIC that it has no objection to the compromise or arrangement has been produced to the court as mentioned in s 411(17)(b). 28 Clemenger received a "no objection" letter from ASIC dated 16 August 2023. That satisfies the requirements of s 411(17)(b). 29 There is nothing in the material before the court to suggest that the Scheme was proposed to avoid the operation of Ch 6 of the Act.

Exemption from s 411(11) 30 Clemenger sought an order under s 411(12) of the Act exempting it from compliance with s 411(11). Section 411(11) provides that "[s]ubject to subsection (12), a copy of every order of the Court made for the purposes of paragraph (4)(b) must be annexed to every copy of the constitution of the body issued after the order has been made". 31 As Clemenger noted in its submissions, the purpose of the requirement in s 411(11) was explained in Re Equinox Resources Ltd (2004) 49 ACSR 692; [2004] WASC 143 at [22] (EM Heenan J) as follows: [T]o ensure that any modification of the rights of shareholders of the company which is the subject of the scheme or any other provision in the scheme which may affect the interests of persons dealing with the company, such as prospective creditors or purchasers of shares, will be sure to have the opportunity of seeing what the exact rights of shareholders in the company or of its creditors are, as modified, if at all, by the scheme which has been approved. 32 In Clemenger No 1 at [10], I detailed amendments to be made to Clemenger's constitution, associated with the Scheme. To the extent that the ongoing rights of Clemenger's members are altered by the Scheme at all, those alterations are incorporated into the constitution itself. Otherwise, the effect of the Scheme will relevantly be to provide for the transfer of half the Class A and Class C shares in Clemenger from Scheme Shareholders to Portview. There is no apparent effect on creditors. Class A and Class C shares in Clemenger can only be acquired by employees (and directors and associates) of Clemenger companies. The Scheme will not have any effect on those who may become shareholders in the future, and existing Scheme Shareholders have already been apprised of the Scheme. In my view, no useful purpose would be served by requiring that a copy of orders made be attached to every copy of Clemenger's constitution issued henceforth. Accordingly, I consider that the exemption sought is appropriate. 33 Accordingly, orders will be made for the Scheme to be approved, together with ancillary orders. I certify that the preceding thirty-three (33) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Button.