CW Group Holdings Limited, in the matter of CW Group Holdings Limited [2024] FCA 1471

Introduction

1. This is an application by the plaintiff, CW Group Holdings Limited (CWG) for orders under s 411(1) of the Corporations Act 2001 (Cth) (Act) to convene a meeting of its members (Scheme Meeting) to consider a proposed scheme of arrangement (Scheme).
2. The commercial purpose of the Scheme is to implement a merger of CWG and Sigma Healthcare Limited (Sigma) (Transaction).
3. CWG is a leading Australian retail pharmacy franchisor, and it owns the 'Chemist Warehouse' and 'My Chemist' pharmacy franchise brands. CWG's principal activities in Australia consist of the provision of intellectual property and support services, as well as the supply of goods to a network of franchised pharmacies. CWG is an unlisted public company and currently has 1,567,857,011 ordinary shares on issue held by 311 shareholders.
4. Sigma is a national full-line pharmaceutical wholesaler, distributor and pharmacy franchisor. Sigma is a public company, and its shares are listed on the ASX.
5. If the Scheme is implemented:
6. Sigma will acquire 100% of the issued share capital of CWG from CWG shareholders as at the Scheme Record Date (as defined in the Scheme) (Scheme Shareholders);
7. in exchange for the transfer of their CWG shares, Scheme Shareholders will receive a combination of shares in Sigma (New Sigma Shares) and cash (together, the Scheme Consideration);
8. CWG will become a wholly-owned subsidiary of Sigma (which will remain listed on the ASX); and
9. the merged group will be owned as to 85.75% by the Scheme Shareholders (i.e. the former CWG shareholders) and as to 14.25% by existing Sigma shareholders.
10. The Scheme is subject to a number of conditions precedent, such as the approval of CWG shareholders and the Court, as well as various Sigma shareholder approvals in relation to the Transaction.
11. The parties' obligations in relation to the Scheme are set out in a Merger Implementation Agreement between CWG and Sigma dated 11 December 2023, as amended on 10 December 2024 (MIA), which annexes the form of the proposed Scheme (amongst other things).
12. The directors of CWG have formed the view that the Scheme is in the best interests of CWG shareholders, and they unanimously recommend that CWG shareholders vote in favour of the Scheme (in the absence of a Chemist Warehouse Superior Proposal (as defined in the MIA), and subject to the Chemist Warehouse Independent Expert continuing to conclude that the Scheme is in the best interests of CWG shareholders).
13. The following material is before the Court:
14. an affidavit of Merryn Jill Quayle, a partner of Herbert Smith Freehills, the solicitors for CWG, dated 13 November 2024 (Quayle Affidavit);
15. an affidavit of Joseph Norman Gottlieb, the General Counsel and Company Secretary of CWG, dated 12 December 2024 (Gottlieb Affidavit); and
16. an affidavit of Kara McGowan, the General Counsel and Company Secretary of Sigma, dated 12 December 2024 (McGowan Affidavit).
17. CWG's counsel have prepared and provided a detailed and helpful outline of submissions dated 12 December 2024 (Outline of Submissions) in support of the orders sought today. These reasons for judgment are substantially drawn from those submissions.
18. At the hearing today, CWG's counsel made oral submissions in support of the application. Counsel for Sigma also appeared in support of the application.
19. For the reasons that follow, I consider that it is appropriate to make orders convening the Scheme Meeting and the related orders that are sought by CWG.

The Scheme

1. The terms of the Scheme are contained in the proposed Scheme of Arrangement, a copy of which is Annexure 4 to the scheme booklet prepared by CWG (Scheme Booklet). The Scheme Booklet provides an overview of the Scheme in section 4.
2. A copy of the Scheme will be annexed to the Court's orders to be made today.
3. Each Scheme Shareholder is entitled to receive the Scheme Consideration for each Scheme Share held. The Scheme Consideration is comprised of a cash amount per Scheme Share (i.e. the Scheme Cash Consideration) and a specific number of New Sigma Shares per Scheme Share (i.e. the Scheme Share Consideration). That is, for each Scheme Share held, a Scheme Shareholder will receive both the Scheme Cash Consideration and the Scheme Share Consideration (subject to an exception relating to Ineligible Foreign Shareholders).
4. The precise amount of the Scheme Cash Consideration will not be confirmed until shortly prior to the Implementation Date. This is because the formula for determining the amount of the Scheme Cash Consideration takes into account any "Leakage" in respect of CWG or Sigma up to the time of implementation, as explained in section 4.2(a) of the Scheme Booklet. Leakage is defined to include such things as dividends, distributions or other payments to shareholders.
5. In particular, the formula provides that the amount of the Scheme Cash Consideration will be $700 million, adjusted up or down to take into account any Leakage, divided by the number of Scheme Shares on issue at the Scheme Record Date. If the Sigma Leakage is greater than the CWG Leakage, then the Scheme Cash Consideration will increase. If the CWG Leakage is greater than the Sigma Leakage, then the Scheme Cash Consideration will decrease.
6. As disclosed in section 4.2(a) of the Scheme Booklet, assuming that there is no Leakage adjustment to the Scheme Cash Consideration, and if the total number of CWG shares as at the Scheme Record Date remains the same as at the Last Practicable Date, the amount of the Scheme Cash Consideration will be $0.446469 cash per Scheme Share held. In addition, the Scheme Booklet will confirm that, at the date of the Scheme Booklet, each of Sigma and CWG are not aware of any circumstances which would cause, and do not expect, any Sigma Leakage or Chemist Warehouse Leakage, respectively.
7. The Scheme Share Consideration is also determined by a formula, which is discussed in section 4.2(b) of the Scheme Booklet. The integers of the formula, which will determine the ratio of New Sigma Shares to Scheme Shares, are fixed, so that Scheme Shareholders will (in aggregate) receive such number of New Sigma Shares as will result in the Scheme Shareholders owning 85.75% of the merged group, with existing Sigma shareholders owning the remaining 14.25%. However, the precise amount of New Sigma Shares to be issued per Scheme Share will depend upon the total number of fully diluted Sigma Shares on issue on the Scheme Record Date, and the total number of Scheme Shares on issue on the Scheme Record Date.
8. As disclosed in the Scheme Booklet (in section 4.2(b)), assuming that the total number of CWG shares and the total number of fully diluted Sigma Shares on issue at the Scheme Record Date remains unchanged from the Last Practicable Date, Scheme Shareholders will receive approximately 6.317841 New Sigma Shares per Scheme Share held.
9. The key steps in the Scheme are as follows:
10. CWG shareholders will vote on whether to approve the Scheme at the Scheme Meeting (which will commence shortly after the conclusion of the Sigma shareholder meeting at which Sigma shareholders will be asked to approve specified resolutions in connection with the Transaction and the issuance of Sigma shares under the Scheme, amongst other things);
11. if the Scheme is to proceed, all conditions precedent (other than Court approval) must be either satisfied or waived by the applicable time, which for most conditions precedent is 8.00 am on the date of the second court hearing;
12. if the Scheme is agreed to by the requisite majorities at the Scheme Meeting and approved by the Court, it becomes effective on the lodging of an office copy of the Court's approval orders with the Australian Securities and Investments Commission (ASIC);
13. if the Scheme becomes effective then it will be implemented as follows:
    1. on the Business Day before the Implementation Date, Sigma must deposit an amount equal to the aggregate Scheme Cash Consideration payable to all Scheme Shareholders into a trust account operated by CWG as trustee for the Scheme Shareholders (Trust Account) (cl. 5.2(a) of the Scheme);
    2. on the Implementation Date, CWG must pay the Scheme Cash Consideration to each Scheme Shareholder in respect of that Scheme Shareholder's Scheme Shares from the Trust Account (cl. 5.2(b) of the Scheme);
    3. on or before the Implementation Date, Sigma must issue the Scheme Share Consideration to each Scheme Shareholder (cl. 5.3 of the Scheme) (subject to an exception for Ineligible Foreign Shareholders); and
    4. on the Implementation Date, but subject to the provision of the Scheme Cash Consideration and the Scheme Share Consideration to Scheme Shareholders, all of the Scheme Shares will be transferred to Sigma (cl. 4.2 of the Scheme).
14. The directors of CWG have appointed Kroll Australia Pty Ltd (Independent Expert) to prepare an independent expert report in relation to the Scheme (Independent Expert Report). In the report, the Independent Expert expresses the opinion that the Scheme is fair and reasonable and therefore is in the best interests of CWG shareholders, in the absence of a superior proposal. In summary, the Independent Expert has:
15. assessed the value of a CWG share as between $4.85 and $5.48;
16. assessed the value of a New Sigma Share as between $0.98 and $1.13, multiplied that value by the estimated Scheme Share Consideration ratio of 6.317841 New Sigma Shares for each Scheme Share, and added the estimated value of the Scheme Cash Consideration of $0.446 for each Scheme Share, to arrive at a total value of the Scheme Consideration of $6.65 - $7.56 per Scheme Share.
17. Because the assessed value of the Scheme Consideration (being $6.65 - $7.56 per Scheme Share) is greater than the assessed value of a CWG share (being $4.85 - $5.48), the Independent Expert considers that the Scheme is fair and, as such, is also reasonable and in the best interests of CWG shareholders.

Applicable principles

1. The applicable principles have been set out in numerous cases. For present purposes, it is sufficient to refer to my judgment in Re Carbon Revolution Ltd [2023] FCA 1081 at [21]-[23], where I stated: 21 The principles that apply upon an application to convene a scheme meeting are well-known and have been referred to in a number of recent decisions in this Court: see, for example, Re Verdant Minerals [2019] FCA 556 at [20]-[30]; Re Japara Healthcare Limited [2021] FCA 1150; 156 ACSR 695 at [23]-[34]; Re 5G Networks Limited [2021] FCA 1189 at [22]-[25]; Re RXP Services Limited [2021] FCA 38 at [16]-[19]; Re Citadel Group Limited [2020] FCA 1580; 148 ACSR 598 at [24]-[27]; Re DWS Limited [2020] FCA 1590; 148 ACSR 616 at [14]-[17]; Re Healthscope Limited [2019] FCA 542; 139 ACSR 608 at [43]ff; Re Amcor Ltd [2019] FCA 346 at [45]ff. The principles were summarised by Davies J in Re Cytopia Ltd [2009] VSC 560 at [3]: The authorities make it clear that the Court's role at this stage is not to express a view on whether the proposed scheme should be approved. It is also clear that it is not the Court's role to usurp the shareholders' decision, by attempting to intrude its own commercial judgment. The Court is to be concerned with whether there is adequate disclosure to the shareholders in the Scheme Booklet (or explanatory memorandum), whether the legal requirements otherwise have been complied with and whether the scheme, on its face, is one that is sufficiently "fair and reasonable" to be capable of being put to shareholders for their approval or rejection. 22 It has consistently been held that the question whether or not to accept particular consideration for shares is quintessentially a commercial matter for the members to assess, and they ought not be prevented from having the opportunity to do so, provided that the Court can be satisfied that they are acting on sufficient information and with time to consider what they are voting on. Therefore, if the arrangement is one that seems fit for consideration by the meeting of members, and is a commercial proposition likely to gain the Court's approval if passed by the necessary majorities, then orders should be made to convene the meeting. 23 The Court's task at the first court hearing is to assess, first, whether the statutory prerequisites to the making of orders convening a meeting have been met and, second, whether it is appropriate for the Court to exercise its discretion in favour of making those orders. Each of these matters will be considered in turn.

Statutory prerequisites

1. At paragraphs 30 to 40 of the Outline of Submissions, CWG addresses each of the statutory prerequisites. On the basis of those submissions (which are substantially drawn on in the paragraphs that follow) and the affidavit evidence, I am satisfied that each of the statutory prerequisites is satisfied.
2. Section 411(1) requires that the plaintiff has made an application in relation to a compromise or arrangement that is proposed between a Part 5.1 body and its members. CWG has satisfied these requirements in the present case. In particular:
3. this application was made by originating process filed on 13 November 2024;
4. a 'Part 5.1 body' is defined in s 9 to include a company registered under the Act, which CWG is; and
5. the proposed Scheme is an 'arrangement' within the meaning of s 411(1).
6. Section 411(2)(a) requires that 14 days' notice of the hearing of this application must be given to ASIC, or such lesser period of notice as the Court or ASIC permits. This requirement has been satisfied.
7. Section 411(2)(b) requires that ASIC be given a reasonable opportunity to examine the terms of the proposed Scheme and the draft explanatory statement, and to make submissions to the Court. These requirements have been satisfied.
8. Rule 2.4(1) of Federal Court (Corporations) Rules 2000 (Cth) (Rules) requires that, unless the Court otherwise directs, an originating process must be supported by an affidavit stating the facts in support of the process. Paragraph 3(b) of the Court's Schemes of Arrangement Practice Note (GPN-SOA) (Practice Note) states that: The Court will generally be prepared to dispense with the requirement under rule 2.4(1) of [the Rules] for the initial affidavit filed in support of the application to state the facts in support of the Originating Process, where that will be addressed by later evidence. It is ordinarily sufficient for that affidavit to identify, in brief terms, the nature of the scheme and key dates, and annex a company search.
9. The Quayle Affidavit (which was filed with the originating process) has been prepared in accordance with the Practice Note, and the proposed orders sought by CWG include an order dispensing with the additional requirements of r 2.4(1) of the Rules.
10. As required by r 2.4(2) of the Rules, the evidence includes an ASIC company extract in relation to CWG carried out no earlier than 7 days before the originating process was filed.
11. As required by rules 3.2(a) and (b) of the Rules, the necessary evidence about the willingness of the proposed chairperson and alternate chairperson to chair the Scheme Meeting has been provided, as has evidence of any prior dealings of those persons with CWG and any conflicts of interest.
12. As required by r 3.3(1) of the Rules, the orders will annex a copy of the Scheme.
13. In addition, the information to be provided to members for the purposes of their consideration of the Scheme is regulated by s 412 of the Act and reg 5.1.01 and Schedule 8 of the Corporations Regulations 2001 (Cth) (the Regulations). In particular, s 412(1) of the Act and Schedule 8 (Part 3) of the Regulations set out the disclosure requirements of the explanatory statement (which is included within the Scheme Booklet). There are three aspects to the requirements of s 412(1):
14. 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. The effect of the Scheme is addressed in the letter from the Chairman of CWG commencing at page 1 of the Scheme Booklet, and it is also addressed in section 4 of the Scheme Booklet, and the required information in relation to the material interests of directors is addressed in section 12 of the Scheme Booklet;
15. secondly, the explanatory statement must set out the prescribed information, being the information set out in reg 5.1.01 and Schedule 8 of the Regulations. The evidence as to verification of the Scheme Booklet in the Gottlieb Affidavit and the McGowan Affidavit demonstrates that this requirement has been satisfied; and
16. thirdly, the explanatory statement must set out any other information that is material to the making of a decision whether or not to agree to the compromise or arrangement. In this respect, it is submitted, and I accept, that the Scheme Booklet is clear and comprehensive, and along with the Independent Expert Report annexed to the Scheme Booklet, contains a detailed evaluation of the Scheme, presented in a way that enables CWG shareholders to form their own view of the merits of the Scheme.
17. Moreover, it is necessary for the Scheme Booklet to be registered by ASIC before being sent to shareholders: s 412(6). Before registering the Scheme Booklet, ASIC must conclude that it appears to comply with the requirements of the Act, and must form the opinion that the Scheme Booklet does not contain any matter that is false in a material particular or materially misleading in the form and context where it appears: s 412(7) and (8). Assuming the Scheme Booklet is registered by ASIC following the first court hearing, this will provide further assurance as to the satisfaction of the relevant disclosure requirements.
18. Finally, the notice required by para 6 of the Practice Note is included in the "Important Notices" section on page i of the Scheme Booklet.
19. In light of the procedural requirements having been satisfied, the Court's discretion to make the convening orders is enlivened.

Discretion

1. The relevant discretionary considerations involve two main questions: first, whether the Scheme is fit for consideration by the members; and second, whether the members are to be properly informed as to the nature of the Scheme.

Scheme is fit for consideration

1. CWG submits that the Scheme is fit for consideration by CWG shareholders, in that:
2. the Scheme is of such a nature and cast in such terms that, if agreed to at the Scheme Meeting, the Court would be likely to approve the Scheme at the second court hearing;
3. there is no issue arising from the Scheme which would unquestionably lead to a refusal by the Court to approve the Scheme at the second court hearing; and
4. it cannot 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 [2002] FCA 742; 42 ACSR 252 at [44] per French J).
5. I accept those submissions.
6. The following particular matters are addressed in the Outline of Submissions:
7. performance risk (at paras 45 to 46);
8. scheme consideration (at paras 47 to 57);
9. director interests and benefits (at paras 58 to 64); and
10. reimbursement fees and exclusivity (at para 65).
11. I am satisfied, for the reasons set out in those submissions, that those matters do not provide a cause for concern in making the orders sought and that it is appropriate to make the orders sought.
12. The one matter that I will refer to in more detail relates to the topic of director interests and benefits.
13. The interests of CWG directors and any benefits they are to receive in relation to the Scheme are clearly and prominently disclosed in the Scheme Booklet, including, in respect of the interests in CWG shares and Sigma shares, in each place that the directors' recommendation to CWG shareholders is referred to.
14. As disclosed in section 12 of the Scheme Booklet:
15. each CWG director holds shares in CWG and has a relevant interest in shares in Sigma by virtue of CWG's indirect holding in Sigma via a CWG group company;
16. in their capacity as CWG franchisees, each CWG director has an interest in supply contracts with Sigma and in a software licence agreement with a subsidiary of Sigma that is yet to be entered into;
17. Mario Verrocchi, Jack Gance and Damien Gance will be appointed to the board of the merged group following implementation and be entitled to receive remuneration in those capacities, and entitled to enter into a deed of access, indemnity and insurance with the merged group.
18. Otherwise, no payment or other benefit is proposed to be made or given to any CWG director which is conditional upon, or related to, the Scheme.
19. Interests and benefits to directors in relation to a scheme raise two issues for consideration: first, whether there is a need for separate classes; and secondly, the appropriateness of any directors who might receive a benefit making a recommendation to shareholders in relation to the proposed Scheme.
20. As to the first issue, a question may arise as to whether directors with interests or benefits relating to a scheme and who are also shareholders of the scheme company should form a separate class from those shareholders who do not have such interests or benefits. In the present case, CWG submits, and I accept, that the interests and benefits are not of the kind that would require separate classes. All CWG shareholders will participate in the Scheme on the same basis and receive the same consideration as all other shareholders, and it is, accordingly, possible for them to consult together with a view to their common interest.
21. Even where certain members may have extraneous interests in the outcome of a scheme of arrangement, this in itself is not a reason for placing those members in a separate class for voting purposes. In the present case, CWG submits, and I accept, that no such concerns arise. In the first place, none of the CWG directors could properly be said to have extraneous or divergent interests in the outcome of the Scheme. For example, none of the directors will receive a material collateral benefit from the bidder if the Scheme proceeds. Moreover, a person should not be excluded from a class merely because they hold equity securities in both the bidder and the target: see, eg, Re PM Capital Asian Opportunities Fund Limited [2021] FCA 1380 at [61] per Beach J. Indeed, it has been held that separate classes are not necessary even where a director, in addition to holding shares in both bidder and target, is also a director of the bidder, provided that the director is to be treated the same as every other target member under the scheme: see, eg, Re 5G Networks Limited [2021] FCA 1189 at [39]-[45] per Beach J.
22. As to the second issue, CWG submits, and I accept, that the CWG directors' interests and benefits do not impact on the ability of the CWG directors to recommend the Scheme to shareholders. They are fully and prominently disclosed in the Scheme Booklet so that shareholders may have regard to them when considering the directors' recommendation that shareholders vote in favour of the Scheme. This is consistent with the approach discussed in the relevant authorities: see, eg, Re DWS Limited [2020] FCA 1590; 148 ACSR 616 at [42]-[49] per Beach J; Re Japara Healthcare Limited [2021] FCA 1150; 156 ACSR 695 at [71]-[72].

Members are to be properly informed

1. The second principal aspect relevant to the exercise of the Court's discretion is the adequacy of the information to be provided to shareholders.
2. For the reasons set out in paras 67 and 68 of the Outline of Submissions, I am satisfied that members of CWG are to be properly informed.

Conclusion on exercise of discretion

1. For these reasons, I am satisfied that the Scheme is of such a nature and cast in such terms that, if it achieves the statutory majorities at the Scheme Meeting, the Court would be likely to approve the Scheme. Accordingly, it is appropriate for the Court to make the orders sought convening the Scheme Meeting.

Other matters

1. The Outline of Submissions, at paras 70 to 73, deals with the proposed processes for dispatch of the Scheme Booklet and for the Scheme Meeting. I am satisfied that the proposed arrangements are appropriate.
2. The Outline of Submissions, at para 75, deals with notice of the second court hearing (which is due to take place at 10.15 am on 3 February 2025). For the reasons set out in the submissions, and in accordance with the Practice Note, it is appropriate to make an order dispensing with compliance with r 3.4 of the Rules.

Conclusion

1. I will therefore make orders substantially in the terms sought by CWG. I certify that the preceding fifty-six (56) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Moshinsky.