DuluxGroup Limited, in the matter of DuluxGroup Limited (No 2) [2019] FCA 1225

Overview of the Scheme 5 The Scheme is described in my decision convening the Scheme meeting referred to above. The Scheme provides for the transfer of all DuluxGroup shares to Nippon Paint Holdings Co., Ltd (Nippon Paint) in consideration for a cash payment by Nippon Paint to Scheme shareholders of $9.80 per share, less the amount of the Permitted Dividends (being in aggregate $0.43 per share). The Permitted Dividends were paid on 28 June 2019. 6 Accordingly, if the Scheme is approved by the Court, then on the Implementation Date (which is anticipated to be 21 August 2019): (a) Scheme shareholders who were listed on the share register on the Scheme Record Date (which is anticipated to be 6 August 2019) will be paid the Scheme consideration of $9.37 per share; and (b) all DuluxGroup shares will be transferred to Nippon Paint and DuluxGroup will become a wholly owned subsidiary of Nippon Paint and will be delisted from the ASX.

Relevant principles 7 Section 411(4) of the Act provides that an arrangement is binding on members and DuluxGroup only if: (a) at a meeting of members, it is passed by a majority of members present and voting (in person or by proxy) and by 75% of votes cast; and (b) it is approved by order of the Court. 8 Section 411(6) of the Act provides that the Court may grant approval subject to such alterations or conditions as it thinks just. 9 In Re Alabama, New Orleans, Texas and Pacific Junction Railway Company [1891] 1 Ch 213 at 247, Fry LJ described the role of the Court in applications of this type as follows: … the Court is bound to ascertain that all the conditions required by the statute have been complied with; it is bound to be satisfied that the proposition was made in good faith; and, further, it must be satisfied that the proposal was at least so far fair and reasonable, as that an intelligent and honest man, who is a member of that class, and acting alone in respect of his interest as such a member, might approve of it. What other circumstances the Court may take into consideration I will not attempt to forecast. 10 In deciding whether to grant approval of a scheme of arrangement, the Court will ordinarily have regard to the following matters: (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 statutory requirements 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. See, for example, Re Solution 6 Holdings Ltd (2004) 50 ACSR 113 at [18]-[24]; Re Permanent Trustee Co Ltd (2002) 43 ACSR 601 at [8]-[10]; Re Central Pacific Minerals NL [2002] FCA 239 at [12]-[14]; Re Seven Network Ltd (No 3) (2010) 267 ALR 583 at [35]-[39]; 77 ACSR 701; Re Signature Capital Investments Ltd (No 2) [2016] FCA 385; Re Medical Australia Ltd (No 2) [2017] FCA 1429.

Compliance with Orders convening the meeting 11 An office copy of the orders I made on 14 June 2019 (Convening Orders) was lodged with ASIC on 17 June 2019 as required by r 3.5(b) of the Federal Court (Corporations) Rules 2000 (Rules). 12 The explanatory statement (which is included in the Scheme Booklet) was registered by ASIC on 17 June 2019 prior to being sent to Scheme shareholders in accordance with s 412(6) of the Act. 13 The Convening Orders required that the Scheme meeting be convened by sending the following documents to each Scheme shareholder: a document substantially in the form of Exhibit 1 (the Scheme Booklet) and a proxy form for the Scheme meeting. The Scheme Booklet and the proxy form were required to be sent by the following methods: (a) in the case of Scheme shareholders who elected to receive communications electronically, by way of email to their nominated email address (Email Recipients); and (b) in the case of Scheme shareholders who did not elect to receive communications electronically, by post (if residing in Australia) or by airmail (if residing overseas) (Postal Recipients). 14 Based on the evidence adduced at the hearing, I am satisfied that those requirements were complied with. 15 On 29 July 2019, a notice advertising the hearing listed for 6 August 2019 was published in The Australian newspaper in accordance with Order 5 of the Convening Orders.

Passing of the approval resolutions 16 The Scheme meeting was held at the Clarendon Auditorium, Melbourne Exhibition Centre, 2 Clarendon St, South Wharf, Victoria, Australia, on 31 July 2019 commencing at 2.00pm (as required by Order 1 of the Convening Orders). 17 In accordance with Order 3(c) of the Convening Orders, the Scheme meeting was chaired by Mr Graeme Liebelt. 18 In accordance with Order 3(e) of the Convening Orders, voting on the resolution in favour of the Scheme was conducted by way of poll. 19 Mr Wayne Hopkins of Computershare was appointed as the returning officer for the Scheme meeting and calculated the results of the poll. After the Scheme meeting, Mr Hopkins produced a "Poll Report", a copy of which was in evidence. The resolution in favour of the Scheme was passed by 97.58% of votes cast on the resolution and by 91.85% of members present and voting. Accordingly, the statutory majorities set out in ss 411(4)(a)(ii)(A) and (B) of the Act have been satisfied.

Full and fair disclosure to members 20 As noted above, the explanatory statement contained in the Scheme Booklet was registered by ASIC prior to dispatch as required by s 412(6) of the Act. The content of the explanatory statement provided to members was considered at the first court hearing. I am satisfied that the explanatory statement contained in the Scheme Booklet satisfies the requirements in ss 411(3) and 412 of the Act. 21 DuluxGroup adduced evidence of the conduct of the Scheme meeting including the address given by the chairman and the questions and answers that followed. The evidence shows that a number of members asked questions about the Scheme. One shareholder raised detailed questions about the value of DuluxGroup and whether the Scheme consideration represented fair value for the shares. I am satisfied that, through the Scheme Booklet and further consideration given to the Scheme at the Scheme meeting, there has been full and fair disclosure to members of all information material to the decision whether to vote for or against the Scheme.

Is the Scheme fair and reasonable? 22 When making orders convening the Scheme meeting, I concluded that the Scheme was fit for consideration by the members of DuluxGroup. In reaching that conclusion, I noted that the question whether to accept particular consideration for shares is quintessentially a commercial matter for members to assess. Nevertheless, the Court's role is also to scrutinise the terms of a scheme to satisfy itself that there is no element of unfairness. In respect of the present Scheme, I considered it relevant that: (a) all directors recommended that shareholders vote in favour of the Scheme; (b) all directors intended to vote their DuluxGroup shares in favour of the Scheme; and (c) the independent expert, Grant Samuel, opined that the Scheme is fair and reasonable and is in the best interests of DuluxGroup shareholders. 23 There is no evidence of opposition to approval by the Court, or as to oppression in the conduct of the meeting of members. 24 In my view, the Scheme is fair and reasonable in the sense that an intelligent and honest person who was a shareholder of DuluxGroup, properly informed and acting alone, might approve the Scheme. 25 At the first hearing to convene the meeting, I gave consideration to the proposed treatment of shares issued to executives of DuluxGroup under its Long Term Executive Incentive Plan (LTEIP): see Re DuluxGroup Limited [2019] FCA 961 at [42]-[47]. Under the rules of that plan, the directors invited eligible employees to acquire shares in the company and receive a loan to finance the acquisition. The number of shares that are currently subject to the LTEIP is approximately 7.5 million, which represents about 1.9% of the company's shares. Under the Scheme Implementation Deed, and exercising its discretion under the rules of the LTEIP, DuluxGroup will forgive 30% of each LTEIP loan, subject to the Scheme becoming effective. The Scheme Booklet discloses that the value of the loan forgiveness is approximately $12.2 million, which represents about $1.60 per LTEIP share. One way of viewing the arrangements is that, if the Scheme becomes effective, the holders of the LTEIP shares will receive the Scheme consideration ($9.37 per share) plus the loan forgiveness of $1.63 per share. 26 The question therefore arose whether the additional benefit being received by the holders of the LTEIP shares (being the loan forgiveness of $1.63 per share) was such as to constitute the holders of the LTEIP shares a different class to other members. I concluded that it was not: Re DuluxGroup Limited [2019] FCA 961 at [44]-[47]. However, I also noted (at [47]) that the fact that the holders of LTEIP shares receive an additional benefit (loan forgiveness) if the Scheme is approved can be taken into account in deciding whether to approve the Scheme at the second court hearing. I also observed that the issue would become irrelevant if the Scheme achieved strong support at the meeting. 27 The resolution in favour of the Scheme was passed by 97.58% of votes cast with 91.85% of Scheme shareholders present and voting. Accordingly, the statutory majorities would have been achieved whether or not the holders of the LTEIP shares voted on the resolution and the votes of those shareholders did not affect the achievement of the requisite majorities. Therefore, this issue has no bearing upon the fairness of the Scheme.

Conditions Precedent 28 Clause 3.1 of the Scheme stipulates that the Scheme is conditional upon and will not become effective unless the following conditions precedent are satisfied: (a) all the conditions in clause 3.1 of the Scheme Implementation Deed (other than the condition relating to Court approval of the Scheme) are satisfied or waived in accordance with the terms of the Deed by 8am on the second court hearing date; (b) neither the Scheme Implementation Deed nor the Deed Poll is terminated in accordance with its terms before 8am on the second court hearing date; (c) the Court has approved the Scheme pursuant to s 411(4)(b) of the Act, including with any alterations made or required by the Court under s 411(6) of the Act as are acceptable to DuluxGroup and Nippon Paint; (d) such other conditions made or required by the Court under s 411(6) of the Act as are acceptable to DuluxGroup and Nippon Paint are satisfied or waived; and (e) the order of the Court approving the Scheme under s 411(4)(b) of the Act becomes effective. 29 Clause 3.2 of the Scheme stipulates that each of DuluxGroup and Nippon Paint will provide a certificate (or such other evidence as the Court may require) to the Court at the second hearing confirming (in respect of matters within their knowledge) whether or not the conditions precedent in clauses 3.1(a) and (b) have been satisfied or waived (other than the condition in clause 3.1 of the Scheme Implementation Deed concerning Court approval). 30 In accordance with clause 3.2 of the Scheme, at the second hearing DuluxGroup and Nippon Paint each provided to the Court a signed certificate confirming that, in respect of matters within their knowledge, each of the conditions precedent: (a) in clause 3.1 of the Scheme Implementation Deed (other than the condition relating to Court approval of the Scheme) has been satisfied or waived in accordance with the terms of the Deed; and (b) in clauses 3.1(a) and (b) of the Scheme has been satisfied.

Section 411(17) 31 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 to the effect that ASIC has no objection to the compromise or arrangement, but the Court need not approve a compromise or arrangement merely because a statement by ASIC that it has no objection to the compromise or arrangement has been produced to the Court as mentioned in s 411(17)(b). 32 DuluxGroup provided the Court with a letter from ASIC issued pursuant to s 411(17)(b) of the Act stating that ASIC has no objection to the Scheme. In those circumstances, there is no need for the Court to consider s 411(17)(a), particularly where no issue has been raised concerning Ch 6 of the Act by any person: Re Tatts Group Ltd (No 2) [2017] VSC 770.

Have all necessary matters been brought to the attention of the Court? 33 At the first hearing, DuluxGroup notified the Court of several matters warranting the attention of the Court. These matters were considered by the Court: Re DuluxGroup Limited [2019] FCA 961 at [23]-[57]. In my view, none of those issues justifies the Court refusing to approve the Scheme.

Orders sought 34 For the reasons given, I made the order sought by DuluxGroup approving the Scheme pursuant to s 411(4)(b) of the Act. 35 DuluxGroup also sought an order under s 411(12) of the Act exempting it from compliance with s 411(11), which requires a copy of the Court's order under s 411(4)(b) to be annexed to the company's Constitution. An order under s 411(12) is appropriate in circumstances where the Scheme does not amend DuluxGroup's Constitution and where, upon implementation, DuluxGroup will become a wholly owned subsidiary of Nippon Paint: Re Toll Holdings Ltd (No 2) [2015] VSC 236 at [18]-[19]. I therefore made that order. I certify that the preceding thirty-five (35) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice O'Bryan.