Eumundi Group Limited, in the matter of Eumundi Group Limited [2024] FCA 1510

Introduction 1 On 8 November 2024 the plaintiff filed an originating process under s 411 and s 1319 of the Corporations Act 2001 (Cth) by which it seeks orders pursuant to s 411(1) convening a meeting of the holders of ordinary fully paid shares in the plaintiff for the purpose of considering an arrangement proposed between the plaintiff and its members and orders pursuant to s 411(4)(b) and s 411(6) approving the scheme. This morning I pronounced orders on the plaintiff's application to convene a meeting of its members (scheme members or shareholders) to consider a proposed scheme between the plaintiff and its members (scheme) and approving the despatch of a scheme booklet containing an explanatory statement (scheme booklet). These are my reasons for pronouncing those orders. The orders, with minor amendments, were subsequently entered and distributed to the plaintiff earlier this afternoon. A further minor correction was made under r 39.05(c) and r 39.05(e) of the Federal Court Rules 2011 (Cth) to Annexure A to the orders at the time of publication of these reasons.

Background 2 Section 411 provides a mechanism for, amongst other things, a binding arrangement to be made between a company and its creditors or members. The arrangement is binding if the Court convenes a meeting of the company's creditors or members and the arrangement is agreed to by majorities of creditors or members prescribed in s 411(4) and the Court approves the arrangement. Therefore, it is a mechanism for a company to make a binding arrangement with all creditors or members, even the creditors or members in a minority that do not agree to the arrangement. 3 Due to the nature of an originating process brought under s 411 of the Corporations Act there are typically two court hearings. The first court hearing is an interlocutory hearing at which orders are made for the purpose of convening a meeting of a company's creditors or members. Subject to the creditors or members voting in favour of the arrangement by required statutory majorities, there is a second court hearing for final orders to approve the arrangement. 4 In this case, the plaintiff proposes an arrangement by which SEQ Hospitality Group Pty Ltd (ACN 681 115 471) (Bidder) will acquire all the issued fully paid ordinary shares in the plaintiff (scheme shares) for $1.62 per share (scheme consideration). There are 49,767,770 scheme shares and the total proposed scheme consideration is $80,623,787.40. The scheme shares are quoted on the Australian Securities Exchange. That is, the plaintiff is 'listed' on the ASX. The plaintiff has no other issued securities. Therefore, there are no other securities quoted on the ASX or otherwise that form part of the proposed scheme or that are to be dealt with outside the proposed scheme. 5 The plaintiff is an independent hotel, retail liquor and investment property company based predominantly in South East Queensland. The company's chair holds about 26% and another director about 17% of the scheme shares. Individuals who appear to be relatives of the company's chair have a relevant interest in about 22% and 23% of the scheme shares respectively. Therefore, ownership of the scheme shares appears to be relatively tightly held and concentrated in the hands of a small number of significant and connected shareholders. 6 The Bidder appears to be a company that was incorporated for the purpose of acquiring the scheme shares. It has issued share capital of $1,000 and is wholly owned by SEQ Hospitality Group Holdings Pty Ltd. It forms part of the Fortitudo Group which is an independent hotel and liquor retail operator also based in South East Queensland. 7 On 30 October 2024 the plaintiff and the Bidder entered into an implementation deed setting out the terms upon which the plaintiff and Bidder have agreed that the plaintiff will propose to undertake the scheme. The implementation deed (or ID) was amended by deeds made on 3 December 2024 and 16 December 2024. The amending deeds dealt with payment of an interim dividend and an increase in the scheme consideration from $1.55 to $1.62 per share respectively. 8 While the proposed scheme, in isolation, is quite straightforward, the terms of the implementation deed contemplate that the Bidder will also make an off-market takeover offer for the scheme shares under the provisions of Ch 6 of the Corporations Act. The dual or hybrid nature of the transaction introduces complexity to the structure, components, conditions and requirements for successful completion of one or other of the takeover or proposed scheme. 9 A condition of the takeover is that at 7.00pm (AEDT) on 4 March 2025 the Bidder has acquired, or otherwise has, a relevant interest in at least 90% of the scheme shares and is entitled to proceed to compulsory acquisition of the remaining shares under Pt 6A.1 or Pt 6A.2 (or both) of the Corporations Act. I refer to that condition as the 90% minimum acceptance condition in these reasons. 10 If the 90% minimum acceptance condition is met before the scheme meeting is held, the plaintiff intends to apply to the Court to vacate the orders convening that meeting. As matters stand, the Bidder has acceptances and a relevant interest in about 68% of the scheme shares. Therefore, there is evident utility in convening the scheme meeting because the 90% minimum acceptance condition has not been and may not be satisfied. 11 It is also a condition of the takeover offer that either the scheme members do not vote in favour of the proposed scheme by the statutory majorities at the scheme meeting (the proposed scheme is capable of Court approval) or the Court does not approve the proposed scheme at the second court hearing. That is, if the proposed scheme is approved the takeover will not proceed. 12 If the proposed scheme is not capable of approval or is not otherwise approved, the takeover offer will remain open until 7.00pm (AEDT) on 4 March 2025. Therefore, the 90% minimum acceptance condition could be met even if the proposed scheme is not capable of approval or otherwise approved. The Bidder may also elect to waive the 90% minimum acceptance condition before 4 March 2025. In that event, the Bidder would become a substantial shareholder and controller of the plaintiff and any scheme member that has not accepted the takeover offer would be a minority shareholder in a company controlled by the Bidder. Although the Bidder has not expressed an intention to waive the 90% minimum acceptance condition, it is a possibility and a risk to scheme members should they neither accept the takeover offer nor vote in favour of the proposed scheme and the proposed scheme fails to achieve the statutory majorities at the scheme meeting. 13 In addition to the complexity and uncertainty concerning the mechanism - takeover or scheme of arrangement - by which the transaction may be completed, the statutory and regulatory requirements that must be met and information that must be provided to scheme members for the purposes of the takeover offer and the proposed scheme, while similar, are not identical. As a consequence of the dual or hybrid structure, scheme members (shareholders) have or will receive the Bidder's statements and Target's statements in accordance with the requirements for the takeover offer and an explanatory statement (or scheme booklet) in accordance with the requirements for the proposed scheme. The sheer volume of information that scheme members (shareholders) have or will receive within a relatively short period of time of a similar nature, but in different forms, is a circumstance that is ripe to create confusion and misunderstandings about the process and consequences for scheme members (shareholders) when making decisions to accept (or not) the takeover offer or vote in favour (or against) the proposed scheme. 14 For reasons given later, the dual or hybrid nature of the transaction structure does not provide a reason to refuse to make orders to convene a scheme meeting, but it may be a matter that features, depending upon the circumstances prevailing at that time, in the exercise of the Court's discretion to approve the scheme at the second court hearing.

Evidence and other materials 15 The plaintiff filed and relied on the following materials in support of the interlocutory orders made to convene the scheme meeting. 16 Affidavits of Nicole Jane Radice sworn 8 November 2024 (first Radice affidavit), 16 December 2024 (second Radice affidavit), 18 December 2024 (third Radice affidavit) and 19 December 2024 (fourth Radice affidavit). Ms Radice is a solicitor who acts for the plaintiff. 17 The first Radice affidavit provides an overview of the proposed scheme and implementation deed and exhibits a copy of that deed. The second Radice affidavit deposes to facts and exhibits correspondence addressing the provision of a draft scheme booklet to the Australian Investments and Securities Commission and her willingness to act as an alternate chair for the scheme meeting and the matters referred to in r 3.2 of the Federal Court (Corporations) Rules 2000 (Cth). 18 The third Radice affidavit deposes to further facts and exhibits further correspondence with ASIC relating to preparation of the draft scheme booklet and to completion of the verification process concerning the information contained in the draft scheme booklet. The affidavit exhibits copies of the draft scheme booklet incorporating the draft explanatory statement including an independent expert report of Mark Whittaker and Chris Catanzaro of BDO Corporate Finance Ltd. The exhibits include 'marked-up' and 'clean' versions of the draft scheme booklet and independent expert report. The 'marked-up' versions identify changes that have been made as a result of communications with ASIC or for other reasons. The independent expert report indicates that it has been prepared in accordance with ASIC Regulatory Guide 111 (Contents of expert reports) and includes a Financial Services Guide provided to comply with the requirements of the Corporations Act. The authors of the report opine that, in the absence of a superior proposal, the proposed scheme is fair and reasonable and in the best interest of the scheme members. 19 The fourth Radice affidavit deposes to facts relating to and exhibits the usual letter ASIC provides before a first court hearing confirming that it does not wish to appear or make submissions at the hearing. 20 Affidavits of Martin Andrew Ward sworn 16 December 2024 (first Ward affidavit) and 19 December 2024 (second Ward affidavit). Mr Ward is the chairman of the Bidder. 21 The first Ward affidavit deposes facts describing the nature of the Bidder, including that it was incorporated on 27 September 2024, is a wholly owned subsidiary of SEQ Hospitality Group Holdings Pty Ltd and that it that forms part of the Fortitudo Group which is an independent hotel and liquor retail operator based in South East Queensland. That affidavit explains the commercial rationale for the hybrid nature of the transaction and the exclusivity, matching right and break fee provisions of the implementation deed, the Bidder's intentions if it successfully acquires the plaintiff, the process by which the scheme consideration was increased, the source of the Bidder's funding for the scheme consideration and the manner in which it is intended to be paid, including by exhibiting an executed copy of a deed poll made by the Bidder. He also explains the process the Bidder undertook to verify that the information contained in the scheme booklet relating to the Bidder is accurate and not misleading. There are a number of exhibits to Mr Ward's affidavit including Bidder's statements sent to scheme members in connection with the off-market takeover offer. He also deposes to the number of acceptances the Bidder has received with respect to that offer. The second Ward affidavit addresses the financial position of a company that has agreed to provide funding to the Bidder for the scheme consideration. 22 An affidavit of Joseph Michael Ganim sworn 16 December 2024. Mr Ganim is the non-executive chair of the plaintiff. His affidavit deposes facts describing the nature of the plaintiff, its capital structure, board of directors and business. He explains the nature of the proposed scheme and commercial rationale for the hybrid nature of the implementation process and the exclusivity, matching right and break fee provisions and manner in which these were negotiated with the Bidder. He explains the performance risk associated with payment of the scheme consideration and how that is managed in commercial terms, the recommendations of the directors that scheme members vote in favour of the proposed scheme and reasons for those recommendations. He describes key components of the implementation deed and proposed scheme, conditions precedent to implementation, communications that have been provided to scheme members through the off-market takeover process, the manner in which the plaintiff proposes to give scheme members notice of the scheme meeting and to convene that meeting as well the proposed manner in which the plaintiff will communicate with scheme members and other interested persons using a 'call script' exhibited to his affidavit. Mr Ganim deposes on information and belief that Mr Boyte is willing to act as chair for the scheme meeting and as to the matters referred to in r 3.2 of the Corporations Rules. He deposes to the process by which the scheme booklet was drafted and the plaintiff verified the information contained in the scheme booklet is accurate and not misleading. 23 Affidavits of Matthew James Duncan affirmed 18 December 2024 and Ashish Mohan Tirthankar sworn 19 December 2024. These affidavits address the financial positions of companies that have agreed to provide funding for the scheme consideration to the Bidder. 24 The plaintiff relied on an outline of written submissions that was filed on 18 December 2024. Annexed to it was a checklist setting out the content requirements for the explanatory statement prescribed in Sch 8 of the Corporations Regulations 2001 (Cth) and Pt 5.1 of the Corporations Act and the content requirements of ASIC Regulatory Guide 60 and where that content is contained in the draft scheme booklet. The plaintiff also filed a minute of proposed orders dated 19 December 2024 and moved for interlocutory orders in terms of that minute. 25 I accept the uncontested facts deposed in the affidavits to which reference has been made. I also accept the information contained in the exhibits to the affidavits.

Applicable principles 26 The principles applicable to the exercise of the Court's power under s 411(1) to convene a meeting between a company and its members are well settled and have been summarised and set out in numerous judgments of this and other courts. I summarised these principles and cited relevant authorities in Chesser Resources Limited, in the matter of Chesser Resources Limited [2023] FCA 1021 at [15], [17]-[20], [26]-[29], [57]-[58], [62]-[63] and A-Cap Energy Limited, in the matter of A-Cap Energy Limited [2023] FCA 1142 at [14], [67], [68], [70]. Justice Colvin summarised the principles and authorities in a similar way in OreCorp Limited, in the matter of OreCorp Limited [2023] FCA 1359 at [10]-[13]. In short, I take the following principles to be well-established and not in need of further explanation. 27 First, s 411(1) confers a discretion on the Court to make appropriate orders to convene a meeting of a company's members where the following pre-conditions are met. (1) A compromise or arrangement is proposed between a Part 5.1 body and its members (or any class of them) (s 411(1)). (2) An application is made in a summary way for an order by the body or a member of the body (s 411(1)). (3) Fourteen days' notice of the hearing of the application has been given to ASIC (or such lesser period as the Court or ASIC permits (s 411(2)(a)). (4) The Court is satisfied that ASIC has had a reasonable opportunity (s 411(2)(b)): (a) to examine the terms of the proposed compromise or arrangement to which the application relates and a draft explanatory statement relating to the proposed compromise or arrangement; and (b) to make submissions to the Court in relation to the proposed compromise or arrangement and the draft explanatory statement. 28 Second, in the exercise of the Court's discretion, it should be satisfied of the following further matters which may overlap to some degree. (1) The proposed scheme is bona fide and properly proposed. (2) The creditors and members are properly informed of the nature of the proposed scheme before the meeting, including that requirements in s 411(3) and 412 of the Corporations Act and reg 5.1.01 and Sch 8 of the Corporations Regulations regarding the information that is to be sent to creditors or scheme members about the scheme have been met, that the explanatory statement relating to the proposed scheme will provide sufficient disclosure to creditors or members, and there is nothing obviously ambiguous, inaccurate, or misleading in the information to be sent to them. The explanatory statement should also meet the disclosure requirements set out in RG 60 relating to the preparation of independent expert reports (ASIC Regulatory Guides 111 and 112) and the takeover and prospectus provisions of the Corporations Act to the extent these are applicable to a proposed scheme. (3) The proposed scheme is 'fit for consideration' by the proposed meeting in the sense that it is of such a nature and cast in such terms that if it achieves the statutory majorities at the meeting would likely approve it at the second court hearing if unopposed. (4) All applicable procedural requirements, including those of the Corporations Rules have been or will be met or otherwise that it is appropriate to modify or dispense with one or more of them. 29 Third, as s 411(1) allows for a compromise or arrangement between a company and its creditors or members (or any class of them), it is appropriate when considering if the pre-conditions have been met and the scheme is properly proposed to consider whether the nature of the proposed scheme means that there are separate classes and that there should be separate meetings convened between creditors or members of separate classes. 30 Fourth, the question of whether or not to vote in favour of a proposed scheme is a commercial matter for the creditors or members to assess. In general, creditors or members should not be prevented from having the opportunity to do so provided that they are adequately informed and have sufficient time to consider the proposed compromise or arrangement. 31 Last, the Court's role under s 411 is supervisory. In general, at the first court hearing the Court should confine itself to ensuring that the applicable procedural and substantive requirements are met (including that there will be adequate disclosure), with limited consideration of issues of fairness. The Court should only consider the merits or fairness of a proposed compromise or arrangement at such a hearing if the issue is such as would unquestionably lead to a refusal to approve it at the approval hearing (second court hearing). 32 Bearing in mind that in most circumstances applications to convene meetings and to approve arrangements are heard in the absence of a contradictor, the role and function that ASIC performs under s 411 and s 1330 of the Corporations Act is quite important for the proper performance of the Court's supervisory function. ASIC has an obligation to assist the Court by presenting arguments if it deems that course to be necessary or desirable and its approach to that obligation is explained in RG 60.4. Having regard to these matters, where ASIC has provided its usual letter to a scheme proponent before the first court hearing and has indicated that it does not wish to appear and make submissions at that hearing, the Court is entitled to infer that ASIC has discharged its obligation to assist the Court. Similarly, the absence of a contradictor sharpens the duty of the plaintiff and imposes a heavy responsibility on it to bring to the Court's attention all matters that could be considered relevant to the exercise of the Court's discretion. As a consequence, the Court is entitled, in the exercise of its supervisory function, to be confident that all relevant and material matters are before the Court.

Conclusions as to pre-conditions, procedural requirements and discretionary considerations 33 On the originating process and facts deposed and documents exhibited to the affidavits the plaintiff filed in support of its application, I was satisfied of the following matters. (1) The plaintiff is a Part 5.1 body and the proposed scheme is an 'arrangement' between the plaintiff and its members. No issue arises requiring separate meetings of separate classes of scheme members. (2) Notice was given to ASIC within 14 days of the hearing and it has had a reasonable opportunity to examine the terms of the proposed scheme and draft explanatory statement and make submissions to the Court on them. (3) ASIC provided its usual letter to the scheme proponent indicating that it does not wish to appear and make submissions at the first court hearing. Thus, ASIC has discharged its obligation to assist the Court by reviewing the scheme documents, reviewing the nature and function of the scheme, representing the interests of investors and creditors and ensuring that all matters that are relevant to the Court's decision are properly brought to its attention before it makes orders convening a scheme meeting. (4) The application to convene the scheme meeting was made in a summary way and all procedural requirements have been met or, to the extent that they have not been met, it is appropriate to modify or dispense with them in the manner recorded in the orders made today. In particular, the required company search of the plaintiff has been undertaken and the required matters in respect of the proposed chair and alternative chair for the scheme meeting have been proven. (5) Having scrutinised and evaluated the terms of the implementation deed, as varied, the proposed scheme, and the deed poll, and the plaintiff's constitution, the proposed scheme is bona fide and properly proposed. (6) Having scrutinised the draft scheme booklet (including the draft explanatory statement), subject to the amendments reflected in the orders made today, the scheme booklet provides adequate disclosures in sufficiently clear language of the nature of the scheme, including the prescribed information and, on the evidence, that appropriate steps have been taken to ensure that the information to be provided to scheme members is accurate such that scheme members will be properly informed before the scheme meeting. (7) Having regard to the matters referred to below under the headings 'Specific matters raised by the plaintiff' and 'Matters raised by the Court', the plaintiff has discharged its duty and responsibility of bringing to the Court's attention all matters that could be considered relevant to the exercise of the Court's discretion and, as such, all relevant material is before the Court. (8) The proposed scheme is fit for consideration in the sense that it the required majorities were achieved at the scheme meeting the Court would be likely to approve the scheme if unopposed at the second court hearing. That is, there is no issue of merit or fairness that would unquestionably lead to a refusal to approve the proposed scheme at the second court hearing. 34 It follows that I was satisfied that I should exercise the discretionary power to order the plaintiff to convene the scheme meetings.

Specific matters raised by the plaintiff 35 The plaintiff drew to the Court's attention and addressed the following specific matters that could have a bearing on the exercise of the Court's discretion to make orders to convene the scheme meeting. For the reasons given, I accepted that none of these matters was a reason or sufficient reason for refusing to make the requested orders.

Independent expert report 36 An independent expert has opined that, in the absence of a superior proposal, the proposed scheme is fair and reasonable and in the best interests of the scheme members. I accept that report supports the fitness of the proposed scheme for consideration.

Bona fide and properly proposed 37 I accept that there is nothing in the materials before the Court to suggest that the proposed scheme is not bona fide or properly proposed. Further, the proposed scheme is not prevented by the plaintiff's constitution.

Conditions precedent 38 The implementation deed, as varied, and the proposed scheme are subject to a number of conditions precedent. Terms to similar effect are common and uncontroversial in 'takeover' schemes. 39 I accept that a summary of the conditions precedent and their effect is disclosed in the draft scheme booklet. As matters stand, if the statutory majorities are attained at the scheme meeting it appears likely that the conditions precedent will be satisfied. The existence of these conditions precedent do not render the proposed scheme unfit for consideration.

Performance risk 40 Performance risk is the risk to scheme members that if the proposed scheme were to be approved that the Bidder would fail to pay the scheme consideration. I accept that the risk is mitigated by the terms of the implementation deed [cl 5.2], proposed scheme [cll 4.2, 4.4, 6.1] and deed poll [cl 5] that have the effect that the shares will not be transferred until after the scheme consideration has been paid. However, there is a residual risk that the scheme members will not be able to obtain specific performance of the Bidder's obligation to pay the scheme consideration or recover damages for breach of the deed poll in the event of the Bidder's default. That risk is not merely theoretical because the Bidder is a special purpose company with paid up share capital of $1,000. 41 The plaintiff submitted that the residual risk of non-performance is mitigated by the terms of funding deeds by which Four Leaf Family Pty Ltd, JWT Bespoke Holdings Pty Ltd and Winbirra Estate Pty Ltd have irrevocably and unconditionally undertaken to provide or procure the provision of the $13,375,000, $13,375,000 and $54,250,000 respectively to the Bidder and represented and warranted to the Bidder that they have the unrestricted right and authority to cash reserves which are sufficient to enable them to comply with their funding obligations under the funding deeds. However, each of Four Leaf Family and JWT Bespoke Holdings has paid up share capital of $12.00 calling into question the ability of the Bidder to meet its obligations under the proposed scheme. (Winbirra Estate has paid up share capital of $100,000,002.) 42 After the Court requested the matter to be addressed, the plaintiff filed the second Ward affidavit and the affidavits of Mr Duncan and Mr Tirthankar. On the facts deposed and documents exhibited to those affidavits, I accept that there is no real risk of non-performance on the part of the Bidder. Further, in the circumstances, the disclosure relating to performance risk and the Bidder's funding arrangements in the draft scheme booklet is adequate.

Exclusivity provisions 43 Under cl 11 of the implementation deed the plaintiff has agreed that it will not, unless it has the prior written consent of the Bidder, directly or indirectly (among other things): (a) entertain, solicit, invite, encourage or initiate (including by the provision of non-public information to any third party) any inquiry, expression of interest, offer, proposal or discussion by any or with person in relation to, or which would reasonably be expected to encourage or lead to the making of, or with a view to obtaining, an actual, proposed or potential competing proposal or communicate to any person an intention to do any of these things [cl 11.1(a)]; (b) participate in or continue any negotiations or discussions with respect to any inquiry, expression of interest, offer, proposal or discussion by any person to make, or which would reasonably be expected to encourage or lead to the making of, an actual, proposed or potential competing proposal or participate in or continue any negotiations or discussions with respect to any actual, proposed or potential competing proposal [cl 11.1(b)(i)]; (c) negotiate, accept or enter into, or offer or agree to negotiate, accept or enter into, any agreement, arrangement or understanding regarding an actual, proposed or potential competing proposal [cl 11.1(b)(ii)]; (d) disclose or otherwise provide any non-public information about the business or affairs of the plaintiff and any related entities to a third party (other than a Government Agency) with a view to obtaining, or which would reasonably be expected to encourage or lead to receipt of, an actual, proposed or potential competing proposal (including providing such information for the purposes of the conduct of due diligence investigations in respect of the plaintiff and any related entities whether by that third party or another person) [cl 11.1(b)(iii)]; (e) communicate to any person an intention to do any of the things referred to above [cl 11.1(b)(iv)]. 44 Each of the prohibitions in cl 11.1(b) of the implementation deed is subject to an express 'fiduciary and statutory duty carve out': cl 11.2 of the implementation deed. 45 In addition, the implementation deed includes notification and matching right provisions which require the plaintiff to notify the Bidder of any negotiations, discussions, approaches, and the like as well as giving the Bidder the right to match or beat (by a counterproposal) any offer identified as a superior proposal from a rival bidder: cl 11.3 and cl 11.4 of the implementation deed. 46 I accept that, consistently with well-established authorities of this and other courts, exclusivity provisions do not undermine the merits or fairness of a scheme if they operate for a reasonable period capable of precise identification, are subject to a 'fiduciary and statutory duty carve out', are not otherwise unlawful, and are adequately, prominently and accurately explained in the scheme booklet. I am satisfied that the exclusivity provisions meet these criteria in this case.

Break fees 47 Clause 12 of the implementation deed contains a provision in relation to the payment of a reimbursement payment of $771,400 (excl GST): (a) by the plaintiff to the Bidder if certain events occur, as set out in cl 12.1 of the deed (break fee); or (b) by the Bidder to the plaintiff, if the plaintiff has terminated the deed pursuant to cl 13.1(a) (because of a material breach of the deed by the Bidder of the deed [cl 12.2]) (reciprocal break fee). 48 I accept that, consistently with well-established authorities of this and other courts, the break fee that would be payable by the plaintiff is acceptable. Break fees are common in 'takeover' schemes and takeovers under the Corporations Act. The Australian Government Takeovers Panel Guidance Note 7 provides guidance on the circumstances in which break fees are unlikely to involve 'unacceptable circumstances'. Break fees may be unacceptable because they may act to coerce acceptance of takeover offers or votes in favour of proposed takeover schemes. In general, as here, break fees less than 1% of the implied equity value of the total scheme consideration are not regarded as unacceptable. 49 I also accept that there are additional reasons that the break fee that would be payable by the plaintiff in this case is not coercive or unacceptable. (a) If the scheme is not approved by scheme members or the Court, the break fee is not payable. (b) The break fee is not payable by the plaintiff if one or more of the directors fails to provide, withdraws, or modifies his scheme recommendation, or recommends that the plaintiff's shareholders vote in favour of a competing proposal, as a result of the independent expert opining that the schemes are not in the best interests of the scheme members or that the offer is other than fair and reasonable, except in circumstances where that conclusion is reached because of a competing proposal [cl 12.1(a)(v)-(vi)) of the implementation deed]. (c) The amount of the break fee was negotiated, after advice, at arm's length and represents a fair and reasonable pre-estimate of the transaction costs the Bidder would likely incur should the scheme not proceed, such costs being acknowledged by the parties at cl 12.5 and cl 12.6 of the implementation deed, and Mr Ganim and Mr Ward have each explained their reasons for accepting this clause. (d) A reciprocal break fee is payable by the Bidder to the plaintiff (in different circumstances) in recognition of the need for the Bidder to reimburse the plaintiff for its costs in certain circumstances [cl 12.2 of the implementation deed]. Therefore, cl 12 is not one-sided. 50 Last, I accept that the break fees are identified and adequately explained in sections 9.7(e) and 9.7(f) of the draft scheme booklet.

Directors' recommendations 51 The plaintiff's directors have unanimously recommended that the scheme members vote in favour of the proposed scheme, in the absence of a superior proposal and subject to the independent expert concluding and continuing to conclude that the scheme is fair and reasonable and therefore in the best interests of scheme members. 52 It is ordinarily appropriate for a director who is to receive a financial benefit to make a recommendation, but to fully and prominently disclose that benefit in the scheme booklet. Here, I accept that the interests of the directors are adequately and prominently disclosed in section 9.2 the draft scheme booklet. Otherwise, the directors' interests, as shareholders, are the same as the interests of all other scheme members, as shareholders. The directors will have no continuing role with the plaintiff and will receive no consideration or benefit from the proposed scheme in addition to the scheme consideration. 53 In my view, scheme members would ordinarily want and expect the directors, particularly those with a financial interest in the company, to express their opinion and recommendations on the merits of the proposed scheme. With proper disclosure, scheme members can assess and form their own judgements about the directors' reasons for making their recommendations and the weight to be attached to their opinions. In any event, in this case, the directors' recommendations are qualified by and subject to the independent expert continuing to opine that the proposed scheme is in the scheme members' best interests. Thus, I accept that it is appropriate for the directors to make the recommendations they have made in the draft scheme booklet.

Deemed warranties 54 The scheme contains 'Warranties by Scheme members' provisions in which the scheme members warrant that their shares are unencumbered and that they have the full power and capacity to sell and transfer the shares [proposed scheme, cl 7.4]. 55 I accept that scheme members are informed of these provisions and the effect of them in section 3.9 of the draft scheme booklet. Again, consistently with well-established authority, deemed warranties in these terms that are disclosed and explained are acceptable.

Exclusion of directors' and officers' liability in connection with the transaction 56 Clause 7.8(b) and cl 7.8(c) of the implementation deed provides that, subject to the Corporations Act, none of the directors or officers of the plaintiff or the Bidder will be liable for anything done or purported to be done in connection with the transaction, but nothing excludes liability which may arise from misconduct, fraud, misrepresentation or bad faith. I accept, again consistently with authority, that clauses of this nature do not have a material effect on the merits or fairness of the proposed scheme and are acceptable.

Communications with scheme members 57 The plaintiff does not intend to undertake a 'proxy solicitation' process or make 'outbound' communication with scheme members. However, the plaintiff proposes that its company secretary will handle all 'inbound' telephone communications concerning the proposed scheme according to a call script that was in evidence. The call script had been the subject of communications with ASIC and amendments had been made to it as a consequence. 58 In accordance with s 411(1) the Court may approve the explanatory statement required by s 412(1)(a) to accompany notices of the meeting. The Court would also expect the scheme proponent to obtain the Court's approval and to send a supplementary explanatory statement to scheme members. 59 In my view, in general, it is not necessary to obtain 'pre-approval' of the Court to make oral or informal communications with scheme members. However, if and to the extent that such communications take place, they should be consistent with the information contained in the explanatory statement the Court has approved and not contain inaccurate or misleading statements that could or would undermine the integrity of the scheme meeting process. In accordance with the scheme proponent's duty of candour, the Court would expect oral or informal communications of that character to be disclosed at the time the Court's approval of the proposed scheme is sought. See, e.g., the disclosure of informal communications and discussion of its effect in A-Cap Energy Limited, in the matter of A-Cap Energy Limited (No 2) [2023] FCA 1356 at [21]-[39] (Feutrill J). Further, depending upon the circumstances, where it is likely or expected that there will be informal communications with scheme members, it is prudent to disclose the nature and extent of those communications to the Court at the second court hearing so as to allow the Court to assess the extent to which: (1) there were informal communications; (2) they were consistent with the approved explanatory statement; and (3) they may, otherwise, have affected the integrity of the scheme meeting process: see, e.g., the observations of Colvin J in OreCorp Limited at [19]-[22]. 60 Accordingly, I made no order 'approving' the company secretary as the designated person to handle 'inbound' communications or to 'approve' the proposed inbound 'script' or any other oral or informal communications between the plaintiff and scheme members before the scheme meeting.

Chapter 6 avoidance 61 Regarding fitness for consideration and whether the proposed scheme would be approved at the second court hearing if not opposed, under s 411(17) the Court must not approve a compromise or arrangement unless satisfied that it has not been proposed for the purpose of enabling any person to avoid the operation of any provision of Ch 6; or a statement of writing by ASIC is produced stating that ASIC has no objection to the compromise or arrangement. However, even if such a statement of ASIC is produced, the Court retains a discretion to approve (or not approve) the compromise or arrangement under s 411(6). Therefore, if the Court remains unsatisfied that a compromise or arrangement has not been proposed for the purpose of avoiding Ch 6, it may refuse to approve the compromise or arrangement even if s 411(17)(b) is satisfied. 62 As already mentioned, the implementation deed, as varied, requires the plaintiff and Bidder to attempt implementing the transaction through an off-market takeover bid under Ch 6 at the same time as proposing a scheme of arrangement under Pt 5.1 of the Corporations Act. The commercial rationale for this dual or hybrid process is explained in the affidavits of Mr Ward and Mr Ganim. In substance, it was devised to maximise the possibility of the Bidder acquiring 100% of the issued fully paid ordinary shares in the plaintiff in circumstances in which there was at least one large shareholder who may not be in favour of selling for the scheme consideration or takeover offer of $1.55 or $1.62 per share. Due to the size of that shareholding, it makes the prospect of satisfaction of 90% minimum acceptance condition somewhat doubtful. However, it remains possible to reach the statutory majorities in s 411(4)(b) which require a majority in number of members at the meeting (headcount) and 75% of the votes cast at the scheme meeting (voting power). Therefore, with a majority of 75% of the voting power at the scheme meeting, the Bidder may acquire 100% of the shares in the plaintiff. 63 It is generally accepted that, although the distinction may be subtle, where an arrangement is proposed under Pt 5.1 to deliver a legal outcome that cannot be achieved under Ch 6, such as 100% ownership in one procedure, the purpose may not be to avoid Ch 6 but to prefer Pt 5.1. A preference for Pt 5.1 is a legitimate choice for which the Corporations Act makes provision: e.g., Re Rusina Mining NL (No 2) [2010] FCA 609; 78 ACSR 615 at [38] (Barker J); Re Healthscope Ltd (No 2) [2019] FCA 759; 136 ACSR 259 at [36] (Beach J). 64 While judicial concerns have been expressed about the desirability of a dual structure or hybrid process due to complexity and to information provided to scheme members in the associated takeover bid complicating the process of approval of the scheme, the approach has been regarded as permissible and, at least, not a reason for refusing to make an order to convene a scheme meeting in a number of authorities in this and other courts. Justice Black, while expressing concern about the desirability of the approach, nonetheless made orders to convene a meeting in Re Virtus Health Ltd [2022] NSWSC 597 at [25] and Re Nitro Software Limited [2023] NSWSC 13 at [32]. In this Court, Beach J in Re Healthscope Ltd [2019] FCA 542; 139 ACSR 608 at [170] and O'Callaghan J in Huon Aquaculture Group Limited, in the matter of Huon Aquaculture Group Limited [2021] FCA 1170 made orders to convene scheme meetings without apparent adverse comments on the dual or hybrid approach to the transactions under consideration in those cases. 65 While there is force in the observations of Black J regarding the desirability of the dual structure approach, in this case, there is no reason to consider at the first court hearing stage on the information before the Court that the hybrid process to which the plaintiff and the Bidder agreed was for the purpose of avoiding Ch 6 of the Corporations Act. Nor is there reason to consider that scheme members will be misled or misinformed in any material way so as to undermine the integrity of the scheme meeting process. The susceptibility of the dual structure to that outcome is not a reason to refuse to convene meetings. Nor is the possibility that ASIC will not provide a statement for the purposes of s 411(17)(b). The time to determine if and the extent to which the proposed scheme is to avoid Ch 6 is at the time of considering whether to approve the scheme at the second court hearing. 66 I have also taken into account the general desirability of uniformity, certainty and predictability in the application of legal principles between and within courts exercising powers under the Corporations Act. The approach taken in the authorities to which reference has been made is not plainly wrong and, therefore, I consider I should follow them.

Other matters 67 The plaintiff referred in its written submissions to a number of additional subsidiary matters which I am satisfied have no bearing on the outcome of the application. However, I formally record that I accept that no question of collateral benefits arises for consideration in this case. Further, fractional entitlements to the scheme consideration are noted but rounding the scheme consideration up or down for fractional entitlements is normal and uncontroversial practice that has no material implications for the merits or fairness of the proposed scheme.

Matters raised by the Court 68 Before the first court hearing the Court requested the plaintiff to make submissions addressing five matters. These related to the clarity of the explanation of the interaction between the off-market takeover offer and the proposed scheme in the chair's letter to scheme members at the commencement of the scheme booklet, the Bidder's ability to exercise voting power over shares where the takeover offer had been accepted, residual performance risk if the Bidder fails to pay the scheme consideration or pay the reciprocal break fee and the desirability of dispensing with r 3.4 of the Corporations Rules having regard to the composition of the plaintiff's register of members. All these issues, except for two, were addressed by amendments that were made to the draft scheme booklet through the plaintiff's communications with ASIC and (or) by the second Ward affidavit and affidavits of Mr Duncan and Mr Tirthankar and no further explanation is necessary. The two remaining issues were the chair's letter to scheme members and dispensing with r 3.4. 69 As to the chair's letter, even after amendments were made to the draft of that letter following comments from ASIC, I remained of the view that there was an absence of an explanation, at the outset of the scheme booklet, about what may happen in the event that neither the 90% minimum acceptance condition is met nor the proposed scheme is capable of being approved or approved. The Bidder's statement explains its intentions in section 6.3 and the conditions and circumstances in which the conditions may be waived and the bid may become unconditional even if the 90% minimum acceptance condition is not met are explained in sections 9.7 to 9.11 of that document. In circumstances in which the Bidder has less than 90% but more than 50% acceptances it may waive the 90% condition and acquire a majority shareholding in the plaintiff. In those circumstances, shareholders who have not accepted a takeover offer would become minority shareholders of a company controlled by the Bidder. I was of the view that scheme members should be made aware (or reminded) of that possibility and the risk that if they do not accept the takeover offer and they vote against the scheme at the scheme meeting, they may become a minority shareholder of a company controlled by the Bidder. That possibility or risk could be a material consideration for scheme members. 70 During the oral hearing counsel for the plaintiff identified parts of the draft scheme booklet and the Bidder's statement where the possibility and risk is identified and explained. I accept that these parts of the draft scheme booklet and Bidder's statement adequately disclose and explain the possibility and risk. However, I remained unsatisfied about the lack of an early explanation and identification of a potential outcome of the dual structure process in the scheme booklet. Accordingly, I ordered that the scheme booklet be amended in the manner recorded in the orders made today. 71 As to r 3.4 of the Corporations Rules, as already mentioned, I made orders modifying or dispensing with various aspects of the Corporations Rules. However, due to the particular nature of the register of members of the plaintiff and the number of members who had not elected to receive electronic communications or had made no election to receive electronic communications, I was not prepared to dispense with the requirement of r 3.4 and Form 6. 72 Having regard to the contemporary manner in which listed companies communicate with holders of issued securities and the declining popularity and circulation of traditional newspapers, the requirement of r 3.4 of the Corporations Rules to advertise the second court hearing in a newspaper before the second court hearing may be thought to be of limited or no real utility. However, depending upon the composition of the members on the register of a company, many or perhaps most, members may continue to use newspapers as a primary source of information about public notices and announcements. In this case, I was not satisfied, on the evidence presented, that r 3.4 had no utility or insufficient utility to dispense with it.

Disposition 73 For these reasons orders were made substantially in the terms of the plaintiff's minute of proposed orders filed on 19 December 2024. I certify that the preceding seventy-three (73) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Feutrill.