Fairfax Media Limited, in the matter of Fairfax Media Limited [2017] FCA 1149

Introduction 1 The plaintiff, Fairfax Media Limited, applies for an order under s 411(1) of the Corporations Act 2001 (Cth) (the Act) that it convene a meeting of its members holding fully-paid ordinary shares (the scheme meeting) to consider, and if thought fit, agree to, with or without modification, a scheme of arrangement (the scheme) between the plaintiff and those members. 2 The scheme document is included in a proposed scheme booklet which will stand as the explanatory statement required under s 412(1) of the Act. A notice of meeting is included in the scheme booklet. 3 The scheme is an integral step in a proposed restructure by the plaintiff to effect a separation of one of its businesses (the Domain business) which, after separation, will be conducted, ultimately, by a standalone ASX-listed company.

The domain business 4 The Domain business is a real estate media and technology services business focused on the Australian property market. It offers residential and commercial property marketing services via its listings portals on desktop and mobile platforms, and via social media and print magazines. It also provides media and lead-generation solutions for advertisers looking to promote their products and services to consumers. The business creates property market content to engage consumers and support audience growth. 5 In addition to operating its residential and commercial real estate portals, the Domain business provides data and technology services to real estate agencies through CRM (Customer Relationship Management) software, property data subscriptions and research, and property inspection management tools. 6 Through a series of investments in recent years, the business has expanded its offerings to include other transactional services to consumers at different points in the property life cycle, including home loan brokerage, residential and commercial utilities product comparison and connection, and home improvement and local trade services. 7 The Domain business reaches a monthly audience of approximately 5 million people across its online portals and through print. Its customer base is diverse, including residential and commercial real estate agencies and professionals, property developers, financial services companies, retailers, utilities companies, media, government and consumers. 8 To date, the Domain business has been operated by Domain Holdings Australia Pty Limited (DHA) and other entities within the plaintiff's group. As part of the restructure, DHA will convert to public company status in October 2017. DHA will then be listed with a view to commencing the trading of its shares on the ASX by mid-November 2017.

The restructure 9 The purpose of the restructure is to give effect to what has been described in the explanatory statement as the Separation Principle, namely that: DHA will have the entire economic benefit and risk of the Domain business as if it had owned and operated that business at all times, and none of the economic benefit or risk of the plaintiff's post-separation businesses; and the plaintiff will have the entire economic benefit and risk of its post-separation businesses as if it had owned and operated those businesses at all times and none of the economic benefit or risk of the Domain business, other than as a result of its proposed shareholding in DHA (see [14] below). 10 The major steps in implementing the restructure will be as follows. 11 First, the plaintiff and DHA will enter into agreements to ensure that the assets and businesses required for DHA to own and operate the Domain business are held by or transferred to DHA, and that the assets or liabilities required for the plaintiff to operate the remaining, post-separation businesses are held by or transferred to the correct entity within the plaintiff's group. Under these agreements, the parties will give each other releases and indemnities to reflect the Separation Principle. Further, the plaintiff will agree to continue to provide certain services to DHA that are essential to the operation of the Domain business for a transitional period, pending migration of those services to, or the replication of those services by, DHA. The agreements will also formalise the ongoing provision of certain services to each party that were provided before separation, including agreements relating to the printing and distribution of certain publications of the Domain business and the provision of marketing and promotion services. The scheme booklet identifies and describes these agreements. 12 Secondly, the scheme will be put to the plaintiff's members for approval at the meeting contemplated by the present application. 13 Thirdly, an ordinary resolution will be put to a general meeting of the plaintiff's members seeking approval of a $536 million reduction in the plaintiff's share capital, to be effected as an equal reduction. This meeting will be held immediately following the scheme meeting. The resolution for the reduction, which will be proposed pursuant to s 256C(1) of the Act, will be subject to and conditional on the scheme becoming effective in accordance with s 411(10) of the Act. The amount of the capital reduction is equal to 40% of the equity value of the Domain business determined by the plaintiff as $1,341 million (the capital reduction amount). 14 Fourthly, the capital reduction amount will then be applied as consideration for shares in DHA to be issued to the plaintiff's members bound by the scheme. These members will hold 40% of the shares issued by DHA. The remaining 60% of the shares will be held by the plaintiff.

The scheme 15 Under the scheme, the plaintiff will reduce its share capital by $536 million in accordance with the resolution to be proposed at the general meeting and, then, compulsorily apply that amount as consideration for the issue to each member of one share in DHA for every 10 shares in the plaintiff held by the member at the Record Date for the scheme, with fractional entitlements rounded up. 16 Each member will be taken to have agreed to become a member of DHA; to have accepted the shares issued in DHA; and to be bound by DHA's Constitution. Further, each member will be taken to have agreed and acknowledged that the issue of the shares in DHA, in accordance with the scheme, constitutes satisfaction of that member's entitlements in and to that person's share of the capital reduction amount. 17 The scheme provides for Ineligible Foreign Shareholders - namely, members whose registered address recorded in the plaintiff's register of members is not in Australia, New Zealand, Hong Kong, Singapore or the United Kingdom, or is a place where the plaintiff reasonably believes it would be prohibited from implementing, or where it would be unduly onerous or impractical for the plaintiff to implement, the scheme and to issue shares in DHA to the member in that place. 18 For these members, the shares in DHA to which they would have been entitled will be issued to a Sales Agent for sale on a financial market whose operation is authorised by a licence under s 795B of the Act. The proceeds of sale in respect of those shares will be remitted to the Ineligible Foreign Shareholders in one of the ways specified in cl 4.1(c) of the scheme. 19 Each member who is an Ineligible Foreign Shareholder will be taken to have agreed and acknowledged that the sale in respect of that person's capital reduction entitlement constitutes satisfaction of that person's entitlement in and to the capital reduction amount.

The directors' recommendation 20 The plaintiff's directors have unanimously recommended that the members vote in favour of the scheme. The basis for that recommendation is explained in summary form in a letter in the scheme booklet from the plaintiff's Chairman, Mr Falloon. 21 In essence, the plaintiff's Board believes that the separation will enhance the overall value of the members' investment over time by establishing a direct market valuation for the Domain business; increase the focus of the separated businesses' growth and strategic priorities through the support of dedicated Boards and management teams; allow the adoption of a capital structure that is appropriate to each of the separated businesses; provide greater shareholder investment choice; and provide the plaintiff with greater future flexibility regarding its retained shareholding in DHA.

The independent expert's report 22 The plaintiff's Board has appointed Grant Samuel & Associates Pty Limited (Grant Samuel) to provide an independent opinion on whether the separation is in the best interests of the plaintiff's members. A copy of the report will be included in the scheme booklet. Ms Stilwell is a director of Grant Samuel and its authorised representative. She has had responsibility for preparation of the report. 23 The report discusses Grant Samuel's approach to forming its opinion: Fairfax shareholders are being asked to split their current investment into two parts, a shareholding in Fairfax Post Separation and a separate shareholding in Domain. The transaction is a "clean" split in so far as there is no change in the underlying economic interest of each shareholder (except for ineligible foreign shareholders). They will, in aggregate, continue to own 100% of the Domain business, but in a different form, with 40% held directly and 60% owned indirectly through their ongoing shareholding in Fairfax Post Separation. There is: • no purchase or sale of equity in either Domain or Fairfax Post Separation to third parties; • no value leakage to third parties from either entity; and • no adverse tax consequences for the separate entities and tax consequences for the vast majority of Fairfax shareholders with be minimal (refer to Section 6.7). Accordingly, the Proposed Separation is definitionally fair as shareholders (except ineligible foreign shareholders) will hold exactly the same underlying economic interests in the Domain business before and after the separation is implemented. Evaluation of whether or not the Proposed Separation is in the best interests of shareholders therefore involves weighing up the advantages and disadvantages of the proposal for shareholders. This involves judgements about the advantages and benefits such as management focus, financial and shareholder flexibility and opportunities for value realisation weighed against the disadvantages, risks and costs such as transaction costs and tax consequences, rather than analysis of quantifiable financial or other verifiable factors. 24 The report expresses the opinion that, for the reasons given, the advantages of the separation outweigh its disadvantages: The question is whether shareholders are likely to realise greater value over time if the Proposed Separation is implemented than if Fairfax's current structure is maintained. The evaluation is essentially subjective as the advantages and benefits are not quantifiable or verifiable. They are, at least to some extent, a matter of perception. None of the benefits are individually compelling but collectively are meaningful and likely to enhance shareholder value. The Fairfax share price has strengthened from pre announcement levels and, arguably, already reflects some of the benefits but many will only emerge over the medium to longer term. The disadvantages, risks and costs are not trivial but they are not major drawbacks. In short, in Grant Samuel's opinion the advantages of the Proposed Separation outweigh the disadvantages. While implementation of the Proposed Separation is not a guarantee of future performance, on balance, shareholders are likely to be better off if the Proposed Separation proceeds. In any event, it does not rule out the possibility of future transactions such as an offer for Fairfax Post Separation or the sale of Domain. Accordingly, in Grant Samuel's opinion, the Proposed Separation is in the best interests of Fairfax shareholders. 25 Ms Stilwell has verified the opinions expressed in the report. She has confirmed that, since the preparation of the report, she has not become aware of any facts or circumstances which would cause her to change the opinions that have been expressed.

Verification and compliance of the scheme booklet 26 Ms Hambly, the Group General Counsel and Company Secretary of the plaintiff, has given evidence concerning the steps taken by the plaintiff to verify the accuracy of the statements made in the scheme booklet. The steps have included the appointment of a Due Diligence Committee with oversight of the verification process. On 19 September 2017, the plaintiff's Board approved the scheme booklet. In submissions, the plaintiff provided a table demonstrating that the explanatory statement, as made in the scheme booklet, complies with the disclosure requirements of the Act, Sch 8 to the Corporations Regulations 2001 (Cth), ASIC Regulatory Guide 60 and Practice Note C&C-1. 27 Subject to any matter that might be brought to my attention at the proposed second court hearing, I am satisfied that the scheme booklet contains an adequate and accurate disclosure of the restructure and the scheme, such as to enable members to make an informed decision on the resolution to be proposed at the scheme meeting.

Deed poll 28 On 19 September 2017, DHA entered into a deed poll in favour of the members to be bound by the scheme in which DHA covenants to perform its obligations under the scheme. These obligations include issuing the shares contemplated by clauses 3.3 and 3.4 of the scheme and applying for the admission of DHA to the official list of the ASX so that its shares can be traded.

Chairman of scheme meeting 29 It is proposed that the scheme meeting be held on 2 November 2017. Mr Falloon has agreed to act as Chairman of the meeting. Mr Millar, a non-executive director of the plaintiff, has consented to act as Chairman of the meeting in the event that Mr Falloon is unable to do so. The evidence required by r 3.2 of the Federal Court (Corporations) Rules 2000 (Cth) has been provided.

Tax implications 30 The scheme booklet includes a general summary of the Australian income tax and GST implications that might affect members as a result of the restructure. Necessarily, the advice is of a general nature and members are encouraged to consult their professional tax advisers in respect of their particular circumstances.

Incentive plans 31 The restructure will affect certain current incentive plans which the plaintiff has in place for its senior management and employees. The scheme booklet summarises how the plaintiff will amend those plans. The plaintiff submitted that the aim of these amendments is to ensure that the plaintiff's employees who hold incentives under the plans are not disadvantaged because of the separation. 32 The scheme booklet also summarises the new incentive plans proposed for DHA's executives.

Despatch of the scheme booklet and proxy form 33 The plaintiff seeks an order pursuant to s 1319 of the Act that provides for the despatch of the scheme booklet and proxy form by electronic means to those members who have nominated an electronic address for the purpose of receiving notices of meetings from the plaintiff. 34 As at 13 September 2017, 24,893 persons were registered as holding ordinary shares in the plaintiff, with 10,636 nominating to receive notices of meetings by electronic means. 35 In respect of the last-mentioned members, the plaintiff proposes to send an email to each nominated electronic address, which will inform the member(s) concerned of the convening of the scheme meeting. The email will include a link to the scheme booklet. The email will also include instructions on voting procedure, including on how to appoint a proxy. 36 In this latter regard, the email says that members can "vote online". This is intended to be a reference to appointing a proxy online. The description "vote online" is inapposite. It may confuse members into thinking that, by following the instructions, votes in favour of or against the scheme can be cast online. The plaintiff's Constitution does not provide for this means of voting and certainly s 411(4) of the Act does not contemplate such voting. I raised this matter in the course of the hearing and the proposed email has now been amended to reflect its true intent in this regard, as has one part of the draft proxy form. 37 Members who have not elected to receive notices of meetings by electronic means will be sent a copy of the scheme booklet, a proxy form and a reply-paid envelope addressed to Link Market Services Limited (Link) by hand, pre-paid post or courier to their addresses recorded in the plaintiff's register of members. A copy of the scheme booklet, proxy form and a reply-paid envelope addressed to Link will also be sent by one of these means where permitted electronic delivery to a member has failed.

ASIC 38 The Australian Securities and Investments Commission (ASIC) has provided a letter dated 21 September 2017 in which it acknowledges that the requirement of s 411(2)(a) of the Act (requiring ASIC to be given at least 14 days' notice of the hearing of the application) has been satisfied. Further, for the purposes of s 411(2)(b) of the Act, ASIC has expressed the view that it has had a reasonable opportunity to examine the terms of the scheme and the draft explanatory statement, and to make submissions to the Court in relation thereto.

conclusion and disposition 39 I am satisfied that the plaintiff is a Part 5.1 body and that the scheme is a "compromise or arrangement" for the purposes of s 411(1) of the Act. 40 I am satisfied that the formal requirements that are preliminary to the Court convening a meeting under s 411(1) of the Act have been complied with. 41 I am also satisfied that the proposed scheme is of such a nature and is cast in such terms that, if it receives the requisite statutory majorities, the Court would be likely to approve it on an unopposed application. 42 Orders, substantially as sought, should be made. I certify that the preceding forty-two (42) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Yates.