Fowler v Lindholm, in the matter of Opes Prime Stockbroking Limited

THE COURT ORDERS THAT: 5. At the time of notifying shareholders pursuant to clause 5.2(c) of the Scheme, the plaintiff: (a) shall send (or procure the "Paying Agent" (as defined in the Scheme) to send) to those Shareholders who have not returned any "Tax Declarations" (as defined in the Scheme): (i) if such Shareholder has, in accordance with the Act, nominated an electronic address for the purposes of receiving notices of meeting from the plaintiff, sending to such address, an email to such Shareholder substantially in the form of the document which is Annexure HHJ-38 to the eleventh affidavit of Helen Hui Jin affirmed on 31 August 2021 in these proceedings; and (ii) a letter to such Shareholder (other than those referred to in Order 5(a)(i) above) by pre-paid post, or in the case of a Shareholder whose registered address is outside Australia, by pre-paid air mail, a letter substantially in the form of the document which is Annexure HHJ-39 to the eleventh affidavit of Helen Hui Jin affirmed on 31 August 2021 in these proceedings, and shall further cause communications to be made to those Shareholders who have not returned any Tax Declarations, and for whom it has a telephone number, by calling such Shareholders provided the caller follows a script substantially in the form of the document which is Annexure HHJ-14 to the sixth affidavit of Helen Hui Jin affirmed on 16 July 2021; and (b) shall send (or procure the "Paying Agent" (as defined in the Scheme) to send) to those Shareholders who have returned Tax Declarations that were incomplete and/or not accompanied by the required supporting documents: (i) if such Shareholder has, in accordance with the Act, nominated an electronic address for the purposes of receiving notices of meeting from the Plaintiff, sending to such address, an email to such Shareholder substantially in the form of the document which is Annexure HHJ-40 to the eleventh affidavit of Helen Hui Jin affirmed on 31 August 2021 in these proceedings; and (ii) a letter to such Shareholder (other than those referred to in Order 5(b)(i) above) by pre-paid post, or in the case of a Shareholder whose registered address is outside Australia, by pre-paid air mail, a letter substantially in the form of the document which is Annexure HHJ-41 to the eleventh affidavit of Helen Hui Jin affirmed on 31 August 2021 in these proceedings, and shall further cause communications to be made to those Shareholders who returned Tax Declarations which were incomplete and/or not accompanied by the required supporting documents by notifying those Shareholders of the nature of those deficiencies, in the manner set out in paragraph 14 to the eleventh affidavit of Helen Hui Jin affirmed on 31 August 2021 in these proceedings. 6. By no later than three months after the entry of these orders, the plaintiff shall undertake the steps set out in Order 5 above a second time, in respect of the Shareholders who received notification pursuant to clause 5.2(c) of the Scheme and who otherwise satisfy the criteria set out in either Order 5(a) or Order 5(b) above at that time. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Introduction 1 On 16 July 2021, at the conclusion of the first court hearing in this matter, I made orders under ss 411(1) and 1319 of the Corporations Act 2001 (Cth) (Act) that the plaintiff (DTS) convene a meeting of the holders of its fully paid ordinary shares (Scheme Meeting) for the purpose of considering, and if thought fit, agreeing to a proposed scheme of arrangement to be made between DTS and its shareholders (Scheme) and approving a scheme booklet to be distributed by DTS to its shareholders (Scheme Booklet): see Dragontail Systems Ltd, in the matter of Dragontail Systems Limited [2021] FCA 834. 2 On 31 August 2021, I made orders under s 411(4)(b) of the Act approving the Scheme, as well as orders providing for additional notifications to DTS shareholders, as Scheme participants, with respect to the provision of forms seeking an exemption from Israeli withholding tax that would otherwise be deducted from the Scheme consideration that they would receive if the Scheme were approved. 3 These are my reasons for making those orders.

Background 4 The Scheme Meeting was held on 23 August 2021. The statutory majorities required by s 411(4)(a)(ii) were attained at the meeting, as follows: (a) shares present and voting in favour, 98.72%; and (b) members present and voting in favour, 84.89%. 5 The application by DTS for the approval of the proposed Scheme was uncontested. 6 The plaintiff relied on the following affidavits at the second court hearing, in addition to the affidavits it read at the first court hearing: (a) a second affidavit of Henry Shiner sworn on 25 August 2021 addressing proof of the holding of the Scheme Meeting and the obtaining of the necessary statutory majorities and communications with shareholders concerning Israeli withholding tax declarations; (b) a second affidavit of Ido Levanon affirmed on 19 August 2021 identifying changes to the Scheme Booklet since the first court hearing and the number of shares DTS had on issue at that date, and confirming that "follow ups" were made to shareholders pursuant to Order 6 of the orders that I made at the first court hearing; (c) an affidavit of Stephen John Hewitt-Dutton sworn on 26 August 2021 proving service of the Scheme Booklet on members, confirming the abovementioned "follow ups" were made and addressing communications with shareholders concerning Israeli withholding tax declarations; (d) an affidavit of Vanessa Cannakamma affirmed on 26 August 2021 proving receipt of proxy forms and collation of proxies, and addressing communications with shareholders concerning Israeli withholding tax declarations; (e) a ninth affidavit of Helen Hui Jin affirmed on 26 August 2021 proving proof of lodgement of the first court hearing orders made on 16 July 2021 with the Australian Securities and Investments Commission (ASIC) and addressing communications with shareholders concerning Israeli withholding tax declarations; (f) an affidavit of Dr Doron Goldbarsht affirmed on 19 August 2021 providing a legal opinion on foreign execution of the Withholding Agent Deed; (g) an affidavit of Tzvi-David Bernstein affirmed on 20 August 2021 confirming foreign execution of the Withholding Agent Deed on behalf of the Withholding Agent, IBI Trust Management; (h) a tenth affidavit of Helen Hui Jin affirmed on 27 August 2021 annexing a letter from ASIC dated 27 August 2021 confirming that it had no objection to the proposed Scheme for the purposes of s 411(17)(b) of the Act; (i) an affidavit of Jason Gary Marcus affirmed on 30 August 2021 proving satisfaction of the waiver of conditions precedent and communications with shareholders concerning Israeli withholding tax declarations; and (j) an eleventh affidavit of Helen Hui Jin affirmed on 31 August 2021 with respect to further communications with shareholders concerning Israeli withholding tax declarations.

Legal principles 7 At the second court hearing, the Court must be satisfied that it is appropriate to exercise its discretion to grant approval to a scheme after it has received the consideration and approval of a meeting of the members or creditors under s 411(4)(b) of the Act. 8 Insofar as discretionary considerations are concerned, the general principles which guide the Court's discretion are well established and are helpfully summarised by Gleeson J in EcoBiotics Limited, in the matter of EcoBiotics Limited (No 2) [2017] FCA 1031 at [26]-[28], which I respectfully adopt. 9 The Court has a discretion whether to approve a scheme and is not bound to approve it merely because it has previously made orders for the convening of meetings or because the statutory majorities have been achieved: Seven Network Limited, in the matter of Seven Network Limited (No 3) (2010) 77 ASCR 701; [2010] FCA 400 (Re Seven Network) at [31] (Jacobson J), citing NRMA Limited (Application of); NRMA Insurance Limited (Application of) (2000) 34 ACSR 261; [2000] NSWSC 408 (Re NRMA) at [22] (Santow J). 10 The Court will usually approach the task on the basis that the members are better judges of what is in their commercial interests than the Court: Re Seven Network at [32]-[33]. 11 At [35] to [40] of Re Seven Network, Jacobson J set out the following six matters which courts have taken into account as informing their discretion regarding whether or not to approve a scheme: (1) whether the shareholders have voted in good faith and not for an improper purpose: In the matter of Foundation Healthcare Limited (No 2) (2002) 43 ACSR 680; [2002] FCA 973 at [27] (French J, as his Honour then was); (2) whether the proposal 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: Fowler v Lindholm, in the matter of Opes Prime Stockbroking Limited (2009) 178 FCR 563; [2009] FCAFC 125 at [79] (Emmett, Gordon and Jagot JJ); (3) whether 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: Permanent Trustee Company (2002) 43 ACSR 601; [2002] NSWSC 1177 at [7] (Barrett J); (4) whether there has been full and fair disclosure of all information material to the decision: Re NRMA at [30]; (5) whether minority shareholders would be oppressed by the scheme: Re Ranger Minerals Ltd; Ex parte Ranger Minerals Ltd (2002) 42 ACSR 582; [2002] WASC 207 at [39] (Parker J); and (6) whether the scheme offends public policy: see for example CSR Limited, in the matter of CSR Limited (2010) 183 FCR 358; [2010] FCAFC 34 at [51]-[56] (Keane CJ and Jacobson J).

Satisfaction of standard requirements 12 I am satisfied that the evidence relied upon by the plaintiff establishes all of the procedural matters that are necessary to permit me to approve the Scheme.

Discretionary considerations 13 As to fairness, the independent expert report of BDO Corporate Finance (East Coast) Pty Ltd (BDO Report) concluded that the Scheme is fair and reasonable and in the best interests of DTS shareholders. I am satisfied that there is no evidence to the contrary and nothing in the BDO Report, on its face, that suggests that the opinion should not be accepted. 14 Further, I observe that the reasonableness of the Scheme was established, at least on a prima facie basis, at the first court hearing pursuant to the principle in FT Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 at 72 (Street CJ, with whom Hutley and Samuels JJA agreed), subject to any new matters being brought to the Court's attention at the second court hearing. 15 There is nothing before me to suggest that the relevant DTS shareholders voted other than in good faith, that they cast their votes for an improper purpose or that any member had been treated in a way that may be characterised as oppressive. Nor is there anything that materially casts doubt on the procedural integrity of the processes followed for the Scheme Meeting. 16 ASIC has provided a statement pursuant to s 411(17)(b) of the Act stating that it has no objections to the Scheme. 17 ASIC has not raised any public policy concern and there is nothing before me to suggest that there should be any such concern. 18 I am satisfied that fairness can be inferred in all the circumstances including the obtaining of the statutory majorities in the Scheme Meeting in a context where there was adequate and verified disclosure and those who voted did so as the best judges of their own interests.

Voter turnout 19 As the plaintiff submitted, the concept of voter turnout at a scheme meeting has no statutory basis, but as a matter of practice, the Court has (since the decision of Emmett J in Lion Nathan Limited, in the matter of Lion Nathan Limited (No. 2) [2009] FCA 1261) requested and had regard to such evidence for the purpose of assessing the integrity of the process. 20 Voter turnout percentages at the Scheme Meeting were approximately 78.7% by shares participating and approximately 24.1% by members participating. 21 These voter turnout percentages compare favourably with voter turnout percentages noted by Courts in approving schemes of arrangement in: Avoca Resources Limited, in the matter of Avoca Resources Limited [2011] FCA 208 at [25] (Gilmour J), of 72.38% by shares participating and 11.49% by persons participating; in Re Auzex Resources Ltd (No 2) [2012] QSC 101 at [18] (Applegarth J) of 42.3% by shares participating and 9.75% by persons participating; and in TriAusMin Limited, in the matter of TriAusMin Limited (No 2) [2014] FCA 833 (TriAusMin) at [9] (Farrell J) of 52.9% by shares participating and 10.94% by persons participating. Farrell J observed in TriAusMin at [10]: Although the statutory requirement under s 411(4)(a)(ii) has been satisfied, it is the usual practice of the Court at the second court hearing to consider the number of shareholders who attended the Scheme Meeting in person or by proxy. Low shareholder turnout may be an indication that some procedural irregularity occurred. It is inappropriate to assume (in the absence of complaint) that shareholders did not vote either did not have notice of the meeting or were silent in protest of the scheme: Re Professional Investment Holdings Ltd (No 2) [2010] FCA 1336 at [7] and Re Seven Network Ltd (No 3) (2010) 267 ALR 583 … at [61] per Jacobson J; apathy should not be presumed to be antagonism: Re Matine Ltd (1998) 28 ACSR 268 at 295 per Santow J. 22 The percentages achieved at the Scheme Meeting also compare favourably with the percentages of approximately 26.9% by shares participating and 4.0% by members participating at the plaintiff's 2021 annual general meeting. 23 I am satisfied that given the evidence as to the dispatch of the Scheme Booklet and the voter turnout percentages at the Scheme Meeting, there is nothing to suggest that there was any flaw in the procedure for convening the Scheme Meeting.

Israeli withholding tax issues 24 An unusual feature of the Scheme is the potential deduction in an amount equal to 25% of the consideration to be received by Scheme participants for Israeli withholding tax, unless Scheme participants provide documentation that establishes that they are exempt from the payment of Israeli withholding tax. Scheme participants who do not provide that documentation may subsequently individually seek to recover the withholding tax directly from the Israeli taxation authority, but they would likely face significant costs and delays in doing this and also be subject to exchange rate risk as any reimbursement would be paid in shekels. 25 It was for that reason that significant "health warnings" were included in the Scheme Booklet, together with cross-references to comprehensive explanations of the steps required to establish exemptions and copies of an Israeli tax letter and an Israeli withholding tax ruling. I was satisfied that these disclosures, including amendments to the "health warnings" that were made in response to concerns that I raised in the course of the first court hearing, and the revised form of orders providing for the follow-up of Scheme participants who had not returned exemption documentation, was sufficient to draw the Israeli withholding tax issue to the attention of Scheme participants. 26 DTS shareholders were advised in the Scheme Booklet that Scheme participants seeking to avoid the potential deduction of 25% of the consideration that they would receive under the Scheme were required to return completed Israeli withholding tax declarations (IWHT forms), together with all supporting documentation, to the Paying Agent, Advanced Share Registry Ltd, by no later than 1 September 2022. 27 As at 5.00 pm on 27 August 2021, DTS had 760 shareholders holding in aggregate 397,526,926 shares. IBI Trust Management held 95,130,209 DTS shares on behalf of 12 shareholders (IBI shareholders). The plaintiff has received tax advice to the effect that the IBI shareholders do not need to submit IWHT forms under the terms of the Israeli withholding tax ruling. 28 The records of Advanced Share Registry reveal that as at 5.00 pm on 27 August 2021: (a) 164 DTS shareholders, holding 62,971,643 shares, had returned IWHT forms; (b) 113 of those 164 shareholders, holding 37,111,854 shares, had returned forms that were incomplete and/or required additional supporting documentation; and (c) 584 DTS shareholders, holding 239,425,074 shares, had not returned IWHT forms. 29 It is thus apparent that as at 27 August 2021, after excluding IBI shareholders, only 51 of 748 DTS shareholders, holding 25,859,789 shares of the total number of shares issued in DTS, had returned completed IWHT forms. Expressed as percentages of the total number of DTS shareholders and the total number of DTS issued shares, after excluding IBI shareholders, only 6.8% of DTS shareholders holding 8.6% of the issued share capital of DTS, had returned completed IWHT forms. 30 I appreciate that the deadline for the return of IWHT forms is 1 September 2022, which is approximately 12 months away. However, given the significant impact to Scheme participants on the consideration that they would receive if they did not provide properly completed IWHT forms, these statistics raised concerns for me. My concerns were both as to the relatively low response to date but also as to the significant proportion of those responses that were incomplete and/or required additional supporting documentation. In order to allay these concerns, I considered that it was necessary to make additional orders providing for a structured follow up plan and a specific protocol to address the provision of incomplete IWHT forms and outstanding supporting documentation.

Section 411(11) exemption 31 Section 411(11) of the Act provides that copies of all orders made by the Court for approving a scheme pursuant to s 411(4)(b) of the Act must be annexed to every copy of the company's constitution issued after the approval of the scheme. Section 411(12) of the Act provides that the Court may exempt a company from complying with s 411(11). 32 I am satisfied that it is appropriate to make an order pursuant to s 411(12) of the Act exempting DTS from compliance with s 411(11), in circumstances where the Scheme will not amend the constitution of DTS and DTS will become a wholly owned subsidiary of the acquirer upon implementation of the Scheme: In the matter of Toll Holdings Limited (No 2) [2015] VSC 236 at [18]-[19] (Robson J); In the matter of BINGO Industries Limited [2021] NSWSC 911 at [13] (Black J).

Disposition 33 In all the circumstances I was satisfied, for the reasons outlined above, that orders be made approving the Scheme, exempting DTS from compliance with s 411(11) of the Act and providing for a structured follow up plan and a specific protocol to address the provision by DTS shareholders of incomplete IWHT forms and outstanding supporting documentation. I certify that the preceding thirty-three (33) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Halley.