Fraser v NRMA Holdings Ltd

RARES J: 1 On 11 August 2016, I ordered that the plaintiff, Diversa Limited, convene a meeting of its members pursuant to s 411(1) of the Corporations Act 2001 (Cth) for the purposes of considering and, if thought fit, agreeing with or without modification to a scheme of arrangement proposed between Diversa and its members, being a scheme of arrangement as set forth in an explanatory statement: In the matter of Diversa Limited [2016] FCA 1137. On 2 September 2016, I ordered that a supplementary scheme booklet updating certain matters, that had since eventuated, be sent to Diversa's members: In the matter of Diversa Limited (No 2) [2016] FCA 1142. 2 On 20 September 2016, the scheme meeting, that I ordered be convened, occurred at which approximately 47% of the issued shares held by 26% of the members participating voted in favour of the scheme, creating majorities of 97.91% of the members present and voting, and 99.15% of the votes cast in favour of the scheme. 3 Diversa has sought that the scheme be approved pursuant to s 411(4)(b) of the Act. No member of Diversa has applied or appeared today to oppose the making of the orders necessary to implement the scheme.

Consideration 4 A plaintiff on an application for the convening of a meeting under s 411(1), through its lawyers, owes to the Court the usual duty of full and frank disclosure on any ex parte application where, as frequently happens, not only is the application made ex parte by the company proponent, but also the final hearing of the application for the approval of the scheme proceeds ex parte. That duty requires the proponent to bring to the attention of the Court any matters that might be put that are, or could be, material to its consideration as to whether to grant or withhold its approval, being matters that are known to the proponent. Mahoney A-P, with whom Clarke JA agreed, described the duty as entailing "a high standard of candour and responsibility", in Garrard (t/as Arthur Anderson & Co) v Email Furniture Pty Ltd (1993) 32 NSWLR 662 at 676F-677F applying what Isaacs J had said in Thomas A Edison Limited v Bullock (1912) 15 CLR 679 at 681-682 and see too Re Permanent Trustee Company Limited (2002) 43 ACSR 601 at 603 [7] per Barrett J. 5 The first Court hearing under s 411 is the occasion at which the Court must form a view whether the scheme is of such a nature and cast in such terms that, if it received a statutory majority at the creditors meeting, the Court would be likely to approve it at an unopposed second Court hearing: FT Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 at 72 per Street CJ with whom Samuels JA agreed, and see too the authorities that I referred to in Diversa [2016] FCA 1137 at [22]. That test relates to the appearance of the proposed scheme and to the Court's consideration, whether, on the material then in evidence, it appears to be at least fair and reasonable from the viewpoint of an intelligent and honest creditor or member, being one of the persons who might approve it, so as to justify the calling of the meeting under s 411(1). 6 Nonetheless, 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). In Re Seven Network Limited (No 3) (2010) 267 ALR 583 at 588-589 [31]-[45], Jacobson J summarised a number of the principles that govern the Court's discretion to approve a scheme, including on ex parte applications. 7 The nature of the consideration that the Court must give on a second hearing under s 411(4) is, of course, different to that required for the convening of the meeting. When the Court is called on to exercise its discretion under s 411(4)(b), it will take into account the approval of the scheme at the meeting referred to in s 411(4)(a) in light of all of the circumstances. Often where ex parte applications for approval of a scheme are made, the commercial judgment of the majority of the creditors or members whose votes satisfied the requirements for the approval by them, as the statutory electorate, will carry substantial weight. However, as Jacobson J observed in Re Seven Network 267 ALR at 588 [31]-[35,] there may be cases in which that is not decisive. 8 I am of opinion that there did not appear to be any issues about the voting processes or the adequacy of information put to the meeting of members of Diversa. Importantly, in cases involving substantially commercial considerations that are unaffected by conflicts between particular groups of members or creditors, the determination of what is in the statutory electorate's best interests is likely to be best represented by their attendance and vote at the meeting called under s 411(1), provided that there has been full and frank disclosure of all information material to them making a decision and the scheme, were it to be implemented, would not be oppressive or otherwise offend public policy. The importance of the provision to members or creditors voting on a scheme of arrangement of all information material to them making an informed decision has been emphasised by many cases: see, for example, Fraser v NRMA Holdings Ltd (1995) 55 FCR 452 at 465F-466E per Black CJ, von Doussa and Cooper JJ; Re NRMA Limited (No. 2) (2000) 156 FLR 412 at 421 [29]-[30] per Santow J; Re Seven Network 267 ALR at 589 [38]. 9 As I noted in Diversa [2016] FCA 1137 at [11], the independent expert's report prepared by Andrea De Cian, a director of Grant Thornton Corporate Finance Pty Limited concluded that the proposed scheme is fair and reasonable and in the best interests of Diversa's shareholders. For that purpose Grant Thornton had regard to first, both forms of the proposed consideration (being, in respect of each Diversa share, either the receipt of 1.2375 OneVue Limited shares or, alternatively, 10 cents and 1.073 OneVue shares rounded up or down to the nearest whole number of shares and in the case of a midpoint number of a share, to the next highest number) and, secondly, analysis it performed that both forms of consideration fell within most of the three different assessed ranges that the expert had used for determining the value of Diversa shares on a transfer of control basis, before the announcement on 14 June 2016 of the proposed scheme to the market. 10 The supplementary scheme booklet informed the shareholders that the more up-to-date material then provided did not affect Grant Thornton's opinion that the scheme, as proposed, was fair and reasonable. 11 No evidence suggesting that Grant Thornton's opinion was invalid appears in any of the material before me or has been disclosed. No member or regulatory body has expressed any criticism or reservation about the substance of the disclosure in the scheme and supplementary scheme booklets. There is no evidence to suggest that Diversa's members or any of them voted other than in good faith or cast their votes for any improper purpose or purposes or that any member has been or will be treated in a way that might be characterised as oppressive. Nor, having regard to the extensive formal affidavits as to the convening and holding of the meeting, is there any reason to think that a procedural irregularity has in any material way affected the consideration of the scheme by the members or their decision, by large majorities, to approve it. 12 The Australian Securities and Investments Commission has not appeared today. However, on 23 September 2016, the Commission informed Diversa that it had no objection to the scheme as proposed. Under s 411(17)(b) such a statement by the Commission provides a prima facie basis for the Court to be satisfied that the proposed compromise or arrangement is not designed for the purpose of enabling a person to avoid the operation of the provisions of Ch 6 of the Act: see s 411(17)(a) and the observations of Santow J in Re Advance Bank Australia Ltd (1997) 136 FLR 281 at 287. 13 Diversa today has identified the procedural and formal steps that it has undertaken for the purposes of complying with the requirements of the Act and the Corporations Regulations 2001 (Cth). 14 I am satisfied that pursuant to the orders made on 11 August 2016, the scheme booklet was lodged with the Commission on 12 August 2016 and that the scheme booklet was dispatched to Diversa's members substantially in accordance with the orders of 11 August 2016. Diversa lodged those orders and the orders made on 2 September 2016 with ASIC on 15 September 2016. 15 As explained in the affidavit of Matthew Foster, a senior client relationship manager with Link Market Services Limited (responsible for supervising dispatch and receipt of company documents and forms, collection and counting of proxies and votes, and preparation of reports to Diversa) the scheme booklet unexpectedly weighed more than 500 grams. He said that this resulted in only 634 of the booklets being dispatched to Diversa's 834 shareholders by parcel post on 17 August 2016 in accordance with order 9 made on 11 August 2016. But, Mr Foster said, Link sent the remaining 200 scheme booklets by prepaid post on 18 August 2016. He said that the scheme booklet also had been dispatched by email to the 275 members of Diversa who had elected to receive electronic notifications, in addition to receiving hard copy versions. It is not possible to tell how many of those receiving the electronic version were among the 200 who received their hard copies one day late. In my opinion, on the material before me, there is no reason to think that any material prejudice arose to any of the 200 shareholders potentially affected by the one day delay in the dispatch of the scheme booklets. 16 Mr Foster said that Link sent 834 Diversa members a copy of the supplementary scheme booklet on 6 September 2016, and an email copy of the supplementary booklet to the 275 members who had elected to receive electronic communications in addition. Mr Foster also said that when the supplementary booklet had to be dispatched, 109 new members had been added to Diversa's register since 18 August 2016. He said that Link sent to those new members copies on 5 September 2016, of the scheme booklet and, on 6 September 2016, of the supplementary scheme booklet. 17 Mr Foster noted that Link's records showed there were 23 shareholders whose mailing addresses appeared to be incorrect because mail on previous occasions had been marked "return to sender". He said that Link's records showed that before the meeting Link also had received return mail for eight shareholders, representing 267,776 shares, in respect of the initial dispatch of the scheme booklet and one return for one shareholder, representing 2,400 shares, in the dispatches to the new members made on 5 and 6 September 2016. He said that Link received one invalid proxy form in respect of 30,000 shares in Diversa that had not been included in the count. He said that, but for the invalidity, the proxy form indicated that the shareholder would have voted for the approval of the scheme. 18 I am satisfied by Mr Foster's evidence that, pursuant to reg 5.6.13, his statement in writing in accordance with Form 530 is sufficient proof that the notice of the convening of the meeting was sent to each of the members, at the member's address, specified for that member in the notice. I am satisfied that the notice of meeting was also advertised in The Australian on 14 September 2016. 19 Mr Foster prepared a declaration of a poll that recorded 27,721,024 votes (99.15%) in favour (being votes of 234 members, representing 97.91% of those members voting at the meeting), 238,731 votes (0.85%) against (being votes of five members representing 2.09%) with 1,603 votes of two members abstaining. 20 In my reasons for convening the meeting, I noted that the scheme booklet disclosed that a number of Diversa's directors, executives and shareholders might receive additional payments or remuneration as a result of the proposal to implement the scheme and its coming into effect, and that Diversa intended to record how each of those directors, executives and shareholders had voted on the poll: Diversa [2016] FCA 1137 at [12]-[17] and [20]. 21 Angus Craig, who is the company secretary and chief financial officer and one of the executives who will become redundant if the scheme is approved, gave evidence of the voting by each of the persons whom I identified. Stephen Bizzell, one of the non-executive directors, held six million shares. He owned and controlled Centec Securities Pty Ltd. Mr Craig said that it had transpired that a nominee shareholder for one parcel of Mr Bizzell's holding, amounting to five million shares, failed to act on his instruction to vote in favour of the resolution. That parcel comprised about 8.5% of the total shares on issue. Thus, in substance, the majority of shares voting, but for this error, would have substantially increased. 22 Mr Craig said that Mr Bizzell voted the balance of his holding of one million shares, and the other directors, shareholders and executives potentially affected all voted their shares in favour of the resolution, including Thorney Opportunities Limited. Their votes accounted for 27.4% of Diversa's issued capital. 23 Given the very small number of shareholders, by value and number, who voted against the resolution it is clear that the overwhelming majority of the members present and voting approved of the scheme. 24 Mr Craig's affidavit indicated that at annual general meetings of Diversa in 2013, 2014 and 2015, about 32%, 62% and 45% respectively of the holders of the issued capital of Diversa had lodged proxies. In the case of the scheme meeting, leaving aside the 8.5% or five million shares held by Mr Bizzell that were not voted, 47% of the issued capital was present and voted at the meeting. 25 In Re Seven Network 267 ALR at 591 [61], Jacobson J recorded that unrelated shareholders, representing about 70% of the total votes cast, but only 27% of the shareholders entitled to vote, cast their votes. He noted that in Re Matine Limited (1998) 28 ACSR 268 at 295 Santow J had said: The apathetic shareholder who chooses not to vote upon a scheme should not be presumed to be antagonistic to the scheme or to warrant paternalistic protection. 26 In my opinion, that observation is apposite here: see also Avoca Resources Limited [2011] FCA 208 where Gilmour J approved a scheme based on a voter turnout of over 72% by votes participating that represented only 11.5% of the individual shareholders. 27 One further matter that arose during the course of argument involved the tender today of an agreement between Centec and Diversa in a letter dated 22 July 2016. That agreement provided, among other things, that if the scheme were implemented, Centec would be required to realise the shares in OneVue that would otherwise have been allotted to those overseas Diversa members who were not eligible to receive them. Clause 5(c) provided that as soon as reasonably practicable, but in any event not later than 10 business days after settlement of all the sales of those shares had occurred, Centec would have to remit the net proceeds of sale, after deducting any fees, taxes, other charges and costs of the sale, either to the ineligible overseas scheme shareholder directly in the proportion of the entitlement of that shareholder or to OneVue or to an appropriate registry service provider or an analogous third party, as directed by Diversa in writing. 28 In my view, the ability of Diversa under cl 5(c) of that agreement to specify in writing that the proceeds of sale of OneVue shares should be remitted to OneVue is not a matter that was disclosed to the members when they considered the scheme, nor is it necessary or appropriate for the scheme's implementation. The only disclosure of a mechanism to pay ineligible overseas scheme shareholders that was made was that Centec would be responsible for paying the net proceeds to them. Accordingly, I am of opinion that I should make an order that limits the ability of Diversa to make such a direction so that it cannot act inconsistently with cl 3.3(b) of the scheme that I will approve.

Conclusion 29 For these reasons, I will order that the scheme be approved. I certify that the preceding twenty-nine (29) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Rares.