In the matter of Cenntro Electric Group Ltd [2023] NSWSC 1644

Supreme Court of NSW|2023-12-14|Before: Black J

Solicitors: MinterEllison (Plaintiff) File Number(s): 2023/292940

Judgment

By Originating Process filed on 14 September 2023, the Plaintiff, Cenntro Electric Group Ltd ("CEG") seeks orders under ss 411 and 1319 of the Corporations Act 2001 (Cth) ("Act") convening a meeting of CEG's ordinary shareholders to consider a scheme of arrangement and ancillary orders.
By way of background, the proposed scheme will effect a redomiciliation of CEG from Australia to the United States, by Cenntro, Inc. ("HoldCo"), a new corporation formed under the laws of Nevada in the United States, acquiring all of the CEG shares, so that CEG initially becomes a wholly owned subsidiary of HoldCo. The scheme provides for eligible CEG shareholders to receive one HoldCo share for each CEG share, which will be credited to each eligible scheme shareholder's account with the Exchange Agent (as defined); "Street-name Holders" will receive one HoldCo share for each CEG share, which will be initially issued to the Clearance Nominee (as defined) and held through the facilities of the Depository Trust Company ("DTC") in the United States; and shares to which Ineligible Foreign Shareholders (as defined) would otherwise be entitled to under the scheme will be issued to a Sale Agent (as defined) and sold through a sale facility, with the proceeds being remitted to the Ineligible Foreign Shareholders. Following implementation of the proposed scheme, CEG shareholders will still hold the same proportional economic interest in the assets of the Cenntro Group that they currently hold. It is intended that CEG will be delisted from the Nasdaq Capital Market ("Nasdaq") in the United States following implementation of the scheme and that HoldCo will apply to be listed on Nasdaq.

Affidavit evidence

CEG reads the affidavit dated 12 December 2023 of its Chief Financial Officer, Mr Edmond Cheng, which outlines the background to the application. Mr Cheng notes that the intent of the scheme is that HoldCo will become the new parent company of CEG and its related entities. Mr Cheng refers to the announcement of CEG's entry into the proposed scheme made on the Securities and Exchange Commission's ("SEC") public announcements platform in the United States, where the majority of holders of CEG shares are resident in the United States rather than Australia. Mr Cheng notes that CEG has no material business operations in Australia and less than 0.01% of its shares are held by 14 shareholders whose addresses are in Australia, a matter which provides an obvious commercial justification for the proposed transaction. Mr Cheng also refers to the structure of the scheme and, in particular, to the way in which "Street-name Holders" will be treated under the scheme, where such holdings are commonplace in the US securities market. Mr Cheng also refers to an independent expert's report prepared by Lonergan Edwards & Associates Ltd ("Lonergan Edwards") in respect of the scheme, which is largely directed to the commercial logic of the proposal. Mr Cheng also refers to CEG's capital structure, the steps which will be taken to implement the scheme and the steps which have been taken to verify information concerning CEG and HoldCo in the scheme booklet, which was in common form. Mr Cheng also refers to a consolidation of CEG shares which was approved at an annual general meeting of CEG shareholders on 1 September 2023, to take effect from 1 December 2023, the completion of which was delayed as a result of requirements for a consolidation of shares of a company listed on the Nasdaq. As discussed below, CEG also seeks relief under s 1322 of the Act in that regard.
Mr Cheng also addresses the notice that is to be given of the second Court hearing, by an announcement to the SEC and on CEG's website, an approach which is unusual but appropriate where the majority of shareholders in CEG are in the United States. Mr Cheng also outlines the process which will be adopted for the scheme meeting, which is to be held as a hybrid meeting with a physical meeting in the United States, the voting arrangements which will be adopted for shares held within nominee structures in the United States, and for the dispatch of documents relating to the scheme meeting to shareholders, many of whom hold shares within such nominee structures. Mr Cheng also refers to the operation of a proposed shareholder information line in respect of the scheme, and indicates the consent of the chair and alternate chair of the scheme meeting.
CEG reads an affidavit dated 14 September 2023 of its solicitor Mr Anthony Sommer, which annexes an extract of the records maintained by the Australian Securities & Investments Commission ("ASIC") relating to CEG. CEG reads a second affidavit dated 13 December 2023 of Mr Sommer, which addresses correspondence with ASIC in relation to the scheme and in relation to the delay in the consolidation of CEG shares.
Mr Izzo also took me through the proposed scheme booklet in the course of submissions. The scheme booklet is in largely conventional terms, outlines the advantages and disadvantages of the transaction and contains extensive risk disclosure as to CRG's business, and contains the Lonergan Edwards report which concludes that the scheme is in the best interests of CEG shareholders, in the absence of a superior proposal, because the advantages of the scheme outweigh the disadvantages and CEG shareholders are likely to be better off if the scheme proceeds. CEG also tendered two letters from ASIC dated 13 December 2023, one dealing with its proposed application under s 1322 of the Act in respect of the consolidation of its shares, and the other dealing with ASIC's position under s 411(17)(b) of the Act, in conventional terms.

Applicable principles

Mr Izzo rightly submits that the principles governing an application for orders to convene a meeting of members under s 411(1) of the Act are well settled and he refers to my decisions in Re InvoCare Ltd [2023] NSWSC 1180 ("InvoCare") at [14]-[16] and Re Origin Energy Ltd [2023] NSWSC 1246 at [19] in that regard. He notes that the Court's discretion to make an order under s 411(1) of the Act is enlivened if a compromise or arrangement is proposed between a Part 5.1 body and its members (or any class of them); application for the order is made in a summary way by the body; 14 days' notice of the hearing of the application has been given to ASIC (or such lesser period as the Court or ASIC permits); and the Court is satisfied that: (1) ASIC has had a reasonable opportunity 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 (2) make submissions to the Court in relation to the proposed compromise or arrangement and the draft explanatory booklet.
Mr Izzo submits that each of these requirements is satisfied here. CEG is a company registered under the Act and a Part 5.1 body for the purposes of s 411. He submits and I accept that the proposed redomiciliation under the scheme is an "arrangement" within the meaning of s 411 of the Act: Re Opus Group Ltd [2018] FCA 959 at [16]; Re Tronox Ltd (2019) 135 ACSR 343; [2019] FCA 312 ("Tronox") at [6]; Re Avita Medical Ltd (No 2) [2020] FCA 674 at [7]; Re Boart Longyear Ltd [2021] NSWSC 982 ("Boart Longyear") at [62]; Re Surf Lakes Holdings Ltd [2023] FCA 1355 at [7]. The evidence establishes that notice was given to ASIC which has had the opportunity to consider the scheme. The Lonergan Edwards report expresses the view that the scheme is in the best interests of CEG shareholders in the absence of a superior proposal and, as I noted above, Mr Cheng's affidavit summarises the verification procedure undertaken to ensure that the "Cenntro Information" (as defined) and "HoldCo Information" (as defined) in the scheme booklet is complete and accurate in all material respects, is not misleading or deceptive in any material respect, and that there is no material omission in respect of that information which renders that information misleading or deceptive in any material respect.
As I noted above, notice of the second Court hearing will be the subject of an announcement to the SEC and on CEG website. Mr Izzo submits and I accept that it is appropriate to dispense with the requirement under r 3.4 of the Supreme Court (Corporations) Rules 1999 (NSW) to publish an advertisement in a newspaper where such an announcement is made by CEG before the second Court hearing, where the majority of CEG shareholders reside in the United States and that course is more likely to draw that hearing to CEG shareholders' attention than a newspaper advertisement: InvoCare at [22]. As I noted above, it is proposed that the scheme meeting will be a hybrid meeting including a physical meeting in the United States. Mr Izzo submits and I also accept that the Court has the power to make an order pursuant to s 411(1) of the Act for a meeting to be held overseas, and must have regard to where the members reside in exercising this power under s 411(3A) of the Act: Re Lonsdale Financial Group Ltd [2007] VSC 394 at [26]. I also accept that the United States is the appropriate jurisdiction to hold the physical part of the scheme meeting where the majority of CEG shareholders reside there.
Mr Izzo also notes that he principles which apply to the exercise of the Court's discretion are well understood and refers, in addition to the case law noted above, to Re Estia Health Ltd [2023] NSWSC 1256 at [14] and Re Thorn Group Ltd [2023] NSWSC 1299 at [15]. The Court must be satisfied that the scheme is fit for consideration by the proposed scheme meeting in the sense that it is of such a nature and cast in such terms that, if it achieves the statutory majority at the meeting, the Court would be likely to approve it on the hearing of a petition which is unopposed; and members are to be properly informed as to the nature of the scheme before the scheme meeting. I accept that there is nothing in the terms of the scheme that is out of the ordinary for redomiciliation schemes of this type and that would warrant the Court declining to permit its consideration by members.

Other issues

Mr Izzo also addresses the implications of the DTC system, in which US shareholders of CEG generally hold their shares for voting at the scheme meeting, and I have had regard to a memorandum prepared by CEG's United States lawyers which set out the key features of the DTC system and how beneficial owners of CEG shares held under that system transmit voting rights using an "Omnibus Proxy Procedure," by which DTC issues an Omnibus Proxy to CEG as soon as possible after the Record Date (as defined) which sets out the "security position" of each DTC Participant (as defined) and the voting position of the DTC Participant, where the voting position is an amalgamation of the voting rights of the DTC Participant's customers. As an alternative to submitting voting instructions to a DTC Participant, beneficial owners may cast a direct vote by assigning their right to vote to an individual or third party who may appear at the meeting and cast a vote on their behalf. I made orders in relation to voting at the scheme meeting which reflect the requirements of the DTC system, consistent with the approach taken in Tronox. Mr Izzo also recognised that the DTC system may cause potential issues in relation to the "headcount test" under s 411(4)(a)(ii)(A) of the Act, where DTC's nominee, Cede & Co, casts both positive and negative votes on a resolution, when votes by beneficial holders are collated: Re Spark Infrastructure Holdings No 1 Ltd & Ors (2010) 79 NSWLR 756; [2010] NSWSC 1497 at [24]-[27]; Tronox at [64]; Re Tronox Ltd (No 2) [2019] FCA 681 at [29]. Mr Izzo notes and I accept that the Court has power to dispense with the headcount test in an appropriate case, but that question can appropriately be deferred to the second Court hearing.
Mr Izzo also addresses the manner in which HoldCo will issue HoldCo shares to CEG shareholders, including "Street-name Holders" in the United States, where shares are held by Cede & Co in the DTC system in 'street-name' book-entry form through an intermediary, such as a bank, broker-dealer, clearing agency, or nominee; and to the Sale Agent in respect of Ineligible Foreign Shareholders. Mr Izzo submits and I accept that the sale of the share consideration payable to certain shareholders outside identified jurisdictions and remittance of the cash received in place of the shares is a common arrangement included in schemes, and does not give rise to a need for a separate class at the scheme meeting: Boart Longyear at [64]; Tronox at [76]; Re OreCorp Ltd [2023] FCA 1359; Re Talon Energy Ltd [2023] FCA 1362 at [17].
Mr Izzo notes that two of five CEG directors hold both CEG shares and CEG options and one director holds CEG options; the proposed treatment of CEG options and warrants is set out in section 3.20 of the scheme booklet; there is no acceleration or vesting or change in material terms of any options under the scheme and no class issues arise in relation to the proposed treatment of the CEG options and warrants; and CEG directors who hold CEG options will not receive an additional benefit if the scheme is approved in respect of their options and no issue arises in relation to those directors' recommendation about voting in favour of the scheme: Re Telstra Corporation Ltd (2022) 163 ACSR 429; [2022] NSWSC 1180 at [33]-[34].
Mr Izzo recognises that a deed poll has been executed by HoldCo, which is incorporated in Nevada. I proceed on the basis that, consistent with Practice Note SC Eq 4 at [28(a)], evidence is not required concerning foreign law advice in relation to the execution or enforceability of the deed poll as against HoldCo, where there is no suggestion of any real uncertainty or material issue in respect of the enforceability of the deed poll in accordance with its terms. I accept that performance risk is sufficiently addressed by the deed poll and the usual provision that the transfer of CEG shares to HoldCo is subject to the issue of the shares in HoldCo to each CEG shareholder, other than Ineligible Foreign Shareholders, whose CEG shares are issued to the Sale Agent. I recognise that these are well established means of managing performance risk and similar measures have been accepted in other redomiciliation schemes: Re ELMO Software Pty Ltd [2023] NSWSC 12 ("ELMO") at [27]-[28]; Tronox at [106]-[109]. Clause 7.3 of the scheme of arrangement provides for a deemed warranty given by scheme shareholders in conventional form and I accept that a clause of this kind will not prevent the making of orders under s 411(1) of the Act, provided that the clause is properly disclosed in the scheme booklet, as is the case here in section 3.16 of the scheme booklet: ELMO at [32].
CEG has engaged a third party to dispatch documents relating to the scheme meeting to CEG shareholders and detailed evidence of the plan of dispatch of the explanatory statement and other materials was not required in accordance with Practice Note SC Eq 4 at [26(i)]. The text of a proposed reminder letter has been disclosed to the Court in the evidence, and I accept that an order approving that reminder letter is not necessary: InvoCare at [23]-[26]. Mr Izzo also further addresses the approach to be adopted in the distribution of materials to beneficial owners under the DTC system, to ensure that United States securities law requirements are met and proxy materials are provided to those beneficial owners.
As is commonplace in schemes with a United States component, CEG intends to rely upon the Court's approval of the scheme if ordered for the purposes of the exemption under s 3(a)(10) of the Securities Act 1933 (US), which provides relief from the registration and prospectus requirements in connection with the issue of shares to United States residents pursuant to the scheme. It is a condition of the exemption that prior to any hearing for approval of the scheme, the Court be advised that the issuer will rely on the Court's approval for the purposes of the exemption, and disclosure of this matter is contained in the "Important Notices" in the scheme booklet. I note this matter and that CEG intends to rely on the exemption, which will be raised again at the second Court hearing.

Extension of time for share consolidation

As I noted above, on 1 September 2023, CEG shareholders in general meeting passed a resolution to approve a consolidation of CEG shares on a one-for-ten shares basis which was to be implemented by the adjustment by the Nasdaq of its records for CEG shares on 1 December 2023. In the event, additional time was required to determine the eligibility of post-split shares in the DTC system, and the consolidation of CEG's shares in the records of Nasdaq did not occur on 1 December 2023 as contemplated by that resolution and in accordance with s 254H(2)(b) of the Act. The update of the Nasdaq's records for the share consolidation took place some seven days later, on 8 December 2023. This issue is disclosed in sections 3.20 and 4.4 of the scheme booklet.
CEG seeks an order under s 1322(4)(d) of the Act to extend the period for the share consolidation to take effect under s 254H(2)(b) of the Act up to and including 8 December 2023. Mr Izzo notes that, although the words "takes effect" in s 254H(2) of the Act arguably contemplate that a consolidation occurs automatically and without any act or thing needing to be done by the company, practical steps will need to be taken by the operator of any relevant market to reflect the reorganised share structure of the company, and submits that the power under s 1322(4)(d) of the Act is available to extend the date the conversion "takes effect" under s 254H(2). Mr Izzo rightly points out that the power under s 1322 is given a liberal construction, reflecting its remedial purpose, and may be exercised nunc pro tunc; and he also submits that the exercise of that power here will ensure that the date of the consolidation is consistent with the reality, which is that CEG shares continued to trade as if they had not been consolidated between 1 and 8 December 2023; and points to Mr Cheng's evidence that CEG's board is not aware of any material impact or prejudice suffered by CEG shareholders or any third party as a result of the share consolidation not taking effect on 1 December 2023. I am satisfied that it is just and equitable to make the order sought and, for the purposes of s 1322(6)(c), no substantial injustice has been or is likely to be caused to any person by the delay.
Mr Izzo also recognises that CEG did not lodge a copy of the share consolidation resolution with ASIC within one month of it being passed, as required by s 254H(4) of the Act. I accept that failure partly involved an inadvertent error, and partly the fact that CEG is awaiting confirmation of the number of CEG shares on issue on account of the rounding up of fractional shares created in the process of the share consolidation, which it expects to be completed on 15 December 2023, and intends to lodge a copy of the share consolidation resolution with ASIC as soon as possible following receipt of that final confirmation. I am satisfied that I should make the further order sought by CEG, under s 1322(4)(d) of the Act, extending the period for the lodgement of the share consolidation resolution with ASIC pursuant to s 254H(4) of the Act up to and including 22 December 2023. I accept that that order is appropriate where an earlier lodgement with ASIC could not occur where it was not possible to determine the final number of CEG Shares post-consolidation within the required time period under s 254H(4) of the Act. I also accept that CEG's failure to comply with s 254H(4) in this respect does not have the capacity to cause any material impact or prejudice to CEG shareholders or third parties. I note that CEG's solicitors had, properly, notified ASIC that CEG intended to seek relief under s 1322(4)(d) of the Act in respect of the share consolidation at the first Court hearing in this proceeding and ASIC has indicated that it neither supports nor opposes the relief sought and does not intend to appear at this hearing.

Orders

I am satisfied that the scheme is of such a nature and cast in such terms that, if it achieves the statutory majorities at the scheme meeting, the Court would be likely to approve it. For the reasons set out above, I made the orders sought by CEG at the conclusion of the first Court hearing.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 21 December 2023

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