In the Matter of Foundation Healthcare Limited ACN 002 611 501 [2002] FCA 742

ASIC Consideration 16 Between 10 May 2002 and 4 June 2002 Mr Wall, a solicitor acting for Foundation, prepared final drafts of the documents to comprise the scheme booklet including the schemes, explanatory statement and notices of meeting. He sent copies of the documents to the Australian Securities and Investments Commission (ASIC). On 4 June 2002, ASIC wrote to Mr Wall advising that it has no objection to the proposed scheme. It reserved the right to change its view should further material information come to its notice prior to the confirmation hearing. The letter concluded: "Please note that this letter is not the 'statement in writing' referred to in section 411(17) of the Corporations Act 2001." 17 A further letter, dated 4 June 2002, and handed up on the day of the hearing (Exhibit 1) stated: "Under subregulation 5.1.01(1) of the Corporations Regulations, the Australian Securities and Investments Commission (Commission) allows Foundation Healthcare Limited, to send an explanatory statement under s 412(1) of the Corporations Act 2001, which does not: . state the matters set out in paragraphs 8201(a), 8201(b), 8201(d) and 8201(e); nor . contain or have annexed to the explanatory statement the reports and copies of documents referred to in paragraphs 8203(a) and 8203(b); of Part 2 of Schedule 8 to the Corporations Regulations." ASIC made that allowance on the basis that the Explanatory Statement sent will be substantially in the form given to the Commission on or about 4 June 2002. The requirements waived are relevant to an Explanatory Statement for a meeting of creditors pursuant to s 411. This waiver is presumably given on the assumption that the proposed Optionholders' meeting falls within that category. Having regard to the limited nature of the class and the small size (four in all), it is not surprising that the particular notice requirements mentioned in the letter were waived. Statutory Framework 18 The application is made under Pt 5.1, "Arrangements and Reconstructions" appearing in Ch 5 of the Corporations Act headed "External Administration". The relevant parts of s 411 are in the following terms: "411(1) Where a compromise or arrangement is proposed between a Part 5.1 body and its creditors or any class of them or between a Part 5.1 body and its members or any class of them, the Court may, on the application in a summary way of the body or of any creditor or member of the body, or, in the case of a body being wound up, of the liquidator, order a meeting or meetings of the creditors or class of creditors or of the members of the body or class of members to be convened in such manner, and to be held in such place or places (in this jurisdiction or elsewhere), as the Court directs and, where the Court makes such an order, the Court may approve the explanatory statement required by paragraph 412(1)(a) to accompany notices of the meeting or meetings. . . . 411(2) The Court must not make an order pursuant to an application under subsection (1) … unless: (a) 14 days notice of the hearing of the application, or such lesser period of notice as the Court or ASIC permits, has been given to ASIC; and (b) the Court is satisfied that ASIC has had a reasonable opportunity: (i) 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 (ii) to make submissions to the Court in relation to the proposed compromise or arrangement and the draft explanatory statement." Subsection (3) explains the term "draft explanatory statement". That is a statement: "(a) explaining the effect of the proposed compromise or arrangement and, in particular, stating any material interests of the directors of the body, whether as directors, as members or creditors of the body or otherwise, and the effect on those interests of the proposed compromise or arrangement in so far as that effect is different from the effect on the like interests of other persons; and (b) setting out such information as is prescribed and any other information that is material to the making of a decision by a creditor or member of the body whether or not to agree to the proposed compromise or arrangement, being information that is within the knowledge of the directors of the body and has not previously been disclosed to the creditors or members of the body. . . . 411(4) A compromise or arrangement is binding on the creditors, or on a class of creditors, or on the members, or on a class of members, as the case may be, of the body and on the body or, if the body is in the course of being wound up, on the liquidator and contributories of the body, if, and only if: (a) at a meeting convened in accordance with an order of the Court under subsection (1) or (1A): (i) in the case of a compromise or arrangement between a body and its creditors or a class of creditors - the compromise or arrangement is agreed to by a majority in number of the creditors, or of the creditors included in that class of creditors, present and voting, either in person or by proxy, being a majority whose debts or claims against the company amount in the aggregate to at least 75% of the total amount of the debts and claims of the creditors present and voting in person or by proxy, or of the creditors included in that class present and voting in person or by proxy, as the case may be; and (ii) in the case of a compromise or arrangement between a body and its members or a class of members - a resolution in favour of the compromise or arrangement is: (A) passed by a majority in number of the members, or members in that class, present and voting (either in person or by proxy); and (B) if the body has a share capital - passed by 75% of the votes cast on the resolution; and (b) it is approved by order of the Court." 19 It is also necessary to have regard to s 411(17) which provides: 411(17) The Court must not approve a compromise or arrangement under this section unless: (a) it is satisfied that the compromise or arrangement has not been proposed for the purpose of enabling any person to avoid the operation of any of the provisions of Chapter 6; or (b) there is produced to the Court a statement in writing by ASIC stating that ASIC has no objection to the compromise or arrangement; but the Court need not approve a compromise or arrangement merely because a statement by ASIC stating that ASIC has no objection to the compromise or arrangement has been produced to the Court as mentioned in paragraph (b)." 20 Section 412 requires that an Explanatory Statement be sent with the notice convening a meeting under s 411. The Explanatory Statement must explain the effect of the arrangement and, in particular, any material interests of the directors whether as directors or members or creditors of the body or otherwise and the effect on those interests of the arrangement in so far as that effect is different from its effect on the like interests of other persons. It must also set out prescribed information and any other information that is material to the making of a decision by a member whether or not to agree to the arrangement. 21 Under s 413 the Court may make orders providing, inter alia, for the transfer to the transferee company of the whole or a part of the undertaking and of the property or liabilities of the transferor company. Section 414 provides for compulsory acquisition by the transferee under a Scheme of dissenting Shareholders. It is a condition of that power that the Scheme being one which involves a transfer of shares to the transferee has, within four months of the making of the offer relating to the Scheme by the transferee, been approved by members holding shares in the relevant class carrying at least 90% of the votes attached to shares in that class, other than excluded shares. It is not necessary for present purposes to refer to this section in any detail. 22 Regulation 5.1.01 of the Corporations Regulations imposes, by reference to Schedule 8, specific content requirements for the Explanatory Statement required by ss 411 and 412 as follows: "5.1.01(1) For paragraph 411(3)(b) and subparagraph 412(1)(a)(ii) of the Act, unless ASIC otherwise allows, the explanatory statement must: (a) for a proposed arrangement between a Part 5.1 body and its creditors, or a class of its creditors: (i) state the matters set out; and (ii) have annexed to it the reports and copies of documents mentioned; in Part 2 of Schedule 8; and (b) for a proposed arrangement between a Part 5.1 body and its members, or a class of its members, other than a proposed arrangement mentioned in paragraph (c): (i) state the matters set out; and (ii) have annexed to it the reports and copies of documents mentioned; in Part 3 of Schedule 8; …" The requirements are not exhaustive as the Statement must comply with s 412. 23 Part 2 of Schedule 8 is entitled "Prescribed Information Relating to Proposed Compromise or Arrangement with Creditors or Class of Creditors" and contains three items, 8201 to 8203, which it is not necessary to set out in full here. Part 3 is entitled "PRESCRIBED INFORMATION RELATING TO PROPOSED COMPROMISE OR ARRANGEMENT WITH MEMBERS OR A CLASS OF MEMBERS" and contains ten items, 8301 to 8310 inclusive. These items are referred to in parentheses against those aspects of the Explanatory Statement to which they relate. 24 Regulations 5.6.12 to 5.6.36 prescribe procedures in relation to the convening and conduct of, and voting at meetings of members and creditors of a company under Pts 5.3A, 5.4, 5.4B, 5.5 and 5.6 of the Act. In terms they do not apply to meetings convened under Pt 5.1. However, Rule 2.15 of the Corporations Law Rules of the Federal Court provide that: "Subject to the Law, these Rules and any direction of the Court to the contrary, regulations 5.6.12 to 5.36A of the Corporations Regulations apply to meetings ordered by the Court." Scheme Documentation 25 The Explanatory Statement appears in a Scheme Booklet prepared for circulation to Shareholders and Optionholders. It is preceded by a number of paragraphs under the heading "IMPORTANT NOTICES", including the necessary notice that an order of the Court under s 411(1) and s 411(1A) is not an endorsement of, or any other expression of opinion on, the Schemes (Item 8202). After a letter from the chairman, the Explanatory Statement itself is set out. It contains the following statement, at p 7: "Your Directors believe that the Merger is in the best interests of Scheme Participants. The Directors unanimously recommend, in the absence of a higher offer, you vote in favour of the Schemes. Your Directors intend to do so for the Foundation Shares and Foundation Options which they control. The key reasons why your Directors recommend that you vote in favour of the Merger are outlined in Section 3.3 of this Explanatory Statement." 26 Section 2 of the Explanatory Statement sets out a "Summary of the Schemes". Section 3 sets out "Reasons for the Schemes" and in 3.3 what is said to be a "Summary of Merger Benefits, Synergies and Savings". That section commences with the statement: "The directors of Foundation and LifeCare believe that a number of significant benefits will flow from the Merger." There follows a statement of the benefits said to flow from the merger. 27 Section 5 is entitled "CONSIDERATIONS FOR SCHEME PARTICIPANTS". Subsection 5.1 is entitled "Why the Merger Proposal should be implemented". It restates the unanimous recommendation of the directors that the Scheme Participants approve the Scheme and pass the resolutions required to give effect to the merger proposal. It states that the directors have given careful consideration to the merger proposal and set out some of the more relevant matters which were considered. Those considerations follow. In s 5.2 "perceived disadvantages" of the merger proposal are set out, albeit with a statement that the directors believe the advantages outlined in ss 3.3 and 5.1 outweigh any disadvantages that may arise from the merger proposal. The statement that the directors unanimously recommend the acceptance of the Scheme coupled with their joint reasons for so doing satisfies the requirements of Pt 3 of Schedule 8 that the Explanatory Statement set out, in relation to each director of the company, whether or not the director recommends the acceptance of the Scheme and his or her reasons (Item 8301). 28 Section 10.7 of the Explanatory Statement comprises a list of the directors of Foundation and the marketable securities in Foundation held by or on behalf of them (Item 8302(a)). There is a separate statement in s 1.2 at p 7, that the directors intend to vote in favour of the Schemes both for the Foundation Shares and the Foundation Options which they control (Item 8302(b)). The Explanatory Statement discloses that as at 26 March 2002, Michael Boyd, the chairman of directors of Foundation, has a relevant interest in 18.6 million LifeCare shares, representing 18.82% of its issued share capital. Section 10.8 states that, other than Boyd, no director of Foundation has any relevant interest in LifeCare (Item 8302(c)). Section 10.9 sets out payments and other benefits to directors, secretaries and executive officers of Foundation and states that with the exception of Michael Boyd and Ralph Shreeve, no directors, secretaries or executive officers of Foundation will receive any payment or other benefit through the Schemes other than an allocation of Scheme Consideration on equivalent terms to all Scheme Participants. As Chairman of the Merged Group, Boyd will be remunerated as a non-executive director of LifeCare. Shreeve will be offered the position of Managing Director of the Merged Group (Items 8302(d) and (e)). Section 10.10 dealing with directors' interests indicates that, other than as disclosed elsewhere in the Explanatory Statement or previously to the ASX, no director of Foundation has, or during the previous two years, has had any interest in the Schemes other than as a holder of, or of a relevant interest in, Foundation Shares and Foundation Options, nor any interest in any contract entered into by LifeCare, nor any interest as a creditor of Foundation (Item 8302(f)). It is also stated in s 10.11 that there have been no material changes to the financial position of Foundation since the half year report for the six months ended 31 December 2001 (Item 8302(h)). And in s 10.13 it is said that there is no other information material to the making of a decision in relation to the Schemes or a decision by Scheme Participants whether or not to agree to the Schemes being information within the knowledge of any director of Foundation or LifeCare or of a related company of either that has not previously been disclosed to Foundation Shareholders other than as set out in the Explanatory Statement or its appendices (Item 8302(i)). 29 According to s 10.14, as at the date of the Scheme Booklet, LifeCare had no interest in any Foundation Shares or Foundation Options. There is therefore no requirement by reason of Item 8303(a) for the provision of an independent expert report. The second condition which may give rise to that requirement is that of common directorship between the two companies (Item 8303(b)). It appears from s 10.10 that Michael Boyd was previously but is no longer a director of LifeCare. On that basis no independent expert report would appear to be required. However, as set out in the Explanatory Statement such a report has been commissioned and circulated. Indeed, having regard to the common shareholding, Boyd's former office as a director and his proposed assumption of office in the merged entity, it may be that the preparation of an independent expert report would have been a condition of approval of the meeting in any event. Only one report has been commissioned, albeit it was amended in one respect following discussions with ASIC. (Item 8304 does not apply.) 30 The Independent Expert Report does contain a statement of forecast earnings for Foundation for the year ended 30 June 2003 prepared by the management of Foundation. The firm preparing the report, Hall Chadwick Corporate Finance (WA) Pty Ltd, states that it has undertaken a review of the forecasts and that based on its review nothing has come to its attention which causes it to believe the key assumptions used do not provide a reasonable basis. It would seem therefore that the Report can be said to contain "a forecast of the profits or profitability of the company" which would, in the case of a report prepared pursuant to Item 8303, attract the requirement that it must not accompany the Explanatory Statement except with the consent in writing of ASIC and in accordance with such conditions (if any) as are stated by ASIC (Item 8305). Although it appears from the affidavit material that the report has been submitted to ASIC and, in effect, approved by it, there is no express written consent which would suggest that ASIC has addressed that question. Enquiries from the solicitor for the applicant yielded the advice that, as the Report was not commissioned pursuant to Item 8303, consent was not required under Item 8305. I am not persuaded that that is an answer to the requirement in Item 8305 which would seem to have a protective function to play in respect of forecast profits, not solely dependent upon it being mandatory pursuant to Item 8303. In this case, however, the forecasts are identified as management figures and are not in terms adopted by the Independent Expert Report. It will suffice that a statement be included in the Explanatory Statement to the effect that the forecast earnings in the Expert Report have not been included with the consent of ASIC because the Report was not mandated by Item 8303 of the Schedule. 31 Item 8306 is inapplicable. Item 8307 is complied with by reference to the formula of 3.8 LifeCare New Shares for each Foundation Share transferred and 3.8 LifeCare New Options for each Foundation Option transferred. 32 The LifeCare New Shares are not yet quoted on a Securities Exchange and it is intended, as noted in s 10.5 of the Explanatory Statement, that application will be made for the quotation of those shares on the Australian Stock Exchange within seven days of the Effective Date under the Scheme. Information in relation to trading in LifeCare shares required by Item 8309(2) is set out in s 10.15 of the Explanatory Statement. There is a statement as to the further intentions of the directors set out in s 10.19 which appears to comply with the requirements of Item 8310. 33 Having regard to the preceding matters, it appears that the Explanatory Statement complies with the requirements of the Act and the regulations subject to the absence of a written consent from ASIC in relation to the forecast of profitability in the Independent Expert Report. 34 Appendix 1 to the Explanatory Statement is a copy of the Implementation Agreement between Foundation and LifeCare. It contains covenants under which each agrees to give effect to the Schemes. Appendix 2 sets out the schemes of arrangement proposed. Appendix 3 is a Deed Poll by LifeCare "…for the purposes of covenanting in favour of each Scheme Participant to perform certain obligations". Appendix 4 sets out notices of the proposed meetings and other papers including proxy forms. Appendix 5 is the Independent Expert Report. There is a modification of that report required by ASIC which is not relevant for present purposes. The modified report was exhibited to an affidavit of Mr Wall which was read in Court on the hearing of the application. Whether the Application Should Be Granted 35 On the face of it the proposed Schemes have the potential to yield benefits to the Shareholders and Optionholders in the two companies. These are indicated in the Independent Expert Report as are perceived disadvantages. There is no class of Shareholder or Optionholder who at this stage appears to be materially disadvantaged by the Scheme proposals. That is not to say that different participants may not take different views depending upon particular factors, including taxation considerations relevant to their own circumstances. The Schemes if approved, will involve an exchange of listed shares and options on a 3.8:1 basis. Foundation will become a fully owned subsidiary of LifeCare. Orders necessary to give effect to the merger and in particular the transfer of liabilities to the Merged Group may be sought and made by the Court under s 413. 36 An application for leave to convene a scheme meeting is part of a three stage process, the Court's approval of the meeting, the members' or creditors' approval of the scheme and the Court's approval of the scheme. Owen J has observed that the practice has developed that the Court, on a first stage application, closely scrutinises the scheme documents. If it be of the view that the scheme would be unlikely to receive approval, then the Court should not give leave to convene the meeting - Re Bond Corporation Holdings Ltd (1991) 5 ACSR 304 at 316 and see Re Stockbridge Ltd (1993) 11 ACLC 201 (Murray J). It is however important to bear in mind that, by granting leave to convene the meeting, the Court does not give its imprimatur to the proposed scheme. If the arrangement is one that seems fit for consideration by the meeting of members or creditors and is a commercial proposition likely to gain the Court's approval if passed by the necessary majorities, then leave should be given - Re ACM Gold Ltd (1992) 10 ACLC 573 (O'Loughlin J). The Court is not required to give close consideration to the effects of the scheme upon individual members of the classes of members or creditors affected. So to do would be to "introduce burdensome and to a large extent ineffectual consideration at this interlocutory stage" - Re Jax Marine Pty Ltd (1967) 1 NSWR 145 at 148 (Street J). 37 The role of the Court in approving a meeting was discussed by Santow J in Re NRMA Ltd (2000) 33 ACSR 595. His Honour described the process under s 411 generally as supervisory and therefore "to a degree inquisitorial" as well as "potentially adversarial" in the event of opposition to the scheme. A distinction was to be drawn between the role of the Court prior to approving the scheme meeting and the role of the Court in considering whether to approve the scheme of arrangement after the members have voted in favour of the scheme. At the latter stage the Court has a discretion to make orders approving the scheme (at 601). 38 A threshold requirement is the Court's satisfaction that the Explanatory Statement provides proper disclosure as required in s 411(3). It must set out "all the main facts as will enable shareholders to exercise their judgment on the proposed scheme". Having regard to the requirement that such applications are to be made in a summary way, I am satisfied that the Explanatory Statement in this case does make adequate disclosure subject to the requirement I have foreshadowed in relation to the advice that ASIC has not given its consent to the forecast of earnings referred to in the Independent Expert Report. The Statement also, in my opinion, complies with the specific requirements of Pt 3 of Schedule 8 to the Corporations Regulations. 39 The question then to be addressed is whether what is proposed is an arrangement. The word "arrangement" is of wide import. As was said in Re NRMA Ltd, at 603: "Generally speaking, unless the arrangement is ultra vires the company or seeks to deal with a matter for which a special procedure is laid down by the Corporations Law or to evade a restriction imposed by the Corporations Law, almost any arrangement otherwise legal which touches or concerns the rights and obligations of the company or its members or creditors, and which is properly proposed, may come under s 411…" I accept that the proposed Schemes fall into the class of arrangements for the purposes of s 411(1) of the Act. 40 Foundation, which proposes the Scheme, is a Pt 5.1 body. A Pt 5.1 body is defined in s 9 of the Act as: "(a) a company; or (b) a registrable body that is registered under Division 1 or 2 of Part 5B.2." Plainly Foundation is a company. 41 It has been suggested that s 411 gives jurisdiction to order scheme meetings only where the schemes are properly proposed - Re NRMA Ltd. This involves reading the word "proposed" in s 411 as importing the requirement that the proposal is within the power of the relevant Pt 5.1 body to make. While ultra vires corporate action is hardly a concern given the wide-ranging powers conferred on companies today, there may be a question whether a proposal is made in bad faith. Such a case may arise "… where the majority are endeavouring to prefer their own interests over those of the minority" - Re Theatre Freeholds Ltd (1996) 14 ACLC 1150 at 1157. In the present case there does not appear to be anything on the material before me to suggest that the application is made in bad faith or for an improper purpose. 42 Section 411(2) conditions the power of the Court to make an order for a scheme meeting upon its satisfaction that ASIC has had a reasonable opportunity to examine the terms of the proposed arrangement and the draft explanatory statement relating to it and to make submissions to the Court. In this case it is apparent that ASIC has had that opportunity. Its letter of 4 June 2002 indicates that it has no objection to the proposed Scheme albeit the letter is not a statement of the kind referred to in s 411(17). 43 Section 411(17) conditions the Court's ultimate approval of a scheme upon fulfilment of one of two conditions. The first is the Court's satisfaction that the arrangement has not been proposed for the purpose of enabling any person to avoid the operation of any of the provisions of Ch 6. The second is that there is produced to the Court a statement in writing by ASIC stating that ASIC has no objection to the compromise or arrangement. The production of such a statement does not mandate approval, it is simply one of two alternative necessary conditions for approval. Strictly speaking, these conditions do not fall for consideration at this first stage which is concerned with approval of the proposed scheme meeting rather than of the Scheme itself. However, if it were already apparent that the proposed arrangement would serve the purpose of enabling a person to avoid the operation of the provisions of Ch 6, then approval for the meeting would not be ordered. On the materials before me there is no such indication. In so saying, I have regard to the observations of O'Loughlin J in Re ACM Gold at 580 that "Chapter 6 does not … dominate and take automatic precedence over the provisions of Chapter 5 and, in particular s 411". His Honour denied the broadly based proposition advanced in that case that an arrangement must be struck down if it or any part of it could have been implemented as a takeover scheme or by means of a takeover announcement. Such a proposition, his Honour regarded as "far too rigid" going on to say: "The mixture of strong control in Chapter 6 on the one hand … coupled with the legislature's willingness to make exceptions and grant exemptions from the provisions of Chapter 6 call for a liberal and practical interpretation of subs 411(17)." In this case, and for the purposes only of this application, I take some comfort from the fact that ASIC having had time to consider the Explanatory Statement and proposal has indicated, albeit informally, by letter that it has no objection to the proposed Schemes. 44 The Court at the stage of ordering a meeting to approve a scheme does not ordinarily go very far into the question of whether the arrangement is one which warrants the approval of the Court - Re NRMA Ltd at 605. That question is to be answered when the scheme returns to the Court for final approval. That is not to exclude the possibility that a scheme may appear on its face so blatantly unfair or otherwise inappropriate that it should be stopped in its tracks before going any further. The Court is not required to be satisfied either at the convening or approval stage that no better scheme could have been devised. The Scheme, on the face of it, is not obviously unfair or otherwise inappropriate. If there are interests adversely and unfairly affected then the probability is that the question will arise at either or both the Scheme meetings or the final approval stage. Conclusion 45 I am prepared to order that Foundation be at liberty to convene the Scheme meetings for Shareholders and Optionholders in terms of the minute of proposed orders. In so doing, it has been drawn to my attention that Rule 2.15 of the Corporations Rules would apply the procedural requirements of the Corporations Regulations 5.6.12 to 5.6.36A to a meeting ordered under Pt 5.1 unless otherwise directed by the Court. Having regard to the directions made as to notice, the small defined class of affected creditors, ie the Optionholders, and the defined class of Shareholders, I do not consider it necessary to impose the requirements of these Regulations which would not apply of their own force to meetings under that Part. There will be orders accordingly.

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