In the matter of GBST Holdings Limited [2019] NSWSC 1280

The Court's power to make orders under s 411(1) of the Corporations Act

1. Under s 411(1) of the Corporations Act, the Court has power to order a meeting of members to be convened, and to approve the applicable explanatory statement, where a compromise or arrangement is proposed between a Pt 5.1 body and its members or any class of them; an application for the order is made in a summary way by the body or by a creditor or member of the body; 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. The Court must also be satisfied that ASIC has had a reasonable opportunity to examine the terms of the proposed compromise or arrangement to which the application relates and a draft of the explanatory statement relating to the proposed compromise or arrangement, and make submissions to the Court in relation to the proposed compromise or arrangement and the draft explanatory statement.
2. Mr Thomas, who appears for GBST, submits and I accept that each of these matters is satisfied in this case. The scheme falls within the concept of a "compromise or arrangement" within the meaning of s 411(1) of the Act; and the Originating Process was served on ASIC on 23 August 2019, and a copy of a draft of the scheme booklet (including attachments and annexures) was provided to ASIC on that date, which is more than 14 days before the first hearing date, and ASIC has had a reasonable opportunity to examine the terms of the scheme. As I noted above, ASIC has also confirmed by letter that it does not currently propose to appear to make submissions, or intervene to oppose the scheme. Where these matters are satisfied, the Court has power to convene a meeting of GBST's members and approve the draft scheme booklet.

The exercise of the Court's discretion

1. Mr Thomas rightly points out that, once the preconditions to the exercise of the Court's power under s 411 of the Act are satisfied, the Court exercises a judicial discretion to determine whether to make the orders sought in respect of the scheme meeting. Mr Thomas refers to my summary of the manner in which that discretion is to be exercised in Re DUET Finance Ltd [2017] NSWSC 415 at [14]: "[T]hree of the schemes in issue are company schemes within the scope of s 411 of the Corporations Act. It is, of course, well-established that the Court will generally approve the convening of a meeting of shareholders to consider a proposed scheme if it seems fit for consideration by a meeting of members and a commercial proposition that, if passed by the requisite majorities, is likely to be approved by the Court on an uncontested application: Re ACM Gold Ltd; Re Mt Leyshon Gold Mines Ltd [1992] FCA 89; (1992) 34 FCR 530 at 535; Re The Trust Company Ltd [2013] NSWSC 1680 at [5]. … [T]he Court's approach at the first hearing is that it "will not ordinarily summon a meeting unless the scheme is of such a nature and cast in such terms that, if it receives the statutory majority at the … meeting the court would be likely to approve it on the hearing of a petition which is unopposed": FT Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1997) 3 ACLR 69 at 72; Australian Securities Commission v Marlborough Gold Mines Ltd [1993] HCA 15; (1993) 177 CLR 485 at 504. … [A]t the first hearing, the Court exercises a "supervisory jurisdiction" to review the scheme and raise any queries with the plaintiff, and the Court will intervene at the first hearing if it has any concerns, since the market will have regard to the orders made by the Court at the first hearing: Re Archean Gold NL (1997) 23 ACSR 143 at 146; Cleary v Australian Cooperative Foods Ltd [1999] NSWSC 991; (1999) 32 ACSR 701 at [46]. The Court does not substitute its commercial judgment for that of the members to whom the scheme is directed, but considers whether the scheme is one that sensible businesspeople might conclude is of benefit to members: Re Prime Infrastructure Holdings Ltd [2010] NSWSC 1104; (2010) 80 ACSR 193 at [13]; Re AXA Asia Pacific Holdings Ltd [2011] VSC 4 at [13]; Re Aspen Group Ltd [2015] NSWSC 1718 at [11]."
2. Mr Thomas in turn submits that the Court should convene the scheme meeting and approve the draft scheme booklet. He submits, and I accept, that the proposed transaction is fit for consideration by a meeting of GBST members, so far as it reflects a commercial proposition that, if passed by the requisite majorities, is likely to be approved by the Court on an uncontested application. As Mr Thomas pointed out, relevant matters include that GBST's board unanimously supports the scheme in the absence of a superior proposal; the consideration represents a premium to the price at which GBST shares traded, as calculated on some but not all bases, including by reference to the 30 day trading day volume weighted average price to 11 April 2019 (Ex 1, section 1.1); and Grant Thornton has concluded that the scheme is fair and reasonable and therefore in the best interests of GBST shareholders. Mr Thomas also submits, and I accept, that there are no discretionary matters warranting the refusal by the Court to convene the scheme meeting.

Particular issues

1. It is customary for a company which seeks to have a scheme convened to address several issues to which the Court may give particular attention prior to exercising the discretion conferred under s 411(1) of the Act.
2. First, Mr Thomas rightly recognises that Courts will generally have regard to whether the structure of the scheme mitigates any risk that the acquirer will not comply with its obligation to pay the scheme consideration to scheme members: Re SFE Corporation Ltd [2006] FCA 670; (2006) 59 ACSR 82 at [4]; Re APN News & Media Ltd [2007] FCA 770; (2007) 62 ACSR 400 at [23]; Re Macquarie Capital Alliance Ltd [2008] NSWSC 745; (2008) 67 ACSR 484 at [43]; Re Simavita Holdings Ltd [2013] FCA 1274 at [43]-[44]; Re DUET Finance Ltd above at [18]; Mirvac Funds Management Ltd in its capacity as responsible entity of Mirvac Industrial Trust [2014] NSWSC 1569 at [7]ff. I am satisfied that cll 4.2 and 5.1 of the scheme address that issue by ensuring that the transfer of the scheme shares to FNZ Sub does not occur until an amount equal to the aggregate scheme consideration payable to scheme shareholders has been deposited in clear funds into an Australian dollar denominated trust account operated by GBST as trustee for the scheme shareholders. As Mr Thomas points out, that protection is reinforced by the obligations assumed by FNZ and FNZ Sub under the FNZ Deed Poll. As Mr Thomas rightly points out, materially identical arrangements have been held to be sufficient in previous cases: Re APN News & Media Ltd above at [23]; Re Coles Group Ltd [2007] VSC 389; (2007) 25 ACLC 1380 at [38]; Re Hostworks Group Ltd [2008] FCA 64; (2008) 26 ACLC 137 at [32].
3. Second, Mr Thomas addresses exclusivity provisions under the Scheme Implementation Deed. Mr Thomas points out that cl 11.2 of that deed imposes "no shop" and "no talk" restrictions on GBST and cl 11.4 requires GBST to notify FNZ of Competing Proposals (as defined), although the no talk restrictions are subject to a "fiduciary exception" under cl 11.3 of the Scheme Implementation Deed. Mr Thomas submits, and I accept, that exclusivity restrictions in this form are now commonplace in s 411 schemes, and the restrictions imposed on GBST are not inconsistent with those contemplated by Takeovers Panel, Guidance Note 7: Lock-up devices. Mr Thomas points out that neither that Guidance Note nor prior authority have required that "no shop" provisions be subject to a "fiduciary exception": Re Coles Group Ltd above at [62]-[63]; Re Macquarie Private Capital A Ltd [2008] NSWSC 323; (2008) 26 ACLC 366 at [18]-[19]; Re Hostworks Group Ltd above at [34]-[37]; Re Investa Listed Funds Management Ltd as responsible entity for the Armstrong Jones Office Fund and the Prime Credit Property Trust [2018] NSWSC 1766 at [15]; Re Villa World Ltd [2019] NSWSC 1207 at [23].
4. Mr Thomas also notes that, under cl 11.5 of the Scheme Implementation Deed, FNZ is allowed a matching right in respect of a Competing Proposal. Mr Thomas points out that, although the Takeovers Panel has recognised the possibility that a matching right can be anti-competitive in some cases, the notification of a Competing Proposal would be expected to occur under GBST's continuous disclosure obligations in any event, and the process provided for in the matching right regime corresponds "to the course that a prospective bidder would expect [GBST] to take, even without such a provision, in order to obtain the best possible offer if competing bidders emerged": Re DUET Finance Ltd above at [24]. Mr Thomas submits, and I accept, that matching rights are also increasingly commonplace in schemes of arrangement: Re Veda Group Ltd [2015] FCA 1506 at [10]; Re Toll Holdings Ltd [2015] VSC 123 at [35]-[36]; Re SAI Global Ltd [2016] FCA 1312 at [61]. The exclusivity provisions are also sufficiently disclosed in the scheme booklet (Ex 1, section 8.10(b)) and there is evidence that they were negotiated at arm's length and reflect the basis on which FNZ would enter the transaction.
5. Third, Mr Thomas points out that cl 12.2 of the Scheme Implementation Deed provides for the payment of a break fee of A$2,700,000 in specified circumstances, which represents 1% of the equity value of GBST, which is approximately A$268,130,797.55 (as implied by the scheme consideration, assuming that all existing GBST options and performance rights vest in full and result in the issue of additional GBST shares, other than certain GBST options that are to be satisfied by the acquisition and transfer to Mr DeDominicis of issued GBST shares) (Bannan 10.9.19 [33]). Mr Thomas submits, and I accept, that break fees are common features in schemes of arrangement and will be permitted unless "the amount of the break fee was such that it could influence voting at the meeting to be convened or if there are some other unusual circumstances": Re SFE Corporation Ltd above at [6]-[7]; Re APN News & Media Ltd above at [43]; Re Hostworks Group Ltd above at [40]; Re Investa Listed Funds Management Ltd as responsible entity for the Armstrong Jones Office Fund and the Prime Credit Property Trust above at [16]; Re Villa World Ltd above at [24]. Mr Thomas submits, and I accept, that neither of these concerns arises here. Mr Thomas also submits, and I also accept, that the quantum of the fee is consistent with the Takeovers Panel's guideline of a maximum of 1% of equity value in Guidance Note 7 above, which has been applied in earlier cases: Re APN News & Media Ltd above at [55]; Re Hostworks Group Ltd above at [40]ff; Re Coles Group Ltd above at [69]-[74]. As Mr Thomas points out, the break fee is disclosed in section 8.10(c) of the scheme booklet and the evidence addresses the matters relevant to its negotiation to which Lindgren J referred in Re APN News & Media Ltd above at [55].
6. Fourth, Mr Thomas points out that cl 8.2 of the scheme contains a "deemed warranty", by which scheme shareholders are deemed to have warranted to GBST and FNZ Sub that the scheme shares are fully paid, and free from all mortgages, charges, liens, encumbrances, pledges, security interests and interests of third parties. I accept that clauses of this kind are permissible and now commonplace in schemes: Re APN News & Media Ltd above at [62]; Re Hostworks Group Ltd above at [41]; Re Coles Group Ltd above at [45]; Re Mitchell Communication Group [2010] VSC 423 at [10]-[12]; Re Ardent Leisure Ltd [2018] NSWSC 1665 at [26]; Re Villa World Ltd above at [25]. The existence of the deemed warranty is disclosed in the scheme booklet, as contemplated by Re APN News & Media Ltd above at [63].

Recommendation of GBST's chief executive officer and managing director in respect of the scheme

1. Fifth, Mr Thomas identifies an issue as to the chief executive officer's and managing director's ability to make a recommendation to shareholders in respect of the scheme. Mr Thomas points out that, if the scheme becomes effective, Mr DeDominicis, GBST's chief executive officer and managing director, will be entitled to a cash payment of up to A$490,000 (in aggregate) under the terms of GBST's Deferred Cash Bonus long term incentive plan and short term cash incentive plan, as described in section 8.5 of the scheme booklet. Mr DeDominicis also holds or controls 699,055 GBST shares (which have a value of approximately A$2.691 million based on the consideration of A$3.85 for each GBST share), and holds 1,059,436 GBST options (which have a maximum value of approximately A$1.895 million based on the consideration of A$3.85 for each GBST Share). If the scheme becomes effective, the GBST options held by Mr DeDominicis will be dealt with as described in section 8.12 of the scheme booklet, and Mr DeDominicis will receive the total cash consideration (as defined in the scheme booklet) for each GBST share he holds at the scheme record date, including any GBST shares that are granted to him following exercise of his GBST options.
2. Mr DeDominicis' interest is disclosed in the scheme booklet, in the context of GBST's directors' unanimous recommendation in respect of the scheme. Mr Thomas points out that, given the importance of the scheme and Mr DeDominicis' role in the management of GBST, the GBST board (absent Mr DeDominicis) and, separately, Mr DeDominicis, have determined that Mr DeDominicis can, and should if he wishes to do so, make a recommendation on the scheme notwithstanding the nature and quantum of the benefits he will receive if the scheme becomes effective. This view is disclosed in the scheme booklet in the chairman's letter and in section 1.1.
3. Mr Thomas recognises that, where a director will receive a substantial benefit in relation to a scheme which other shareholders will not receive, that benefit should be fully and prominently disclosed as a matter for shareholders to take into account when considering that director's recommendation: Re SMS Management & Technology Ltd [2017] VSC 257 at [22]-[27]; Re Nzuri Copper Ltd [2019] WASC 189 at [88]; Re Ruralco Holdings Ltd [2019] FCA 878 at [28]; Re Kidman Resources Ltd [2019] FCA 1226 at [115]. He points out that such disclosure of Mr DeDominicis' interest is made in the scheme booklet.
4. Mr Thomas submits that, given these disclosures, it is not strictly necessary for the Court to consider whether it is otherwise appropriate, as a general rule, for a director to make a recommendation in favour of a scheme where that director will receive a substantial financial benefit from a scheme's approval. However, he also acknowledges that some cases have expressed the view that such a director should not make such a recommendation: Re Gazal Corporation Ltd [2019] FCA 701 at [30]; Re Navitas Ltd (No 2) [2019] WASC 218 at [32]. On the other hand, O'Callaghan J left open that such a recommendation could be made, with adequate disclosure, in Re Kidman Resources Ltd above at [105]-[115], following the approach of Robson J in Re SMS Management & Technology Ltd above at [25]-[27]. His Honour there referred to the combined effect of s 412(1)(a)(ii) of the Act, and reg 5.1.01(1)(b) and reg 8301(a) of Schedule 8 of the Corporations Regulations 2001 (Cth), and the ordinary expectations of shareholders and observed (at [113]ff) that: "It seems to me that in the ordinary case a shareholder would expect each director, whether or not any one or more of them was "the main moving force" behind the company, to make their recommendation. Such an expectation is clearly reflected in the regulations. As I said, reg 8301(a) obliges "each" director make a recommendation, unless they are unavailable to do so, or they do not desire to do so, or they are not justified in doing so (and, if so in any such instance, to explain why). As counsel for Kidman submitted, and I agree, each director is required to engage actively with the proposed scheme that is to be put before the shareholders, so that the shareholders have the benefit and guidance of the knowledge and expertise of the directors - who, after all, are the persons responsible for the operation and management of the scheme company and who, by reason of their position, ought to be best placed to express a view whether or not the scheme is in the shareholders' best interests. They are, in my view, ordinarily obliged to do so even if they stand to gain personally in the form of some specific benefit if the scheme is approved, provided the benefit is sufficiently explained to shareholders. Although Farrell J in Re Gazal referred (at [30]) to the "common practice" of a director declining to make a recommendation to shareholders as to how they should vote and explaining the reason for so declining by reference to the substantial benefit to be received by that director if the scheme proceeds, I am, with great respect, unaware of any such practice."
5. Mr Thomas submits that the reasoning in Re SMS Management & Technology Ltd above and Re Kidman Resources Ltd above should be preferred to that in Re Gazal Corporation Ltd above and Re Navitas Ltd (No 2) above on this issue. Mr Thomas also submits that, even if the latter approached were followed, it would not lead to the result that a scheme meeting would not be convened or a scheme would not ultimately be approved, where it is a matter for the relevant director to decide whether to make a recommendation, and full disclosure of the interest is made.
6. I addressed this issue in Re Villa World Ltd above at [38]ff, in a judgment delivered after this application was heard and orders were made in it, and observed that: "On balance, and for three reasons, I prefer the approach adopted in Re SMS Management & Technology Ltd above and Re Kidman Resources Ltd above to the approach adopted in Re Gazal Corporation Ltd above and Re Navitas Ltd (No 2) above. First, it seems to me that reg 8301(a) of Schedule 8 of the Corporations Regulations contemplates that a director should make a recommendation and give reasons for doing so, unless he or she does not feel justified in doing so; and, as I will note below, there would be real inconsistency in a director at once supporting a scheme as a member of the board and then taking the position in the scheme booklet that he or she was not justified in making a recommendation about it to shareholders. Second, I am not persuaded that there is or should be any general rule or principle that it is preferable that a director should not make a recommendation to shareholders on the basis of an interest in the outcome of the scheme arising from incentive or performance rights or the like. It seems to me that in many, or most cases, shareholders will benefit from such a recommendation, with appropriate disclosure as to the nature of the interest to allow them to assess the weight to be given to it. The importance of such disclosure was, of course, recognised in each of the cases to which I have referred above and, in Re Ruralco Holdings Ltd above, Farrell J made orders convening a scheme meeting although a director had there recommended to shareholders that they vote in favour of the scheme, where the director would receive an immediate cash payment under an executive performance plan as a result of implementation of the scheme. Third, there will be many cases where an executive director of a scheme company, who has an interest in the outcome of a scheme arising from incentive or performance rights or the like, would properly participate in the board's decision whether to go forward with the proposed scheme, as distinct from any decision as to how his or her incentive or performance rights should be treated if the scheme is implemented. Possibly rarely, a director in that situation may be entitled to participate in board decisions concerning the proposed scheme because the benefit arising from any incentive or performance rights or the like that would arise from implementation of the scheme is not a material personal interest for the purposes of s 195 of the Corporations Act, and the company's constitution permits his or her participation after he or she has disclosed his or her interest. Second, a director in that situation may be entitled to participate in such board decisions because that interest falls within an exception in s 195(1A), where it is not required to be disclosed under s 191 of the Act, and the company's constitution permits his or her participation. Third, a director in that situation may be entitled to participate in such board decisions because other directors have authorised his or her participation in them in the manner contemplated by s 195(2) of the Corporations Act. It seems to me that, where a director was entitled to and did participate in a decision that a company should go forward with a scheme, there would be little utility and real inconsistency in then preventing that director from making a recommendation to shareholders consistent with the view that he or she took as a member of the board, subject to appropriate disclosure of his or her personal interest in the explanatory materials for the scheme." [Footnote omitted]
7. I continue to take that view. The recommendation made by Mr DeDominicis, in the context of disclosure of the financial benefits which he would receive if the scheme proceeds, does not provide reason not to convene the scheme meeting or approve the explanatory material in respect of the scheme for publication.

Whether separate classes are necessary at the scheme meeting

1. Mr Thomas also points out that GBST has options and performance rights on issue, comprising 1,887,740 GBST Options (FY19 CEPOs), 1,694,003 GBST Options (FY20 CEPOs) and 279,246 GBST Performance Rights. If the scheme becomes effective, these securities will vest and be exercised prior to FNZ Sub acquiring the scheme shares. Section 8.12 of the scheme booklet indicates that the holders of those securities, after the vesting and exercise of them by the implementation date, would obtain a value equivalent to or substantially the same as the scheme consideration for each security less, in the case of GBST Options, the "exercise price" for the applicable GBST Option.
2. As Mr Thomas points out, whether or not separate classes are required depends on whether securityholders have different rights, as distinct from different interests, that are so dissimilar as to make it impossible for them to consult together with a view to their common interest: Sovereign Life Assurance Company v Dodd [1892] 2 QB 573 at 583; Re Opes Prime Stockbroking Limited [2009] FCA 813; (2009) 179 FCR 20 at [64]; Re Foster's Group Ltd (No 2) [2011] VSC 547 at [38]-[43]; Re Ardent Leisure Ltd above at [25]; Re Villa World Ltd above at [29]. Mr Thomas submits, and I accept, that the holders of these securities (so far as they also hold GBST shares at the time for determining entitlements to vote at the scheme meeting) do not constitute a different class of shareholder, because there is no relevant distinction between the rights of scheme shareholders and the rights of holders of these securities.

Orders

1. I am satisfied that there is no reason that the scheme should not be put to GBST's shareholders for their consideration or that it could not be approved at the second Court hearing if it receives the requisite shareholder approvals. The Court should therefore make orders convening the scheme meeting. I am also satisfied that the scheme booklet should be approved for distribution to GBST's shareholders. The other orders sought by GBST are uncontroversial. I therefore made orders in accordance with those proposed by GBST at the hearing on 11 September 2019.

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: 25 September 2019