In the Matter of National Australia Bank Ltd v National Australia Bank Ltd [2016] VSC 62

2 On 7 December 2015 I made the following orders, ("7 December Orders"):

(a) that NAB convene and hold a meeting ("Scheme Meeting") of NAB Shareholders to consider and, if thought fit, resolve to approve (with or without modification) the Scheme proposed to be made between NAB and NAB Shareholders, the terms of which were set out in Annexure A of the Scheme Booklet ("Scheme Booklet") referred to in the 7 December Orders;

(b) that the Scheme Meeting be held on 27 January 2016 commencing from 10:00am (AEDT) at the Melbourne Convention and Exhibition Centre;

(c) that the Scheme Meeting be convened by sending (in hard copy, or an email containing electronic links, as the case may be) a number of documents including, inter alia, a document substantially in the form of the Scheme Booklet, which included (in Annexure C), the notice of Scheme Meeting;

(d) orders in relation to the manner in which the Scheme Meeting was to be convened and held, and also orders in relation to the general meeting associated with the Scheme ("General Meeting").

3 The Scheme Meeting was held on 27 January 2016 at the time and location specified in the 7 December Orders.[1] The General Meeting was also held at the time and location contemplated in the Scheme Booklet.[2] Dr Kenneth Ross Henry chaired both of the meetings. [3] The Scheme resolution was passed by the requisite majorities, and each of the resolutions at the General Meeting was also passed by the requisite majorities.[4]

4 At the inquiry hearing on 28 January 2016, Associate Justice Gardiner declared by order, in accordance with rule 16.6 of the Supreme Court (Corporations) Rules 2013 (Vic), that the Scheme Meeting ordered to be convened by the 7 December Orders was duly convened and held and that the resolution considered at the Scheme Meeting was duly passed.

5 By letter dated 1 February 2016, under s 411(17)(b) of the Corporations Act 2001 (Cth), the Australian Securities and Investments Commission ("ASIC") has advised that it has no objection to the Scheme.

6 No notice of objection to the proposed approval of the Scheme has been served on, or received by, King & Wood Mallesons.

(a) approving the Scheme pursuant to section 411(4)(b) of the Corporations Act; and

(b) exempting it from compliance with section 411(11) of the Corporations Act pursuant to section 411(12) of that Act.

8 The application is made by originating process filed on 24 July 2015.

9 I approved the Scheme and made orders on 1 February 2016. I indicated that reasons would follow. These are the reasons.

10 NAB was registered as a public company limited by shares in Victoria on 23 June 1893. NAB was previously named:

(a) National Commercial Banking Corporation of Australia Limited - from 4 January 1983 to 4 October 1984; and

(b) The National Bank of Australasia Limited - from 23 June 1893 to 4 January 1983.

11 NAB was admitted to the official list of ASX on 1 January 1974 and has the ASX code "NAB". Its registered office is at Level 1, 800 Bourke Street, Docklands, Victoria.

12 NAB is an Australian based major financial services organisation servicing over 12 million customers, operating more than 1,500 branches and business banking centres, with more than 560,000 shareholders and approximately 42,000 employees. For the financial year ended 30 September 2015, NAB generated cash earnings of approximately $5.84 billion.[5]

13 NAB's capital structure as at 26 November 2015 is as follows:

14 As at 26 November 2015, the total number of NAB fully paid shareholders was 2,626,097,214. The market capitalisation of NAB as at the close of business on 26 November 2015 was $77,968,826,283.66, being 2,626,097,214, the total number of fully paid shares, multiplied by $29.69, the closing share price of NAB fully paid ordinary shares on 26 November 2015. In addition, there are 63 NAB partly paid shareholders, whose shares are registered in the name of one legal holder.

15 CYB Investments Limited ("CYBI") (formerly National Australia Group Europe Limited (NAGE)) is a wholly owned subsidiary of NAB that owns and operates the UK retail and business banks known as Clydesdale Bank and Yorkshire Bank. CYBI currently represents a relatively small proportion of NAB's business, accounting for 3.3% of NAB's cash earnings for the year ended 30 September 2015 and 8.8% of total assets as at 30 September 2015.

16 At present, the shares in CYBI are held by NAB, having been transferred to NAB by its wholly owned subsidiary, National Equities Limited ("NEL"), which had previously held the shares in CYBI. NAB and CYBG have entered into a sale and purchase agreement under which, subject to the Scheme becoming effective, NAB has agreed to transfer the entire issued share capital of CYBI to CYBG, in consideration for CYBG issuing new ordinary shares in CYBG to NAB.

17 The CYBG Group includes CYBG and CYBI and its subsidiaries.

18 With over 175 years of history, CYBG Group is a leading mid-sized UK retail and SME bank with a long-established customer franchise across its core regions (Scotland, North East England, North West England, Yorkshire and the Humber) and selected national markets. Headquartered in Glasgow, Scotland, CYBG Group offers through its strong local community brands, Clydesdale Bank and Yorkshire Bank, a full range of banking products and services, including mortgages, current accounts, deposits, term lending, personal loans, working capital solutions, overdrafts, credit cards and payment and transaction services. CYBG Group is also one of only a small number of banks in the world that issues banknotes.

19 Currently a wholly-owned subsidiary of NAB, following the Demerger, CYBG will be independent of the NAB group and will apply for CYBG Shares to be admitted to the premium listing segment of the UKLA Official List and to the LSE for such shares to be admitted to trading on the LSE's main market for listed securities. CYBG will also apply for admission to the ASX Official List as an ASX foreign exempt listing and for official quotation of the CYBG CDIs on ASX.

20 The background to and reasons for the Demerger are explained in the chairman's letters to NAB securityholders, a version of which was included in the package of materials despatched to each NAB securityholder.

21 In October 2014, NAB signalled that it was considering exiting its CYBG Group operations as part of NAB's strategy to focus more on its core Australia and New Zealand franchises. NAB is proposing to exit its investment in CYBG Group by way of the Demerger. The NAB Directors believe that the benefits of operating a retail and SME banking business in multiple geographies are becoming more limited and difficult to achieve given the growing complexity and differences in regulation and operating environments. CYBG Group is such a business, operating within a different geography, macroeconomic environment, economy and regulatory regime to NAB's core Australia and New Zealand franchises. Increasingly, NAB's core business and the CYBG Group business have operated separately, with different banking products, marketing and branding, infrastructure and operational functions. As such, this has limited the extent of any synergies between NAB's core Australia and New Zealand franchises and the CYBG Group business, and has led to the CYBG Group business consuming a disproportionate share of NAB Board and management resources.

22 For these reasons, the NAB Directors believe that the Demerger will reduce the risk and complexity of managing NAB, and accordingly, reduce the risk for investors associated with an investment in NAB. Separating the businesses into two independent corporate groups will allow each group to focus more on improving performance in its own home markets, local strategy, business operations and growth objectives and to pursue its own value maximising priorities. In addition, the separation of the two businesses will allow both NAB and CYBG Group to adopt independent capital structures, dividend policies and financial policies best suited to their individual regulatory and operating requirements and business performance.

23 As part of the structure to effect the Demerger, a new public limited company, CYBG, was incorporated in England and Wales as a wholly owned subsidiary of NAB.

24 NAB and CYBG have entered into an Implementation Deed.[6] The key terms of the Implementation Deed are described in section 4.8.1 (page 157) of the Scheme Booklet. Set out in Annexure A to the Scheme Booklet is a copy of the proposed Scheme.

25 The Demerger is to be effected by the terms of the Implementation Deed and the Scheme. In essence, the proposed Demerger steps are as follows:

(a) NEL, the wholly owned subsidiary of NAB which owned all of the shares in CYBI, has transferred its entire shareholding in CYBI to NAB;

(b) NAB and CYBG have entered into a sale and purchase agreement under which, subject to the Scheme becoming effective, NAB has agreed to transfer the entire issued share capital of CYBI to CYBG in consideration for CYBG issuing new ordinary shares in CYBG to NAB;

(c) there will be a Scheme Meeting, followed immediately by an extraordinary general meeting ("General Meeting");

(d) at the Scheme Meeting, NAB Shareholders will be asked to consider and vote on the Scheme Resolution; the notice of Scheme Meeting is set out in Annexure C to the Scheme Booklet;

(i) NAB Shareholders will be asked to consider and vote on a NAB capital reduction resolution ("NAB Capital Reduction Resolution"), and to provide confirmatory approval for a CYBG capital reduction ("CYBG Capital Reduction"); and

(ii) holders of National Income Securities, NAB CPS and NAB CPS II (as discussed below) ("NAB Tier I Securityholders") will be asked to consider and vote on the NAB Capital Reduction Resolution; NAB Tier 1 Securityholders are not entitled to and will not vote on the Scheme Resolution, and will not participate in the approval for the CYBG Capital Reduction; the notice of General Meeting is set out in Annexure D to the Scheme Booklet;

(f) the Demerger is not conditional on the CYBG Capital Reduction Resolution being passed;

(g) if the Scheme Resolution and the NAB Capital Reduction Resolution are passed by the requisite majorities at the meetings, the Court approves the Scheme and all other conditions precedent to the Scheme are satisfied or waived:

(ii) the NAB Capital Reduction will occur. In that regard:

1. under sections 256B and 256C of the Corporations Act, a company may reduce its share capital if the reduction is approved by a resolution passed at general meeting;
2. the members of NAB that have a right to vote at the General Meeting comprise NAB Shareholders, as well as the NAB Tier I Securityholders;

1. NAB will reduce its capital by the Capital Reduction Aggregate Amount, being broadly an amount calculated by multiplying the number of NAB Shares on issue at the Scheme Record Date by the average volume-weighted average price of CYBG Shares and CYBG CDIs as traded on LSE and/or ASX (assuming admission to these exchanges occurs) respectively over the first 5 trading days following the Effective Date, divided by four. A similar mechanism for determining a capital reduction amount was adopted in other recent demergers involving schemes of arrangement, such as Brambles/Recall; International Coal Holdings Limited; PBL; and

1. entitlements under the NAB Capital Reduction will not be distributed in cash. Rather, the entitlements of Scheme participants will be satisfied by the transfer of CYBG Shares or the issue of CYBG CDIs (as appropriate) to, or for the benefit of, the Scheme participants under the Demerger (see the notice of general meeting in Annexure D (page 311) of the Scheme Booklet);

(iii) NAB will transfer its entire shareholding in CYBI to CYBG in accordance with the terms of the Sale and Purchase Agreement, in consideration for CYBG issuing new ordinary shares:

1. as to 75% of CYBG's issued share capital, to NAB as nominee and bare trustee for NAB Shareholders or the sale agent, and immediately following such issue, NAB will transfer legal title to such CYBG Shares to or for the benefit of NAB Shareholders; in that regard:
   1. eligible NAB Shareholders will receive one CYBG CDI or CYBG Shares (as the case may be) for every four NAB Shares which they hold as at the Scheme Record Date;
   2. in respect of each Ineligible Shareholder, the CYBG Shares which they would otherwise have received will be transferred to the Sale Agent and sold, with the proceeds being remitted to them as soon as practicable following the sale of those shares;
   3. in respect of each eligible NAB Shareholder who holds 2,000 NAB Shares or less as at the Scheme Record Date and who elects to sell their CYBG Securities through the Sale Facility, the CYBG Securities which they would have otherwise received will also be transferred to the Sale Agent and sold with the proceeds being either remitted to them as soon as practicable following the sale of those securities, or at their election, donated to ShareGift, a charity; and
   4. CYBG will apply to the UKLA for admission to the official list of LSE and for official quotation of the CYBG Shares on LSE, and will also apply to ASX for admission to the official list of ASX and for official quotation of the CYBG CDIs on ASX, and CYBG will then be a separate listed company;
2. as to 25% of CYBG's issued share capital, to NAB, which shares are expected to be sold by NAB to institutional investors under an Institutional Offer conducted concurrently with the Demerger. If it proceeds, the proceeds of the Institutional Offer will be remitted to NAB. The Demerger is not conditional on the Institutional Offer proceeding. If the Institutional Offer does not proceed at all, NAB will retain 25% of the CYBG Shares, in which case it intends to sell those retained CYBG Shares as soon as practicable, having regard to market conditions and the price it can obtain, and to retain the proceeds of sale. If NAB does not proceed with the full Institutional Offer, it will only be able to sell its retained CYBG Shares following the expiry of certain agreed lock up arrangements (under which CYBG Shares will be subject to a lock up period commencing on the first day of conditional trading of CYBG Shares on LSE until the date falling 90 days after the admission of CYBG to the LSE); and

(iv) subject to confirmation being obtained in accordance with the Companies Act 2006 (UK), the CYBG Capital Reduction will occur, under which CYBG will reduce its share capital to create distributable reserves in CYBG.

26 Details of how the Demerger is to be undertaken are set out in section 4 (pages 146-171) of the Scheme Booklet, on pages 1-2 of the concise independent expert's report (being pages 192-193 in section 8 of the Scheme Booklet) prepared by Grant Samuel & Associates Pty Limited ("Grant Samuel") and in paragraphs 58-83 of the Drummond Affidavit). Details of the Sale Facility for the Ineligible Shareholders and those NAB shareholders with small holdings (being 2,000 NAB Shares or less) who elect to sell the CYBG Securities to which they would otherwise be entitled are set out in paragraphs 63-67 of the Drummond Affidavit and in section 4.5 (pages 152-154) of the Scheme Booklet.

27 As noted above, the effect of the Demerger will be that 75% of the issued shares in CYBG will have been divested by NAB. NAB intends to sell the remaining 25% of the issued shares in CYBG through an Institutional Offer. The price of CYBG Shares under the Institutional Offer will be determined following a period of investor marketing and a bookbuild process. The proceeds (net of underwriting commissions, taxes and other expenses) from the sale of CYBG Shares under the Institutional Offer will be remitted to NAB. Under certain circumstances NAB may elect not to proceed with the Institutional Offer at all, or in part, in which case it will retain the relevant CYBG Shares.

28 As pointed out orders were made on 1 February 2016 and the Demerger is in the process of being implemented.

29 The statutory framework relating to schemes of arrangement involves a three stage process:

(a) the hearing of an application to the court to convene a meeting or meetings: section 411(1);

(b) the holding of the meeting or meetings: section 411(4)(a); and

(c) the hearing of an application to the court to approve the scheme (preceded by an application to an Associate Judge): section 411(4)(b), section 411(6) and rule 16.6 of the Supreme Court (Corporations) Rules 2013 (Vic).

30 Section 411(1) of the Corporations Act confers a discretion on the Court to order a meeting of members to be convened, and to approve the applicable explanatory statement, where the following matters are satisfied:

(a) a compromise or arrangement is proposed between a Pt 5.1 body and its members or any class of them;

(b) application for the order is made in a summary way by the body or by a creditor or member of the body;

(c) 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

(d) the Court is satisfied that ASIC has had a reasonable opportunity to:

(i) 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

(ii) make submissions to the Court in relation to the proposed compromise or arrangement and the draft explanatory statement.

31 In Re NRMA Ltd[7] Santow J made the following observations as to the role of the Court under section 411(1) of the Act:

A distinction should be drawn between the role of the Court prior to approving the scheme meeting (that is, at the convening stage) 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 (the approval stage). At the approval stage, the court pursuant to s 411(6) has a discretion to make orders approving the scheme. Following Court approval, the arrangement generally takes immediate effect in accordance with its terms.

...

While at the meeting convening stage the Court must on the information then before it be satisfied as to compliance with these threshold statutory and regulatory requirements, the Court does not determine the business or commercial efficacy of the proposed arrangement. The terms of s 411(6) make clear that questions going to whether the scheme or arrangement is "just" or "fair" are to be considered by the court after the scheme has been approved by the members of the scheme company and then only in the limited sense I have earlier described.

...

Thus, at the stage of ordering a meeting to approve the scheme, the Court does not ordinarily go very far into the question of whether 'the arrangement is one that warrants the approval of the Court'. That question is to be answered when the scheme returns to the Court for final approval pursuant to s 411(6). I say "ordinarily" because it is conceivable - this is not such as case- that a scheme on its face is so blatantly unfair that it should be stopped in its tracks before even the meeting stage.

32 Each of these matters was satisfied with respect to the Scheme by reason of the following matters:

(a) NAB is a Pt 5.1 body as defined in section 9 of the Act.

(b) the Scheme falls within the concept of an "arrangement" within the meaning of section 411(1) of the Act.

(c) NAB has applied, by way of Originating Process, for an order pursuant to section 411(1) of the Act.

(d) ASIC has been provided with the requisite notice of this application.

33 Accordingly, the 7 December Orders were made convening a meeting of NAB Shareholders in order to approve the draft scheme booklet, pursuant to section 411(1) of the Corporations Act.

34 In making the 7 December Orders I did not consider that there were any other classes of shareholders or members or groups that necessitated the holding of a separate meeting.

35 The meeting is required to be held pursuant to the orders made for the convening of the meeting and pursuant to the detailed regulations governing such meetings. The Corporations Act specifies the relevant majority that is required.

36 The role of the hearing before the Associate Justice is to examine and confirm that the meeting was properly held and the resolutions validly passed.

37 In approving a scheme of arrangement, the role of the Court is well settled. It is supervisory in nature, requiring the Court to be satisfied that there has been no oppression and that the compromise or arrangement is one which is capable of being accepted by shareholders looking to their own commercial advantage: Re NRMA Ltd,[8] applying Re Dorman Long & Co Ltd[9] and Scottish Insurance Corp Ltd v Wilsons & Clyde Coal Co Ltd.[10]

38 The following principles, restated by Santow J in Re NRMA Ltd,[11] are relevant:

When the approval stage is reached, the court's task is well settled, and accurately set out in I A Renard and J G Santamaria in Takeovers and Reconstructions in Australia, Butterworths, Sydney, 1990, (looseleaf), at 15,061:

"... the court will determine: (1) whether all the conditions required by CL s 411 have been complied with; (2) whether the majority of members or creditors, though acting regularly, have acted in good faith and not in pursuit of some illegitimate purpose; and (3) whether the proposal was 'at least so far fair and reasonable, as that an intelligent and honest man, who is a member of that class, and acting alone in respect of his interest as such member, might approve it' (per Fry LJ in Re Alabama, New Orleans, Texas and Pacific Junction Railway Co [1891] 1 Ch 213 at 247." [footnote abbreviated].

See also the reasons of Warren J in both Re Timor Sea Petroleum NL [2000] VSC 337; (2000) 35 ACSR 186 at 196 and Re Victorian Grain Services Limited [2000] VSC 334; (2000) 35 ACSR 198 at 201; the application of the principles in Re Alabama by Robson J in Re Coles Group Limited (No 2) [2007] VSC 523; (2007) 215 FLR 411 at [9], Re Lonsdale Financial Group Limited (No 2) [2007] VSC 525 at [12]-[13]; Re IWL Limited [2007] VSC 530 and Re Mitre 10 Ltd [2010] VSC 100 at [12], by Judd J in Re Lion Selection Ltd [2009] VSC 546 at [17], by Croft J in Re Cytopia (No 2) [2010] VSC 4 at [9]- [11], and by Robson J in Re Toll Holdings Limited (No 2) [2015] VSC 236 at [9].

39 In Re Coles Group Limited (No 2), Robson J, in considering the role of the Court at the approval stage also made reference at [8] to the judgment of Emmett J in Re Central Pacific Minerals NL[12] and noted as follows:

In Re Central Pacific Minerals NL [2002] FCA 239, Emmett J of the Federal Court of Australia said that the court must satisfy itself that the arrangement is fair and equitable between different classes of security holders, and as between security holders and those who will benefit from it. He also said that the jurisdiction of the court in relation to an arrangement is supervisory, in the sense that the court is concerned to be satisfied that there has been an absence of oppression and that the arrangement is one that is capable of being accepted. He said that the court will generally take the view that the shareholders are the best judges of whether an arrangement is to their commercial advantage and will be reluctant to make decisions contrary to the views of security holders expressed at meetings.

This passage was also adopted by Judd J in Re Lion Selection Ltd[13] and by Croft J in Re AXA Asia Pacific Holdings Ltd (No 2).[14]

40 The role of the Court at the approval stage was also considered by the Federal Court in Re Opes Prime Stockbroking Ltd (No 2).[15] In that case, Finkelstein J made the following observations at [8]-[9] concerning the role of Court in considering whether to approve a scheme of arrangement:

There are many cases that have discussed the role of the court in approving a scheme of arrangement. The most useful statement to my mind is found in Buckley on Companies, 14th ed, Butterworths, London, 1981, vol 1, pp 473-4 (which is in slightly different terms from the corresponding passages in later editions of the work). The relevant passage reads:

In exercising its power of sanction the court will see, first, that the provisions of the statute have been complied with, second, that the class was fairly represented by those who attended the meeting and that the statutory majority are acting bona fide and are not coercing the minority in order to promote interests adverse to those of the class whom they purport to represent, and thirdly, that the arrangement is such as an intelligent and honest man, a member of the class concerned and acting in respect of his interest, might reasonably approve.

The court does not sit merely to see that the majority are acting bona fide and thereupon to register the decision of the meeting, but, at the same time, the court will be slow to differ from the meeting, unless either the class has not been properly consulted, or the meeting has not considered the matter with a view to the interests of the class which it is empowered to bind, or some other blot is found in the scheme.

This passage has been cited with approval in a number of English cases. It is not inconsistent with Australian authority: see for example Re Central Pacific Minerals NL [2002] FCA 239; Re Permanent Trustee Co Ltd (2002) 43 ACSR 601; [2002] NSWSC 1177.

41 In Re Healthscope Ltd (No 2),[16] Davies J at [5] described the role of the Court in approving a scheme as follows:

The role of the Court in approving a scheme is supervisory in nature. When deciding whether to approve a scheme the Court must consider whether there has been compliance with the Corporations Act 2001 (Cth) ("the Act"), whether the majority of shareholders are acting in good faith in voting in favour of the scheme and whether the scheme is one that is capable of being accepted by shareholders looking to their own commercial advantage.

(See also similar statements made by Davies J in Re Mitchell Communications Group (No 2) [2010] VSC 534 at [4] and in Re Plantic Technologies Ltd (No 2) [2010] VSC 554 at [4]. See also Croft J in Re AXA Asia Pacific Holdings Ltd (No 2) [2011] VSC 102 at [25]- [26]).

42 In an often-quoted passage, in Re Seven Network Ltd (No 3),[17] Jacobson J adopted, from the December 2009 Report of the Corporations and Markets Advisory Committee on members' schemes of arrangement, a list of five considerations which the courts have taken into account as informing their discretion whether to approve a scheme:

(a) whether the shareholders have voted in good faith and not for an improper purpose;

(b) whether the proposal is fair and reasonable so that an intelligent and honest man or woman who was a member of the relevant class, properly informed and acting alone might approve it;

(c) 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;

(d) whether there has been full and fair disclosure of all information material to the decision;

(e) whether minority shareholders would be oppressed by the scheme.

Jacobson J added a further consideration - whether the scheme offends public policy.

43 It is necessary to refer to several other matters before considering the matter further.

44 The NAB Directors' recommendation is set out (among other places) on the front page of the Scheme Booklet, on page 9 of the Scheme Booklet and in each of the chairman's letters to NAB securityholders. Each of the NAB Directors recommends that the NAB Shareholders vote in favour of the Scheme. In addition, each NAB Director currently intends to hold the CYBG Securities that he or she receives under the Demerger at least for 12 months from the date the Demerger is implemented.

45 The independent expert, Grant Samuel has expressed the draft opinion that the Demerger and the opportunity to undertake the Institutional Offer (which it describes together as the 'Proposal') is in the best interests of NAB Shareholders. The draft concise independent expert's report is set out in section 8 (page 191-240) of the Scheme Booklet and the summary of the draft opinion expressed by Grant Samuel is set out on pages 4-6 of the concise independent expert's report. A copy of the full version of the report is available on the Demerger website (www.clydesdaledemerger.com.au) and is available on request (see the statements made to that effect on page 3 of the concise independent expert's report).

46 Grant Samuel also expresses the draft opinion that the proposed NAB Capital Reduction will not materially prejudice existing NAB creditors (see pages 47-48 of the draft concise independent expert's report, being pages 238-239 of the Scheme Booklet). In making this statement, Grant Samuel refers, amongst others, to the following matters:

(a) NAB's CET1 ratio will fall from 10.2% (which reflects a pro rata capital raising in May 2015, the purpose of which was, in part, to facilitate the Proposal) to 9.8% (being comfortably above NAB's target CET1 ratio range of 8.75-9.25%);

(b) the reduction in NAB Shareholders' funds and earnings as a result of the Demerger is relatively minor; and

(c) following the announcement of the Demerger, each of the three major ratings agencies reaffirmed NAB's long term debt rating.

47 The conditions precedent to the implementation of the Scheme are set out in clause 2.1 of the Scheme and include:

(a) a majority of the NAB Directors recommending and not changing or withdrawing their recommendation to NAB Shareholders to vote in favour of the Scheme and to NAB Shareholders and NAB Tier 1 Securityholders to vote in favour of the NAB Capital Reduction Resolution;

(b) the NAB Shareholders approving the Scheme by the requisite majorities;

(c) the passing of the NAB Capital Reduction resolution by the requisite majority under the Act; and

49 As noted above, ASIC has no objection to the Scheme, and has provided the necessary letter pursuant to s 411(17)(b) of the Act.

50 After the Scheme Meeting on 27 January 2016, NAB was provided with a copy of a letter dated 5 January 2016 that had been sent to ASIC by Mr John Muller, who is a holder of National Income Securities issued by NAB (and, thereby a NAB Tier 1 Securityholder) but not a NAB Shareholder.[18] Mr Muller's letter to ASIC referred to a letter dated 21 December 2015 that Mr Muller had sent to NAB, which was received by NAB on 30 December 2015.[19] NAB responded to Mr Muller's letter dated 21 December 2015 on 28 January 2016 and provided a copy of its response to ASIC.[20] Mr Muller has not otherwise indicated an intention to appear to oppose the approval of the Scheme.[21] NAB's response addresses the matters raised by Mr Muller.

51 In my opinion the response to Mr Muller is appropriate and satisfactory.

52 Section 411(17) of the Corporations Act provides that 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 [being the takeover provisions]; 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.

53 The potential application of section 411(17) to a scheme arises if the proposed transaction is one that could have been effected under the takeover provisions contained in Chapter 6 of the Act. As the Demerger is not a change of control transaction that would have been amenable to being achieved under Chapter 6, the operation of section 411(17) is irrelevant. In any event, and as noted above, ASIC has not objected.

54 Section 411(4) of the Corporations Act relevantly provides as follows:

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) ......

(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) unless the Court orders otherwise - 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

55 The requisite majorities for the purposes of section 411(4)(a) were satisfied in respect of the Scheme resolution as:

(a) 99.21% of the votes cast (in person or by proxy) at the Scheme Meeting were in favour of the Scheme resolution; and

(b) 97.66% of the NAB Shareholders that were present and voting (in person or by proxy) at the Scheme Meeting voted in favour of the Scheme resolution,

These results were calculated by the returning officer.[22]

56 It is to be noted that the chairman of the Scheme Meeting declared it closed following the voting, except for and subject to the announcement of the results of the poll. In that way the Scheme Meeting remained formally open until the results of the poll for the Scheme resolution had been announced to those present at the Scheme Meeting, in accordance with Re MAC Services Group Ltd.[23]

57 The proposed Demerger is an "arrangement" within the meaning of section 411 of the Act. The word "arrangement is of wide import and in no way limited by the word "compromise". See Re International Harvester Co of Australia Pty Ltd;[24] Australian Securities Commission v Marlborough Gold Mines Ltd.[25] In effect, the jurisdiction conferred by section 411 enables a company to implement a reconstruction with the consent of the requisite majority of its members or shareholders but without the need for unanimity. See Re Guardian Assurance Co.[26]

58 The jurisdiction conferred by section 411 has been used on many occasions to effect a demerger like the one proposed in the present case. See Re Amcor Ltd;[27] Re CSR Ltd;[28] Re Australian Gas Light Co;[29] Re A-CAP Resources Ltd;[30] Re Orica Limited;[31] Re Straits Resources Ltd;[32] Re Strategic Energy Resources Limited;[33] Re Texon Petroleum Limited.[34]

59 In my opinion this is an appropriate case for the Court to make an order approving the Scheme pursuant to section 411(4)(b). Having regard to the role of the Court referred to above, relevant matters in this regard include the following:

(a) the attitude of the NAB Shareholders as reflected in the voting results at the Scheme Meeting;

(b) the opinion of the independent expert (Grant Samuel) that the Demerger and the Institutional Offer (which it describes together as the 'Proposal') is in the best interests of NAB Shareholders (see the concise independent expert's report set out in Section 8 of the Scheme Booklet); by way of update, on 18 January 2016 NAB announced to the ASX the indicative pricing range for the Institutional Offer, namely between 175 pence and 235 pence per CYBG share;

(c) the position of ASIC that it has no objection to the Scheme;

(d) the terms and nature of the Scheme and the Demerger;

(e) the unanimous recommendation of the directors of NAB (contained in the Scheme Booklet) that the NAB Shareholders vote in favour of the Scheme;

(f) considerations such as those referred to in the letter from the chairman of NAB; and

(g) that schemes of this kind (that is, schemes facilitating a demerger) have consistently been approved by the Court and other courts (see, by way of example, Re Orica Ltd;[35] Re Foster's Group Ltd;[36] Re Strategic Energy Resources Ltd (No 2);[37] Re Alchemia Limited (No 2);[38] Re Texon Petroleum Limited (No 2).[39]

60 In light of these matters, the Court is satisfied that the Scheme has been made in good faith and is 'at least so far fair and reasonable, as that an intelligent and honest [person], who is a member of that class, and acting alone in respect of [their] interest[s] as such a member, might approve it' (Re Alabama, New Orleans, Texas and Pacific Junction Railway Company [1891] 1 Ch 213 (Fry LJ), and that it is accordingly appropriate that the Court exercise its jurisdiction to approve the Scheme.

61 Section 411(11) of the Corporations Act provides, subject to section 411(12), that a copy of the Court's order approving the scheme be annexed to every copy of the company's constitution issued after the order is made. Section 411(12) allows the Court to exempt a body from compliance with this provision or to determine the period during which it shall comply.

62 Such exempting orders are almost always made and are particularly apposite in the present case as there is no alteration to the constitution and further, once the Scheme is implemented, CYBG will be demerged from NAB and the Scheme will then be of historical interest. In Re AXA Asia Pacific Holdings Ltd (No 2), Croft J observed (at [36]) that an order pursuant to section 411(12) "is a usual adjunct to orders approving schemes to effect mergers or acquisitions." Although the present Scheme is for a demerger, similar considerations apply. In Re Alchemia Limited (No 2) [2012] FCA 1136, a demerger case, Yates J agreed at [16] with the company's submission that there was no utility in requiring compliance with section 411(11) as the Court's order did not effect any change to the constitution and did not involve modification of any rights of shareholders or of creditors or of persons dealing with the company. Another example of such an order in the context of a demerger scheme is Re Texon Petroleum Limited (No 2).[40]

63 Further, corporate constitutions are nowadays generally maintained electronically and it is in a practical sense difficult to ensure that a copy of the Court's order is attached to each electronic version of the constitution that may be created from time to time.

64 At the approval hearing the Court was advised that NAB intends to rely upon the Court's approval for the purposes of the exemption under section 3(a)(10) of the Securities Act of 1933 of the United States in connection with the implementation of the Scheme: See Re Permanent Trustee Co,[41] Re Central Pacific Minerals NL,[42] Re Simeon Wines Ltd,[43] Re Solution 6 Holdings Ltd,[44] Re Unilife Medical Solutions Ltd (No 2);[45] Re Professional Investment Holdings Ltd (No 2)[46] and Re Aston Resources Ltd (No 2).[47] The order of the Court made a note in "Other Matters" to the effect that NAB will rely on the Court's Order for the purpose of qualifying for exemption from the registration requirements of the U.S. Securities Act of 1933, provided for by section 3(a)(10) of that Act, in connection with the implementation of the Scheme. It is noted that a similar note (in the context of a scheme of arrangement) was contained in the approval order made by Jacobson J in the matter of Re Aston Resources Limited (No 2).[48]

65 Section 3(a)(10) of the Act is in the following terms:

Except with respect to a security exchanged in a case under title 11 [of the United States Code], any security which is issued in exchange for one or more bona fide outstanding securities, claims or property interests, or partly in such exchange and partly for cash, where the terms and conditions of such issuance and exchange are approved, after a hearing upon the fairness of such terms and conditions at which all persons to whom it is proposed to issue securities in such exchange shall have the right to appear, by any court, or by any official or agency of the United States, or by any State or Territorial banking or insurance commission or other governmental authority expressly authorized by law to grant such approval.

66 One of the conditions of that exemption is that the Court must be advised, before any hearing at which the Scheme is approved, that the issuer will rely on the section 3(a)(10) exemption based on the Court's approval in the event that the Scheme is in fact approved. The Court was so advised.

67 Section 9.17.1 of the Scheme Booklet addresses foreign jurisdictions and refers to the proposed reliance on section 3(a)(10) exemption.

68 The Scheme provides for steps to be taken by CYBG. In so far as CYBG is neither the scheme company nor one of its members, the order of the court under section 411 will not bind CYBG. See for example Re Westfield Holdings Ltd.[49]

69 In this context, courts have discussed the question of "performance risk" as regards the obligations to be performed by the non-scheme party. See for example Re Kaz Group Ltd;[50] Re Tempo Services Ltd;[51] Re Tribeca Learning Ltd;[52] Re SFE Corporation Limited;[53] Re WebCentral Ltd;[54] Re Coles Group Ltd;[55] Re Lonsdale Financial Group Ltd;[56] Re Cytopia Ltd;[57] Re Healthscope Ltd;[58] Re Mitchell Communication Group;[59] Re AWB Ltd;[60] Re AXA Asia Pacific Holdings Ltd;[61] Re Talison Lithium Ltd.[62]

70 The Court must be satisfied that the steps attributable to CYBG under the Scheme are enforceable and, moreover, that they are enforceable by each NAB Shareholder. In the present scheme, the steps to be undertaken by CYBG are secured by a deed poll executed by it on 27 November 2015, copies of which are contained in Annexure B (page 304) of the Scheme Booklet.[63]

71 Conformably with the practice in recent cases involving foreign entities (eg Re Simavita Holdings;[64] Re Biosceptre International Ltd;[65] Re Atlantic Gold NL,[66] there is before the Court evidence of an opinion concerning the execution of the CYBG deed poll and its enforceability under English law.[67]

72 As required by section 593 of the Companies Act 2006 (UK), prior to any CYBG Shares being allotted to NAB (as nominee and bare trustee for the Scheme Participants or the Sale Agent, as applicable) as consideration for the transfer by NAB of the entire issued share capital of CYBI to CYBG, CYBG must, during the period of six months immediately preceding the allotment of such shares, obtain a valuer's report addressed to it from an independent qualified person, meeting the eligibility criteria set out in the Companies Act 2006 (UK).

73 This report has been obtained by CYBG and, as required by section 593 of the Companies Act (UK), has been sent to NAB as the proposed allottee of the CYBG Shares. The report contains a statement from the valuer that, on the basis of a market value assessment using income and market approaches carried out by it, in its opinion the value of the total consideration provided by NAB for the allotment to it of the CYBG Shares (being all of the issued shares in CYBI) is not less than £1,011,094,070, being the aggregate nominal value of the CYBG Shares to be treated as paid up by the consideration. The report is not required to, and does not, contain a detailed valuation of CYBG.[68]

74 Provided that the allotment of the CYBG Shares pursuant to the Demerger takes place during the six months immediately following the delivery of the report to CYBG then, in obtaining the report and in sending it to NAB, CYBG will have complied with the obligations applicable to it under section 593 of the Companies Act (UK) in connection with the allotment of such CYBG Shares.

75 A copy of the report is available for download from the website www.clydesdaledemerger.com.au.

76 NAB has agreed to provide a hard copy of the report to NAB Shareholders on request.

[1] Affidavit of Kenneth Ross Henry sworn 27 January 2016 ("Second Henry Affidavit") [7]-[8].

[5] Page 5 of the NAB 2015 Annual Financial Report, provided at tab 8 of confidential exhibit "CMD-1" to the affidavit of Craig Milton Drummond sworn 30 November 2015 ("Drummond Affidavit").

[6] The Implementation Deed is behind tab 25 of confidential exhibit "CMD-1".

[7] [2000] NSWSC 82; (2000) 156 FLR 349.

[8] [2000] NSWSC 82; (2000) 156 FLR 349, 361 (Santow J).

[9] [1934] Ch 635.

[10] [1949] UKHL 3; [1949] AC 462, 486.

[11] [2000] NSWSC 82; (2000) 156 FLR 349, 361.

[12] [2002] FCA 239.

[13] [2009] VSC 546, [17].

[14] [2011] VSC 102, [25].

[16] [2010] VSC 440.

[17] [2010] FCA 400; (2010) 267 ALR 583, [35]-[40].

[18] Affidavit of Diana Patricia Nicholson sworn 29 January 2016 ("Third Nicholson Affidavit") [13].

[22] See paragraph 49 of the Affidavit of Sandra Elizabeth Clark sworn 27 January 2016 and exhibit SEC-06 to that affidavit.

[23] [2010] NSWSC 1474.

[24] [1953] VicLawRp 90; [1953] VLR 669, 674.

[25] [1993] HCA 15; (1993) 177 CLR 485, 501.

[26] [1917] 1 Ch 431, 449-50.

[27] [2000] VSC 157; (2000) 34 ACSR 199.

[28] [2003] FCA 82; (2003) 45 ACSR 34.

[29] [2006] FCA 120; (2006) 56 ACSR 659.

[30] [2007] VSC 223.

[31] [2010] VSC 231.

[32] [2010] FCA 1466.

[33] [2011] VSC 645.

[34] [2013] FCA 29.

[35] [2010] VSC 231.

[37] [2012] VSC 75.

[38] [2012] FCA 1136.

[39] [2013] FCA 147).

[40] [2013] FCA 147, [22].

[41] [2002] NSWSC 1177; (2002) 43 ACSR 601, [11].

[42] [2002] FCA 239.

[43] [2002] SASC 204; (2002) 42 ACSR 454.

[44] [2004] FCA 1049; (2004) 50 ACSR 113, [37]-[45] (Jacobson J).

[45] [2010] FCA 12, [11]-[16] (Stone J).

[46] [2010] FCA 1336, [44]-[60] (Jacobson J).

[47] [2012] FCA 401, [2]-[17].

[48] [2012] FCA 401.

[49] [2004] NSWSC 458; (2004) 49 ACSR 734, 739.

[50] [2004] FCA 738, [4]-[5].

[51] [2005] FCA 410; (2005) 53 ACSR 523, [5].

[52] [2006] FCA 356, [9].

[53] [2006] FCA 670; (2006) 59 ACSR 82, [4]

[54] [2006] FCA 937, [6]-[12].

[55] [2007] VSC 389, [38].

[56] [2007] VSC 394, [42].

[57] [2009] VSC 560, [10].

[58] [2010] VSC 367, [31]-[42].

[59] [2010] VSC 423, [30]-[31].

[60] [2010] VSC 456, [16].

[61] [2011] VSC 4, [20]-[25].

[62] [2013] FCA 194, [56].

[63] A copy of the deed poll is behind tab 28 of confidential exhibit "CMD-1".

[64] [2013] FCA 1274, [43]-[44].

[65] [2013] FCA 1429, [21].

[66] [2014] FCA 697, [34]).

[67] A copy of the opinion letter is behind tab 29 of confidential exhibit "CMD-1".

[68] A copy of the report is behind tab 30 of confidential exhibit "CMD-1".