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[2019] FCA 2105
Federal Court of Australia
2019-12-09
Mr J, Farrell J
Original judgment source is linked above.
FARRELL J: 1 These are the reasons for orders made under ss 411(4)(b) and 411(12) of the Corporations Act 2001 (Cth) approving a proposed scheme of arrangement between Konekt Limited and its shareholders in the form of exhibit 11 in these proceedings. The background to the proposed scheme is to be found in Konekt Limited, in the matter of Konekt Limited [2019] FCA 1811 and Konekt Limited, in the matter of Konekt Limited (No 2) [2019] FCA 1997. 2 On 30 October 2019, the Court made orders that: (1) The scheme meeting to consider whether to approve the scheme be held at 10 am on 3 December 2019 at the offices of Gilbert + Tobin at Level 35, Tower Two, International Towers, 200 Barangaroo Avenue, Sydney. (2) The chairman of the meeting was to be Douglas Flynn. (3) Konekt may determine that only proxy forms received by Konekt no later than 10.00 am on 1 December 2019 are valid. (4) A poll must be taken for the resolution of the vote at the meeting, other than in relation to procedural matters. (5) A scheme booklet substantially in the form of exhibit 1 was to be sent to Konekt shareholders by email or by post. (6) A notice of the second court hearing was to be published in The Australian newspaper five days before the date fixed for the second court hearing. 3 The following evidence was read and tendered at the second court hearing: (1) An affidavit affirmed by Gemma Coyle 4 December 2019 and exhibit GC-1. Ms Coyle is a relationship manager in Issue Services at Computershare Investor Services Pty Ltd. Ms Coyle gave evidence about the following matters: Computershare maintains Konekt's share register; the preparation of scheme materials for despatch, the identification of those shareholders who had opted to receive communications by email and those shareholders, both domestic and overseas, who had elected to receive correspondence by mail; the number of Konekt shareholders (870) as at 21 November 2019 which was relevant to the despatch of supplementary scheme materials in accordance with orders made by this Court on 22 November 2019; the despatch of the scheme booklet and the supplementary scheme materials; monitoring of the share register and the despatch of packages of information to new shareholders during the period 30 October 2019 to 21 November 2019; the receipt and recording of proxies; the registration of attendees at the scheme meeting; voting at the scheme meeting and the production of a poll report. (2) An affidavit affirmed by Rachael Lindy Bassil on 5 December 2019 and exhibit RLB-4. Ms Bassil is a partner at Gilbert + Tobin and she gave evidence concerning: lodging the scheme booklet with the Australian Securities & Investments Commission (ASIC) on 31 October 2019 and ASIC's acknowledgement of its registration; a search of ASIC's records undertaken on 4 December 2019 which demonstrates that the scheme booklet was registered on 31 October 2019; the provision of a supplementary scheme booklet to ASIC on 22 November 2019 substantially in the same form as that despatched to Konekt shareholders; publication on 27 November 2019 in The Australian of notice of the date of the second court hearing; and confirmation that, as at 5 December 2019, no shareholder had advised of an intention to attend the second court hearing to oppose orders being made. (3) An affidavit sworn by Damian Eric Banks on 5 December 2019 and exhibit DEB-4. Mr Banks is the Managing Director and Chief Executive Officer of Konekt. He gave evidence concerning settling the final form of the scheme booklet and the supplementary scheme booklet; the shareholder information line; and the view of the directors concerning the provision of a Dividend Loan by Advanced Personnel Management International Pty Ltd (APM) (or an APM Group Member) to fund the Special Dividend of $0.05 per Konekt Share to be paid on 20 December 2019 (conditional on the scheme becoming effective) as discussed in the scheme booklet at section 8.11. (4) An affidavit sworn by Douglas Ronald Flynn on 5 December 2019 and exhibit DRF-1. Mr Flynn is the chairman of the board of Konekt. Mr Flynn gave evidence that he acted as chairperson of the scheme meeting; the scheme meeting was held at the time and place complying with the Court's orders; the proceedings at the scheme meeting and the results of the poll; draft minutes of the scheme meeting and a notice given to ASX Limited on 3 December 2019 concerning the outcome of the scheme meeting. (5) Exhibit 9, which is ASIC's "usual letter" dated 6 December 2019. The letter indicates that ASIC has no objection to the proposed scheme for the purposes of s 411(17)(b) of the Corporations Act. (6) Exhibit 10, which comprises certificates signed on behalf of Konekt and APM dated as at 9 December 2019 at 8.00 am indicating that all conditions (other than that relating to Court approval of the scheme) have been satisfied. (7) Exhibit 11, which is the scheme of arrangement. 4 The matters the Court must take into account in deciding whether to approve the scheme are well-established. They include: (1) Whether the orders of the Court convening the scheme meeting were complied with; (2) Whether the resolution to approve the scheme was passed by the requisite majority and whether other statutory requirements have been satisfied; (3) Whether all conditions to which the scheme is subject (other than Court approval and lodgement of the Court's orders with ASIC) have been met or waived; (4) Whether the scheme is fair and reasonable so that an intelligent and honest Konekt shareholder, properly informed and acting alone, might approve it. In considering this question, it is not the role of the Court to usurp the decision of shareholders by imposing its own commercial judgement on the scheme or to consider whether a better scheme might have been proposed; (5) Whether Konekt has brought to the attention of the Court all matters that could be considered relevant to the exercise of the Court's discretion; and (6) Whether there was full and fair disclosure to shareholders of all information material to the decision whether to vote for or against the scheme. See Solution 6 Holdings Limited ACN 003 264 006, in the matter of Solution 6 Holdings Limited ACN 003 264 006 [2004] FCA 1049; 50 ACSR 113 at [18]-[24] (Jacobson J); Re Permanent Trustee Company Limited [2002] NSWSC 1177; (2002) 43 ACSR 601 at [8]-[10] (Barrett J); Re Central Pacific Minerals NL [2002] FCA 239 at [8]-[14] (Emmett J); Seven Network Limited (ACN 052 816 789), in the matter of Seven Network Limited (No 3) [2010] FCA 400 at [35]-[39] (Jacobson J). 5 Based on the evidence tendered at the second court hearing, the scheme meeting was convened and held on 3 December 2019 in accordance with the Court's orders. Douglas Flynn acted as the chairperson of the meeting. 183 shareholders of the 870 shareholders recorded on Konekt's register as at 21 November 2019 attended and voted at the scheme meeting. The following results were achieved: For Against Abstain Votes cast 80,247,449 32,248 Nil Members 180 3 Nil Percentage 99.96% 0.04% Nil
6 Those results demonstrate that the members of Konekt approved the scheme by majorities which more than comfortably satisfied the requirements of s 411(4)(a)(ii) of the Corporations Act. While the voter turnout was less than 25% of the shareholders recorded on Konekt's share register as at 21 November 2019, there is nothing in the evidence that suggests that there was any error in the printing or despatch of scheme booklets or supplementary scheme booklets which might have caused voter turnout to be low. 7 The date and time of the second court hearing were advertised in accordance with the Court's orders. No shareholder appeared at the second court hearing to oppose orders of the kind proposed by Konekt being made. 8 The conditions to which the scheme was subject had been satisfied. 9 ASIC has no objection to the Court making orders approving the scheme. 10 The Court was satisfied that there had been full and fair disclosure of material information relevant to a decision by a Konekt shareholder concerning how to vote at the scheme meeting and that an intelligent and honest Konekt shareholder, properly informed and acting alone, might approve it. The Court was also satisfied that Konekt brought to its attention all matters that could be considered relevant to the exercise of the Court's discretion. 11 There was one issue discussed at the second court hearing. It concerned the Dividend Loan and Mr Banks' evidence that it was the directors' view that calling on the Dividend Loan to pay the fully franked Special Dividend remains in the best interests of Konekt and its shareholders and does not and will not materially prejudice Konekt's ability to pay its creditors. Mr Banks said that, in reaching that conclusion, he was informed by Konekt's directors and believed that they considered the net asset position of Konekt having regard to, among other things, the fact that the Dividend Loan cannot be drawn in circumstances where the scheme is not effective. 12 This evidence was given in connection with the following disclosure made at section 8.11 of the scheme booklet: 8.11 Financial Assistance for the Special Dividend If the Scheme is approved by Konekt Shareholders and the Court, then Konekt Shareholders will receive, for each Konekt Share held by them the Total Cash Consideration (being $0.49), comprising the Special Dividend of $0.05 per Konekt Share held on the Special Dividend Record Date, payable by Konekt Group; and the Scheme Consideration of $0.44 per Konekt Share held on the Scheme Record Date, payable by APM. Pursuant to section 7.6 of the Scheme Implementation Deed, Konekt has requested and APM must provide or procure that an APM Group Member provides, a loan on normal commercial terms up to the amount of the fully franked Special Dividend on the later of the first Business Day after the Effective Date and the first Business Day after the Permitted Dividend is declared by Konekt (Dividend Loan). The fully franked Special Dividend is currently expected to be paid on the Special Dividend Payment Date, being 20 December 2019. Section 260A of the Corporations Act enables a company to financially assist a person to acquire shares in the company or a holding company only if certain conditions are satisfied. Financial assistance of this kind would be permitted if the giving of assistance does not materially prejudice: (a) the interest of the company; (b) the interests of its shareholders; or (c) the company's ability to pay its creditors. The Corporations Act specifically contemplate that financial assistance (of the kind that it is regulated under section 260A) may take the form of paying a dividend which may be given before the acquisition of shares. Konekt will only pay the fully franked Special Dividend if they can do so in compliance with section 260A. The directors of Konekt have determined to call on the Dividend Loan after assessing the financial position of Konekt and the expected impact on creditors. Based on the information currently available, and given that the payment of the fully franked Special Dividend is contingent on the Scheme becoming Effective, the Directors of Konekt believe that calling on the Dividend Loan to pay the fully franked Special Dividend was and is in the best interest of Konekt and Konekt Shareholders and did not and will not materially prejudice Konekt's ability to pay's creditors. 13 The benefit to Konekt's shareholders in receiving the Special Dividend and Konekt calling on the Dividend Loan for that purpose is clear and they will have no ongoing interest in Konekt after the scheme is implemented. The impact of the Dividend Loan and payment of the Special Dividend on Konekt's creditors is a matter relevant to the exercise of the Court's discretion whether to approve the scheme, since their interests may be affected following implementation of the scheme. By exercising its discretion to approve the scheme, the Court does not approve the giving of any financial assistance in connection with the acquisition of Konekt Shares. Rather, in exercising its discretion to approve the scheme, the Court must be satisfied that the directors' view that there would be no material effect on Konekt's ability to pay its creditors is reasonable and open to the directors to hold. 14 The Court was satisfied of that the directors' view was reasonable and open to them to hold, having regard to: (1) The circular resolution dated 25 October 2019 indicates that the considerations that the Konekt Board took into account when it resolved to pay the Special Dividend were as follows: It was noted that, under the terms of the Scheme Implementation Deed, the Company may declare and pay a special dividend that: (a) will be fully franked, subject to practicability such as the availability of franking credits and to the extent franked, will not result in the franking account of the company being a deficit after the payment of the dividend; (b) will reduce the scheme consideration payable by the amount of the special dividend; (c) will be paid from profits, retained earnings or distributable reserves (or a combination of all or some of them) of the Konekt group existing prior to the declaration authorisation of such dividend, subject to the Scheme becoming Effective, to procedures contemplated by clause 7.6(e) of the Scheme Implementation Deed and to applicable law. It was also noted that, under the terms of the Scheme Implementation Deed between APM and the Company, APM had agreed to provide a loan on normal commercial terms to the Company to fund the payment of the special dividend. The Board reviewed the Special Dividend Paper and considered the possibility and implications of paying a special dividend of up to $0.05 on the Company's balance sheet, cash flows, cash reserves and franking account. The Board confirmed that they had satisfied themselves that the declaration on payment of the Special Dividend satisfies requirements of section 254T of the Corporations Act, namely that: (a) the Company's assets exceed its liabilities immediately before the dividend is declared and the excess is sufficient for the payment of the dividend; and (b) the payment of the dividend is fair and reasonable to the Company's shareholders as a whole; and (c) the payment of the dividend does not materially prejudice the Company's ability to pay its creditors. (2) The likely aggregate amount of the Special Dividend (having regard to the number of Konekt Shares on issue) after the expected number of Konekt Performance Rights vest is approximately $5.35 million which will lead to net debt of approximately $15 million after the Dividend Loan. The net assets attributable to shareholders as at 30 June 2019 as disclosed in the independent expert's report is approximately $30.5 million. The Dividend Loan will be made by APM or one of its Group Members and Konekt will become part of that group upon implementation of the scheme. As disclosed in this scheme booklet, APM had, as at 30 June 2019, cash reserves of $48 million and undrawn borrowing capacity of $40 million. 15 Having regard to all of these matters, the Court concluded that it was appropriate to make the orders sought by Konekt. I certify that the preceding fifteen (15) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Farrell.