Mercedes-Benz Financial Services Australia Pty Limited v Daimler Truck Financial Services Australia Pty Limited, in the matter of Mercedes-Benz Financial Services Australia Pty Limited

INTRODUCTION 1 These are my reasons for making the orders that were sought by the plaintiff, Mercedes-Benz Financial Services Australia Pty Ltd (MBFSA) at the first hearing of this proposed scheme of arrangement on 14 October 2021. They adopt in significant measure the content of senior counsel's written submissions received the evening before the hearing. As there are some aspects of the application which differ from many such applications, it is appropriate to explain the reasons for the orders in some detail. 2 MBFSA seeks orders under s 411(1) and s 413 of the Corporations Act 2001 ((Cth) to: (a) to convene a meeting of the sole member of MBFSA, Daimler Mobility Australia Pty Ltd ACN 629 142 212 (Scheme Shareholder), to consider and if thought fit, agree to a scheme of arrangement between MBFSA and the Scheme Shareholder (Scheme); and (b) to approve the Scheme if adopted by the Scheme Shareholder; and (c) to transfer the undertaking, property and liabilities the subject of the Scheme from MBFSA to the defendant, Daimler Truck Financial Services Australia Pty Ltd (DTFSA) on the date the Scheme is to be implemented. 3 DTFSA is the transferee company. DTFSA, MBFSA and the Scheme Shareholder are all part of the same corporate group (Daimler Group) with their ultimate holding company being Daimler AG. 4 The Daimler Group develops, produces, sells and finances the acquisition of passenger cars, vans, trucks and buses globally. Daimler AG has decided to restructure its operations to facilitate a spin-off of the trucks and buses business from the passenger car and van business with a view to establishing two independent companies and groups. The Scheme is a crucial step in this global restructure. 5 MBFSA offers finance products for new and used cars, vans, trucks and buses across Australia. There are two parts of the business: (a) passenger cars and vans (PC Business); and (b) trucks and buses (CV Business). 6 The effect of the proposed Scheme if approved and implemented, will be that MBFSA's trucks and buses financial services business in Australia, being its CV Business, will be transferred to DTFSA.

OUTLINE OF SCHEME 7 On 17 September 2021, MBFSA and DTFSA entered into a Scheme Facilitation Deed (SFD). The SFD provides for MBFSA to propose and implement the Scheme on, and subject to, the terms of the SFD (cl 2.1). 8 If the proposed Scheme becomes effective and is implemented: (a) the CV Business of MBFSA will be transferred to DTFSA; (b) MBFSA will receive scheme consideration equal to the fair market value of the CV Business as at the Implementation Date as calculated by an independent expert, PWC GmbH Germany, that has been jointly instructed by Daimler AG and Daimler Truck AG; (c) MBFSA will continue to carry on the PC Business in Australia; and (d) DTFSA will then carry on the CV Business in Australia. 9 The Scheme is subject to conditions precedent, including Court approval of the Scheme. A copy of the proposed Scheme appears at Appendix A to the Scheme Booklet. The Scheme Booklet was tendered at the hearing. 10 The 'Foreign Investment Review Board Condition' referred to in the Scheme has been satisfied, as explained in the first affidavit of Mr Rafael Marcelo Pasquet affirmed on 13 October 2021 (First Pasquet Affidavit).

Transfer of contracts 11 MBFSA's existing business is predominantly composed of entering into contracts with customers for the financing of vehicle purchases by those customers from the Daimler Group and with dealers for the financing of the dealer's selling facilities and the financing of cars that the dealers wish to sell. As part of the Scheme, MBFSA will transfer to DTFSA various contracts which pertain to the CV business being: (a) contracts between MBFSA and its retail and corporate customers (Customer CV Contracts); and (b) contracts between MBFSA and its authorised dealers (Dealer CV Contracts). 12 It is mainly in respect of this proposal in this otherwise essentially internal restructure that MBFSA intends, at the second court hearing, to seek orders under s 413(1)(a), s 413(2) and, to the extent necessary under s 413(1)(g), transferring the Customer CV Contracts and Dealer CV Contracts to DTFSA. 13 MBFSA also has 43 fleet customers who have a fleet master agreement with MBFSA, with schedules referencing this fleet master agreement, and with each asset being individually financed accordingly to these schedules. Following the restructure, it is necessary for the master fleet agreements to continue to operate in favour of MBFSA and each customer, so far as they concern PC assets. However, to the extent that CV assets are being transferred to DTFSA in respect of these combined fleet arrangements, DTFSA needs to be substituted for MBFSA under the master fleet agreements to enable it to receive the benefit of the overarching processes and rights and obligations provided for under these umbrella agreements: 14 In relation to the combined fleet contracts, MBFSA intends to seek orders under s 413(1)(g) of the Act that the fleet master agreements and associated guarantees and indemnities identified in the Property and Liabilities Schedule which relate to CV assets be read as references to DTFSA.

EVIDENCE FOR THE FIRST COURT HEARING 15 The evidence may be summarised as follows: (a) formal evidence of the scheme company (MBFSA); (b) details of MBFSA's issued capital; (c) MBFSA's Constitution; (d) MBFSA's commitment to propounding the Scheme provides prima facie evidence that the Scheme is bona fide and has been properly proposed; (e) the text of the draft Scheme Booklet (including the Scheme) and the Notice of Scheme Meeting. The text of the Scheme provides prima facie evidence that it is 'an arrangement' within s 411; (f) verification of factual information in the Scheme Booklet providing prima facie evidence of proper disclosure; (g) consents to act as chairperson and alternative chairperson of the Scheme Meeting: affidavit of Mr Juergen Rochert affirmed on 12 October 2021 and affidavit of Ms Lorraine Parrott affirmed 12 October 2021; (h) notification to Australian Securities and Investments Commission (ASIC); and (i) the 'usual letter' from ASIC that it does not propose to appear at the first court hearing. This provides prima facie evidence that s 411(2) of the Act has been activated.

SCHEME MEETING 16 It is proposed that a scheme meeting be held at 4:00pm (Australian Eastern Daylight Time) on 21 October 2021 for the purpose of considering the scheme resolution, which is set out in the notice of meeting which appears at Annexure B to the Scheme Booklet (Scheme Meeting). 17 It is proposed that MBFSA director Mr Rochert be the chair of the Scheme Meeting and failing him, MBFSA Company Secretary and General Counsel, Ms Parrott. 18 Because MBFSA, DTFSA and the Scheme Shareholder are part of the same corporate group, it is proposed that short notice of the Scheme Meeting be provided to the Scheme Shareholder in accordance with the approach taken in Equatorial Mining Pty Ltd v Antofagasta Investment Company Ltd [2013] FCA 1452 per Yates J (at [33]).

LEGAL CONSIDERATIONS 19 The Court's approach at the first court hearing is that it will not ordinarily summon a scheme meeting unless the scheme is of such a nature and cast in such terms that, if it receives the support of the statutory majorities at the scheme meeting, the Court would be likely to approve it on the hearing of an application which is unopposed. The question is whether it is reasonable to suppose that sensible business people might consider the arrangement proposed is of benefit to members: see Re Centrebet International Ltd [2011] FCA 870 per Emmett J (at [29]). 20 The Court is not concerned with the business or commercial efficacy of the proposed scheme, which is a matter for members: Re Orica Limited [2010] VSC 231 per Davies J (at [8]). The Court does not need to be satisfied that no better scheme could have been devised: Re Foundation Healthcare Ltd [2002] FCA 742; (2002) 42 ACSR 252 per French J (as his Honour then was) (at [44]). 21 In Re Orica, Davies J stated (at [7]) that the function of the Court at the first court hearing is: (a) to consider whether the scheme booklet that will be provided to the shareholders sufficiently discloses the detail and effect of the scheme to enable shareholders to make an informed decision on how to vote; (b) to consider procedural matters about the calling and conduct of the meeting; (c) to ascertain whether the Australian Securities and Investments Commission ("ASIC") has had reasonable opportunity to examine the proposed scheme; (d) to consider whether there may be matters that may make it unlikely that the scheme would be capable of a grant of approval by the Court if, in due course, its approval is sought and so make it futile to put the scheme to the shareholders for their vote. (Citations omitted.) 22 An internal corporate reconstruction may be facilitated by a members' scheme between the transferring entity and its member: see Re Clydesdale Bank Ltd [1950] SC 30 (at 37); Re AGL Sydney Ltd (1994) 13 ACSR 597 per Young J (at 598); SGIC Insurance Ltd v Insurance Australia Ltd [2004] FCA 1492; (2004) 51 ACSR 470 per Jacobson J (at [10]-[11]); Stork ICM Australia Pty Ltd v Stork Food Systems Australasia Pty Ltd [2006] FCA 1849 per Lindgren J (at [69]); AGL Energy Services (Queensland) Pty Ltd v AGL Energy Services Pty Ltd [2010] FCA 452 per Emmett J (at [16]-[18]); All Star Funds Management Limited v Ventura Investment Management Ltd [2012] FCA 527 per Jagot J (at [4]-[6]); JP Morgan Operations Australia Ltd v JP Morgan Australia Group Pty Ltd [2018] FCA 1131 per Farrell J (at [31]); and Re Anglo-Gaelic Investments Pty Ltd [2019] NSWSC 441 per Black J (at [26]). 23 In Woolworths Group Ltd v Pinnacle Liquor Group Pty Ltd [2019] FCA 1810, Farrell J (at [20]) summarised the principles which may be drawn from the authorities referred to above in connection with schemes of this nature. They are: (1) The terms "reconstruction" and "amalgamation" in s 413 have the meaning given in commerce and a restrictive interpretation should not be placed on them. (2) A reconstruction occurs when, after the transfer, substantially the same undertaking is carried on by the same shareholders, or, if (in an intragroup situation), the ultimate holding company remains the same. (3) An amalgamation involves the combination of two separate share capital structures into one and it does not matter if the structure of the new share capital (e.g. classes and amounts of shares) does not reflect the structures of the predecessor systems. (4) The transfer of the assets and liabilities of one or more companies in a corporate group to another company or companies in the same corporate group, with the transferor company being deregistered is within the meaning of a reconstruction and amalgamation under s 413. (5) The fact that [several plaintiffs] have only one member is no obstacle to the Court convening scheme meetings constituted by those sole members, or the Court subsequently approving the schemes proposed between those entities and their sole member. (6) It remains necessary that the members' scheme embody an element of compromise or arrangement between the scheme company and its member or members in order to enliven the Court's jurisdiction under s 411 of the Corporations Act. However, the element of compromise or arrangement necessary to satisfy s 411 need not be of any great magnitude or significance. It can be satisfied by an agreement by members to the scheme despite diminution in the value of their shareholding or the waiver of any rights the member may otherwise have had in connection with the reconstruction or amalgamation. (7) Although transferee companies are not parties to the members' schemes, it is now conventional for any transferee companies to be joined as defendants to the proceedings so as to bind them to the schemes, as has been done in this proceeding. (Emphasis added.) 24 DTFSA, the transferee company, has been joined as a defendant in accordance with the approach set out in Re Royal Victorian Institute for the Blind Ltd [2004] FCA 735; (2004) 206 ALR 581 per Finkelstein J (at [17]). 25 There have been a number of reconstructions approved by the Courts under s 413 of the Act which have involved the partial transfer of assets and liabilities of the scheme company: see for example Woolworths and Re RBS Group (Australia) Pty Ltd (unreported, NSW Sup Ct, Ward J, 2 February 2012).

STATUS OF THE SCHEME COMPANY AND TRANSFEREE COMPANY 26 MBFSA and DTFSA are Pt 5.1 bodies and companies under s 9 of the Act, as explained in the First Pasquet Affidavit.

PROPOSED SCHEME IS AN ARRANGEMENT WITHIN THE MEANING OF s 411 27 Having regard to the propositions extracted at [23] above, the Scheme is an 'arrangement' which involves the necessary element of compromise in effecting a restructure to ensure that the assets and liabilities which comprise the CV Business of MBFSA are transferred to DTFSA. If the Scheme is implemented, DTFSA will continue to conduct the CV Business in generally the same manner as it was conducted immediately prior to the lodgement of the Scheme Booklet with ASIC for registration and will continue to employ the transferring employees on the same terms and conditions in which they were employed by MBFSA, as explained in the First Pasquet Affidavit. 28 In AGL, Emmett J considered what element of compromise is required to satisfy s 411 and concluded (at [15]) that it need not be of any great magnitude or significance. Since his Honour handed down his decision in AGL, the Courts have approved schemes where the necessary element of compromise is found in the member or members of the scheme company approving the scheme and consenting to the reconstruction or amalgamation contemplated by the scheme, notwithstanding the diminution of the value of their shareholding in the scheme company in which such member holds shares: see, for example, All Star (at [6]). 29 The Scheme includes a provision at cl 5.1(b) by which the Scheme Shareholder approves the scheme and consents to the reconstruction notwithstanding the diminution of the value of its shareholding in MBFSA and any rights that it may have in connection with the Scheme (including pursuant to MBFSA's constitution) and waives any rights it may otherwise have as against MBFSA in connection with the Scheme. I consider that this is sufficient to demonstrate the existence of a compromise for the purposes of s 411 of the Act.

THE SCHEME BOOKLET PROVIDES PROPER DISCLOSURE TO MEMBERS 30 Evidence of the due diligence process and verification of the Scheme Booklet undertaken by MBFSA and its solicitors is located in the First Pasquet Affidavit. Verification of factual information in the Scheme Booklet is prima facie evidence of proper disclosure. 31 There is no independent expert report as to whether the Scheme is in the best interests of the Scheme Shareholder. In schemes of this nature, there is no such requirement: see Woolworths (at [26]). Further and importantly, on 13 October 2021, ASIC informed MBFSA that it allowed MBFSA to send the Scheme Booklet, which does not contain or have annexed to it an independent expert report of the kind referred to in cl 8303 of Pt 3 of Sch 8 of the Corporations Regulations 2001 (Cth), as explained in the third affidavit of Mr Paul Shillington affirmed on 13 October 2021 (Third Shillington Affidavit).

SCHEME IS RECOMMENDED BY THE DIRECTORS 32 MBFSA has two directors who unanimously recommend that the Scheme Shareholder vote in favour of the Scheme, as explained in the First Pasquet Affidavit.

SCHEME IS BONA FIDE AND PROPERLY PROPOSED 33 The restructure is bona fide and properly proposed. The rational for the Scheme is disclosed at s 1.1 of the Scheme Booklet being to achieve the separation of the Australian truck and bus financial services business, that is the CV Business, from the passenger car and van financial services business, PC Business, consistent with the global initiative of Daimler AG to spin-off the truck and bus business and create the Daimler Truck Group. The spin-off is a separate transaction to the Scheme and is not conditional on the Scheme. 34 As disclosed in s 1.2 of the Scheme Booklet, under the Scheme, MBFSA will transfer the CV Business to DTFSA. The CV Business is comprised of the assets and liabilities listed in the Property and Liabilities Schedule which include, but are not limited to: (a) CV-related customer and dealer financing contracts, including the CV-related components of a number of combined PC/CV financing arrangements; (b) information and data on customer bases pertaining exclusively to the CV Business; (c) inventory; (d) intellectual property; (e) security interests held by MBFSA over any assets including mortgages under which MBFSA is the mortgagee; (f) plant and equipment; and (g) data or information relating to the CV Business. 35 A copy of the Property and Liabilities Schedule comprising a narrative and two attachments is annexed to the Second Affidavit of Mr Pasquet affirmed on 13 October 2021 (Second Pasquet Affidavit). 36 MBFSA, DTFSA and Daimler AG are solvent. The only liabilities that will be transferred to DTFSA are employee-related liabilities. Having regard to DTFSA's receipt of the Scheme Consideration, it will have sufficient cash to discharge those employee liabilities. As disclosed in the Scheme Booklet at s 5.6 and the Second Pasquet Affidavit, there has been no material change in the financial position of MBFSA since 30 June 2021.

EFFECT OF SCHEME ON CREDITORS OF MBFSA 37 This consideration was amongst the more important. Mr Pasquet, a director and chief financial officer of MBFSA, has given evidence that he does not believe that creditors of DTFSA will be adversely affected by the Scheme. Mr Pasquet has put into evidence MBFSA's: (a) audited consolidated financial report for the year ended 31 December 2021; (b) unaudited management accounts for the period from 1 January 2021 to 30 June 2021; and (c) opined that there has been no material change to the financial position of MBFSA since that time. 38 The use of unaudited management accounts is consistent with the approach adopted in Barrick (Australia Pacific Exploration) Pty Ltd v Barrick (PD) Australia Pty Ltd [2017] FCA 998 per Barker J ([40] and [58]). 39 MBFSA will receive cash consideration from DTFSA consistent with the fair market value of the CV Business as determined by an independent valuer. The cash consideration payable on 30 November 2021 has been estimated to be between €647 million to €686 million (being approximately AUD$998 million to AUD$1,058 million). 40 As at 30 June 2021, MBFSA's total assets exceeded its total liabilities by AUD$410,153,000. Factoring in the cash consideration payable for the CV Business, and assuming it is in the range stated in [39] above, Mr Pasquet is satisfied that MBFSA will continue to be solvent after the restructure, as the total assets of MBFSA will continue to exceed its total liabilities by a substantial margin. 41 MBFSA's major liabilities are to banks and financial institutions, and none of these funding arrangements are directly attributable to either the PC Business or CV Business individually. MBFSA currently funds the business as a whole and not by assets. None of MBFSA's corporate debt will be transferred to DTFSA. If the Scheme is implemented, the only MBFSA liabilities which will be transferred to DTFSA are in respect of employee entitlements. 42 Importantly, the creditors of MBFSA are also the beneficiaries of cross-guarantees provided by Daimler AG under a deed of cross-guarantee. 43 The restructure is intended to effect a solvent reorganisation of the business. Any creditors who have any concerns about the Scheme are entitled to appear at the second court hearing.

EFFECT OF THE SCHEME ON EMPLOYEES 44 This was an equally important consideration. Of MBFSA's approximately 170 employees, approximately 30 employees are transferring to DTFSA. As disclosed at s 6.3 of the Scheme Booklet, these employees will be transferred to DTFSA on the same terms and conditions as apply to them in their employment with MBFSA and DTFSA will recognise their accrued entitlements.

EFFECT OF THE SCHEME ON LITIGATION 45 Any existing litigation (if any) to which MBFSA is a party will not transfer to DTFSA, as explained in the First Pasquet Affidavit.

SCHEME CONSIDERATION 46 Under cl 4.4 of the SFD, in consideration for the transfer of the CV Business to it, DTFSA has agreed that it will pay the Scheme Consideration to MBSFA. Scheme Consideration has the meaning given to it in the Scheme. 47 Under the Scheme, Scheme Consideration is defined as being equal to the fair market value of the CV Business as at the Scheme Implementation Date as calculated by the independent expert, PWC GmbH Germany, that has been jointly instructed by Daimler AG and Daimler Truck AG. On the Scheme Implementation Date, DTFSA will pay a preliminary purchase price determined by PWC GmbH Germany in accordance with the terms of the Scheme and then, approximately 40 business days following payment of the preliminary purchase price, MBFSA will obtain PWC GmbH Germany's final calculation of the CV Business. 48 On 30 September 2021, ASIC asked MBFSA's solicitors to direct its attention to any examples where the scheme consideration was not known precisely by the time the member voted on it. On 1 October 2021, MBFSA directed ASIC's attention to cl 3.4(a) and cl 3.4 (b) of the Scheme in Woolworths where the scheme consideration did not consist of a specified value, as explained in the Third Shillington Affidavit. ASIC has not raised any further questions in connection with the Scheme Consideration and has indicated that it does not propose to appear. 49 I accept that there is nothing novel about the Scheme Consideration mechanism employed by MBFSA and that it is consistent with the approach in Woolworths which the court approved.

ADDITIONAL RESTRUCTURE STEPS OUTSIDE THE SCHEME 50 The transfer of the CV Business to DTFSA will also involve MBFSA separating a small number of dealer contracts that pertain to both the CV Business and PC Business. The renegotiation of these agreements with the dealers to reflect the new structure under MBFSA and DTFSA will occur outside of the Scheme and does not form part of the Scheme. This is explained in the Scheme Booklet.

CONFIDENTIALITY 51 Confidentiality orders were necessary only to protect the identity and particulars of contracting customers. There is no good reason for that information to be public and every reason that it should not be.

ENGAGEMENT WITH ASIC 52 ASIC was provided with drafts of the Scheme Booklet on 21 September 2021 and 12 October 2021. 53 The evidence reveals that on 13 October 2021, ASIC provided the 'usual letter' informing the parties that it does not propose to appear together with a letter confirming that it had waived the requirement for the Scheme Booklet to include an independent expert report.

CONCLUSION 54 I was satisfied that orders should be made in the terms sought for the convening of a meeting and for the purposes necessary and incidental to that purpose as identified in these reasons. I certify that the preceding fifty-four (54) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice McKerracher.