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[2010] FCA 45
plaintiff. Orders made approving the Schemes of Arrangement for members and optionholders (Appendices 2 and 3 to the Scheme Booklet), exemption granted from s 411(11) CA in accordance with s 411(12),...
The Federal Court (McKerracher J) approved Peak Coal's two related schemes of arrangement for shareholders and optionholders after finding that the meetings were properly convened, the statutory majorities were obtained, ASIC had a reasonable opportunity to consider the scheme and did not object, and the scheme was proposed in good faith for a legitimate commercial purpose. The Court rejected the contention that the scheme improperly sought to avoid takeover rules in Chapter 6, and held the scheme fair and reasonable.
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Peak Coal Limited sought to implement a corporate reorganisation by way of two schemes of arrangement under s 411 of the Corporations Act 2001 (Cth): one affecting its ordinary shareholders and one affecting optionholders holding options exercisable at $0.20 on or before 31 December 2011. The Court had previously granted leave to convene the requisite meetings (referred to in the judgment as Peak Coal No 1) on 21 December 2009 (see para 1). Peak Coal convened the members' meeting and an Optionholders' meeting, distributed a Scheme Booklet incorporating an Explanatory Statement, and held the meetings on 28 January 2010. Certified minutes of those meetings were provided to ASIC on 29 January 2010. ASIC indicated it would not appear at the approval hearing and stated it had no objection. The Court heard the approval application on 4 February 2010 and delivered reasons dated 5 February 2010. McKerracher J found that notice requirements and convening procedures had been complied with, that the required statutory majorities had approved the schemes at the meetings, that ASIC had a reasonable opportunity to consider the proposal and had not objected, and that the scheme was proposed in good faith for a proper commercial purpose and was fair and reasonable. The Court therefore made orders approving both Schemes, exempting compliance with s 411(11) pursuant to s 411(12), directed lodgement of an office copy with ASIC and ordered that the orders take effect immediately (paras 1, 6-12).
The decision turns on the statutory gatekeeper function the Court exercises under s 411 CA when asked to approve a scheme. McKerracher J restated the Court's role (following Santow J in Re NRMA (No 1)) as encompassing three key inquiries: (a) whether all statutory conditions in s 411 were complied with; (b) whether the majorities had acted in good faith and not for an illegitimate purpose; and (c) whether the proposal was sufficiently fair and reasonable for a hypothetically intelligent and honest person to approve it (para 3). The Court emphasised its supervisory jurisdiction and that its concern is to guard against oppression and to ensure the arrangement is reasonably capable of acceptance (para 4).
Applying those principles, the Court addressed the procedural and substantive questions the statute requires. On procedure, McKerracher J examined evidence about notice and content of the meetings and the Explanatory Statement, and concluded that the notices were adequate and the meetings were validly convened under ss 249H and 249J and s 412(1) (para 6-7). On statutory majorities, the Court relied on certified minutes demonstrating overwhelming support at both meetings (para 7).
On regulator engagement, the Court noted that ASIC received the minutes on 29 January, although the timeframe was short. The fact ASIC informed the Court it would not appear and stated it had no objection carried weight; following authorities such as Re Coles Group (No 2), McKerracher J observed that such a statement ordinarily implies ASIC is satisfied members have received material information and are not disadvantaged by the scheme (para 8). Given ASIC's non-objection and the materials before the Court, McKerracher J accepted ASIC had a reasonable opportunity to examine and make submissions under s 412(7) and s 411(2) (para 8).
On purpose, the Court confronted the suggestion that the scheme was a device to avoid Chapter 6 takeover rules. McKerracher J held that implementing something that might be characterised as a takeover via Chapter 5 does not, of itself, amount to an illegitimate purpose. The scheme had been disclosed as a method to secure 100% ownership by Wildhorse Energy Limited without the delay, cost and uncertainty of a Chapter 6 takeover, and the Court accepted that resolving ownership in a single transaction is a legitimate commercial objective (para 10). Finally, noting decisive shareholder and optionholder approval and the adequacy of disclosure, the Court concluded the scheme was fair and reasonable (para 11) and made the orders approving it (para 12).
Before this decision, the established tests for Court approval of schemes under s 411 were well-trodden: the Court requires compliance with statutory convening and voting requirements, ASIC must have an opportunity to consider and make submissions, and the Court must be satisfied that the scheme is proposed in good faith and is fair and reasonable, ensuring absence of oppression. McKerracher J expressly relied on relevant authority including Re NRMA (No 1), Re Stockbridge, Re ACM Gold and Re Coles Group (No 2) (paras 3-4, 8-10). Those authorities collectively articulate the Court's supervisory role and the interplay between Chapters 5 and 6.
This judgment does not alter legal tests, it applies them to the facts. Its contribution is confirmatory and practical: it reiterates that ASIC's formal statement of non-objection is significant evidence that ASIC has had a reasonable opportunity to consider the scheme (para 8), and it makes clear that electing to use Chapter 5 processes for what may be in effect a takeover is not itself illegitimate provided there is full disclosure and no evidence of an improper purpose (paras 9-10). The decision therefore reinforces the approach that Chapter 5 and Chapter 6 can operate in complementary fashion, and that courts will look to the substance of disclosure and purpose rather than the chapter label chosen by the parties (para 9).
Para 3: "The Court's role ... is to determine: (a) whether all the conditions required by s 411 CA have been complied with; (b) whether the majority ... have acted in good faith ...; and (c) whether the proposal was sufficiently fair and reasonable ..." Plain-English: The Court must check the paperwork and procedure are correct, ensure shareholders and optionholders voted for proper reasons, and decide whether a reasonable person would regard the deal as fair.
Para 4: "the jurisdiction is fundamentally supervisory ... concerned to satisfy itself that there has been an absence of oppression ..." Plain-English: The Court's job is to oversee and protect against abuses, not to re-run commercial decisions; it asks whether the arrangement is oppressive or unfair.
Para 7: "I am satisfied that adequate and proper notice ... the sole resolution ... was passed by an overwhelming majority ..." Plain-English: The Court accepted the meetings were legally called and that shareholders and optionholders overwhelmingly approved the schemes.
Para 8: "ASIC ... has no objection to the scheme ... the statement from ASIC normally carries with it the implication that ASIC is satisfied ..." Plain-English: ASIC's formal non-objection is persuasive evidence that the regulator considers the information given to investors sufficient and that they were not being short-changed.
Para 10: "There is no evidence ... other than in good faith ... to guarantee Wildhorse Energy Limited one hundred per cent ownership ... without the delay, cost, expense and uncertainty associated with a Ch 6 CA takeover." Plain-English: The disclosed commercial reason for using a scheme, to give a buyer certainty and avoid the time and expense of a formal takeover, is legitimate and not a reason to refuse approval.
This decision is directly relevant where:
In such fact patterns, this judgment supports approval where statutory notice, voting and disclosure conditions are met, ASIC has had an opportunity to review and does not object, and there is no evidence of improper purpose.
This judgment itself relies upon and applies previous authorities; it is relatively short and fact-specific. It confirms established lines rather than creating new law. Later courts, when considering scheme approvals, will continue to examine statutory compliance, the conduct and purpose of majorities, and ASIC's position. The specific emphasis McKerracher J places on ASIC's written non-objection as carrying indicia of satisfactory disclosure echoes observations in Re Coles Group (No 2) and will be relied upon where ASIC takes a similar stance. Practitioners should note that timeliness of ASIC involvement matters, but a clear statement of non-objection will be influential. This decision therefore fits within a body of authority that treats regulator engagement and full, Chapter-6-like disclosure as central to the acceptability of Chapter-5 schemes that effect control changes (paras 8-9).
Conclusion Peak Coal (No 2) is a concise application of established principles governing scheme approvals under s 411 CA. It confirms that procedural regularity, statutory majorities, adequate disclosure, and a regulator's non-objection together provide a secure foundation for approval, even where the scheme effects a change of control that might alternatively have been pursued under Chapter 6. The decision is a useful practical example for practitioners preparing scheme materials and managing ASIC engagement when a takeover-style outcome is sought via Chapter 5.
REASONS FOR JUDGMENT 1 On 21 December 2009, I granted leave to the plaintiff (Peak Coal) to convene a meeting of shareholders to consider and, if thought fit, to approve a scheme of arrangement (a Share Scheme) (Peak Coal Limited (ACN 125 884 031), In the matter of Peak Coal Limited (ACN 125 884 031) [2010] FCA 6) (Peak Coal No 1). I also gave leave for Peak Coal to convene a meeting (Option Holders Meeting) of each person registered as a holder of an option issued by Peak Coal with an exercise price of 20 cents expiring on 31 December 2011 (Optionholders) for the purpose for considering and, if thought fit, approving with or without amendment the scheme of arrangement contained in the Scheme Booklet, the Booklet which was before the Court when those orders were made (the Option Scheme). Additional ancillary orders were made to facilitate the granting of leave for purposes of s 411 of the Corporations Act 2001 (Cth) (CA). 2 This (from the Court's perspective), is the second stage in relation to the implementation of the Scheme. 3 The Court's role as observed by Santow J in Re NRMA (No 1) (2000) 156 FLR 349 (at 361) on this occasion is to determine: (a) whether all the conditions required by s 411 CA have been complied with; (b) whether the majority of members or creditors (in this case, the Optionholders), though acting regularly, have acted in good faith and not in pursuit of some illegitimate purpose; and (c) whether the proposal was sufficiently fair and reasonable for an intelligent honest person, able to do so, to approve it (to paraphrase somewhat what was said by Fry LJ in Re Alabama, New Orleans, Texas and Pacific Junction Railway Co (1891) 1 Ch 213 at 247). 4 As observed in a number of cases (including Re Stockbridge Ltd (1993) 9 ACSR 637 (at 646-648) per Murray J), the jurisdiction is fundamentally supervisory with the Court being concerned to satisfy itself that there has been an absence of oppression and that the compromise or arrangement is one which is reasonably capable of being accepted. 5 It is unnecessary to repeat the reasons for making the orders in Peak Coal No 1. From a practical perspective, the remaining issues specific to Peak Coal on which it is necessary to be satisfied are that before making orders under s 411(4)(b) CA: (a) the meetings convened by Peak Coal were convened and held in accordance with the orders made at the 'convening' hearing on 21 December 2009 in Peak Coal No 1; (b) the resolutions required to be passed were passed at those meetings by the majorities required by s 411(4)(a) CA; (c) Peak Coal otherwise complied with the orders in Peak Coal No 1; and (d) the Australian Securities and Investments Commission (ASIC) has had a reasonable opportunity to examine Peak Coal's Explanatory Statement and to make submissions to the Court in relation to thereto (s 412(7) CA). 6 Dealing with the first three matters, Peak Coal is not a company listed on the Australian Securities Exchange. Pursuant to s 249H(1) CA, at least 21 days notice is to be given of a meeting of members of an unlisted company. Each member is to be given written notice (s 249J(1) CA) and a meeting may be given by any means that the company's constitution (if any) permits (s 249J(3)(d) CA). There is substantial affidavit material relating to the method by which and the time within which notice of the meeting and the content was given. As to the content, an Explanatory Statement is required to be given with every notice convening a s 411 meeting (s 412(1) CA). 7 It is not necessary to record the minute detail of that evidence. Suffice it to say that I am satisfied that adequate and proper notice of the meeting was given. At the members' meeting held on 28 January 2010, the sole resolution to be put to the members was passed by an overwhelming majority in accordance with the requirements of s 411(4)(a) CA. On the same date, a meeting of the Optionholders was held in a manner in which I am satisfied fulfils the requirement of the CA, and at the Optionholders meeting the sole resolution to be put to the Optionholders was also passed by the majority as required by statute (s 411(4)(a) CA). There is also detailed evidence as to the advertising of the specified notices of the shareholders' meeting and the Optionholders' meeting and the dates and circumstances upon which such notice was given. 8 As to the notice given to ASIC, ASIC did not wish to attend the convening application giving rise to the orders in Peak Coal No 1. ASIC has received, on 29 January 2010, certified copies of the minutes of each of the two meetings. While the timeframe is not generous, I am satisfied, in light of the content of the material, that ASIC has had a reasonable time to examine the terms of the proposed scheme and to make submissions to the Court in accordance with the requirements of s 411(2) CA. In that regard I am particularly mindful that ASIC has provided written notice that it does not intend to appear at this second hearing and, moreover and more importantly, that it has no objection to the scheme of arrangement proposed by Peak Coal. As Robson J observed in Re Coles Group Ltd (No 2) (2007) 215 FLR 411 (at [75]-[77]), the statement from ASIC normally carries with it the implication that ASIC is satisfied that the members have received all material information they need for their decision; that they have received reasonable and equal opportunity to share in the benefits under the scheme; and that members are not being adversely affected by the takeover proceeding by a scheme of arrangement. 9 The statement of non-objection by ASIC is important but regardless of that statement, I can see no indication that the purpose of the Scheme is to avoid the mechanisms of Ch 6 CA dealing with takeovers. Whilst the result of the Scheme could be characterised as a 'takeover' and could have been implemented under Ch 6 CA, the fact that it was proposed under Ch 5 does not imply that it was proposed for the purpose of avoiding the operation of Ch 6 CA. There is no legislative preference for implementing a 'takeover' under Ch 6 CA as opposed to Ch 5 CA. As to the level of disclosure, in any event, as observed in Peak Coal No 1, the Explanatory Statement does give the level of disclosure and information required under the provisions of Ch 6 CA so that in substantial effect, the primary risk of mischief to which Ch 6 CA is directed will not arise. The two chapters compliment one another: s 411(17) CA (Re ACM Gold Ltd (1992) 34 FCR 530 at 538. 10 There is no evidence to suggest that the Scheme has been proposed other than in good faith and for a proper purpose. There appears to be nothing in Peak Coal's Constitution which is contrary to any term of Scheme. In the present case there is disclosure that the Scheme was proposed as a means of guaranteeing Wildhorse Energy Limited one hundred per cent ownership of Peak Coal without the delay, cost, expense and uncertainty associated with a Ch 6 CA takeover. I do not consider that the entire ownership of Peak Coal being resolved at the one time is an illegitimate commercial interest: Re Stockbridge at 653 and Re International Goldfields Ltd [2004] WASC 112 per Barker J (at [32]). 11 In all the circumstances the Scheme is fair and reasonable. The shareholders and Optionholders at each of the meetings both voted overwhelmingly in favour of the schemes with one abstention only but no votes being cast against either of the schemes. 12 For the foregoing reasons, I make the following orders: 1. The Schemes of Arrangement between the plaintiff and its: (a) members; and (b) optionholders of options to acquire ordinary fully paid shares of the plaintiff exercisable at $0.20 on or before 31 December 2011, being Appendix 2 and 3 respectively to the Scheme Booklet (which incorporates the Explanatory Statement) which is included in Annexure "GL-6" to the affidavit of George Lasarou sworn on 15 October 2009 and substituted with the Scheme Booklet filed on 18 December 2009 as well as agreed to by resolutions of the members and optionholders of the plaintiff at meetings of its members and optionholders on 28 January 2010, be approved. 2. That, in accordance with s 411(12) of the Corporations Act 2001 (Cth) ("CA"), the plaintiff is exempt from compliance with s 411(11) CA. 3. An office copy of this order be lodged with the Australian Securities and Investments Commission within 14 days. 4. That, pursuant to s 411(1) CA, these orders have effect from the date of this order. 5. Liberty to apply. I certify that the preceding twelve (12) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice McKerracher.
Orders made approving the Schemes of Arrangement for members and optionholders (Appendices 2 and 3 to the Scheme Booklet), exemption granted from s 411(11) CA in accordance with s 411(12), direction to lodge an office copy with ASIC within 14 days, orders effective from the date of the order, and liberty to apply (Order paragraphs and Reasons paras 1, 12).