Director benefits and recommendation of the Scheme
83 Clause 6.1 of the Scheme Implementation Deed provides that QMS must procure that each QMS Director will recommend that QMS Shareholders vote in favour of the Scheme, "in the absence of a superior proposal and subject to the independent expert concluding and continuing to conclude that the Scheme is in the best interests of the QMS Shareholders".
84 The QMS Board unanimously recommends that QMS Shareholders vote in favour of the Scheme, in the absence of a Superior Proposal and subject to the Independent Expert continuing to conclude that the Scheme is in the best interests of QMS Shareholders.
85 I need not rehearse what I said in Re Kidman Resources Limited [2019] FCA 1226 at [103]-[115] about whether a director who receives benefits under a scheme different from that of other shareholders should make a recommendation to shareholders to vote in favour of the scheme.
86 Since that decision, the issue has been considered by Black J in Re Villa World Limited [2019] NSWSC 1207 at [31]-[40]. With respect, I agree entirely with the views expressed by his Honour in the following passages of his reasons in that case:
31 In submissions, Villa World acknowledges that, where a director will receive a substantial benefit in relation to the scheme that other shareholders will not receive, then that benefit should be fully and prominently disclosed as a matter for shareholders to take into account when considering that director's recommendation: Re SMS Management & Technology Ltd [2017] VSC 257; Re Nzuri Copper Ltd [2019] WASC 189 at [88]; Re Ruralco Holdings Ltd [2019] FCA 878 at [28]; Re Kidman Resources Ltd [2019] FCA 1226 at [115].
32 In Re SMS Management & Technology Ltd above at [25]-[27], Robson J addressed this issue and noted that reg 8301(a) of Schedule 8 of the Corporations Regulations 2001 (Cth) required that the information provided to members in respect of a members scheme of arrangement must set out, in relation to each director of the company:
(i) whether the director recommends the acceptance of the Scheme or recommends against acceptance and, in either case, his or her reasons for so recommending; or
(ii) if the director is not available to consider the Scheme - that the director is not so available and the cause of his or her not being available; or
(iii) in any other case - that the director does not desire to make, or does not consider himself or herself justified in making, a recommendation and, if the director so requires, his or her reasons for not wishing to do so...
33 His Honour there noted a recommendation supporting the scheme by a director who would receive such a benefit, where the nature of that benefit was disclosed in the scheme booklet, and observed (at [26]) that:
In my view, it is appropriate for [the managing director] to make the recommendation that he proposes. I think it is important that the managing director, who in this case is the main moving force behind the company, give his reasons for putting forward the scheme. In my opinion, the footnote to the chairman's letter [disclosing the benefit] satisfies the concerns raised by ASIC.
34 Mr Jackman recognises that two recent cases have taken the different view that, as a general rule, a director who will receive such a benefit should decline to make a recommendation to shareholders as to how they should vote. In Re Gazal Corporation Ltd [2019] FCA 701 at [30], Farrell J observed that:
In my view, it would have been better practice for [the director who would receive a benefit] to adopt the common practice of declining to make a recommendation to shareholders as to how they should vote, and to explain that the reason for that is that he will receive a substantial benefit depending on the outcome of the scheme which other shareholders will not receive. While it is most important that there be prominent disclosure in a scheme booklet of those matters which might, realistically, affect a director's judgment in making a recommendation about whether shareholders should vote in favour of approving a scheme, directors who are interested in the outcome of the scheme because they stand to receive a bonus or benefit (other than as a shareholder) only if the scheme proceeds should exercise caution in making recommendations and, in my view, generally should not do so. As demonstrated in this case, the disclosure did not carry over in summary statements of the directors' recommendation. Both the front of the Scheme Booklet and the script used for telephone canvassing of shareholders contained the directors' recommendation without reference to the fact that [the director] would receive a bonus.
35 In Re Navitas Ltd (No 2) [2019] WASC 218 at [32], Vaughan J took the same view as Farrell J in Re Gazal Corporation Ltd above.
36 However, that view was not followed in Re Kidman Resources Ltd above at [105]-[115], where O'Callaghan J considered that view was inconsistent with the combined effect of s 412(1)(a) of the Act, reg 5.1.01(i)(b) of the Corporations Regulations and reg 8301(a) of Schedule 8, and was inconsistent with the ordinary expectations of shareholders, and preferred the reasoning in Re SMS Management & Technology Ltd above.
37 Mr Jackman submits that the reasoning Re SMS Management & Technology Ltd above and Re Kidman Resources Ltd above should be preferred to that of Re Gazal Corporation Ltd above on this issue, and the scheme booklet prepared by Villa World proceeds on that basis so far as Mr Treasure makes a recommendation supporting the scheme. Mr Jackman also submits that a resolution of the different views expressed in the recent cases would be of assistance to practitioners who are advising in respect of schemes of arrangement. While it may be unlikely that one further judgment will resolve this position, I should indicate my view as to this issue, which squarely arises in this application.
38 On balance, and for three reasons, I prefer the approach adopted in Re SMS Management & Technology Ltd above and Re Kidman Resources Ltd above to the approach adopted in Re Gazal Corporation Ltd above and Re Navitas Ltd (No 2) above. First, it seems to me that reg 8301(a) of Schedule 8 of the Corporations Regulations contemplates that a director should make a recommendation and give reasons for doing so, unless he or she does not feel justified in doing so; and, as I will note below, there would be real inconsistency in a director at once supporting a scheme as a member of the board and then taking the position in the scheme booklet that he or she was not justified in making a recommendation about it to shareholders.
39 Second, I am not persuaded that there is or should be any general rule or principle that it is preferable that a director should not make a recommendation to shareholders on the basis of an interest in the outcome of the scheme arising from incentive or performance rights or the like. It seems to me that in many, or most cases, shareholders will benefit from such a recommendation, with appropriate disclosure as to the nature of the interest to allow them to assess the weight to be given to it. The importance of such disclosure was, of course, recognised in each of the cases to which I have referred above and, in Re Ruralco Holdings Ltd above, Farrell J made orders convening a scheme meeting although a director had there recommended to shareholders that they vote in favour of the scheme, where the director would receive an immediate cash payment under an executive performance plan as a result of implementation of the scheme.
40 Third, there will be many cases where an executive director of a scheme company, who has an interest in the outcome of a scheme arising from incentive or performance rights or the like, would properly participate in the board's decision whether to go forward with the proposed scheme, as distinct from any decision as to how his or her incentive or performance rights should be treated if the scheme is implemented. Possibly rarely, a director in that situation may be entitled to participate in board decisions concerning the proposed scheme because the benefit arising from any incentive or performance rights or the like that would arise from implementation of the scheme is not a material personal interest for the purposes of s 195 of the Corporations Act, and the company's constitution permits his or her participation after he or she has disclosed his or her interest. Second, a director in that situation may be entitled to participate in such board decisions because that interest falls within an exception in s 195(1A), where it is not required to be disclosed under s 191 of the Act , and the company's constitution permits his or her participation. Third, a director in that situation may be entitled to participate in such board decisions because other directors have authorised his or her participation in them in the manner contemplated by s 195(2) of the Corporations Act. It seems to me that, where a director was entitled to and did participate in a decision that a company should go forward with a scheme, there would be little utility and real inconsistency in then preventing that director from making a recommendation to shareholders consistent with the view that he or she took as a member of the board, subject to appropriate disclosure of his or her personal interest in the explanatory materials for the scheme.
87 I respectfully do not agree with the view expressed by O'Bryan J in Re Wellcom Group Limited [2019] FCA 1655 at [60] that no inconsistency of the type described by Black J would arise. There will be many cases, as Black J explains, where a director with an interest in the outcome of a proposed scheme may properly participate in the board's decision whether to proceed with it. In my view, as Black J says, there would be little utility and real (and I think undesirable), inconsistency "in a director at once supporting a scheme as a member of the board and then taking the position in the scheme booklet that he or she was not justified in making a recommendation about it to shareholders". That outcome would be contrary to the expectation of shareholders and does not sit well with regs 8301(a) and 8302 of Schedule 8 of the Corporations Regulations 2001 (Cth). See Re Kidman Resources Limited [2019] FCA 1226 at [103]-[115].
88 Be that as it may, as all the cases make clear, the critical consideration for the court at this stage is to determine whether the relevant benefit or benefits have been properly disclosed.
89 In the present case, the opening page of the Scheme Booklet contains a footnote that reads: "In respect of the recommendations of Barclay Nettlefold and David Edmonds, QMS Shareholders should have regard to the fact that, if the Scheme is implemented, Barclay Nettlefold and David Edmonds will receive benefits as further detailed in Section 2". Section 2 is at pages 12-13 and is headed: "IMPORTANT INFORMATION REGARDING DIRECTORS' RECOMMENDATIONS". All the relevant and important information about the benefits that they will receive if the Scheme is implemented is then set out in detail.
90 The footnote is then repeated at pages 14, 15, and 19 under the rubric of "KEY CONSIDERATIONS RELEVANT TO YOUR VOTE", at page 23 under "FREQUENTLY ASKED QUESTIONS" and at page 79 under "RISKS".
91 And the text of the footnote also appears in the body of the Chairman's letter at page 9.
92 In such circumstances, there is proper (and repeated) disclosure which no reasonable reader could possibly miss, or fail to understand.