Re Dorman Long & Co Ltd; Scottish Insurance Corp Ltd v Wilsons and Clyde Coal Co Ltd

Re NRMA Ltd [No. 1] [2000] NSWSC 82; (2000) 33 ACSR 595.

Re Dorman Long & Co Ltd; Scottish Insurance Corp Ltd v Wilsons and Clyde Coal Co Ltd [1949] UKHL 3; [1949] AC 462.

Re Coles Group Limited (No. 2) [2007] VSC 523.

Re Lonsdale Financial Group Limited (No. 2) [2007] VSC 525.

Re IWL Limited [2007] VSC 530.

Re Opes Prime Stockbroking Ltd (No. 2) (2009) 73 ACSR 411.

Re Stockbridge Ltd (1993) 9 ACSR 637.

Re GRD Limited [2009] FCA 1595.

Re Permanent Trustee Co [2002] NSWSC 1177; (2002) 43 ACSR 601.

Zenyth Therapeutics Ltd v Smith [2006] VSC 436; (2006) 60 ACSR 548.

Re Hudson Conway Limited (2000) 33 ASCR 657.

Re Amcor Limited (2000) 345 ACSR 199.

1 This proceeding was commenced on 13 November 2009 by way of originating process under the Supreme Court (Corporations) Rules 2003 seeking orders that:

(a) a meeting of the members of the plaintiff ("Cytopia") be convened pursuant to s 411(1) of the Corporations Act 2001 ("Act") to consider a scheme of arrangement ("Scheme");

(b) for approval of the Scheme under ss 411(4) and/or 411(6) of the Act in the event that it was agreed to by the members.

2 The commercial purpose of the Scheme is to give effect to the merger of Cytopia with YM BioSciences, Inc ("YM"), a Canadian listed company, by the acquisition of all of the shares in Cytopia by YM in exchange for shares in YM.

3 On 8 December 2009, Davies J ordered that a meeting of the members of Cytopia be convened and held on 12 January 2010 for the purpose of considering the Scheme ("Scheme Meeting"), and that the further hearing of the originating process be adjourned to the judge in the Practice Court on 15 January 2010. Davies J made a number of other procedural orders and directions, to which reference is made below ("December Orders"). Davies J published reasons for her decision ("Reasons").[1]

4 The meeting of the members of Cytopia was duly convened and held, and the resolution agreeing to the Scheme was duly agreed to by the majority stipulated in s 411(4)(a)(ii) of the Act. The resolution was agreed to by 99.67% of the votes cast.

5 At the adjourned hearing on 15 January 2010, the plaintiff sought an order approving the Scheme. On the making of such an order then, by virtue of s 411(4), the scheme becomes binding upon the members and upon Cytopia when the order takes effect. Under s 411(10), and in the absence of any earlier date being stipulated in the order, this will occur upon the lodgement of an office copy of the order with ASIC.

6 Rule 16.6 of the Supreme Court (Corporations) Rules 2003 ("Rules") provides (amongst other things) that if an order has been made for the convening of a meeting to consider a resolution, the party obtaining the order must attend before an Associate Justice after the meeting is held and the Associate Justice shall inquire whether the meeting was duly convened and held and whether the resolution was duly passed.

7 By order 12 of the December Orders, Davies J ordered that the requirements of Rule 16.6 of the Rules be dispensed with. The reason for this was that an Associate Justice is not available during the first half of January to conduct the inquiry. As a result, it is necessary for Cytopia to satisfy the Court at the hearing on 15 January that the meeting was duly convened and held, and the resolution passed by the required majority. I am satisfied that proper notice of the adjourned hearing on 15 January 2010 was given in accordance with the Rules.

8 I am satisfied on the basis of the evidence referred to in the plaintiff's submissions at the adjourned hearing on 15 January 2010 that the meeting was duly convened and held and the resolution was duly passed by the required majority.

9 In approving a scheme of arrangement, the role of the Court 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.[2]

"When the approval stage is reached, the court's task is well settled:

'... 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'* Fundamentally, the jurisdictions is supervisory; the court is concerned to be satisfied that there has been an absence of oppression and that the compromise or arrangement is one which is capable of being accepted: see Re Dorman Long & Co Ltd [1934] Ch 635; Scottish Insurance Corp Ltd v Wilsons and Clyde Coal Co Ltd [1949] UKHL 3; [1949] AC 462 at 486.

*Per Fry LJ in Re Alabama, New Orleans, Texas and Pacific Junction Railway Co [1891] 1 Ch 213 at 24.7 [Footnote abbreviated]."

See also Robson J in Re Coles Group Limited (No. 2),[3] Re Lonsdale Financial Group Limited (No. 2)[4] and Re IWL Limited.[5]

11 In Re Opes Prime Stockbroking Ltd (No. 2),[6] Finkelstein J adopted the following statement from Buckley on Companies.[7] 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 blot is found in the scheme."

12 The Scheme is subject to a number of conditions being satisfied. These conditions precedent are referred to in clause 3 of the Scheme[8] which cross references the conditions precedent referred to in the implementation agreement entered into by Cytopia and YM.[9]

13 Clause 3(d) of the Scheme provides that at the Scheme approval hearing Cytopia and YM will provide to the Court a certificate confirming whether or not the conditions precedent in the implementation agreement (other than the condition relating to Court approval) and the Scheme have been satisfied or waived. Such a certificate was exhibited to the fifth affidavit of Ashley Neil Arnott sworn 15 January 2010.

Approval of the scheme of arrangement - exercise of discretion

14 Relevant matters to the exercise of the Court's discretion include the following:

(a) the support of the Shareholders as reflected in the voting results of the Scheme Meeting;[10]

(b) the opinion of the independent experts that the Scheme is in the best interests of Shareholders;[11]

(c) the terms and nature of the Scheme and the transaction;

(d) the unanimous recommendation of the board of directors of Cytopia;

(e) considerations referred to in the Scheme Booklet;

(f) the position of ASIC in relation to section 411(17);

(g) the fact that the Scheme formed part of a larger transaction involving the cancellation of various series of options;[12] and

(h) the evidence of Robert Charles Gregory Watson ("Watson"), the chairman of Cytopia.

15 With further reference to the report of the independent experts, the Scheme Booklet[13] indicates that the experts have applied ASIC's Regulatory Guide 111 in concluding that the transaction is not fair on the basis that the value of the YM shares to be provided as the scheme consideration is less than their assessed value of the shares in Cytopia. The independent experts have, nevertheless, formed the view that the transaction is reasonable, and in the best interests of Cytopia shareholders.[14] The size of the majority in favour of the Scheme, both in terms of numbers and votes, permits the Court to infer that the Shareholders found these considerations persuasive.

16 As stated by the independent experts, ASIC's regulatory guide 111 indicates that experts who are asked to opine on whether a transaction is "fair and reasonable" should give separate consideration to fairness and reasonableness, and not treat them as a composite expression. The issues arising out of this, and the discussions of those issues in earlier cases, were considered by Davies J in the Reasons.[15]

17 The experts' report included in the Scheme documents before the Court in Re Coles Group Ltd also stated the view that the transaction was not fair but reasonable.[16] A more recent example is provided by Re GRD Limited.[17] It can be seen from the discussion of the expert's report that Gilmour J[18] approached the matter in a similar way to Davies J[19] in this case.

18 In light of these matters, the Court is satisfied that the Scheme of arrangement is made in good faith and is "at least so far fair and reasonable that an intelligent and honest [person], who is a member of the class concerned, and acting alone in respect of [their] interests as such a member, might approve it"[20] and that it is accordingly appropriate that the Court exercise its jurisdiction to approve the scheme of arrangement. See also Re Permanent Trustee Co[21] and Zenyth Therapeutics v Smith.[22]

19 Section 411(11) of the Act requires, subject to s 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.

20 In my opinion, the exemption from compliance with s 411(11) is appropriate given that current and potential security holders are capable of being fully informed of the Scheme through the ordinary channels for distribution of information regarding listed companies. An order under s 411(12) is regularly made on this basis (for example see the order made by Beach J in Re Hudson Conway Limited[23] and the order made by Warren J (as she then was) in Re Amcor Limited[24] and Judd J in Re Lion Selection Limited.[25]) There is no alteration to the constitution of Cytopia or to the rights of shareholders, creditors or other persons dealing with the company as a result of the Court approving the Scheme.[26] It is noted that the plaintiff submitted that the nature of the Scheme is such that it will be fully implemented within a short period after its approval by the Court, after which time Cytopia will be a wholly owned subsidiary of YM and the scheme will be of merely historical interest.[27]

21 The evidence of Watson is that the transaction as presently structured was not proposed for the purpose of enabling any person to avoid the operation of any provision of Chapter 6 of the Act. Additionally, a statement in writing by ASIC has been provided stating that ASIC has no objection to the arrangement and no issues have been raised with respect to s 411(17) of the Act. Consequently, it is not necessary to consider matters with respect to s 411(17) any further.

22 YM intends to rely upon an exemption from the registration requirements of the United States securities legislation in respect of the YM shares it issues to Cytopia shareholders on the implementation of the Scheme. It may do so if it meets the conditions of s 3(a)(10) of the Securities Act of 1933, which provides:

"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 of other governmental authority expressly authorized by law to grant such approval."

23 YM has been advised that it is the practice of the US Securities and Exchange Commission, in giving rulings confirming the applicability of this section to a particular case, to require confirmation that the court approving the terms and conditions of the exchange has been informed that reliance is intended to be placed on s 3(a)(10). The plaintiff so informed the Court and a note to this effect was included in the "other matters" section of the draft orders which were provided for the adjourned hearing. No order or ruling was sought by either Cytopia or YM as to the applicability of the provision.

24 For these reasons, I approve the Scheme and make the orders sought at the adjourned hearing on 15 January 2010.

[1] [2009] VSC 560.

[2] Re NRMA Ltd [No. 1] [2000] NSWSC 82; (2000) 33 ACSR 595 at 607 per Santow J, applying Re Dorman Long & Co Ltd; Scottish Insurance Corp Ltd v Wilsons and Clyde Coal Co Ltd [1949] UKHL 3; [1949] AC 462 at 486.

[3] [2007] VSC 523.

[4] [2007] VSC 525.

[5] [2007] VSC 530.

[7] (14th ed, 1981) vol 1, 473-474 (which is slightly different terms from the corresponding passages in the later editions of the work).

[8] Set out in Annexure D of the Scheme Booklet, p 186.

[9] Set out in the Scheme Booklet, p 171.

[11] See Annexure A of the Scheme Booklet, particularly pp 133 and 148.

[12] See Re Stockbridge Ltd (1993) 9 ACSR 637 at 653.

[14] For the reasons set out in paragraphs 151 and 153-172 of their Report.

[16] See [2007] VSC 389 at paragraph [77]- [79].

[17] [2009] FCA 1595.

[20] Re Alabama, New Orleans, Texas and Pacific Junction Railway Company (1891) 1 Ch 215 at 247, per Fry LJ.

[21] [2002] NSWSC 1177; (2002) 43 ACSR 601 at [8]- [10].

[22] [2006] VSC 436; (2006) 60 ACSR 548.

[23] (2000) 33 ASCR 657 at 668.

[24] (2000) 345 ACSR 199 at [35] and [36].

[26] See Re Lion Selection Limited at [24].

[27] See also Re GRD Limited at [36] to [38].