Re Lion Selection Ltd [2009] VSC 546 (3 December 2009)

2 The proposed scheme between Lion Selection and its members is designed to have the effect of converting the company into a wholly owned subsidiary of Catalpa Resources Limited. Lion Selection and Catalpa are companies listed on the Australian Stock Exchange.

3 On 9 October 2009 Robson J ordered a meeting of Lion Selections shareholders for the purpose of considering the Scheme of Arrangement referred to in paragraph 45 of an affidavit of Craig Kevin Smyth sworn 1 October 2009 and filed in this proceeding. Orders were made for a Scheme Meeting to take place on 17 November 2009 and for notification to shareholders by sending to each of them a Scheme Booklet and other material.

4 The Scheme Meeting took place and on 25 November 2009 Efthim AsJ made orders, pursuant to Rule 6.6 of the Rules of Court, that the meeting was duly convened and that the resolution under s 411(4) of the Corporations Act was duly passed at the meeting in accordance with the orders of Robson J.

5 The Merger Implementation Agreement between Lion Selection and Catalpa, dated 24 June 2009, contained conditions precedent. The scheme was conditional on all conditions being satisfied or waived. By a certificate dated 27 November 2009, Lion Selection certified, in accordance with cl 3.3 of the Scheme of Arrangement, that each condition set out in cl 3.1 of the Merger Implantation Agreement, other than the condition set out in cll 3.1(f) and 3.2(g), had been satisfied or, subject to the terms of the Merger Implantation Agreement, had been waived. Clause 3.1(f) required court approval of the scheme and cl 3.2(g) required the court order to be lodged with ASIC. Both of those events could only occur upon approval.

6 On 9 November 2009 Lion Selection published notice of the Scheme Meeting in The Australian newspaper. On 18 November 2009 it published a notice of the hearing of this application to approve the scheme in The Australian newspaper. The Scheme Booklet, sent to each shareholder, included a schedule of key dates and timetables including the date for this hearing for approval of the scheme.

7 At the Scheme Meeting, 79.67% of voted shares were in favour of the resolution to approve the scheme while 20.33% voted against the scheme. 91.16% of the contrary votes were cast by HSBC Custody Nominees (Australia) Ltd, which holds a parcel of shares on behalf of Laxey Partners Ltd, an investor based in the Isle of Man. Accordingly, the contrary votes were overwhelmingly dominated by a single shareholder which could have, but did not, appear to resist this application for approval.

8 Counsel for Lion Selection brought to the court's attention a number of matters which might be regarded as irregularities or which in some way might be perceived to have compromised the information available to shareholders. The first matter concerned an invitation to shareholders to attend a briefing by Lion Selection and Catalpa to be held in Melbourne, Sydney, Brisbane, Adelaide and Perth. The invitation accompanied the Scheme Booklet sent to shareholders pursuant to the order of Robson J. On 28 October 2009 Lion Selection published to the ASX a document entitled "Lion Shareholder Briefing" which was employed by Lion Selection at meetings held in Melbourne on 28 October 2009 and in Sydney and Brisbane on the following day. It was in the form of a slide presentation.

9 On 29 October 2009 Lion Selection received a letter from ASIC concerning the briefing document. ASIC complained that the information had been omitted from the Scheme Booklet and was material to decisions to be made by Lion Selection shareholders. ASIC expressed concern that the additional information was not balanced because it did not discuss the risks and disadvantages and may be misleading. ASIC was also concerned that the information had not been brought to the attention of the court on 9 October 2009.

10 As a consequence, Lion Selection cancelled briefing meetings to be held on 30 October in Adelaide and Perth. It advised ASIC of its intention to withdraw the briefing document and complied with a suggestion by ASIC that its notification of withdrawal be accompanied by information regarding the risks and disadvantages of the scheme. ASIC was provided with a draft joint announcement to be made by Lion Selection and Catalpa and a draft letter to shareholders which included an extract from the Scheme Booklet in relation to the risks and disadvantages of the proposed transactions. ASIC suggested some amendments and they were adopted and included in the final version.

11 In a joint announcement to the ASX, made by release dated 2 November 2009, Lion Selection and Catalpa notified the ASX and shareholders of its withdrawal of the shareholder briefing. On the same day a letter was sent to shareholders in the form agreed with ASIC accompanied by section 7 from the Scheme Booklet - "Risks and Disadvantages of the Transaction".

12 By letter dated 26 November 2009 ASIC informed Lion Selection's solicitors that it had no objection to the scheme. Accordingly, I may conclude that the steps that were taken were satisfactory to ASIC. My own review of the material leads me to the conclusion that a shareholder receiving the letter dated 2 November 2009 could not reasonably have persisted with any misunderstanding that might have been created as a consequence of a briefing meeting.

13 The next matter brought to my attention was that the Merger Implementation Agreement included a condition in relation to rulings from the Australian Taxation Office. It was a condition that before the application for approval Lion Selection had obtained written confirmation from the ATO that its shareholders would have the benefit of merger relief upon the transfer of all of the shares in Lion Selection Group Ltd as contemplated by the Demerger Resolution. Mr Smyth, company secretary, deposed that the ATO ruling condition was included in the Merger Implantation Agreement solely for the benefit of Lion Selection and may be waived. The Scheme Booklet made reference to taxation issues. It stated at paragraph 11.1.2,

Lion Selection has applied to the Commissioner of Taxation for rulings in relation to the demerger and cash distribution (the Lion Selection Class Rulings) confirming the income tax implication set out in the summary below. Any Lion Selection Class Ruling with the Commissioner of Taxation issues will only apply to Lion Selection shareholders who are Australian residents for income tax purposes and who hold their shares as capital assets. Lion Selection cannot provide any assurance that the requested Lion Selection Class Rulings will in fact be issued or that they will confirm the position set out in the summary below. The income tax implications of the Scheme may therefore differ from the income tax implications set out below.

14 At paragraph 11.1.5 of the Scheme Booklet, Lion Selection went a little further. After summarising the earlier reference to an application for a Class Ruling it continued,

Whilst this summary reflects the expected outcomes to be confirmed by the ATO in the Class Ruling, the final Class Ruling cannot be issued until after this capital return is completed. Although it is not anticipated to be the case, when the final Class Ruling is issued by the ATO, it is possible that it may express a view contrary to that set out in this booklet.

15 Counsel for Lion Selection, quite properly, drew these matters to my attention in the context of Lion Selection having waived compliance with the condition requiring a ruling. Lion Selection may well anticipate a favourable outcome although it was made clear that a favourable ruling may not be forthcoming. Section 7.7 of the Scheme Booklet includes a statement that there is a risk that the benefit of demerger relief will not be available. Section 11.1.3 of the Scheme Booklet outlines the consequences for Lion Selection shareholders if the tax demerger relief is available and s 11.1.7 outlines the consequences if it is not.

16 As for the treatment of the cash distribution component, referred to in paragraph 11.1.5, the view is expressed in s 7.7 of the Scheme Booklet that, although not anticipated, there was a risk of an adverse outcome to Lion Selection shareholders if there was an adverse ruling by the ATO in relation to the cash distribution. I do not regard the expression of anticipation by Lion Selection as capable of misleading a shareholder in any material respect, nor do I regard the waiver of the condition as a material alteration to the entitlement of shareholders under the scheme. The cash distribution component is only 10 cents per Lion Selection share. It is a small component of the overall transaction.

17 When deciding whether to approve a scheme the court must consider whether there has been compliance with the Act, whether the majority of shareholders are acting bona fide when approving the scheme and whether the scheme is so fair and reasonable that an intelligent and honest member, acting alone in respect of their interests as such a member, might approve it. A useful summary of the court's power is set out in the judgment of Robson J in Coles Group Ltd[1]:

In Re Central Pacific Minerals NL, Emmett J of the Federal Court of Australia said that the court must satisfy itself that the arrangement is fair and equitable between different classes of security holders, and as between security holders and those who will benefit from it. He also said that the jurisdiction of the court in relation to an arrangement is supervisory, in the sense that the court is concerned to be satisfied that there has been an absence of oppression and that the arrangement is one that is capable of being accepted. He said the court will generally take the view that the shareholders are the best judges of whether an arrangement is to their commercial advantage and will be reluctant to make decisions contrary to the views of security holders expressed at meetings.[2]

These observations are consistent with a long line of authorities, including Re Alabama, New Orleans and Pacific Junction Railway Co where Fry LJ said that the court is bound to ascertain that all the conditions required by the statute have been complied with. It is also bound to be satisfied that the proposition was made in good faith; and, further, it must be satisfied that 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 a member, might approve it. What other circumstances the court may take into consideration he did not attempt to forecast.[3] See also Zenyth Therapeutics Ltd v Smith.[4]

18 I am satisfied that the shareholders have been properly informed in making their decision. Any uncertainty introduced by the briefing meetings has been corrected. The risks and advantages were reemphasised to the shareholders.

19 The commercial judgement of shareholders plays an important part of the approval process. In the present case a sufficient majority of shareholders have approved the scheme, with disapproval expressed, for the most part, by a single foreign shareholder, represented by HSBC Custody Nominees. The shareholder is obviously a sophisticated party who has not come to this court with any objection to the making of the order for approval.

20 Section 411(17) of the Act provides that the court shall not approve a scheme unless it is satisfied that the arrangement has not been proposed for the purpose of enabling any person to avoid the operation of any of the provisions of Chapter 6 of the Act. Chapter 6 is, of course, concerned with takeovers. One consequence of the implantation of the scheme transactions is that Lion Selection will become a subsidiary of Catalpa.

21 The cases establish that the court should not refuse approval for a scheme merely because it is possible that the arrangement might have been affected under Chapter 6 of the Act.[5] In Re Coles Group Ltd (No 2) Robson J said, after reviewing authorities concerning the effect of a "no objection" statement by ASIC,

In my view, in normal circumstances the existence of the no objection statement would carry with it the implication that ASIC is of the view that members have received all material information that they need for their decision, members have received reasonable and equal opportunity to share in the benefits provided under the scheme and that members are not being adversely affected by the takeover proceeding by a scheme of arrangement rather than by a takeover under Chapter 6. If the court accepted that was the case then the no objection statement may well effectively counter any adverse inference that might have been drawn from the existence of the proscribed purpose.

22 The evidence does not indicate that the scheme was proposed for the purpose of avoiding the operation of any of the provisions of Chapter 6 of the Act even though it may be said that Chapter 6 might have been employed to achieve a substantial part of the intended outcome. It is unlikely, however, that Chapter 6 would have so efficiently facilitated the commercial transactions necessary for the outcome achieved by the scheme.

23 Lion Selection applied for an exemption from compliance with s 411(11) of the Act which requires a copy of the court order approving the scheme to be annexed to every copy of the constitution after the order is made. Section 411(12) authorises the court to exempt the body from compliance with that requirement.

24 It was submitted that an exemption should be granted because current shareholders were fully informed of the scheme and will be notified in writing of the court's approval. Once the scheme becomes binding on shareholders, only transfers to Catalpa will be accepted for registration. Therefore, new shareholders, apart from Catalpa will not be entered into the plaintiff's register of members with the effect that Lion Selection will become a wholly owned subsidiary of Catalpa. By approving the scheme there is no alteration to the constitution of Lion Selection or to the rights of shareholders, creditors or other persons dealing with the company.[6] In these circumstances I considered that it was appropriate to exempt Lion Selection from compliance with s 411(11) of the Act and did so.

[1] [2007] VSC 523, [8] and [9].

[2] [2002] FCA 239, [12] - [14].

[3] [1891] 1 Ch 213 at 257.

[4] [2006] VSC 436; (2006) 60 ACSR 548.

[5] Re ACM Gold Ltd v Mt Lehshon Goldmines Ltd (1992) 34 FCR 530 at 542; Re Stockbridge Ltd (1993) 9 ACSR 637 at 652-653; Re Foundation Healthcare Ltd [2002] FCA 742; (2002) 42 ACSR 252 at 265.

[6] Hostworks Group Ltd (No 2) [2008] FCA 248, [36] and [37].