Re Lonsdale Financial Group Limited (No 2) [2007] VSC 525 (17 December 2007)

Re Advance Bank Australia Ltd (No 2) (1997) 22 ACSR 513.

Re Alabama, New Orleans, Texas and Pacific Junction Railway Co [1891] 1 Ch 213.

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

Re Foundation Healthcare Ltd (No 2) [2002] FCA 973; (2002) 43 ACSR 680.

Re Lonsdale Financial Group Ltd [2007] VSC 394.

Re MIM Holdings Ltd (2003) 45 ACSR 554.

Re Mincom Ltd (No 3) [2007] QSC 207.

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

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

1 On 9 November 2007, the court had before it an application by Lonsdale Financial Group Ltd ("Lonsdale") pursuant to s 411(4)(b) of the Corporations Act 2001 (Cth) ("the Act") for an order to approve two schemes of arrangement proposed to be made between it and its shareholders. I approved the schemes, giving short reasons which I repeat here along with the substance of the submissions in support of approval. I reserved my reasons dealing with the relevance of s 411(17) of the Act to the court's discretion to approve the scheme.

2 On 2 October 2007, I ordered the convening of meetings of members of Lonsdale for the purposes of considering the two schemes of arrangement. The transactions are described in my earlier judgment.[1]

3 In substance, Lonsdale is an unlisted public company with some 140 members. The schemes are intended to effect a merger of Lonsdale and DKN Financial Group Ltd ("DKN"). The merger involves the acquisition by DKN of all of the shares in Lonsdale for a consideration of:

(a) $16.04 cash and 18.1 fully paid ordinary shares in DKN for each fully paid ordinary share in Lonsdale (the ordinary share scheme) ; and

(b) 25.9 DKN practice shares for each practice share in Lonsdale (the practice share scheme).

4 The acquisitions are part of a wider transaction that involves the sale by Zurich Australia Ltd (the majority shareholder of Lonsdale) to DKN of its shares in a company called Wrap Account Limited and the establishment of a marketing arrangement between Zurich Australia Ltd and DKN. Zurich executed a deed poll on 3 September 2007 in which it undertook that it would not vote at the ordinary shareholders' meeting and acknowledged that it would be bound by the ordinary share scheme. The purpose of any person to avoid the operation of any of the provisions of Chapter 6 of the Act. In Re Coles Group Limited (No. 2) I commented on ASIC's use of the qualifying words. The same comments apply to this matter.

5 The schemes were agreed to by the following majorities:

(a) ordinary share scheme: 100% of the members present and voting and 100% of the votes cast on the resolution. Votes were cast in respect of approximately 89.4% of the ordinary shares on issue (excluding the shares held by Zurich);

(b) practice share scheme: 100% of the members present and voting and 100% of the votes cast on the resolution. Votes were cast in respect of approximately 85% of the practice shares on issue.

6 The plaintiff tendered a letter dated 8 November 2007 from the Australian Companies and Securities Commission stating that, under s 411(17)(b) of the Act, the Commission has no objection to the schemes "on the basis that it is satisfied that they have not been proposed for the purpose of any person to avoid the operation of any of the provisions of chapter 6 of the Act." In Re Coles Group Limited (No 2) I commented on ASIC's use of those qualifying words, and the same comments apply in this matter. [2]

7 Master Efthim conducted an inquiry and made orders under Rule 16.6 of the Corporations Rules on 7 November 2007.

8 The court's jurisdiction to make orders is enlivened under s 411(4) if the schemes are agreed to by the statutory majorities at the meetings convened in accordance with the court's orders. Subject to an irregularity noted in the Master's order in relation to the ordinary shares scheme, those matters have been found to be so by the Master. The irregularity involved an error in the counting of the votes cast at the ordinary shareholders meeting which resulted in the poll result report overstating the number of votes cast by 350 votes and the number of members voting by two. The error was immaterial to the reported outcome of the poll.

9 Section 411(4)(b) provides that the scheme will be binding on the members included in the scheme if it is approved by the court. Section 411(6) empowers the court to grant its approval to an arrangement subject to such alterations and conditions as it thinks just.

10 The condition referred to in para 411(17)(b) has been satisfied by ASIC's letter of no objection. Accordingly, paras 411(17)(a) and (b) no longer act as a bar to the scheme being approved, if the court is otherwise of the opinion it should be. The relevance or otherwise of the matters referred to in paras 411(17)(a) and (b) to the exercise of the court's discretion is considered further below.

11 There is no opposition to either of the schemes, and the holders of each of the relevant classes of shares present and voting at the meetings have overwhelmingly voted to agree to them. The court's orders for the convening of the meetings to consider the schemes have been complied with and the consequences of the irregularity are not such as to invalidate the meeting.[3]

12 In Re Alabama, New Orleans, Texas and Pacific Junction Railway Co, Fry LJ said that in approving a scheme 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. [4] See also Re Permanent Trustee Co[5] and Zenyth Therapeutics Ltd v Smith.[6]

13 I am satisfied that all the conditions required by the statute have been complied with. I am satisfied that the proposal in the scheme is made in good faith. I am satisfied that the proposal in the scheme was at least so far fair and reasonable as that an intelligent and honest person, who is a member and acting alone in respect of his or her interests, as such a member, might approve of it. Subject to my observations below on the effect of s 411(17) on the exercise of my discretion, there were no other matters in my discretion which I sought to mention when I approved the scheme.

The proscribed intention's relevance to the court's discretion under s 411(4)(b).

14 I also had before me on 9 November 2007, an application by Coles Group Limited to approve a scheme of arrangement for the acquisition of all its issued shares by a subsidiary of Wesfarmers. I reserved my reasons for approving the scheme and have now delivered them in Re Coles Group Limited (No. 2).[7] Those reasons contain my views on the relevance of the matters referred to in paras 411(17)(a) and (b) in relation to the court exercising its discretion whether or not to approve the scheme. Accordingly, I rely and refer to those reasons in dealing with the submissions of Lonsdale.

15 In Re Mincom Ltd (No 3)[8], Fryberg J considered that if the court were satisfied that a purpose of the kind referred to in para 411(17)(a) existed, ("the proscribed purpose") that is a matter that may be taken into account in the exercise of the court's discretion under sub-s 411(4) even where ASIC has provided a statement under para 411(17)(b).[9] He considered that the continued relevance of any such purpose was confirmed by the closing words of the provision.

16 Lonsdale submitted that sub-s 411(17) has not altered the unconfined nature of the discretion conferred by sub-s 411(4). In other words, there is not to be discerned from sub-s 411(17) a matter that the court is either bound to take into account, or bound not to take into account.

17 Lonsdale submitted that this is supported by the history of the provision (referred to in the Coles case) and by the following considerations:

(a) paragraphs 411(17) (a) and (b) are alternatives, so that the written statement of no objection by ASIC removes the requirement that the court be satisfied that the arrangement has not been proposed for the specified purpose;[10]

(b) in providing that statement, ASIC is not required to satisfy itself that the scheme has not been proposed for the specified purpose, and may give the statement regardless of that circumstance;[11] and

(c) the concluding words of s 411(17) can be given a sensible commercial operation by treating them as a reminder that the court's discretion to approve the scheme remains unconfined, and that discretion is not intruded upon or otherwise affected by the statement of no objection by ASIC.[12]

18 Lonsdale submitted that Chapter 6 itself is built upon a multitude of prescriptive and proscriptive requirements, all or any of which can be waived or modified by ASIC.[13] In exercising these powers, Lonsdale submits that ASIC is required to have regard to the purposes of Chapter 6 as spelt out in s 602 of the Act.

19 Lonsdale submitted that in adding para 411(17)(b), Parliament should be taken to have recognized that the strict rule expressed in sub-s 411(17) as originally enacted (then s 315(21)) should be relaxed in circumstances where ASIC has no objection. In effect, the legislature invested ASIC with the function of deciding on a case by case basis whether the purposes for which a scheme had been proposed mattered or not.[14]

20 Lonsdale submitted that this analysis suggests that, contrary to the examination of Fryberg J, the provision of a statement by ASIC that satisfies para 411(17)(b) has the effect that the purpose for which the scheme is proposed no longer has any particular significance in relation to the court's exercise of the discretion under s 411(4). In this light, the closing words do not confirm the continued relevance of any purpose of avoiding Chapter 6; rather, they confirm that the court's discretion remains unconfined, and it is neither compelled to take the purpose for which the scheme is proposed into account nor compelled to disregard that question.

21 For the reasons I gave in the Coles case, I agree that the court is neither compelled to take the purpose for which the scheme is proposed into account nor compelled to disregard that question. On the other hand, if the court does find the proscribed purpose exists then that finding may be relevant but will normally be of no particular significance in the light of ASIC's no objection statement.

22 Lonsdale submitted that in the present case, the mechanism of a scheme of arrangement was chosen for bona fide commercial reasons. The acquisition of the shares in Lonsdale by DKN forms part of a wider commercial transaction. In conjunction with completion of the schemes, the transaction contemplates the purchase by DKN from Zurich of all of the shares in Wrap Account Limited. DKN also intends to enter into a marketing agreement with Zurich.

23 Lonsdale submits that these integrated transactions would most probably not have been possible if the acquisition by DKN of the shares in Lonsdale had proceeded by way of a Chapter 6 takeover

24 I accept these submissions. I do not find there existed the proscribed intention and even if it did exist, contrary to my finding, the provision of the no objection statement satisfies me in the absence of any evidence to the contrary that the schemes do not undermine the purposes of Ch 6 spelt out in s 602 of the Act.

[1] In Re Lonsdale Financial Group Ltd [2007] VSC 394, 1.

[4] [1891] 1 Ch 213 at 257.

[5] [2002] NSWSC 1177; (2002) 43 ACSR 601 at [8] to [10].

[6] [2006] VSC 436; (2006) 60 ACSR 548.

[7] [2007] VSC 523.

[8] [2007] QSC 207.

[10] Re Advance Bank Australia Ltd (No 2) (1997) 22 ACSR 513 at 519, per Santow J.

[11] Re ACM Gold Ltd [1992] FCA 89; (1992) 107 ALR 359 per O'Loughlin J at 367-368.

[12] Re Advance Bank Australia Ltd (No 2) at 519; Re Arnotts Ltd (1998) 16 ACLC 423 per Bryson J at 425; Re MIM Holdings Ltd (2003) 45 ACSR 554 per White J at 556-7; Re Foundation Healthcare Ltd (no 2) [2002] FCA 973; (2002) 43 ACSR 680 at [29].

[13] Act, s 655A. These powers have been part of takeover law since the Companies (Acquisition of Shares) Act 1980.

[14] See the relevant observations of O'Loughlin J in Re ACM Gold Ltd [1992] FCA 89; (1992) 107 ALR 359 summarised below.