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[2016] QSC 73
General information, not legal advice.
Supreme Court of Queensland
2016-03-10
Bond J
Original judgment source is linked above.
(c) for members whose registered address on the applicant's share register is in Australia, a reply-paid envelope addressed to Computershare Investor Services Pty Limited; and
(d) for members whose registered address on the applicant's share register is outside Australia, a reply envelope addressed to Computershare Investor Services Pty Limited.
"unless Auswide Bank determines (in consultation with YCU) that:
(i) it is lawful and not unduly onerous or unduly impracticable to issue that YCU Member with New Auswide Bank Shares on implementation of the Scheme; and
(ii) it is lawful for that YCU Member to participate in the Scheme by the law of the relevant place outside Australia and its external territories."
(b) the changes noted in the table in the annexure hereto marked "B"
CORPORATIONS - ARRANGEMENTS AND RECONSTRUCTIONS - SCHEMES OF ARRANGEMENT OR COMPROMISE - APPLICATION FOR ORDER FOR MEETING - where applicant proposes scheme of arrangement between itself and all of its shareholders - whether the Court should make an order for a meeting of the applicant company's shareholders to be convened
Corporations Act 2001 (Cth), s 411, s 412
FT Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69, cited
Re APN News & Media Ltd (2007) 62 ACSR 400; [2007] FCA 770, cited
Re Arthur Yates & Co Ltd (2001) 36 ACSR 758; [2001] NSWSC 40, cited
Re AXA Asia Pacific Holdings Ltd [2011] VSC 4, cited
Re Bolnisi Gold NL (No 2) (2007) 165 FCR 45; [2007] FCA 2078
Re Golden Circle [2008] QSC 298, cited
Re Hills Motorway Limited (2002) 43 ACSR 101; [2002] NSWSC 897, cited
Re Macquarie Private Capital A Ltd (2008) 26 ACLC 366; [2008] NSWSC 323, cited
Re NRMA Ltd (No 1) (2000) 156 FLR 349; [2000] NSWSC 82, cited
HIS HONOUR: This application concerns a proposed scheme of arrangement between the applicant (which I will refer to as YCU) and all of its shareholders.
The scheme is in the conventional form of a transfer or acquisition scheme in which:
(a) all the shares in YCU are to be transferred to a third party, namely, Auswide Bank Limited (which I will refer to as Auswide) leaving YCU as the wholly owned subsidiary of Auswide; and
(b) each YCU shareholder will receive from Auswide, in exchange for their YCU shares, two things: first, a payment of cash per share and, secondly, an issue of 696 new shares in Auswide.
Auswide is listed on the Australian Stock Exchange so after implementation of the scheme the YCU shareholders would have cash and scrip in the newly merged entity.
In relation to the scrip component of the scheme consideration, provision is made for three different categories of scheme participants.
First, for eligible members, which are all scheme participants other than foreign YCU members who do not elect to sell their Auswide shares under the share sale facility, the scrip component of the scheme consideration is to be provided by the Auswide shares being registered in their name on the implementation date.
Second, for foreign YCU members, the relevant Auswide shares are to be registered in the name of a nominee for sale under a share sale facility with the proceeds being remitted to the scheme participants.
Third, for eligible members who elect to sell their Auswide shares under the share sale facility, their Auswide shares will also be registered in the name of the nominee for sale under the share sale facility with the proceeds remitted to them.
There is a slight possible alteration to that pattern in relation to some foreign YCU members.
There are presently only 4094 members of YCU. Of these members, 27 can be regarded as foreign YCU members. They reside variously, in Canada, Fiji, France, Indonesia, Ireland, Malaysia, New Zealand, Papua New Guinea, Singapore, Switzerland, United Kingdom and the United States of America. This consideration is relevant because allowance must be made for the fact that the law of the jurisdiction in which foreign members reside may affect whether or not it is lawful for a foreign person (in this case, Auswide) to make a share issue to them in the terms contemplated.
There are two ways in which it is proposed that this may be dealt with.
(a) it is lawful and not unduly onerous or unduly impracticable to issue the foreign YCU member with new Auswide bank shares under the scheme; and
(b) it is lawful for the foreign YCU member to participate in the scheme by the law of the relevant place outside Australia and its territories,
then what will happen is what I have earlier described in relation to the shares being issued to the foreign member being registered in the name of a nominee, being sold with the proceeds remitted to the scheme participants. However, it is possible that the foreign YCU member may be able to persuade YCU and Auswide that shares may be issued to them and held by them, but if that does not happen, then the shares will be registered in the name of the nominee and sold with the proceeds remitted to the participants.
In the course of argument, I drew the attention of Senior Counsel for the applicant to a paragraph of the scheme booklet, namely, section 4.6, in which I thought the option might be more clearly set out and I have been informed that that will be done. I will address that later as a condition of the order that I will make.
I have mentioned that there are 4094 members of YCU, 27 of which are members residing in the foreign countries I have listed. It is also relevant to note that of the total membership of YCU there are 138 who are minors. I will come back to the significance of the fact that they are minors.
In legal structure, the transaction is intended to be effected pursuant to three main instruments, namely, a merger implementation instrument, a deed poll by Auswide in favour of all YCU shareholders and the proposed scheme which, if it comes into effect, will authorise the proposed transfer of shares to Auswide.
I note that the scheme is unanimously supported by the board of YCU. Their principal reasons for that support are:
(a) it would release substantial value for the YCU members;
(b) there is no superior proposal to achieve this outcome that they regard as desirable;
(c) there was some concern about YCU's continuing prospects as a standalone entity; and
(d) it would allow the members of YCU to become members and customers of a larger and potentially more effective financial institution.
I also observe that the scheme has been subject to independent expert analysis by a specialist valuation firm. That analysis has found the scheme to be fair and reasonable and in the interests of YCU shareholders as a whole in the absence of any superior proposal. No superior proposal has been forthcoming.
I observe that one of the matters that must be addressed in the scheme is that the scheme booklet must set out the latest recorded share price before the date on which the statement is lodged for registration. I have been provided with evidence as to the latest share price and it is proposed to amend the form of the scheme before me to reflect that information. That also will have to be a condition to the order that I propose to make. The quantum of the latest share price is, when one has regard to the terms of the specialist valuation, such that it does not make any alteration to the impact of that expert opinion, that the scheme is fair and reasonable and in the interests of the YCU shareholders as a whole in the absence of any superior proposal.
I mentioned that the directors of YCU had formed the view unanimously to support the scheme and in the context of mentioning that, I referred to their view being that it would release value to the members. The reason that is so is that YCU is presently structured as a mutual credit union in which all customers are generally required to be shareholders of YCU. Each of the issued shares is designated as a member share. Shares are acquired for a nominal subscription price of $10. They cannot, however, generally be transferred and they may be subject to redemption by YCU in a range of circumstances, which will include if the member ceases to be an active member. The proposal releases value in the form of cash and scrip in Auswide, in an amount which favourably compares with the valuation carried out of the underlying value of the enterprise conducted by YCU. Of course, the shareholders cannot get access to that value as YCU presently stands. That is the explanation for the directors' current view.
For the scheme to proceed, a meeting of YCU members must be convened pursuant to court orders made under s 411 of the Corporations Act 2001 (Cth).
The present hearing involves an application under s 411 of the Act for orders:
(a) convening a meeting of YCU shareholders to consider and vote on the scheme, together with ancillary orders; and
(b) approving the explanatory statement to be sent to shareholders before the meeting as required by s 412(a) of the Act.
The matters which a court, in my position, must consider on an application of this kind have been dealt with by many cases in this court and in other courts in Australia. It is not necessary to carry out a significant discussion of those cases. Senior Counsel's written submissions to me, which I found very helpful, identified the key issues as follows:
(a) whether the applicant is a Part 5.1 body;
(b) whether what is proposed is to be regarded as a "compromise or arrangement" within the meaning of that term in s 411(1);
(c) whether the arrangement is with "[the applicant's] members or any class of them";
(d) whether there has been appropriate disclosure in the explanatory statement and the statement contains the prescribed information;
(e) whether there is any apparent reason why the scheme should not in due course receive the Court's approval if the necessary majority of votes is achieved by the meeting convened by the court order; and
(f) whether appropriate notice of the application has been given to ASIC_._
I will deal with the final consideration first and then will deal with the remaining considerations in the order that I have mentioned them.
Section 411(2) obliges me not to make an order pursuant to s 411(1) unless, first, I am satisfied that the required notice has been given to ASIC and, second, I am satisfied that ASIC has had a reasonable opportunity to examine the terms of the proposed arrangement and the draft explanatory statement and to make submissions to me in relation to the proposed arrangement and the draft explanatory statement.
It had already been demonstrated in affidavit material that ASIC had been given the requisite notice of the application. I was provided further with affidavit evidence this morning deposing to contact between the solicitors for the applicant and ASIC representatives which has led to a number of alterations to the draft scheme booklet as sought by ASIC. Consequent upon that having occurred, ASIC has advised the applicant by letter to its solicitors that, based on the amended scheme booklet, it does not currently propose to appear to make submissions or intervene to oppose the scheme at the first hearing (which is the hearing conducted before me today). Accordingly, I am satisfied of the matters that I need to be satisfied under s 411(2) of the Act.
The requirements that the applicant must be a Part 5.1 body and that the proposal must fall within the definition of "compromise or arrangement" do not seem to me to be controversial in the circumstances of this case. The applicant is plainly a Part 5.1 body and the arrangement falls within the law's conception of the terms to which reference has been made.
I turn, then, to the third consideration, namely, whether the scheme is a scheme between the applicant and its members or any class of them.
The scheme has been framed on the basis that it is between YCU and its members as a single class. A question arises as to whether that is appropriate or whether there should be other classes. The applicant contends that it is appropriate that there be a single class and that that conclusion is not affected by the existence of foreign shareholders, the existence of shareholders who are minors and the fact that retirement payments are being made to non-executive directors. I will deal with those last two issues first.
I have mentioned that there are a small number of members of YCU who are minors. Under the Constitution of YCU, minors may attend and participate in the discussion at such meetings as the one I am being asked to convene, but cannot vote. Unless I make an order to the contrary, the effect of the relevant regulatory provisions applicable to the meeting will mean that the provisions of the Constitution apply to constrain minor members so that they may attend and participate at the meeting but cannot vote. It does not seem to me that it is appropriate to alter that existing scheme. It does not seem to me that there is any reason to believe that the interests of the members would be prejudiced by this approach.
Although I have not yet examined the legal test applicable to the question of whether there should be one or more classes, and I will come to that, it does not seem to me that the existence of minors creates any difficulty in the proposed formulation of a single class.
I reach the same conclusion in relation to the non-executive directors. Their position is the subject of separate submissions because, under the Constitution of YCU, non-executive directors are elected to a three-year term and are entitled to remuneration for their services for this period. One of the consequences of the implementation of the scheme will be they will cease being directors prior to the end of their three-year term. The various instruments by which the scheme will be effected operate to create a settlement affecting the rights of the non-executive directors which provides them with professional indemnity insurance, access to board papers and payment of an amount equal to one year of director's fees. Those proposed benefits are appropriately disclosed in the scheme booklet and, again, there does not seem to me to be anything in these arrangements which is apt to suggest there ought be more than the one class of members created for voting purposes.
I come, then, to the question of the foreign members and I should articulate the test that is applicable to the question of classes of members.
It suffices to refer to what Barrett J said in Re Hills Motorway Limited (2002) 43 ACSR 101; [2002] NSWSC 897 at [12]:
The test is thus not one of identical treatment. It is one of community of interest. The court must ask itself whether the rights and entitlements of the different groups, viewed in the totality of the scheme's context, are so dissimilar as to make it impossible for them to consult together with a view to their common interest. The focus is not on the fact of differentiation but on its effects. The extent and nature of the differentiation must be measured in terms of the effect on the ability to consult together in a common interest or, in other words, the ability to come together in a single meeting and to debate the question of what is good or bad for the constituency as a whole and where the common good lies. Only if the differentiation destroys that ability - the word used by Bowen LJ is "impossible" - does class distinction come to prevail.
That individuals may hold divergent views based on their private interests not derived from their legal rights against the company is not a ground for calling separate meetings.
It seems to me that the application of this test to the non-executive directors and the minors is such that the relevant differentiation does not make it impossible for those people to consult together with other members with a view to their common interest. That is why I expressed the view I was not concerned about those particular differences.
I turn now to the foreign YCU members. I have already explained how many of them there are, where they reside and the way in which it is proposed that they be treated differently.
Subject to the clarification of section 4.6 to which I have already adverted, it seems to me that the mechanism proposed by the applicant is consistent with the way in which the courts have had regard to this question, it being not uncommon in schemes of arrangement that there are foreign shareholders. The question whether there ought be a separate class in consequence of that distinction has also been not uncommonly considered. The best analysis which has been applied in subsequent cases to which I have been referred is that of Barrett J in Re Hills Motorway Ltd (to which I have earlier referred) at [9] to [13].
The result is that I do not think that treating the foreign members in this way interferes with the conclusion that is sought by the applicant, namely, that the proposed scheme being framed as one between YCU and its members as a single class is not affected by the existence of foreign shareholders. I agree with that submission.
The next considerations are: (1) the adequacy of disclosure in the explanatory statement, and, (2) the compliance of the proposed explanatory statement with the statutory and regulatory provisions which operate to require it to contain particular information.
As to the latter consideration, submissions before me have identified the way in which the scheme does comply with the legislative and regulative requirements. I am not troubled by this aspect.
As to the former consideration, ss 411(3) and 412(1) operate so that the draft explanatory statement must explain the effect of the scheme and provide such information as is material to the making of a decision by a member whether or not to agree to the scheme, being information within the knowledge of the directors.
The authorities indicate that the approach I should take is that I must be satisfied, at least at a prima facie level, that there has been proper disclosure with nothing misleading in any material sense: see observations made by Santow J in Re NRMA Ltd (No 1) (2000) 156 FLR 349; [2000] NSWSC 82 at 351. I have reviewed the draft scheme booklet and formed the view that, subject to the matter I have already mentioned in relation to the foreign members, I am satisfied there has been proper disclosure in the respects which are material.
The final issue that I need to address is whether there is any reason to form the view that the scheme would not, in due course, receive the Court's approval if the necessary majority vote is achieved at the meeting. The test has been the subject of a number of considerations in the authorities. My attention has been drawn to the formulation by Street CJ in FT Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 at 72, which articulates the test in a general way.
It is appropriate to note that I am not required to conduct an extensive examination of fairness or reasonableness of the scheme or to speculate as to the prospect that shareholders might approve the scheme at the scheme meeting (see Re Macquarie Private Capital A Ltd (2008) 26 ACLC 366; [2008] NSWSC 323 at [26]- [27]).
Having regard to the following considerations, I do form the view that if the scheme achieves the statutory majority at the meeting of the members that I would be likely to approve it on the hearing of a subsequent application:
(a) the terms of the scheme appear to be inherently beneficial to the shareholders;
(b) the independent expert has concluded that the scheme is fair and reasonable in the interests of the members absent a superior proposal;
(c) all the directors of the applicant are also of the view that the scheme is in the best interests of the members and recommended the members support the scheme;
(d) there have been no competing offers that have emerged;
(e) there is no element of unfairness between the different types of members of the applicant; and
(f) there is no suggestion in the evidence that the recommendation of the directors has been influenced by external observations.
One issue that is sometimes subject of controversy at this stage is whether I should have any regard to s 411(17) which says:
The court must not approve a compromise or arrangement under this section unless:
(a) it is satisfied that the compromise or arrangement has not been proposed for the purpose of enabling any person to avoid the operation of any of the provisions of Chapter 6; or
(b) there is produced to the Court a statement in writing by ASIC stating that ASIC has no objection to the compromise or arrangement;
but the Court need not approve a compromise or arrangement merely because a statement by ASIC stating that ASIC has no objection to the compromise or arrangement has been produced to the Court as mentioned in paragraph (b).
I will follow the approach by McMurdo J (as his Honour then was) in Re Golden Circle [2008] QSC 298 which disagrees with the statement by an earlier judge of this Court and concludes that the proper approach is to consider s 411(17) at the second hearing if the scheme is approved by the members of the meeting convened. Even if this were wrong, I would be minded to infer that the non-objection by ASIC, which I have already referred to, would have been sufficient to satisfy me of the matters required in s 411(17).
I conclude that there is no reason to prevent the members from considering and forming their own judgment about the scheme.
A number of additional matters were drawn to my attention and I will make brief observations regarding them.
First, the scheme is not one that binds the creditors and it does not seem to me that it is necessary to take account of their position at this hearing.
Second, cases instruct courts to ensure that schemes are constructed to protect shareholders from performance risk, namely, the risk that they might not receive payment. In the present case, the performance risk is addressed in a satisfactory way, not least by the provision in the scheme which makes the obligation to transfer the shares to Auswide subject to the applicant having procured the provision of the consideration, including by entering relevant names on the share register. It does not seem to me that this question needs to be further considered.
Third, there is a question of the exclusivity provisions. The merger implementation agreement contains relatively conventional "no-shop" and "no-talk" provisions. I am satisfied that those provisions address the requirements which have been the subject of discussion in the cases. I advert, for example, to Re Arthur Yates & Co Ltd (2001) 36 ACSR 758; [2001] NSWSC 40 at [9] and Re AXA Asia Pacific Holdings Ltd [2011] VSC 4 at [29].
Fourth, another issue drawn to my attention is the break fee. The scheme provides that in particular circumstances, if the scheme does not proceed, a fee is payable in particular circumstances. Considerations relevant to the analysis of break fees appear in the judgment of Lindgren J in Re APN News & Media Ltd (2007) 62 ACSR 400; [2007] FCA 770 and (by the same judge) in Re Bolnisi Gold NL (No 2) (2007) 165 FCR 45; [2007] FCA 2078. In my view, the size of the fee in this case, which is $750,000 is not unreasonable having regard to the following considerations.
(a) It is not a "naked" break fee. It is not triggered simply because the scheme meeting does not approve the scheme. It is only payable when the merger does not proceed in circumstances involving some element of blameworthiness on the part of one party.
(b) It is bilateral and equal. It is potentially payable by YCU to Auswide, and vice versa in the same amount.
(c) The quantum was arrived at by genuine pre-estimate of the cost which would be regarded as thrown away if the transaction did not proceed. There is evidence before me from both YCU and Auswide justifying that proposition.
(d) Auswide would not have entered into the merger implementation agreement without there being agreement for the provision of a break fee.
(e) The directors of YCU considered the proposed fee is appropriate and necessary to secure the advantages that they see in the scheme.
(f) This is a scheme with a relatively modest scheme consideration of about $30 million, but necessarily having a degree of complexity. The percentage of the break fee, which is about 2.5 per cent, is within, I think, bounds that are reasonable.
(g) It does not seem to me that the quantum of the fee and its nature will unduly influence the consideration of the scheme by the members; and
(h) There is adequate disclosure in the scheme booklet.
Fifth, it has been drawn to my attention that the scheme includes a warranty of title by scheme participants. Again, this consideration was the subject of analysis in Re APN News & Media Ltd by Lindgren J and I propose to follow his Honour's approach. The device is aimed at ensuring that members whose shares are encumbered are not advantaged because the amount of damages payable for breach of the warranty would be the amount required to discharge the encumbrance. It does not seem to me that the mechanism in clause 5.6 provides any concern as to whether I ought make the orders that the applicant seeks.
The final consideration is that in order for the scheme to proceed, there need to be amendments to the Constitution of YCU. I have mentioned that the nature of YCU is that it is a mutual credit union. Amendments to bring about a demutualisation to the Constitution of YCU will be required and that will require a special resolution of the shareholders in general meeting. The scheme provides for that to occur.
A form of order has been provided to me which provides for convening the meetings and approving the explanatory statement. I am satisfied that I ought to make an order in the form which has been provided to me with two alterations to it. First, the approval of the scheme booklet will be subject to a condition requiring section 4.6 of the explanatory statement to be amended in the way I have already described. Secondly, approval of the scheme booklet will be subject to a condition which identifies by a schedule the passages in the material that need to be altered consequent upon the evidence provided today of the latest Auswide share price.
Subject to my being provided with a satisfactory form of order addressing those considerations, I will make the order in the terms that have been sought.
(2007) 165 FCR 45
(2000) 156 FLR 349