Re Skilled Group Limited (No 2) [2015] VSC 805 (1 October 2015)

(a) that a meeting of the shareholders of the plaintiff (Skilled) be convened pursuant to s 411(1) of the Corporations Act 2001 (Cth) (the Act) to consider a scheme of arrangement;

(b) for approval of the scheme under ss 411(4)(b) and 411(6) of the Act in the event it was agreed to by the shareholders; and

(c) that Skilled be exempted pursuant to s 411(12) of the Act from compliance with the requirements of s 411(11).

2 The commercial purpose of the scheme is to give effect to the merger of Skilled and Programmed Maintenance Services Limited (Programmed) by the acquisition of all of the shares in Skilled by Programmed in exchange for shares in Programmed and cash.[1]

3 On 21 August 2015, I heard the first stage of the application. At the end of the hearing I made an order that Skilled convene a meeting of scheme participants for the purpose of considering and, if thought fit, agreeing (with or without modification) to the scheme (convening orders).[2]

4 Skilled now seeks an order pursuant to s 411(4)(b) of the Act that the scheme, approved by the requisite majorities at the meeting of its members on 25 September 2015, be approved by the Court. Skilled also seeks an order pursuant to s 411(12) that it be exempt from compliance with s 411(11).

5 As for the scheme meeting, 99.12 per cent of the votes cast were in favour of the resolution that the scheme be adopted, and 94.85 per cent of Skilled shareholders, present and voting, cast votes in favour of the scheme.

6 In Re Skilled (No 1), I considered the impact of performance rights and options held by some employees on the convening of the meeting to consider the scheme.

7 Several employees of Skilled hold both shares in Skilled as well as performance rights relating to shares in Skilled. Skilled undertook to 'tag' the votes of relevant employees. Nine of these shareholders voted at the scheme meeting, either in person or by proxy. All nine voted in favour of the scheme, casting a total of 290,195 votes. Based on the size of their shareholdings, these nine shareholders did not alter the outcome of the vote.[3] Accordingly, there was no relevant impact on the scheme by not counting these shareholders in a separate class.

8 As is discussed further below, ASIC has issued a letter under s 411(17) of the Act stating, among other things, that ASIC had no objection to the scheme of arrangement. Certificates were provided by Skilled and Programmed noting that all conditions precedent for the scheme (except court approval) had been satisfied. An advertisement has been placed in The Australian newspaper advertising the hearing on 1 October 2015.

9 No shareholder attended the hearing to oppose the application to approve the scheme.

10 In the convening orders, I referred to Associate Justice Randall an inquiry required by r 16.6 of the Rules. Associate Justice Randall made an order on 29 September 2015, which declared that the resolution agreeing to the scheme was passed by the requisite majority. Randall AsJ also found that, subject to some minor procedural irregularities discussed below, the scheme meeting was duly convened and held in accordance with my convening orders of 21 August 2015, and the scheme resolution was duly passed.

(a) shareholders who had elected to receive correspondence by email were, according to the drafting of the convening orders, required to be provided a pre-addressed envelope, but were not so provided, for the obvious reason that they elected to receive email communication; and

(b) in the case of 18 of those shareholders who elected to receive communication by email, the emails initially sent failed to transmit. Those shareholders were then sent hard copy documents referred to in the convening orders. Mr Sise deposed that the shares held by those 18 shareholders represented approximately 0.1 per cent of the votes cast on the resolution (and approximately 1.57 per cent of the shareholders who voted).

12 My duties in respect of this application were set out by Lord Justice Fry in Re Alabama, New Orleans, Texas and Pacific Junction Railway Co,[4] and in particular at page 257 where his Lordship said:[5]

The Court is bound to ascertain that all the conditions required by the statute have been complied with; it is 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 circumstance the court may take into consideration I will not attempt to forecast.

13 Subject to some brief observations below, I am satisfied that those tests have been met.

14 Section 411(17) of the Act states that 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).

15 I considered in detail the relevance of s 411(17) of the Act to the court's discretion whether or not to approve a scheme in Re Coles Group Limited (No 2).[6] I adopt what I said on that occasion. Without repeating in full what was said, I note the following comments:[7]

Section 411(17) of the Act imposes a burden on the proponent of a scheme, which is to be discharged, at the approval stage, by establishing one or other of the matters in s 411(17)(a) and (b). Failing that, the court must not approve the scheme. The two limbs of s 411(17) are true alternatives.

Where ASIC provides such a statement, the proponents are relieved of the burden imposed by s 411(17)(a) and the court may, but not must, approve the scheme.

...

Whether or not the scheme should be approved is a different matter and is to be determined in accordance with the usual considerations, which are encapsulated in the judgment of Fry LJ in Re Alabama, New Orleans, Texas Pacific Junction Railway Co. Although there is no express provision in the Act which says that a scheme of arrangement must not be proposed for the purpose of enabling any person to avoid the operation of any of the provisions of Ch 6, there is in my opinion, an implication in s 411(17)(a) that the existence of the proscribed purpose is be a relevant factor to consider in approving a scheme.

16 As noted, in this case I have received a statement in writing by ASIC stating that ASIC has no objection to the scheme of arrangement. For the reasons I gave in Re Coles (No 2), I am satisfied that s 411(17) does not provide any bar to me approving the scheme.

17 Mr Crutchfield has brought to my attention the low voter turnout. Mr Crutchfield informed me that, although the scheme was approved comfortably in this case, approximately 14 per cent of all shareholders appeared at the meeting in person or by proxy, having approximately 62 per cent of all the issued shares in Skilled.

18 Mr Crutchfield drew my attention to the decision by Farrell J in TriAusMin Limited (No 2).[8] In that decision, her Honour addressed the issue of low voter turnout. In particular, only 10.94 per cent of the TRO shareholders, holding 52.90 per cent of the shares, who were eligible to do so, voted at the scheme meeting.[9] Her Honour considered several decisions, and the issues that might be relevant to the court's consideration of whether or not to approve the scheme by reason of the low voter turnout. Her Honour said:[10]

Although the statutory requirement under s 411(4)(a)(ii) has been satisfied, it is the usual practice of the Court at the second court hearing to consider the number of the shareholders who attended the Scheme Meeting in person or by proxy. Low shareholder turnout may be an indication that some procedural irregularity occurred. It is inappropriate to assume (in the absence of complaint) that that shareholders who did not vote either did not have notice of the meeting or were silent in protest of the scheme: Re Professional Investment Holdings Ltd (No 2) and Re Seven Network Limited (No 3) (Re Seven Network Ltd) (Jacobson J); apathy should not be presumed to be antagonism: Re Matine Limited (Santow J).

Nonetheless it does call for consideration to ensure that the vote is not unrepresentative, since the court retains the discretion to withhold its approval in that case: see Re Seven Network Ltd and Re BTR plc. It is relevant to consider whether members have been deterred from attending or voting at the meeting: Re Cape plc (David Richards J).

19 Her Honour went on to cite a number of cases in which the relatively low voter turnout did not prevent orders being made approving a scheme:[11]

Relatively low shareholder turnout did not prevent orders being made in Re Avoca Resources Limited (11.49% of shareholders holding 72.38% of shares) or Re Cortona Resources Limited (17.5% of shareholders holding 45.2% of shares); see also Re Redcape Property Fund Limited and The Trust Company (RE Services) Limited per Black J. In Re Auzex Resources Limited (No 2) Applegarth J noted that a turnout of 9.75% of shareholders representing 42.3% of votes was substantially higher than at annual general meetings of the company. In Re Osiris Insurance Ltd only 35 of 971, scheme creditors with claims worth approximately 41% of the total value attended the meeting and Re British Aviation Insurance Co Ltd, creditor turnout was 15% representing approximately 50% of claims. See Damian T and Rich A, Schemes, Takeovers and Himalayan Peaks for a full discussion of this issue.

20 Mr Crutchfield also submitted that the scheme approved by this court in Re Toll Holdings Limited (No 2)[12] involved a resolution by approximately 16.63 per cent of all shareholders, and 60.17 per cent of all shares on issue.

21 As Farrell J suggests in the passage cited above, one of the issues is whether the low voter turnout was due to the fact that the voters in some way have been deterred, or were 'silent in protest of the scheme', or if there is some other reason which might be relevant to the court's decision whether or not to approve the scheme.

22 In this case I infer it is likely that the non-attendance of shareholders with small holdings was referable to the fact that they have no objection to the scheme. Mr Crutchfield acted appropriately in drawing the low voter turnout to my attention, but I find nothing unusual or untoward in the turnout that was experienced in this case.

23 I have been assisted in my decision by the written submissions prepared by Mr Crutchfield and Mr Holmes of counsel. The court expresses its appreciation to counsel and their instructing solicitors, Clayton Utz, for the excellent standard of those submissions.

24 Having regard to the matters set out in those submissions, I am satisfied that the requirements of the Act have been complied with. The scheme was proposed in good faith, and the proposal was such that a reasonable, intelligent and honest person might approve it.

25 I particularly had regard to the matters set out in the submissions as follows:[13]

(a) the overwhelming support of the shareholders as reflected in the voting results of the scheme meeting (94.85 per cent of members voting and 99.12 per cent votes cast) (see above);

(b) the opinion of the independent expert that the scheme is fair and reasonable and therefore in the best interests of shareholders (as noted at page 113 of the Explanatory Memorandum);

(c) the recommendation from all directors who have made a recommendation that shareholders vote in favour of the scheme;

(d) the premium offered for Skilled shares (as referred to at page 11 of the Explanatory Memorandum);

(e) the absence of any opposition to the scheme by ASIC or any shareholder, and the position of ASIC in relation to s 411(17);

(f) the Explanatory Memorandum fully disclosed the potential benefits and disadvantages of the scheme;

(g) there is nothing to suggest that the scheme was proposed by Skilled other than in good faith;

(h) there is nothing to suggest that the shareholders voted other than in good faith;

(i) there is nothing to suggest that any shareholder was oppressed; and

(j) the scheme contains measures to protect shareholders against performance risk.

26 I also adopt what is said in the submissions,[14] which seeks to paraphrase the requirements set out by Lord Justice Fry in Re Alabama, where it is submitted that in light of the matters previously referred to, the court ought to be satisfied that the scheme of arrangement was 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 and acting alone in respect of their interests as such a member, might approve of it, and I accept accordingly it is appropriate for the court's exercise of jurisdiction to approve the scheme under s 411(4)(b).

27 The final matter I wish to address is the application by Skilled to be exempted from the requirements of s 411(11).

28 Section 411(11) of the Act requires, subject to s 411(12), that a copy of the court's order approving a scheme of arrangement 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.

29 In Re Equinox Resources Ltd,[15] EM Heenan J indicated that the purpose of s 411(11) was:[16]

... to ensure that any modification of the rights of shareholders of the company which is the subject of the scheme or any other provision in the scheme which may affect the interests of persons dealing with the company, such as prospective creditors or purchasers of shares, will be sure to have the opportunity of seeing what the exact rights of shareholders in the company or of its creditors are, as modified, if at all, by the scheme which has been approved.

30 The above passage has been quoted with approval in Re Hostworks Group Ltd (No 2)[17] and Re AXA Asia Pacific Holdings Ltd (No 2).[18]

31 It was submitted by the plaintiff that exemption from compliance with s 411(11) is appropriate given that the scheme will not alter the constitution of Skilled or the rights of shareholders, creditors or other persons dealing with the company.[19] Current shareholders are fully informed of the scheme and will be informed in the event that the court approves the scheme. Further, on the implementation of the scheme, Skilled will become a wholly owned subsidiary of Programmed, a listed public company. An order under s 411(12) is regularly made on this basis.[20]

32 I am therefore prepared to exempt Skilled from compliance with s 411(11) of the Act.

33 For the above reasons, I made the orders sought.

[1] Details of the scheme are set out in Re Skilled Group Limited (No 1) [2015] VSC 789 ('Re Skilled (No 1)').

[3] They account for approximately 0.2 per cent of votes cast and approximately 0.8 per cent of shareholders who voted.

[4] (1891) 1 Ch D 213 ('Re Alabama').

[5] Re Alabama, 257; (citations omitted).

[6] [2007] VSC 523 ('Re Coles (No 2)').

[7] Re Coles (No 2) [16]-[23], [69], citation omitted.

[8] [2014] FCA 833; also reported in [2014] 32 Australian Company Law Cases 14-053 ('TriAusMin').

[9] TriAusMin, [9], citations omitted.

[11] TriAusMin, [12], citations omitted.

[12] [2015] VSC 236.

[15] [2004] WASC 143; (2004) 49 ACSR 692 ('Re Equinox').

[17] [2008] FCA 248, [36].

[18] [2011] VSC 102, [36].

[19] Re Lion Selection Ltd [2009] VSC 546, [24] ('Re Lion Selection').

[20] For example, Re Amcor Ltd [2000] VSC 157, [35] and [40]; Re Lion Selection, [24].