RE WESFARMERS LTD; EX PARTE WESFARMERS LTD [2018] WASC 308 (8 October 2018)

1. On 16 March 2018 Wesfarmers announced to the ASX a proposal to separate and demerge Coles into a separately listed company via a demerger scheme of arrangement.
2. It was said that:

The decision follows a review of the Wesfarmers portfolio and an assessment of the composition of its capital employed to support higher levels of future growth and total shareholder returns. As at 31 December 2017, Coles accounted for approximately 60 per cent of the Group's capital employed and 34 per cent of Group divisional earnings.

1. The managing director of Wesfarmers, Robert Scott, suggested that the company was repositioning its portfolio to target a higher capital weighting toward businesses with future earnings growth prospects. Mr Scott was quoted as saying:

A demerger of Coles will facilitate greater focus by Wesfarmers on growth opportunities within its remaining businesses and the pursuit of value accretive transactions. The capacity to act opportunistically will be retained through a strong balance sheet and a cash generative portfolio.

1. As to the proposed demerger mechanics, timing and execution, Wesfarmers disclosed:

If the demerger is implemented, Wesfarmers shareholders will receive shares in Coles proportional to their existing Wesfarmers holdings, after taking into account any shares to be retained by Wesfarmers. It is expected that the distribution of Coles shares to shareholders will qualify for demerger tax relief, subject to an Australian Tax Office ruling being obtained.

The demerger is subject to final Board approval, third party consents, and regulatory and shareholder approvals. If approved, the demerger would be expected to be completed in the 2019 financial year.

1. A further ASX announcement was made on 23 July 2018. Wesfarmers disclosed an intention to retain 15% of Coles and 50% of the Flybuys business. It was confirmed that the proposed demerger would be effected by way of scheme of arrangement. Eligible shareholders were to receive one Coles share for every Wesfarmers share. Wesfarmers again mentioned that it was expected that the distribution of the Coles shares would, subject to a favourable ruling, qualify for demerger tax relief. Indicative timing for the steps in obtaining approval of the proposed scheme was provided.

The demerger proposal as evidenced in the draft scheme of arrangement

1. The present corporate structure in relation to Wesfarmers and Coles is that Coles is a wholly owned subsidiary of Wesfarmers. The Coles shares are held by another Wesfarmers' subsidiary, Wesfarmers Retail Holdings Pty Ltd.
2. The proposed demerger will effect the separation of Coles from Wesfarmers. However, Wesfarmers will retain 15% of the ordinary shares in Coles through Wesfarmers Retail Holdings Pty Ltd. It is intended that Coles will become a separate listed company on the official list as conducted by the ASX and that ordinary shares in Coles will be quoted for trading by the ASX.
3. Broadly speaking, there are two aspects to the proposed demerger. First, Wesfarmers and Coles are to undergo an internal restructure before the implementation of the scheme. Second, a corporate reorganisation is to be effected through a proposed equal capital reduction and scheme of arrangement.
4. The internal restructure is intended to ensure that, following implementation of the proposed scheme, Coles and its subsidiaries hold the Coles businesses (eg the supermarkets, retail liquor, fuel and convenience stores, financial services and hotel businesses), while Wesfarmers and its remaining subsidiaries hold the other Wesfarmers' businesses. A number of agreements have been prepared to give effect to that internal restructure. These include a Restructure Agreement, a Separation Deed, a Transitional Services Agreement and a Relationship Deed. Arrangements as to the Flybuys business - which is intended to be conducted as a 50:50 joint venture between Wesfarmers and Coles will be addressed in a shareholders' agreement.
5. Those instruments were not adduced in evidence. However, the nature of their terms was referred to in the affidavit evidence and is addressed in the draft explanatory statement (see particularly at pages 100 to 102). Relevantly:

(1) there will be elimination of all inter-company loans between members of the post-demerger Wesfarmers group and the Coles group; and

(2) the parties agree a 'demerger principle' - essentially that each respective post-demerger group has the entire economic benefit and risk of the businesses that it retains and conducts as if it, and not the other, had owned those businesses at all times.

1. The corporate re-organisation to be effected through the proposed capital reduction and scheme is explained in the draft explanatory statement (pages 94 to 102). The draft explanatory statement also contains the terms of the proposed scheme of arrangement (pages 186 to 205) and a deed poll to be provided by Coles under the terms of the scheme (pages 208 to 217). The deed poll has now been executed (attachment 'BCF-29'). The papers as before me also include a Demerger Implementation Deed (attachment 'RGS-8').
2. On their face the various instruments as drafted present as being of some complexity. Much of that is due to the technique of employing numerous definitions which themselves rely on further definitions. However, conceptually the demerger proposal and its mechanics are not complicated. In short summary there are two key elements. First, a reduction of Wesfarmers' share capital and a demerger dividend. Second, the scheme of arrangement. The two elements are interdependent. The proposed resolution for approval of a capital reduction is to be subject to and conditional on the scheme becoming effective. Similarly, the passing of a resolution for the capital reduction is a condition precedent to the scheme (cl 2.1(c)).
3. The draft explanatory statement includes the proposed notice for the general meeting to approve the proposed capital reduction (pages 220 to 225). The resolution seeks approval under s 256C(1) of the Act as an equal capital reduction in Wesfarmers' share capital under s 256B of the Act. The capital reduction amount to be approved is calculated by reference to the market value of the Coles shares to be transferred under the demerger proposal (it being contemplated that there will be trading of Coles shares on the ASX on a deferred settlement basis on the day after the scheme becomes effective).
4. The scheme of arrangement is subject to a number of conditions precedent. Importantly, these include:
   • Wesfarmers' members passing the proposed capital reduction resolution (cl 2.1(c)); and
   • the ASX approving the admission of Coles to the official list of the ASX and the official quotation of the Coles shares on the ASX (cl 2.1(e).
5. It is contemplated that both of these matters must be satisfied before the second court hearing at which Wesfarmers will seek approval of the scheme under s 411(4)(b). However, as was discussed at the first hearing, it might be that the ASX approvals will be conditional on approval of the proposed scheme.
6. Assuming that there is approval under s 411(4)(b), the scheme will come into effect on the lodgement of a copy of the court's order with the ASIC in compliance with s 411(10) (cl 2.1(f) and cl 2.3).
7. The terms of the scheme of arrangement as proposed then provide for the following to occur on the 'Implementation Date' (expected to be 28 November 2018):
   • Wesfarmers will reduce its share capital and declare the demerger dividend (cl 3.2(a)). Together these will give rise to an entitlement of members. As defined - and it is here in particular that one has to work through a series of intertwined definitions - the capital reduction entitlement and the demerger dividend entitlement amounts equate to an entitlement of one Coles share for each Wesfarmers share.
   • The entitlement will not be distributed in cash. Rather the entitlement will be applied in providing for the transfer of Coles shares to the members (or - in the case of 'Ineligible Overseas Shareholders' - to the benefit of the members). The members will receive one Coles share for each Wesfarmers share held on the record date (cl 3.2(c), cl 3.3, cl 3.4 and cl 3.5).
8. The scheme contemplates that Wesfarmers Retail Holdings Pty Ltd will retain 15% of all Coles shares on issue as at the Implementation Date. The remainder will be transferred to or to the benefit of the members as scheme participants (cl 3.4). I note that, to ensure the relevant capital structure of Coles is consistent with Wesfarmers retaining a 15% shareholding in Coles, the Demerger Implementation Deed requires Coles to have only a certain number of ordinary shares on issue (cl 6(a)). Accordingly, as is explained in the draft explanatory statement, immediately following the demerger Coles will have 17.65% more shares on issue than the number of Wesfarmers' shares on issue (page 94).
9. The proposed scheme will operate differently for certain Wesfarmers shareholders.
10. Most members will be 'Eligible Shareholders'; they will receive one Coles share for each Wesfarmers' share. However, the proposed scheme has alternate arrangements or possible alternate arrangements for 'Ineligible Overseas Shareholders' and 'Small Shareholders' respectively.
11. Ineligible Overseas Shareholders comprise members whose registered address is in countries other than Australia, Canada, New Zealand, Hong Kong, Singapore, the United Kingdom or the United States of America (although Wesfarmers may reduce the scope of the category in prescribed circumstances). The papers suggest that there are some 470 Ineligible Overseas Shareholders holding 332,069 shares. That is less than 0.1% of the members by number and 0.03% by value.
12. The members who are Ineligible Overseas Shareholders will not receive Coles shares under the demerger. Instead the shares that would otherwise have been transferred to these members will be transferred to a Sale Agent (cl 3.3(b)). The Sale Agent is to sell the Coles shares with the proceeds of the sale (free of brokerage costs or stamp duty) to be paid to the Ineligible Overseas Shareholders. By the proposed scheme Wesfarmers is to procure the sale and subsequent distribution of proceeds by the Sale Agent (cl 4.1(b)).
13. Small Shareholders comprise Eligible Shareholders who hold 160 shares or less. The papers suggest that there are some 143,607 Small Shareholders holding 11,688,883 shares. That is approximately 26.9% of the members by number but only a little over 1% by value.
14. Small Shareholders may elect to become a 'Selling Shareholder'. Then the Coles shares that would otherwise have been transferred to them will instead be transferred to the Sales Agent, the shares will be sold and the proceeds remitted to the member (cl 3.3(c) and cl 4.1(b)). Alternatively, a Small Shareholder who elects to become a Selling Shareholder may (effectively by way of donation) elect that the proceeds be remitted to the charity ShareGift (cl 4.1(a)).
15. It will be seen from this summary that the capital reduction and demerger scheme of arrangement as proposed by Wesfarmers is broadly consistent with other demerger schemes that have been considered by the courts in recent years.[2]

1. Wesfarmers' affidavit evidence did not specifically address the reasons for the demerger proposal. However, the background to and reasons for the proposal appear clearly from Wesfarmers' announcements to the ASX, as already mentioned, and the terms of the draft explanatory statement.
2. The decision to demerge Coles was said to have followed a review of Wesfarmers' portfolio and the composition of its capital employed. It is contended by the Board that a demerger of Coles will reposition Wesfarmers' portfolio thereby targeting a higher capital weighting to businesses with future earning growth prospects. It is also said that the proposed demerger will allow for greater flexibility and impact in pursuing growth opportunities in an attempt to enhance returns for shareholders.

(1) An affidavit of Baden Furphy affirmed 18 September 2018: Mr Furphy is a partner at Herbert Smith Freehills, Wesfarmers' solicitors, and has conduct of the proposed transaction for Wesfarmers. Mr Furphy confirmed a number of formal matters, outlined the nature of the proposed scheme, and attached the ASX announcements dated 16 March and 23 July 2018 and a further announcement of 23 August 2018. Mr Furphy also attached Wesfarmers' constitution (attachment 'BCF-2') and its 2018 annual report.

(2) An affidavit of Michael Chaney AO affirmed 28 September 2018: Mr Chaney is Wesfarmers' chairman and is the proposed chairperson of the scheme meeting. By his affidavit Mr Chaney consented to so act and provided the necessary disclosures under r 3.2 of the Supreme Court (Corporations) (WA) Rules 2004 (WA).

(3) An affidavit of Anthony Howarth AO sworn 4 October 2018: Mr Howarth is a non-executive director of Wesfarmers and chairman of its audit and risk committee. It is proposed that Mr Howarth act as alternate chairperson of the scheme meeting if Mr Chaney is unable to act.

(4) An affidavit of Jaye Gardner affirmed 27 September 2018: Ms Gardner is a director of Grant Samuel. She has considerable expertise in the preparation of independent expert's reports and valuations, holding qualifications in law, commerce and finance.

Grant Samuel has prepared an independent expert report as to the proposed demerger together with a concise version of that report. Ms Gardner had overall responsibility for the preparation of the reports. Ms Gardner confirms that the opinions expressed in a draft of the Grant Samuel report relied on by Wesfarmers are opinions that she honestly and genuinely holds.

(5) An affidavit of Robert Scott affirmed 1 October 2018: Mr Scott is Wesfarmers' managing director. Among other things, Mr Scott confirmed details as to Wesfarmers' share register, summarised the contemplated process to effect the proposed demerger and outlined the proposed arrangements for the necessary members' meetings including distribution of the scheme booklet.

Mr Scott also confirmed that Wesfarmers' board of directors had formed the view that the scheme was in the best interests of shareholders and had on 13 September 2018 unanimously recommended that members vote in favour of the scheme in the absence of a superior proposal. Finally, he attached the Demerger Implementation Deed dated 27 September 2018 as executed by Wesfarmers and Coles (attachment 'RGS-8').

(6) An affidavit of Timothy Bult affirmed 1 October 2018: Mr Bult is an employee of Wesfarmers who describes his title as 'Director, Associate Businesses and International Development'. Mr Bult deposed to the activities of a demerger and due diligence committee established by Wesfarmers. In particular, Mr Bult informed the court of steps taken in coordinating due diligence inquiries and the consideration of disclosure issues in respect of the information contained in the scheme booklet. The verification process undertaken in relation to the scheme booklet is addressed more fully below.

(7) An affidavit of Mr Furphy affirmed 3 October 2018: By this affidavit Mr Furphy attached numerous email exchanges between his firm and the ASIC as to the draft explanatory statement. Mr Furphy also confirmed service of the court papers on the ASIC and provided a copy of a deed poll dated 27 September 2018 as executed by Coles (attachment 'BCF29').

(8) An affidavit of Mr Furphy affirmed 4 October 2018: By this affidavit Mr Furphy attached further email exchanges between his firm and the ASIC. Mr Furphy also attached a final draft of the explanatory statement (attachment 'BCF-42') and formal correspondence received from the ASIC (attachments 'BCF-45' and 'BCF-46').

1. A booklet dated 19 September 2018 containing the draft explanatory statement required by s 412(1)(a) of the Act (Scheme Booklet) was attachment 'RGS-4' to the affidavit of Mr Scott. That version of the Scheme Booklet was partly redacted to remove confidential and commercially sensitive information about Wesfarmers (predominantly matters relating to executive remuneration but also information concerning Coles' plans for the development of new automated distribution centres).
2. An unredacted version of the Scheme Booklet - containing various alterations following conferral between Wesfarmers and the ASIC and otherwise updated - was provided at the hearing (attachment 'BCF-42').
3. The Scheme Booklet is some 236 pages in length and comprises the following sections:
   • Important information - including a warning that the booklet is important and should be read in its entirety; and encouraging members to obtain independent advice before making any investment decision. (A similar entreaty to read the document in its entirety is provided on the cover to the Scheme Booklet.)
   • Letter from the chairman - containing a clear statement as to the Board's recommendation, but otherwise encouraging members to read the booklet thoroughly and directing members to the section of the Scheme Booklet listing the advantages, disadvantages and risks of the proposal.
   • Overview of the Wesfarmers group (post-demerger) and Coles group.
   • Actions and important dates for Wesfarmers shareholders.
   • A summary of what Wesfarmers shareholders should do reiterating that the booklet should be read in full and informing members how to exercise their right to vote.
   • Frequently asked questions (FAQ) - summarising much of the remainder of the booklet and providing signposting to where a more detailed discussion of the particular subjects is located.
   • Section 1: Advantages, disadvantages and other relevant considerations - providing, in some four pages, the background and rationale to the proposal, a statement as to alternatives considered, the advantages of the demerger, the disadvantages of the demerger and the risks associated with the demerger.
   • Section 2: Information on Coles - including pro forma historical financial information, in an abbreviated form, adjusted for the effects of the proposed demerger.
   • Section 3: Information on Wesfarmers post demerger - also including pro forma historical financial information, in an abbreviated form, adjusted for the effects of the proposed demerger.
   • Section 4: Details of the demerger - containing a succinct explanation of the process and mechanism for implementation of the proposed demerger as well as a summary of the key transaction documents to give effect to the demerger.
   • Section 5: Tax implications for shareholders.
   • Section 6: Independent accountant's report - by this report Ernst & Young Transaction Advisory Services Pty Ltd, through a director Jo Barker, expresses a limited assurance conclusion on the pro forma historical financial information provided for Coles and Wesfarmers post demerger. It is said that nothing has come to Ernst & Young's attention to cause it to believe that the information is not presented fairly.
   • Section 7: Concise independent expert's report - which I address more fully below.
   • Section 8: Additional information.
   • Section 9: Glossary.
   • Section 10: Terms of the scheme of arrangement, ie the formal legal instrument to effect the proposed scheme.
   • Section 11: Proposed deed poll by Coles.
   • Section 12: Notice of general meeting (as to, among other things, approval of the proposed capital reduction).
   • Section 13: Notice of scheme meeting.
   • Corporate directory.
4. Wesfarmers filed detailed written submissions dated 3 October 2018. The written submissions identified the relevant legal principles on an application for orders under s 411(1) and the evidence in support of the matters as to which I was required to be satisfied. Most helpfully, counsel provided, by an appendix, a checklist which identified the specific evidence as to the formal matters and where the various required disclosures appeared in the draft Scheme Booklet. Those written submissions were amplified by oral submissions on 5 October 2018 in which senior counsel for Wesfarmers directed my attention to specific considerations as to the proposed demerger.
5. The comprehensive submissions demonstrated that Wesfarmers and its legal representatives were conscious of their duty of disclosure. It is well-established that as the application is made ex parte, subject to notification to the ASIC, the applicant has a responsibility to bring to the court's attention all matters which could be considered relevant to the exercise of its discretion.[3]

1. Section 411 of the Act permits a scheme of arrangement to be used to re-organise a company in a manner which will be binding on a dissenting minority of members provided that: (1) the arrangement is agreed by the requisite majorities under s 411(4)(a) (75% by value and ordinarily 50% by number); and (2) the court approves the arrangement under s 411(4)(b). For a scheme to become effective it is also necessary that the scheme proponent follow the procedural requirements mandated by the Act.
2. There are three stages to an application under s 411 of the Act. First, the court approves the convening of a scheme meeting and the draft explanatory statement to be sent to the scheme members. Second, the members vote on the proposed scheme at the scheme meeting. Third, assuming the first two stages are navigated successfully, the court approves the proposed scheme.[4]
3. The application before me concerned the first stage of the proposed demerger scheme.
4. The other stage at which the court plays a part in the process is on an application for approval of the scheme under s 411(4)(b) of the Act following agreement to the arrangement by the requisite majorities at the scheme meeting. It is not necessary, for present purposes, to examine the principles that apply on the third stage. It suffices to observe that the second court hearing is where the court makes its final determination.[5] It is the most important hearing if the matter becomes contested.[6]
5. Otherwise, pending the return of the matter before me should the proposed demerger be approved by Wesfarmers' members, it is enough to identify that the applicable principles at the third stage are discussed in Re NRMA Ltd [No 1],[7] Central Pacific Minerals NL[8] and Re Programmed Maintenance Services Ltd.[9]
6. It is convenient to commence with the statutory provisions that are material to the first stage.
7. Section 411(1) relevantly applies where an 'arrangement' is proposed between a Part 5.1 body and its members (or any class of its members). The court may, on an application in a summary way of the body, order a meeting of the body's members. Where the court makes such an order it may also approve the explanatory statement required by s 412(1)(a) to accompany the notice of meeting.
8. Section 412(1)(a) makes provision for an explanatory statement to accompany every notice as to a meeting convened under s 411. The statement must explain the effect of the arrangement. It must also state the material interests of the directors and any differential effect that the proposed arrangement will have on those interests. The explanatory statement must set out the prescribed information[10] and, broadly speaking, any other information known to directors, not previously disclosed, that is material to the making of a decision by a member as to whether to agree to the arrangement.[11]
9. As to the standard of disclosure:
   • The emphasis is on ensuring full disclosure so that the members are properly informed in their consideration of the proposed scheme.[12] Thus the explanatory statement must provide proper disclosure conformable with s 411(3) and s 412 of the Act.
   • What is required is a statement of all of the main facts as will enable shareholders to exercise their judgment on the proposed scheme.[13]
   • The court is also concerned with the notion of a fair picture being presented; there should not be an unbalanced presentation. The expectation is one of forthrightness. Cards must be placed on the table.[14]
   • The court must be satisfied, at least to a prima facie level, that there has been proper disclosure with nothing misleading or deceptive in any material sense.[15]
10. In each case the extent of disclosure required is a question of fact and degree dependent on the nature of the scheme and the context in which it is advanced for consideration.[16] This must be considered in a practical and commercially realistic way having regard to the complexity of the proposed scheme.
11. In any large or complex proposed scheme of arrangement there is a balance to be struck. An insufficiency of information may mean that members are not properly informed. Too much information may mean that the disclosure is unintelligible or incomprehensible. While made in a different context, the following observations are apposite:

If every possible formulation of the commercial objective of the proposal, and arguments for and against every theoretical possibility, were set forth the total package of information to members would be likely to confuse rather than to illuminate the issue for decision, even for people having a familiarity with corporate law and commerce. The need to make full and fair disclosure must be tempered by the need to present a document that is intelligible to reasonable members of the class to whom it is directed, and is likely to assist rather than to confuse. In complex cases it may be necessary to be selective in the information provided, confining it to that which is realistically useful.[17] (citations omitted)

1. The court has endorsed the use of summaries in an effort to avoid overwhelming members with information and a larger - but less user friendly - explanatory statement.[18] So too the ASIC, in my view correctly, recognises the benefit of a concise form expert report.[19]
2. The central concern is that the content of the draft explanatory statement be clear, complete and not misleading. It is also desirable that an explanatory statement be concise and economical in satisfying its statutory purpose. The explanatory statement does not serve its function if it is liable to prejudice or impair the fair consideration of the proposed scheme. But it should be accepted that it will often be possible to criticise the manner in which disclosure is made notwithstanding that, as a matter of commercial reality, the terms of the explanatory statement suffice to enable the members to exercise a commercial judgment on a fully and properly informed basis. The court has recognised that perfection is hardly attainable.[20]
3. By s 411(2) the court must not make an order under s 411(1) unless appropriate notice of the application has been given to the ASIC. Ordinarily 14 days is required but the court or the ASIC may permit a shorter period. The court must also be satisfied that the ASIC has had a reasonable opportunity to consider the terms of the proposed arrangement and the draft explanatory statement and to make submissions to the court in relation to those matters. The term 'draft explanatory statement' is defined in s 411(3).
4. Accordingly, in the present context, before making orders for the convening of a scheme meeting and approving for distribution an explanatory statement the court has to be satisfied that:

(1) The relevant entity is a 'Part 5.1 body' (s 411(1)) - this includes a company.[21]

(2) An 'arrangement' is proposed between the Part 5.1 body and its members or any class of its members (s 411(1)). As to this:

(a) the term 'arrangement' is given a wide and liberal meaning[22] which extends beyond the inclusive definition in s 9 of the Act. An arrangement is a transaction that involves some 'give and take' or the provision of some 'benefit'.[23] Almost any arrangement, otherwise legal, which touches and concerns the rights and obligations of the company or its members may be given effect to under s 411;[24] and

(b) the scheme meeting or meetings are to be convened between members of the same class.[25]

(3) The ASIC has been given 14 days' notice of the hearing or such shorter period as may be permitted (s 411(2)(a)).

(4) The ASIC has had a 'reasonable opportunity' to examine the terms of the proposed arrangement and the draft explanatory statement and make submissions in relation to those matters (s 411(2)(b)).

(5) The draft explanatory statement provides adequate disclosure (s 412(1)(a) and s 411(3)) and contains the prescribed information (s 412(1)(a)(ii)).

1. The procedural requirements under r 3.2 and r 3.3 of the Supreme Court (Corporations) (WA) Rules 2004 (WA) must also be complied with.
2. As has been seen, the statutory provisions provide for circumstances in which the first meeting must not be ordered (s 411(2)). There are also certain jurisdictional requirements (s 411(1)). There is, however, no statement of the criteria which must be satisfied before a meeting is ordered; although it is clear that there is a discretion that must exercised judicially.[26]
3. The authorities establish accepted guidelines for the favourable exercise of the discretion. As well as the applicant meeting the statutory and procedural provisions, the court ought to be satisfied that:

(1) the scheme is bona fide and properly proposed;[27] and

(2) there is no apparent reason why the proposed scheme should not, in due course, receive the court's approval if the necessary majority of votes are achieved.[28]

1. An alternate formulation of the second requirement is that enunciated in F T Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd[29] and approved in Australian Securities Commission v Marlborough Gold Mines Ltd:[30]

[T]he court will not ordinarily summon a meeting unless the scheme is of such a nature and cast in such terms that, if it achieves the statutory majority at the ... meeting the court would be likely to approve it on the hearing of a petition which is unopposed.

1. That approach has been adopted and applied in subsequent authorities too numerous to mention.
2. It has also been said on many occasions that the court exercises a supervisory role in exercising its discretions under s 411.[31] Some judges have referred to the process as being 'to a degree inquisitorial'.[32]
3. There is a practice that, at the first stage, the court will subject the proposal (in general terms) and the scheme documents (in particular) to close scrutiny.[33] The court does so with a view to raising any queries as to the scheme and the draft explanatory statement with the applicant.[34] For example, the court considers the acceptability of the documentation of the proposed arrangement to determine whether the arrangement complies with the substantive requirements of the law; it does so with a view to seeking to avoid defects at the technical or mechanical level.[35] The court must be satisfied, at least at a prima facie level, as to the legality of what is proposed.[36] However, the court is not required to give close consideration to the effects of the scheme on individual members of the classes of members or creditors affected; to do so would be to introduce a burdensome and ineffectual consideration at this initial interlocutory stage.[37]
4. In exercise of its supervisory role the court may:
   • suggest or require the re-drafting of scheme documentation;[38]
   • seek to ensure that the terms of the arrangement will be enforceable by all persons bound by the scheme against those who seek to implement or obtain benefits from the scheme;[39] or
   • suggest or require additional disclosure in the scheme booklet[40] (because deficient disclosure should ideally be identified before the scheme meeting rather than after it).[41]
5. In short, the court will intervene at the first stage if it has concerns. The court should be alive to the difficulties which may arise subsequently when it is asked to give approval to the scheme.[42]
6. One reason for this is that court approval to convene the scheme meetings is viewed by the market as giving assurance that the scheme is at least in form and substance such as would warrant receiving preliminary court clearance. Trading thereafter takes place on that basis.[43]
7. Similarly, the practice is that disputes about classes ought usually to be determined at the first stage hearing.[44] This avoids the waste of costs and court time which would otherwise result if it was left to the second hearing to determine that the classes were wrongly constituted.[45]
8. There is, however, a clear distinction between consideration of the legal efficacy of the proposed arrangement, on the one hand, and the commercial merits (or demerits) of the proposed arrangement, on the other. The court primarily concerns itself with the former rather than the latter. In Re Amcom Telecommunications Ltd McKerracher J addressed the nature of the court's review at the first hearing stage in terms which bear repeating:

[T]he standard of review relevant to the first hearing requires the court to consider whether the proposed scheme is not inappropriate and is one that sensible business people might consider is of benefit to its members. If the proposed arrangement is one that seems fit for consideration by a meeting of members and is a commercial proposition likely to gain the court's approval if passed by the necessary majorities, then leave should be given to convene the meeting. The court does not need to be satisfied that no better scheme could have been devised.[46] (citations omitted)

1. There is an obvious reason why the court is only concerned with whether it is reasonable to suppose that sensible business people might consider the proposed arrangement beneficial to members and does not require satisfaction that no better scheme could have been proposed. Ultimately the question is for the members themselves.[47] The members are the best judges of whether an arrangement is to their commercial advantage.[48] In general, where a scheme has been approved by properly informed members at a duly convened meeting and is fair and reasonable, the court will be reluctant to go behind the commercial judgment so exercised.[49]
2. Accordingly, it is not for the court to be satisfied as to the commercial desirability of the proposed arrangement; it is enough if the scheme is one that would be open to the members of the company to adopt.[50]
3. Thus it is said that, at the first stage, the court does not ordinarily go very far into the question of whether the arrangement is one that warrants approval of the court.[51] That question arises when the scheme returns to the court for final approval.[52]
4. Nevertheless, the court will not exercise its discretion to order the convening of a scheme meeting where doing so would set in motion a process that is clearly bound to fail;[53] for example, where the order would be futile as the proposed scheme is unlikely to be finally approved.[54] There are rare cases where a scheme may appear on its face to be so blatantly unfair or otherwise inappropriate that it should be stopped in its tracks.[55] But the first stage is not the time to resolve difficult questions on which reasonable minds may differ.[56]
5. The s 411(1) order to convene the scheme meeting does no more than signify that the court considers the proposed arrangement to be one that is appropriate for the consideration of members at the intended scheme meeting.
6. By making an order under s 411(1) to convene the scheme meeting the court does not give its imprimatur to the proposed arrangement or herald its approval under s 411(4)(b) at the second hearing.[57] For that reason it is appropriate that, although not part of the prescribed information for a members' scheme, the explanatory statement record something to the effect that an order under s 411(1) is not an endorsement of, or any other expression of opinion on, the scheme.[58] The mere fact that the court has convened a meeting does not necessarily mean that the court will approve the arrangement even if the arrangement is unopposed at the third stage.[59]

1. Counsel organised their written submissions under two main headings: principal matters under s 411(1) and the exercise of the court's discretion. A series of some 22 topics were addressed within those broad headings.
2. I propose to cover the pertinent matters arising on the application more generally. It is necessary to address a number of subjects, namely: formal matters; the single class as identified; the proposed capital reduction; consideration of the nature and terms of the proposed scheme; disclosure and the Scheme Booklet; electronic notification; notice of the second hearing; and the s 1319 directions made as to the scheme meeting.
3. There is, in my view, no need to address some of the topics mentioned by counsel. This is not a merger or acquisition scheme and thus many of the issues that commonly arise where a scheme is employed to effect a change in control of a company do not arise. For example, I do not presently see any apparent issue arising in terms of s 411(17) of the Act.

1. Wesfarmers is a Part 5.1 body; it is a public company. The ASIC search attached to Mr Furphy's first affidavit proves as much (attachment 'BCF-1').
2. The proposed scheme is an 'arrangement' within s 411 of the Act. In Re Foster's Group Ltd Ferguson J (as her Honour then was) identified that demerger schemes had been considered by the courts on a number of occasions and were clearly arrangements.[60] The scheme in that case was broadly similar to Wesfarmers' demerger proposal. So too, in National Australia Bank Ltd, it was noted that the jurisdiction conferred by s 411 has been used on many occasions to effect a demerger, as it was in that case.[61] Re AMP Ltd is an earlier example of a demerger, employing an equal capital reduction under s 265B and s 265C(1), which was accepted to fit within the statutory concept of an 'arrangement'.
3. The proposed arrangement is between Wesfarmers and its ordinary shareholders. Those shareholders are 'members' as defined in s 9 of the Act by reference to s 231. They are persons who are entered on Wesfarmers' register of members.
4. Mr Furphy's second affidavit proved that the ASIC was given notice of the hearing before me on 19 September 2018 (attachments 'BCF-26' and 'BCF-27'), ie more than 14 days before the hearing.
5. The same affidavit, together with Mr Furphy's third affidavit, satisfied me that the ASIC was provided with a reasonable opportunity to examine the terms of the proposed arrangement and the draft explanatory statement and to make submissions in relation to those matters. The ASIC was provided with an early and incomplete draft of the Scheme Booklet on 27 August 2018 (attachment 'BCF-7'). Thereafter, in an iterative process involving numerous email exchanges, the ASIC made various suggestions as to matters of disclosure which were responded to comprehensively by Wesfarmers' solicitors. The emails also refer to matters having been discussed in various telephone conversations.
6. The version of the Scheme Booklet attached to Mr Scott's affidavit was provided to the ASIC on 19 September 2018 (attachment 'BCF12'). The conferral process continued thereafter.
7. On 1 October 2018 the ASIC informed Wesfarmers that it had one sole remaining disclosure concern (attachment 'BCF-20'). Further conferral ensued, resulting in changes to the Scheme Booklet (attachment 'BCF-21'). On 2 October 2018 the ASIC then recorded that it had no further comments on the outstanding issue (attachment 'BCF21'). There were, however, further email communications between Herbert Smith Freehills and the ASIC over 2 to 4 October 2018 (attachments 'BCF-30' to 'BCF-37' and 'BCF-39'). Among other things, the ASIC was provided with the updated draft of the Scheme Booklet (attachment BCF-36) together with a version showing the changes made (attachment BCF-37). During the afternoon of 4 October 2018 the ASIC provided a further email informing Wesfarmers' solicitors that, based on revisions to the Scheme Booklet and the independent expert reports, it had no further comments (attachment 'BCF-43').
8. In any case, by letter dated 4 October 2018 (attachment 'BCF-45'), the ASIC informed Wesfarmers that: (1) it was of the view that it has had the 'reasonable opportunity' required under s 411(2)(b); and (2) it did not propose to appear to make submissions or intervene to oppose the proposed scheme as the first hearing.
9. Otherwise, by the affidavits of Mr Chaney AO and Mr Howarth AO, there was compliance with the requirements under r 3.2 of the Supreme Court (Corporations) (WA) Rules 2004 (WA). The terms of the order as made ensured compliance with r 3.3.

1. Wesfarmers has proposed the scheme of arrangement on the basis that there is relevantly only a single class - in other words, that the members comprising fully paid shareholders are one class.
2. The issue of classes is not just a matter of form. As scheme proponent Wesfarmers carries an obligation to ensure that, if more than one class exists, class meetings are properly constituted. A failure to do so deprives the court of power to approve the proposed arrangement.[62]
3. Counsel for Wesfarmers submitted that there was a single class as all Wesfarmers' shareholders had, in substance, the same rights under the proposed scheme. The main such right was said to be to receive the scheme consideration under the terms of the proposed scheme. However, counsel directed my attention to the differential arrangements that affect the Ineligible Overseas Shareholders and those that may be enjoyed by the Small Shareholders (refer to pars 31 - 36 above).
4. The test usually applied for identifying a class for the purposes of a scheme of arrangement in that formulated in Sovereign Life Assurance v Dodd:

The word 'class' is vague, and to find out what is meant by it we must look at the scope of the section, which is a section enabling the court to order a meeting of a class of creditors to be called. It seems plain that we must give such a meaning to the term 'class' as will prevent the section being so worked as to result in confiscation and injustice, and that it must be confined to those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest.[63]

1. The test laid down is not one of identical treatment but rather one of 'community of interest'.[64] Divergent commercial interests extrinsic to share membership are ordinarily not a factor which should differentiate classes.[65] The focus is not on the fact of differentiation but on its effects. The court asks whether the rights and entitlements of the group, viewed in the totality of the scheme's contexts, are so dissimilar as to make it impossible for them to consult together with a view to their common interest.[66]
2. The proposed treatment of Ineligible Overseas Shareholders as evinced by the scheme as now promoted by Wesfarmers is not class creating. The intrinsic value for members if the proposed demerger scheme is approved is the same for all. There remains a sufficient community of interest between the Ineligible Overseas Shareholders and the other members such that they may consider whether it is in their collective interest for Coles to be demerged from Wesfarmers. Similar issues concerning different arrangements for foreign shareholders in other schemes have been considered by the courts on numerous occasions. Those earlier authorities have concluded that there is a single class.[67] There is nothing in the present proposed scheme to differentiate it from those earlier authorities.
3. In this regard it has been acknowledged that often foreign shareholders are treated differently under a scheme of arrangement so as to avoid the costs and logistics to the company of assessing and complying with the securities law in an overseas jurisdiction.[68]
4. For the same reasons that the Ineligible Overseas Shareholders do not constitute a separate class, so too the Small Shareholders do not constitute a separate class. Here it is material that the Small Shareholders must elect to become a Selling Shareholder. The arrangement is thus an 'opt-in' regime and is clearly explained as such in the Scheme Booklet (see eg pages 16 and 99).
5. It is not necessary to consider the position of the holders of the performance rights. They are not scheme participants under the proposed scheme of arrangement.

1. The proposed capital reduction stands apart from the proposed scheme. It does not require approval of the court. The proposed capital reduction is, however, integral to the effectuation of proposed demerger. I consider it appropriate to consider the proposed arrangement in its totality. If, for example, the proposed capital reduction necessarily contravened Div 1 of Pt 2J.1 of the Act it is difficult to see how the proposed scheme of arrangement could meet the standard in F T Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd. Indeed, even if there is a mere risk of contravention there would be a disclosure issue.
2. Accordingly, in making the orders under s 411(1) convening the scheme meeting I required satisfaction, at a prima facie level given the interlocutory and ex parte nature of the application before me, as to the legality of what is proposed. I consider that to be consistent with the approach of the Full Court in Re CSR Ltd.[69]
3. Wesfarmers' counsel submitted, and I accept, that there is nothing in Wesfarmers' constitution that would prevent the proposed scheme. Nor does the constitution prevent the proposed reduction of capital.
4. Section 256B(1) of the Act provides that a company may reduce its share capital in a way that is not otherwise authorised by law if the reduction:

(a) is fair and reasonable to the company's shareholders as a whole; and

(b) does not materially prejudice the company's ability to pay its creditors; and

(c) is approved by shareholders under s 256C.

1. The type of approval required under s 256C depends on whether the reduction is an 'equal reduction' or a 'selective reduction'. An equal reduction requires approval by a resolution passed at a general meeting (s 256C(1)). A selective reduction requires special shareholder approval as set out in s 256C(2). Various member disclosure and the ASIC lodgement requirements must also be observed (s 256C(3), (4) and (5)).
2. By s 256B(2) the reduction is an 'equal reduction' if:

(a) it relates only to ordinary shares; and

(b) it applies to each holder of ordinary shares in proportion to the number of ordinary shares they hold; and

(c) the terms of the reduction are the same for each holder of ordinary shares.

1. I am satisfied that Wesfarmers' proposed capital reduction is an equal reduction. Self-evidently it relates only to ordinary shares and it applies proportionally. Also, the terms of the reduction are the same for each ordinary shareholder. In that regard the differential treatment proposed as to the Ineligible Overseas Shareholders does not affect satisfaction of s 256B(2)(c).[70] The sale of their Coles shares occurs under the proposed scheme rather than the terms of the reduction. Accordingly, as proposed, the capital reduction may be approved by an ordinary resolution of Wesfarmers' members.
2. I accept, necessarily on a prima facie basis only given the nature of the first stage hearing, Wesfarmers' contention that the proposed reduction is fair and reasonable to the company's shareholders as a whole. The proposed demerger cannot proceed without the capital reduction. The independent expert, Ms Gardner, has concluded that the proposed scheme is in the best interests of the shareholders (Scheme Booklet page 121). As I have mentioned, the capital reduction is integral to the effectuation of the demerger. On that basis there is prima facie justification as to the fairness and reasonableness of the proposed capital reduction: it is required to effect something which the independent expert has concluded is in the best interests of the members.
3. In assessing the question of apparent fairness and reasonableness it is also useful to examine the approach to evaluation of the demerger as stated in the Grant Samuel concise report. There Ms Gardner states:

Wesfarmers shareholders are being asked to split their current investment into two parts, a shareholding in Wesfarmers post Demerger and a separate shareholding in Coles.

The transaction is a 'clean' split in so far as there is no change in the underlying economic interest of each shareholder (except for ineligible overseas shareholders and selling shareholders). They will, in aggregate, continue to own 100% of the Coles business, but in a different form, with 85% held directly and 15% owned indirectly through their ongoing shareholding in Wesfarmers. There is:

• no purchase or sale of equity in either Coles or Wesfarmers to third parties;
• no value leakage to third parties from either entity; and
• not expected to be any adverse tax consequences for the separate entities and for the vast majority of Wesfarmers shareholders.

Accordingly, the Demerger is definitionally fair as shareholders (except ineligible overseas shareholders) will hold exactly the same underlying economic interests in the Coles business before and after the Demerger is implemented.[71]

1. The final issue on the proposed capital reduction is satisfaction, on a prima facie basis, that it will not materially prejudice Wesfarmers' ability to pay its creditors. The question of 'material prejudice' to the company's ability to pay its creditors relates to a material, as opposed to theoretical, increase in the likelihood that the reduction in capital will result in an reduced ability to pay creditors.[72]
2. Here there are two evidentiary matters to which I have regard. First, the Wesfarmers board has concluded, and recorded in the Scheme Booklet, that the proposed capital reduction will not, if implemented, materially prejudice Wesfarmers' ability to pay its existing creditors (Scheme Booklet, page 95). That view is repeated in the notice of general meeting to consider the proposed capital reduction (Scheme Booklet, page 223). Second, the Grant Samuel independent expert report also concludes that Wesfarmers creditors will not be materially prejudiced by the proposed capital reduction (Scheme Booklet, pages 165 to 167).
3. I have considered the reasons given for that conclusion in the Grant Samuel report. I have also had regard to the post-demerger Wesfarmers pro forma historical financial information (Scheme Booklet, pages 79 to 90). Based on this material I accept - necessarily on a provisional basis only - the conclusions of Wesfarmers' directors and Grant Samuel. Accordingly, I am satisfied to the required level that the proposed capital reduction will not be an impediment to the effectuation of the proposed demerger.
4. It should be noted that Wesfarmers proposed a separate general meeting to consider the proposed capital reduction. Wesfarmers was correct to do so. Scheme meetings under s 411 are a specific statutory meeting and not a general meeting of the company. Corporate action that relates directly or indirectly to a proposed scheme should be considered separately to a general meeting of members.[73]

Nature and terms of the proposed demerger scheme

1. It is necessary to consider four issues as to the nature and terms of the proposed scheme of arrangement: propriety and legality; fairness and reasonableness; performance risk; and drafting issues.
2. The first issue may be dealt with summarily. On the materials before me there is nothing to suggest that the proposed scheme is not properly proposed or unlawful. Indeed, as Wesfarmers' submits, if there is to be any contention advanced as to bona fides that is something best agitated at the second court hearing.
3. Similarly, the second issue - the fairness and reasonableness of the proposed demerger - is not one that I need to develop at length given the authorities I have referred to. It is not for the court to form a view as to the merits or commercial desirability of the proposed scheme of arrangement; that is all the more so at the first stage. It is enough for me to conclude, as I do, that the proposed scheme is one that it would be open for Wesfarmers' members to adopt. Sensible business people might consider the proposed scheme to be of benefit to Wesfarmers's members.
4. I consider the proposed arrangement evinced by the draft scheme of arrangement to be of that character given:
   • The conclusion reached in the Grant Samuel independent expert report as verified by Ms Gardner: the opinion expressed is that the proposed demerger is in the best interests of Wesfarmers' shareholders (Scheme Booklet, page 121).
   • Wesfarmers' board also unanimously considers the demerger to be in the best interests of Wesfarmers' shareholders (Scheme Booklet, pages 8, 20 and 223).
5. The Grant Samuel independent expert report provides detailed reasons for the opinion it has reached on the merits of the proposed scheme. It is not necessary to repeat or summarise those reasons. The independent expert's process of reasoning has been exposed for members' consideration. It suffices to record that, having read the concise independent expert report (Scheme Booklet section 7) and a 27 September 2018 draft of the full independent expert report as attached to Ms Gardner's affidavit (attachment 'JLG-2'), I am satisfied that the opinion expressed is open.
6. Accordingly, to the limited extent that it is necessary to consider apparent fairness and reasonableness at the first stage, I am satisfied that the proposed arrangement is one that is fit for consideration by members.
7. As a separate matter, counsel for Wesfarmers invited my attention to issues associated with performance risk. Counsel was correct to do so. Where a proposed scheme involves a third party who will not be bound by the scheme the court commonly considers the level of risk that the third party will not perform its obligations.
8. Performance risk is, in my view, a more significant issue in a merger or acquisition scheme. In such a case the court will seek to ensure that a member's shares are not transferred or cancelled until the member has received the scheme consideration. The risks associated with possible non-performance are not as acute in a demerger context. As counsel noted, the proposed scheme is not such that Wesfarmers' members could stand to lose their shares.
9. To the extent that steps are to be taken by Coles a deed poll has been provided (attachment 'BCF-29'). The deed poll provides, by cl 1.4, that the deed poll may be relied on and enforced by any scheme participant. As the members are sufficiently identified, the deed poll will be enforceable by them.[74] The deed poll otherwise addresses Coles' obligations to update its register (cl 3.2), confirm allotment (cl 3.3) and apply for admission to the ASX official list and official quotation of the Coles shares to be transferred (cl 4.1). More generally, Coles covenants to perform the steps attributed to it under and to otherwise comply with the scheme and the Demerger Implementation Deed (cl 4.2).
10. The terms of the scheme of arrangement provide that Wesfarmers will enforce the deed poll against Coles on behalf of and as agent and attorney of the members as scheme participants (cl 6.8). It is in Wesfarmers' interests to do so. Elsewhere it has covenanted to procure registration of the Coles shares to be transferred and that Coles will issue holding statements where required (cl 3.4(b) and cl 3.5).
11. In addition to the deed poll, the Demerger Implementation Deed contains covenants on the part of Coles - in favour of Wesfarmers - by which Coles agrees the take all necessary steps to implement the demerger (cl 6). This includes registering transfers under the scheme (cl 6(c)) and confirming the allotments (cl 6(d)).
12. I did, however, harbour reservations about the lack of any deed poll on the part of Wesfarmers Retail Holdings Pty Ltd. It will be recalled that this is the Wesfarmers' group entity that holds the Coles shares. The scheme of arrangement provides that Wesfarmers is to procure that Wesfarmers Retail Holdings Pty Ltd effect the necessary transfers (cl 3.4). There is, however, no deed poll on the part of Wesfarmers Retail Holdings Pty Ltd. Theoretically there is a risk albeit extremely remote - that it might not do what is contemplated by the terms of the proposed scheme.
13. A similar situation occurred in the demerger scheme in Re Foster's Group Ltd.
14. I consider it would be preferable if an appropriate deed poll were proffered by Wesfarmers Retail Holdings Pty Ltd. Nevertheless, Wesfarmers Retail Holdings Pty Ltd is and will remain wholly owned by Wesfarmers. Wesfarmers - who will be bound by the terms of the scheme - is required to procure that Wesfarmers Retail Holdings Pty Ltd transfers the Coles shares. In the circumstances, as in Re Foster's Group Ltd,[75] I considered that the risk of non-performance was sufficiently low that it was not necessary to require that Wesfarmers Retail Holdings Pty Ltd enter into a deed poll as a condition of making orders under s 411(1).
15. Finally, it is necessary that I touch on some minor drafting issues that I raised with counsel for Wesfarmers at the hearing on 5 October 2018. In that regard, consistent with the authorities I have referred to, I have given closer consideration to the mechanical aspects and technical operation of the proposed scheme of arrangement rather than the commercial aspects of the arrangement (those being a matter for the members rather than the court).
16. I have asked that further consideration be given by Wesfarmers and its legal representatives to:
    • The interaction of cl 2.1(f), cl 2.3 and the definition of 'Effective Date'. Insofar as the Scheme Booklet suggests that the Effective Date will be 20 November 2018 (page 6), it would be preferable for practical steps to be effected to ensure that members' expectations are met in this respect.
    • Clause 2.2 - my provisional view is that other than as to proof of satisfaction or acceptability on the part of Wesfarmers or Coles no such certificate will be 'conclusive' for the purpose of the second hearing. Affidavit evidence will be required.
    • Clause 3.2 and the definition of 'Implementation Date' - I am concerned as to the ambulatory nature of the definition and the potential discretion it provides to Wesfarmers as to the implementation of the proposed scheme of arrangement if accepted by members and approved by the court.
    • Clause 7.4 - Whether this clause is necessary or appropriate is a subject on which Wesfarmers ought to address me at the second hearing.
17. None of these drafting issues were material. All were technical matters raised by way of identification of issues for future consideration rather than a requirement. None of the matters so identified were such that it would have been appropriate, in the exercise of discretion, to delay the making of orders under s 411(1). I expect that some of the issues will be addressed by the taking of practical steps. For example, the first issue could be accommodated by an appropriate order at the second court hearing. As to the others they might, if necessary, be dealt with by appropriate alterations or the imposition of appropriate conditions under s 411(6). That can await the further hearing and the outcome of the members' meetings.

1. Wesfarmers' proposed demerger scheme is one where the draft explanatory statement exhibits the tension that exists between providing fulsome, yet comprehensible, disclosure.
2. I have already referred to the imposing bulk of the Scheme Booklet. Much of the 236 pages is replete with dense financial information. I also expect that many shareholders, even those with legal qualifications, would have some difficulty in tracking through the detail of the proposed scheme of arrangement itself. While I have read through the entirety of the Scheme Booklet - and I acknowledge that in a number of places Wesfarmers has suggested that all shareholders do likewise - I suspect that most shareholders will not. In such circumstances there is a risk that the Scheme Booklet will not be effective in conveying to shareholders the essence of the proposed demerger scheme and its implications.
3. To militate against that risk Wesfarmers has adopted the now standard, but eminently sensible, practice of providing for various concise summaries within the Scheme Booklet. Where appropriate the shareholders are directed to a more detailed discussion on the various subjects. The summaries are well-constructed and effective in conveying material information about the proposed scheme and its advantages, disadvantages and risks - as well as the effects that the proposed scheme, if implemented, will have on the members' interests.
4. I accept that these summaries are more likely to be consulted and understood by shareholders meaning that the disclosure effected by the Scheme Booklet as a whole is enhanced.
5. I note in particular:

(1) The Frequently Asked Questions (pages 8 to 18): Among other things, the FAQs explain the nature of the proposed demerger, the directors' recommendation and the independent expert's opinion, the advantages, disadvantages and risks of the demerger, what is intended by way of implementation and process and the process to vote at the general and scheme meetings.

(2) The discussion as to advantages, disadvantages and other relevant considerations in section 1 (pages 20 to 23).

(3) The details of the demerger in section 4 (pages 94 to 102): This, while more complicated than the equivalent section in the FAQs, is reasonably comprehensible and is successful in explaining the nature and effect of the process to be effected by the proposed capital reduction and the demerger scheme.

(4) The information at the outset of the Scheme Booklet as to what Wesfarmers' shareholders should do and the important dates in terms of actions under the proposed scheme.

1. Although, as mentioned, I have considered the Scheme Booklet as a whole, I have given closer consideration to these four parts of the Scheme Booklet. So too I have given closer consideration to the chairman's letter (page 3) and the opinion, summary and conclusions sections of the independent expert report (pages 121 to 124) as well as the part of the independent expert report that evaluates the demerger proposal (pages 136 to 164) and the impact of the proposed capital reduction on Wesfarmers' ability to pay its creditors (pages 165 to 167). I did so as I expect that these parts of the Scheme Booklet will be more widely read by the shareholders.
2. I am satisfied with the balance that has been struck by Wesfarmers in its preparation of the Scheme Booklet. At this interlocutory stage I am satisfied, to the prima facie level that presently pertains, that there has been proper disclosure as to the effect of the proposed scheme and the material considerations to which shareholders ought to have regard.
3. My conclusion that Wesfarmers has met its obligations in this regard takes into account the iterative process that Wesfarmers undertook with the ASIC which resulted in the ASIC having no further comments as to Wesfarmers' proposed disclosure in the Scheme Booklet. In its letter of 4 October 2018 the ASIC clarifies that it is not responsible for the contents of the draft explanatory statement (attachment 'BCF-45'). That is undoubtedly the case. The Scheme Booklet is a matter for Wesfarmers, not the ASIC. Nor is the court responsible for the contents of the draft explanatory statement. However, the ASIC's Regulatory Guide does state that the ASIC considers its role as being one to assist the court by, among other things, reviewing the content of scheme documents and reviewing the nature and function of the scheme.[76] It is evident from the attachments to Mr Furphy's second and third affidavits that the ASIC carried out that function assiduously in the case of Wesfarmers' proposed scheme.
4. It is also necessary to consider whether, prima facie, there is nothing apparently misleading - including by omission - in the Scheme Booklet. Wesfarmers has an obligation to ensure the disclosure of material information which has not previously been disclosed.
5. Mr Scott and more particularly Mr Bult have given affidavit evidence as to the due diligence and verification process undertaken by Wesfarmers in the preparation of the Scheme Booklet.
6. A demerger and due diligence committee was established. Among other things, the committee had responsibility to oversee preparation of the Scheme Booklet. Under the auspices of the committee Wesfarmers and Coles have each undertaken a process of verifying the accuracy of the statements in the Scheme Booklet. That process has been comprehensive and administered with the assistance of experienced external legal advisers. There have been a series of management sign-offs as well as approval where the respective boards have approved statements attributed to them.
7. Based on that process, Mr Bult deposes that:

I am satisfied, to the best of my knowledge and belief, that all statements in the Scheme Booklet have been verified in the manner described in this affidavit, are true and complete, are not misleading or deceptive, and that the Scheme Booklet does not omit any material information.

1. Mr Scott deposes to Wesfarmers' board's consideration and approval of the form and content of the Scheme Booklet.
2. I accept that evidence on the part of Mr Bult and Mr Scott. On the basis of that evidence and the other matters I have referred to I am satisfied that there is prima facie evidence that the Scheme Booklet will provide proper disclosure to members.
3. Finally as to disclosure, I was satisfied that the Scheme Booklet contained the prescribed information in accordance with s 412(1)(a)(ii) of the Act and Sch 8 of the Corporations Regulations 2001 (Cth). Those requirements have been modified in one respect by the ASIC's letter dated 4 October 2018 (attachment 'BCF-46'). Otherwise, in locating and satisfying myself as to disclosure of the prescribed requirements, I was greatly assisted by the appendix 'A' checklist provided by Wesfarmers' counsel in their written submissions.

1. Wesfarmers sought, and I made, orders providing for electronic notification of the scheme meeting to those Wesfarmers' shareholders who have nominated an electronic address for the purpose of receiving notices of meeting. The orders provided for those members to access the Scheme Booklet and a proxy form in respect of the scheme meeting through URLs provided in the email giving notification of the scheme meeting. However, where the email proves undeliverable hard copy documents are to be dispatched within a reasonable time.
2. It is well-established that the court may make orders that provide for the electronic notification of a scheme meeting and the explanatory statement required by s 412(1).[77] Indeed, electronic mail-out orders are now said to be 'commonly made' in relation to scheme meetings.[78]
3. The evidence was that of Wesfarmers' 489,517 registered shareholders some 212,221 had nominated to receive notice of meeting by electronic means.
4. The Scheme Booklet is one of considerable size. Provision of the Scheme Booklet by electronic means is desirable in terms of efficiency and economy. It is, however, necessary to ensure that the electronic notification is effective in making the materials available to members.
5. Drafts of the proposed emails by which notification is to be made to shareholders were attached to Mr Scott's affidavit (attachments 'RGS-5' and 'RGS-6'). Shareholders are to be directed, through a URL hyperlink, to an ASX announcement and the Wesfarmers' website at 'www.wesfarmers.com.au'. To submit a proxy shareholders may, again through a URL hyperlink, access an 'InvestorVote' website.
6. Mr Scott's affidavit also provided screenshots of the proposed 'InvestorVote' website (attachment 'RSG-7').
7. I was satisfied that the terms of the proposed emails are appropriate. So too the website materials appear to be easily navigated and properly adapted to the purpose of facilitating the proposed scheme meeting.
8. Accordingly, it was appropriate to make orders sanctioning electronic notification. However, as is usual, Wesfarmers should monitor the efficacy of the electronic notification and be in a position to adduce evidence in that respect at the second hearing. And, while I did not consider it necessary to make such orders, as a matter of good commercial practice Wesfarmers should provide a hard copy of the Scheme Booklet to all members who request one even if the member has otherwise elected to receive materials electronically.

1. Unless the court orders otherwise, the applicant for an order under s 411(4)(b) of the Act must publish a notice of the second hearing in accordance with Form 6 at least five days before the date fixed for the hearing of the application.[79]
2. It is contemplated that the second hearing will proceed on Monday, 19 November 2018. Five days before that fixed date is Wednesday, 14 November 2018. That day is before the date for the scheme meeting - the scheme meeting being convened to be held on the same day as Wesfarmers' annual general meeting on Thursday, 15 November 2018. However, the terms of Form 6 contemplate that publication of the notice of the second hearing will occur after the scheme meeting.
3. To avoid any question of non-compliance it was appropriate to make a specific order as to the publication of an advertisement providing notice of the second hearing. Compliance with r 3.4 of the Supreme Court (Corporations) (WA) Rules 2004 (WA) is therefore dispensed with.

Section 1319 directions as to the scheme meeting

1. Wesfarmers sought, and I made, orders displacing the effect of r 2.15 of the Supreme Court (Corporations) (WA) Rules 2004 (WA). There is, in any case, difficulty in the application of r 2.15 so far as the meeting regulations referred to therein have been repealed with effect from 1 September 2017. To avoid any confusion it was prudent to provide under s 1319 for various procedural matters concerning the proposed meeting.
2. Essentially, subject to specific orders, the scheme meeting is to be convened and conducted in accordance with Pt 2G.2 of the Act so far as it applies to members of a company and the provisions of Wesfarmers' constitution that are not inconsistent with Pt 2G.2. The chairperson of the meeting has a specific right to adjourn the meeting in partial displacement of r 3.3(2) of the Supreme Court (Corporations) (WA) Rules 2004 (WA). Voting is to be by poll. A 13 November 2018 cutoff date is provided for determination of voting entitlements and the lodgement of proxies.

1. Wesfarmers' application for orders under s 411(1) of the Act to convene a scheme meeting was thoroughly prepared and carefully presented.
2. I was left in no doubt that the substantive and procedural requirements under s 411(1) had been satisfied. I was equally satisfied that the proposed demerger scheme is one that is fit for consideration by Wesfarmers' members. The demerger scheme is one that sensible business people might consider is of benefit to Wesfarmers' members.
3. It is not for the court to adjudge the commercial desirability of the proposed arrangement. I am not to be taken as having endorsed the proposed demerger proposal or as having provided any other expression of opinion as to whether the demerger proposal is in the best interests of the members. That is a matter for the members to consider for themselves assisted by the comprehensive account of the advantages, disadvantages and risks of the demerger proposal as set out in the Scheme Booklet.
4. I was, however, satisfied for the reasons I have given that the demerger proposal is a commercial proposition of such a nature and cast in such terms that there is no apparent reason that it should not receive the court's approval if the requisite majorities are achieved at the scheme meeting. Wesfarmers has satisfied the F T Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd standard.
5. For these reasons I made orders in the following terms:
   1. Pursuant to subsection 411(1) of the Corporations Act 2001 (Cth) (Act):

(a) the Plaintiff convene and hold a meeting (Scheme Meeting) of its members holding fully paid ordinary shares in the Plaintiff (Shareholders) for the purpose of considering and, if thought fit, agreeing to (with or without modification) a scheme of arrangement proposed to be made between the Plaintiff and the Shareholders (Scheme), the terms of which are contained in Section 10 of Annexure "BCF42" to the affidavit of Baden Charles Furphy affirmed 4 October 2018 (Third Furphy Affidavit);

(b) the Scheme Meeting be held:

(i) at the later of 1:45 pm (Perth time) or the conclusion of the General Meeting (which General Meeting is to be held at the later of 1:30 pm (Perth time) or 30 minutes after the conclusion of the Annual General Meeting of the Plaintiff) on 15 November 2018; and

(ii) at the Perth Convention and Exhibition Centre, Mounts Bay Road, Perth, Western Australia; and

(c) the booklet containing the explanatory statement required by section 412(1)(a) of the Act, in the form of Annexure "BCF42" to the Third Furphy Affidavit (Scheme Booklet), be and is hereby approved for distribution to Shareholders, subject to:

(i) correction of any typographical or grammatical errors and final typesetting and formatting;

(ii) any minor amendments required or approved by the Australian Securities and Investments Commission (ASIC) for registration under section 412(6) of the Act; and

(iii) correction or update of any relevant date references or last trading prices.

1. Pursuant to section 1319 of the Act:

(a) Mr Michael Alfred Chaney AO or, failing him, Mr Anthony John Howarth AO, be authorised to act as Chairperson of the Scheme Meeting;

(b) subject to these orders, the Scheme Meeting is to be convened, held and conducted in accordance with:

(i) the provisions of Part 2G.2 of the Act that apply to members of a company and the provisions of the Plaintiff's constitution that are not inconsistent therewith and that apply to meetings of members; and

(ii) the notice of meeting in the form or to the effect contained in Section 13 of the Scheme Booklet, as approved;

(c) the Chairperson of the Scheme Meeting may adjourn the Scheme Meeting in his absolute discretion for such time that the Chairperson thinks appropriate, to a time and place advised by the Chairperson;

(d) at the Scheme Meeting, three Shareholders, entitled to vote, present in person or by proxy or by an attorney under power, or by a corporate representative (if applicable) shall constitute a quorum;

(e) at the Scheme Meeting, each Shareholder, present and entitled to vote, will be entitled to one vote for each fully paid ordinary share in the capital of the Plaintiff that the Shareholder is registered as holding at 4:00 pm (Perth time) on 13 November 2018;

(f) at the Scheme Meeting, voting on the resolution on whether to approve the Scheme is to be conducted by way of a poll;

(g) on or before 12 October 2018, there be dispatched to:

(i) each Shareholder who has nominated an electronic address for the purposes of receiving notices of meeting from the Plaintiff, at such address, an email substantially in the form of Annexure "RGS5" (for Shareholders holding more than 160 ordinary shares) or "RGS6" (for Shareholders holding 160 or fewer ordinary shares) to the affidavit of Robert Geoffrey Scott affirmed 1 October 2018 (Scott affidavit), which includes URL links to documents substantially in the form of the Scheme Booklet and the InvestorVote proxy website in respect of the Scheme Meeting, images of which are contained in Annexure "RGS7" to the Scott affidavit; and

(ii) each other Shareholder, including any Shareholder where there is any doubt whether the Shareholder wishes to receive notices of meeting in electronic form, by hand or by pre-paid post or ordinary or express mail, to the address of that Shareholder as set out in the register of members of the Plaintiff, documents substantially in the form of the Scheme Booklet and a proxy form in respect of the Scheme Meeting (Proxy Form), a copy of which is contained in Annexure "RGS3" to the Scott affidavit, and an envelope addressed to Computershare Investor Services Pty Limited (Computershare); and

(h) if it comes to the attention of the Plaintiff that any email dispatched in accordance with (g)(i) results in the return of a receipt or notice that the email was undeliverable then, in respect of that Shareholder, the Plaintiff dispatch within a reasonable time thereafter documents substantially in the form of the Scheme Booklet and the Proxy Form in respect of the Scheme Meeting, and an envelope addressed to Computershare, by the means specified in (g)(ii); and

(i) the time by which Proxy Forms for the Scheme Meeting must be lodged in accordance with the instructions given on the Proxy Form is 4:00 pm (Perth time) on 13 November 2018.

1. Dispatch of the documents referred to in paragraph 2(g) and 2(h) in accordance with the terms of those paragraphs is to be taken to be sufficient notice of the Scheme Meeting.
2. Rule 2.15 of the Supreme Court (Corporations) (WA) Rules 2004 (WA) (Rules) shall not apply to the Scheme Meeting.
3. On or before 14 November 2018, the Plaintiff is to publish a Notice of Hearing in The Australian newspaper substantially in the form of Annexure A to these orders.
4. The proceeding be stood over to 8:30 am on 19 November 2018 for the hearing of any application to approve the Scheme.
5. There be liberty to apply.
6. These orders be entered forthwith.

ANNEXURE A

WESFARMERS LIMITED ABN 28 008 984 049

Notice of hearing to approve compromise or arrangement

TO all the creditors and members of WESFARMERS LIMITED ABN 28 008 984 049 (Wesfarmers):

TAKE NOTICE that at 8.30 am on 19 November 2018 the Supreme Court of Western Australia at 28 Barrack Street, Perth, Western Australia will hear an application by Wesfarmers seeking the approval of an arrangement between Wesfarmers and its members, if agreed to by resolution to be considered by the members of Wesfarmers at a meeting of such members held on 15 November 2018 at Perth Convention and Exhibition Centre, Mounts Bay Road, Perth, Western Australia at the later of 1:45 pm (Perth time) or the conclusion of the General Meeting (which General Meeting is to be held at the later of 1:30 pm (Perth time) or 30 minutes after the conclusion of the Annual General Meeting of the Plaintiff).

If you wish to oppose the approval of the arrangement, you must file and serve on Wesfarmers a notice of appearance, in the prescribed form, together with any affidavit on which you wish to rely at the hearing. The notice of appearance and affidavit must be served on Wesfarmers at its address for service at least 1 day before the date fixed for the hearing of the application.

The address for service on Wesfarmers is: c/o Herbert Smith Freehills, Level 36, 250 St Georges Terrace, Perth WA 6000 (Attention: Elizabeth Macknay).

Linda Kenyon

Company Secretary

Wesfarmers Limited

I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.

[1] See Re Coles Group Ltd [2007] VSC 389; (2007) 25 ACLC 1380; Re Coles Group Ltd (No 2) [2007] VSC 523; (2007) 215 FLR 411.

[2] See eg Re Foster's Group Ltd [2011] VSC 93 [2], [5] - [7]; Re Alchemia Ltd [2012] FCA 927 [6], [15] [26]; Re National Australia Bank Ltd [2016] VSC 62 [24] - [27].

[3] Re Permanent Trustee Co Ltd [2002] NSWSC 1177; (2002) 43 ACSR 601 [7]; Re AMP Ltd [2003] FCA 1465; (2003) 48 ACSR 540 [23].

[4] Re CSR Ltd [2010] FCAFC 34; (2010) 183 FCR 358 [7].

[5] Australian Securities Commission v Marlborough Gold Mines Ltd [1993] HCA 15; (1993) 177 CLR 485, 505.

[6] Re Staging Connections Group Ltd [2015] FCA 1012 [23]. See also Re CSR Ltd [65] - [67], [77] - [78].

[7] Re NRMA Ltd [No 1] [2000] NSWSC 82; (2000) 156 FLR 349 [41].

[8] Central Pacific Minerals NL [2002] FCA 239 [4], [7], [12] - [15].

[9] Re Programmed Maintenance Services Ltd [2017] FCA 1265 [68] - [71].

[10] As to the prescribed information see Corporations Regulations 2001 (Cth) reg 5.1.01(1)(b), Sch 8 Pt 3.

[11] Corporations Act 2001 (Cth) s 412(1)(a)(ii). See also Corporations Regulations 2001 (Cth) reg 5.1.01(1)(b), Sch 8 Pt 3 item 8302(i).

[12] Re NRMA Ltd [No 1] [30]; Re Seven Network Ltd [2010] FCA 220 [8].

[13] Re Dorman, Long & Co Ltd [1934] 1 Ch 635, 665 - 666; Re NRMA Ltd [No 1] [16]; Re Foundation Healthcare Ltd [2002] FCA 742; (2002) 42 ACSR 252 [38]; Re Anatolia Energy Ltd [2015] FCA 1134 [22]; Re Programmed Maintenance Services Ltd [33].

[14] Re Crusader Ltd [1996] 1 Qd R 117, 125 - 126; Re Staging Connections Group Ltd [22].

[15] Re NRMA Ltd [No 1] [3]; Re Programmed Maintenance Services Limited [50].

[17] Fraser v NMRA Holdings Ltd (1995) 55 FCR 452, 468.

[19] ASIC Regulatory Guide 60 Schemes of Arrangement [RG60.84].

[21] Corporations Act 2001 (Cth) s 9.

[22] Re NRMA Ltd [No 1] [20], [140] - [142]; Re International Harvester Co of Australia Pty Ltd [1953] VicLawRp 90; [1953] VLR 669, 672.

[23] Re Opes Prime Stockbroking Ltd [2009] FCA 813; (2009) 179 FCR 20 [29]; but cf [30] - [31].

[24] Re International Harvester Co of Australia Pty Ltd (672).

[25] Re Anatolia Energy Ltd [9(a)(iv)]; Re Programmed Maintenance Services Limited [15(a)(iv)].

[27] Re NRMA Ltd [No 1] [22] - [24]; Re Integra Mining Ltd [2012] FCA 1414 [34]; Re Staging Connections Group Ltd [19(4)]; Re Programmed Maintenance Services Ltd [48]; Re APN Outdoor Group Ltd [2018] FCA 1425 [10].

[28] Re Hills Motorway Ltd [2002] NSWSC 897; (2002) 43 ACSR 101 [5]; Re AMP Ltd [23]; Re Westfield Holdings Ltd [2004] NSWSC 458; (2004) 49 ACSR 734 [4]; Re Integra Mining Ltd [12]; Re Amcom Telecommunications Ltd [2015] FCA 341 [12]; Re Anatolia Energy Ltd [9(f)]; Re Programmed Maintenance Services Ltd [15(e)].

[29] F T Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69, 72.

[30] Australian Securities Commission v Marlborough Gold Mines Ltd (504).

[31] See eg Re Archaean Gold NL (1997) 23 ACSR 143, 146 - 147; Cleary v Australian Co-operative Foods Ltd (No 2) [1999] NSWSC 991; (1999) 32 ACSR 701 [46]; Cleary v Australian Co-operative Foods Ltd (No 3) [1999] NSWSC 1062; (1999) 32 ACSR 701 [51] - [52]; Re NRMA Ltd [No 1] [12], [29], [32] - [33], [41]; Re Foster's Group Ltd [9]; Re Staging Connections Group Ltd [22]; Re Programmed Maintenance Services Ltd [71].

[32] Re NRMA Ltd [No 1] [12]. See also Re Foundation Healthcare Ltd [37].

[33] Re Bond Corp Holdings Ltd (1991) 5 ACSR 304, 316.

[34] Re Staging Connections Group Ltd [22]; Re Sirtex Medical Ltd [2018] FCA 1315 [13].

[35] Central Pacific Minerals NL [9] - [10].

[37] Re Foundation Healthcare Ltd [36].

[38] See eg Re Buka Minerals NL (1983) 8 ACLR 507, 511 - 512.

[39] Central Pacific Minerals NL [11].

[40] See eg Re Coles Group Ltd [79], [82].

[42] Australian Securities Commission v Marlborough Gold Mines Ltd (504).

[45] Re Opes Prime Stockbroking Ltd [20].

[46] Re Amcom Telecommunications Ltd [10]. McKerracher J's summary has been adopted in Re Staging Connections Group Ltd [20] and Re Sirtex Medical Ltd [14].

[47] F T Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (73).

[48] Central Pacific Minerals NL [10], [13]; Re Chevron (Sydney) Ltd [1963] VicRp 39; [1963] VR 249, 255; Re English, Scottish and Australian Chartered Bank Ltd [1893] 3 Ch 385, 409 (while there referring to a creditors' scheme the principle is equally applicable to a members' scheme).

[49] Re Phosphate Resources Ltd [2005] FCA 1705; (2005) 56 ACSR 169 [132].

[50] Re Australian Gas Light Co [2006] FCA 120; (2006) 56 ACSR 659 [6], [14].

[52] Re Foundation Healthcare Ltd [44].

[55] Re Foundation Healthcare Ltd [44].

[57] Re Foundation Healthcare Ltd [36]; Australian Securities Commission v Marlborough Gold Mines Ltd (504 - 505).

[58] Cf Corporations Regulations 2001 (Cth) Sch 8 Pt 2 item 8202.

[59] Central Pacific Minerals NL [11].

[61] Re National Australia Bank Ltd [58]. See also [59(g)].

[63] Sovereign Life Assurance v Dodd [1892] 2 QB 573, 583.

[67] Re Hills Motorway Ltd [7] - [13]; Re Foster's Group Ltd [14] - [19]; Re Alchemia Ltd [34] - [35]; Re Integra Mining Ltd [19] - [21]; Re Amcom Telecommunications Ltd [22] - [24]; Re OPUS Group Ltd [2018] FCA 959 [19], [29] - [31]; Re SRG Ltd [2018] FCA 1092 [25] - [28].

[69] Re CSR Ltd [14], [65] - [66], [68].

[73] Re Australian Consolidated Press (1994) 117 FLR 451, 452 - 453.

[74] Netglory Pty Ltd v Caratti [2013] WASC 364 [79].

[76] ASIC Regulatory Guide 60 Schemes of Arrangement [RG60.04]

[77] Re Alinta Ltd (No 2) [2007] FCA 1378 [2] - [3]; MDA National Ltd v Medical Defence Australia Ltd [2014] FCA 954 [102] - [105]; Re Amcom Telecommunications Ltd [45]; Re Staging Connections Group Ltd [50] - [52]; Re Programmed Maintenance Services Ltd [54] - [55].

[78] Re Sino Gas & Energy Holdings Ltd [2018] FCA 1183 [37].

[79] Supreme Court (Corporations) (WA) Rules 2004 (WA) r 3.4.