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[2021] FCA 38
procedural. Orders made under s 411(1) convening the scheme meeting for 2 March 2021 to be held electronically, approving dispatch methods, dispensing with certain rules, appointing a chair, requiring poll...
RXP, a listed IT services company, wanted its shareholders to vote on a takeover by a Capgemini subsidiary offering 55 cents cash per share (potentially reduced by a 5 cent special dividend). At the first court hearing the judge checked that shareholders would receive a clear booklet with an independent expert’s view that the price was fair, that ASIC had been given proper notice and raised no objection, and that several standard deal features (a break fee, exclusivity period, director bonuses that were really just accelerated pay, and the possible special dividend) were all acceptable and properly explained. Because nothing about the deal looked obviously unfair, the judge ordered that the virtual meeting go ahead so shareholders could decide.
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RXP Services Limited (RXP), an Australian public company listed on the ASX and operating as a digital services consultancy, entered into a Scheme Implementation Deed (SI Deed) on 10 November 2020 with Capgemini Australia Limited (BidCo), a wholly-owned subsidiary of the French company Capgemini SE. The SI Deed, amended on 19 and 25 January 2021, provided for RXP to propose a members’ scheme of arrangement under which BidCo would acquire 100% of the issued shares in RXP.
Under the Scheme, shareholders were to receive $0.55 cash per share less any special dividend of up to $0.05 per share that the RXP board might declare in its discretion prior to implementation. The special dividend, if paid, would be fully franked and paid to shareholders on the register at a record date before the scheme record date; the cash consideration paid by BidCo would be reduced by the same amount. BidCo executed a Deed Poll in favour of scheme shareholders containing a covenant to provide the scheme consideration. The mechanics required BidCo to deposit cleared funds into a trust account before any transfer of shares, with RXP then distributing the cash and transferring the shares to BidCo on the implementation date, anticipated to be 26 March 2021. After implementation RXP would be delisted.
RXP prepared a Scheme Booklet containing the explanatory statement required by ss 411(2) and 412(1). The booklet included an updated independent expert report by Mr Craig Edwards of Lonergan Edwards & Associates Ltd concluding that, in the absence of a superior proposal, the Scheme was fair and reasonable and in the best interests of shareholders. The expert valued RXP shares on a 100% controlling interest basis at between $0.46 and $0.54, so the headline $0.55 (less possible dividend) exceeded the upper end of that range. The RXP board unanimously recommended the Scheme in the absence of a superior proposal and subject to the expert’s continued favourable opinion. All directors intended to vote their own shares in favour.
Two executive employees (not directors) held 453,806 performance rights issued under the FY20 STI Deferral Plan. Those rights vested automatically on a “Change of Control”, defined to include the Scheme becoming effective. On the effective date RXP would issue new shares to an employee share trust so the holders could participate in the Scheme. Eight executives, including director Mr Ross Fielding, had short-term and deferred STI arrangements that would become payable in cash on a Change of Control. Mr Fielding’s entitlement was $574,087. The board (in Mr Fielding’s absence) determined that these arrangements did not induce him to support the Scheme, were an acceleration of payments he might otherwise receive, and were given in his executive rather than shareholder capacity. The booklet disclosed these matters whenever the directors’ recommendation was mentioned and told shareholders to take them into account when considering Mr Fielding’s recommendation.
The SI Deed contained standard exclusivity provisions (no-shop and no-talk) with fiduciary carve-outs, a reimbursement fee of $954,700 (approximately 1% of RXP’s equity value at announcement) payable in certain circumstances but not if the Scheme became effective or if shareholders simply voted it down, and provisions dealing with the special dividend. The meeting was to be held virtually on 2 March 2021 in accordance with the Corporations (Coronavirus Economic Response) Determination (No.3) 2020 (Cth) because of COVID-19 restrictions.
On 29 January 2021 Beach J heard RXP’s application under s 411(1). ASIC had been given more than 14 days’ notice, had examined the draft booklet and the terms of the Scheme, and had written to RXP’s directors on 28 January 2021 indicating it had no objection. No shareholder appeared to oppose the application. Counsel for an intervener (whose identity is not material to the reasoning) also appeared. After considering the various features raised, Beach J was satisfied the Scheme was fit for consideration by shareholders and made orders convening the meeting, approving dispatch methods (primarily electronic), dispensing with certain rules, requiring a poll, appointing a chair, setting a proxy deadline, requiring publication of a notice of the second hearing, and adjourning the approval application to 4 March 2021.
Beach J began by confirming that the statutory preconditions in s 411(1) were satisfied: a compromise or arrangement was proposed, the application was brought by the company, ASIC had received 14 days’ notice, and it had had a reasonable opportunity to examine the terms and draft explanatory statement and to make submissions. The Court’s discretion was therefore enlivened.
His Honour reiterated the well-established supervisory character of the first court hearing. The task is not to approve the Scheme at this stage but to decide whether it is appropriate for shareholders to consider it. The Court will generally not examine fairness in depth unless an issue appears so “blatantly unfair or otherwise inappropriate” that the proposal should be stopped before going further (adopting the language of French J in Re Foundation Healthcare Ltd at [44]). Beach J found no such issue. The question whether to accept $0.55 cash (less possible dividend) for shares valued by the expert at $0.46–$0.54 was a commercial matter for members, provided they had sufficient information and time. The unanimous board recommendation, directors’ intention to vote in favour, and independent expert report reinforced that the Scheme should go to a meeting.
Each specific feature raised was then addressed and found acceptable. On performance risk, the combination of the Deed Poll, the sequencing that prevented share transfer until funds were deposited, and RXP’s undertaking to enforce the Deed Poll as agent for shareholders eliminated material risk. The shareholder warranty clause was in usual form and adequately disclosed.
The reimbursement fee of $954,700 (~1% of equity value) was payable only in defined circumstances, was not payable if the Scheme became effective or merely because shareholders voted against it, and was consistent with authority. The exclusivity provisions were standard, limited to roughly six months, contained fiduciary carve-outs, and were fully disclosed; they therefore did not preclude convening the meeting.
On classes, Beach J restated Bowen LJ’s test from Sovereign Life Assurance Co v Dodd and concluded that the performance rights (which would convert to shares before the record date) and the different forms of consideration did not create separate classes. The rights of all shareholders under the Scheme were sufficiently similar.
The acceleration of executive STI payments, including to director Mr Fielding, had been carefully considered by the board. Following his own earlier reasoning in Re DWS Limited and the approaches in Re SMS Management, Re Kidman Resources and Re Villa World, Beach J held that the benefits were not of such a nature as to prevent Mr Fielding from making a recommendation, especially given the transparent disclosure and the board’s view that the payments were not inducements in a shareholder capacity. The same conclusion was reached as in Re Citadel Group.
The special dividend was not required by the Scheme; it remained at the board’s discretion, was subject to s 254T, a favourable ATO class ruling and the Scheme becoming effective, and would reduce the BidCo consideration by the same amount. BidCo would not receive the dividend. Applying a commercial realities analysis, Beach J held that the payment did not constitute financial assistance within s 260A. In any event, evidence from the CFO and the independent expert satisfied the Court that there would be no material prejudice to RXP, its shareholders or its creditors.
Section 411(17) presented no bar because ASIC was likely to provide a no-objection statement at the second hearing and there was no evidence of any proscribed purpose.
Finally, the explanatory statement was clear, comprehensive, contained all prescribed and material information, had been verified, and would be registered by ASIC. The virtual meeting format was authorised by the Coronavirus Determination. In conclusion, the Scheme was of a conventional kind that, if it obtained the statutory majorities, was likely to be approved at the second hearing. The orders were therefore made.
Prior to this judgment the law on first court hearings was already settled. The supervisory role, the limited merits review, the “blatantly unfair” threshold from Re Foundation Healthcare Ltd, the Sovereign Life Assurance class test, the acceptability of standard reimbursement fees at approximately 1% with fiduciary carve-outs, the treatment of performance risk through Deed Polls, and the approach to director recommendations where benefits are disclosed had all been articulated in earlier Federal Court and Victorian Supreme Court decisions.
Beach J’s contribution lies in the detailed application of those principles to a concrete set of facts involving a discretionary special dividend that reduced scheme consideration, the automatic vesting of performance rights into shares that then participated in the Scheme, and the acceleration of STI payments to a recommending director. The judgment confirms that a special dividend structured in this way does not engage the financial assistance prohibition in s 260A because the commercial reality is simply a reduction in net assets reflected in a lower purchase price paid by the bidder. It also confirms that pre-existing contractual entitlements accelerated by a change of control do not disqualify a director from recommending the transaction or create separate classes where the booklet contains clear warnings.
After the judgment the law remained substantively the same; the decision is an orthodox application rather than a development. It nevertheless provides practitioners with a clear checklist of the matters that will satisfy a judge at the first hearing in a cash acquisition scheme involving typical incentive arrangements and a possible franked special dividend. The emphasis on full disclosure, board consideration of conflicts, and the independent expert’s valuation range continues to guide the preparation of scheme booklets. The acceptance of fully electronic meetings under the Coronavirus Determination also reflected the temporary legislative response to the pandemic that has since been made permanent in modified form.
Paragraph 18 contains the core statement of the Court’s limited role: “my function on an application to order the convening of a meeting is supervisory. At this stage I should generally confine myself to ensuring that certain procedural and substantive requirements have been met including dealing with adequate disclosure, but with limited consideration of issues of fairness.” In plain English, the judge is not deciding whether the deal is a good one; he is simply checking that the paperwork is in order and that nothing looks so obviously unfair that shareholders should be prevented from voting.
The same paragraph adopts the “blatantly unfair” test: the Scheme should only be stopped if it appears “so blatantly unfair or otherwise inappropriate that it should be stopped in its tracks before going any further”. This sets a high bar. Unless the proposal is obviously confiscatory or misleading, the shareholders get to decide.
Paragraph 34 quotes Bowen LJ’s classic class test and applies it to members’ schemes. The translation is that shareholders are put in the same class unless their legal rights under the Scheme are so different that they could not sensibly sit down together and discuss what is in their common interest. Different tax outcomes or the existence of performance rights that convert into ordinary shares do not usually create separate classes.
Paragraph 55 explains why the special dividend is not financial assistance: “BidCo is not currently a shareholder … the effect … is merely to reduce the consideration payable … the Scheme does not require the dividend to be paid.” In everyday language, the company is not helping the buyer buy the shares; it is simply choosing to distribute some of its own cash to its own shareholders before the buyer pays a correspondingly lower price. The commercial substance is a lower purchase price, not an injection of funds by the target to assist the acquirer.
Paragraph 46 records Beach J’s approval of the approach in Re DWS Limited, Re SMS, Re Kidman and Re Villa World. The plain-English takeaway is that if a director’s extra payment is really just bringing forward money he was already entitled to earn through employment, and everyone is told about it, the director can still recommend the deal to shareholders.
This decision will be relevant whenever a listed Australian company proposes a members’ scheme of arrangement that is an all-cash acquisition by a bidder that is not already a shareholder. It is particularly engaged where:
The judgment confirms that none of these features, when fully disclosed and structured in the conventional manner described, will prevent the Court from ordering that the meeting be convened.
Because the judgment is a relatively recent first-instance decision of a single judge applying well-settled principles, later courts have treated it as an orthodox example of the application of the Re Foundation Healthcare and Re Healthscope line of authority rather than as establishing new doctrine. Subsequent scheme decisions have cited Beach J’s careful analysis of the special dividend mechanics and his conclusion that they do not constitute financial assistance under s 260A. The reasoning on director recommendations where STI payments accelerate has been followed in cases involving similar incentive plans; judges have repeated that adequate disclosure and a board minute addressing independence are sufficient to allow the director to recommend the transaction.
The restatement of the Sovereign Life Assurance class test at [34]–[36] has been treated as a convenient modern summary and applied in cases where performance rights or employee share schemes convert into ordinary shares immediately before the record date. No court has suggested that Beach J’s approach to the 1% reimbursement fee or the six-month exclusivity period departs from the mainstream. Overall, later decisions have treated the judgment as persuasive confirmation of the checklist that experienced practitioners already apply at first hearings. It has not been distinguished on any material point and has not required appellate correction.
The judgment leaves open whether a special dividend that is contractually mandated by the SI Deed (rather than merely permitted at the board’s discretion) would still be characterised as not constituting financial assistance. Beach J emphasised the discretionary nature of the dividend and the fact that the Scheme itself did not require it; a more prescriptive obligation might shift the commercial reality analysis.
A further open question is the outer limit of “acceleration” of incentives that still permits a director to recommend. The judgment involved a payment that the board viewed as an acceleration of an entitlement that would arise irrespective of the Scheme. If the quantum were dramatically larger or the trigger more closely tied to the success of the particular transaction, a court might reach a different view on whether the recommendation remains appropriate even with disclosure.
The interaction between s 260A and a special dividend paid after the scheme becomes effective but before implementation is not squarely addressed; the present facts had the dividend record date before the scheme record date. Finally, while the judgment comfortably accepts virtual meetings under the Coronavirus Determination, the extent to which hybrid or wholly virtual meetings remain acceptable once the temporary regime expires may require further consideration in light of any permanent amendments to the Corporations Act. These residual questions illustrate that while the core principles are settled, marginal variations in commercial structuring will continue to require careful first-hearing analysis.
OTHER MATTERS:
[The order entered is available on the Commonwealth Courts Portal, which attaches the Scheme]
BEACH J: 1 RXP Services Limited (RXP) applies for an order under s 411(1) of the Corporations Act 2001 (Cth) for a meeting of RXP shareholders to be convened to consider a proposed scheme of arrangement (the Scheme). 2 RXP is an Australian public company limited by shares. It is admitted to the official list of the ASX, and its shares are quoted for trading. It is an Australian-based digital services consultancy provider. 3 The commercial purpose of the Scheme is to provide for the acquisition of all the shares in RXP by Capgemini Australia Limited (BidCo), a wholly owned subsidiary of Capgemini SE, a French company (Capgemini). 4 If the Scheme is implemented, RXP shareholders will receive $0.55 cash per RXP share less a special dividend of up to $0.05 per RXP share. 5 On 10 November 2020, RXP entered into a Scheme Implementation Deed with BidCo, which was subsequently amended on 19 January and 25 January 2021 (SI Deed). The SI Deed provided for RXP to propose the Scheme and that both RXP and BidCo would implement the Scheme on the terms of the SI Deed. 6 The Scheme provides for the acquisition by BidCo of 100% of the shares in RXP on issue (the scheme shares). Prior to BidCo receiving a transfer of the scheme shares, the scheme consideration must be provided to the holders of the scheme shares (the scheme shareholders). The scheme consideration will comprise the cash consideration. The cash consideration of $0.55 per scheme share less the amount of any special dividend is to be paid by BidCo. The obligation of BidCo to provide the scheme consideration has been secured by its entry into of a Deed Poll in favour of scheme shareholders. Following provision of the scheme consideration to scheme shareholders, all scheme shares will be transferred to BidCo. It is anticipated that the above steps will be completed on or around 26 March 2021. 7 Following the implementation of the Scheme, RXP will be a wholly-owned subsidiary of BidCo, and will be delisted from the ASX. 8 Now RXP has prepared a Scheme Booklet, which includes the explanatory statement required by ss 411(2)(b)(i) and 412(1). A draft of the Scheme Booklet was lodged with ASIC on 22 December 2020. Amendments to that version were subsequently made and provided to ASIC. 9 The Scheme Booklet sets out a detailed description of the Scheme and its advantages and disadvantages. It also annexes an updated independent expert report of Mr Craig Edwards of Lonergan Edwards & Associates Limited. In the updated independent expert report, Mr Edwards concludes that the Scheme is fair and reasonable and in the best interests of the scheme shareholders in the absence of a superior alternative proposal emerging. In particular, Mr Edwards has assessed the value of RXP shares on a 100% controlling interest basis to be between $0.46 and $0.54 per RXP share. The cash consideration is therefore above the upper estimate of his assessed valuation range for RXP shares. 10 The RXP Board has unanimously recommended that RXP shareholders vote in favour of the Scheme in the absence of a superior proposal and subject to Mr Edwards continuing to conclude that the Scheme is in the best interests of RXP shareholders. 11 Let me say something further on the provision of the scheme consideration. Under the terms of the SI Deed, the RXP Board may declare a fully franked special dividend of up to $0.05 per RXP share to be paid on or prior to the implementation of the Scheme. But whether a special dividend is ultimately declared and paid remains at the discretion of the RXP Board. But if the special dividend is declared, it will be paid to all persons registered as RXP shareholders as at the special dividend record date. The special dividend is expected to be fully franked. If the special dividend is declared, then under the Scheme the cash consideration of $0.55 per scheme share provided by BidCo will be reduced to the extent of any special dividend. 12 If the Scheme is to proceed, all conditions precedent other than Court approval must be either satisfied or waived by 8.00 am on the date of the second Court hearing, which will be on 4 March 2021. If the Scheme is agreed to by shareholders and approved by me, it will become effective on 5 March 2021, and the scheme consideration will be issued to scheme shareholders on 26 March 2021. The scheme shares will subsequently be transferred to BidCo on that date. 13 The mechanism for the transfer of the scheme shares to BidCo and the issue of the scheme consideration to scheme shareholders is as follows. Prior to the implementation date and prior to the transfer of any scheme shares to BidCo, BidCo must deposit into a trust account in cleared funds an amount equal to the aggregate amount of cash comprised in the scheme consideration payable to scheme shareholders, with that amount to be held by RXP on trust for the scheme shareholders for the purpose of RXP dispatching the aggregate cash comprised in the scheme consideration to the scheme shareholders to which they are entitled. On the implementation date, subject to the deposit of funds by BidCo, RXP must pay or procure the payment of the cash consideration to each scheme shareholder from the trust account referred to. And on the implementation date but after BidCo has satisfied its obligations to provide the scheme consideration, the scheme shares held by scheme shareholders will be transferred to BidCo. 14 Now whilst the scheme consideration is to be issued by BidCo, it is not a party to the Scheme and cannot be directly bound by it. So it has been necessary for it to execute a Deed Poll in favour of scheme shareholders. BidCo has now entered into a Deed Poll which contains a covenant by it in favour of scheme shareholders to perform its obligations in relation to the Scheme. This includes the obligation to provide or procure the provision of the scheme consideration to the scheme shareholders in accordance with the terms of the Scheme. And under the terms of the Scheme, RXP undertakes in favour of each scheme shareholder to enforce the Deed Poll against BidCo on behalf of and as agent and attorney for the scheme shareholders. 15 Let me move to some more general matters. 16 Section 411(1) confers a discretion on the Court to make an order if certain requirements are satisfied, namely: (a) a compromise or arrangement is proposed between a Pt 5.1 body and its members or any class of them; (b) application for the order is made in a summary way by the body; (c) 14 days' notice of the hearing of the application has been given to ASIC or such lesser period as the Court or ASIC permits; and (d) the Court is satisfied that ASIC has had a reasonable opportunity to: (i) examine the terms of the proposed compromise or arrangement to which the application relates and a draft explanatory statement relating to the proposed compromise or arrangement; and (ii) make submissions to the Court in relation to the proposed compromise or arrangement and the draft explanatory statement. 17 Now these requirements have been satisfied in the present case. Accordingly my power has been enlivened. I am also satisfied that relevant provisions of the Corporations Regulations 2001 (Cth) and the Federal Court (Corporations) Rules 2000 (Cth) have been satisfied. Let me turn then to the exercise of my discretion. 18 Now as I have said on more than one occasion, my function on an application to order the convening of a meeting is supervisory. At this stage I should generally confine myself to ensuring that certain procedural and substantive requirements have been met including dealing with adequate disclosure, but with limited consideration of issues of fairness. But having said that, it is appropriate to consider the merits or fairness of a proposed scheme at the convening hearing if the issue is such as would unquestionably lead to a refusal to approve a proposed scheme at the approval hearing, that is, the proposed scheme appears now to be on its face "so blatantly unfair or otherwise inappropriate that it should be stopped in its tracks before going any further" (Re Foundation Healthcare Ltd (2002) 42 ACSR 252 at [44] per French J). But in the present case, in my view there is no issue arising from the Scheme which would unquestionably lead to a refusal to approve the Scheme at the approval hearing. It cannot be said that the Scheme on its face is "so blatantly unfair or otherwise inappropriate that it should be stopped in its tracks before going any further". Put another way, the Scheme is not of such a nature and cast in such terms that if it receives the support of the statutory majorities at the meeting, nevertheless I would not be likely to approve it at the second court hearing. 19 In my view the Scheme is fit for consideration by RXP shareholders at the proposed meeting, in the sense referred to. The question whether or not to accept particular consideration for shares is a commercial matter for the members of RXP to assess, and they ought not be prevented from having the opportunity to do so provided that I am satisfied that they are acting on sufficient information and with time to consider what they are voting on. I am so satisfied. Further, it is relevant in this respect that the Scheme Booklet contains a recommendation from all directors that shareholders vote in favour of the Scheme, a statement that all directors intend to vote their RXP shares in favour of the Scheme, and an independent expert report that the Scheme is fair and reasonable and in the best interests of RXP shareholders. 20 Let me now discuss the following particular features of the Scheme that have been drawn to my attention, being: (a) performance risk; (b) shareholder warranties; (c) the reimbursement fee; (d) the exclusivity arrangements; (e) separate classes and recommendations; (f) the special dividend and financial assistance; and (g) the purpose of the Scheme, and whether it is to avoid Ch 6 of the Act.
Performance risk 21 Although BidCo is to issue the scheme consideration, it is not a party to the Scheme and is not directly bound by it. As such, its obligations do not depend upon s 411. But the Scheme before me effectively eliminates any performance risk. This is because RXP has adopted safeguards to address the performance risk arising from the obligation of BidCo to issue the scheme consideration. In particular, the terms of the Scheme supported by the SI Deed prevent any transfer of the scheme shares to BidCo unless and until the scheme consideration has been issued, and BidCo has executed a Deed Poll as I have said. It follows that there is no material performance risk which would justify me not ordering the convening of the scheme meeting.
Shareholder warranties 22 The Scheme provides that each scheme shareholder is taken to have warranted to BidCo that, as at the implementation date, all of their scheme shares that are transferred under the Scheme will, at the date of transfer, be fully paid and free from all security interests and interests of third parties of any kind and from any restrictions on transfer of any kind, and that it has full power and capacity to sell and to transfer those shares together with any rights and entitlements attaching to such shares to BidCo under the Scheme. The warranty is in the usual form, and such clauses have been held to be acceptable, as long as the warranty is sufficiently disclosed in the explanatory statement to shareholders, which it is. In my view, this deemed warranty clause is acceptable.
Reimbursement fee 23 If the Scheme does not become effective, a reimbursement fee of $954,700 may be payable by RXP to BidCo. 24 The circumstances in which the reimbursement fee would be payable are set out in the SI Deed and explained in the Scheme Booklet. I do not need to set these out. They are in standard terms. 25 However, notwithstanding the occurrence of any event which would trigger a requirement to pay the reimbursement fee under the SI Deed, the reimbursement fee is not payable if the Scheme becomes effective. 26 Further, the reimbursement fee is not payable merely because the Scheme does not proceed as a result of RXP shareholders not approving the scheme resolution. 27 The value of the reimbursement fee of $954,700 represents approximately 1% of the total equity value of RXP, having regard to the value of the bid consideration at the time of the announcement of the transaction. 28 In my view the terms of the reimbursement fee and the circumstances in which it was agreed are consistent with the requirements of the relevant authorities, and do not represent a barrier to the convening of a meeting to consider the Scheme.
Exclusivity arrangements 29 The SI Deed contains a number of exclusivity provisions, including the usual "no shop" and "no talk" provisions which are common features of such agreements. In particular, as noted by me in Re Healthscope Ltd (2019) 139 ACSR 608, provisions such as those in the SI Deed are commonly found in merger implementation agreements. 30 The existence and nature of the exclusivity provisions are addressed in detail in the Scheme Booklet. The exclusivity provisions are in standard form. And the longest period during which the exclusivity provisions could be anticipated to apply is a little over six months. Further, there are the usual fiduciary carve-outs. 31 In my view, the fiduciary carve-outs in the SI Deed are appropriate. Further, the exclusivity period of around six months is reasonable in light of the size, nature and complexity of the transaction. For these reasons, the exclusivity arrangements do not prevent me from making an order to convene a meeting of members to vote on the Scheme.
Separate classes and recommendations 32 Let me deal with some other matters. 33 First, the potential availability of different forms of scheme consideration does not necessarily lead to the creation of more than a single class of shareholders. The question of classes and separate class meetings arises because of the reference in s 411(1) to an arrangement proposed between a company and its members "or any class of them". 34 In Re Healthscope Ltd I engaged in a detailed review of the relevant authorities on classes at [105] to [120]. At [106], I said: The well-established test for identifying a class for the purposes of a scheme of arrangement is that expressed by Bowen LJ in Sovereign Life Assurance Co v Dodd [1892] 2 QB 573 at 583. Sovereign Life Assurance concerned a creditors' scheme of arrangement, but the test enunciated by Bowen LJ has been adopted ever since in members' schemes (Re Foster's Group Limited [2011] VSC 93 at [15] per Ferguson J). Bowen LJ expressed the class test in the following terms: …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… 35 I also expressed the relevant question as being whether the rights of the relevant shareholders there under consideration were (at [107]): so dissimilar from the rights of the other Healthscope shareholders as to make it impossible for them to consult together with a view to their common interest. Or put another way, do the differences in rights between NWH AssetCo (or its affiliates) and the other Healthscope shareholders mean that any community of interest between them has been displaced for the purposes of them considering and voting upon the proposed Scheme. 36 In relation to the specific question of whether different forms of scheme consideration give rise to the need for separate classes, it is appropriate to consider whether the existence of different proportional entitlements to different forms of consideration under a scheme of arrangement would necessitate the creation of separate classes of shareholders for the purpose of voting. 37 Now RXP has on issue 453,806 performance rights, which were issued to two executive employees (who are not directors of RXP) under the "RXP Services Limited FY20 STI Deferral Plan", which relates to the financial year that ended on 30 June 2020 (Performance Rights). As explained in the Scheme Booklet: (a) each vested Performance Right entitles its holder to acquire one RXP Share; (b) pursuant to the terms of the RXP Services Limited FY20 STI Deferral Plan, all Performance Rights vest and are automatically exercised on a "Change of Control", which is defined in the Plan to include a scheme of arrangement becoming effective in accordance with s 411(10) of the Act; and (c) accordingly, the Performance Rights will vest and be automatically exercised on the effective date of the Scheme. 38 On vesting of the Performance Rights, RXP intends to issue new RXP shares to the RXP Employee Share Scheme Trust established for the purposes of the Plan. This will enable the relevant holders to participate in the Scheme and receive the scheme consideration. 39 Otherwise, RXP has no options, performance rights or any other securities on issue. 40 Let me deal with another matter. 41 Eight executives of RXP have "short term incentive" and "deferred STI" components of their remuneration packages that will become payable in cash on a "Change of Control", which is defined consistently with the definition of that term in the RXP Services Limited FY20 STI Deferral Plan. These cash payments are proposed to be made to the relevant executives on the effective date of the Scheme. One of those executives is Mr Ross Fielding, who is also director of RXP, and who is to receive a cash payment of $574,087 pursuant to the above arrangements. 42 Now there is evidence before me that: (a) Mr Fielding considers that it is appropriate for him to make a recommendation on the Scheme, given the importance of the Scheme and Mr Fielding's role in the management of RXP; (b) the RXP Board has, in the absence of Mr Fielding, determined that Mr Fielding can, and should if he wishes to do so, make a recommendation on the Scheme notwithstanding the nature and quantum of the above payment, given the importance of the Scheme and Mr Fielding's role in the management of RXP; and (c) the directors of RXP other than Mr Fielding have formed the view that Mr Fielding's incentive arrangements: (i) do not induce Mr Fielding to accept an offer or dispose of securities in connection with the Scheme; and (ii) are not a benefit, but rather an acceleration of a payment that Mr Fielding may have become entitled to for the FY 2021, irrespective of RXP entering into the Scheme; and (iii) even if a benefit, are given to Mr Fielding not in his capacity as a shareholder of RXP, but rather in his capacity as an executive of RXP. 43 These arrangements are discussed in the Scheme Booklet. The Scheme Booklet also refers to Mr Fielding's arrangements whenever the recommendation of the directors to vote in favour of the Scheme is mentioned. Further, shareholders are instructed to have regard to these arrangements when considering Mr Fielding's recommendation on the Scheme. 44 Now there are two issues in relation to the proposed treatment of the Performance Rights and the incentives. The first issue concerns classes, and the second concerns the appropriateness of Mr Fielding making a recommendations to shareholders in relation to the Scheme. 45 As to the first issue, in my view there is no need for separate class treatment. I need say nothing further. 46 As to the second issue, in Re DWS Limited [2020] FCA 1590, I reviewed the authorities in relation to this issue. I agreed with the approach taken by Robson J in Re SMS Management and Technology Limited [2017] VSC 257 at [26], O'Callaghan J in Re Kidman Resources Ltd (2019) 375 ALR 760 at [105] to [113] and Black J in Re Villa World Ltd (2019) 139 ACSR 550 at [38] to [40]. I concluded that the benefits under consideration in Re DWS Limited were not of such a nature that they ought to preclude the director from making a voting recommendation to members, and that in any event, the arrangements were adequately disclosed in the scheme booklet in that case, such that transparency had been properly served and preclusion from making a recommendation was unnecessary. 47 In addition, in Re Citadel Group Limited [2020] FCA 1580 a director of Citadel potentially became entitled to receive a proportionate amount of his annual incentive award if the Scheme became effective and he remained employed by Citadel. I held that the nature and extent of any additional benefits that it might be said that the director would become entitled to if the Scheme was implemented were not such as to make it inappropriate for him to make a voting recommendation to members. I also noted that, in any event, the arrangements were adequately disclosed in the scheme booklet in that case, and shareholders were expressly told to have regard to these arrangements when considering that director's recommendation of the Scheme. 48 In my view the same conclusions ought to be drawn in the present case. That is, the nature and extent of any additional benefits that it might be said that Mr Fielding will become entitled to if the Scheme is implemented are not such as to make it inappropriate for him to make a voting recommendation to members. In any event, the arrangements are adequately disclosed in the Scheme Booklet, and shareholders are told to have regard to these arrangements when considering Mr Fielding's recommendation of the Scheme.
The special dividend and financial assistance 49 The SI Deed provides that RXP may in its discretion declare and pay a special dividend of up to $0.05 per RXP share. The SI Deed provides that: (a) the ability of RXP to declare and pay the special dividend is subject to the Scheme becoming effective, RXP having received a favourable draft class ruling from the Australian Tax Office to confirm the key taxation implications of the Scheme, including the availability of franking credits for certain classes of taxpayers, and RXP complying with the requirements of s 254T of the Act; (b) the record date for the special dividend must be on or before the scheme record date. The special dividend record date is currently anticipated to be 7.00 pm on 11 March 2021, and the scheme record date is currently anticipated to be 7.00 pm on 19 March 2021; and (c) the payment date for the special dividend will be determined by RXP in its absolute discretion, provided that the payment date occurs on or before the implementation date. The special dividend payment date is currently anticipated to be 18 March 2021, and the implementation date is currently anticipated to be 26 March 2021. 50 The SI Deed provides that if the special dividend is declared and paid, the scheme consideration payable to scheme shareholders will be reduced by the cash amount of that special dividend. 51 If the special dividend is declared and paid by RXP, there may arise a question whether financial assistance is given by RXP to BidCo to acquire the scheme shares. 52 Now s 260A provides that a company may financially assist a person to acquire shares in the company only if: (a) giving the assistance does not materially prejudice (i) the interests of the company or its shareholders or (ii) the company's ability to pay its creditors; (b) the assistance is approved by shareholders under s 260B; or (c) the assistance is exempt under s 260C. 53 In considering the effect of those provision in relation to the special dividend, two questions arise: the first question is whether the proposal in relation to the special dividend constitutes financial assistance at all, within the meaning of the Act. The second question is whether, if it does, it is nevertheless permitted by s 260A. 54 As to the first question, the words "financial assistance" have no technical meaning. The task is to examine the commercial realities of the transaction to determine whether it can properly be described as the giving of financial assistance by the company. 55 In my view, payment of the special dividend is not relevant financial assistance. In this respect: (a) BidCo is not currently a shareholder of RXP and therefore will not receive the special dividend; (b) the effect of the payment of the special dividend is merely to reduce the consideration payable for the scheme shares pursuant to the Scheme in a manner that reflects the cash outflow from RXP and the consequential reduction in its net assets; and (c) whilst the SI Deed anticipates the payment of the special dividend, the Scheme does not require the dividend to be paid. Declaration of the dividend is in the discretion of the RXP Board. 56 Properly characterised, these arrangements are not financial assistance within the meaning of the Act. 57 In any event, the payment of the special dividend will not prejudice RXP, its shareholders or its ability to pay its creditors for the purposes of ss 260A(1)(a)(i) to (ii). There is evidence before me from RXP's Chief Financial Officer, Mr David Royale that the financial position of RXP generally and its asset and liability position in particular are such that RXP's net asset position is more than sufficient to meet the payment of the special dividend, and that the payment would not prejudice the interests of RXP or its members or the ability of RXP to pay its creditors. In addition, the independent expert has opined that the Scheme is fair and reasonable and therefore in the best interests of RXP shareholders, in the absence of a superior proposal. Further, s 254T will not be infringed.
Section 411(17) 58 My power to approve a scheme is restricted by s 411(17). At the approval stage, I must be satisfied that there is no proscribed purpose as described in s 411(17)(a) or there must be provided to me a statement in writing by ASIC that it has no objection to the arrangement (s 411(17)(b)). But if such a statement is provided by ASIC, it will not be provided until the second court hearing. 59 In my view, s 411(17) does not present a bar to a meeting now being ordered to be convened as it seems likely that ASIC will produce the relevant statement at the second court hearing. Given that ASIC does not oppose the application for convening the meeting, it is appropriate for me to proceed at this stage on the basis that an application for approval would be unopposed by ASIC, and that ASIC will in due course provide a statement in the form contemplated by s 411(17)(b). I have taken comfort from ASIC's letter dated 28 January 2021 to the directors of RXP in this respect. 60 Accordingly, in circumstances where it is likely that ASIC will produce a statement under s 411(17)(b) and there are presently no matters supporting an inference that there is any proscribed purpose, the requirements of s 411(17) do not present a bar to me ordering that a meeting be now convened.
Adequacy of information 61 Relevant to the exercise of my discretion is the adequacy of the information to be provided to shareholders by way of explanation of the Scheme. This involves considering the adequacy of the disclosure in the Scheme Booklet. 62 There are three aspects to the explanatory statement required by s 412(1)(a). 63 First, the explanatory statement must explain the effect of the arrangement, and in particular state any material interest of the directors, and the effect on those interests of the arrangement so far as it is different from the effect on the like interests of other persons. These matters are addressed in the Scheme Booklet. 64 Second, the explanatory statement must set out the prescribed information. I have no reason to doubt that relevant disclosure requirements have been met in the Scheme Booklet. 65 Third, the explanatory statement must set out any other information that is material to the making of a decision whether or not to agree with the arrangement, being information which is within the knowledge of the directors and has not previously been disclosed. The Scheme Booklet appears clear and comprehensive. In addition, the updated independent expert report contains a detailed evaluation of the Scheme, presented in a way that enables a shareholder to form a view of the merits of the Scheme. 66 Further, the verification procedures implemented to ensure that the Scheme Booklet does not contain any misleading or deceptive statements and satisfies the applicable disclosure requirements in relation to the information set out in the Scheme Booklet are, in my view, adequate. 67 Let me deal with another aspect. 68 As the Scheme is a members' scheme only, it is necessary that the explanatory statement be registered by ASIC before the notice of meeting is sent to RXP shareholders. Before registering the statement, ASIC must conclude that it appears to comply with the requirements of the Act, and must form the opinion that the statement does not contain any matter that is false in a material particular or materially misleading in the form and context where it appears. 69 RXP has provided the proposed Scheme Booklet to ASIC, together with all amendments. There does not appear to be any unresolved matter of disagreement between ASIC and RXP such as to impede registration. I do not see any difficulty concerning registration. 70 Now s 411(1) provides that if I have made an order convening a meeting of members, I may approve the explanatory statement. But I do not propose to formally do so. In view of the requirement for registration by ASIC and the criteria that ASIC must apply, it is more appropriate that the explanatory statement for a members' scheme be dealt with in that fashion. But I should stress that not to so formally approve should not be seen as casting any doubt on the accuracy or adequacy of the Scheme Booklet which comprises the explanatory statement or that it is not suitable for registration by ASIC.
Scheme meeting 71 It is proposed that the scheme meeting will be held virtually at 11.00 am (Melbourne time) on 2 March 2021 via an online platform. As a result of the health risks associated with the COVID-19 pandemic, it is not appropriate to have a physical meeting. Instead, the meeting is to be held electronically through an online platform. Shareholders will be able to access the online platform by visiting a particular webpage address specified in the notice of meeting, which is annexed to the Scheme Booklet. The online platform will enable participants to view the scheme meeting live, vote on the relevant resolution in real time and ask questions online. Such an arrangement is in accordance with the Federal and State government directions and restrictions and the Treasurer's determination regarding electronic shareholder meetings. In particular, Pt 2 of the Corporations (Coronavirus Economic Response) Determination (No.3) 2020 (Cth) modifies the relevant provisions of the Act to permit shareholder meetings to be held electronically.
Conclusion 72 I am satisfied that the Scheme is of such a nature and cast in such terms that, if it achieves the statutory majorities at the scheme meeting, I would be likely to approve it, and that it is therefore appropriate to make the orders sought by RXP 73 In summary, the terms of the proposed Scheme are in a conventional form for an acquisition scheme. Further, there is no reason why the Scheme, if considered and adopted by the members, is not of such a nature as would be likely to be approved by me at the second hearing. Further, the RXP shareholders are to be presented with an analysis of the proposed Scheme by an independent expert, including a discussion of its advantages and disadvantages. Further, the Scheme Booklet appears to meet the statutory requirements. Finally, it cannot be said that the Scheme appears on its face so blatantly unfair or otherwise inappropriate that it should be stopped in its tracks before going any further. I certify that the preceding seventy-three (73) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Beach.
Orders made under s 411(1) convening the scheme meeting for 2 March 2021 to be held electronically, approving dispatch methods, dispensing with certain rules, appointing a chair, requiring poll voting, setting proxy deadline, requiring newspaper notice of the second hearing, and adjourning the approval application to 4 March 2021.