Sovereign Life Assurance Co v Dodd

REASONS FOR JUDGMENT 1 This is an application to convene a meeting of members pursuant to s 411(1) of the Corporations Act 2001 (Cth) to consider and, if thought fit, to approve a scheme of arrangement between Cashcard and its shareholders, the terms of which are contained in an explanatory statement which is part of the scheme booklet. 2 The following affidavits have been read in support of the application, an affidavit of Mr Richard Michael Haddock affirmed 16 February 2004, an affidavit of Mr Paul John Joseph Biancardi affirmed 25 February 2004, an affidavit of Mr Richard Michael Haddock affirmed 25 February 2004, an affidavit of Mr March Bernard Joseph Crean sworn 25 February 2004, an affidavit of Mr Gregory Craig Nash affirmed 25 February 2004, an affidavit of Mr Craig Lloyd Edwards sworn 24 February 2004, an affidavit of Mr Wayne Richard Lonergan sworn 24 February 2004 and finally an affidavit of Mr Antony Robert Damian sworn 27 February 2004. The exhibits to all of those affidavits were tendered with the exception of an earlier draft of the scheme booklet. The final form of the booklet was substituted for the earlier draft and that document was Exhibit A on this application. 3 An issue has arisen as to whether the possibility of payments being made to two persons who are defined as the specified persons on page 19 of the scheme booklet constitute a separate class such that there ought to be a separate class meeting. There are four persons who constitute the specified persons but only Mr Greg Baker and Mr Greg Monaghan are relevant to the question which has arisen. The total of payments which may be made to the specified persons is $4 million. Mr Baker and Mr Monaghan stand to receive percentages as referred to in the scheme booklet and the total amount of payments which may be made to them will be well in excess of $1 million. 4 ASIC has submitted that the fact that Mr Baker and Mr Monaghan are treated differently from other shareholders is sufficient to make them a separate class. Mr Baker and Mr Monaghan are shareholders and they also hold "Performance Share Rights" or "PSR's" which, if the scheme is approved, may be converted to shares in the company thereby entitling them to payment of the consideration as provided for in the scheme documents. 5 The test for what constitutes a separate class of creditors has been dealt with in cases dating back more than one hundred years. The test is a very long standing one as identified by Bowen LJ in Sovereign Life Assurance Co v Dodd [1892] 2 QB 573 at 583. 6 It is unnecessary to quote the relevant passage but it is referred to by Santow J in re NRMA Limited (1999-2000) 33 ACSR 595 at [76]. Essentially the test is whether the interests of the persons in question are so different as to make it impossible for them to consult together with the other shareholders. Santow J dealt with a similar question more recently in Application of Australian Co-Operative Foods Limited (2001) 38 ACSR 71, in particular at [79] and [81]. The effect of what Santow J said in those cases is that courts ought to be cautious in fractioning the membership into separate classes so as to give one group of members an effective right of veto over the scheme. 7 Here it seems to me that each member will get the same benefit for his or her shares, namely $4.11 plus or minus the adjustments provided for in the scheme. It is possible that the specified persons will get the additional benefits to which I have referred. The reason why the board considered it was appropriate that the specified persons receive those benefits is set out on page 19 of the scheme booklet. Essentially it is to compensate them, and the other two named specified persons, for the possible loss of the benefits which may have arisen if an initial public offering had gone ahead rather than for the merger to have been effected pursuant to the proposed scheme of arrangement. Also it was considered that it was appropriate for incentives to be provided to the specified persons to ensure that the condition of the company's business will be such that the possible uplifts in the consideration be paid to the members. 8 In that context I accept the submission of Mr Bathurst QC, who appeared for the company, that the interests of Mr Baker and Mr Monaghan are not so dissimilar that they cannot consult together with the other members of the company. Of course if the scheme is passed only as a result of the votes of Mr Baker and Mr Monaghan that is a matter which I may take into account in deciding whether to exercise my discretion to approve the scheme. 9 Mr Gleeson SC adopted Mr Bathurst's submissions and made the point that the essential test is whether the members have interests which are so different that they could not meet and consult fairly with the other members. He pointed out that the interests of Mr Baker and Mr Monaghan are indeed aligned with those of other members because there are provisions for possible claw back of the uplift in the purchase price and if the claw back should arise it would be taken firstly out of the specified person's amount. This appears from pages 203 to 204 of the scheme booklet. 10 Mr Gleeson referred me to another decision of Santow J in re CMPS & F Pty Ltd (1997) 24 ACSR 728 at 734. Again in this case Santow J made the point that it is undesirable to make the company hostage to a class veto. His Honour said that the court will have to determine whether a group of shareholders are in reality concerned in the scheme, or whether their interests are compromised such that they might constitute a separate class. Here, as I have said, although there is the possibility of payment of additional benefits to Mr Baker and Mr Monaghan, I do not see that their interests are so different or divergent that they could not consult together with the other members. 11 Ms Howitt who appeared for ASIC submitted that the test was whether the terms of the scheme treated the members differently. She made the point that Mr Baker and Mr Monaghan are the only two members entitled to participate in the fund created for the specified persons. She also made the point that they are or may become entitled to payments out of that fund, in a very substantial amount well in excess of a million dollars. She referred me to a decision of Barrett J in Re The Hills Motorway Ltd (2002) 43 ACSR 101. 12 I do not think that there is anything in what His Honour said, particularly at paragraph 12, which overcomes the points made by Mr Bathurst and Mr Gleeson in their submissions. Indeed, it seems to me that what his Honour said in that paragraph supports the submissions that have been put to me by Mr Bathurst and by Mr Gleeson. 13 It seems to me that the effect of the scheme is that all the shareholders are treated equally. In my opinion Ms Howitt's submissions are not consistent with the principles stated in the well known authority of Re Jax Marine Pty Ltd [1967] 1 NSWR 145 and I therefore cannot accept the submissions that have been put to me. 14 It follows that I am satisfied that I ought to convene the meeting and I make the orders in accordance with the short minutes of order which have been submitted to me. I certify that the preceding fourteen (14) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jacobson.