Sovereign Life Assurance Co v Dodd

The Company and its shareholders 1 Clemenger Group Limited (Clemenger) is the holding company of a number of advertising and marketing companies operating in Australia and New Zealand. It is an unlisted public company. The terms of its constitution provide that its shares may only be traded on 1 June each year at a price fixed by a formula. 2 Clemenger operates a scheme whereby employees and directors may acquire shares in Clemenger. Only Australian resident employees and directors can acquire Class A shares. Those who are resident in countries outside Australia can acquire Class C shares. All Class B shares are held by Portview Holdings Australia Pty Ltd (Portview), a wholly owned subsidiary of Omnicom Group Inc (Omnicom). Omnicon is a company registered in New York and listed on the New York Stock Exchange. 3 Clemenger has applied to the court for orders pursuant to s 411(1) of the Corporations Act 2001 (Cth) (the Act) convening a meeting of the holders of Class A and Class C shares, to consider and vote on a proposed scheme of arrangement which, if approved, will see Portview acquire 50% of their shares in Clemenger. Portview appeared at the first court hearing and made brief submissions. 4 The Class B shares held by Portview presently represent 73.67% of the issued share capital in Clemenger. As at the Record Date (which is 31 May 2023), the Class A shares presently represent 21.35% of the issued share capital in Clemenger, and the Class C shares 4.98%. Minor changes to these percentages have resulted from share trading that occurred on 1 June 2023. Holders of Class A and Class C shares are referred to as Scheme Shareholders. 5 Class A and Class C shares enjoy the same rights under the constitution, save that Class A shareholders are entitled to appoint four directors, whereas Class C shareholders are entitled to appoint two directors. Under the constitution, Portview can appoint up to 17 directors (of a maximum board of 25 directors), so already has the capacity to control the composition of the board. 6 Acquisitions of Class A and Class C shares can be funded by borrowing from a related entity of Clemenger. Interest on any such loans is charged at a rate fixed annually. The entities providing funding do so through a facility with Omnicom Finance (the Omnicom Facility). The facility is presently close to its limit (AUD89 million drawn down on a facility with a limit of AUD90 million). Clemenger determined to approach Omnicom, seeking that Omnicom (through Portview) increase its shareholding in Clemenger. The evidence is that the decision to approach Omnicom was taken for two reasons. (a) First: to reduce the amount of shareholder loans provided to Scheme Shareholders, and thereby to also reduce the amount drawn down under the Omnicom Facility that is used to fund those shareholder loans. Clemenger's board considers that it is desirable to reduce the company's borrowing requirements so as to better support the long-term funding and working capital of Clemenger. (b) Secondly: to provide Scheme Shareholders an opportunity to immediately realise value for half of their investment in Clemenger. 7 Clemenger's board established an independent board committee (IBC) to progress the terms of the Scheme. The four directors on that committee all hold Scheme Shares (as defined below), but do not have any relevant interest in any Portview shares. Other directors of Clemenger are Portview appointees, or are also directors of Portview.

The evidence 8 Clemenger and Portview relied on the following affidavits: (a) an affidavit of William Khong (solicitor for Clemenger) dated 23 June 2023; (b) an affidavit of Hylton John Mackley (director of Clemenger) dated 13 July 2023; (c) an affidavit of Louis Januzzi (Senior Vice President, General Counsel and Secretary of Omnicom) dated 14 July 2023; (d) an affidavit of William Khong dated 17 July 2023; (e) an affidavit of Merryn Jill Quayle (solicitor for Portview) dated 17 July 2023; and (f) an affidavit of William Khong dated 18 July 2023.

The proposed scheme of arrangement 9 On 28 June 2023, Clemenger executed a scheme implementation deed (SID) with Portview. The scheme of arrangement that is sought to be implemented by the SID (Scheme) provides for the acquisition of 50% of the shares of the Scheme Shareholders (ie 50% of the Class A and Class C shares held by each shareholder in each class (the Scheme Shares)). 10 If implemented, the Scheme will result in Portview increasing its shareholding in Clemenger from 73.67% to 86.84%, with Class A and Class C shares acquired by Portview being converted to Class B shares. Implementation of the Scheme is contingent on shareholders passing resolutions to the constitution permitting the one-off acquisition by Portview of Class A and Class C shares, the conversion of those shares to Class B shares, and an amendment to cl 8.2 of the constitution to state explicitly that Portview (which will, if the Scheme is implemented, be able to pass special resolutions unilaterally) cannot effect an amendment to the Clemenger constitution that abrogates the rights or privileges attaching to Class A and Class C shares without the consent of the holders of the majority of the issued shares of the affected class. 11 If the Scheme is implemented, shares in Clemenger will be held as follows: (a) 18,340,500 Class A shares (10.45% of the share capital of Clemenger), will be held by Australian-based employees of Clemenger; (b) 152,399,500 Class B shares (86.84% of the share capital of Clemenger), will be held by Portview; and (c) 4,760,000 Class C shares (2.71% of the share capital of Clemenger), will be held by non-Australian based employees of Clemenger. 12 Notably, implementation of the Scheme will see Portview's shareholding cross the 75% threshold. 13 Under the Scheme, the price to be paid is AUD3.29 per share (Scheme Consideration). The treatment of all Scheme Shareholders under the Scheme is identical, save as to the payment waterfall applying to Class A and Class C shareholders. The payment waterfall differs given the anticipated capital gains tax exposure of Class A shareholders, who are resident in Australia (there is no capital gains tax in New Zealand). The waterfall ensures that Class A shareholders will not have an unfunded tax liability arising from the acquisition of 50% of their shares. 14 The payment waterfall for Class A shares involves Clemenger reasonably estimating a Scheme Shareholder's Estimated Tax Liability in respect of the acquisition of that Scheme Shareholder's Scheme Shares. The Scheme Consideration is then paid: (a) first, to the Scheme Shareholder in the amount of their Estimated Tax Liability (if any); (b) secondly, in reduction of the Scheme Shareholder's Outstanding Share Loan Balance (if any); and (c) thirdly, any surplus Scheme Consideration net of the preceding two steps is paid to the Scheme Shareholder. 15 Class C shareholders will be paid according to the second and third steps set out above. The aggregate amounts paid in respect of step (b) above are referred to as the Australian Share Loan Repayment Amount in respect of Class A shares and as the NZ Share Loan Repayment Amount in respect of Class C shares. 16 The effect of the payment waterfall is that if a Scheme Shareholder's Estimated Tax Liability (if applicable) and Outstanding Share Loan Balance exceeds the amount of Scheme Consideration due, the Scheme Shareholder may not receive any cash beyond an amount equal to their Estimated Tax Liability. 17 Another difference between the treatment of Class A and Class C shareholders is that Class C shareholders will be paid in NZD, with the conversion occurring at the exchange rate between AUD and NZD prevailing three business days prior to the Scheme Implementation Date. Class C shareholders therefore bear some foreign exchange risk. 18 The Scheme makes provision for the payment of funds into trust accounts in Clemenger's name before the Implementation Date (which is expected to be 25 August 2023). The transfer of Scheme Shares to Portview is subject to payment of the Scheme Consideration in the manner prescribed by the Scheme. A side letter addresses a number of details concerning the flow of funds to pay down loans held by subsidiaries of Clemenger, which in turn loaned funds to Scheme Shareholders. 19 Prior to the hearing, Portview delivered an executed Deed Poll in favour of Scheme Shareholders. 20 Clemenger proposes to convene a single Scheme meeting of both Class A and Class C shareholders. As to the holding of a single meeting, it submits (emphasis in original): As outlined above, the legal rights conferred on the A Class and C Class shareholders by Clemenger's constitution are almost identical. As set out further below, the only difference between the treatment of A Class and C Class shareholders is the payment waterfall for the Scheme Consideration [citing First Pacific Advisors LLC v Boart Longyear Ltd (2017) 320 FLR 78, 93-4 [80] (Bathurst CJ)]. In those circumstances, the differing payment waterfalls do not affect the ability of A Class and C Class shareholders to "come together in a single meeting and to debate the question of what is good or bad for the constituency as a whole and where the common good lies" [citing Re Hills Motorway Ltd (2002) 43 ACSR 101, 104 [12] (Barrett J)]. 21 The first meeting is to be held at the following three locations, linked by audio-visual technology: (a) in Melbourne, at the offices of Clemenger, 474 St Kilda Road, Melbourne, Victoria; (b) in Sydney, at the offices of Clemenger, Pier 9, 23 Hickson Road, Walsh Bay, New South Wales; and (c) in Auckland, at the offices of Colenso BBDO, 100 College Hill, Ponsonby, Auckland, New Zealand. 22 The meeting is to be chaired by Mr Mackley or, if he is unavailable, Mr Adrian Ciabotti. Mr Mackley deposed to his willingness to act as chair, and the willingness of Mr Ciabotti to act if Mr Mackley is unavailable. Mr Mackley also deposed to the following facts concerning his own position: he is a director of Clemenger, he is a member of the IBC, he was previously a director of Portview (from 30 November 2010 to 19 August 2022), his receipt of remuneration as a director of Clemenger, his previous and current interest in Class A shares, the absence of any dealing or relationship with an interested person or entity (other than as disclosed), and the absence of any interest or obligation that may give rise to a conflict of interest or duty if he were to act as chairman (other than as disclosed). 23 Mr Mackley also deposed, on information and belief, to the following facts concerning Mr Ciabotti: he is a director of Clemenger, he is a member of the IBC, he receives remuneration from Clemenger as a director and CFO of Clemenger, his current interest in Class A shares, the absence of any dealing or relationship with an interested person or entity (other than as disclosed), and the absence of any interest or obligation that may give rise to a conflict of interest or duty if he were to act as chairman (other than as disclosed).

Corporations Act and Corporations Regulations 24 I will first address compliance with the matters specified in the Act and the Corporations Regulations 2001 (Cth) (the Corporations Regulations). 25 ASIC was given notice of the hearing of the application on 28 June 2023. Accordingly, it has been given at least 14 days' notice of the hearing of the application, as required by s 411(2)(a) of the Act. A draft of the scheme booklet was provided to ASIC on 28 June 2023, for its review. Mr Mackley deposed to amendments having been made to the scheme booklet in response to comments from ASIC. 26 Clemenger relied on a letter from ASIC dated 17 July 2023, which stated (inter alia) that: (a) the requirement to give ASIC 14 days' notice of the hearing of an application under s 411(1) has been complied with; (b) ASIC is of the view that it has had a reasonable opportunity to examine the terms of the Scheme and the draft explanatory statement, and to make submissions to the court in relation to the Scheme and the draft explanatory statement; (c) ASIC does not currently propose to appear or make submissions or intervene to oppose the Scheme at the first hearing; and (d) ASIC's policy is that it will not provide a statement that it has no objection to the Scheme under s 411(17)(b) of the Act until the second court hearing. 27 As foreshadowed by its letter, ASIC did not seek to make any submissions to the court at the first hearing. 28 I am satisfied that ASIC has had a reasonable opportunity to examine the terms of the proposed arrangement and to make submissions in relation to the arrangement and the draft explanatory statement, as required by s 411(2)(b). 29 The draft scheme booklet: (a) explains why Clemenger is proposing the Scheme, having regard to its debt facility, its cash requirements and the potential for Scheme Shareholders to realise value for half their investment in Clemenger; (b) explains the composition and recommendations of the IBC; (c) explains the mechanics of the proposed Scheme, and its effect on Scheme Shareholders, as well as the shift in the balance of the company's shareholding if the Scheme is approved, with a lower proportion being held by employees (and a greater proportion by Portview, which will exceed 75%); (d) explains the differences between the rights of Class A and Class C shareholders; (e) explains the payment waterfalls and the way in which funds will be applied in respect of both Class A and Class C shareholders, noting the differences between the payment waterfalls and the reasons for those differences; (f) explains that funds will be applied to the loan balances of Scheme Shareholders before any remaining funds are remitted to them, such that Scheme Shareholders may not receive any cash if their loan balances exceed the consideration payable in respect of the shares to be acquired by Portview (other than cash to be received by Class A shareholders in respect of their Estimated Tax Liability); (g) details the material interests of the directors of Clemenger and the effect on their interests of the proposed Scheme; (h) explains the price to be paid for each acquired share, if the Scheme is approved, and that this is the same as the amount that would be derived by applying the formula in the company's constitution for valuing Clemenger shares in the 2023 annual share trading period; (i) summarises the reasons to vote in favour of the Scheme, and the reasons why a Scheme Shareholder may consider voting against the Scheme; and (j) summarises the views of Grant Thornton's independent expert report (namely that the Scheme is fair and reasonable and in the best interests of Clemenger shareholders in the absence of a superior proposal), and annexes the full report. 30 Regulation 5.1.01(1)(b) of the Corporations Regulations requires (relevantly) that: (1) For paragraph 411(3)(b) and subparagraph 412(1)(a)(ii) of the Act, unless ASIC otherwise allows, the explanatory statement must: … (b) for a proposed arrangement between a Part 5.1 body and its members, or a class of its members, other than a proposed arrangement mentioned in paragraph (c): (i) state the matters set out; and (ii) have annexed to it the reports and copies of documents mentioned; in Part 3 of Schedule 8 … 31 During the first hearing, I raised three matters with counsel for Clemenger as matters that ought to be attended to in the form of the scheme booklet to be provided to Scheme Shareholders. 32 First, the scheme booklet did not comply with item 8310 (being part of Sch 8 Pt 3 to the Corporations Regulations), as it referred to the intentions of Omnicon, when the rule requires that the intentions of the directors of Clemenger be set out in respect of specific matters. 33 The second matter was whether the summary section of the scheme booklet should do more to make it clear to Scheme Shareholders that, although only 50% of their qualifying shares are being acquired, the entirety of the consideration for those shares is being applied to their loan balances (other than in respect of the Estimated Tax Liability of the Class A shareholders). As such, one effect of the Scheme is that it will apply the entirety of the consideration (or the post-tax consideration for Class A shareholders) to paying down Scheme Shareholders' loan balances even where the loan balance, or a portion of it, may relate (as a shareholder might see it) to the retained 50% of their shareholding. While the payment waterfall is set out in section 3.4 of the draft scheme booklet, the summary at page 10 of the draft scheme booklet does not expose this feature of the Scheme. I raised with counsel whether wording similar to the following wording (found in sections 3.4 and 4.4) ought to be included in the summary of the scheme booklet: Accordingly, Scheme Shareholders should be aware that if their Estimated Tax Liability (if an A Class Shareholder) and Share Loan balance are greater than the Scheme Consideration due to them, they will not receive a cash amount from the Scheme. … It is important to note that the residual amount left over after the payment to you of your Estimated Tax Liability will be applied to the full amount of debt owing by you on any of your Clemenger Shares until that residual is exhausted or the debt is discharged in full. This means that it may be that the debt on over 50% of the Clemenger Shares held by you (and not just your Scheme Shares) is repaid. 34 The third matter was whether the following statement (in section 4.4 of the draft scheme booklet, emphasis added) ought to be amended as it tends to convey that Scheme Shareholders ought to evaluate the proposed Scheme on the assumption that interest rates will continue to increase: As a result, the Clemenger Shares you retain will be less encumbered by debt, and you will be carrying less debt and have reduced interest payments as compared to if the Scheme had not been implemented. This is important to note because interest rates continue to increase. 35 A further affidavit of Mr Khong was provided after the first hearing. That affidavit exhibited proposed replacement pages to the scheme booklet, addressing each of the three matters raised during the first hearing. With those amendments, I am satisfied that the "scheme booklet", annexed in draft to Mr Mackley's affidavit, is a draft explanatory statement meeting the criteria specified in s 411(3) of the Act, is suitable to be approved pursuant to s 411(1), and that there has been compliance with the applicable elements of Pt 3 of Sch 8 of the Corporations Regulations. 36 Counsel for Clemenger confirmed during the first hearing that there are no matters that ought to be brought to the attention of the court that would suggest that the arrangement has been proposed for the purpose of enabling any person to avoid the operation of any of the provisions of Ch 6 of the Act.

Holding a meeting attended by both Class A and Class C shareholders 37 I am satisfied, based on the submissions of Clemenger, that it is appropriate for there to be a single meeting at which both Class A and Class C shareholders vote on the Scheme. As noted above, under the constitution, the only difference in the rights associated with each class of share concerns the number of directors shareholders in a particular class may appoint. Given that the Scheme will not alter the appointment rights of the two classes of shareholders, and that Portview already controls the composition of the board, this distinction between the rights of the two classes of shareholders does not warrant separate meetings being held. Such differences as exist between Class A and Class C shareholders are not such as to make it impossible for them to consult together with a view to their common interest: Re Hills Motorway Ltd (2002) 43 ACSR 101; [2002] NSWSC 897 at [12] (Barrett J); Re URB Investments Ltd [2019] FCA 1977 at [44]-[46] (Markovic J citing, amongst other cases, the observations of Bowen LJ in Sovereign Life Assurance Co v Dodd [1892] 2 QB 573 at 583). Accordingly, it is appropriate that the Scheme Shareholders debate the merits of the Scheme in a single meeting. 38 Nor do the different payment waterfalls require separate meetings to be held. The reasons for the distinction in the payment waterfalls are set out in the scheme booklet. If any Scheme Shareholder is not satisfied with the applicable waterfall, that shareholder may vote accordingly. In any event, even if separate meetings were held, that would not confer any additional capacity on either group to affect the outcome as their votes would be combined under s 411(5) to determine whether the Scheme has been approved with the necessary majorities.

Corporations Rules 39 Clemenger sought to be relieved from compliance with several of the applicable rules in the Federal Court (Corporations) Rules 2000 (Cth) (the Corporations Rules). I consider that it is appropriate to excuse Clemenger from those rules for the following reasons. 40 Rule 2.4(1) relevantly requires that, unless the court otherwise directs, an originating process must be supported by an affidavit stating the facts in support of the process. Here, the originating process was accompanied by a short solicitor's affidavit exhibiting a company search (as required by r 2.4(2)). The substantive facts were stated in subsequent affidavits provided prior to the first hearing. There is nothing inappropriate in that process, and Clemenger ought to be relieved from the default requirement to set out the substantive facts in the commencing affidavit. 41 Rule 2.15 applies Div 75 of the Insolvency Practice Schedule (Corporations) and Div 75 of the Insolvency Practice Rules (Corporations) 2016 (Cth) to meetings ordered by the court, subject to the Act, the Corporations Rules and any direction of the court. Here, there is no need for the conduct of the meeting of Scheme Shareholders to be governed by those provisions. It is, as Clemenger submitted, appropriate that the meeting be conducted in accordance with the orders of the court, the company's constitution, and Pt 2G.2 of the Act. As the authors of Schemes, Takeovers and Himalayan Peaks state, the default provisions were not designed with members' or creditors' schemes of arrangement in mind, and it is common for courts to make orders dispensing with the operation of those rules on the basis of the existence of the inherent safeguard of court approval processes in schemes of arrangement: Tony Damian and Andrew Rich, Schemes, Takeovers and Himalayan Peaks: The Use of Schemes of Arrangement (Herbert Smith Freehills, 4th ed, 2021) 248-9, referring to Re HIH Casualty and General Insurance Ltd [2006] NSWSC 191 at [11]-[12] (Barrett J). 42 Rule 3.4 relevantly provides that, where there is an application under s 411(4) for an order approving (inter alia) an arrangement in relation to a Pt 5.1 body, unless the court otherwise orders, a notice is to be published in a daily newspaper circulating in the relevant area. Here, the orders proposed by Clemenger provide for Scheme Shareholders to be notified of the second court hearing directly, by email, and by notice on the company's website. Shares in Clemenger are not publicly traded. Class A and Class C shares can only be held by limited classes of persons, all of whom will be notified directly by email. There is no utility in a legal notice being published in one or more newspapers, so it is appropriate to relieve Clemenger from compliance with that default requirement.

Other considerations 43 I have addressed above the applicable requirements under the Act, the Corporations Regulations and the Corporations Rules. It remains to address the wider considerations, to which the authorities indicate regard should be had in determining whether the court should exercise its discretion to make orders that a meeting of a company's members should be convened to consider a proposed arrangement. 44 It is not necessary to rehearse that case law at length. Rather, it suffices to note that the decided cases indicate that (as summarised by O'Bryan J in Re DuluxGroup Ltd (2019) 136 ACSR 546; [2019] FCA 961 (Re DuluxGroup) at [19]): [19] Before ordering a meeting, the Court needs to be satisfied of two matters: (a) first, that the scheme is fit for consideration by the proposed meeting in the sense that it 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": F T Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 at 72 per Street CJ; Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485 at 504; 112 ALR 627 at 638; 10 ACSR 230 at 241; Re Coles Group Ltd (2007) 25 ACLC 1380; [2007] VSC 389 (Re Coles Group) at [29]-[36] per Robson J; and (b) second, that "the members [are to be] properly informed as to the nature of the scheme before the scheme meeting": Re NRMA Insurance Ltd (2000) 33 ACSR 595; 156 FLR 349; [2000] NSWSC 82 (Re NRMA Insurance) at [30]; Re Foundation Healthcare at [38]. See also Re Proptech Group Ltd [2022] FCA 1606 at [19] (O'Callaghan J) and Re Japara Healthcare Ltd (2021) 156 ACSR 695; [2021] FCA 1150 at [34] (Moshinsky J). 45 The first consideration noted by O'Bryan J in Re DuluxGroup has also been addressed by Beach J in Re Amcor Ltd [2019] FCA 346. There, Beach J described the court's function and the relevant standard of review on the first court hearing as follows (at [47], emphasis in bold added, citations omitted): 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, 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". 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. 46 As observed by Keane CJ and Jacobson J in Re CSR Ltd (2010) 183 FCR 358 (at [64]), "[t]he Court should not promote the waste of resources and the raising of false hopes or the creation of unnecessary concern and anxiety by promoting a process which will clearly not proceed to consummation under s 411(4)(b)". 47 In this case, I am satisfied that, if the Scheme achieves the necessary majorities at the meeting, there is no reason that is presently apparent which would cause the court not to approve the Scheme at the second court hearing, if it is unopposed. Having regard to the matters set out above concerning the scheme booklet and the orders to be made for its distribution, I am also satisfied that Scheme Shareholders will be properly informed as to the nature of the Scheme before the meeting. 48 Accordingly, orders will be made for the first meeting to be convened, together with ancillary orders. I certify that the preceding forty-eight (48) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Button.