Spicers Limited, in the matter of Spicers Limited (No 2) [2019] FCA 1110

Introduction 1 On 17 May 2019, Anderson J made orders convening a meeting of the holders of ordinary shares of Spicers Limited (ACN 005 146 350) (Spicers) pursuant to s 411(1) of the Corporations Act 2001 (Cth) (Act) in relation to a proposed scheme of arrangement (Scheme): Re Spicers Limited [2019] FCA 731. 2 On 26 June 2019, at the meeting of members convened pursuant to those orders, the Scheme was approved by 99.75% of votes cast, with 91.63% of members present either in person or by proxy. 3 At a hearing held on 3 July 2019, Spicers sought an order under s 411(4)(b) of the Act approving the Scheme. No shareholder or other person appeared at the hearing to object to the Scheme. Two issues became the subject of particular consideration at the hearing: the first concerned the satisfaction of one of the conditions precedent to the Scheme; the second concerned whether the directors ought to have recommended that members vote in favour of the Scheme in circumstances where the directors stood to receive an additional financial benefit from Spicers if the Scheme was approved. Those issues are discussed below. 4 At the conclusion of the hearing, I made the orders sought by Spicers. These are my reasons for doing so.

Overview of the Scheme 5 The Scheme is described in the decision of Anderson J convening the Scheme meeting referred to above. In essence, the Scheme facilitates a proposed acquisition of all of the issued share capital of Spicers by Kokusai Pulp & Paper Co Ltd (KPP). Under the terms of the Scheme, Scheme Shareholders (being each person who is recorded in the share register as holding shares in Spicers as at the "Scheme Record Date") will transfer their shares to KPP on the Implementation Date (being the date on which the Scheme will be implemented) and will receive a total cash consideration, to be paid by KPP, comprising: (a) the Base Scheme Consideration of 4.3 cents per Scheme Share (totalling $90 million); plus, (b) the Deferred Consideration (if any), which is described further at paragraph 8 below. 6 In conjunction with the Scheme, Spicers also sought shareholder approval of a return of capital under s 256C(1) of the Act. The amount of the capital return (Capital Return Consideration) was the sum of the following three amounts: (a) (Asian Operations Distribution) the net proceeds received by the Spicers Group in respect of the sale of its Asian operations in December 2018; (b) (Property Sale Proceeds) the net proceeds received from the sale of properties held by the Spicers Group in Tasmania and Singapore; and (c) (Excess Cash Distribution) a sum calculated as the Excess Net Cash Amount less the Net Working Capital Adjustment as at 30 June 2019 (provided that if the sum resulted in a negative number, the amount would be zero). Each of those components are discussed further below. 7 If approved, the Capital Return Consideration would be paid to shareholders on the Implementation Date together with the Base Scheme Consideration. 8 As at the date of convening the shareholder meeting, the amount of the Asian Operations Distribution was a known and fixed sum ($22.2 million). However, the amount of the Property Sale Proceeds was still to be finalised, including whether any amounts from the sale of the Singapore property was to be held in escrow by the purchaser. Under the Scheme Implementation Deed, Spicers and KPP agreed that any amount from the property sales that was received by Spicers after the Implementation Date would be held for the shareholders and distributed as Deferred Consideration under the Scheme. As at the date of the second hearing before me, all amounts in respect of the property sales had been received by Spicers which meant that there would be no amount of Deferred Consideration and the amount of the Property Sale Proceeds was also a known and fixed sum ($14.8 million). 9 The third component of the Capital Return Consideration, the Excess Cash Distribution, had two integers: the Excess Net Cash Amount and the Net Working Capital Adjustment. The Excess Net Cash Amount was defined in the Scheme Implementation Deed as: (a) the aggregate of all cash and cash equivalents held by the Spicers Group on hand or credited to an account with a bank or other financial institution as recorded in the reconciled general ledgers of the Spicers Group; less (b) the amount of external financial debt of the Spicers Group; less (c) Spicers' unpaid transaction costs for the transaction, including payments to the directors of Spicers; less (d) an amount equal to any amounts paid by Spicers for directors' and officers' run-off insurance cover; less (e) an amount equal to the outstanding liability for the Spicers Group for Victorian and Tasmanian workers' compensation self-insurance commitments for claims incurred to 31 May 2019, with the liability measured based on an independent actuarial report dated on or about 30 June 2019. 10 The Net Working Capital Adjustment was defined in the Scheme Implementation Deed as an amount (if any) of cash and cash equivalents to be retained by Spicers to ensure that the Net Working Capital (the sum of receivables and inventories less payables) of the Spicers Group that will be recorded in the reconciled general ledgers of the Spicers Group as at 30 June 2019 (as estimated by the Spicers Board acting reasonably and in good faith) would be at least $60.2 million. 11 Under the Scheme Implementation Deed, Spicers and KPP agreed that, if the Excess Cash Distribution was approved by Spicers' shareholders, the two integers of the Excess Net Cash Amount and the Net Working Capital Adjustment as at 30 June 2019 would be calculated by 9 July 2019 and the Excess Cash Distribution would be paid to Scheme Shareholders as part of the Capital Return Consideration on the Implementation Date. 12 It can be observed that the amount of the Excess Cash Distribution could not be known as at the date of the shareholder meeting held on 26 June 2019 because that amount was to be calculated as at 30 June 2019 and that calculation was to be made by 9 July 2019. There is no difficulty in shareholders approving the capital return under s 256C(1) of the Act notwithstanding that the total amount of the capital to be returned was not known as at the date of the shareholder meeting. The directors of Spicers were able to estimate that amount and provide the appropriate assurance to members that the capital return would not materially prejudice the ability of Spicers to pay its creditors. However, the uncertainty about the final amount of the Excess Cash Distribution component of the Capital Return Consideration created an issue in relation to the satisfaction of the conditions precedent to the Scheme contained in the Scheme Implementation Deed, to which I will return. 13 Although the final amount of the Excess Cash Distribution component of the Capital Return Consideration was not known as at the date of the hearing, Spicers adduced evidence from its Chief Financial Officer, Damien Power, that the amount was expected to be in the range of $21 million to $25 million. This meant that the Capital Return Consideration would be in the range of $58 million to $62 million. Adopting that estimate, if the Scheme were approved by the Court, it was estimated that Scheme Shareholders would receive a total cash consideration of $148 million to $152 million (in the range of 7 cents to 7.2 cents per Scheme Share) comprising: (a) $90 million (4.3 cents per Scheme Share) as the Base Scheme Consideration to be paid by KPP; plus (b) $58 million to $62 million (2.7 to 2.9 cents per Scheme Share) as the expected amount of the Capital Return Consideration. 14 That amount represented a premium of approximately 30% to the ASX closing price of Spicers' shares (being 5.3 cents) on 17 January 2019 before the announcement of the transaction on that date.

Relevant principles 15 Section 411(4) of the Act provides that an arrangement is binding on members and Spicers only if: (a) at a meeting of members, it is passed by a majority of members present and voting (in person or by proxy) and by 75% of votes cast; and (b) it is approved by order of the Court. 16 Section 411(6) provides that the Court may grant approval subject to such alterations or conditions as it thinks just. 17 In Re Alabama, New Orleans, Texas and Pacific Junction Railway Company [1891] 1 Ch 213 at 247, Fry LJ described the role of the Court in applications of this type as follows: … the Court is bound to ascertain that all the conditions required by the statute have been complied with; it is bound to be satisfied that the proposition was made in good faith; and, further, it must be satisfied that the proposal was at least so far fair and reasonable, as that an intelligent and honest man, who is a member of that class, and acting alone in respect of his interest as such a member, might approve of it. What other circumstances the Court may take into consideration I will not attempt to forecast. 18 In deciding whether to grant approval of a scheme of arrangement, the Court will ordinarily have regard to the following matters: (a) that the orders of the Court convening a meeting of members were complied with; (b) that the meeting of members so convened has approved the Scheme with the requisite majority; (c) that all other statutory requirements have been satisfied; (d) that the Scheme is fair and reasonable so that an intelligent and honest person who was a member of the relevant class, properly informed and acting alone, might approve it; (e) that there has been full and fair disclosure to members and creditors of all information material to the decision whether to vote for or against the applicable scheme; and (f) that the plaintiff has brought to the attention of the Court all matters that could be considered relevant to the exercise of the Court's discretion. See, for example, Re Solution 6 Holdings Ltd (2004) 50 ACSR 113 at [18]-[24]; Re Permanent Trustee Co Ltd (2002) 43 ACSR 601 at [8]-[10]; Re Central Pacific Minerals NL [2002] FCA 239 at [12]-[14]; Re Seven Network Ltd (No 3) (2010) 267 ALR 583 at [35]-[39]; 77 ACSR 701; Re Signature Capital Investments Ltd (No 2) [2016] FCA 385; Re Medical Australia Ltd (No 2) [2017] FCA 1429.

Compliance with Court orders 19 The affidavit evidence establishes that the Court's orders for convening the meeting have been complied with: (a) copies of an Explanatory Booklet in substantially the same form as Exhibit MGC-2 in the proceedings were distributed to members on 22 May 2019 (to email recipients) and 24 May 2019 (to postal and airmail recipients); (b) proxy forms substantially in the form of those contained in Tab 5 of Exhibit MGC-1 in the proceedings (subject only to the matters described below) (the Proxy Forms) were distributed to members on 22 May 2019 (to email recipients) and 24 May 2019 (to postal and airmail recipients); (c) a notice of hearing in the form of Annexure A to the Court's orders dated 17 May 2019 was published in The Australian newspaper on 19 June 2019; and (d) the Scheme meeting was held at the Computershare Conference Centre, Yarra Falls, 452 Johnston Street, Abbotsford, Victoria on 26 June 2019 with Jonathan Alfred Grey Trollip as the chair. 20 An issue arose in printing hard copy Proxy Forms despatched to members who had not elected to receive electronic communications from Spicers. The Proxy Forms had been printed without a specific box to mark corresponding to each of the voting options in respect of both the Scheme resolution and the capital return resolution. On 29 May 2019, after despatch, Computershare Investor Services Pty Limited (which Spicers had engaged to arrange for the despatch of all communications in connection with the Scheme to members) became aware of the issue. On 31 May 2019, Spicers issued an ASX announcement regarding the issue with the Proxy Forms. Computershare implemented a process involving the manual review and audit of all hard copy Proxy Forms received by members. In nine cases where Computershare discerned ambiguity or vagueness as to how a member intended to direct their proxy, Computershare contacted the member directly in order to confirm how they intended to direct their proxy. Even if all of the ambiguous Proxy Forms were directed to vote against the Scheme resolution and the capital return resolution (as applicable), both the Scheme resolution and the capital return resolution would have been passed by the requisite majorities. I am satisfied that the Proxy Form issue did not affect the assessment of votes at the Scheme meeting in any material way.

Approval of Scheme by members 21 As noted above, the Scheme was approved by 99.75% of votes cast and 91.63% of members present in person or by proxy at the meeting. Accordingly, the statutory majorities in sub-paragraphs 411(4)(a)(ii)(A) and (B) of the Act have been satisfied.

Section 411(17) 22 Section 411(17) of the Act provides that the Court must not approve a compromise or arrangement unless: (a) it is satisfied that the compromise or arrangement has not been proposed for the purpose of enabling any person to avoid the operation of any of the provisions of Chapter 6; or (b) there is produced to the Court a statement in writing by ASIC stating that ASIC has no objection to the compromise or arrangement, but the Court need not approve a compromise or arrangement merely because a statement by ASIC stating that ASIC has no objection to the compromise or arrangement has been produced to the Court as mentioned in paragraph (b). 23 Spicers provided the Court with a letter from ASIC issued pursuant to s 411(17)(b) of the Act stating that ASIC has no objection to the Scheme. In those circumstances, there is no need for the Court to consider s 411(17)(a), particularly where no issue has been raised concerning Chapter 6 of the Act by any person: Re Tatts Group Ltd (No 2) [2017] VSC 770.

Is the Scheme fair and reasonable? 24 In making orders for convening the meeting of members, the Court was satisfied that the Scheme was of such a nature and cast in such terms that, if it received the requisite statutory majorities at the Scheme meeting, it was likely that the Court would approve the Scheme: Re Spicers Limited [2019] FCA 731 at [36]. Subject to the satisfaction of the conditions precedent in the Scheme Implementation Deed, nothing has emerged that would cause me to form any different view. Without repeating all of the matters that were considered by Anderson J in convening the Scheme meeting, I note that: (a) the Scheme has received the unanimous support of the Board of Spicers in the absence of a superior proposal; (b) the Scheme is straightforward in its operation and involves an all cash bid for 100% of the shares in Spicers; (c) the expected consideration payable to members of between 7 and 7.2 cents per share represents a premium of approximately 30% to the ASX closing price of Spicers shares (being 5.3 cents) on 17 January 2019 before the announcement of the transaction on that date, is the highest cash proposal currently made for 100% of the shares in the company and no superior proposal has been made or seems likely to emerge; and (d) the independent expert retained by Spicers, Piera Murone, has deposed that in her opinion the Scheme is fair and reasonable and therefore in the best interests of shareholders. 25 Further, there is no evidence of opposition to approval by the Court, or as to oppression in the conduct of the meeting of members. 26 That brings me to the conditions precedent in the Scheme Implementation Deed. The relevant terms of the conditions precedent were as follows: 3.1 Conditions Precedent Subject to this clause 3, the Scheme will not become Effective, no Capital Returns will be implemented, and the respective obligations of the parties in relation to the implementation of the Scheme and the Capital Returns are not binding, until each of the following Conditions Precedent is satisfied or waived to the extent and in the manner set out in this clause 3: Conditions Precedent for the benefit of KPP and Spicers (a) (Independent Expert's Report)... (b) (Spicers Shareholder approval of the Scheme) the Scheme Resolution is approved by the requisite majorities of Spicers Shareholders under section 411(4)(a)(ii) of the Corporations Act; (c) (Spicers Shareholder approval of Capital Return) Spicers Shareholders, to the extent they have not already done so, approve the Capital Return Resolutions by the requisite majority under section 256C(1) of the Corporations Act at the Special General Meeting; (d) (Scheme Consideration and Capital Returns) as at 8am on the Second Court Date, the aggregate of: (i) the Base Scheme Consideration; (ii) the Deferred Consideration; and (iii) the amounts to be returned to Scheme Shareholders by way of Capital Returns, is equal to or greater than 6.6 cents per Scheme Share; (e) (Court approval of the Scheme) … (f) (no restraints)… (g) (no Spicers prescribed occurrence)… (h) (no Spicers Material Adverse Change)… 3.2 Benefit and Waiver of Conditions Precedent (a) The Conditions Precedent in clauses 3.1(a) to 3.1(f) are for the benefit of each party. The Conditions Precedent in clauses 3.1(b), 3.1(c) and 3.1(e) cannot be waived. Any breach or non-fulfilment of the Conditions Precedent in clauses 3.1(a) and 3.1(f) may only be waived with the written consent of both parties. (b) … (c) The Conditions Precedent in clause 3.1(d) is for the sole benefit of Spicers, and any breach or non-fulfilment of that Condition Precedent may only be waived by Spicers giving its written consent. (d) A party entitled to waive the breach or non-fulfilment of a Condition Precedent pursuant to this clause 3.2 may do so in its absolute discretion... … 3.6 Certificates in relation to Conditions Precedent On the Second Court Date: (a) Spicers must provide to the Court a certificate (or such other evidence as the Court may request) confirming (in respect of matters within its knowledge) whether or not as at 8am on the Second Court Date: (i) the conditions precedent set out in clauses 3.1(a), 3.1(b), 3.1(c), 3.1(d), 3.1(g) and 3.1(h) have been satisfied or waived in accordance with this Deed; (ii) to the best of Spicers' knowledge whether the conditions precedent set out in clause 3.1(f) has been satisfied or waived in accordance with this Deed; and (b) KPP must provide to the Court a certificate (or such other evidence as the Court may request) confirming (in respect of matters within its knowledge) whether or not as at 8am on the Second Court Date, to the best of KPP's knowledge whether the condition precedent set out in clause 3.1(f) has been satisfied or waived in accordance with this Deed. 27 A number of aspects of the conditions precedent can be noted. First, the Scheme and the capital return were inter-conditional. Thus, the Scheme could only proceed if the capital return was also approved by shareholders. The parties could not waive the "capital return" condition precedent and allow the Scheme to proceed on its own. Second, the condition in cl 3.1(d) of the Scheme Implementation Deed required that, as at 8am on the day of the second court hearing, the aggregate of the amounts to be paid to shareholders by way of Base Scheme Consideration, Deferred Consideration and the Capital Return Consideration would be at least 6.6 cents per share. I will refer to that condition as the minimum consideration condition. While the Scheme Implementation Deed expressly contemplated that that condition could be waived by Spicers, it is apparent that the condition afforded an important protection to shareholders. As noted above, as at the date of the meeting to approve the Scheme and the capital return, members could not have known what the total consideration payable to them would be because the Excess Cash Distribution component of the Capital Return Consideration was not known as at that date. Nevertheless, members had the assurance of the minimum consideration condition which meant that, unless that condition was waived, the transaction would not proceed unless shareholders received at least 6.6 cents per share. 28 The importance of the minimum consideration condition as a protective measure for shareholders was reinforced by the Explanatory Booklet. Three aspects of the Explanatory Booklet should be noted. First, the Booklet correctly informed shareholders about the components of the consideration they would receive if the Scheme and the capital return were to be approved and how those amounts were to be calculated. The Booklet stated clearly that the final amount of the consideration could only be calculated after the meeting had occurred, but that the directors estimated that the consideration would be 7 cents per share. Second, the independent expert was asked to express an opinion on whether the Scheme was fair and reasonable and in the best interests of shareholders based on the expected return to shareholders of 7 cents per share. The independent expert valued each Spicers share (on a fully diluted basis) in the range of 6.6 to 7.5 cents per share. On that basis, the independent expert considered that the expected return was fair and reasonable. The independent expert did not express any opinion on whether a return of lower than 7 cents per share would be fair and reasonable and it is implicit from the report that the expert would not have considered a return of less than 6.6 cents per share to be fair and reasonable. Third, the minimum consideration condition was prominently disclosed to members in the Explanatory Booklet. While a person who read the Explanatory Booklet closely could have discovered that the minimum consideration condition was able to be waived by Spicers, an ordinary shareholder reading the Booklet would be unlikely to have understood that possibility. To the contrary, in my view, shareholders reading the Explanatory Booklet would have formed the belief that the minimum consideration they would receive if the Scheme and capital return were approved would be 6.6 cents per share. Members would not have understood or expected that Spicers would waive the minimum consideration condition if there was any risk that the aggregate consideration would fall below 6.6 cents per share. 29 These circumstances created a difficulty for the Court to assess satisfaction of the minimum consideration condition as at the second hearing which occurred on 3 July 2019. As at that date, the final calculation of the Excess Cash Distribution had not been performed (the parties had until 9 July 2019 to complete that calculation). The question arose whether the minimum consideration condition could be satisfied in those circumstances, or whether it was necessary to adjourn the second hearing until after 9 July 2019. 30 At the hearing, Spicers and KPP tendered a document titled "Conditions Precedent Deed" dated 3 July 2019 which had been executed as a deed by each party. Pursuant to that deed, each of Spicers and KPP certified that, relevantly, the minimum consideration condition had been satisfied or waived. 31 It is clear that, under cl 3.6 of the Scheme Implementation Deed, Spicers had the right to waive the minimum consideration condition. However, such a waiver had the potential to have a material adverse effect on members. If Spicers waived the condition but the aggregate consideration ultimately payable to shareholders fell below 6.6 cents per share (because of the final calculation of the Excess Cash Distribution), in my view shareholders would be unfairly treated because the consideration would not be consistent with the expectation created by the terms of the Explanatory Booklet. 32 At the hearing, I asked Senior Counsel for Spicers, Mr Chris Archibald QC, whether the hearing needed to be adjourned to a date after 9 July 2019 so that the Court could be satisfied that the minimum consideration to be received by shareholders would be 6.6 cents per share. Mr Archibald QC confirmed that there would not be any material adverse consequences for Spicers or its members if the hearing were to be adjourned, other than a flow-on delay to the final implementation of the Scheme and the receipt of the consideration by members. However, Mr Archibald QC submitted that the Court should be satisfied that the minimum consideration condition was not an impediment to the approval of the Scheme. In support of that submission, Mr Archibald QC advanced two alternative contentions. 33 First, Mr Archibald QC submitted that, on its proper construction, the minimum consideration condition contemplated that, as at the date of the second court hearing, the final amount of the consideration payable would not be known with complete certainty and that the condition was intended to be satisfied by Spicers' estimate of that amount as at that date. In support of that submission, Mr Archibald QC observed that the indicative timetable that formed part of the Scheme Implementation Deed had always contemplated that the second court hearing might occur before 9 July 2019. The evidence established that, on Spicers' current estimate of the Excess Cash Distribution, the condition would be satisfied. 34 I do not accept that construction of the minimum consideration condition. In my view, the language of the condition is clear. It is expressed as an objective fact, not as an estimate or opinion held by Spicers. The condition requires that the aggregate consideration be equal to or greater than 6.6 cents per Scheme share. It can be accepted that the Scheme Implementation Deed required the Excess Cash Distribution component of the Capital Return Consideration to be calculated by 9 July 2019; and it can also be accepted that the indicative timetable for the Scheme that was included in the Scheme Implementation Deed contemplated that the second court hearing date might occur before 9 July 2019. However, those circumstances do not require any change to the plain meaning of the condition in order to give it business efficacy. The minimum consideration condition could be satisfied in one of two ways: either the second court hearing would occur after 9 July 2019 and the amount of the consideration would be known; alternatively, if the second court hearing occurred prior to 9 July 2019, the condition could still be satisfied if the known components of the consideration payable in respect of the Scheme and the capital return were in such amounts that the minimum return of 6.6 cents per share was satisfied without reference to the unknown components. 35 The second submission advanced by Mr Archibald QC in the alternative was that Spicers was entitled to waive the minimum consideration condition under the Scheme Implementation Deed and had done so in circumstances where the evidence showed that the risk of the aggregate consideration to be paid to members falling below the minimum amount of 6.6 cents per share was remote. I accept that Spicers was entitled to waive the condition and I also accept that it had done so pursuant to the Conditions Precedent Deed. The relevant question was therefore whether the evidence established that there was no real risk to shareholders if the Court were to proceed to approve the Scheme before the final amount of the Excess Cash Distribution had been calculated. 36 In support of this alternative submission, Spicers relied on an affidavit of its Chief Financial Officer, Mr Power. The affidavit set out an analysis of each component of the Capital Return Consideration payable to shareholders pursuant to the Scheme and the capital return, including the current estimate of the Excess Cash Distribution. Mr Power deposed to the fact that, in order for the return to shareholders to be at least 6.6 cents per share, the Excess Cash Distribution needed to be at least $12.1 million. Relying on the latest internal treasury report to the Board of Spicers (dated 19 June 2019), Mr Power calculated that the expected Excess Cash Distribution was in the range of $21 million to $25 million (resulting in an aggregate consideration payable to members of 7 to 7.2 cents per share), which was well in excess of the minimum amount of $12.1 million. Further, given the integers in the calculation of the Excess Cash Distribution, Mr Power expressed the opinion that, in order for the expected return to shareholders not to exceed 6.6 cents per share, Spicers would need to become aware of an inventory write down with a magnitude of at least around $10 million. On the evidence of Mr Power, I accept that the risk of such an event transpiring is remote. 37 Having considered the evidence of Mr Power, I am satisfied that the prospect of the aggregate return to members from the Scheme and capital return falling below 6.6 cents per share is sufficiently remote as to be disregarded. In those circumstances, I do not consider that the waiver of the minimum consideration condition by Spicers requires me to adjourn the hearing of the approval of the Scheme.

Has there been full and fair disclosure? 38 The content of the Explanatory Booklet provided to members was considered at the first hearing. I am satisfied that the Explanatory Booklet satisfies the requirements in ss 411(3) and 412 of the Act. 39 At the hearing, Mr Archibald QC drew the Court's attention to one matter concerning the Explanatory Booklet. In various places throughout the Explanatory Booklet, the directors expressed a unanimous recommendation that members vote in favour of the Scheme and the capital return, in the absence of a superior proposal and subject to the independent expert continuing to express the view that the Scheme was in the best interests of shareholders. The Explanatory Booklet also disclosed that the Spicers Board had approved the payment of additional cash remuneration to the directors of Spicers conditional on the Scheme becoming effective. Each of the four non-executive directors would receive additional cash remuneration of $170,000. The Booklet disclosed that those amounts were to be paid in recognition of the directors' additional efforts in connection with delivering the transaction and having regard to the fact that their remuneration of $30,000 per annum since their appointment was substantially below market rates for non-executive directors of comparable ASX companies. The Booklet disclosed that if the Scheme was not approved by shareholders and the Court, the additional payments would not be made. 40 In a number of recent decisions, courts have considered whether a director who is to receive an additional financial benefit if a Scheme is approved should make a recommendation to members about voting in favour of the Scheme. In Re SMS Management and Technology Limited [2017] VSC 257, Robson J concluded that, in the circumstances of that case, it was appropriate for the managing director of the company to make a recommendation notwithstanding that he stood to receive an additional payment if the Scheme was approved (at [26]). Justice Robson considered that the disclosure of the managing director's additional benefit was sufficiently prominent that it enabled members to understand that he stood to benefit from the Scheme. 41 In Re Gazal Corporation Limited [2019] FCA 701 (Re Gazal), Farrell J expressed reservations about that approach (at [29]-[34]). Her Honour expressed the view that the better practice is for a director who stands to receive an additional benefit from the Scheme to decline to make a recommendation to shareholders as to how they should vote and to explain that the reason for that is that the director will receive a benefit which other shareholders will not receive if the Scheme is approved. The director could, and should, put forward reasons why a member might vote in favour a Scheme (along with reasons why they might not) and state what the director's own voting intentions are, but without making a recommendation to members as to how they should vote. Her Honour noted the practice that had emerged for the Scheme Implementation Deed to contain a covenant that the Scheme company would ensure that the Explanatory Booklet contained a statement that each director recommends that members approve the Scheme, but observed that that practice does not eliminate the director's individual obligation to consider whether he or she has an interest different from other shareholders which would properly preclude making a voting recommendation (at [32]). Despite the reservations expressed by Farrell J in that case, ultimately her Honour approved the Scheme. 42 The same issue arose again before Farrell J in Re Ruralco Holdings Limited [2019] FCA 878 (Re Ruralco) where her Honour convened a Scheme meeting. Her Honour observed (at [28]) that it was an issue for the interested director to decide whether to make a recommendation or to decline to do so and explain why, but it was for the Court to be satisfied that the disclosure in the Scheme Booklet was adequate and not misleading. In that case, her Honour was satisfied that the disclosure of the director's interest was sufficient. 43 Similar circumstances have also recently been considered in Re Nzuri Copper Ltd [2019] WASC 189 at [83]-[89] and Re Navitas Ltd (No 2) [2019] WASC 218 at [31]-[38]. 44 With respect, I agree with the principles stated by Farrell J in each of Re Gazal and Re Ruralco. As her Honour observed in Re Gazal at [32]: "While it may be true that it has become a common practice for a bidder to require unanimous and unqualified recommendations from the directors of the target company, that "practice" does not justify the bidder and the directors of the target failing to address the circumstances of each individual case". Nevertheless, in the present case I am satisfied that there has been no lack of disclosure or unfairness to members by reason of the unanimous recommendation of the directors. That is for two reasons. First, there was adequate disclosure of the additional benefit to be received by the directors. Secondly, the additional benefit is not out of the ordinary and has a reasonable commercial basis; the additional payment to the directors is to supplement the fees payable to directors in circumstances where the existing fees received by the directors can be seen to be very modest.

Have all necessary matters been brought to the attention of the Court? 45 At the first Court hearing, Spicers notified the Court of several matters warranting the attention of the Court. These matters were considered by the Court: Re Spicers Limited [2019] FCA 731 at [26]. In my view, none of those issues justifies the Court refusing to approve the Scheme.

Orders sought 46 For the reasons given, I made the order sought by Spicers approving the Scheme pursuant to s 411(4)(b) of the Act. 47 Spicers also sought an order under s 411(12) of the Act exempting it from compliance with s 411(11) which requires a copy of the Court's order under s 411(4)(b) to be annexed to the company's Constitution. An order under s 411(12) is appropriate in circumstances where the Scheme does not amend Spicers' Constitution and, upon implementation, Spicers will become a wholly owned subsidiary of KPP: Re Toll Holdings Ltd (No 2) [2015] VSC 236 at [18]-[19]. I therefore made that order. I certify that the preceding forty-seven (47) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice O'Bryan.