Surf Lakes Holdings Limited, in the matter of Surf Lakes Holdings Limited [2023] FCA 1355

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011

O'CALLAGHAN J 1 After a hearing this morning, I made the orders set out above. These are my reasons. 2 By originating process filed on 26 October 2023, Surf Lakes Holdings Limited (Surf Lakes) sought orders pursuant to s 411(1) of the Corporations Act 2001 (Cth) directed to convening a meeting (Scheme Meeting) of holders of ordinary shares in Surf Lakes (Surf Lakes Shareholders) for the purpose of considering a proposed scheme of arrangement (Scheme) between Surf Lakes and Surf Lakes' Shareholders. 3 Surf Lakes is an unlisted public company, limited by shares. It is registered in Queensland. It provides a "technologically advanced wave-generating device" and "bathymetric reef designs" to wave park project developers. 4 The purpose of the proposed scheme is to redomicile Surf Lakes and its subsidiaries (Surf Lakes Group) to become a US-based company. 5 This will occur by way of a "top-hatting" transaction: a newly-incorporated US company, Surf Lakes Global Inc (SL Global), will acquire all the shares on issue in Surf Lakes (Scheme Shares), and Surf Lakes Shareholders will be issued one fully paid common stock in the capital of SL Global for every 10 Scheme Shares held (Scheme Consideration). 6 If the Scheme is approved, the following will occur: (a) SL Global will become the new holding company of the Surf Lakes Group; (b) Surf Lakes will become a wholly-owned subsidiary of SL Global; and (c) existing Surf Lakes Shareholders will hold the same proportion of shares in SL Global after the Scheme as they held in Surf Lakes prior to the Scheme. 7 Surf Lakes submitted that this type of transaction, where a new holding company is superimposed or "top-hatted" over the scheme company, has been employed in several cases. See, by way of example only, Re Opus Group Ltd [2018] FCA 959; Re News Corporation Ltd [2004] FCA 1480; (2004) 51 ACSR 394; and Re GetSwift Ltd [2020] FCA 1733. 8 Surf Lakes' directors have unanimously recommended that Surf Lakes Shareholders vote in favour of the Scheme. Those directors intend to vote in favour of the Scheme. 9 A draft Scheme Booklet, including the explanatory statement required by s 412 of the Act, has been prepared (Annexure MW2 to the affidavit of Michael Eric Wilton affirmed 2 November 2023) (Scheme Booklet). It provides a detailed description of the Scheme, including its advantages and disadvantages. 10 An independent expert report has been prepared by PKF Melbourne Corporate Pty Ltd and is annexed to the Scheme Booklet. That report assesses the Scheme and opines that the Scheme is in the best interests of Surf Lakes Shareholders.

Key aspects of the Scheme 11 The terms of the Scheme are contained in Annexure B to the Scheme Booklet. 12 The Scheme is subject to several conditions precedent, including that Surf Lakes Shareholders vote in favour of the Scheme, and that the court approves the Scheme at the second court hearing. 13 If all conditions precedent are satisfied (or waived), then the Scheme becomes effective upon lodging a copy of the court's approval orders with the Australian Securities and Investments Commission (ASIC). 14 The key steps in the Scheme are as follows: (a) on or before the Implementation Date (expected to be 22 December 2023), SL Global will issue the Scheme Consideration to Scheme Shareholders (and to the "Sale Agent" in respect of ineligible foreign shareholders); (b) on the Implementation Date, but subject to the provision of the Scheme Consideration to Scheme Shareholders and to the Sale Agent, all of the Scheme Shares will be transferred to SL Global; and (c) as soon as reasonably practicable on or after the Implementation Date, SL Global must procure that the Sale Agent sells all the New SL Global Shares issued to the Sale Agent and remits the proceeds of the sale to Surf Lakes (after deduction of any applicable brokerage, stamp duty and other costs, taxes and charges), and Surf Lakes must promptly thereafter remit the proceeds to the ineligible foreign shareholders according to their entitlements. 15 On 2 November 2023, SL Global executed a deed poll pursuant to which it agreed, subject to the Scheme becoming effective, to acquire the Scheme Shares for the Scheme Consideration pursuant to the terms of the Scheme.

Statutory framework 16 The statutory framework relating to schemes of arrangement is set out in Part 5.1 of the Act and involves a three stage process: (a) the hearing of an application to the court for orders to convene a meeting or meetings (s 411(1)); (b) the holding of the meeting or meetings (s 411(4)(a)); and (c) the hearing of an application to the court for an order to approve the scheme (ss 411(4)(b) and 411(6)). 17 The hearing this morning concerned the first stage. 18 The court's discretion to make an order under s 411(1) is enlivened if: (a) a compromise or arrangement is proposed between a Part 5.1 body and its members (or any class of them); (b) an 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 booklet. See, by way of example only, Re Kidman Resources Ltd [2019] FCA 1226; (2019) 375 ALR 760 at 763-4 [22]. 19 I was satisfied that the criteria set out above have been met. Accordingly, the court's discretion to make orders for the plaintiff to convene the Scheme Meeting was enlivened.

Should the discretion be exercised? 20 The principles which apply to the exercise of the court's discretion are well-understood. The court must be satisfied that: (a) 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; and (b) members are to be properly informed as to the nature of the Scheme before the Scheme Meeting. 21 The role of the court at the first court hearing is supervisory. Justice Finkelstein summarised relevant authorities in an oft cited passage in Re CSR Ltd (2010) 183 FCR 358 at 379-80 [74]-‍[76], explaining that the court should generally confine itself to ensuring that certain procedural and substantive requirements are met (for example, that there will be adequate disclosure), with limited consideration of issues of fairness. The court should only 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 the scheme at the approval hearing; that is, the scheme may "appear on its face so blatantly unfair or otherwise inappropriate that it should be stopped in its tracks before going any further". 22 I had the benefit of detailed written and oral submissions by Mr BK Holmes of counsel.

Fit for consideration 23 Surf Lakes' submissions raised the following features of the Scheme to demonstrate that it is fit for consideration by the Scheme Meeting: (a) performance risk; (b) common directors; (c) options and convertible notes; and (d) treatment of ineligible foreign shareholders. 24 Counsel submitted, and I agreed, that none of these matters provide reason to deem the Scheme unfit for consideration by the proposed meeting. There are no matters arising from those submissions that require explanation in these reasons.

Members to be properly informed 25 Surf Lakes submitted, in relation to whether Surf Lakes Shareholders will be properly informed as to the nature of the Scheme before the Scheme Meeting, as follows: [Section] 412(1) of the Act and Schedule 8 (Part 3) of the [Corporations Regulations 2001 (Cth)] set out the disclosure requirements of the explanatory statement (which is included in the Scheme Booklet. The prescription of the contents of the explanatory statement in these provisions ordinarily provides guidance to the court in assessing this matter, bearing in mind that these applications are made in a summary way. Accordingly, if the Court is satisfied that the statutory disclosure requirements are met … it will ordinarily be satisfied that information to be provided to shareholders is adequate for the purposes of the exercise of the court's discretion to convene a meeting. 26 Surf Lakes also submitted that Surf Lakes Shareholders will be presented with a clear and detailed explanation of the Scheme in the Scheme Booklet, will have the benefit of the independent expert report, and the benefit of the directors' recommendation. 27 I was satisfied that the statutory disclosure requirements are met and that, including for the further reasons submitted at paragraph [26] above, Surf Lakes Shareholders will be properly informed as to the nature of the Scheme before the Scheme Meeting.

Dispensation with the Rules 28 Surf Lakes sought dispensation under r 1.3 of the Federal Court (Corporations) Rules 2000 (Cth) from compliance with rr 2.4(1), 2.15, and 3.4 (including Form 6) of those rules. 29 Paragraph 3 of the Federal Court's Schemes of Arrangement Practice Note (GPN-SOA) (Practice Note) states that: The Court recognises that the process for approval of schemes of arrangement is intended to be as simple as possible and the Court is supportive of simplification so far as it is consistent with the Court's statutory responsibilities and binding authority. 30 Rule 2.4(1) requires that, unless the court otherwise directs, an originating process must be supported by an affidavit stating the facts in support of the process. 31 Paragraph 3(b) of the Practice Note states that: The Court will generally be prepared to dispense with the requirement under rule 2.4(1) of the Federal Court (Corporations) Rules 2000 (Cth) for the initial affidavit filed in support of the application to state the facts in support of the Originating Process, where that will be addressed by later evidence. It is ordinarily sufficient for that affidavit to identify, in brief terms, the nature of the scheme and key dates, and annex a company search. 32 The affidavit of Michael Eric Wilton affirmed 24 October 2023 identified, in brief terms, the nature of the Scheme and key dates, and annexed a company search. I was prepared to dispense with the requirement under r 2.4(1) of the Rules. 33 Rule 2.15 relevantly provides that, to the extent applicable, Division 75 of the Insolvency Practice Schedule (Corporations) and Division 75 of the Insolvency Practice Rules (Corporations) 2016 (Cth) apply to scheme meetings. There was no reason to withhold dispensation, as is the usual practice of the court. 34 Rule 3.4 requires (in summary) that, unless the court otherwise orders, the plaintiff must publish a notice of the second court hearing of the application in accordance with Form 6 and in a daily newspaper. 35 Paragraph 3(f) of the Practice Note states that: The Court will be prepared to dispense with the publication of a notice of the second Court hearing in a newspaper, if notice can be given by an announcement made on the Australian Securities Exchange or by an announcement on the scheme proponent's website if it is not listed. A newspaper advertisement would only be required if the scheme proponent has reason to think that neither of those mechanisms would be effective to bring the scheme to the attention of its securityholders. 36 Surf Lakes submitted that it proposes to provide notice of the details of the second court hearing via its website. I was prepared to dispense with the requirement under r 3.4 of the Rules.

Disposition 37 For the above reasons, I was 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, the court would be likely to approve it at the second court hearing. I was also satisfied that the information to be provided to Surf Lakes Shareholders as to the nature of the Scheme before the Scheme Meeting is adequate. 38 It was therefore appropriate to make the orders sought by Surf Lakes. I certify that the preceding thirty-eight (38) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice O'Callaghan.