It is not the function of the court on an application for a order convening a meeting to consider the business or commercial efficacy of the proposed scheme, as that is a matter for the shareholders nor is it the court's role to express a view on whether the proposed scheme should be approved, if the requisite majority of votes is obtained. An order of the court that the meeting be convened is not an indication that the court has a view as to the merits of the scheme or as to how shareholders should vote."
Questions arising
6 In the present case, as I have said, three particular matters arose. One arose under Davies J's item (d) and the others under item (b).
7 The first matter (related to item (d)) was the question whether, having regard to a particular aspect of the collateral agreements, there were in reality different classes of MSL shareholders so that, in the absence of assent of each class by the requisite majority at a meeting, it will not be open to the court, in due course, to make an approving order under s 411(4)(b) if and when application for such an order is made.
8 The second issue (related to item (b)) concerned the definition of members' voting rights for the purposes of a meeting of members convened pursuant to a s 411(1) order.
9 The third matter (also related to item (b)) concerned a cut-off time for determining members entitled to vote at the meeting.
The first matter - the option agreement
10 OSI-SPV has entered into a contract with Marley which, as I have said, owns some 52% of the shares in MSL. Marley is a "Scheme Shareholder". The scheme of arrangement, if and when it becomes binding, will operate upon Marley in relation to its 52% shareholding.
11 Under the contract between Marley and OSI-SPV, the latter acquired an option to purchase from the former shares representing about 19.9% of MSL's total issued share capital (or about 38% of Marley's 52% holding). The option will become exercisable by OSI-SPV only if:
(a) some third party makes a competing proposal for the acquisition of shares in MSL; and
(b) OSI-SPV, in turn, then publicly announces a counter-proposal which the board of MSL determines in good faith is more favourable to MSL shareholders than the third party's competing proposal.
12 Only if both those events happen will there be a short period within which it is open to OSI-SPV to exercise the call option it holds from Marley in respect of 19.9% of the shares in MSL.
13 Upon any exercise of this option by OSI-SPV, the price per share payable by OSI-SPV to Marley will be the equivalent of that provided for in OSI-SPV's counter-proposal, that is, one must assume, a price more favourable to Marley than that contemplated by OSI-SPV's current proposal to be put before shareholders pursuant to the orders made on 9 November 2010.
14 In summary, therefore, Marley occupies a position from which it may receive for 19.9% of the shares in MSL (out of its total holding of 52%) a cash price greater than that provided for in the scheme of arrangement proposal to which the orders of 9 November 2010 relate, but Marley will only receive that price if, among other things, OSI-SPV, faced with a third party's competing acquisition proposal for MSL shares, has not only announced a new acquisition proposal of its own that contemplates that higher price for all Scheme Shareholders but also elected to take the 19.9% shareholding from Marley at that higher price. OSI-SPV's ability to exercise the option to purchase from Marley is not dependent upon the ultimate success of the OSI-SPV new acquisition proposal: there need be no more than a favourable determination by the MSL board. There is thus a possibility - it is no more - that Marley will receive for 19.9% a price higher than that contemplated by the presently proposed OSI-SPV scheme of arrangement while the other Scheme Shareholders receive nothing and are left with their shares.
The first matter - decided cases
15 Counsel drew attention to several cases in which attention has been given to the question whether class-creating possibilities relevant to the operation of Part 5.1 arise from a collateral arrangement of this kind between, on the one hand, a party playing a role such as that played here by OSI-SPV and, on the other, a holder of a significant parcel of shares in the subject company.
16 Reference was made in submissions to the recent case of Re Mitchell Communication Group Ltd [2010] VSC 423 which also involved an option to purchase 19.9%. In that case, the option price per share was equivalent to that payable under the arrangement itself but the only event triggering the right to exercise was the emergence of a competing proposal. Davies J was satisfied (at [38]) that, for the purposes of convening the s 411 meeting, it was reasonable to assume that the option did not give rise to different interests that would be relevant to the class-creation question. A similar view has been stated more recently by Jagot J in Re Andean Resources Ltd [2010] FCA 1190.
17 In both these cases, there was reliance on what was said by Mansfield J in Re Hostworks Group Ltd [2008] FCA 64; (2008) 26 ACLC 137. In that case, the price per share applicable under the 19.9% option was the same as that contemplated by the Part 5.1 acquisition arrangement and, as Mansfield J put it, the option "will lapse if the scheme is not approved by Hostworks' members or by the Court". His Honour's assessment of the class-creation question was as follows (at [45]):
"As the price to be paid by Broadcast Australia, if it exercises its call options over some 19% of the issued capital of Hostworks, is equivalent to the scheme consideration, and because if the scheme is not approved, those call options will lapse, in my view there is no sufficient reason to consider that the present holders of those shares should constitute a separate class for the purposes of the scheme meeting. The options do not affect the rights and obligations of those shareholders in relation to Hostworks. Those option grantors will not be advantaged or disadvantaged depending upon the outcome of the scheme in relation to other members of Hostworks. Broadcast Australia does not have the ability to exercise or to control the exercise of the votes attached to those shares in Hostworks before the exercise of the options, and effectively in practice before the meeting."
18 On the basis of these and other decisions about preliminary options to purchase (Re CCI Holdings Ltd [2007] FCA 832, Re Bolsini Gold NL [2007] FCA 1668 and Re People Telecom Ltd [2009] FCA 180), as well as cases about preliminary arrangements to secure favourable voting by influential shareholders (Re Telewest Communications plc [2004] BCC 342; Re Depfa Bank plc [2007] IEHC 463), it was submitted that the court should not have any concern about the possibility that Marley should be considered as constituting a class distinct from all other Scheme Shareholders.
The first matter - discussion and assessment
19 Two things should be said about this submission. First, the question of classes is properly addressed by the court at the s 411(1) stage as part of item (d) in Davies J's formulation. If, as here, a class-creating possibility is flagged by the subject company at that point, the court will deal with it as best it can on the material then before it, even though the situation is one in which submissions are received from the subject company alone (under s 411(1), it is the only competent applicant) or perhaps the applicant company and the potential acquirer. That approach is to be preferred over the previous practice (stated, in England, in Practice Note [1934] WN (Eng) 142) for the reasons explained by David Richards J in Re T & N Ltd (No 3) [2006] EWHC 1447 (Ch); [2007] 1 All ER 851 at [18] - [19]:
"Following the decision of the Court of Appeal in Re Hawk Insurance Co Ltd [2001] EWCA Civ 241, {2001] 2 BCLC 480, the practice as regards applications under s 425 to convene meetings was changed. So far as possible, issues arising on the composition of classes should be decided at that stage, rather than on the later application to sanction the scheme of arrangement if approved at the meeting(s). The revised practice is set out in the Practice Statement (companies: schemes of arrangement) [2002] 2 All ER 96, [2002] 1 WLR 1345. The responsibility as to the constitution of classes and as to the number of meetings lies with the applicant, but para 4 of the practice statement requires the applicant to draw the attention of the court as soon as possible to any issues which may arise as to the constitution of the meetings or which may otherwise affect the conduct of the meetings. Unless there are good reasons for not doing so, the applicant must also take all steps reasonably open to it to notify any person affected by the scheme of the intention to promote the scheme and of its purpose and of the proposed composition of classes. The court will, if necessary, give directions for the resolution of any such issues and in particular will hear interested parties. The practice statement concludes by stating that the court will expect any creditor who raises any such issue at the hearing to sanction the scheme to show good cause why they did not raise it at an earlier stage.
This practice is to avoid the waste of costs and court time which results if it is not until the sanction hearing that it is determined that the classes were wrongly constituted. If the classes have been wrongly constituted, the court has no jurisdiction to sanction the scheme. The purpose underlying this revised practice shows also that if there are known to be other issues which would go to the jurisdiction of the court to sanction the scheme, they too are best raised at the stage of the application to convene the meetings (see Re Savoy Hotel Ltd [1981] 3 All ER 646, [1981] Ch 351 and Re MyTravel Group plc, Fidelity Investments International plc v MyTravel Group plc [2004] EWCA Civ 1734, [2005] 2 BCLC 123). The same is true also of issues which, although not strictly going to jurisdiction, are such that they would unquestionably lead the court to refuse to sanction the scheme."
20 The current Australian practice is the same: see, for example, the express approval of it by Finkelstein J in Re Opes Prime Stockbroking Ltd [2009] FCA 813; (2009) 179 FCR 20 (at [16]ff) and the recent authoritative statement in Re CSR Ltd [2010] FCAFC 34; (2010) 183 FCR 358. But any view reached on the matter of classes upon the hearing of the s 411(1) application will necessarily be provisional. It will not prevent full debate on the issue if and when it is raised at any s 411(4)(b) hearing. An issue of possible class differentiation may emerge for the first time at that point: see, for example, Re HIH Casualty and General Insurance Ltd [2006] NSWSC 485; (2006) 200 FLR 243. Members generally have not had any earlier opportunity to be heard and to put arguments to the court.
21 The second point to be made concerns a possible distinction between the option arrangements in the earlier cases to which I was referred and that between Marley and OSI-SPV. In the other cases, the option was exercisable at the purchase price under the arrangement initially proposed by the party occupying the position corresponding with that of OSI-SPV. Here, by contrast, the price payable on any exercise of the option by OSI-SPV will be the equivalent of that provided for the OSI-SPV's publicly announced counter-proposal that follows on from the emergence of a third party's competing proposal.
22 It is at least conceivable, having regard to this aspect, that Marley has an interest in the emergence of a counter-proposal by OSI-SPV (in response to a third party's competing proposal) that differs from that of other Scheme Shareholders. Those other holders will receive the enhanced price contemplated by any OSI-SPV counter-proposal only if that proposal, once announced, is carried through to completion; whereas the announcement of the counter-proposal by OSI-SPV will alone secure the enhanced price for Marley, as to a 19.9% holding, subject only to exercise of the option to purchase by OSI-SPV.
23 This, as I have said, may conceivably set this case apart from the earlier cases. But it does not by any means follow that, for s 411 purposes, Marley must be regarded as standing in a class of its own because unable to consult together with all other Scheme Shareholders with a view to their common good according to like-minded appreciation of where members best interests lie. For any such conclusion of class distinction to be warranted, it would be necessary to find some difference in rights, as distinct from interests. In UDL Argos Engineering & Heavy Industries Co Ltd v Li Oi Lin [2001] 3 HKLRD 634; [2002] 1 HKC 172, Lord Millett said (at [17]) after surveying the cases:
"The principle upon which the classes of creditors or members are to be constituted is that they should depend upon the similarity or dissimilarity of their rights against the company and the way in which those rights are affected by the Scheme, and not upon the similarity or dissimilarity of their private interests arising from matters extraneous to such rights."