United Energy Limited, In re [2003] VSC 266 (23 July 2003)

5. At the hearing, four shareholders who were opposed to the scheme appeared in person and made submissions to the Court. After considering the issue of approval and the various matters raised by the company and the shareholders I approved the scheme. I informed those present I would publish my reasons later. These are my reasons.

8. The background to the application can be briefly summarised. United Energy is a public company incorporated in Australia and is limited by shares. It operates the business of owning and managing energy networks. At the end of May 2003 it had approximately 50,000 shareholders and the issued capital consisted of 421,770,972 fully paid ordinary shares. A company, Power Partnership Pty Ltd ("Power Partnership"), holds approximately 57% of the total issued shares in United Energy. On 23 April 2003 United Energy agreed with AMP Henderson Global Investors Limited, Alintagas Limited and Aquila Inc. to a proposal which would result in the Power Partnership acquiring 100% of all the issued shares in United Energy. The proposal involved a scheme of arrangement pursuant to Part 5.1 of the Corporations Act 2001 between United Energy and the holders of its fully paid ordinary shares other than Power Partnership. The scheme provided that the fully paid ordinary shares in United Energy, other than those held already by Power Partnership, would be transferred to Power Partnership for a cash consideration of $3.15 per share being paid by Power Partnership to the other shareholders.

11. A scheme of arrangement is subject to a statutory framework pursuant to which three stages are involved. First is an application to the Court for an order summoning a meeting of the shareholders, the second stage concerns the actual holding of the meeting and finally application being made to the Court for approval of the scheme if it is accepted by the meeting of shareholders.

14. On 30 May 2003 Hansen J ordered that United Energy convene a meeting of the holders of fully paid ordinary shares in the capital other than Power Partnership for the purpose of considering and, if thought fit, resolving to approve a scheme by arrangement pursuant to Part 5.1 of the Act. The scheme meeting was to be held on 10 July 2003. His Honour ordered that notice must be given to the shareholders of the scheme booklet which contained the explanatory statement. The Australian Securities and Investments Commission ("ASIC") informed the Court by letter dated 28 May 2003 that it did not oppose the orders to be made by his Honour. Hansen J appointed Mr John F.H. Clark to be chairperson of the scheme meeting.

17. His Honour further ordered that a Master of this Court hold an inquiry on 11 July 2003 to determine whether the meeting was held and conducted in accordance with the orders made by his Honour and the law. He further ordered that I was to hear the application for approval of the scheme of arrangement on 14 July 2003 in the event that the shareholders approved the scheme by the statutory majority. As at 30 May 2003 there were nine directors of the United Energy, seven of whom had some association with one or other of the parties who were promoting the scheme. There were two directors who were independent of the parties to the proposal. They were Mr J. Clark and Ms Tina McMeckan. The two independent directors recommended that the shareholders vote in favour of the scheme resolution.

20. The second part of the process took place on 10 July 2003, and by a majority the shareholders voted to accept the scheme.

23. The third part of the process, namely the Court approval, commenced on Friday 11 July 2003 when Master Evans inquired whether the meeting of the holders of the fully paid ordinary shares in the capital of United Energy (other than Power Partnership) was properly convened and held, and the Master by order declared that the meeting was duly convened and held and the resolution considered by the meeting was duly passed. Because of a matter raised by the four shareholders who appeared before me, it will be necessary to refer to and consider what occurred at the meeting.

26. Section 411(4) relevantly provides -

"(4) A ... arrangement is binding ... on the members ... of the body and on the body ..., if, and only if: (a) at a meeting convened in accordance with an order of the Court under sub-section 1 or (1A): (i) ... (ii) in the case of a ... arrangement between a body and its members or a class of members - a resolution in favour of the ... arrangement is: (A) passed by a majority in number of the members in that class present and voting (either in person or by proxy); and (B) if the body have a share capital - passed by 75% of the votes cast on the resolution; and (b) it is approved by order of the Court."

30. The Court is empowered under s.411(6) to grant its approval to an arrangement subject to any alterations and conditions it thinks just.

33. Section 411(17) requires the Court not to approve arrangement unless it is satisfied the 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 unless there is produced to the Court a statement in writing by ASIC stating that it has no objection to the arrangement. But as the latter words of that sub-section provide, the mere fact that ASIC has no objection will not stand in the way of the Court deciding not to approve the arrangement if the Court decides that is the appropriate decision.

36. It can be seen that there are a number of statutory matters that the Court must address. Also it must be satisfied that the terms of the order made by Hansen J calling the meeting have been complied with and of course it must also be satisfied that the meeting was duly convened and properly held. It must also be satisfied as to the requisite majority resolving to approve the scheme. Subject to those requirements, s.411 does not identify any criterion which the Court must take into account in considering whether to approve the arrangement.

39. Legislation dealing with companies have contained provisions similar to s.411 going back well over 100 years. Such provisions originated in the Joint Stock Companies Arrangement Act 1870 of the U.K. A body of case law has evolved setting out the important matters for consideration by the Court on an application to approve a scheme of arrangement.

42. In a statement quoted often with approval, Maugham J in Re Dorman Long & Co,[1] discussed the functions of the Court and at p.655 his Lordship said -

"I will first state my view as to the function of the court in determining whether the compromise or arrangement should be sanctioned by the court. It is plain that the duties of the court are two-fold. First is to see that the resolutions are passed by the statutory majority in value and in number ... at a meeting ... duly convened and held. Upon that depends the jurisdiction of the court to confirm the scheme. The other duty is in the nature of a discretionary power ..."

His Lordship then referred to a number of authorities and stated at p.657 -

"In my opinion, then, so far as the second duty is concerned, what I have to see is whether the proposal is such that an intelligent and honest man, a member of the class concerned and acting in respect of his interests, might reasonably approve."

See also In the Matter of Chevron (Sydney) Ltd[2].

49. The fact that the shareholders by a substantial majority approve the scheme is evidence of substance that the scheme is to the commercial advantage of the shareholders. In Re English, Scottish and Australian Chartered Bank[3] Lindley LJ at p.409 said -

"If the creditors are acting on sufficient information and with time to consider what they are about, and are acting honestly, they are, I apprehend, much better judges of what is to their commercial advantage than a court can be."

53. His Lordship's observations apply equally to the position of a shareholder. This view has often been repeated in cases involving reconstruction and is a matter of weight.

56. The cases also show that on occasions there are matters brought to the attention of the Court and established which persuade a court not to approve the scheme. However, the Court is at somewhat of a disadvantage. Procedures in our courts are not well adapted to an inquisitorial role that may be thrown upon judges in considering a scheme of arrangement. However, the obligation to have the scheme approved by the Court provides an opportunity for any dissatisfied shareholder or, in the case of a compromise of debts, a creditor, to approach the Court and place evidence before it to dissuade the Court from approving the scheme. In the present case four shareholders did attend the hearing and raised a number of matters. Each informed the Court that he was a shareholder of shares less than 2,000.

59. As I have already stated, the Master was satisfied that the meeting was duly convened and properly held. Three of the shareholders who appeared before me raised a question as to the propriety of an event which occurred at the meeting. Subject to that question, I am satisfied that the meeting was duly convened and properly held. The matter raised by the three shareholders was the subject of an affidavit by the chairperson before the Master. The Master considered the matter and was satisfied on the evidence that the meeting was properly held and the resolution lawfully passed. The three shareholders were Messrs Aubry Sidaway, Hugh Doherty and Peter McCallum. None of the shareholders placed any evidence before the Court. However, as I stated, they made submissions.

62. The only evidence before the Court concerning the meeting was the affidavit evidence of the chairperson of the meeting John Forrest Haymen Clark. In his affidavit sworn 10 July 2003, he stated that in accordance with the order of Hansen J he called for a poll and after the resolution was put to the vote and the proxy voting papers were lodged, he declared the poll closed. He then realised that he had not lodged his proxy votes, nor had other directors. He immediately informed the meeting that he withdrew the closure of the poll and he then accepted the proxy papers from himself and other directors.

65. It would appear that Mr Sidaway challenged him and told him that he was not able to do that because the poll had already closed. According to Mr Clark he informed Mr Sidaway that he was entitled to withdraw the closure of the poll and to accept the other voting papers.

68. It was contended by the shareholders who appeared before the Court that this was an irregularity which affected the legality of the meeting and accordingly it was not properly held. Mr Santamaria QC accepted that even though the Master had come to the view that the meeting had been lawfully conducted, it was still open to the Court on the application to approve the arrangement to re-consider the question.

71. Subject to any provision in a company's constitution or the Corporations Act a chairman has a wide discretion concerning the conduct of a meeting. He is bound to act in good faith, give a reasonable opportunity for debate and to act fairly.

74. In my opinion what the chairman of the meeting did was appropriate and proper. Having realised his mistake, he sought to rectify it. By so doing he did not cause any prejudice to any shareholder. He, being chairman of the meeting, had the authority to correct an error. If he had not done so, he would have deprived a number of shareholders of their right to vote by proxy. Mr Santamaria QC referred me to a case which supported that conclusion. In Shanahan v Pivot Pty Ltd[4], Beach J dealt with a situation where the chairman of a meeting after receiving numerous proxies concerning the replacement of a director, announced the result and was then informed that a shareholder had inadvertently omitted to attach a proxy summary to his voting slip. The chairman refused to accept the proxy votes. Beach J held that the chairman was in error and his decision was upheld on appeal[5].

77. In my opinion what the chairman did was appropriate and proper in the circumstances. Further, it accorded with common sense. The shareholders before the Court contended that the company should have gone through the whole process again because of the error. This would have involved delay and a substantial waste of money. I do not accept the contention. In my opinion the meeting was properly held.

80. Mr Doherty complained that the chairman did not properly conduct the meeting. When pressed, Mr Doherty stated that Mr Sidaway, at or around 1.00 p.m., sought to move a resolution that the meeting be adjourned to enable those present to partake of sustenance and refreshments. According to Mr Doherty, the chairperson refused to put the motion. There is no evidence as to this alleged event before the court. In my view, it is a matter of no substance. The conduct of the meeting was for the chairperson, and he had to make an assessment based upon the circumstances then existing whether such a motion should be put. In my opinion, if the alleged event occurred, it did not in any way affect the validity of the meeting.

"That, pursuant to s.411 of the Corporations Act 2001 (Cth), the scheme of arrangement proposed to be entered into between United Energy and the holders of its ordinary shares, other than Power Partnership Pty Ltd, as more particularly described in the Scheme of Arrangement which is contained in the booklet of which the notice convening this meeting forms part, is agreed to (with or without modification as approved by the Supreme Court of Victoria)."

87. The result of the poll established that 17,210 shareholders were present either in person or by proxy, by attorney or by corporate representatives at the meeting. The number of shareholders who voted in favour of the scheme represented 80.86% of the shareholders present and voting either in person or otherwise, and by 71.10% of the votes cast on the scheme resolution.

90. I am satisfied that the statutory provisions were complied with. The evidence also established that the relevant provisions of United Energy's constitution and the directions contained in the order made by Hansen J were observed and complied with. The evidence also established that Power Partnership did not vote on the resolution. By letter dated 11 July 2003, ASIC advised that under s.411(17)(b) of the Act, it had no objection to the scheme of arrangement between United Energy and its shareholders other than Power Partnership Pty Ltd, under which each shareholder was to receive $3.15 per share in return for returning the shares to Power Partnership. The said letter made it clear that ASIC was satisfied that the scheme was not proposed for the purpose of enabling any person to avoid the operation of any of the provisions of Chapter 6 of the Act.

93. On 11 July 2003, Master Evans ordered after carrying out an enquiry, that the meeting was duly convened and held and the resolution considered by that meeting was duly passed. In carrying out the enquiry, Master Evans considered whether the requirements of the Act and Hansen J's order had been complied with, and was satisfied that they had.

96. The court's jurisdiction on an application such as the present, is supervisory and as stated, courts have adopted the general rule that shareholders are the best judges of what is to their commercial advantage. A court naturally, in the face of a substantial number of shareholders voting in favour of a scheme, is reluctant to interfere with that commercial decision. As I have stated, it is difficult for a court to take an inquisitorial role in that regard and a court is dependent upon shareholders placing material before the court if doubt is raised.

99. In addition to the alleged irregularity at the meeting, the three shareholders who appeared before the court also raised a number of other matters. A fourth shareholder, Mr Haines, forwarded to the court a written submission, and attended but did not seek to address the court.

102. It is important when considering the views of shareholders, that proper material is placed before the court. That is not to say that shareholders cannot make submissions on the evidence that is already before the court, but if they wish to introduce some factual matter which is not before the court, then it is necessary for them to adduce the evidence.

105. Mr Haines, in his written submission, asserted that the matter before the court was "a scheme" and that it represented a bullying by the majority in respect of the minority. The fact is that the legislation permits a scheme of arrangement to be adopted by the statutory majority of shareholders and the fact that some minority shareholders opposed to the scheme are not happy is not to the point. The very nature of the jurisdiction results in a democratic vote at the shareholders meeting being upheld, and those who are in the minority cannot complain when the majority succeeds.

108. Mr McCallum submitted that it was wrong that a government utility which was sold to a public company so that the members of the community of this State could be part of an independent electricity supply company, was re-arranged so that the essential utility was taken away from the people and invested in a single shareholder. Whilst one has a degree of sympathy with the views of Mr McCallum, again the fact is that that is what the law permits. There is no fetter in the legislation which deprives a single shareholder from controlling a public utility.

111. Mr McCallum's next point was that the approval should have been at least by 90% of the shareholders. In this regard he contended that the reconstruction should have been pursuant to Chapter 6 of the Act which is concerned with takeovers. The fact was that Chapter 6 could have been utilised but there is no obligation to utilise Chapter 6 and the company resolved to utilise the Chapter 5 scheme of arrangement process. In this regard I refer to the notice provided by ASIC pursuant to s.411(17) of the Act. The notice stated that ASIC was satisfied that the arrangement had not been proposed for the purpose of enabling any person to avoid the operation of Chapter 6. The question was addressed by Bryson J in Nicron Resources Ltd v Catto[6] under the previous legislation. The legislation to all intents and purposes is the same. His Honour, after noting at p.234 that there were suggestions that Chapter 6 might be the more appropriate way to go, held that there was no compulsion to go via Chapter 6 in preference to Chapter 5. The choice is there and the corporations law is neutral as to the choice. His Honour said at p.245 -

"The existence of Chapter 6 does not affect an appraisal of whether a confirmation is fair and equitable to shareholders who are to be expelled. It is relevant and necessary to consider and evaluate what their position would be if Chapter 6 had been followed; on the other hand there is no compulsion on a company or those who control its affairs to proceed under Chapter 6."

I respectfully agree. See also observations of French J in Re Foundation Healthcare Ltd.[7]

116. The next point made was that the two independent directors who had in the original scheme booklet recommended that the scheme be adopted, did not speak to individual shareholders. The two independent directors who had no interest with Power Partnership, evaluated the proposal and in the scheme booklet which came into existence prior to the order made by Hansen J, recommended to the shareholders that they resolve in favour of the scheme. There is nothing in the legislation requiring them to speak to any shareholders and no doubt they made their appraisal on material available to them. Other than the assertion from the Bar table that they did not speak to any shareholders, there is no evidence that they did not. Bearing in mind the vast number of shareholders, it would be an impossible task. But nevertheless, having said that, in my view there is no substance in this complaint.

119. It was also argued that the experts who had made an appraisal of the proposal and who had made certain recommendations in relation to it had also not spoken to any individual shareholders. That was asserted from the Bar table. Again, the experts are independent and accordingly it would have been inappropriate to talk to any shareholders to gain their views as to the proposed scheme. I am not saying that it would not be open to them to have discussions to see what points are made, but in my view, as independent experts, in the end they make their own decision based upon the material.

122. In my opinion, the matters raised by the four shareholders who came to court do not establish any basis for the court refusing to approve the scheme.

125. A number of affidavits had to be sworn before the scheme could be approved. The affidavits were sworn and filed with the court.

128. The evidence, in my opinion, leads to the conclusion that the scheme of arrangement should be approved and the court approves it. Application was made pursuant to s.411(12) exempting United Energy from the requirement of s.411(11) that a copy of the court's order approving this scheme be annexed to every copy of the company's constitution which is issued after the date the order is made. As the various security holders and potential investors will have access to information concerning the scheme through the ordinary channels for distribution, in my opinion it is appropriate to make an order pursuant to s.411(12), and I do so.

[1] [1934] Ch 635.

[2] [1963] VicRp 39; [1963] VR 249 at 251.

[3] [1893] 3 Ch. 385.

[7] [2002] FCA 742; (2002) 42 ACSR 252 at 264-5.