WebCentral Group Limited, in the matter of WebCentral Group Limited (No 2) [2006] FCA 1203

NetRegistry's competing indicative proposal 7 While the proposal for the Scheme was in train, Sydney Capital Partners, on behalf of its client, NetRegistry, advised that NetRegistry was interested in making an offer for the business of, or shares in, WCG. NetRegistry was, of course, aware of the proposal by MLB which had received the support of WCG's board of directors. 8 NetRegistry indicated the possibility of an offer of $1.65 per share, payable in cash, contingent on a number of conditions precedent being satisfied, including confirmation of funding. The facts relating to the NetRegistry approach are conveyed in detail in an affidavit sworn on 24 August 2006 of Grant Chamberlain, Director and Deputy Head of Mergers and Acquisitions, Deutsche Bank AG, which had been retained by WCG to advise it in relation to the Scheme, and in the documents constituting the Exhibit to Mr Chamberlain's affidavit. 9 The initial approach by NetRegistry was in a face to face meeting on 14 July 2006. This was followed by a letter dated 18 July 2006 from Sydney Capital Partners. 10 The directors of WCG did not regard NetRegistry's indicative proposal as constituting a material change of circumstances in relation to the Scheme or as enlivening WCG's continuing disclosure of obligation. However, because of rumours in relation to NetRegistry's indicative proposal, on Wednesday 16 August 2006 WCG announced to the Australian Stock Exchange ("ASX") the approach from NetRegistry. The announcement referred to the "unsolicited indicative proposal" that had been made to WCG on behalf of NetRegistry and set out reasons why the board of directors of WCG had determined that the interests of WebCentral Shareholders would be better served by the board's continuing to pursue the well advanced proposed merger with MLB. The ASX notice stated that NetRegistry's proposal was conditional and at an early stage of development, and did not yet represent an offer capable of acceptance. 11 Subsequently, NetRegistry expressed its disappointment over the decision of WCG's board not to pursue discussions with NetRegistry. As well, NetRegistry issued a press release disagreeing with certain aspects of WCG's ASX announcement. 12 If the board of WCG had "stalled" the MLB proposal in the hope of grasping an offer from NetRegistry, WCG may have released the MLB "bird in the hand" and finished up with nothing. It was a business judgment for the directors of WCG whether to run that risk. 13 The conditional approach from NetRegistry and the WCG board's decision to proceed with the Scheme Meeting on 21 August 2006 notwithstanding it, are not reasons why the Court should withhold its approval of the Scheme.

The "no encumbrances" issue 14 In relation to the "no encumbrances issue", I have decided to follow the course allowed by s 411(6) of the Act of approving the Scheme subject to the alteration of the Scheme, by the deletion of clause 9.3(b) (and the re-lettering of clause 9.3(c) as clause 9.3(b)). As noted in my earlier Reasons for Judgment at [15], this was an alternative course which Mr M B Oakes, senior counsel for WCG, suggested if the course which he primarily supported, namely, that of the Court's approving the Scheme containing clause 9.3(b), should not find favour. 15 Clause 9.3(b) was set out at [13] of my earlier reasons and is as follows: "The Scheme Shares transferred to MLB under the Scheme will be transferred free from all mortgages, charges, liens, encumbrances, pledges, security interests and other interests of third parties of any kind, whether legal or otherwise, that will bind MLB." 16 Mr Oakes made a detailed written submission in favour of approval of the Scheme containing this clause. To summarise his submission would not adequately reflect it, but I think it fair to say that he seeks to call in aid, with reference to authorities, the following propositions: · that a shareholder holds its shares subject to the risk of disposition under the Act, including a transfer pursuant to a Court-approved scheme of arrangement; · that the holder of a security interest in shares does not obtain an interest higher than that of the registered holder of the shares; and · that a transfer pursuant to a Court-approved scheme of arrangement will "override the proprietary interest of the holder of a security interest in the shares, although not in the scheme consideration". 17 For the first proposition, senior counsel referred to several authorities, including Cambridge Gas Transport Corporation v The Official Committee of Unsecured Creditors (of Navigator Holdings Plc and others) [2006] UKPC 26, especially at [26]. For the proposition that the security attaches to the scheme consideration, he referred to In re General Exchange Bank (1871) LR 6 Ch App 818. 18 In substance, a scheme of arrangement approved by the Court supplies the agreement to be bound by the scheme of all members or creditors, as the case may be, of the company, including those who in fact did not vote in favour of the scheme. The effect of the Court's approval, and of the operation of s 411(4) of the Act, is that all members or creditors, as the case may be, are bound by the compromise or arrangement. 19 I referred to s 1072E(10) of the Act at [15] of my earlier reasons. That subsection provides: "Except as provided in this section and section 169: (a) no notice of a trust, whether express, implied or constructive, must be entered on a register kept in this jurisdiction or be receivable by ASIC; and (b) no liabilities are affected by anything done under a preceding subsection of this section or under section 169; and (c) nothing so done affects the body corporate concerned with notice of a trust." As noted also in [15] of my earlier Reasons, cl 2.5 of WCG's constitution provides: "Except as permitted or required by the Corporations Law, the Company shall not recognise a person as holding a Share or Share Option upon any trust". and cl 2.6 of the constitution provides that WCG is: "not bound by or compelled in any way to recognise any equitable, contingent, future or partial right or interest in any Share or Share Option (whether or not it has notice of the interest or right concerned) unless otherwise provided by [the] Constitution or by law, except an absolute right of ownership in the registered holder of the Share or Share Option." 20 The Scheme, and the Court's approval of it, cannot affect the interests of a holder of security over shares the subject of the Scheme. Two opposed rhetorical questions can therefore be asked: "Why retain the 'no encumbrances' clause in the Scheme?" "Why not retain the 'no encumbrances' clause in the Scheme?" 21 The reason why I think that the 'no encumbrances' clause should not remain is that its presence may give the impression that the interests of the holders of security over shares are being adversely affected. In my view, it is no answer to this objection to say that a security holder's fears would be immediately allayed upon its being informed that clause 9.3(b) did not go beyond describing the position that prevails at law, in any event, and that in relation to the security interest the clause might just as well have been omitted. The security holder would reply, I think with justification: "Then why cause me concern (and the cost of obtaining legal advice) by having the clause in the Scheme?". 22 The preferable course is to omit cl. 9.3(b). 23 Two further matters remain to be noted. The first is that it is arguable that cl 9.3(b) purports to extinguish any security interest so that the security interest would not in fact attach to the Scheme consideration. Anticipating this further possible objection to the clause, Mr Oakes SC said that his instructions were to agree to a modification of cl 9.3(b) so as to make it clear that this was not intended. In the light of the view which I have reached in relation to the clause generally, any question of amendment does not arise. 24 The other matter is that I have no doubt that it is within the Court's power under s 411(6) to approve the Scheme subject to an alteration consisting of deletion of cl 9.3(b). It is inconceivable that any shareholder who voted in favour of the Scheme would have done otherwise if it had lacked cl 9.3(b).

Form of order 25 It is proposed that there be set out as attachments to the form of orders: · the Scheme of Arrangement as approved at the Scheme Meeting, with the alterations now made pursuant to s 411(6) highlighted; and · the Scheme of Arrangement as approved by the Court, incorporating those alterations, but without highlighting. In this way, as senior counsel says, what has occurred can be readily identified. I followed this course, which I consider to be commendable, in the form of order made on 25 August 2006.

I certify that the preceding twenty-five (25) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Lindgren.

Date of Hearing: 25 August 2006 (via video link from Adelaide to Sydney)