Zenyth Therapeutics Ltd v Smith

Re Lonsdale Financial Group Ltd (No 2) [2007] VSC 525.

Re Permanent Trustee Co [2002] NSWSC 1177; (2002) 43 ACSR 601.

Zenyth Therapeutics Ltd v Smith [2006] VSC 436; (2006) 60 ACSR 548.

1. On 9 November 2007, the court had before it an application by IWL Limited pursuant to sub-s 411(4) of the Corporations Act 2001 (Cth) seeking an order pursuant to para 411(4)(b) and sub-s 411(6) of the Corporations Act approving the scheme of arrangement between the plaintiff and each registered holder of fully paid ordinary shares in the plaintiff (other than Excluded Shareholders).
2. I approved the schemes, giving short reasons which I repeat here along with the substance of the submissions in support of approval. I reserved my reasons dealing with the relevance of sub-s 411(17) of the Act to the court's discretion to approve the scheme.

1. On 21 September 2007, I ordered that a meeting of the relevant plaintiff's shareholders be convened for the purpose of considering the scheme.
2. At the scheme meeting, the resolution in favour of the scheme was agreed to by the requisite majorities of shareholders pursuant to sub-para 411(4)(a)(ii) of the Corporations Act. The resolution was agreed to by 97.86% of members present and voting and 99.70% of the votes cast on the resolution.
   1. On 8 November 2007, Master Efthim made orders pursuant to r 16.6 of the Supreme Court (Corporations) Rules 2003 to the effect that the scheme meeting was duly convened and held and the resolution under sub-s 411(4) of the Corporations Act was duly passed at the scheme meeting in accordance with my orders of 21 September 2007.
3. The plaintiff tendered a letter from ASIC dated 8 November 2007 advising that it currently did not intend to appear or intervene at the second hearing and that ASIC has no objection to the scheme "on the basis that it is satisfied that it has not been proposed for the purpose of enabling any person to avoid the operation of any of the provisions of Chapter 6 of the Act." I believe there are some issues arising out of this qualification which I refer to in Re Coles Group Limited (No 2)[1] which I repeat here.

In Re Alabama, New Orleans, Texas and Pacific Junction Railway Co, Fry LJ said that in approving a scheme the court is "bound to ascertain that all the conditions required by the statute have been complied with." It is also "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 it." What other circumstances the court may take into consideration he did not attempt to forecast. [2] See also Re Permanent Trustee Co[3] and Zenyth Therapeutics Ltd v Smith.[4]

1 I am satisfied that all the conditions required by the statute have been complied with. I am satisfied that the proposal in the scheme is made in good faith. I am satisfied that the proposal in the scheme was at least so far fair and reasonable as that an intelligent and honest person, who is a member and acting alone in respect of his or her interests, as such a member, might approve of it. Subject to my observations below on the effect of sub-s 411(17) on the exercise of my discretion, there were no other matters in my discretion which I sought to mention when I approved the scheme.

2 I also had before me on 9 November 2007, an application by Coles Group Limited to approve a scheme of arrangement for the acquisition of all its issued shares by a subsidiary of Wesfarmers. I reserved my reasons for approving the scheme and have now delivered them in Re Coles Group Limited (No. 2).[5] I also had before me an application by Lonsdale Financial Group Ltd to approve two schemes of arrangement involving a takeover and reserved my reasons for approving those schemes. I have now delivered my reasons in Re Lonsdale Financial Group Ltd.[6]

3 Those reasons contain my views on the relevance of the matters referred to in paras 411(17)(a) and (b) in relation to the court exercising its discretion whether or not to approve the scheme.

4 The submissions made by IWL are substantially similar to those made by Lonsdale Financial Group. I believe my reasons in those two judgments adequately deal with the submissions of IWL on the issue. Accordingly, I rely on and refer to those reasons in dealing with the submissions of IWL.

5 IWL submitted that if, contrary to its submission, the court were to take the view that the question of purpose still had any relevance to the court's exercise of discretion either under sub-s 411(17) or under the court's general approval power of para 411(4)(b), there is in any event no issue in this case, where the decision to proceed by way of scheme was based on genuine commercial reasons.

6 IWL submitted that the mechanism of a scheme of arrangement was chosen here for bona fide commercial reasons, including;

(a) in order for the acquisition to be strategically viable, CBA would have to acquire all of the ordinary shares in the plaintiff, thereby ensuring that it would have the ability to integrate the plaintiff's business with CBA's equities business;

(b) it would be preferable for the acquisition to proceed to completion in accordance with a set timetable as this would better enable CBA to prepare for, and manage, the integration of the plaintiff into CBA's equities business; and

(c) the plaintiff's shareholders would be attracted by the ability to receive scrip consideration for their IWL shares in respect of which they could obtain capital gains tax rollover relief, which could only be guaranteed if CBA gained over 80% of the share capital of the plaintiff.

(d) the plaintiff has key client contracts with two major retail banks, other than CBA, that account for a significant proportion of the plaintiff's revenue. These contracts are subject to standard "change of control" provisions which, in general terms, give the clients the right to terminate the contract where there has been a change in ownership of IWL Shares (with a threshold significantly lower than 90%).

(e) the plaintiff wanted a transaction structure that was "all or nothing" in that CBA either gained 100% of the shares in the plaintiff or it did not gain any IWL Shares. Otherwise, proceeding in a manner which enabled a "change of control" of the plaintiff at less than 100% would have triggered a termination right in the key client contracts referred to above. If the key client contracts had been terminated but CBA did not acquire 100% of the shares in the plaintiff, then existing IWL shareholders who retained a minority interest in the plaintiff would have been exposed to the risk of holding shares in a company with a significantly diminished value due to the potential loss of revenues from the key client contracts.

7 I accept these submissions. I do not find there existed the proscribed intention and even if it did exist, contrary to my finding, the provision of the no objection statement satisfies me in the absence of any evidence to the contrary that the scheme does not undermine the purposes of Ch 6 spelt out in s 602 of the Act.

[1] [2007] VSC 523 at [42]- [44].

[2] [1891] 1 Ch 213 at 257.

[3] [2002] NSWSC 1177; (2002) 43 ACSR 601 at [8]- [10].

[4] [2006] VSC 436; (2006) 60 ACSR 548.

[5] [2007] VSC 523.

[6] [2007] VSC 525.