In the matter of Damstra Holdings Limited

[2024] NSWSC 425

Supreme Court

New South Wales

Medium Neutral Citation:

In the matter of Damstra Holdings Limited [2024] NSWSC 425

Hearing dates:

16 April 2024

Date of orders:

16 April 2024

Decision date:

19 April 2024

Jurisdiction:

Equity - Corporations List

Before:

Black J

Decision:

Orders made approving a scheme of arrangement.

Catchwords:

CORPORATIONS – Arrangements and reconstructions – Schemes of arrangement or compromise – Application under s 411 of the Corporations Act 2001 (Cth) for orders approving scheme of arrangement – Where formal requirements satisfied – Whether scheme of arrangement should be approved.

Legislation Cited:

- Corporations Act 2001 (Cth), ss 411, 1322

Cases Cited:

- Nenna v Australian Securities and Investments Commission (2011) 198 FCR 32; [2011] FCA 1193

- Re Amcor Ltd (No 2) [2019] FCA 842

- Re Atlas Iron Ltd (No 2) [2016] FCA 481

- Re Central Pacific Minerals NL [2002] FCA 239

- Re Coca-Cola Amatil Ltd [2021] NSWSC 489

- Re Damstra Holdings Ltd [2024] NSWSC 284

- Re Ellerston Global Investments Ltd [2020] NSWSC 1108

- Re Fairfax Media Limited (No 2) (2018) 366 ALR 516; [2018] FCA 1930

- Re New Cap Reinsurance Corporation Ltd (in liq) [2013] NSWSC 1170

- Re Pendal Group Ltd (No 3) [2023] NSWSC 14

- Re QT Mutual Bank Ltd (No 2) [2016] QSC 265

- Re Redcape Property Fund and the Trust Company (RE Services) Ltd (as the responsible entity for the Redcape Property Trust) [2012] NSWSC 486

- Re Seven Network Ltd (No 3) (2010) 267 ALR 583; (2010) 77 ACSR 701; [2010] FCA 400

- Re Statewide Office Furniture Pty Ltd (2015) 293 FLR 275; [2015] NSWSC 142

- Winpar Holdings Ltd v Goldfields Kalgoorlie Ltd (2001) 166 FLR 144; (2001) 40 ACSR 221; [2001] NSWCA 427

Category:

Principal judgment

Parties:

Damstra Holdings Limited (Plaintiff)

Representation:

Counsel:
M Izzo SC/J Taylor (Plaintiff)
N M Bender SC (Acquirer)

Solicitors:
Gilbert & Tobin (Plaintiff)
MinterEllison (Acquirer)

File Number(s):

2024/67662

Judgment

1. By Originating Process filed on 21 February 2024, the Plaintiff, Damstra Holdings Ltd (“Damstra”) sought orders under s 411 of the Corporations Act 2001 (Cth) (“Act”) convening a meeting of its shareholders to consider a proposed scheme of arrangement and ancillary orders. The application related to a proposed scheme of arrangement by which a third party, Ideagen Ltd would acquire all of the issued shares in Damstra for cash consideration of A$0.24 for each fully paid ordinary share in Damstra. By way of background, Damstra is a global provider of safety, risk management and compliance software solutions and is listed on the Australian Securities Exchange (“ASX”). I made the orders sought by Damstra at the conclusion of the hearing on 8 March 2024 for the reasons set out in my judgment in Re Damstra Holdings Ltd [2024] NSWSC 284 (“First Judgment”).

2. The scheme meeting was held on 10 April 2024 and, as I will note below, Damstra’s shareholders approved the scheme by a majority in number of Damstra shareholders present and voting and by more than 75% of the votes cast. At the second Court hearing on 16 April 2024, Damstra sought and I made orders approving the scheme of arrangement and ancillary orders. These are my reasons for doing so. I have drawn on the helpful submissions of Mr Izzo with whom Ms Taylor appeared for Damstra in this judgment.

Affidavit evidence

3. Damstra reads the affidavit dated 15 April 2024 of its executive director and chair, Mr Risseeuw. Mr Risseeuw addressed the registration of the scheme booklet with the Australian Securities and Investments Commission (“ASIC”) and the dispatch of the scheme materials. He noted that Damstra became aware on 11 April 2024, after the scheme meeting, of the fact that Automic Ltd (“Automic”) – which retains its register of members and had been engaged to provide services in respect of the scheme – had not dispatched scheme documents to a relatively small number of members, in the circumstances which I address below. Mr Risseeuw also noted that there had been 13 inbound calls to the shareholder information line to which I referred in my First Judgment, and that Automic’s personnel had responded to those calls in accordance with the inbound call script to which I also referred in that judgment.

4. Mr Risseeuw also addressed the scheme meeting and the results of the poll on the scheme resolution, by which 338 shareholders present and voting at the scheme meeting voted in favour of the scheme resolution, representing 143,024,568 votes or 98.58% of the eligible votes cast; 78 shareholders voted against the scheme resolution, representing 2,065,332 votes or 1.42% of the eligible votes cast; and 3 Damstra shareholders abstained from voting. Mr Risseeuw observed that the scheme resolution was passed by 80.67% of Damstra shareholders present and voting at the scheme meeting and by 98.58% of the number of votes cast on the scheme resolution, comfortably satisfying the statutory requirements under s 411 of the Act.

5. Mr Risseeuw also noted that the shareholders present at the scheme meeting constituted approximately 5.18% of Damstra shareholders by number and 56.09% of Damstra’s total issued share capital. This is not a particularly substantial turnout by number of shareholders, and Damstra did not lead comparative evidence as to shareholder turnout at its annual general meetings, which would have been helpful in these circumstances. However, I am not left with any concern that the relatively low turnout by number of shareholders present indicated a failure to bring the scheme to the attention of shareholders generally. Mr Risseeuw also referred to Damstra’s publication of notice of the second Court hearing, which was made by an announcement made by Damstra to ASX. His evidence was that Damstra’s solicitors had not received a notice of appearance from any person intending to appear to oppose the scheme, and there was no such appearance at the second Court hearing. Mr Risseeuw also addressed the status of conditions precedent as to the scheme and Damstra tendered certificates indicating the satisfaction or waiver of relevant conditions precedent, and also tendered a letter dated 15 April 2024 from ASIC which indicated that it had no objection to the proposed scheme for the purposes of s 411(17)(b) of the Act.

6. Damstra also read the affidavit dated 15 April 2024 of Mr Cooper, who is a Customer Success Director at Automic, and addressed the steps taken by Automic in respect of the dispatch of scheme materials. One difficulty had arisen in that respect, since Automic had not dispatched scheme documents to 173 shareholders which it had recorded as “Returned Mail Shareholders”, being persons as to which mail sent by Automic had previously been returned to sender on at least one occasion. In the event, the failure to send scheme documents to those shareholders had no practical impact on the result of the scheme meeting, where – quite apart from the practical prospect that mail sent to those shareholders would again have been returned to sender for the same reasons that previous mail had been returned – the scheme would still have been approved by the requisite statutory majorities had all of those shareholders voted against the scheme resolution at the scheme meeting. I return to that matter below.

Submissions and determination

7. Mr Izzo submits, uncontroversially, that the Court will need to be satisfied at the second Court hearing that the relevant procedural requirements of the convening orders have been met, and, if so, the Court will then exercise its discretion whether to approve the scheme: Re Central Pacific Minerals NL [2002] FCA 239 (“Central Pacific”) at [12]; Re Redcape Property Fund and the Trust Company (RE Services) Ltd (as the responsible entity for the Redcape Property Trust) [2012] NSWSC 486 at [7]; Re Pendal Group Ltd (No 3) [2023] NSWSC 14 (“Pendal”) at [9]. Mr Izzo also rightly submits that the principles which govern the exercise of the Court’s discretion to approve a scheme of arrangement are well settled and that, generally, before approving a scheme, the Court will need to be satisfied that the scheme complies with the statutory and regulatory requirements for schemes of arrangement; the scheme was approved by shareholders acting in good faith and for a proper purpose; there has been accurate and comprehensive disclosure of the details of the scheme and its effect to those voting on it; there is no suggestion of oppression of any minority; the scheme is fair and reasonable in the sense that an intelligent and honest shareholder who is a member of the relevant class, properly informed and acting alone, might approve the scheme; there is no evidence that any third parties will be disproportionally adversely affected by the operation of the scheme; the scheme does not offend against any aspect of public policy; all conditions precedent to the scheme have been met or waived, other than as to the Court’s approval of the scheme; ASIC has been given the opportunity to draw to the attention of the Court any relevant matters; and all matters that could be considered relevant to the exercise of the Court’s discretion have been brought to the attention of the Court: Re Seven Network Ltd (No 3) (2010) 267 ALR 583; (2010) 77 ACSR 701; [2010] FCA 400 at [31]-[40]; Re Atlas Iron Ltd (No 2) [2016] FCA 481 at [5]-[6]; Re Amcor Ltd (No 2) [2019] FCA 842 at [7]-[11]; Re Ellerston Global Investments Ltd [2020] NSWSC 1108 (“Ellerston”) at [10]-[12]; Re Coca-Cola Amatil Ltd [2021] NSWSC 489. Mr Izzo also submits and I accept that the Court will also have regard to shareholders’ assessment of their interests as manifested in the voting results on the scheme resolution and will generally recognise that shareholders are the best judges of whether an arrangement is to their commercial advantage: Central Pacific at [13]; Ellerston at [10].

8. Subject to the issue as to notice to the Returned Mail Shareholders which I address below, I can readily be satisfied that the Court should exercise its discretion to approve the scheme. There is evidence that the scheme booklet and convening orders were lodged with ASIC and, as I noted above, ASIC has advised that it does not object to the scheme for the purposes of s 411(17)(b) of the Act.

9. The scheme documents were dispatched to Damstra shareholders, substantially in accordance with the convening orders, other than for Automic’s failure to dispatch them to the Returned Mail Shareholders. Damstra fairly accepts that the scheme documents should have been dispatched to those shareholders irrespective of whether they had previously had “returned mail” from the relevant postal addresses, although Mr Izzo notes that Damstra could have addressed this issue in advance by seeking a variation to the convening orders: Re QT Mutual Bank Ltd (No 2) [2016] QSC 265 (“QT Mutual”) at [18]. In the event, as I noted above, Damstra became aware of Automic’s failure to send the scheme documents to those shareholders after the scheme meeting, on or around 11 April 2024.

10. Mr Izzo submits and I accept that the failure to send the scheme documents to the 173 Returned Mail Shareholders is a procedural irregularity for the purposes of s 1322(2) of the Act, which does not invalidate the scheme meeting and the resolution passed at the scheme meeting, and that that irregularity has not caused substantial injustice. That concept is defined non-exhaustively in s 1322(1) of the Act to include, relevantly, a defect, irregularity or deficiency of notice. Section 1322(2) in turn applies, relevantly, to a “proceeding under this Act” and that concept is not given a narrow interpretation: Winpar Holdings Ltd v Goldfields Kalgoorlie Ltd (2001) 166 FLR 144 at 164; (2001) 40 ACSR 221; [2001] NSWCA 427; Re New Cap Reinsurance Corporation Ltd (in liq) [2013] NSWSC 1170 at [47]. I accept that the scheme meeting is a proceeding under the Act for that purpose: QT Mutual at [21]. A procedural irregularity in such a proceeding is automatically validated under s 1322(2) without the need for a Court order, unless the Court orders to the contrary, and that result can extend to an irregularity brought about by deliberate conduct, subject to the particular circumstances and to considerations of whether the relevant irregularity has caused or may cause substantial injustice: Nenna v Australian Securities and Investments Commission (2011) 198 FCR 32; [2011] FCA 1193; Re Statewide Office Furniture Pty Ltd (2015) 293 FLR 275; [2015] NSWSC 142 at [10]-[11]; Pendal at [12].

11. Mr Izzo points out that Bond J reached a similar result in QT Mutual, where the plaintiff did not dispatch documents to 252 members who were known to be deceased, in breach of the relevant Court orders convening a scheme meeting. His Honour there distinguished the quite different position that had arisen in Re Fairfax Media Limited (No 2) (2018) 366 ALR 516; [2018] FCA 1930, Gleeson J similarly approved a scheme, although without express reference to s 1322 of the Act, where scheme materials were not dispatched to 292 “undelivered email recipients”. These decisions reinforce the view that I would have reached in applying the section in its terms, where the scheme and scheme meeting had been publicised by other means, including an announcement to ASX; as I noted above, even apart from the practical prospect that mail sent to the Returned Mail Shareholders would again have been returned, the evidence indicates that the scheme would still have been approved by the requisite statutory majorities had all of those shareholders voted against the scheme resolution at the scheme meeting; it is highly unlikely that the small number of Returned Mail Shareholders would generally have opposed the scheme where the larger number of other shareholders generally supported it; and no shareholder notified Damstra of any intention to oppose the grant of approval for the scheme or appeared at the second Court hearing to do so. There is, it seems to me, no substantial injustice to the Returned Mail Shareholders in giving effect to the result of the scheme meeting in these circumstances, and no reason to make an order that would prevent the automatic validation of this irregularity under s 1322(2) of the Act. Mr Izzo also notes that, had there been any difficulty in reliance on section 1322(2), Damstra would have sought a corresponding order under s 1322(4)(a) of the Act. I would have made such an order had they been necessary, but it is not necessary here. It is not necessary to address Mr Izzo’s further submission as to the possible application of cl 5.3(f) of Damstra’s constitution in these circumstances.

12. Subject to this issue, Mr Izzo point out, again uncontroversially, that s 411(4) of the Act provides that a scheme of arrangement is binding on scheme shareholders if it is passed by a majority of scheme shareholders present and voting (in person or by proxy) and by 75% of votes cast and it is approved by order of the Court and those requirements have been satisfied here. He points out that, in accordance with the convening orders, Damstra published an ASX announcement providing notice of the second Court hearing. He also points out that the scheme is conditional on the satisfaction or waiver of the conditions precedent set out in cl 3.1 of the Scheme Implementation Deed and cl 3.1 of the scheme and, as I noted above, Damstra has tendered condition precedent certificates confirming the satisfaction or waiver of the relevant conditions precedent. As I also noted above, Damstra also tendered a letter from ASIC confirming that it has no objection to the scheme for the purposes of s 411(17)(b) of the Act.

13. Mr Izzo also points out that the independent expert had concluded, and as at the date of the second Court hearing, continues to conclude, that the scheme is fair and reasonable and in the best interests of Damstra shareholders, in the absence of a superior proposal, and the Damstra shareholders have voted in favour of the scheme by the requisite statutory majorities. He submits and I accept that there is no reason to doubt that the substantial number and majority of shareholders who voted in favour of the scheme resolution did so in good faith and for a proper purpose; there is no reason to doubt that the scheme is fair and reasonable to Damstra shareholders; and there is no element of oppression to minority shareholders in the scheme and there is no aspect of the scheme which might offend public policy or adversely affect the interests of third parties. For these and the reasons set out above, I was satisfied that the scheme should be approved at the second Court hearing.

14. In accordance with common practice, Damstra seeks an order under s 411(12) of the Act exempting it from compliance with s 411(11) of the Act, which would otherwise require that a copy of the Court’s order approving the scheme be annexed to every copy of Damstra’s constitution issued after the order is made. I accept that such an order is properly made where the scheme does not modify any rights of Damstra shareholders or of creditors or persons dealing with Damstra.

Orders

15. I am otherwise satisfied that the scheme is appropriate for the Court’s approval. For these reasons, I made the orders sought by Damstra at the second Court hearing on 16 April 2024.

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Decision last updated: 22 April 2024