Perpetual Custodians Ltd v IOOF Investment Management Ltd
[2013] NSWCA 231
•19 July 2013
This decision has been amended. Please see the end of the decision for a list of the amendments.
Court of Appeal
New South Wales
Case Title: Perpetual Custodians Ltd as custodian for Tamoran Pty Ltd as trustee for Michael Crivelli v IOOF Investment Management Ltd;Murray v Perennial Investment Partners Ltd Medium Neutral Citation: [2013] NSWCA 231 Hearing Date(s): 27, 28 June 2013 Decision Date: 19 July 2013 Before: McColl JA [1]
Gleeson JA [2]
Leeming JA [3]Decision: Appeals dismissed, with costs.
[Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.]
Catchwords: COMPANIES - Compromises and arrangements - Scheme of arrangement - Transfer scheme conferring authority on target to transfer members' shares to acquirer in exchange for shares in acquirer - Statutory majority of members voted in favour of scheme - Whether target company and its members who voted in favour of scheme "associates" - Whether relevant agreement between target and members voting in favour of scheme for purpose of controlling or influencing composition of acquirer's board or conduct of acquirer's affairs - Whether target and members voting in favour of scheme acting in concert - Whether target and members voting in favour of scheme proposing to become associated - Whether target and members voting in favour of scheme had "together become entitled" to shares in acquirer
CONTRACT - Construction and interpretation - Definitions - Whether definition displaced by context
WORDS AND PHRASES - "Associated" - "Acting in concert" - "Together become entitled"Legislation Cited: Competition and Consumer Act 2010 (Cth)
Corporations Act 2001 (Cth)Cases Cited: ACCC v CC (NSW) Pty Ltd [1999] FCA 954; (1999) 92 FCR 375
ACCC v Channel Seven Brisbane Pty Ltd [2009] HCA 19; (2009) 239 CLR 305
ACCC v Universal Music Australia Pty Ltd [2001] FCA 1800; (2001) 115 FCR 442
ACP Publishing Pty Ltd v Commissioner of Taxation [2005] FCAFC 57; (2005) 142 FCR 533
Anthony Hordern & Sons Ltd v Amalgamated Clothing and Allied Trades Union of Australia (1932) 47 CLR 1
Australasian Meat Industry Employees Union v Meat and Allied Trades Federation of Australia [1991] FCA 672; (1991) 32 FCR 318
Australian Education Union v Department of Education and Children's Services [2012] HCA 3; (2012) 86 ALJR 217
Bateman v Newhaven Park Stud Ltd [2004] NSWSC 566; (2004) 49 ACSR 597
BHP Petroleum (Australia) Pty Ltd v Sagasco South East Inc [2001] WASCA 159
Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd [2010] NSWSC 233; (2010) 77 ACSR 410
Carr v Western Australia [2007] HCA 47; (2007) 232 CLR 138
Centro Retail Ltd and Centro MCS Manager Ltd in its capacity as Responsible Entity of Centro Retail Trust [2011] NSWSC 1321
Chapmans Ltd v Australian Stock Exchange Ltd [1996] FCA 474; (1996) 67 FCR 402
City of Swan v Lehman Brothers Australia Ltd [2009] FCAFC 130; (2009) 179 FCR 243
Cordon Investments Pty Ltd v Lesdor Properties Pty Ltd [2012] NSWCA 184
Cranbrook School v Woollahra Municipal Council [2006] NSWCA 155; (2006) 66 NSWLR 379
Fardell v Coates Hire Operations Pty Ltd [2010] NSWSC 346; (2010) 201 IR 64
Galaxy Communications Pty Ltd v Paramount Films of Australia Inc (Court of Appeal, 27 March 1998, unreported)
Halford v Price (1960) 105 CLR 23
Hayes v Willoughby [2013] UKSC 17; [2013] 1 WLR 935
Industrial Equity Ltd v Commissioner for Corporate Affairs [1990] VR 780
In re Aldridge Uranium Ltd [2010] FCA 1263
In re Hostworks Group Ltd [2008] FCA 64; (2008) 26 ACLC 137
In re Little World Beverages Ltd [2012] FCA 1057
In re Marengo Mining Ltd [2012] FCA 1220
In re United Minerals Corporation NL [2010] FCA 7
In re Vulcan Resources Ltd [2009] FCA 1599
IPT Systems Ltd v MTIC Corporate Pty Ltd [2000] WASC 316; (2000) 36 ACSR 454
Isles v The Daily Mail Newspaper Ltd (1912) 14 CLR 193
Kempe v Ambassador Insurance Co [1998] 1 WLR 271
Lionsgate Australia Pty Ltd v Macquarie Private Portfolio Management Ltd [2007] NSWSC 371; (2007) 62 ACSR 522
McHugh v Australian Jockey Club Ltd (No 13) [2012] FCA 1441
Melrose Farm Pty Ltd v Milward [2008] WASCA 175; (2008) 175 IR 455
News Ltd v South Sydney District Rugby League Football Club [2003] HCA 45; (2003) 215 CLR 563
Ombudsman v Laughton [2005] NSWCA 339; (2005) 64 NSWLR 114
OneSteel Manufacturing Pty Ltd v BlueScope Steel (AIS) Pty Ltd [2013] NSWCA 27
Re Cashcard Australia Ltd [2004] FCA 223; (2004) 48 ACSR 738
Re Castlereagh Securities Ltd [1973] 1 NSWLR 624
Re Central Pacific Minerals NL [2002] FCA 239
Re Coates Hire (No 2) [2007] FCA 2105
Re CSR Ltd [2010] FCAFC 34; (2010) 183 FCR 358
Re Gas2Grid Ltd [2010] FCA 10
Re Glendale Land Development Ltd (1982) 7 ACLR 171
Re HIH Casualty and General Insurance Ltd [2005] NSWSC 240; (2005) 53 ACSR 12
Re Hills Motorway [2002] NSWSC 897; (2002) 43 ACSR 101
Re International Harvester Co of Australia Pty Ltd [1953] VLR 669
Re IXLA [2007] VSC 573
Re National Foods (No 1) [2005] ATP 8; (2005) 54 ACSR 80
Re NRMA Ltd [2000] NSWSC 82; (2000) 33 ACSR 595
Re Sino Gold Mining Ltd [2009] FCA 1277; (2009) 74 ACSR 647
Re Westfield Holdings Ltd [2004] NSWSC 458; (2004) 49 ACSR 734
Rural Press Ltd v ACCC [2003] HCATrans 291
Sovereign Life Assurance Co v Dodd [1892] 2 QB 573
Starr v Federal Commissioner of Taxation [2007] FCA 23; (2007) 65 ATR 86
Toal v Aquarius Platinum Ltd [2004] FCA 550Texts Cited: Barak, Purposive Interpretation in Law (2005) Princeton University Press
Bennion, Statutory Interpretation, 5th ed (2008) LexisNexis
Carter, The Construction of Commercial Contracts (2013) Hart
Damian and Rich, Schemes, Takeovers and Himalayan Peaks, 3rd ed (2013) The University of Sydney Ross Parsons Centre of Commercial, Corporate and Taxation Law
McMeel, The Construction of Contracts, 2nd ed (2011) Oxford University Press
Steyn, "Pepper v Hart; A Re-examination" (2001) 21 Oxford Journal of Legal Studies 59Category: Principal judgment Parties: ADP proceedings (2012/362321)
Perpetual Custodians Ltd as custodian for Tamoran Pty Ltd as trustee for Michael Crivelli (First Appellant)
Australian Executor Trustees Ltd as custodian for Anthony Patterson as trustee for the Patterson Family Trust (Second Appellant)
Australian Executor Trustees Ltd (as custodian for Nandaroo Pty Ltd) (Third Appellant)
IOOF Investment Management Ltd (Respondent)
Put and Call proceedings (2012/362295)
John Murray (First Appellant)
Anthony Patterson (Second Appellant)
Nandaroo Pty Ltd (Third Appellant)
Anthony Patterson as trustee for the Patterson Family Trust (Fourth Appellant)
Perennial Investment Partners Ltd (First Respondent)
Paul Durham (Second Respondent)
Stephen Bruce (Third Respondent)
PSD Nominees Pty Ltd as trustee for the Durham Family Trust (Fourth Respondent)
Billet Place Pty Ltd as trustee for the Stephen Bruce Family Trust (Fifth Respondent)
Perennial Value Management Ltd (Sixth Respondent)Representation - Counsel: Counsel:
I Jackman SC; R Scruby; B Le Plastrier (Appellants in both proceedings)
P Jopling QC; P Liondas; L Livingston (Respondents in both proceedings)- Solicitors: Solicitors:
ADP proceedings
Atanaskovic Hartnell (Appellants)
King & Wood Mallesons (Respondents)
Put and Call proceedings
Atanaskovic Hartnell (Appellants)
King & Wood Mallesons (First Respondent)
Holman Webb Lawyers (Second, Third, Fourth and Fifth Respondents)
Henry Davis York (Sixth Respondent)File Number(s): 2012/362321; 2012/362295 Decision Under Appeal - Court / Tribunal: Supreme Court - Before: Stevenson J - Date of Decision: 05 November 2012 - Citation: Perpetual Custodians Ltd as custodian for Tamoran Pty Ltd as trustee for Michael Crivelli v IOOF Management Ltd; John Murray v Perennial Investment Partners Ltd [2012] NSWSC 1318 - Court File Number(s): 2012/68986; 2012/113927
HEADNOTE
[This headnote is not to be read as part of the judgment]
In 2006, a subsidiary of IOOF purchased shares from the appellants in the first appeal, on terms that some of the consideration would be deferred. Pursuant to that Share Sale Agreement, the appellants were entitled to an "Accelerated Deferred Payment" if there were a "Change in Control" in IOOF. At the same time, a Shareholders' Agreement to which the appellants in the second appeal were party was varied so that it could be terminated and certain put and call options exercised if there were a "Change in Control". In both contracts, "Change in Control" was defined to include "in relation to the shareholding of IOOF where a person and that person's Associates together become entitled to more than 40% of the voting shares in IOOF ...". "Associate" was defined by reference to the Corporations Act 2001 (Cth). The contractual definition separately addressed change in the board of IOOF.
In 2008, IOOF and AWM announced that they had entered into an Implementation Deed pursuant to which they would merge, through a scheme of arrangement between AWM and its members. Pursuant to the Scheme, if approved, AWM would be authorised to transfer all of its members' shares to IOOF in consideration for their receiving IOOF shares. AWM would become a wholly owned subsidiary of IOOF, and, because the market capitalisation of AWM was greater than that of IOOF, AWM's members would dominate IOOF's register.
The boards of IOOF and AWM unanimously supported the Scheme. So did an independent expert. There was no evidence of any communications between AWM and its members save for the Scheme Booklet. At a meeting of AWM members on 22 April 2009, 99.7% of votes cast were in favour of the Scheme, amounting to around 68% of AWM's shares. When the Supreme Court of Victoria approved the Scheme and the orders were lodged with ASIC, the members who voted in favour of the Scheme (Voting Members) became entitled, on 30 April 2009, to be issued with approximately 48% of the voting shares in IOOF. They were entitled to trade those shares on a deferred settlement basis from 1 May 2009, and on 12 May 2009 they were issued with those shares. As well, AWM already owned some 2.14% of the shares in IOOF.
The appellants claimed that there had been a "Change in Control". In general terms, they submitted that in the period from around the time of the vote on 22 April 2009 until the issue of shares on 12 May 2009, AWM and the Voting Members were "Associates", who had together become entitled to more than 40% of the voting shares in IOOF. The appellants submitted that AWM and the Voting Members were "Associates" in three ways: that the Scheme was a "relevant agreement" between AWM and Voting Members for the purpose of controlling or influencing the composition of IOOF's board or the conduct of IOOF's affairs; that AWM and the Voting Members were acting in concert, and that AWM and the Voting Members were, or were proposing to become, associated, whether formally or informally in any other way.
The trial judge found that the Scheme was a "relevant agreement" between AWM and the Voting Members, but that AWM and the Voting Members were not "Associates" in any of the three ways for which the appellants contended.
Held (by the Court), dismissing the appeals:
1. On the assumption that the Scheme was a "relevant agreement", it was not a relevant agreement for the purpose of controlling or influencing the conduct of IOOF's affairs. Irrespective of whether the "purpose" was that of the Scheme or of AWM and the Voting Members, the purpose was confined to conferring authority upon AWM to transfer members' shares to IOOF in consideration of IOOF shares: [90]-[102].
ACCC v Universal Music Australia Pty Ltd [2001] FCA 1800; (2001) 115 FCR 442; Hayes v Willoughby [2013] UKSC 17; [2013] 1 WLR 935; News Ltd v South Sydney District Rugby League Football Club [2003] HCA 45; (2003) 215 CLR 563, followed.
Re National Foods (No 1) [2005] ATP 8; (2005) 54 ACSR 80, disapproved.2. Although the definition in the Corporations Act of "associate" extended to relevant agreements for the purpose of controlling or influencing the composition of IOOF's board, that limb of the definition was displaced by the specific provision in the contractual definition of "Change in Control" relating to change in the IOOF board: [78]-[89].
Chapmans Ltd v Australian Stock Exchange Ltd [1996] FCA 474; (1996) 67 FCR 402; Cranbrook School v Woollahra Municipal Council [2006] NSWCA 155; (2006) 66 NSWLR 379; Melrose Farm Pty Ltd v Milward [2008] WASCA 175; (2008) 175 IR 455, applied.
3. It may be doubted whether the Scheme was a "relevant agreement", because its binding force did not come from the agreement of the parties, nor was there a meeting of minds so as to constitute an "arrangement or understanding": [65]-[77].
Re HIH Casualty and General InsuranceLtd [2005] NSWSC 240; (2005) 53 ACSR 12, approved.
ACCC v Channel Seven Brisbane Pty Ltd [2009] HCA 19; (2009) 239 CLR 305; ACCC v CC (NSW) Pty Ltd [1999] FCA 954; (1999) 92 FCR 375; McHugh v Australian Jockey Club Ltd (No 13) [2012] FCA 1441, followed.
In re Hostworks Group Ltd [2008] FCA 64; (2008) 26 ACLC 137, distinguished.4. AWM and the Voting Members were not shown to be acting in concert: [103]-[115].
IPT Systems Ltd v MTIC Corporate Pty Ltd [2000] WASC 316; (2000) 36 ACSR 454; Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd [2010] NSWSC 233; (2010) 77 ACSR 410; Australasian Meat Industry Employees Union v Meat and Allied Trades Federation of Australia [1991] FCA 672; (1991) 32 FCR 318, applied.
5. The "other" association limb in s 15(1)(c) of the Corporations Act did not extend the class of persons who were "Associates" for the purposes of the contractual definition: [117]-[122].
6. It may be doubted whether AWM and the Voting Members "together became entitled" to IOOF shares: [123]-[130].
Fardell v Coates Hire Operations Pty Ltd [2010] NSWSC 346; (2010) 201 IR 64, considered.
Galaxy Communications Pty Ltd v Paramount Films of Australia Inc (Court of Appeal, 27 March 1998, unreported), applied.7. Discussion of the nature of members' schemes of arrangement: [44]-[53].
JUDGMENT
McColl JA: I agree with Leeming JA's reasons and the orders his Honour proposes.
Gleeson JA: I agree with the reasons of Leeming JA and the orders his Honour proposes.
Leeming JA:
Overview
The single issue in the these two appeals, which were heard together, is whether on uncontested facts what was described to the market as a "merger", and what was referred to informally by the primary judge as a "reverse takeover", but was in fact an acquisition of one listed company by another using a scheme of arrangement, amounted to a "Change in Control" in the acquirer within the defined meaning of that term in two pre-existing commercial contracts.
The scheme was typical of what is often referred to as a transfer scheme: it was an "arrangement" between a target company and its members, pursuant to which authority was conferred on the target to transfer all of its members' shares to the acquirer, in exchange for its former members receiving shares in the acquirer. A resolution in its favour was passed by the requisite statutory majorities of the target's members, and the scheme was approved by the court. The target was worth more than the acquirer, and so the target's shareholders came to dominate the bidder's share register. Those members who voted in favour are referred to as "Voting Members"; they owned some 68% of the target's shares, and were issued with some 48% of the acquirer's shares when the target became a wholly owned subsidiary of the acquirer. The target itself owned some 2% of the acquirer's shares before the scheme was effected.
There was a "Change in Control" within the meaning of the contracts if a person and its "Associates" together became entitled to more than 40% of the voting shares in the acquirer (also known as the bidder). Whether or not the "Change in Control" provisions were triggered turned on whether the target and the Voting Members had "together become entitled" to shares in the bidder (terms which were not defined), and whether the target and its Voting Members were "Associates" (a term which was defined by reference to the Corporations Act 2001 (Cth)). It was said that no later than the approval of the scheme, the Voting Members became entitled to shares in the bidder, because although shares had not been issued, they had the benefit of the bidder's promise to issue those shares. The submission that they were "Associates" of the target was put in three ways, reflecting different limbs of the statutory definition:
(a) there was a relevant agreement between the target and Voting Members for the purpose of controlling or influencing the composition of the bidder's board or the conduct of the bidder's affairs;
(b) the target and the Voting Members were acting in concert, and
(c) the target and the Voting Members were, or were proposing to become, associated, whether formally or informally in any other way.In general terms, it was said that the association commenced at around the time the target and its directors recommended that members vote in favour of the scheme, and ceased when the scheme was implemented and members' shares in the target were transferred with the target becoming a wholly owned subsidiary of the bidder.
The primary judge upheld the submission as to "together become entitled", but rejected each of the three ways in which it was put that the target and its Voting Members were "Associates". I respectfully agree with each of his Honour's conclusions on "Associates". Accordingly, in my opinion the appeals should be dismissed.
Further, I incline to the view that the Voting Members had not "together become entitled" to the shares at the relevant time, but for reasons which differ from those at the forefront of the arguments at trial and on appeal. Because of the course the argument took and because it is not necessary to do so, I do not rely on this issue to resolve the appeals.
Factual background - Parties and the ADP Proceeding
IOOF Investment Management Ltd (IOOF Investment) is a wholly owned subsidiary of the listed company IOOF Holdings Ltd (IOOF). As at 5 October 2006 IOOF Investment owned 78.15% of the shares in Perennial Investment Partners Limited (PIPL). The minority shareholding of PIPL was held by entities representing its key executives: Mr Michael Crivelli, Mr Kerry Series, Mr Anthony Patterson and Mr John Murray. By a Share Sale and Purchase Agreement dated 5 October 2006 (Share Sale Agreement), IOOF Investment agreed to purchase the executives' minority interest in PIPL. The consideration comprised an up front payment of some $67.9 million and "Deferred Consideration". The latter was either the "Deferred Payment" or the "Accelerated Deferred Payment", amounts which were calculated by reference to PIPL's actual or projected net profit after tax (NPAT) for the financial year 30 June 2009. In certain circumstances, which lie at the heart of these appeals, there was an entitlement to the Accelerated Deferred Payment; otherwise the Deferred Payment was to be a proportion of the actual, audited NPAT for that financial year. To be precise, it was 20.951% of the difference between (25 x NPAT) and $320 million. The consequence was that if NPAT was less than $12.8 million, the Deferred Payment was zero. Mr Jackman SC, who appeared with Messrs Scruby and Le Plastrier for the appellants, told the Court without objection from Mr Jopling SC, who appeared with Messrs Liondas and Livingston for the respondents, that the Deferred Payment was in fact zero.
However, clause 7.15 of the Share Sale Agreement provided that:
"If at any time prior to 30 June 2009 any of the following events (Trigger Event) occurs:
...7.15.3 a Change in Control occurs,
then:
...7.15.6 in the case of the Trigger Event in clause 7.15.3 occurring, each Seller,
shall have the option, exercisable in its absolute discretion, to elect, within 30 day of the Trigger Event occurring, to be paid the Accelerated Deferred Payment in place of the Deferred Payment."
The other "Trigger Events" related to the removal of any of the executives from their roles in PIPL.
"Change in Control" was defined in the Share Sale Agreement to mean:
"(a) in relation to the shareholding of IOOF where a person and that person's Associates together become entitled to more than 40% of the voting shares in IOOF or its holding company, if any;
(b) in relation to the board of directors of IOOF, where there is a change to the majority of the IOOF board of directors as a result of a resolution passed at a meeting of members of IOOF where the resolution to change the directors has been put to members without the support of both the IOOF managing director and chairman of the IOOF board; or
(c) in relation to the shareholding of [IOOF Investment], where a person other than IOOF or its Associates become entitled to more than 40% of the voting shares in that company; or
(d) in relation to the shareholding of [PIPL], where a person other than IOOF becomes entitled, directly or indirectly, to more than 40% of the voting shares in that company."
The term "Associates" was defined to have "the same meaning as in the Corporations Act 2001 (Cth)".
In contrast with the Deferred Payment, which was based on actual NPAT, the Accelerated Deferred Payment was based upon a projected NPAT for the year ended 30 June 2009 of some $19.547 million. That reflected a figure in a budget prepared at the time the Share Sale Agreement was executed. Entities associated with Messrs Crivelli, Patterson and Murray (Executives) (that associated with Mr Series took no part in the litigation) claimed that the "merger" of IOOF and Australian Wealth Management (AWM), described further below, constituted a Change of Control in IOOF. If that be so, it was common ground that they would together be entitled to payments in excess of $25 million constituting the Accelerated Deferred Payment. That proceeding is conveniently called the ADP proceeding.
IOOF's entry into the Share Sale Agreement was approved at its 2006 Annual General Meeting (shareholder approval was required pursuant to ASX listing rules and s 200B of the Corporations Act). The explanatory memorandum for that meeting stated:
"The [Executives] negotiated this clause to ensure their rights to receive the entire Purchase Price, including the Deferred Payment, were protected in the event of a termination of their role or Change in Control of IOOF."
A report from an independent expert (KPMG) which accompanied the explanatory memorandum considered that the proposed transaction was fair and reasonable. It stated that the Deferred Payment was contingent upon PIPL achieving significant growth in future earnings (of approximately 13% for the two years from 2007) in order "to promote an alignment of interests and create a significant incentive for the [Executives] to maximise future earnings". It said of the accelerated payment mechanism:
"In the event of a change of control in IOOF in the future, the [Executives] have a right to trigger an acceleration of the deferred payment based on budgeted 2008/09 financial performance. This type of arrangement is, in our experience, common in transactions of this nature."
The Put and Call proceeding
The second appeal also arose out of the acquisition by IOOF of PIPL. A Deed of Amendment entered into at the time of that transaction amended a Shareholders' Agreement dated 23 February 2004 between PIPL, Perennial Value Management Ltd (PVM) and certain executives of PVM and entities associated with them (Shareholders' Agreement) by inserting a new clause 8.7 which would operate if there was a "Change in Control". The definition of Change in Control was relevantly identical to that in the Share Sale Agreement. The essence of the new clause was that if a Change in Control occurred, then the Shareholders' Agreement could be terminated and a mechanism was set out (sometimes known as a "roulette clause" (see ACP Publishing Pty Ltd v Commissioner of Taxation [2005] FCAFC 57; (2005) 142 FCR 533 at [71])) by which the PVM executives and PIPL would determine a price at which the PVM executives' shares would be sold. As Mr Jackman put it:
"It's a clause that is designed to achieve a sale of shares at a price which accords roughly with what the parties regard as a fair market price, but without going through a valuation or an expert determination procedure to work out what the fair market price is."
It was described in the scheme booklet as follows:
"In connection with the PIPL acquisition, the shareholders agreements for the partly owned investment management boutiques were amended to include call options which, in general terms, entitle the relevant investment managers to purchase PIPL's shares in the investment management boutiques upon a 'Change in Control'. Upon a 'Change in Control', the call options are exercisable by the investment managers at a price determined by PIPL in its sole discretion. In the event that the investment managers of an investment management boutique do not elect to acquire all of PIPL's share in that boutique through the exercise of their call options, the investment managers must sell to PIPL (and PIPL must buy) all of their shares in that investment management boutique at the same exercise price first determined by PIPL for the call options."
Not only was there an overlap of issues between the ADP proceeding and the Put and Call proceeding, there was also an overlap of parties. Two of the PVM executives in the Put and Call proceeding were Executives in the ADP proceeding, although there were other PVM executives who were parties to the Put and Call proceeding but not party to the ADP proceeding. Further, although it was and is common ground that the plaintiffs in the Put and Call proceeding would fail unless there was a "Change in Control", other defences were raised in the Put and Call proceedings. Accordingly, issues relating to the "Change in Control" in the Put and Call proceeding were heard and determined separately, and concurrently with the ADP proceeding, pursuant to orders made by McDougall J on 22 June 2012. At trial and on appeal, the plaintiffs and defendants were represented by the same counsel, and the parties' submissions in the Put and Call appeal adopted those in the ADP appeal. That was a sensible and understandable course to adopt; the relevant text of the "Change in Control" definition was identical in both contracts, and the commercial context very similar.
The "merger" of IOOF and AWM
AWM was also, prior to the "merger", a public company listed on the Australian Stock Exchange. Its market capitalisation had been throughout 2008 in the order of two to three times that of IOOF, and it had almost 10 times the number of shares on issue. On 24 November 2008, IOOF and AWM announced to the market their intention to merge to create "a leading financial services company". The announcement contained the following "merger highlights":
"· [IOOF] will issue [AWM] shareholders with 1 IOOF share for every 3.73 AWM shares
...
· Expected to generate post tax cost synergies of $20 million per annum in the first 12 months post merger
...
· Unanimously recommended by the Boards of IOOF and AWM· Merged group to be owned approximately 30% by IOOF shareholders and 70% by AWM shareholders
· IOOF Chairman, Ian Blair will be Chairman of the merged group. AWM Managing Director, Chris Kelaher will be Managing Director and Chief Executive Officer of the merged group."
The announcements stated that IOOF and AWM had signed an Implementation Deed to "effect" the "merger", which was to be "implemented" by a scheme of arangement between AWM and its members. The essence of the proposal was that IOOF would acquire all the shares in AWM, and AWM shareholders would receive one IOOF share for every 3.73 AWM shares they held. AWM would become a wholly owned subsidiary of IOOF, and the former members of AWM would hold approximately 70% of the voting shares in IOOF.
The announcement to the market reflected the terms of a deed between AWM and IOOF dated 24 November 2008 (Implementation Deed). In it, AWM was described as the "Target"; IOOF was the "Bidder". The "Scheme" was defined by reference to the scheme intended to be approved by the Supreme Court of Victoria pursuant to s 411, Corporations Act, a draft of which was contained in a schedule and which was described in cl 2.2 as follows:
"Outline of the scheme
Subject to the terms and conditions of this document, on the Implementation Date, all of the Target Shares held by Scheme Participants will be transferred to Bidder and the Scheme Participants will be entitled to receive the Scheme Consideration."
"Scheme Participants" were each shareholder of AWM as at 5.00pm on the Record Date. "Scheme Consideration" was defined to mean one share in IOOF for every 3.73 shares in AWM they had held. A series of obligations were imposed upon AWM by the Implementation Deed. They included:
(a)making an announcement that each director considered the Scheme to be in the best interests of AWM shareholders and recommended to them that the Scheme be approved;
(b)announcing that each director who held AWM shares intended to vote them in favour of the Scheme;
(c)using reasonable endeavours to procure that AWM's directors maintained that recommendation;
(d)as expeditiously as practicable, applying to the Court under s 411(1) of the Corporations Act for an order directing AWM to convene a scheme meeting;
(e)convening the scheme meeting and despatching the Scheme Booklet; and
(f)applying for Court approval, lodging the Court order, determining the Scheme Participants and their entitlements, and registering transfers of all AWM shares to IOOF on the Implementation Date.
The Implementation Deed likewise imposed obligations upon IOOF. The most important was a covenant in respect of the Scheme Consideration:
"Bidder covenants in favour of Target (in its own right and as trustee on behalf of the Scheme Participants) that in consideration of the transfer to Bidder of each Target Share held by a Scheme Participant under the terms of the Scheme, Bidder will, subject to the terms of the Scheme, issue 1 Bidder Share to each such Scheme Participant for every 3.73 Target Shares held by that Scheme Participant at the Record Date."
IOOF also promised that it would assist AWM to propose and implement the Scheme, that it would make an announcement supporting the Scheme, that it would use reasonable endeavours to procure that its directors would maintain their support for the Scheme, supply any due diligence information and information about IOOF for inclusion in the Scheme Booklet, apply for regulatory approvals, assist in the preparation of an independent expert's report, and apply for the new shares in IOOF to be approved for official quotation on ASX. IOOF was subject to a particular obligation to reconstitute its board which was of some significance to these appeals, both as to its content and its timing:
"[A]s soon as practical after the Second Court Date and after the Scheme Consideration has been provided to Scheme Participants, reconstitute the board of directors of Bidder so that it consists of (i) 4 directors from the Bidder Board (as nomiated by Bidder) including Mr Ian Blair as the Chairman of the Bidder Board; and (ii) 3 directors from the Target Board (as nominated by Target) including Mr Chris Kelaher as the Managing Director and Chief Executive Officer".
Both IOOF and AWM promised to use reasonable endeavours to give effect to the Scheme.
The "Scheme" itself was a much shorter document. Under the heading "What happens if Scheme becomes Effective" it stated that:
"If the Scheme becomes Effective then:
(a) in consideration of the transfer of each Scheme Share held by Scheme Participants, Bidder will pay the Scheme Consideration to each Scheme Participant in accordance with the terms of this Scheme;
(b) all the Scheme Shares will be transferred to Bidder and Target will become a wholly owned subsidiary of Bidder; and
(c) Target will enter Bidder's name in the Target Register as the holder of all Scheme Shares."
The essential elements of the "arrangement" effected by the Scheme between AWM and its members (including obligations imposed on IOOF which, strictly speaking, were extraneous to it) were set out as follows. The key obligation imposed on members was in clause 8.2:
"8.2 Scheme Participants
Each Scheme Participant:
(a) agrees to the transfer of their Target Shares, together with all rights and entitlements attaching to those Shares, to Bidder, in accordance with the Scheme;
(b) acknowledges that the Scheme binds Target and all Bidder Shareholders from time to time, including those who do not attend the Scheme Meeting, do not vote at that meeting or vote against the Scheme;
(c) consents to Target doing all things and executing all deeds, instruments, transfers or other documents as may be necessary, expedient or incidental to Implementation and to give full effect to the Scheme and the transactions contemplated by it and Target, as agent of each Scheme Participant, may sub-delegate its functions under this clause 8.2(c) to any of its directors and officers, jointly and severally ..."
The most important obligations on AWM and IOOF were as follows.
"4.3 Implementation steps
On or before 12.00pm (Melbourne time) on the Implementation Date:
(a) Bidder will provide evidence to Target that the Scheme Consideration is or will be available for distribution to Scheme Participants in accordance with the Scheme;
(b) all the Scheme Shares, together with all rights and entitlements attaching to those shares as at the Implementation Date, will be transferred to Bidder without the need for any further act by any Scheme Participant (other than acts performed by Target or its directors and officers as attorney and agent for the Scheme Participants under clause 8.2); and
(c) Target will deliver to Bidder a duly completed, executed and if applicable, stamped share transfer form or forms to transfer all of the Scheme Shares to Bidder for registration.
4.4 Bidder to execute transfer forms
Bidder will immediately execute the share transfer forms referred to in clause 4.3(c) as transferred and deliver the share transfer forms to Target for registration.
4.5 Target to enter Bidder's details in Target Register
Target will, immediately following receipt of the transfer form in respect of the Scheme Shares and on the Implementation Date, subject to Bidder complying with its obligations under clause 3, enter the name and address of Bidder in the Target Register in respect of the Scheme Shares.
4.6 Bidder to provide Scheme Consideration
In consideration for the transfer of the Scheme Shares to it, Bidder will provide the Scheme Consideration in accordance with clause 5.1 to each Scheme Participant in respect of each Target Share registered in the name of the Scheme Participant in the Target Register at the Record Date.
...
8.1 Target giving effect to the Scheme
Target must do anything (including execute any document), and must ensure that its employees and agents do anything (including execute any document), that is necessary, expedient or incidental to give full effect to the Scheme and the transactions contemplated by it."
In short, the principal obligation upon Scheme Participants (ie, members of AWM) was to appoint AWM as their agent for the transfer of their shares to IOOF for the Scheme Consideration. They were also to appoint IOOF as their agent if necessary to execute any application form required for the issue of the new shares to them, they agreed to become members of IOOF (as required by s 231 of the Corporations Act), and there was a deemed conversion of any instruction they had given in respect of AWM shares (for example, as to the payment of dividends) to an instruction in respect of the IOOF shares they were to be issued. They also warranted that all their shares were free from all mortgages, charges, liens, encumbrances, pledges, security interests and interests of third parties of any kind, the legal effect of which may be passed over for the purposes of these appeals.
As is customary, IOOF executed a Deed Poll, which permitted AWM shareholders directly to enforce its promises, not least, to provide the Scheme Consideration in the form of one IOOF share for every 3.73 AWF shares they had held. Under the Scheme (clause 6.8) each AWM shareholder appointed AWM as its agent and attorney to enforce the Deed Poll against IOOF and AWM undertook in favour of each AWM shareholder to do so.
Hence the Scheme itself was in essence merely a mechanism by which AWM could transfer all of its shares to IOOF. The consideration for that transfer could not be provided within the scheme itself (since it was to be provided by an outsider, IOOF). All of the other steps to be taken by AWM and IOOF to implement the "merger" were governed by the Implementation Deed between those companies. In addition, members of AWM obtained the benefit of being able to sue IOOF pursuant to its obligations under the Deed Poll.
The Scheme Booklet anticipated the issue that arose in both the ADP and the Put and Call proceedings. It stated that:
"The Merger will not result in a 'Change of Control' for the following reasons:
the AWM Shares are widely held. As at 2 March 2009, no shareholder held more than 17.06% of the AWM shares on issue;
based on the Share Register as at 2 March 2009, the issue of New IOOF Shares to Scheme Participants will not result in any one AWM Shareholder acquiring more than 40% of IOOF Shares and IOOF and AWM are not aware of any association between IOOF Shareholders and/or AWM Shareholders that could result in any one AWM Shareholder or IOOF Shareholder and its associates acquiring more than 40% of IOOF Shares in connection with the Scheme;
....
a majority of the existing members of the IOOF Board will remain as directors of IOOF following Implementation of the Scheme and, in any event, the proposed changes to the IOOF Board are supported by IOOF's Managing Director and Chairman."
Mr Jackman rightly said that it seemed that attention had not been given to the precise arguments which he was propounding in support of there having been a "Change in Control".
Implementation of the Scheme
The steps announced to the market in November 2008 proceeded uneventfully, so far as is disclosed by the evidence. On 6 March 2009 the Supreme Court of Victoria authorised the convening of a s 411(1) meeting of the members of AWM. At that meeting, held on 22 April 2009, the requisite statutory majorities of the members of AWM passed a resolution in favour of the Scheme. On 29 April 2009 the Supreme Court approved the Scheme. That day, IOOF and AWM announced that deferred settlement trading of AWM shareholders' shares in IOOF would commence on 1 May 2009. On 30 April 2009 the Court's orders were lodged with ASIC and the Scheme became effective: s 411(10). On the same day, the IOOF board was reconstituted - 11 days earlier than had been provided in the Implementation Deed. On 1 May 2009, AWM shareholders became entitled to trade shares yet to be issued in IOOF, on a deferred settlement basis. Finally, on 12 May 2009, the "Implementation Date" for the purpose of the scheme, shares in IOOF were issued to the former shareholders of AWM.
At the meeting of AWM shareholders on 22 April, some 99.7% of votes cast supported the resolution in favour of the Scheme. That corresponded to some 94.09% of AWM shareholders present and voting (either in person or by proxy) or in the order of 68% of the members of the company (there were some 418 million shares voted of the almost 600 million shares on issue as at 10 February 2009 disclosed by the expert's report). It was common ground - and essential to all of the arguments on appeal - that the AWM shareholders who voted in favour of the Scheme (referred to by the parties and to the primary judge as Voting Members) became entitled to approximately 48% of the voting shares in IOOF. Overall, former AWM members became entitled to approximately 70% of the voting shares in IOOF.
Importantly for the arguments advanced at first instance and on appeal, prior to the implementation of the Scheme, AWM itself owned some 2.14% of the shares in IOOF. The result of the scheme was that its shareholding in IOOF was reduced to 0.64%. As soon as IOOF acquired all of AWM's shares, AWM's shareholding in IOOF could not be voted: Corporations Act, s 259D(3), and IOOF became obliged to take steps so that it would cease to hold those shares within 12 months: s 259D(1).
The Scheme became effective upon approval by the Court at the second hearing and lodgement of the orders with ASIC. On 13 May 2009, the Executives lodged notices purporting to elect to receive the Accelerated Deferred Payment, and thereafter steps were taken in respect of the put and call options in the Shareholders' Agreement. The defendants denied the validity of the notices and those steps.
Reasoning of the primary judge
The primary judge noted (at [41]) that the principles of construction applicable to the Share Sale Agreement were not in dispute before him, and had been summarised in Cordon Investments Pty Ltd v Lesdor Properties Pty Ltd [2012] NSWCA 184 at [52]:
"A contract is to be construed by reference to what a reasonable person would understand by the language in which the parties have expressed their agreement having regard to the context in which the words appear and the purpose and object of the transaction: Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; (2004) 218 CLR 451 at [22]; Toll (FGCT) Pty Ltd v Alphafarm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165 at [40]; International Air Transport Association v Ansett Australia Holdings Ltd [2008] HCA 3; (2008) 234 CLR 151 at [53]. At least in the case of ambiguity, resort can be had to the surrounding circumstances known to the parties in interpreting the particular provision: Codelfa Construction Pty Limited v State Rail Authority of NSW [1982] HCA 24; (1982) 149 CLR 337 at 352; Western Export Services Inc v Jireh International Pty Ltd [2011] HCA 45; (2011) 282 ALR 604."
Notwithstanding those principles, on the view that his Honour took he found it largely unnecessary to do more than refer to the language in the Share Sale Agreement. His Honour held that AWM and the Voting Members "together became entitled" to more than 40% of the voting shares in IOOF no later than 1 May 2009 because on that date they lost their right to trade AWM shares, but obtained an equivalent right to trade, on a deferred settlement basis, the IOOF shares which they were to receive on 12 May 2009 (at [57]). His Honour accepted (at [50]) the Executives' submission that:
"the right to trade IOOF shares on a deferred basis necessarily bespoke an 'entitlement' to IOOF shares for the purposes of the definition of Change in Control."
His Honour applied what had been noted by White J in Fardell v Coates Hire Operations Pty Ltd [2010] NSWSC 346; (2010) 201 IR 64 at [69]-[70] to the effect that "entitled" did not necessarily require a change in legal title. That conclusion is challenged by IOOF Investment's notice of contention; it says that voting members were not entitled to voting shares in IOOF until shares had been issued and allotted to them on 12 May 2009, at which time AWM had ceased to be entitled to any voting shares in IOOF.
However, his Honour rejected the Executives' submission that AWM and Voting Members were "Associates". Those submissions were substantially repeated on appeal, and they are addressed in more detail below.
The essence of a members' scheme
The essence of a members' scheme is that there is proposed a compromise or arrangement between a company and its members (or a class of its members). At the first (s 411(1)) hearing, the Court examines whether what is proposed falls within the scope of a s 411 "arrangement" or "compromise". The Court will review the way in which that compromise or arrangement is described to members, and the way voting is to occur. In particular, the Court is empowered to (and regularly will) approve the terms of the scheme, the scheme booklet, any other communications to members, and the class definition, applying principles stated by Emmett J in Re Central Pacific Minerals NL [2002] FCA 239 at [8] - [11], approved in Re CSR Ltd [2010] FCAFC 34; (2010) 183 FCR 358 at [12] (cf Re IXLA [2007] VSC 573 at [38]). If the requisite statutory majorities of members supports a resolution in favour of the arrangement or compromise, then the Court may in its discretion approve it at the second (s 411(4)) hearing, in which case it will bind all of the company's members (or all of the members in the class), even those voting against it or those abstaining from voting or those who were unaware of it.
Schemes of arrangement have been used in Australia to effect change in control transactions for some forty years: see Re Castlereagh Securities Ltd [1973] 1 NSWLR 624 and Damian and Rich, Schemes, Takeovers and Himalayan Peaks, 3rd ed (2013) The University of Sydney Ross Parsons Centre of Commercial, Corporate and Taxation Law, p 545. The "merger" announced to the market in November 2008 could fairly be described as a "change in control" transaction. Had it been effected differently (for example, by an on-market bid by AWM) there is no question but that there would have been a "Change in Control". "It cannot be doubted that a Part 5.1 arrangement can achieve the same outcome as offers to buy made to all shareholders. That has been clear at least since Re National Bank Ltd [1966] 1 WLR 819": Lionsgate Australia Pty Ltd v Macquarie Private Portfolio Management Ltd [2007] NSWSC 371; (2007) 62 ACSR 522 at [38] (Barrett J). No differently from that case, nothing in these appeals turns on those commercial or economic considerations, and quite properly it was no part of Mr Jackman's submissions that the contractual terms were engaged by reference to some high level description of the transaction.
It is convenient to note four basal considerations immediately. First, persons other than the company and its members are not bound by a members' scheme of arrangement, even though the goal of the larger transaction is to achieve a compulsory acquisition of members' shares for which the whole of the consideration comes from a third party "outsider". Hence the ongoing attention given to binding outsiders by McLelland J in cases beginning with Re Glendale Land Development Ltd (1982) 7 ACLR 171 (as to which see Re Westfield Holdings Ltd [2004] NSWSC 458; (2004) 49 ACSR 734 at [13]-[15] (Barrett J) and City of Swan v Lehman Brothers Australia Ltd [2009] FCAFC 130; (2009) 179 FCR 243 at [99]-[105] (Rares J)) and the modern practice of the acquirer executing a deed poll at the time of the first court hearing in addition to the implementation agreement so as to give not only the target company but also its members contractual rights against it (see Toal v Aquarius Platinum Ltd [2004] FCA 550 at [49]-[50] (French J)). In short, it is essential to keep steadily in mind that the commercial objective of compulsory acquisition of the target's shares in exchange for the acquirer's shares is much broader in scope than what is capable of being effected by s 411 scheme of arrangement between a target and its members. The scheme merely confers authority to transfer the shares of every member.
Secondly, there is no "agreement" in the ordinary sense between company and members. A members' scheme of arrangement in no sense gives rise to an agreement between members amongst themselves. Consistently with that, the Executives' submissions were directed to a relevant agreement between company and the members (either individually or collectively). Even so, as Barrett J unambiguously said in Re HIH Casualty and General Insurance Ltd [2005] NSWSC 240; (2005) 53 ACSR 12 at [131]:
"A s 411 arrangement does not have contractual force and does not amount to or embody an 'agreement'."
Isaacs J had referred in Isles v The Daily Mail Newspaper Ltd (1912) 14 CLR 193 at 205 to the "compulsory contractual relation" binding the minority when a scheme is approved. That language merely emphasises the fact that a scheme of arrangement takes effect by virtue of statute or court order, as opposed to the consent of the parties (I pass over the controversy as to whether the scheme takes force by virtue of the statute or the court's order or both of them: see Lord Hoffmann's advice in Kempe v Ambassador Insurance Co [1998] 1 WLR 271 at 275-276).
Thirdly, it has long been established that curial scrutiny of the communications between company and members is to "ensure that the explanatory statement presents a fair picture of the proposal and will allow members a fair consideration": Re Gas2Grid Ltd [2010] FCA 10 at [5] (Stone J); see also Re Castlereagh Securities Ltd [1973] 1 NSWLR 624 at 636. As Barrett J said in Re Hills Motorway [2002] NSWSC 897; (2002) 43 ACSR 101 at [15]:
"[I]t is a fundamental premise of Pt 5.1 that the documents which go to members in accordance with the orders of the court ... should be the only vehicle by which there is communication of the substantive message relevant to members' decision making. Registration of the explanatory statement by ASIC and its examination by the court are steps taken with a view to validating its integrity as a suitable communication vehicle."
Thus material should not be sent to members which has not been disclosed to the Court: Re Coates Hire (No 2) [2007] FCA 2105 at [6]-[7] (Emmett J); Centro Retail Ltd and Centro MCS Manager Ltd in its capacity as Responsible Entity of Centro Retail Trust [2011] NSWSC 1321 at [10]-[11] (Barrett J).
It is not necessary to refer to the difficulties which are apt to be caused when the company makes other communications to its members in connection with a scheme (such as unsolicited telephone calls), for the trial proceeded on the basis that the only communication from AWM to its members was the Scheme Booklet in the form approved by the Court.
Fourthly, the legislation has long contemplated meetings of classes of members. The point of requiring members to vote in separate classes is to ensure that members can consult so as to determine their common interest. That is what drives class definition. Where the interests of members are so different as to make it impossible for them to consult with other shareholders, separate classes may be required: Sovereign Life Assurance Co v Dodd [1892] 2 QB 573 at 583 (Bowen LJ); Re NRMA Ltd [2000] NSWSC 82; (2000) 33 ACSR 595 at [76] (Santow J); Re Cashcard Australia Ltd [2004] FCA 223; (2004) 48 ACSR 738 at [5] (Jacobson J); Re Sino Gold Mining Ltd [2009] FCA 1277; (2009) 74 ACSR 647 at [52]-[57] (Lindgren J). As Barrett J said in Re Hills Motorway at [12] after referring to the statements by Lord Esher MR and Bowen LJ in Sovereign Life Assurance:
"The test is thus not one of identical treatment. It is one of community of interest. The court must ask itself whether the rights and entitlements of the different groups, viewed in the totality of the scheme's context, are so dissimilar as to make it impossible for them to consult together with a view to their common interest. The focus is not on the fact of differentiation but on its effects. The extent and nature of the differentiation must be measured in terms of the effect on the ability to consult together in a common interest or, in other words, the ability to come together in a single meeting and to debate the question of what is good or bad for the constituency as a whole and where the common good lies. Only if the differentiation destroys that ability - the word used by Bowen LJ is 'impossible' - does class distinction come to prevail."
There is to my mind a tension between those basal considerations and the conclusions for which the appellants contend. It would be odd for a scheme of arrangement, the essence of which is non-consensual, to amount to an "Association" which turns on the existence of an agreement whose purpose is to control or influence IOOF. It would also be odd for communications between a company and its members, reviewed by the Court so as to enable members to act in their own self-interest, to amount to action in concert for the purposes of "Association". And it would be equally odd in circumstances where the scheme, strictly speaking, is but a small (although essential) component of a larger consensual transaction, for there to be an "Association" in respect of the bidder's shares for a period of a few weeks between vote and implementation between the target and its members, when there is an obvious "Association" between bidder and target whereby the former will acquire the latter.
The oddity in each instance arises because of considerations of coherence within the Corporations Act. What happened in the approval process of this scheme was no different from many others: statutory majorities of members acceded to the recommendations of their directors and an independent expert which had been communicated to them in a manner regarded by ASIC and the court as fair. The Corporations Act definition of "associate" has many consequences in connection with the acquisition and exercise of shareholders' voting power. Two mentioned in argument were the prohibition on acquiring a relevant interest in issued voting shares in a listed company such that the voting power of the person and that person's associates exceeds 20% in s 606, and the obligation in s 671B to lodge substantial shareholder notices if the total votes attached to voting shares of the person and the person's associates exceed 5%. If any of the Executives' submissions on "Associate" be accepted, then they may lead to unexpected contraventions of prohibitions in the Act (for example, if the Executives' second submission were accepted, analogous reasoning might mean that if a bidder held shares in a target, the bidder might be acting in concert with the target's members merely by recommending that they resolve in favour of a scheme, thereby coming to have a substantial holding in the target's shares prior to the scheme becoming effective). It would be odd for a process expressly authorised by the legislation to contravene other provisions within it. Barrett J referred in Lionsgate at [29] to two examples where similar arguments had been advanced:
"The circumstances envisaged by the [bidder's] announcement are such that [the target], no doubt at the prompting of and in conjunction with [the bidder], will propose to its members what is intended to be done, but it will be for the members to say whether they will confer the power on [the target] to do what is foreshadowed. The form of words I have just employed corresponds with that used by Wells J in Re The Bank of Adelaide (1979) 22 SASR 481 at p.509 to describe a similar process embarked upon by the Bank of Adelaide qua its members in relation to a scheme of arrangement involving cancellation of all existing shares by reduction of capital, issue of equivalent new shares to the ANZ Bank and provision by ANZ of consideration to the former holders of the cancelled shares. It was held by a majority of the Full Court of the Supreme Court of South Australia in that case that such a scheme of arrangement did not entail either an offer to acquire shares or an invitation to offer to dispose of shares caught by Part VIB of the Companies Act 1962 (SA). Reference may also be made to the following observation of Jenkinson J in the analogous case of Re Wallace Dairy Co Pty Ltd [1980] VicRp 55; (1980) 5 ACLR 139 (at p 143):
'... to invite the holder of shares to cast a vote at a meeting of the company for a resolution that those shares and other shares of the same class be cancelled is not in my opinion to invite the holder "to offer to dispose of shares".'"
Nevertheless, these appeals turn on the language of the parties' private agreements, and those broader considerations were not fully explored at the hearing. It is ultimately the contractual language which is determinative, and that language picks up the definition of "Associate" in the Corporations Act, to which it is necessary to turn.
The statutory definition of "Associate"
The relevant provisions in the legislation were as follows (emphasis has been added to the words of greatest significance to the Executives' arguments):
"12(1) Subject to subsection 16(1), but despite anything else in this Part, this section applies for the purposes of interpreting a reference to an associate (the associate reference) in relation to a designated body, if:
(a) the reference occurs in a provision of Chapter 6, 6A, 6B or 6C; or
(b) the reference occurs in a provision outside those Chapters that relates to any of the following matters:
(i) the extent, or restriction, of a power to exercise, or to control the exercise of, the votes attached to voting shares in the designated body;
(ii) the primary person's voting power in the designated body;
(iii) relevant interests in securities in the designated body;
(iv) a substantial holding in the designated body;
(v) a takeover bid for securities in the designated body;
(vi) the compulsory acquisition, or compulsory buy-out, of securities in the designated body.(2) For the purposes of the application of the associate reference in relation to the designated body, a person (the second person) is an associate of the primary person if, and only if, one or more of the following paragraphs applies:
...
(b) the second person is a person with whom the primary person has, or proposes to enter into, a relevant agreement for the purpose of controlling or influencing the composition of the designated body's board or the conduct of the designated body's affairs; [or](c) the second person is a person with whom the primary person is acting, or proposing to act, in concert in relation to the designated body's affairs.
...
15(1) The associate reference includes a reference to:
(a) a person in concert with whom the primary person is acting, or proposes to act; and
...
(c) a person with whom the primary person is, or proposes to become, associated, whether formally or informally, in any other way;
in respect of the matter to which the associate reference relates."
"Relevant agreement" in s 12(2)(b) is defined by s 9 to mean an agreement, arrangement or understanding, whether formal or informal, or partly formal and partly informal, whether written or oral, or partly written and partly oral, and whether or not having legal or equitable force and whether or not based on legal or equitable rights.
Two threshold difficulties with the definition of "Associate" may be noticed immediately. The first is that the term "Associate" bears different meanings in the Corporations Act depending on its location and context. Where the term is found in Chapters 6, 6A, 6B or 6C, it bears the meaning in s 12. Where the term is found in Chapter 7, it mostly bears the meaning in s 13. I say "mostly" because wherever the reference to "Associate" is found in the Act, if the reference is in a provision which "relates to" any of the matters referred to in s 12(1)(b), then it bears the meaning in s 12; that is the force of the language in s 12(1) "despite anything else in this Part". In all cases, that meaning is subject to the specific exclusions in s 16, and the expanding provisions of s 15.
Which of the locationally specific meanings of "Associate" is to apply where the reference is not found in the Act at all, but instead is found in the Share Sale Agreement and the Shareholders' Agreement? Happily, each of two references to "Associates" in the definition of "Change in Control" in the Share Sale Agreement and the Shareholders' Agreement relates to persons who become entitled to more than 40% of the voting shares in IOOF or IOOF Investments. Irrespective of the legal meaning of "entitled" in this context, it is plain that the reference to "Associates" in the "Change in Control" definition "relates to" at least (i), (ii) and (iv) in the s 12(1)(b) limb of the definition. In that way, the parties and the primary judge were in my view correct to proceed on the basis that the definitions in s 12(2) as well as s 15 were imported into the Share Sale Agreement and the Shareholders' Agreement.
Secondly, these provisions are more complex than may commonly be appreciated. It may be seen that paragraphs (a), (b) and (c) in s 12(2) are expressed to be necessary and sufficient conditions for the second person being an "associate" of a primary person which is a body corporate. Although it is plain that the exclusions in s 16 subtract from those necessary and sufficient conditions (because s 12 is expressly subject to s 16), it is unclear what is the effect of s 15. Consider a second person who is not an associate by reason of s 12(2). To the extent that s 15 would treat such a person as an associate, there is a conflict: is the necessary aspect of the definition in s 12(2) (which ex hypothesi is not satisfied) to trump the inclusive limb of the definition in s 15 (which ex hypothesi is satisfied)? It will be seen that this complexity becomes acute in relation to the third way in which the Executives propound their case.
Overview of Executives' arguments
Three distinct submissions by which limbs of the definition of "Associate" applied were advanced by the Executives. In each case, the "primary person" was AWM, and the "second person" was either each Voting Member or alternatively the whole class of Voting Members (I follow the same approach adopted by the Executives, and deal with both possibilities together). It will be recalled that the three crucial dates were 22 April (the members' meeting), 30 April (when the scheme took effect following the lodgement of the Court's order) and 12 May (when new shares in IOOF were issued to AWM's former members).
The first submission turned on s 12(2)(b), and asserted that the Voting Members (either individually or collectively) were, between 30 April and 12 May, persons with whom AWM had a relevant agreement in respect of which the purpose element of that paragraph was satisfied. The Executives contended that the "purpose" in s 12(2)(b) was the objective purpose of the agreement, whilst IOOF contended that it was the subjective purpose of the parties. However, the Executives and IOOF each maintained that even if they were wrong about whether the purpose was objective or subjective, they were still right as to their principal contention that there was or was not a purpose of influencing the composition of IOOF's board or the conduct of IOOF's affairs. In this last respect, they were, in my opinion, both right; this appeal is not determined by whether "purpose" in this particular context is subjective or objective.
The second submission turned on s 12(2)(c) and s 15(1)(a), and asserted that from at least 22 April until completion of the implementation of the Scheme AWM and the Voting Members (either individually or collectively) were engaged in a "sustained concert" in relation to IOOF's affairs. It was fairly conceded that nothing turned on the minor textual differences between s 12(2)(c) and s 15(1)(a).
The third submission turned on s 15(1)(c) and was that prior to 12 May the Voting Members (either individually or collectively) were persons with whom AWM was or proposed to become associated, whether formally or informally, in any other way, if neither the first nor the second submission succeeded. At trial, the Executives accepted that this argument could not succeed if the first two failed, but it was not said on behalf of the respondents that they suffered any prejudice by its resurrection as a separate argument on appeal.
Common to all three submissions was a reliance upon the recommendations by AWM and its directors, in its announcement to the market on 24 November 2008 and in the scheme booklet, for members to pass a resolution in favour of the arrangement. The primary judge found that there was "no evidence, nor, in my opinion, inference available, that the Voting Members had any shared links, or prior dealings or prior collaborative conduct": at [81]. No attempt was made to displace that finding. Nor was it said either at trial or on appeal that there were any other acts of the company by its directors or other officers or agents seeking to garner votes at the Scheme Meeting.
Was there a "relevant agreement"?
The primary judge accepted the Executives' submission, made without opposition, that the Scheme was an arrangement, if not also an "agreement", between AWM and members, and thus a "relevant agreement" (at [70]). His Honour relied (at [69]) on a statement made by Mansfield J in In re Hostworks Group Ltd [2008] FCA 64; (2008) 26 ACLC 137 at [26]:
"Section 411 [of the Act] further requires that the Court is satisfied that the scheme can properly be described as a compromise or arrangement so as to come within its ambit. The word 'arrangement' has been held to be a word of wide import, not limited by its relationship or the expression 'compromise'. An arrangement may extend to any subject matter which is something which a company is able to agree with its members, and is likened to a contract between a company and its members."
The primary judge recorded at [71] that:
"Indeed, that proposition was not contested by IOOF, although Mr Jopling submitted that the 'relevant agreement' comprised by the Scheme ceased on 12 May 2009. That does not seem to me to be relevant to the issues that I must determine."
Thus, whether the scheme was a relevant agreement for the purposes of s 12(2)(b) was outside the scope of the appeal. I am doubtful that the Scheme was a relevant agreement.
A s 411 members' scheme is not an agreement in the sense of something whose binding force comes from the consent of the parties to it. It is basal that the force of a scheme derives from the court's order and the effect of statute. The context in which Mansfield J wrote in Hostworks was to identify the (broad) scope of the subject matter which has long been held to fall within the statutory term "arrangement" - it is the "liberal meaning" to which Lowe ACJ referred in Re International Harvester Co of Australia Pty Ltd [1953] VLR 669 at 672. There is nothing in the reasons of Mansfield J, written after an ex parte hearing, to suggest that he had in any other respect turned his mind to the juristic nature of a scheme. Certainly, there is nothing to suggest that his Honour was doubting statements such as those by Barrett J in Re HIH Casualty and General Insurance Ltd referred to in the second "basal consideration" above which deny that a scheme is contractual. I acknowledge that Mansfield J's statement has been reproduced in at least five decisions of the Federal Court, but always in the same context and always in ex parte decisions: In re Vulcan Resources Ltd [2009] FCA 1599 at [4]; In re United Minerals Corporation NL [2010] FCA 7 at [5]; In re Aldridge Uranium Ltd [2010] FCA 1263 at [24]; In re Little World Beverages Ltd [2012] FCA 1057 at [13] and In re Marengo Mining Ltd [2012] FCA 1220 at [7]. None of this is intended to be critical of the reasoning in, or conduct of, those hearings; it is merely to say that repetition of words in one context does nothing to add to the lack of persuasive weight they bear in a foreign context.
Although the subject matter to which a members' scheme may apply is undoubtedly broad, the scheme itself, even when statutory majorities of members pass a resolution in its favour, binds no-one. And a scheme when approved by the Court and lodged with ASIC binds the company and all members, even those voting against it, or abstaining, or unaware of it. Although the Executives' submission confines the alleged agreement to be between the Voting Members and AWM, the only agreement alleged is the Scheme itself. However the Scheme binds all members or none, so that it is artificial to characterise it as an "agreement" between AWM and that minority of members who voted in favour of it.
In my view, a scheme of arrangement is not an "arrangement" or "understanding" as those terms are used in the definition of "relevant agreement" for similar reasons. Of course, a s 411 "arrangement" is not an "agreement, arrangement or understanding" merely because the same word is used in s 411 as appears in the definition of "relevant agreement: in s 9. Both terms have lengthy histories and apply in quite different contexts. An arrangement or understanding is something which falls short of a formal agreement, but still presupposes an informal consensus between parties. There must be a "meeting of minds" as to what will be done in the future. A mere expectation is not sufficient, even if that expectation is brought about by the other party.
As much is borne out by cases on the identical words in the Competition and Consumer Act 2010 (Cth). In ACCC v Channel Seven Brisbane Pty Ltd [2009] HCA 19; (2009) 239 CLR 305 at [48], French CJ and Kiefel J said:
"An arrangement or understanding ordinarily involves an element of reciprocal commitment even though it may not be legally enforceable. It involves more than a mere hope or expectation that each party will act in accordance with its terms."
The authorities were reviewed by Lindgren J in ACCC v CC (NSW) Pty Ltd [1999] FCA 954; (1999) 92 FCR 375 at [135]-[139] where his Honour concluded (at [141], emphasis in original):
"The cases require that at least one party 'assume an obligation' or give an 'assurance' or 'undertaking' that it will act in a certain way. A mere expectation that as a matter of fact a party will act in a certain way is not enough, even if it has been engendered by that party. In the present case, for example, each individual who attended the Meeting may have expected that as a matter of fact the others would return to their respective offices by car, or, to express the matter differently, each may have been expected by the others to act in that way. Each may even have "aroused" that expectation by things he said at the Meeting. But these factual expectations do not found an "understanding" in the sense in which the word is used in ss 45 and 45A. The conjunction of the word 'understanding' with the words 'agreement' and 'arrangement' and the nature of the provisions show that something more is required."
The same point was made memorably by Gleeson CJ in argument in Rural Press Ltd v ACCC [2003] HCATrans 291:
"There has to be a meeting of minds. If you open the door of a cage and all the mice leap [in] and head for the cheese, that does not mean they have an understanding ..."
In McHugh v Australian Jockey Club Ltd (No 13) [2012] FCA 1441 at [1382] Robertson J required there to be:
"[A] meeting of the minds of the parties to the putative contract, arrangement or understanding in which one of the putative parties is understood, by the other or others, and intends to be so understood, as undertaking to regard himself as being in some degree under a duty to conduct himself in some particular way so long as the other party or parties conduct themselves in that way."
The same meaning is to be given to the same words in s 12(2)(b).
I readily accept that there could be a relevant agreement in connection with voting at a scheme meeting, if it were shown that the company and some of its members reached agreement, or something less than agreement sufficient to amount to an arrangement or understanding, as to their voting. But no such meeting of the minds occurred here, on the evidence. The behaviour of AWM was relevantly fixed by what it had promised in the Implementation Deed; it was effectively bound to procure favourable recommendations from its board. As far as the conduct of the Voting Members goes, on the evidence there was no communication from them in advance of their vote. After the vote, there was nothing for them to do.
However, it would be wrong to decide this aspect of the appeals on a basis that was not within their scope and therefore not the subject of argument. I proceed on the basis of what was common ground at trial and on appeal, namely, that the Scheme was a "relevant agreement".
Purpose of controlling or influencing the composition of IOOF's board?
The Executives relied on both limbs of s 12(2)(b): the purpose of controlling or influencing the composition of IOOF's board, and the purpose of controlling or influencing the conduct of IOOF's affairs.
By its notice of contention, IOOF said that the first limb could not be satisfied, because it was displaced by paragraph (b) of the "Change in Control" definition. In my opinion, that submission should be accepted.
Paragraph (b) of the "Change in Control" definition is squarely directed to actual changes in the majority of IOOF's board without the support of IOOF's Managing Director and Chairman. Considered in isolation, paragraph (a) is also capable of being engaged where there is an agreement whose purpose is to control or influence the composition of IOOF's board, through the first limb of the "Associate" definition in s 12(2)(b). In my view, the express language of paragraph (b), which appears on the face of the Share Sale Agreement and the Shareholders' Agreement, prevails over the indirect incorporation of provisions relating to board composition that might otherwise come about through one of the limbs of "Associate" picked up by paragraph (a), to the extent that there is conflict. I think there is conflict. Paragraph (b) requires an actual change in the majority of the Board. Paragraph (a) would, on the Executives' case, apply (i) where there is merely an agreement for the purpose of controlling or influencing the control of IOOF's board (even if not acted upon), (ii) where there is actual change but only of a minority of IOOF's board members, and (iii) where there is change of board composition with the support of both the IOOF Managing Director and Chairman. In short, the direct operation of paragraph (b) is much more confined than the literal operation of paragraph (a) if the reference to "Associate" were to pick up that part of the definition which is specifically addressed in (b), namely, board composition.
In Chapmans Ltd v Australian Stock Exchange Ltd [1996] FCA 474; (1996) 67 FCR 402 at 411, Lockhart and Hill JJ said:
"It is an elementary proposition that a contract will be read as a whole giving weight to all clauses of it, where possible, in an endeavour to give effect to the intention of the parties as reflected in the language which they have used. A court will strain against interpreting a contract so that a particular clause in it is nugatory or ineffective, particularly if a meaning can be given to it consonant with other provisions in a contract. Likewise where there are general provisions in a contract and specific provisions, both will be given effect, the specific provisions being applicable to the circumstances which fall within them."
That mode of reasoning is, in my opinion, unquestionably correct. It amounts to what Francis Bennion styles a "linguistic canon of construction": Statutory Interpretation, 5th ed (2008) LexisNexis, p 1155. He says:
"Linguistic canons of construction are not confined to statutes, or even to the field of law. They are based on the rules of logic, grammar, syntax and punctuation; and the use of language as a medium of communication generally."
The same point was made by Barak CJ, and approved by Spigelman CJ with the agreement of Handley and Basten JJA: that this mode of reasoning is a semantic rule, not a legal rule, of general applicability for understanding language: Ombudsman v Laughton [2005] NSWCA 339; (2005) 64 NSWLR 114 at [24], citing Barak, Purposive Interpretation in Law (2005) Princeton University Press, p 107. In a statutory context, the reasoning involves the "interpretative principle" associated with Anthony Hordern & Sons Ltd v Amalgamated Clothing and Allied Trades Union of Australia (1932) 47 CLR 1; see Australian Education Union v Department of Education and Children's Services [2012] HCA 3; (2012) 86 ALJR 217 at [31].
The Executives' written submissions observed that there could be circumstances where paragraph (b) applies and paragraph (a) does not. As much is undoubtedly true; consider a successful board spill prompted by a falling out between Managing Director and Chairman, where there are no associated shareholders who between them control more than 40% of votes. But that is not, in my opinion, to the point. The difficulty is that paragraph (a), if it bears its literal meaning insofar as it extends to the broad category of agreements to control or influence IOOF's board composition, substantially subtracts from the delineated circumstances in which paragraph (b) applies.
Clause 1.2 of the Shareholders' Agreement prescribes "rules" which "apply unless the context requires otherwise", one of which is that "[w]ords and expressions having a particular meaning in the Corporations Act 2001 have that meaning in this Agreement". Clause 16.2 of the Share Sale Agreement states that unless the context otherwise provides, where a word or phrase is given a defined meaning another part of speech or other grammatical form in respect of that word or phrase has a corresponding meaning. Clearly enough, in the Shareholders' Agreement, the statutory meaning of "Associate" is expressly displaced if the context requires otherwise. The position is not quite so clear on the face of the language of the Share Sale Agreement, but in my opinion the same result obtains: it is not necessary for express provision to that effect to be made. That is the rule in the case of statutes, even where there is no express provision for the context otherwise requiring: Cranbrook School v Woollahra Municipal Council [2006] NSWCA 155; (2006) 66 NSWLR 379 at [40] (McColl JA, Beazley JA agreeing); Melrose Farm Pty Ltd v Milward [2008] WASCA 175; (2008) 175 IR 455 at [7] (Pullin J) and [51] (Le Miere J, Steytler P agreeing).
The same approach applies to contracts. For example, Lord Steyn has written extrajudicially that "[e]ven an agreed definition is of limited use: it takes no account of contextual requirements": (2001) 21 OJLS 59 at 60. The same point was made by Fullagar J in Halford v Price (1960) 105 CLR 23 at 33. Professor McMeel has written (The Construction of Contracts, 2nd ed (2011) Oxford University Press, p159) that "even defined terms must yield to wider context or contrary intention." Professor Carter has said that "the absence of [words to the effect 'unless the context indicates otherwise'] does not mean that the definition necessarily applies to every usage of the term in the document" (The Construction of Commercial Contracts (2013) Hart, p 446). That must in my opinion be correct in principle. The ordinary approach to construction insists on reading the contract as a whole and doing so harmoniously, so as to resolve or minimise internal inconsistency. Foreign to that approach would be a slavish rule that defined terms inevitably bear every aspect of their defined meaning. The contestable nub of the matter is what is sufficient to constitute a displacing context or contrary intention. Owen and Steytler JJ have said that "the deliberate use of defined words is not to be lightly passed over, even where the definition leaves open the possibility of another meaning for a defined phrase": BHP Petroleum (Australia) Pty Ltd v Sagasco South East Inc [2001] WASCA 159 at [24], a proposition whose force I acknowledge.
This is not the occasion to attempt to consider more closely that issue of contractual construction. It suffices to say that the parties have chosen to pick up a very complex statutory term in a context squarely directed to control of a general meeting, where they have in the immediately following clause addressed control of the board. The definition is not itself reproduced in the contract, but is incorporated by reference. On its face there is a clash between the extended literal operation of the statutory definition and what appears on the face of the contract.
Accordingly, in my opinion the reference to "Associate" in paragraph (a) to the extent that it would otherwise pick up relevant agreements directed to controlling or influencing IOOF's board is displaced by the express and specific terms of paragraph (b). Test the matter this way: if the question were to be asked to what "Change of Control" the parties are to be taken to have agreed when it comes to board composition, the answer is to be found in paragraph (b), and paragraph (b) alone, rather than through following the extended statutory definition which would literally be picked up by the reference to "Associates" in paragraph (a). For it will be noted that there is a clear structure to the paragraphs in the definition of "Change in Control": the first relates to the shareholding of IOOF; the second to IOOF's board; the third to the shareholding of IOOF Investment, and the fourth to the shareholding of PIPL.
My conclusions rest on the considerations that (a) the parties have themselves on the face of their contract expressed the test that is required in order for a "Change in Control" event to involve the reconstitution of the IOOF board, and (b) they have done so in a precise and qualified way - stating that what is needed is a change in a majority of the board, and then only where at least one of the Managing Director and Chairman do not support the change. It follows that in my opinion to the extent that the Executives relied upon the first limb of s 12(2)(b), their submissions fail.
Purpose of controlling or influencing the conduct of IOOF's affairs?
Elaborate argument was advanced as to whether the "purpose" in s 12(2)(b) was that of the agreement or of the parties to it. The debate about whether the purpose is the "subjective" purpose of the parties or the "objective" purpose of the agreement is a large one: see Starr v Federal Commissioner of Taxation [2007] FCA 23; (2007) 65 ATR 86 at [28]-[42] (French J), and one on which little may in fact turn. As Hill J observed in ACCC v Universal Music Australia Pty Ltd [2001] FCA 1800; (2001) 115 FCR 442 at [469], often there is little practical difference between objective and subjective purpose, for the best evidence of subjective purpose will be objective effect. That is certainly the case here, where there was no evidence adduced of any subjective purpose of any party.
Moreover, that debate in large measure masks the real question that arises at this stage in the analysis. Once it is accepted (as I do) that an agreement may be said to have a purpose, which may be distinct from the purpose of the parties to it, then the real question is one of choosing the appropriate level of abstraction. The same point in a statutory context was made by Gleeson CJ in Carr v Western Australia [2007] HCA 47; (2007) 232 CLR 138 at [6]:
"[T]he underlying purpose of an Income Tax Assessment Act is to raise revenue for government. No one would seriously suggest that s 15AA of the Acts Interpretation Act has the result that all federal income tax legislation is to be construed so as to advance that purpose."
Consider an example closer to the facts of this appeal. Suppose a small private company contracts to buy some additional land to expand its business. It approaches a lender, who will fund the purchase price, but insists not merely upon a mortgage over the land but also a guarantee from the directors. What is the purpose of the directors executing the guarantee? Is it render themselves liable to perform the obligations of the company? Is it to satisfy a condition precedent imposed by the lender for the drawing down of funds? Is it to enable the company to acquire the land, being something which the company has already bound itself to do? In my view, it does not unduly strain language for any of those purposes to be attributed to the directors, or for that matter to the guarantee.
Was the purpose of the Voting Members voting in favour of the Scheme (a) to satisfy the statutory prerequisites so as to enliven the Court's discretion to make an order under s 411(4) so that the Scheme might be effective, (b) to confer authority upon AWM to transfer its members' shares to IOOF, (c) to enable members to receive IOOF shares, (d) to enable the "merger" which had been announced to the market, including the reconstitution of the IOOF board, to occur, or (e) merely to follow the advice given to them unanimously by their board of directors and an independent expert? Or was it any or all of the foregoing? The answer is not to be found merely in textual considerations. Language is not so precise. It is "inherently contextual": OneSteel Manufacturing Pty Ltd v BlueScope Steel (AIS) Pty Ltd [2013] NSWCA 27 at [61].
In particular, "purpose" is a protean concept, as Lord Sumption JSC observed in Hayes v Willoughby [2013] UKSC 17; [2013] 1 WLR 935 at [9]:
"[T]here is no general rule as to how purpose is to be established when it is relevant to a crime or civil wrong. When purpose is relevant to the operation of a statutory provision, the question will depend on the construction of the statute in the light of the mischief to which it is directed. When it is relevant to a rule of common law, the answer will normally be found in the object of the rule. In his concurring judgment in the High Court of Australia in Williams v Spautz (1992) 174 CLR 509, para 4, Brennan J attempted a partial definition of purpose in the context of the tort of abuse of process, which is committed when a person conducts litigation for a purpose other than that for which the court's process is designed:
'Purpose, when used in reference to a transaction, has two elements: the first, a result which the transaction is capable of producing; the second, the result which the person or persons who engage in or control the transaction intend it to produce. Or, to express the concept in different terms, the purpose of a transaction is the result which it is capable of producing and is intended to produce.'
This is probably as much as can usefully be said in general terms about this protean concept."
His Lordship also criticised (at [10]-[14]) the simplicity in approaching the question as though the choice of giving legal meaning to statutory language was binary, confined to subjective or objective, and ultimately applied a different test: a subjectively held, but at the same time, rational purpose.
That echoes similar criticisms advanced in Australia, to which the Executives pointed. For example, Gleeson CJ said in News Ltd v South Sydney District Rugby League Football Club [2003] HCA 45; (2003) 215 CLR 563 at [18] that:
"The appropriate description or characterisation of the end sought to be accomplished (purpose), as distinct from the reason for seeking that end (motive), may depend upon the legislative or other context in which the task is undertaken."
That said, in my opinion, this is a clear case, when the precise question is attended to. The question is what is the purpose of the Scheme, which is distinct from the purpose of the broader transaction of which the Scheme was a component. The question is confined to the Scheme because of the way the appeal was run, and because of the primary judge's unchallenged finding that the Scheme was a "relevant agreement". So framed, the question is whether AWM and the Voting Members had entered, or proposed to enter, into the Scheme for the purpose of controlling or influencing the conduct of IOOF's affairs. The answer must, in my opinion, be negative.
The Scheme conferred authority on AWM to transfer its members' shares to IOOF for the Scheme Consideration. That was the end sought to be accomplished. That was the only end that could be accomplished by an arrangement between AWM and its members; that is the first "basal consideration" referred to above.
To the extent that it is necessary or appropriate to turn to the purpose of AWM, its broader commercial purpose was fixed in November 2008. AWM was bound to promote the Scheme and cause its members to meet and vote in November 2008. The Scheme itself was but one link in the chain of steps to achieve the acquisition of AWM and the reconstitution of the IOOF board. It is highly artificial to attribute a subjective purpose of AWM in relation to the Scheme, as opposed to its purpose in relation to what was announced to the market when it entered the Implementation Deed. Given that artificiality, in my opinion, there is no good reason to impute any purpose beyond that of seeking to obtain authority to transfer its members' shares to IOOF for the Scheme Consideration. I acknowledge that it does not overly strain the language of purpose to impute a broader purpose to AWM, just as it would not strain language to say in the example given above that the directors' purpose in executing the guarantee was to acquire the land in order to expand their company's business.
However, what is decisive in my opinion is that, to the extent it is necessary or appropriate to consider the purpose of AWM, it must also be necessary or appropriate to consider the purpose of the Voting Members. It is not established that their purpose was other than to act in what they perceived as their self-interest, as recommended by their directors and the independent expert. The point of the statutory procedure was to permit them to do so in a way that was fair as amongst themselves: see the third and fourth "basal considerations" above. There is nothing to suggest that the majority who participated in the vote and acceded to the recommendations had any purpose in mind other than acquiring shares in IOOF in lieu of those which they held in AWM. In my opinion, the reasons and conclusion of the primary judge to the same effect at [80]-[88] are correct.
It follows from the foregoing that I do not consider that there was a purpose of controlling or influencing the conduct of IOOF's affairs. That said, I do not agree with all aspects of the reasoning supporting the primary judge's conclusion. In particular, the Executives criticised the decision of the Takeovers Panel in Re National Foods (No 1) [2005] ATP 8; (2005) 54 ACSR 80 at [55], where it was said that:
"The affairs of a company, on ordinary concepts and without reliance on s 53, include its business and its internal affairs, such as board and company meetings and its dealings with its subsidiaries. Accordingly, an agreement to control or influence the conduct of a company's affairs must be aimed at exerting pervasive control or influence over the company's direction and management."
Putting to one side what is meant by "pervasive" control or influence, I respectfully do not agree that the second sentence of that passage amounts to a necessary condition for there to be the requisite control or influence over a company's affairs. But there is no need for me to go nearly so far in order to resolve these appeals. For the reasons above, the purpose of the scheme was removed from the conduct of the affairs of IOOF. It was (necessarily) an arrangement involving give and take between AWM and its members; otherwise it would not be a s 411 members' scheme.
Acting in concert
The primary judge said:
"102 In order that two parties act 'in concert': -
(a) there must at least be an understanding between them as to their common purpose of object; a mere coincidence of separate acts is insufficient: per McPherson J in Adsteam Building Industries Pty Ltd v Queensland Cement & Lime Co Ltd [1985] 1 Qd R 127, (1984) 14 ACLR 456 at 132;
(b) there must be some knowing conduct the result of communications between parties and not merely simultaneous actions occurring contemporaneously;
(c) there must be an understanding between the parties as to a common purpose of object: Bank of Western Australia v Ocean Trawlers Pty Ltd (1995) 16 ACSR 501 at 524-525 per Owen J;
(d) there must be contemporaneity and community of purpose (per French J (as his Honour then was) in J-Corp Pty Ltd v Australian Builders Labourers Federated Union of Workers (1992) 44 IR 264 at 272);
(e) a concurrence of views about the merits of a particular resolution proposed by another person is not sufficient: Winepros Ltd [2002] ATP 18; (2002) 43 ACSR 566 at [33]; and
(f) the understanding between the parties as to the common purpose or object must be consensual and there must be some adoption of it: Bank of Western Australia v Ocean Trawlers.
103 In this case, the common purpose must relate to either 'the affairs of IOOF' (s 12(2)(c)), or 'together becoming entitled' to 40 per cent of the voting shares in IOOF (s 15(1)(a))."
No challenge to the correctness of those propositions was made by the Executives, so far as they went. The dispositive reasoning of the primary judge was as follows:
"105 The only overt act relied upon by the plaintiffs as constituting the alleged 'acting in concert' is the act of the Voting Members of voting in favour of the resolution at the Scheme meeting on 22 April 2009.
106 I see no basis for concluding that there was a community of purpose between AWM and the Voting Members, or any other collaboration or interaction which could lead to the conclusion that the Voting Members were acting in concert with AWM.
107 The more probable inference, and one which I draw, is that the various Voting Members were separately pursuing their own interests (acquiring a stake in IOOF), which interests coincided with those of the other Voting Members and those of AWM.
108 This is not surprising. Plainly, the board of AWM thought the Scheme was in AWM's interests. That is why the board unanimously recommended the proposal to the AWM members. Further, the Merger had the unqualified recommendation of the independent experts, Ernst & Young."
The Executives attacked that reasoning in essentially three respects. First, they said that the reasoning at [105] was incomplete. Although each Voting Member only did a single thing, namely, cast a vote (either at the Scheme Meeting, whether in person or through a proxy, or in advance of it), AWM performed a series of overt acts in proposing and implementing the Scheme following the meeting: essentially, seeking Court approval, lodging the orders, determing the identity and entitlements of Scheme Participants, giving IOOF share registry details and the share transfer forms, and registering the transfers of all AWM shares to IOOF. They said that the fact that Voting Members only engaged in one overt act was not to the point; a person could act in concert with another even if he or she did nothing other than "being present" or "lending support" in the manner discussed in Industrial Equity Ltd v Commissioner for Corporate Affairs [1990] VR 780.
Secondly, they said that there was a "community of purpose" and "collaboration" in the requisite sense, when AWM acted upon the authority given to it by Voting Members and implemented the Scheme.
Thirdly, they disputed the primary judge's conclusion that Voting Members were separately pursuing their own interests; instead, they were acting (either individually or collectively, and it did not matter which) on the recommendation proposed by AWM.
In my opinion the primary judge correctly rejected these submissions.
There were two companies acting in concert between November 2008 and May 2009: IOOF and AWM. Every element of the conduct of AWM relied on by the Executives as amounting to a "sustained concert" was conduct which AWM was bound to engage in pursuant to the Implementation Deed. The obvious and express objective of that conduct was to achieve an acquisition of all of the shares of AWM through a members' scheme. But that is distinct from the question on which these appeals turn, which is whether AWM and some of its own members were acting in concert.
On the evidence, there was no communication of voting intentions by any of the Voting Members to AWM in advance of their vote being cast. The Voting Members had nothing to do with any of the steps taken by AWM in advance of the Scheme Meeting. Nor could they prevent AWM from taking those steps. Likewise, the Voting Members had nothing to do with any of the steps taken by AWM after the Scheme Meeting, save in the sense that a statutory majority was a statutory and contractual precondition to those steps being taken. There is plainly no analogy with the circumstances of a third party "standing by" and lending tacit support (cf the examples given in Industrial Equity at 785 of an accomplice standing by and lending support while a victim is asaulted and robbed). The role of each Voting Member was complete after his, her or its vote had been cast, and that vote was not known by AWM until it was cast or until the member's proxy was appointed.
The primary judge was therefore correct in my opinion to focus upon the single overt act undertaken by the Voting Members as dispositive of the argument on this issue.
AWM's members fell into three groups. Some voted in favour of the Scheme, some voted against, and (I would readily infer) the overwhelming majority cast no vote at all. (The evidence shows that some 68% of shares were voted, that there were 34,712 shareholders, but that 74.1% of AWM's shares were held by the top twenty shareholders. The primary judge found that the vast majority of AWM's members held small parcels (at [79]), and I would infer that tens of thousands of those small shareholders comprised the 32% who failed to vote. The position is no different from most widely held listed companies in this country involved in members' schemes.)
When a recommendation is put to a vote, there will always be the same three groups: those who vote in favour, those who vote against, and those who abstain or fail to vote at all. As it happens, in the case of AWM, a majority of shares (held by a minority of shareholders) voted in favour of the Scheme. But why should that make them persons acting in concert with those propounding the recommendation? How is the position different from any other resolution that is put to a vote? Mr Jackman sought to distinguish the ordinary case of a resolution put to a company in general meeting, where the shareholders were voting as an organ of the company. He is, with respect, correct: a company can act through its members, by a circulating resolution pursuant to s 249A, or in general meeting. But of course shareholders could agree to act in concert to, say, remove a director or an entire board at a general meeting; this is exactly what the "Associate" provisions are directed to. In such a case, the "association" is formed not merely by, say, voting against a further term for the directors. It is necessary for there to be conduct aside from the vote itself in order for shareholders to be associates. That is necessarily so, because association cannot be determined after the event by reference to the fact of voting - in every case there will be a group of voters who agreed with the resolution, as well as groups who disagreed and failed to vote, and those voters who agreed do not merely by the fact of their vote become persons who were acting in concert with the propounder of the resolution.
The foregoing is consistent with the reasoning of Owen J in IPT Systems Ltd v MTIC Corporate Pty Ltd [2000] WASC 316; (2000) 36 ACSR 454 at [26], which was approved by White J in Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd [2010] NSWSC 233; (2010) 77 ACSR 410 at [133]-[134]. There, in the context of the (now repealed) provisions making void charges created over the assets of a company by a company's officers or their associates which were enforced within six months, Owen J said:
"It seems to me that the phrase 'acting in concert' must mean something more than the mere entry into a transaction. It is not the mere creation of the charge that attracts the operation of the section. If it were as broad as that, then any party involved in the creation of a charge would be an 'associate' for the purposes of the definition for a bank may ask a director to have a charge executed. The bank and the director would have the common purpose of effecting the execution (as a critical step in the creation) of the charge. Even if it is benign and in the ordinary course of business, the bank would be a 'relevant person' for these purposes. That cannot have been the intention of the legislature."
In my view that reasoning is valid, and is applicable here; the reasoning applicable to entering into a transaction translates to voting in favour of a recommendation. Indeed, similar reasoning has been employed at the appellate level albeit in another legislative context. In Australasian Meat Industry Employees Union v Meat and Allied Trades Federation of Australia [1991] FCA 672; (1991) 32 FCR 318 at 329, Gray J referred to the acute difficulties in applying "in concert" too broadly. French J said (at 334) that the term "does not apply to groups of employees of different employers who, as the result of requests by a common union, engage in similar conduct for their own respective purposes", a description which readily translates to the Voting Members who were requested to resolve in favour of the Scheme, but which on the evidence did so for their own respective self-interest, that being after all the purpose of s 411: see the third and fourth "basal considerations" above.
No acting in concert in relation to the affairs of IOOF.
In any event, for the reasons given above, even if there was acting in concert, it did not in my opinion relate to action in concert in relation to the affairs of IOOF. The Scheme was necessarily an arrangement involving give and take between AWM and its members.
Other association (s 15(1)(c))
The primary judge regarded as dispositive the "absence of any direct evidence of actual communication as to voting intentions or of common intentions actually and knowingly shared (as distinct from coinciding)", in accordance with what Barrett J had said in Bateman v Newhaven Park Stud Ltd [2004] NSWSC 566; (2004) 49 ACSR 597 at [42]. The Executives criticised that reasoning, because Bateman involved a "horizontal" association, not the very different association alleged between AWM and some of its members. There is logical force in the criticism, but the ultimate question is whether the expansive words in s 15(1)(c) alter the position in the facts of this case, on the assumption that s 12(2)(b) and (c) and s 15(1)(a) do not apply.
The primary judge said that "in the circumstances of this case, it is hard to see how the requirements of s 15(1)(c) could be satisfied if those of s 12(2)(c) and (d) and s 15(1)(a) were not." I agree. The short point is that to the extent that s 15(1)(c) expands the concept of "Associate" at all, it does so by relaxing questions of timing and formality. But the Executives' failure on the first and primary two grounds of their case was not because of some question of timing or lack of formality.
Three issues arise in relation to s 15(1)(c). The first is whether s 15(1)(c) could add anything to the generality of the definitions in s 12(2)(b) and (c). The second is whether, if it did, how is the clash between the necessity and sufficiency of s 12(2) and the expanding words in s 15(1)(c) resolved. The third is whether any expanded scope of the defined term assists the Executives on the facts of this case.
The definition in s 15(1)(c) includes within the class of associates a person with whom the primary person "is, or proposes to become, associated, whether formally or informally, in any other way". To my mind there is much to be said for the proposition that just as s 15(1)(a) in no way enlarges the class of "associates" in s 12(2)(c), so too s 15(1)(c) adds nothing to s 12(2)(b) or (c) even if it applies so as to override the necessity and sufficiency of the conditions in that subsection. That it adds nothing is apparent once it is broken down into its constituent parts. On its face, it has a present and a future-looking operation. The present operation extends the "associate" reference to persons with whom the primary person is associated, whether formally or informally, in any other way. But s 12(2)(b) and (c) proceed on the basis that formal or informal associations are sufficient: the references to "relevant agreement" in s 12(2)(b) pick up informal agreements and understandings and arrangements, and acting in concert in s 12(2)(c) likewise may be effected formally or informally. The future-looking operation of s 15(1)(c) is expressly picked up by "proposes to enter into" in s 12(2)(b) and "proposes to act" in s 12(2)(c). It is not necessary to explore whether s 15(1)(c) adds anything to s 12(2)(a), upon which the Executives placed no reliance.
Moreover, in its application to the facts of this appeal, nothing turns on the timing or the informality of the alleged association. Only if it did could the expansive words of s 15(1)(c) make a difference, and only then would it be necessary to attempt to reconcile its apparent conflict with the necessary and sufficient conditions provided for in s 12(2).
Hence, in my opinion s 15(1)(c) adds nothing relevant to this appeal.
Become entitled to more than 40% of the voting shares
IOOF by its notice of contention challenges the primary judge's conclusion that on 1 May 2009 (in fact, 30 April 2009) when the Scheme became effective, AWM Voting Members became entitled to more than 40% of the voting shares in IOOF. The legal position was then clear. From that time, although no shares had been issued and allotted to them, all AWM members had a presently enforceable right to sue on the Deed Poll for the IOOF shares to which they were entitled. What is more, they were entitled to trade the rights to shares on a deferred settlement basis, while their rights to trade AWM shares were suspended upon the Scheme taking effect. Further, the Executives point to the ordinary meaning of "entitlement" as a right which falls short of legal and beneficial ownership, and to the fact that a person can materially influence a company prior to the issue of shares to the person. In the present case, the board of IOOF was reconstituted to include AWM appointees, and its Chief Executive Officer replaced on 1 May 2009, 11 days before this was required under the Implementation Deed, because, as the Executives observe, the commercial reality turned upon the AWM members and the Court approving the Scheme, not the issuing of new shares.
The primary judge relied on what White J had said in Fardell v Coates Hire Operations Pty Ltd at [69]-[71], where the question was whether, two days before a members' scheme became effective, Mr Fardell enjoyed a right of contractual termination pursuant to a clause which required notice "within 12 months after any person becomes entitled to more than 50% of Coates Hire's shares". Argument was focused there, as it was in the present appeals, on "entitled". White J said:
"69 ...In my view NED Group Holdings Pty Ltd had become 'entitled' to the shares in Coates Hire. 'Entitled' means having a title, right or claim to something. By that date all necessary approvals for the scheme of arrangement had been provided. NED Group Holdings Pty Ltd was both entitled and obliged to complete the acquisition of the shares by paying the consideration on 9 January 2008. It had an equitable interest in the shares not amounting to full beneficial ownership. It is clear that it was ready, willing and able to complete the purchase as it in fact did. It had a beneficial interest in the shares commensurate with its right to specific performance.
70 Counsel for the defendant submitted that in clause 7.3 'entitled' meant legally entitled to exercise the voting rights attaching to the shares. Counsel rightly submitted that the object of a 'change of control' provision of the kind in clause 7.3 was to recognise that a party to a contract may have an abiding interest in the identity of those whose decisions may affect the substance and purpose of the arrangement. He submitted that the court should construe clause 7.3 in a way that gave effect to that purpose. So far as that submission went, I agree with it. But it does not follow that the change in entitlement referred to requires a change in legal title. Clearly a change in beneficial ownership could produce a change in control before legal title to the shares was transferred. Does it matter that the notice was given before the consideration was paid, although the purchaser was obliged and was able to pay?
71 The clause should be read as a whole. The word 'entitled' takes its colour from the following words. That is to say, the clause is referring to a change in 'entitlement' to the shares that may have a material effect on the plaintiff's employment. A person in the position of NED Group Holdings Pty Ltd could exercise influence over Coates Hire before it acquired legal title to the shares. That it did so was evidenced by the fact that by 7 January 2008 the new finance director, Ms Brennan, had been engaged and Mr Jackman had been engaged as chief executive officer of the merged business. As at 7 January 2008 NED Group Holdings Pty Ltd had the right to become registered holder of all of the shares in Coates Hire and was obliged to pay the consideration to the vendors of the shares. It was able to perform that obligation. In my view, its equitable interest in the shares meant that it had then become entitled to the shares within the meaning of clause 7.3."
Mr Jopling sought to distinguish that reasoning on the basis that whereas NED Group Holdings had a right to acquire existing shares in Coates Hire, the Voting Members merely had rights to future property, in shares not yet issued by IOOF. Although that is so, I do not accept it as a valid point of distinction. The Voting Members had the right from 30 April 2009 to compel IOOF to issue shares to them. The ordinary meaning of "entitled" extends to rights less than full legal ownership of voting shares, and, as White J said, the meaning is informed by the language of the whole clause, which is directed to controlling or influencing, both of which may occur prior to the exercise of voting power.
The salient difference, to my mind, between the facts in these appeals and Fardell is not the strength of Voting Members' entitlement, but the ephemeral nature of the alleged association and the different quality of entitlement enjoyed by AWM and the Voting Members. Taken at its highest, the Executives' case turned on an "association" for a matter of weeks from around 20 April until no later than 12 May 2009. Of course, the Voting Members who, in my opinion, were "entitled" to IOOF shares from 30 April 2009 when the Scheme became effective, would after 12 May 2009 receive legal ownership of those shares. However, the question is whether AWM "and that person's Associates together become entitled" to more than 40% of IOOF shares. At no time did the nature of the IOOF shares to which AWM was entitled resemble that to which the Voting Members were entitled. Prior to 12 May 2009, AWM had legal title to IOOF shares, whilst Voting Members had the benefit of a contract to issue shares to them. After 12 May, AWM's shares could not be voted because of s 259D, whilst Voting Members became registered as members of IOOF and could vote their shares. Did those distinct interests in IOOF shares answer the description of "together become entitled"?
In Galaxy Communications Pty Ltd v Paramount Films of Australia Inc (Court of Appeal, 27 March 1998, unreported), Stein JA (with the agreement of Meagher JA and the general agreement of Priestley JA) addressed the meaning of a clause which essentially provided that "if either party hereto becomes bankrupt", the other might elect to terminate. The competing constructions were whether the corporate party needed to be insolvent at the time of the election, or whether it was necessary for the state of insolvency to exist at the time the election was made. Stein JA said at [21] (emphasis in original):
"While I accept that it is open to construe 'becomes insolvent' as meaning 'coming to be in the state of insolvency' I do not accept that this leads to a right to elect to terminate without the necessity of identifying when that insolvency occurred. The preferable construction is, in my opinion, that argued for by the claimants. To construe cl 13(c) as requiring the state of insolvency to exist at the time of the giving of the notice of election to terminate lends certainty to the determination that state."
To my mind, that reasoning is the key to construing the Share Sale Agreement. The clause 7.15 right to elect to receive the Accelerated Deferred Payment only arises if a "Change in Control" "occurs" (in fact, "occurs" is repeated in the chapeau of the clause, and in clause 7.15.3). A "Change in Control" only occurs if a person and its associates "together become" entitled to more than 40% of the shares.
When on 13 May 2009 the Executives purported to exercise their option to elect for an Accelerated Deferred Payment, and when much later steps were taken in respect of the put and call options, there was no longer an association between AWM and the Voting Members. There could only ever have been a transitory association, lasting throughout the days between the Scheme becoming effective and it being implemented. And, during that time, the interest of AWM in its IOOF shares was qualitatively different from the entitlement of its members to the shares they were to receive on 12 May. In particular, AWM could never join with its members and vote. Whilesoever AWM could vote its parcel of IOOF shares, its members had not been issued shares. As soon as they were issued, AWM lost its right to vote its own shares.
In those circumstances, I am doubtful that the alleged associations (AWM either individually or collectively with Voting Members) amount to their together becoming entitled to voting shares in IOOF. However, the argument which was advanced on appeal focused on "entitled" as opposed to "together becomes", and Galaxy Communications was identified after judgment was reserved. If the outcome of the appeals turned on these points, I would have invited the parties to make further submissions on them. Since it does not, I merely express my view, and do not rely on it to support the conclusion I have reached.
My ultimate conclusion is fortified by the commercial purpose of the "Change in Control" clause. That was to ensure payment in the event that new ownership or management altered the profitability of PIPL, as the primary judge found at [118]-[122]. I agree with his conclusion. Substantially the same purpose is found in relation to the Shareholders' Agreement. That commercial purpose is promoted by the constructions I would give to "becomes entitled to" and to "Associate". It is in my opinion entirely appropriate in a case like this, where ambiguity looms at every turn, to have regard to commercial purpose. It is orthodox to do so, see for example the approach of Allsop P, with whom Macfarlan and Meagher JJA agreed, in OneSteel Manufacturing Pty Ltd v BlueScope Steel (AIS) Pty Ltd [2013] NSWCA 27 at [61].
For those reasons, a combination of textual and contextual considerations lead to the rejection of the Executives' submissions. I would dismiss each appeal, and order the appellants to pay the respondents' costs.
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Amendments
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