JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS
CITATION: RE NAVITAS LTD; EX PARTE NAVITAS LTD [No 2] [2019] WASC 218
CORAM: VAUGHAN J
HEARD: 21 JUNE 2019
DELIVERED : 21 JUNE 2019
FILE NO/S: COR 89 of 2019
EX PARTE
RE NAVITAS LTD; EX PARTE NAVITAS LTD
Plaintiff
BGH BIDCO A PTY LTD
Interested Party
Catchwords:
Corporations law - Scheme of arrangement - Proposed share acquisition - Application for orders approving scheme under s 411(b) of the Corporations Act 2001 (Cth)
Legislation:
Corporations Act 2001 (Cth), s 411
Result:
Application granted
Category: B
Representation:
Counsel:
| Plaintiff | : | S K Dharmananda SC & A J Papamatheos |
| Interested Party | : | T O'Leary & J Ammendolea |
Solicitors:
| Plaintiff | : | Ashurst Australia |
| Interested Party | : | Gilbert + Tobin |
Case(s) referred to in decision(s):
Re Gazal Corporation Ltd [2019] FCA 701
Re Navitas Ltd; Ex parte Navitas Ltd [2019] WASC 180
Re Ruralco Holdings Ltd [2019] FCA 878
Re SMS Management & Technology Ltd [2017] VSC 257
Re Wesfarmers Ltd; Ex parte Wesfarmers Ltd [No 2] [2018] WASC 357
VAUGHAN J:
Overview
On 10 May 2019 I made orders pursuant to s 411(1) of the Corporations Act 2001 (Cth) (Act) to convene two meetings of the shareholders in Navitas Ltd (Navitas). The meetings were convened to consider a proposed scheme of arrangement. I also made orders approving distribution of a scheme booklet.
The proposed scheme provides for BGH BidCo A Pty Ltd (BGH BidCo) to acquire all of the ordinary shares in Navitas. The proposal provides for ordinary shareholders (excluding four so‑called 'Consortium Shareholders') to receive a cash consideration of $5.825 per Navitas share. The Consortium Shareholders may instead, by election, receive a mixed consideration. Part of the Consortium Shareholders' scheme consideration may be received in shares in the parent of BGH BidCo. Otherwise the Consortium Shareholders also receive $5.825 cash per Navitas share.
The differential scheme consideration explains why there were two scheme meetings. The four Consortium Shareholders constituted a different class and had a separate scheme meeting.
The two scheme meetings were held on 19 June 2019. At the Consortium Shareholders' scheme meeting those shareholders approved the scheme of arrangement unanimously. A resolution to approve the proposed scheme of arrangement was also passed at the meeting of the ordinary shareholders excluding the Consortium Shareholders. Those Navitas members approved the scheme of arrangement by 96.93 per cent of votes cast and 94.61 per cent of members present in person or by proxy.
This morning application was made pursuant to s 411(4)(b) of the Act for orders approving the scheme. I made orders approving the proposed scheme of arrangement. These are my reasons for those orders.
Background and additional evidence
Incorporation of earlier reasons
I gave reasons for my 10 May 2019 orders in Re Navitas Ltd; Ex parte Navitas Ltd.[1]
[1] Re Navitas Ltd; Ex parte Navitas Ltd [2019] WASC 180.
I do not intend to repeat what was said in those reasons. These reasons should be read with…
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- AGLC
- Re Navitas Ltd (No 2) [2019] WASC 218
- Case
- [2019] WASC 218
- Decision Date
CaseChat Overview and Summary
The court examined whether the special exertion fees payable to non-executive directors, and the retention payment to the chief executive officer and managing director, David Buckingham, influenced the directors' recommendations in a way that would render the scheme unfair or unreasonable. The non-executive directors' fees were not contingent on the scheme's approval, and therefore did not create a conflict of interest. However, the retention payment to Mr Buckingham, which guaranteed a sum of $750,000 if the scheme passed, did create a potential conflict. This payment provided Mr Buckingham with an additional incentive to support the scheme, separate from his interests as a shareholder. The court had to determine whether this created a situation analogous to previous cases where directors with personal stakes in the scheme's outcome had been cautioned against recommending its approval.
The court concluded that while the special exertion fees did not pose an issue, the retention payment to Mr Buckingham did create a conflict of interest. The terms of the payment meant that Mr Buckingham stood to gain a benefit if the scheme was approved, separate from his interests as a shareholder. This incentive could potentially influence his recommendation to shareholders. The court found that Mr Buckingham should not have joined in the recommendation due to this conflict of interest. The decision in this case aligns with previous rulings that directors with personal benefits at stake in the scheme's approval should exercise caution and generally avoid recommending the scheme to shareholders.
The court ultimately ruled that the scheme could proceed, but with the condition that Mr Buckingham's recommendation be disregarded. The final orders of the court ensured that the scheme could be put to shareholders, but the approval resolution would be based solely on the recommendations of the disinterested directors and shareholders.
Orders
Orders of the court
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Background
Background to the litigation
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Evidence
Evidence Before The Court
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Decision
Reasons for decision
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Ratio Decidendi
Legal Principle Established
In summary, in those three decisions the court has questioned the appropriateness of individual directors joining in a recommendation to members to vote in favour of a scheme where, by reason of a bonus or similar benefit, the director has an additional and different interest to the members in the approval of the scheme. Farrell J has stated, and I agree, that:[D]irectors who are interested in the outcome of the scheme because they stand to receive a bonus or benefit (other than as a shareholder) only if the scheme proceeds should exercise caution in making recommendations and, in my view, generally should not do so.[16] (emphasis added)[16] Re Gazal Corporation Ltd [30]; Re Nzuri Copper Ltd; Ex part Nzuri Copper Ltd [84] - [85]. Senior counsel wished me to be aware that the non‑executive directors (as part of the Navitas board) had joined in the unanimous recommendation that shareholders vote in favour of the scheme in the absence of a superior proposal and subject to the independent experts continuing to conclude that the scheme is in the best interests of Navitas shareholders. It was thought that a concern might arise that the non-executive directors had joined in the recommendation given the special exertion fees that are payable to those directors. A number of reasons were advanced as to why the making of the recommendation by the non-executive directors while they stand to be paid the special exertion fees did not make the proposed scheme unfair or unreasonable, or the approval resolution oppressive, so as to warrant withholding the court's approval of the scheme. The short answer is that the concern does not arise. The special exertion fees payable to the non‑executive directors are not conditional on the proposed scheme proceeding. No inducement operates to incentivise the non‑executive directors to support the scheme. The special exertion fees were not dependent on the shareholders voting in favour of the scheme. Having initially been invited to consider the special exertion fees, my attention was then drawn to a retention payment that is payable to Navitas' chief executive officer and managing director, David Buckingham. The retention payment is also disclosed in the scheme booklet.[17] An amount of $750,000 is payable. The timing of the payment is accelerated if the scheme resolutions are passed. Also, depending on Navitas' financial performance, in the normal course the payment might be reduced. But the effect of the passing of the scheme resolutions is that the full $750,000 is payable immediately without any possibility of reduction. Accordingly, Mr Buckingham stood to receive a benefit other than as a shareholder if the scheme proceeded through shareholders voting in favour of the scheme. That benefit was twofold. First, uncertainty was removed as to the possibility that the retention payment might be reduced below $750,000. Second, the payment of the $750,000 was accelerated.[17] Scheme Booklet, par 10.4(b)(i). Accordingly, while no concern arose as to the non-executive directors' recommendation in the context of the special exertion fees, a question did arise as to Mr Buckingham's joinder in the recommendation to shareholders. The situation was similar to that raised by the facts in Re Ruralco Holdings Ltd. The terms of the retention payment mean that Mr Buckingham stood to receive a benefit other than as a shareholder if the scheme proceeded. Mr Buckingham had an incentive, other than as a shareholder, to bring about the shareholders' approval of the scheme.