Re Telstra Corporation Ltd

[2022] NSWSC 1180

Supreme Court

New South Wales

Medium Neutral Citation:

In the matter of Telstra Corporation Limited [2022] NSWSC 1180

Hearing dates:

23 August 2022

Date of orders:

23 August 2022

Decision date:

02 September 2022

Jurisdiction:

Equity - Corporations List

Before:

Black J

Decision:

Order made convening scheme meeting in respect of proposed scheme and approving the scheme booklet for distribution to shareholders.

Catchwords:

CORPORATIONS – Arrangements and reconstructions – Schemes of arrangement or compromise – Application under s 411 of the Corporations Act 2001 (Cth) for orders convening meeting of members to consider and, if thought fit, to agree to proposed scheme of arrangement to implement corporate restructuring – Whether requirements to order scheme meeting are satisfied.

Legislation Cited:

- Corporations Act 2001 (Cth), ss 110C-110E, 249R, 411, 412, 413, 1319

- Corporations Amendment (Meetings and Documents) Act 2022 (Cth)

- Securities Act of 1993 (US)

Cases Cited:

- Barrick (Australia Pacific Exploration) Pty Ltd v Barrick (PD) Australia Pty Ltd [2017] FCA 998

- FT Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69

- JP Morgan Operations Australia Limited v JP Morgan Australia Group Pty Limited [2018] FCA 1131

- Lendlease RL (Rowville) Pty Ltd v Lendlease Capital Service Pty Ltd [2018] FCA 1601

- Mercedes-Benz Financial Services Australia Pty Limited v Daimler Truck Financial Services Australia Pty Limited [2021] FCA 1279

- Re AGL Ltd [2022] NSWSC 576

- Re Anglo-Gaelic Investments Pty Ltd [2019] NSWSC 441

- Re Application of AGL Sydney Ltd (1994) 13 ACSR 597

- Re Atlassian Corporation Pty Ltd [2013] FCA 1451

- Re Australian Pharmaceutical Industries Ltd [2022] FCA 103

- Re BINGO Industries Ltd [2021] NSWSC 798

- Re Cytopia Ltd [2009] VSC 560

- Re Ellerston Global Investments Ltd [2020] NSWSC 879

- Re Foster’s Group Ltd (No 2) [2011] VSC 547

- Re Hills Motorway Ltd (2002) 43 ACSR 101

- Re Link Administration Holdings Limited [2022] NSWSC 650

- Re Macquarie Private Capital A Ltd [2008] NSWSC 32

- Re Ovato Print Pty Ltd [2020] NSWSC 1882

- Re RXP Services Limited [2021] FCA 38

- Re Simavita Holdings Limited [2013] FCA 1274

- Re Tabcorp Holdings Ltd [2022] NSWSC 448

- Re Vault Intelligence [2020] FCA 1342

- Re Villa World Ltd [2019] NSWSC 1207

- Re Westfield Corporation Ltd (No 2) [2018] NSWSC 921

- Re Woolworths Group Ltd [2019] FCA 1810

- Royal Victorian Institute for the Blind Ltd v RBS.RVIB.VAF Ltd (2004) 206 ALR 581

- Warrnambool Cheese & Butter Factory Company Limited v Warrnambool Cheese & Butter Factory Company Holdings Limited [2017] FCA 302

Category:

Principal judgment

Parties:

Telstra Corporation Limited (Plaintiff)
Telstra Group Limited (First Defendant)
Telstra Limited (Second Defendant)

Representation:

Counsel:
Mr N Young QC/Mr B K Holmes (Plaintiff)

Solicitors:
King & Wood Mallesons (Plaintiff)

File Number(s):

2022/199865

Judgment

Nature of the application

1. By Originating Process filed on 8 July 2022, Telstra Corporation Limited (“Telstra”), applies under ss 411 and 1319 of the Corporations Act 2001 (Cth) (“Act”) for orders that it convene a meeting of the holders of its ordinary shares to consider a proposed scheme of arrangement which would provide for an internal corporate restructure of the Telstra group of companies (“Telstra Group”). Telstra also foreshadows that, if Telstra shareholders agree to the scheme and the Court approves it, it will seek orders at the second Court hearing approving the scheme and orders under s 413 of the Act for the transfer of certain of Telstra’s assets and liabilities to other entities within the Telstra Group.

2. I made the orders sought by Telstra at the first Court hearing at the conclusion of that hearing. These are my reasons for doing so. I have drawn on the helpful submissions of Mr Young, with whom Mr Holmes appears for Telstra in the application, in this judgment.

Background, scheme documents and parties to the proceedings

3. It likely goes without saying that Telstra is an Australian public company limited by shares, and its shares are listed on Australian Securities Exchange (“ASX”). Telstra is currently the ultimate holding company of the Telstra Group, which provides a range of telecommunications products and services in Australia and globally. The restructure of the Telstra Group involves, first, a transaction by which a recently incorporated holding company, Telstra Group Limited (“New Telstra Corp”), will become the new head entity of the Telstra Group and will generally function as a non-operating holding company of the Telstra Group. This transaction is referred to as the “Top Hat Restructure”. Second, the restructure involves a reorganisation of Telstra’s assets and liabilities within the Telstra Group, so that its business is operated in four key operating subsidiaries of New Telstra Corp, namely, Telstra Ltd (“ServeCo”), Telstra, Telstra TowerCo No. 2 Pty Ltd (“Amplitel HoldCo”) and Telstra International Holdings Pty Ltd (“Telstra International”). Those companies will respectively conduct four different businesses, referred to as the ServeCo Business, the InfraCo Fixed Business, the Amplitel Business and the International Businesses. The reorganisation relating to the ServeCo Business and the InfraCo Fixed Business is referred to as the “Business Restructure”; the reorganisation relating to Amplitel HoldCo is referred to as the “Amplitel Restructure”; and the reorganisation relating to Telstra International is referred to as the “International Restructure”. The majority of the steps required to implement the Top Hat Restructure and the Business Restructure will occur under the proposed scheme, and those steps are referred to as the “Top Hat Arrangement” and the “Business Restructure Arrangement” respectively. Associated transactions also occur outside of the scheme, pursuant to contractual arrangements (“Additional Steps”).

4. Telstra, New Telstra Corp and ServeCo have entered into an implementation deed by which they each agree to implement the scheme, the Additional Steps, the Top Hat Restructure and the Business Restructure (“Implementation Deed”). Under the Top Hat Arrangement, all of the ordinary shares in Telstra will be transferred to New Telstra Corp, which will become a public company, with its shares listed for quotation on the Australian Securities Exchange (“ASX”), and Telstra, which is currently the ultimate holding company of the Telstra Group, will become a direct wholly-owned subsidiary of New Telstra Corp. In consideration for the transfer of their Telstra shares to New Telstra Corp, eligible Telstra Shareholders will receive shares in New Telstra Corp on a 1:1 basis, which will have the same dividend and voting rights as existing Telstra shares. Telstra shareholders who participate in the scheme will therefore retain an equivalent economic interest in the Telstra Group to that which they presently hold. After the Top Hat Restructure (including the Additional Steps outside the scheme) has been implemented, Telstra’s assets and liabilities will be reorganised within the Telstra Group and, in particular, several steps will be taken to create a separate ServeCo Business and a separate InfraCo Fixed Business, through the Business Restructure. Telstra will retain and operate the InfraCo Fixed Business and continue to hold the assets and liabilities associated with that business, which comprise the Telstra Group’s passive infrastructure assets that underpin the Telstra Group’s fixed telecommunications network.

5. In implementing the corporate restructure, Telstra, ServeCo and other relevant members of the Telstra Group have entered or will enter into intercompany agreements which govern the provision of infrastructure access, services and support that each of the entities require in order to carry on their respective businesses following implementation of the corporate restructure (or in the case of two relevant companies, from 1 September 2021), as summarised in section 3.2.6 of the scheme booklet. Telstra and certain of its wholly-owned subsidiaries (including ServeCo) are presently parties to a deed of cross guarantee, which allows relief from certain financial reporting requirements. That deed will be revoked and a new deed of cross guarantee will be put in place between New Telstra Corp, InfraCo Fixed (and certain of its wholly-owned subsidiaries), ServeCo (and certain of its wholly-owned subsidiaries) and Telstra International (and certain of its wholly-owned subsidiaries) in connection with the corporate restructure.

6. It is also proposed that, immediately following implementation of the Top Hat Arrangement, a guarantee will be implemented between New Telstra Corp, Telstra and ServeCo under which New Telstra Corp and ServeCo will guarantee relevant debt in Telstra, which will then be conducting the InfraCo Fixed Business and will retain the core existing Telstra Group external financial indebtedness. Immediately following implementation of the Top Hat Arrangement, a guarantee will also be implemented between New Telstra Corp, ServeCo and Telstra by which New Telstra Corp and ServeCo will guarantee relevant debt in Telstra.

7. There is evidence that, in the light of these arrangements, the scheme is not expected to have a material impact on the Telstra Group’s existing external debt financing arrangements or the ability of the Telstra Group to continue to have sufficient access to debt financing and financial markets necessary to ensure continued liquidity for, and funding of, the Telstra Group’s business and operations, including during implementation of the scheme and going forward. It is also not expected that Telstra’s existing debt holders will suffer any material prejudice as a result of the scheme. This issue is also addressed in the independent expert report dealing with creditors position (“Creditor IER”).

8. The terms of the proposed scheme are set out in the scheme of arrangement which, inter alia, sets out the steps that will be undertaken in order to implement the Top Hat Arrangement and the Business Restructure Arrangement. A copy of the scheme of arrangement is at Annexure C to the scheme booklet, to which I refer below. New Telstra Corp has also executed a deed poll in favour of Telstra shareholders, by which it undertakes to issue shares in New Telstra Corp to certain eligible Telstra shareholders as the scheme consideration.

9. The Implementation Deed addresses the steps involved in the scheme, and the Additional Steps that are to occur outside of the scheme in order to implement the broader corporate restructure. The Implementation Deed (cl 2.3(b)(iii)) provides that the implementation of the Top Hat Arrangement is a condition precedent to the implementation of the Business Restructure Arrangement. Clause 3.1 of the Implementation Deed in turn provides that the “Restructure” (as defined) is conditional on, and will have no force or effect until, the satisfaction or waiver of the conditions precedent listed in clause 3.1 of the Implementation Deed, which include, inter alia, shareholder and Court approval, a competition law authorisation relating to the agreement between Telstra, ServeCo and nbn that amends the definitive agreements (as defined) between them, regulatory consents, necessary third party authorisations and ASX confirming that it will grant permission for New Telstra Corp to be admitted to the official list of the ASX and New Telstra Corp Shares to be quoted on the ASX. These conditions, other than the Court making orders to approve the scheme at the second Court hearing, must be satisfied or waived (where applicable) before or as at 8.00am on the day of the second Court hearing, at which the Court will determine whether to make orders approving the scheme under s 411(4)(b) and orders for the transfer of assets and liabilities under s 413 of the Act. Section 6.3 of the scheme booklet summarises those conditions precedent to the Implementation Deed which will remain outstanding as at the date the scheme booklet is sent to Telstra shareholders and also summarises the status of those conditions precedent. There is evidence that there are presently no known facts or circumstances likely to result in a failure of any condition precedent.

10. The proposed scheme booklet describes the proposed scheme and the broader corporate restructure of which the scheme forms part. It also provides a description of the Telstra Group and its businesses, provides financial information about the Telstra Group, refers to the tax implications of the scheme for certain Telstra shareholders and provides information concerning New Telstra Corp and the New Telstra Corp shares to be issued as the scheme consideration. The scheme booklet also annexes an independent expert report for shareholders (“Shareholder IER”) prepared by Grant Samuel & Associates Pty Limited (“Independent Expert”), and the Independent Expert there concludes that the scheme is in the best interest of Telstra shareholders and, on balance, the potential advantages of the scheme outweigh its disadvantages and risks. The Shareholder IER is also summarised in section 6.10.1 of the scheme booklet. The scheme booklet also annexes an independent limited assurance report prepared by Ernst & Young, which reports on the historical financial information and pro forma historical financial information for the Telstra Group included in the scheme booklet; a copy of the scheme of arrangement; and a copy of the notice of scheme meeting. The Independent Expert has also prepared the Creditor IER, as noted above, where the Independent Expert expresses the view that the Business Restructure Arrangement will not materially prejudice the interests of creditors in Telstra.

11. New Telstra Corp and ServeCo are properly named as defendants to this proceeding, as they are the proposed transferees of the assets and liabilities of Telstra, Consistent with the approach in other cases: Lendlease RL (Rowville) Pty Ltd v Lendlease Capital Service Pty Ltd [2018] FCA 1601; Royal Victorian Institute for the Blind Ltd v RBS.RVIB.VAF Ltd (2004) 206 ALR 581; [2004] FCA 735; Warrnambool Cheese & Butter Factory Company Limited v Warrnambool Cheese & Butter Factory Company Holdings Limited [2017] FCA 302 (“Re Warrnambool Cheese & Butter Factory”). They did not take a separate role but there is evidence of their support for the application.

Affidavit evidence and ASIC’s position

12. Telstra reads several affidavits in support of the application. By his affidavit dated 8 July 2022, Mr Benjamin Kiely, who is a partner in the firm acting for Telstra in the application, provides an overview of the scheme and the additional elements of the corporate restructure, and exhibits relevant documents. Mr Kiely also refers to the fact that Telstra’s directors will unanimously recommend that Telstra shareholders vote in favour of the scheme and that each Telstra director intends to vote any Telstra shares they hold or control in favour of the scheme.

13. By his affidavit dated 9 August 2022, Mr John Mullen, who is chair and a non-executive director of Telstra indicates his willingness to act as chair of the scheme meeting, and he addresses his interests in Telstra and the other necessary matters required by r 3.2(b) of the Supreme Court (Corporations) Rules 1999 (NSW) (“Corporations Rules”). By an affidavit also dated 9 August 2022, Mr Craig Dunn, who is a non-executive director of Telstra, indicates his willingness to act as chair of the scheme meeting if Mr Mullen is unable to do so, and he also addresses his interests in Telstra and the other necessary matters required by r 3.2(b) of the Corporations Rules. By an affidavit dated 12 August 2022, Ms Vicki Brady, who is the chief financial officer of the Telstra Group, provides information concerning ServeCo and New Telstra Corp.

14. By her affidavit dated 18 August 2022. Ms Jaye Gardner, who is a managing director and representative of the Independent Expert, addresses the preparation of the Shareholder IER and the Creditor IER and confirms that each report has been prepared in compliance with the Expert Witness Code of Conduct and applicable ASIC regulatory guides, and that she has made the inquiries she believes are necessary and desirable for the purpose of preparing the reports and has not become aware of any facts or circumstances that would cause her to change the opinion expressed in it.

15. By her affidavit dated 19 August 2022, Ms Lyndall Stoyles, who is general counsel and group executive of the legal, regulatory, government and sustainability division at Telstra, provides information as to Telstra and the current composition of the Telstra Group and its current businesses. Ms Stoyles then outlines the background to the proposed corporate restructure, and addresses the scheme and the additional aspects of the broader restructure. She also addresses the treatment of equity based incentive plans available to Telstra employees, executives and senior leaders under the scheme. Ms Stoyles also outlines the process adopted for verification of the scheme booklet and deals with board approval of the scheme booklet and the manner in which the scheme meeting is proposed to be conducted.

16. By his affidavit dated 19 August 2022, Mr Jack Hill, who is also a partner in the firm of solicitors acting for Telstra, deals with the provision of the scheme booklet and the giving of notice of the first Court hearing to ASIC. By letter dated 19 August 2022, ASIC has advised that, based upon its examination of the terms of the scheme and the scheme booklet, ASIC does not currently propose to appear to make submissions or to intervene to oppose the scheme at the first Court hearing.

Applicable principles, statutory prerequisites and the exercise of the Court’s discretion

17. Mr Young addresses the principles relevant to an application under s 411 for orders to convene a meeting to consider a proposed scheme of arrangement and, in anticipation of matters arising at the second Court hearing, the principles applicable to s 413 of the Act. Mr Young rightly submits that, in exercising the Court’s discretion to order the convening of a scheme meeting, Australian courts have commonly applied the approach described by Street J (with whom Hutley and Samuels JJA agreed) in FT Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR:

“The approach taken upon a summons is that the court will not ordinarily summon a meeting unless the scheme is of such a nature and cast in such terms that, if it achieves the statutory majority at the creditors’ meeting the court would be likely to approve it on the hearing of a petition which is unopposed.”

18. Mr Young also refers to other decisions where that approach has been followed, including Re BINGO Industries Limited [2021] NSWSC 798 at [9] and Re Link Administration Holdings Limited [2022] NSWSC 650 at [17]. Mr Young refers to my summary of the applicable principles in Re Ellerston Global Investments Ltd [2020] NSWSC 879 (“Ellerston”) as follows:

“It is, of course, well-established that the Court will order the convening of a scheme meeting and approve a draft explanatory statement if it is satisfied that the plaintiff is a Part 5.1 body; the proposed scheme is an arrangement within the meaning of s 411 of the Corporations Act; the Explanatory Booklet will provide proper disclosure to members; the scheme is bona fide and properly proposed; ASIC has had a reasonable opportunity to examine the terms of the scheme and the Explanatory Booklet and make submissions and has had 14 days’ notice of the proposed hearing date; the procedural requirements of the Supreme Court (Corporations) Rules 1999 (NSW) have been met; and there is no apparent reason why the scheme should not, in due course, receive the Court’s approval if the necessary majority of votes is achieved: Re Staging Connections Group Ltd [2015] FCA 1012 at [19]- [20]; Re Atlas Iron Ltd [2016] FCA 366; (2016) 112 ACSR 554 at [30]; Re Duet Finance Ltd [2017] NSWSC 415 at [15]; Re Villa World Ltd [2019] NSWSC 1207 at [15].

The Court will not ordinarily summon a meeting at the first court hearing unless the scheme is of such a nature and cast in such terms that, if it receives the statutory majority at the meeting, the Court would be likely to approve it on the hearing of a petition which is unopposed: F T Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 at 72, approved in Australian Securities Commissions v Marlborough Gold Mines Ltd [1993] HCA 15; (1993) 177 CLR 485 at 504. In Re Foundation Healthcare Ltd [2002] FCA 742; (2002) 42 ACSR 252 at [36] and [44] (cited with apparent approval in Re CSR Ltd [2010] FCAFC 34; (2010) 183 FCR 358 at [58]), French J observed that:

“... by granting leave to convene the meeting, the court does not give its imprimatur to the proposed scheme. If the arrangement is one that seems fit for consideration by the meeting of members or creditors and is a commercial proposition likely to gain the court’s approval if passed by the necessary majorities, then leave should be given: Re ACM Gold Ltd (1992) 34 FCR 530; 107 ALR 359; 7 ACSR 231; 10 ACLC 573 (O’Loughlin J). The court is not required to give close consideration to the effects of the scheme upon individual members of the classes of members or creditors affected. So to do would be to “introduce burdensome and to a large extent ineffectual consideration at this interlocutory stage”: Re Jax Marine Pty Ltd [1967] 1 NSWR 145 at 148 (Street J)....

The court at the stage of ordering a meeting to approve a scheme does not ordinarily go very far into the question of whether the arrangement is one which warrants the approval of the court ... That question is to be answered when the scheme returns to the court for final approval. That is not to exclude the possibility that a scheme may appear on its face so blatantly unfair or otherwise inappropriate that it should be stopped in its tracks before going any further.”

At the first hearing, the Court is not concerned with whether final approval should be given to the scheme, but whether the scheme is one which is adequately explained to those who have a financial interest in it, and whether there is any obvious flaw in the scheme, such that it would be inappropriate even for it to be submitted for consideration: Re Abacus Funds Management Ltd [2005] NSWSC 1309; (2006) 24 ACLC 211 at [23]; Re Villa World above at [18]. The Court is also not required to be satisfied that no better scheme could have been proposed, but with whether sensible business people might consider the arrangement proposed is of benefit to members: Centrebet International Ltd [2011] FCA 870 at [29]; Re SAI Global Ltd [2016] FCA 1312 at [18]; Re BIS Finance Pty Ltd Finance Pty Ltd [2017] NSWSC 1713 at [22].”

19. Mr Young also referred to the observation of Beach J in Re RXP Services Limited [2021] FCA 38 at [18]-[19] as follows:

“Now as I have said on more than one occasion, my function on an application to order the convening of a meeting is supervisory.  At this stage I should generally confine myself to ensuring that certain procedural and substantive requirements have been met including dealing with adequate disclosure, but with limited consideration of issues of fairness.  But having said that, it is appropriate to consider the merits or fairness of a proposed scheme at the convening hearing if the issue is such as would unquestionably lead to a refusal to approve a proposed scheme at the approval hearing, that is, the proposed scheme appears now to be on its face “so blatantly unfair or otherwise inappropriate that it should be stopped in its tracks before going any further” (Re Foundation Healthcare Ltd (2002) 42 ACSR 252 at [44] per French J).” [emphasis added]

20. Mr Young also rightly points out that the authorities make clear that it is not the Court’s role to express a view on whether the proposed scheme should be approved and the question whether or not to accept particular consideration for shares is a commercial matter for shareholders to assess, once the Court is satisfied that shareholders are acting on sufficient information and with time to consider what they are voting on: Re Cytopia Ltd [2009] VSC 560 at [3]; Ellerston at [27]; Re Australian Pharmaceutical Industries Ltd [2022] FCA 103 at [22].

21. Mr Young also submits and I accept that the Court’s task at the first Court hearing involves the assessment of two principal matters, namely whether the statutory prerequisites to the making of orders convening a meeting have been met and whether it is appropriate for the Court to exercise its discretion in favour of making those orders. I now turn to his submissions as to those matters.

22. Mr Young submits and I accept that the applicable statutory pre-requisites to the making of an order under s 411(1) have been satisfied. I am satisfied that the application concerns a compromise or arrangement that is proposed between Telstra, which is a Pt 5.1 body, and its members, where the proposed scheme will effect an acquisition of members’ shares as an aspect of the Top Hat Arrangement. The internal restructure contemplated by the Business Restructure Arrangement also involves an element of compromise or arrangement between the scheme company and its member or members, so far as, on implementation of the scheme, Telstra will cease to hold relevant assets, will cease to be subject to relevant liabilities and will cease to be a party to the Transferring Litigation (as defined), and the economic value of the transferred part of its business will be transferred to the transferor companies: JP Morgan Operations Australia Limited v JP Morgan Australia Group Pty Limited [2018] FCA 1131 at [18]; Re Woolworths Group Ltd [2019] FCA 1810 at [20(6)]; Re Anglo-Gaelic Investments Pty Ltd [2019] NSWSC 441 (“Re Anglo-Gaelic Investments”).

23. Mr Young notes that, as required by r 2.4(2) of the Corporations Rules, the evidence relied upon by Telstra includes an ASIC company extract recording the results of a search of the records of ASIC in relation to Telstra. He points out that r 2.4(2) of the Corporations Rules requires that the search be carried out no earlier than 7 days before the originating process is filed, whereas here the search was here carried out 9 days before the Originating Process was filed on 8 July 2022, and Telstra seeks an order that the Court extending that time. I make that order to the extent that it is required, where I am satisfied that 14 days’ notice of the hearing has been given to ASIC, which has had a reasonable opportunity to examine the terms of the proposed scheme and the draft explanatory statement, and to make submissions to the Court. The requisite information about the chairman and alternate chairman for the proposed meeting has been provided under r 3.2 of the Corporations Rules.

24. I am also satisfied that the information to be provided to shareholders in the scheme booklet meets the requirements of s 412 of the Act and reg 5.1.01 and Sch 8 of the Corporations Regulations 2001 (Cth). As Mr Young points out, the scheme booklet here explains the effect of the compromise or arrangement, and discloses any material interest of the directors, and the effect on those interests of the compromise or arrangement so far as it is different from the effect on the like interests of other persons. The effect of the scheme is addressed in sections 1 and 2 of the scheme booklet, and the required information in relation to the material interests of directors is addressed in section 7.5 of the scheme booklet. The explanatory statement also sets out the prescribed information, under reg 5.1.01 and Sch 8 of the Corporations Regulations, as evidenced by a Compliance Schedule in Ex JAH-1 to Mr Hill’s affidavit. I am also satisfied, by the evidence led in respect of the verification process, that the explanatory statement sets out the material information to the making of a decision whether or not to agree to the compromise or arrangement. On that basis, I am satisfied that the procedural requirements in respect of the proposed scheme are satisfied and I now turn to the exercise of the Court’s discretion to make the orders in respect of the scheme meeting.

25. Mr Young also submits and I accept that the relevant discretionary considerations involve two main questions being, first, whether the scheme is fit for consideration by the members and, second, whether the members are to be properly informed as to the nature of the scheme. I recognise that, as Mr Young points out, the scheme booklet contains a recommendation from all Telstra directors that shareholders vote in favour of the scheme, and the Shareholder IER expresses the view that the scheme is in the best interest of Telstra shareholders. The scheme discloses no apparent unfairness that would be likely to preclude approval of the scheme, subject to the review of the particular issues that I address below. There is nothing in the terms or structure of the scheme that gives rise to any apparent reason that, if agreed to at the scheme meeting, the Court would not approve the scheme at the second Court hearing.

Particular issues raised by Telstra

26. Mr Young draws several features of the scheme to the Court’s attention and submits that none of the matters gives rise to any likelihood that the Court would decline to approve the scheme at the second Court hearing.

The orders that will be sought under s 413 of the Act

27. First, dealing with the orders that will be sought under s 413 of the Act, Mr Young rightly points out that that section allows the Court to make orders to facilitate the reconstruction of a company if three requirements are satisfied. Those requirements are: that an application has been made under Pt 5.1 of the Act for the approval of a compromise or arrangement; the compromise or arrangement has been proposed for the purposes of, or in connection with, a scheme for, relevantly, the reconstruction of a Pt 5.1 body or bodies; and the whole or any part of the undertaking or property of a body concerned in the scheme is to be transferred to a company under the scheme: see, for example, Re Application of AGL Sydney Ltd (1994) 13 ACSR 597; Barrick (Australia Pacific Exploration) Pty Ltd v Barrick (PD) Australia Pty Ltd [2017] FCA 998 at [81]; Re Ovato Print Pty Ltd [2020] NSWSC 1882 (“Re Ovato Print”) at [47].

28. The element of a compromise or arrangement has been established, at least to the extent necessary at the first Court hearing for the reasons noted above, as it needed to be in order to convene the scheme meeting. Each transferee company is Pt 5.1 body and I am satisfied that the scheme involves a “reconstruction” which, for the purposes of s 413, is given a commercial meaning and not a restrictive interpretation. A reconstruction occurs where, after the proposed transfer of assets, substantially the same undertaking will be carried on by substantially the same members who previously conducted it, and the reference in s 413 to a “reconstruction” at least extends to the transfer of the assets and liabilities of one or more companies in a corporate group to another company or companies in that corporate group: Re Anglo-Gaelic Investments at [26]; Re Ovato Print at [47]. I can also be satisfied, for the purposes of a first Court hearing, that part of the undertaking or property of a body concerned in the scheme, namely Telstra, is to be transferred to a company under the scheme, where Telstra will seek orders under s 413 at the second Court hearing to transfer certain of its assets and liabilities, including contractual rights and obligations, to ServeCo and New Telstra Corp, and also to transfer certain pending legal proceedings to which Telstra is a party. I am satisfied that no reason is apparent at this hearing why such orders should not be made at the second Court hearing.

29. Mr Young also points out that the joinder of the relevant transferee companies as defendants to the proceedings is sufficient to bind them to the scheme and, here, the transferee companies are also parties to the scheme, so there can be no doubt that they will be bound by its terms and by the s 413 orders if made. He submits and I accept that an internal corporate reconstruction of this character may properly be dealt with as a members’ scheme between the transferring company and its members, and there is nothing in s 413(1) which limits a reconstruction to one in which the whole undertaking or all the property of one company is transferred to another, and several reconstructions approved by the Courts under s 413 have involved the partial transfer of assets and liabilities of the scheme company: Mercedes-Benz Financial Services Australia Pty Limited v Daimler Truck Financial Services Australia Pty Limited [2021] FCA 1279 at [22], [25]; Re Warrnambool Cheese & Butter Factory at [11].

30. Mr Young submits, and I accept, that the potential effect of the scheme on creditors, occasioned by the proposed transfer of the relevant assets and liabilities, will be addressed on the second court hearing as a consideration relevant to the discretion whether to approve the scheme: Re Warrnambool Cheese & Butter Factory at [11]; Re Anglo-Gaelic Investments at [26]. To the extent that it is appropriate to consider that matter in a preliminary way at the first Court hearing, the evidence to which I have referred above, including the Creditors IER, the intercompany arrangements and the due diligence process in respect of the scheme, indicates that creditors of the Telstra Group will not suffer material prejudice as a result of the scheme. There is also no reason to think that the interests of employees will be adversely affected if the proposed scheme proceeds, where employees will be transferred on the same terms and conditions as apply to them in their employment with Telstra and their accrued entitlements will also be recognised. There is also no reason to think that the scheme will prejudice the interests of counterparties to litigation where any ServeCo’s assets and the intercompany agreements that will be put in place should allow it to meet any judgment against it. For these reasons, there is no reason to think that the s 413 orders are not capable of being made at the second Court hearing and no reason not to convene the scheme meeting arises from these matters.

Performance risk

31. Mr Young submits and I accept that the issue of performance risk does not arise here, since the scheme binds New Telstra Corp to perform the actions attributed to it under the scheme, and in particular to issue the New Telstra Corp shares to eligible shareholders. He also points out that, under the terms of the scheme, Telstra shares will only be transferred to New Telstra Corp once New Telstra Corp shares are issued to eligible shareholders, which removes any performance risk in so far as the transfer of scheme shares in return for the scheme consideration is concerned.

Ineligible Foreign Shareholders

32. Mr Young points out that the proposed treatment of Ineligible Foreign Shareholders (as defined) is set out at cl 6 of the scheme, and summarised in section 6.4 of the scheme booklet. As Mr Young points out, the proposed treatment of Ineligible Foreign Shareholders under the scheme accords with common practice adopted in schemes of arrangement where scrip comprises (or is a component of) the proposed scheme consideration, and the cases have held that arrangements of this kind do not require that ineligible foreign shareholders meet together as a separate class for the purposes of considering the proposed scheme of arrangement: Re Hills Motorway Ltd (2002) 43 ACSR 101; Re Vault Intelligence [2020] FCA 1342 at [69]. I am satisfied that no need for a separate class arises with respect to Ineligible Foreign Shareholders.

Telstra’s employee equity plans

33. Mr Young points out that participants in Telstra’s existing employee equity plans hold either Restricted Shares or Performance Rights (as defined) and he addressed the manner in which each will be treated under the Top Hat Arrangement. I accept that no class issues arise in relation to the proposed treatment of Telstra’s employee equity plans, where there is no acceleration of performance or vesting conditions, or cancellation of performance rights in return for cash payments, and at least the latter generally does not require that plan participants vote in a separate class in any event: Re Foster’s Group Ltd (No 2) [2011] VSC 547 at [38]-[43].

Director interests

34. Each of the Telstra directors holds Telstra shares and will be able to participate in the scheme, and that matter is disclosed in section 7.5 of the scheme booklet. All Telstra directors immediately prior to the Top Hat Implementation Date (as defined) will become directors of New Telstra Corp, and the terms of their engagement (including their remuneration) will be substantially the same as their existing terms as Telstra directors. Section 7.5 of the scheme booklet disclosed that no Telstra director has any other interest in the scheme or in the Corporate Restructure or in New Telstra Corp, and no amounts have been paid or agreed to be paid to a Telstra director either as (1) compensation for the loss of, or as consideration for, or in connection with his or her retirement from, office in Telstra in connection with the Corporate Restructure; or (2) to induce them to become, or to qualify them as, a director of New Telstra Corp. No issue arises as to whether a director who is to receive an additional benefit if a scheme is approved should make a recommendation to members about voting in favour of the scheme.

Shareholder warranties

35. Clause 4.4 of the scheme of arrangement sets out a warranty to be given by each scheme participant to Telstra and to New Telstra Corp at the date of the transfer of their scheme shares, that their shares will be free from encumbrances. That warranty is in common form and is disclosed in section 2.11.1 of the scheme booklet. Mr Young submits and I accept that deemed warranty clauses are commonly found in schemes of arrangement and are acceptable provided they are sufficiently disclosed, since their purpose and effect is to ensure that a scheme participant whose shares are subject to an encumbrance is not unfairly advantaged: Re Atlassian Corporation Pty Ltd [2013] FCA 1451 at [36]; Re Villa World Ltd [2019] NSWSC 1207 at [25]. This matter gives rise to no reason not to convene the scheme meeting

Section 411(17) of the Act

36. I accept that the Court should address the position under s 411(17) of the Act is on the application to approve a scheme at the second Court hearing: Re Macquarie Private Capital A Ltd [2008] NSWSC 323 at [23]-[31]; Ellerston at [35].

Approval of the scheme booklet, dispatch of the scheme booklet and conduct of the scheme meeting

37. Mr Young points out that s 411(1) of the Act provides that, if the Court has made an order convening a meeting or meetings of members or creditors, the Court “may approve the explanatory statement” which is contained in the scheme booklet. Mr Young recognises that the practice of courts vary in this respect, although such orders have regularly been made in this Court. In any event, Telstra did not seek the approval of the explanatory statement by the Court and I need not make such an order where it is not sought.

38. Mr Young also addresses the means of dispatch of the scheme booklet to Telstra shareholders, in hard copy form or by electronic means. He submits and I accept that this method of dispatch has for a number of years been commonplace for schemes of arrangement for shareholders who have nominated an electronic address; s 411 of the Act permits the Court to order that a scheme meeting “be convened in such manner…. as the Court directs”; ss 110C to 110E of the Act also permit this method of dispatch; and the proposed methods of dispatch referred to above are consistent with the methods of service of notices set out in cl 18.3 of Telstra’s constitution.

37. It is proposed that the scheme meeting will be held as a hybrid meeting. Mr Young submits and I also accept that the Court has power to make orders for a hybrid meeting under ss 411 and 1319 of the Act, which confer a broad power on the Court to make orders for the conduct of scheme meetings, and under s 249R of the Act, which was introduced by the Corporations Amendment (Meetings and Documents) Act 2022 (Cth), with effect from 1 April 2022; see also Re Tabcorp Holdings Ltd [2022] NSWSC 448; Re AGL Ltd [2022] NSWSC 576. Mr Young points out that, in any event, Telstra’s constitution permits a meeting to be held in this manner.

United States securities law exemption

40. Mr Young also foreshadows Telstra’s intention to seek to rely on the exemption to registration requirements set out in s 3(a)(10) of the Securities Act of 1933 (US): Re Simavita Holdings Limited [2013] FCA 1274 at [50]–[52]; Re Westfield Corporation Ltd (No 2) [2018] NSWSC 921 at [12]. I note that intention and that matter is otherwise properly deferred to the second Court hearing.

Orders

41. For these reasons, I was satisfied that the proposed scheme was an arrangement for the purposes of s 411 of the Act and that an order convening the scheme meeting and ancillary orders should be made. I made the orders sought by Telstra at the conclusion of the first Court hearing on 23 August 2022.

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Decision last updated: 08 September 2022