Re White Horses Pty Ltd (No 2)

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SUPREME COURT OF QUEENSLAND

CITATION:

Re White Horses Pty Ltd (No 2) [2016] QSC 282

PARTIES:

WHITE HORSES PTY LTD
ACN 009 696 637

(applicant)

FILE NO/S:

SC No 3047 of 2016

DIVISION:

Trial Division

PROCEEDING:

Application

DELIVERED ON:

2 December 2016

DELIVERED AT:

Brisbane

HEARING DATE:

24 June 2016, further written submissions on 18 November and 28 November 2016

JUDGE:

Bond J

ORDER:

The orders of the Court are that:

1.       The application for approval of the scheme of arrangement between the applicant and its members is dismissed.

2.      The applicant must pay the costs of the shareholder objectors.

CATCHWORDS:

CORPORATIONS – ARRANGEMENTS AND RECONSTRUCTIONS – SCHEMES OF ARRANGEMENT OR COMPROMISE – APPROVAL OF SCHEME BY COURT – EXERCISE OF DISCRETION – GENERALLY – where the scheme was sought to be entered into to overcome, amongst other things, the procedure in s 246B(2) of the Corporations Act 2001 (Cth) to vary or cancel class rights – where the applicant submits that no inconsistency arises with s 246B because the ultimate purpose of the scheme is not to vary or cancel class rights but rather to wind up the applicant – whether the scheme is to be taken as effecting a variation or cancellation of class rights

CORPORATIONS – CONSTITUTION AND REPLACEABLE RULES – MEMORANDUM AND ARTICLES OF ASSOCIATION – ARTICLES OF ASSOCIATION – PARTICULAR ARTICLES – CONSTRUCTION – OTHER CASES – where the applicant’s constitution provides that each member holds a parcel of shares and each parcel is associated with, and attached to, a lease between the applicant and the member – whether, on the proper construction of the applicant’s constitution, each distinct parcel of shares is properly treated as a class of shares

CORPORATIONS – ARRANGEMENTS AND RECONSTRUCTIONS – SCHEMES OF ARRANGEMENT OR COMPROMISE – APPROVAL OF SCHEME BY COURT – EXERCISE OF DISCRETION – OTHER MATTERS – where the consideration that a member is entitled to under the scheme is proportionate to the number of shares held by that member – where the market value of the leasehold interests held by a member is not proportionate to the number of shares held – where the objectors submit that the proportionate entitlements were not fair and equitable between different members – where the applicant submits that all members: will incur significant costs from the building’s structural deficiencies if the scheme was not approved; and will receive a premium for their shares if the scheme was approved – whether, in the circumstances, a hypothetical intelligent and honest shareholder could have approved the scheme

CORPORATIONS – ARRANGEMENTS AND RECONSTRUCTIONS – SCHEMES OF ARRANGEMENT OR COMPROMISE – APPROVAL OF SCHEME BY COURT – EXERCISE OF DISCRETION – OTHER MATTERS – where the chairman of the applicant sent correspondence to scheme participants which had not been approved by the Court at the first hearing – where the objectors submit that the correspondence was misleading and likely had the effect of positively influencing members – whether the unauthorised correspondence would have caused the…

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Details
Case
[2016] QSC 282
Decision Date

CaseChat Overview and Summary

In the case of Re White Horses Pty Ltd (No 2), the applicants, White Horses Pty Ltd, sought approval for a scheme of arrangement involving its members. The primary purpose of the scheme was to wind up the company and distribute the proceeds to its members. However, the scheme also involved altering the rights attached to the members' shares, which raised questions about its compliance with the Corporations Act 2001 (Cth). The objectors to the scheme argued that the scheme was not fair and equitable and that it constituted an impermissible alteration of class rights. The legal issues before the court included whether the scheme constituted a variation or cancellation of class rights, the construction of the company's constitution in relation to the classification of shares, and whether the scheme was fair and equitable to all members.

The court considered the arguments presented by both the applicants and the objectors. It found that the scheme was not merely a winding-up process but also involved altering class rights, which required compliance with specific statutory procedures. The court also concluded that each distinct parcel of shares, associated with a lease, should be treated as a separate class. Regarding the fairness of the scheme, the court found that the consideration each member received was proportionate to the number of shares held, but the market value of the leasehold interests was not. Despite the applicants' argument that all members would benefit from a premium if the scheme was approved, the court determined that a hypothetical intelligent and honest shareholder could not have approved the scheme due to the disproportionate market value of the leasehold interests.

Furthermore, the court addressed the issue of unauthorised correspondence sent by the chairman of the company to scheme participants. The objectors argued that this correspondence was misleading and could have influenced members to vote under a serious misapprehension. The court concluded that the unauthorised correspondence did not cause such a misapprehension, as it did not provide any new or material information that would affect the members' decision.

The court ultimately dismissed the application for approval of the scheme of arrangement and ordered the applicant to pay the costs of the shareholder objectors. The decision underscored the importance of full disclosure and compliance with statutory requirements in approving schemes of arrangement.

Orders

Orders of the court

The orders of the Court are that:

1. The application for approval of the scheme of arrangement between the applicant and its members is dismissed.

2. The applicant must pay the costs of the shareholder objectors.

Background

Background to the litigation

As to this, in Re PR Finance Group Ltd (No 2) [2013] FCA 633, Jacobson J observed (emphasis added):[27] It is fundamental to the exercise of the discretion to approve a scheme of arrangement that there be full disclosure of all material facts to shareholders. Where, as here, the scheme is in the nature of an acquisition, appropriate safeguards, analogous to those which apply to conventional takeovers should be applied: Re NRMA Ltd (2000) 33 ACSR 595 at [16] per Santow J.[28] Materiality is a question of mixed fact and law which depends upon the facts and circumstances of the particular case: Pancontinental Mining Ltd v Goldfields Ltd (1995) 16 ACSR 463 at 466.[29] I accept that in the context of a scheme, the extent of disclosure that is required depends not only on the nature of the scheme but on the total context in which information is presented or omitted: Zenyth Therapeutics Ltd v Smith (2006) 60 ACSR 548 at [85]; see also Re Crusader Ltd [1996] 1 Qd R 117 at 126.[30] The object of the requirement is to put shareholders of the target in possession of information that will enable them to make an informed and critical assessment of the offer. Information is material if it could affect the shareholders' assessment of whether the offeror is likely to improve its offer, or the prospects of a competing offer: Pancontinental at 467.[31] If a deficiency in disclosure is identified, the court considers whether there is any reasonable ground for supposing that the deficiency would cause shareholders to vote, or to abstain from voting, under a serious misapprehension of the position: ENT Pty Ltd v Sunraysia Television Ltd (2007) 61 ACSR 626 at [20] and the authorities there cited; see also Re Castlereagh Securities Ltd [1973] 1 NSWLR 624 at 636. In this case, by letter dated 31 May 2016, ASIC indicated a concern arising out of two communications made to shareholders by or on behalf of the directors of the company. On 3 May 2016, the scheme booklets, notice of scheme meeting and proxy forms were posted to shareholders. There was some problem with delivery by Australia Post and some were delivered personally on 6 May 2016. In the usual way, the scheme booklet:(a)made it very clear that the booklet contained important information which should be examined in its entirety;(b)expressed the unanimous recommendation of the board of the Company that shareholders vote in favour of the resolution in the absence of a superior offer;(c)indicated that if the appropriate majority was obtained there would be a second court date at which the Court would consider whether to approve the scheme;(d)expressly noted that:The fact that, under subsection 411(1) of the Corporations Act, the Court has ordered that the Scheme Meeting be convened and has approved this Scheme Booklet does not mean that the Court: … has formed any view as to the merits of the Scheme or as to how White Horses Shareholders should vote on the Scheme Resolution at the Scheme Meeting (on this matter, White Horses Shareholders must reach their own decision);(e)expressly noted that even if the scheme achieved the requisite votes at the scheme meeting, it would still be necessary that Court approval be obtained and that there would be further opportunity to object in Court at the second court hearing:If you wish to object to the Scheme at the court hearing for the approval of the Scheme, or to make a complaint to ASIC, you should seek independent legal advice and note the date of the Second Court Hearing (stated on page 2 this Scheme).

Evidence

Evidence Before The Court

Full text does not contain this section.

Decision

Reasons for decision

The most authoritative statement of the qualification is not that by McLelland J in Re Glendale Land Development (in liq) referred to by the Company. Rather it appears in Australian Securities Commission v Marlborough Gold Mines Ltd[2], where the High Court (Mason CJ, Brennan, Dawson, Toohey and Gaudron JJ) held (emphasis added):[2](1993) 177 CLR 485 at 500 to 501.27. The Commission’s argument is that s.411 is a machinery provision which does no more than make an agreement binding on a company and its members and creditors notwithstanding that one or more members or creditors do not join in that agreement. That was the view which Street J took of s.181 of the Companies Act 1961 (N.S.W.), a legislative predecessor of s.411, in Re Norfolk Island and Byron Bay Whaling Co. Ltd., following expressions of view to the same effect in earlier English decisions. In these decisions, the statement is repeated that the statutory power to approve an arrangement does not apply to an ultra vires arrangement or one which can only be effected in a prescribed way, for example, a reduction of capital or a reconstruction. This statement was taken up by Martin J in Re International Harvester Co. of Australia Pty. Ltd. In that case, in a passage with which we entirely agree, [Martin J] said:“The authorities make it clear, I think, that sec. 153 (the then equivalent of s.411 of the Law) is to be construed liberally, and that it is wide enough to include schemes altering the provisions in a memorandum relating to the share capital of a company; and it may be that it extends so far as to cover schemes altering other provisions in a memorandum. But however widely the language of sec. 153 may be construed, it cannot, of course, operate to enable a company to escape from compliance with those provisions of the Act which, either expressly or by implication, lay down a special and exclusive procedure for effecting certain kinds of alterations to the memorandum.”28. Further, it has been said that a company’s memorandum can only be altered in the manner prescribed by the relevant companies legislation itself because it would be strange if such an alteration could be achieved otherwise than by complying with the statutory prescription. On the other hand, it has been recognized in England that the statutory power extends to approval of an arrangement altering the rights attached to shares by the memorandum. And in Scotland it has been held that rights attached to shares by the memorandum may be altered by a scheme of arrangement, even where the memorandum makes no provision for the alteration of those rights. 29. Section 171(1) now provides that the memorandum of a company may be altered to the extent, and in the manner, provided by the Law but not otherwise. However, s.172 confers extensive powers to alter the memorandum by special resolution. Section 172(2) provides:“Subject to this section, subsection 180(3) and section 260, if a provision of the memorandum of a company could lawfully have been contained in the articles of the company, the company may, by special resolution, alter the memorandum: (a) unless the memorandum prohibits the alteration of that provision - by altering that provision; or (b) unless the memorandum prohibits the omission of that provision - by omitting that provision.”This sub-section currently constitutes authority, within the prescribed limits, for approval of an arrangement which alters rights attached to shares by the memorandum.30. Whatever the basis for the United Kingdom decisions which sanctioned such an arrangement involving an alteration of rights, the interpretation given to the predecessors of s.411 provides no justification for regarding the section as constituting authority for approving an arrangement containing a provision which is inconsistent with the express or implied provisions of the Law.…

Ratio Decidendi

Legal Principle Established

Full text does not contain this section.