Re White Horses Pty Ltd (No 2)
[2016] QSC 282
•2 December 2016
SUPREME COURT OF QUEENSLAND
CITATION: | Re White Horses Pty Ltd (No 2) [2016] QSC 282 |
PARTIES: | WHITE HORSES PTY LTD (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 members to vote under a serious misapprehension of the position Corporations Act 2001 (Cth), s 136, s 246B, s 411, s 459A, s 459P, s 461 Ashton Millson Investments Ltd v Colonial Ltd (2003) 48 ACSR 581, cited Wilson v Meudon Pty Ltd [2005] NSWCA 448, cited R P Austin and A J Black, LexisNexis Australia, Austin & Black’s Annotations to the Corporations Act |
COUNSEL: | L A Jurth for the applicant D D Purcell for the objectors |
SOLICITORS: | Merthyr Law for the applicant Cronin Shearer Lawyers for the objectors |
Introduction
This is the second court hearing for a proposed scheme of arrangement between the applicant (the Company) and all of its members.
The Company is a home unit company. It owns land on which a building containing 49 home units is built. Although its constitution will be considered in more detail later in these reasons, it suffices presently to say that each shareholder holds a parcel of shares and each parcel is associated with and attached to a lease between the Company and the relevant shareholder, which lease confers the right of occupation for a particular home unit.
The Board of the Company has formed the view that the building is at risk of serious dilapidation and that it has come to the end of its commercial life. Very substantial expenditure in the short term would be required to return the building to a safe state. The Board proposes a scheme of arrangement which would see the whole of the Company’s land including the building sold to a developer for a specified sum, the surrender of all the leases, and the allocation of the purchase price among the shareholders in accordance with the proportion that a shareholder’s shares bear to the total number of shares issued by the Company, followed by a winding up of the Company.
On 28 April 2016, Jackson J made orders pursuant to s 411(1) of the Corporations Act 2001 (Cth) (the Act) convening a meeting of the members of the Company to consider the proposed scheme. At the meeting on 28 May 2016, convened in accordance with his Honour’s orders, the evidence reveals that 100% of the shareholders were present either in person or by proxy. The meeting was held at 10.00am. The chair opened the meeting and called for the votes on the scheme resolution to be provided. The resolution was carried and the meeting closed at about 10.10am.
The resolution in favour of the scheme was passed by 79.792% of the total shareholding voting (of those shareholders present either in person or by proxy). The particulars of the vote were as follows:
(a)for: 38 votes representing 188740 (or 79.7920%) of the total voting shares;
(b)against: 10 votes representing 43800 (or 18.5170%) of the total voting shares;
(c)abstaining: 1 vote representing 4000 (or 1.6910%) of the total voting shares.
Accordingly, the resolution in favour of the scheme was passed by the requisite majority referred to in s 411(4) of the Act.
The applicant now seeks an order pursuant to s 411 of the Act approving the scheme of arrangement.
The application initially came before me on 1 June 2016, but was adjourned –
(a)to enable the Company to comply with the notice provisions of r 3.4 of Schedule 1A to the UCPR, which had been inadvertently overlooked; and
(b)to give shareholder objectors an opportunity to present material explaining their reasons for opposition.
The Company complied with the notice provisions and 6 shareholder objectors (the objectors), by their counsel, appeared before me to submit that I should dismiss the application for approval. The objectors represented a combined total of 8.941% of the total voting shares.
The relevant legal principles
It is appropriate first to identify the legal principles which govern the approach which I should take to the disposition of this application.
As I explained in Re Queensland Professional Credit Union Ltd (No 2) [2016] QSC 105 at [8], before an order approving a scheme can be made:
(a)first, the jurisdiction requirements to attract s 411 must be satisfied;
(b)second, the procedural requirements for the Court to make the convening order must be satisfied;
(c)third, the Court must order the convening of a meeting of relevant members;
(d)fourth, the meeting must be validly convened; and
(e)fifth, the meeting must approve the scheme by the specified statutory majorities.
The judgment of Jackson J to which I have referred provides a sufficient basis for regarding the first, second and third requirements as having been satisfied. No contention to the contrary was advanced before me.
The fourth and fifth requirements concern the scheme meeting. I observe:
(a)Subject to one caveat, the evidence reveals that the meeting was convened in accordance with the terms of the order of Jackson J.That was accepted by the objectors.
(b)The caveat is that there were two communications made to shareholders after the convening order and before the meeting which had not been placed before the Court for its approval. No submission was made that the fact of the communications sounded as to the validity of the convening of the meeting. I think their significance is properly dealt with as a matter relevant to my discretion to approve, a question to which I will turn later in these reasons.
(c)As I have mentioned, the resolution in favour of the scheme was passed by the requisite majority.
(d)Accordingly, it seems to me that my discretion whether or not to approve the scheme has been enlivened.
On an application such as this, I am exercising a supervisory jurisdiction. I am not bound to approve the scheme merely because the requirements to which I have referred have been met. The approach which should be taken to the exercise of the supervisory jurisdiction was not in dispute: I should regard the relevant considerations as sufficiently addressed in Re Seven Network Ltd (No 3) (2010) 267 ALR 583 at [31] to [45] per Jacobson J, which I will quote below (emphasis added):
[31] The principles which govern the exercise of the court’s discretion to approve a scheme are well settled. The court has a discretion whether to approve a scheme, and is not bound to approve it merely because it has previously made orders for the convening of meetings or, as I said earlier, because the statutory majorities have been achieved: Re NRMA Ltd (No 2) (2000) 156 FLR 412; [2000] NSWSC 408 at [22] (Re NRMA Ltd (No 2)). Santow J there referred to a passage from a well-known text on takeovers and reconstructions, in which it was said that the court’s jurisdiction is supervisory; it is concerned to be satisfied that there has been an absence of oppression, and that the compromise or arrangement is one which is capable of being accepted.
[32] It has been said on many occasions that the court will usually approach the task upon the basis that the members are better judges of what is in their commercial interests than the court. Santow J said in Re NRMA Ltd (No 2) at [23], citing earlier authority:
“After all, it is their (the members’) money which is at stake.”
[33] The Corporations and Markets Advisory Committee (CAMAC) recently observed, at para 3.5.2 of its December 2009 Report:
“It is not the role of the court to usurp the decision of shareholders by imposing its own commercial judgment on the scheme, nor to satisfy itself that no better scheme could have been devised.”
These observations were supported by authorities, including Re NRMA Ltd (No 2).
[34] CAMAC referred to English authority for the proposition that a favourable resolution at a meeting is only “a threshold” to be met before the court can approve the scheme: Re BTR plc [2000] 1 BCLC 740 at 747 (Re BTR). The considerations referred to in that case as going against the approval were stated as follows:
“But if the court is satisfied that the meeting is unrepresentative, or that those voting in favour at the meeting have done so with a special interest to promote which differs from the interest of the ordinary independent and objective shareholder, then the vote in favour of the resolution is not to be given effect by the sanction of the court.”
The passage was quoted by CAMAC at footnote 160, on p 49 of its report.
[35] CAMAC set out a list of considerations which the courts have taken into account as informing their discretion whether or not to approve a scheme. Five of the principles are relevant. The first is whether the shareholders have voted in good faith and not for an improper purpose: Re Foundation Healthcare Ltd (No 2) (2002) 43 ACSR 680; [2002] FCA 973.
[36] Second, whether the proposal is fair and reasonable so that an intelligent and honest man or woman who was a member of the relevant class, properly informed and acting alone might approve it: Fowler v Lindholm (2009) 178 FCR 563; 259 ALR 298; [2009] FCAFC 125 at [79] (Fowler).
[37] The third is whether the plaintiff has brought to the attention of the court all matters that could be considered relevant to the exercise of the court’s discretion: Re Permanent Trustee Co Ltd (2002) 43 ACSR 601; [2002] NSWSC 1177 at [7] (Re Permanent Trustee).
[38] The fourth, and related consideration, is whether there has been full and fair disclosure of all information material to the decision: Re NRMA Ltd (No 2) at [30].
[39] The fifth is whether minority shareholders would be oppressed by the scheme: Re Ranger Minerals Ltd; Ex parte Ranger Minerals Ltd (2002) 42 ACSR 582; [2002] WASC 207.
[40] A further consideration has been said to be whether the scheme offends public policy. See, for example, CSR Ltd, Re of CSR Ltd (2010) 265 ALR 703; 77 ACSR 592; [2010] FCAFC 34 at [51]–[56].
[41] CAMAC went on to cite an observation by the Takeovers Panel that the courts have taken the view that where there is no contradictor they must be more careful about their scrutiny of disclosure mechanisms and fulfil the role of a contradictor.
[42] It is true that the courts endeavour to carefully scrutinise the material, but as I said in my earlier judgment, and as CAMAC itself observed, the court is heavily reliant on counsel to bring to its attention those features of the scheme that require attention. That is particularly so where, as here, the transaction is between related parties and the scheme booklets for the share scheme and the TELYS3 scheme each run to approximately 500 pages.
[43] The court also relies on the role of ASIC, to which I referred in my first judgment at [15]. In my opinion, it is not the court’s role, even on an ex parte application, to fulfil the role of contradictor. In that respect I depart from the observations made by the Takeovers Panel. The court’s jurisdiction is supervisory, but it is to be understood in light of what I said above, and in my first judgment at [13].
[44] The authorities support the proposition that it is not the court’s task to determine whether the scheme is intrinsically fair to members. It should not take sides on contested matters going to the commercial merits of the scheme: Re NRMA Ltd (No 2) at [23]; see also R P Austin, I M Ramsay Ford’s Principles of Corporations Law (13th Edition, LexisNexis Butterworths, 2007) p 24.160.
[45] The same seems to me to apply in relation to ex parte applications. The obligations of full disclosure on counsel are well established. As I said in my first judgment, it is significant that CAMAC did not suggest any amendment to the existing procedures; see [58] of my first judgment.
The considerations which are relevant on the facts of this case are:
(a)whether the scheme is capable of being accepted;
(b)whether the proposal should be regarded as fair and reasonable in the requisite sense;
(c)whether there has been full and fair disclosure to the shareholders;
(d)whether the scheme offends public policy;
(e)whether minority shareholders would be oppressed by the scheme; and
(f)the attitude of ASIC to the scheme.
I will deal with each of these matters under a separate heading. However it is appropriate first to identify some of the background facts, including the provisions of the constitution in more detail.
Background facts
Incorporation
The Company was incorporated in about December 1959 as a company limited by shares and formed for the purpose of acquiring and owning real property onto which a residential unit building was to be constructed.
Amended articles of association were adopted by special resolution dated 5 April 1960 and recorded in article 4 that the ordinary shares in the Company were allotted in groups with each share group referable to a unit in the proposed building. There were as many groups of shares as there were units in the building. The shares were held by members in groups and the shares comprising each group were transferable and transmissible together as a group but not otherwise. On completion of the building, the holder of a share group was entitled to the exclusive right to occupy and use the unit in the building referable to the group pursuant to a lease in a prescribed form relating to that unit. Holders who acquired a share group after the building was completed had analogous rights.
Notably the articles of association provided:
The rights conferred and the obligations imposed by this Article in relation to any group of shares and/or the Unit associated therewith shall not be abridged, varied, restricted or released except by the unanimous resolution of the members present in person or by proxy at a meeting of the Company.
In about 1960, the Company purchased and thereby became the registered owner of the estate in fee simple of the land adjacent to Burleigh Beach in Queensland and, shortly thereafter, constructed the proposed building on the land. There were 49 units and, accordingly, 49 share groups and associated leases.
The operative Constitution
In 2007, the Company adopted a new constitution (the Constitution). Although in 2013 and 2015, the Company purported to adopt new and differently worded constitutions the validity of those constitutions was disputed. It was common ground between the Company and the objectors before me that I should treat the 2007 Constitution as the valid and binding version of the Company’s constitution.
The Constitution divided the share capital into 49 separate parcels, each of which was associated with and expressly said to be “attached to” a lease of one of 49 units in the building as set out in a table contained in schedule 2 to the Constitution. The shares could only be owned and dealt with in those parcels, the number of which was required to equate with the number of units in the building. Thus cl 5 provided:
5. SHARE PARCELS
5.1 The ordinary share capital of the company shall be divided into parcels. Each separate parcel shall be associated with and attach to the lease of a unit in the Building as per the table in the schedule hereto.
5.2 Shares in the Company may only be owned and dealt with as parcels. Dealings with individual shares within a parcel is forbidden. The Company is not obliged to recognise any dealing with shares, or any shareholder, other than dealings which deal with, or shareholders who hold, a parcel as a whole.
5.3 The number of share parcels issued and held is at all times to equate exactly with the number of Home Units existing in the White Horse premises.
5.4 A transfer of a parcel of shares shall be of no force or effect until the holder of those shares becomes the registered proprietor of the corresponding lease.
The table referred to in cl 5.1 revealed that the number of shares in each parcel was not uniform. The reason that was so was unexplained by the evidence. It was suggested in argument before me that it was due to an historical anomaly.
Unit Number Contribution Lot Shares in Parcel Car Park A1 1232 4950 2 A2 1232 4950 26 A3 1232 4950 23 A4 1232 3800 8 A5 1202 3995 A6 1232 4000 14 A7 1232 4450 13 A8 1053 3550 A9 1232 4650 20 A10 1202 4800 A11 1202 4850 A12 1381 5950 37 A13 1232 4500 31 A14 1202 4000 A15 1232 4950 39 A16 1381 7350 25 B1 1232 4950 5 B2 1232 4950 11 B3 1232 4950 7 B4 1232 4950 9 B5 1232 3995 16 B6 1232 4450 19 B7 1232 4450 12 B8 1053 3650 B9 1232 4750 15 B10 1232 4850 22 B11 1232 4900 21 B12 1381 6150 30 B13 1231 4500 29 B14 1202 4000 B15 1232 4350 36 B16 1381 7350 4 C1 1232 3850 38 C2 1232 3850 6 C3 1232 4950 3 C4 1202 4950 C5 1232 4450 10 C6 1232 4450 33 C7 1202 4500 C8 1083 3750 17 C9 1232 4750 32 C10 1232 4750 24 C11 1232 4950 28 C12 1381 6250 18 C13 1232 4850 27 C14 1232 4000 35 C15 1232 4000 34 C16 1381 7350 1 PENTHOUSE 1455 8000 40
Each member of the Company was required to be the holder of a share parcel and a lease relating to the particular unit concerned: cl 6.1. The terms of the lease were set out in a schedule to the Constitution and specifically deemed to be part of the Constitution: cll 6.2 and 6.3. The result was that the rights under the lease were to be regarded as rights conferred by the Constitution.
Each member was required to contribute towards the outgoings of the Company in the proportion of a specified “contribution lot” bore to the aggregate amount of the contribution lots as set out in the table contained in schedule 2: cl 8.
All shares were regarded as ordinary shares to which one vote at a general meeting was attached. Thus:
10. SHARES AND CLASS OF SHARES
All Shares of the company shall be ordinary Shares granting the holders thereof the following rights and privileges.
1) The right to receive notice of and to vote at general meetings. One (1) vote is granted to every share held; and
2) The right to participate in any Dividends declared and payable with respect to this class of share; and
3) The right to repayment of capital and to participate in the distribution of surplus assets and or profits of the company
If a share parcel was owned by more than one person, it could only be voted as one parcel. Clause 11 relevantly provided:
11. MULTIPLE SHAREHOLDERS
11.1 Where there is more than one party registered as a member and holder of a share parcel the obligations of the parties including liability for payment of contributions pursuant to clause 8 hereof will be joint and several.
…
11.8 Multiple shareholders vote as one holder of a share parcel and a vote from one individual multiple holder is taken to be the vote of all of the multiple holders voting as if the share parcel was held by one party only.
…
Although the Constitution permitted (by cl 22.1) changes to share capital in any way permitted by law, the relationship between share parcels, share owners and particular units was preserved by the terms of cl 22.3, which provided:
Notwithstanding what is permitted by 1) and 2) above the company cannot in any manner alter; modify; or in anyway change its Share capital in any manner which would not permit there to be at any given time particularly identified Share parcels allocated to particular members which Share parcels are exclusively associated with particular Home Units
Voting at general meetings could be passed and adopted by simple majority with some specific exceptions: cl 28. One such exception was cl 28.5(4), which provided that:
28.5 A resolution at any meeting may be passed and adopted by simple majority other than for:-
…
(4) Resolutions regarding the sale of the Land which must be approved by resolution passed without dissent;
…
The reason for the scheme
I have mentioned the Board’s view that the building has reached the end of its commercial life and should be sold. The essence of its justification for that view is expressed in the outline of the scheme booklet in these terms:
The White Horses Directors consider the Building is currently at risk of serious dilapidation and that it has come to the end of its commercial life. This is in light of the fact that, in 2009, White Horses was the subject of Council enforcement action requiring maintenance expenditure in respect of the Building of approximately $400,000.
The White Horses Directors engaged the Engineer, Stephen Waite of SW Consult, to provide an Engineer’s Report. The Engineer’s Report is attached as Annexure C: Engineer’s Report. The Engineer’s Report outlines that the Building is reaching the end of its commercial life and to restore the serviceability of the structure to the Building Code of Australia (possibly the minimum standard) requires the substantial expenditure of approximately $1,523,000 to $3,343,000.
The White Horses Directors engaged the Valuer, Lawrence Hamilton of Taylor Byrne, to provide a Valuation of the Land and the Building. The Valuation is attached as Annexure D: Valuation. The Valuation provides that the market value of the Land and Building is $19,000,000. The purchase price offered by Nielson Properties for the Land and Building is $21,800,000 which is at a premium to the market value of the Land and Building stated in the Valuation.
At the 2015 Annual General Meeting of the Company, polling was undertaken and approximately 85% of the members were in favour of selling the land and 15% of the members opposed it. Obviously enough, the requirement in cl 28.5(4) of the Constitution for a resolution without dissent was an insurmountable obstacle to any proposal to sell the land in the way proposed.
The Company considered the possibility of amending the Constitution to achieve the majority desired outcome and to overcome the requirement that any sale of the land could only be authorised by a resolution without dissent. The general amendment provision in the Act permits amendment by special resolution: s 136. However the procedure is otherwise where there are rights attaching to classes of shares and the proposal is for variation or cancellation of class rights: see s 246B of the Act, which provides:
246BVarying and cancelling class rights
If constitution sets out procedure
(1)If a company has a constitution that sets out the procedure for varying or cancelling:
(a) for a company with a share capital — rights attached to shares in a class of shares; or
(b) for a company without a share capital — rights of members in a class of members;
those rights may be varied or cancelled only in accordance with the procedure. The procedure may be changed only if the procedure itself is complied with.
If constitution does not set out procedure
(2) If a company does not have a constitution, or has a constitution that does not set out the procedure for varying or cancelling:
(a) for a company with a share capital — rights attached to shares in a class of shares; or
(b) for a company without a share capital — rights of members in a class of members;
those rights may be varied or cancelled only by special resolution of the company and:
(c) by special resolution passed at a meeting:
(i) for a company with a share capital of the class of members holding shares in the class; or
(ii) for a company without a share capital of the class of members whose rights are being varied or cancelled; or
(d) with the written consent of members with at least 75% of the votes in the class.
…
As Jackson J noted in his reasons in respect of the first court hearing, in analogous contexts to the present each group or parcel of shares entitling a holder to the right to occupy a home unit has been said to be a separate class of shares: see Crumpton v Morrine Hall Pty Ltd [1965] NSWR 240; Wilson v Meudon Pty Ltd [2005] NSWCA 448 and Dungowan Manly Pty Ltd v McLaughlin (2012) 90 ACSR 62.
The Company seemed to accept that proposition because, upon advice, it formed the view that any attempt to vary the Constitution by removing the cl 28.5(4) requirement would be to vary class rights. The Company accepted that there was no provision in the Constitution that prescribed how it may be amended or varied, or that specified any procedure for varying or cancelling class rights. It accepted that s 246B(2) applied in respect of variation or cancellation of class rights, with the result that variation or cancellation could only occur by:
(a)a special resolution of the company; and
(b)either –
(i) a special resolution passed at a meeting of the class of members holding shares in the class; or
(ii) the written consent of members with at least 75% of the votes in the class.
The problem which the Company perceived was that if a proposal was for variation of rights attached to any one of the share parcels in the Company, and the holder of the share parcel objected, then that holder (regarded as a distinct class of members) would not pass a special resolution or give its written consent. The proposal would fail. The Company formed the view that unanimous consent of all shareholders would be required to change the Constitution to remove the cl 28.5(4) requirement that sale of the land could only be authorised by resolution without dissent.
The upshot, the Company contended, was that –
(a)cl 28.5(4) of the Constitution would require a resolution without dissent in order to sell the land and the building, and that option was stymied by the minority opposition to the proposal; and
(b)implementation of the s 246B(2) procedure was also stymied by the minority opposition to the proposal.
The Company contended that it was effectively at an impasse in the sense that:
(a)it could not afford to rectify the defects in the building;
(b)the minority opposition to the sale meant that it could not comply with the requirement in the Constitution for a resolution passed without dissent to sell the land;
(c)s 246B(2) of the Act had an analogous problem; and
(d)the defects and the associated risks continued to exist without a solution,
and that it sought to enter into a scheme of arrangement to overcome that deadlock.
On 23 December 2015, the Company entered into a conditional put and call option agreement with a developer granting it an option to purchase the land and the building for $21,800,000. It was a condition precedent to the put and call option that the Company obtain court approval to the sale and, implicitly, of the scheme. Implementation of the scheme would involve:
(a)each shareholder being taken to have irrevocably appointed the Company and each of its directors, officers and secretaries as attorney for the purposes of entering into the sale contract; signing any surrenders of lease to complete such a sale and signing any documents required to wind up the Company;
(b)the Company by its directors and pursuant to the power of attorney granted in this Scheme, signing surrenders of leases for all leases;
(c)the Company and/or its solicitors acting as agent for the shareholders and collecting and ultimately distributing to the shareholders their proportional entitlement to the net purchase price; and
(d)ultimately the winding up of the Company.
Was the scheme capable of being accepted?
It is well established that a scheme of arrangement may override the constitution of a company where there is inconsistency: Ashton Millson Investments Ltd v Colonial Ltd (2003) 48 ACSR 581 (Buchanan JA, with whom Ormiston and Batt JJA agreed)[1].
[1]See at [12] footnote 2, where his Honour cites: Re Glendale Land Development Ltd (in liq) [1982] 2 NSWLR 563 at 568; per McLelland J; Re International Harvester Co of Australia Pty Ltd [1953] VLR 669 at 675 per Martin J; Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485 at 501 to 502 per Mason CJ, Brennan, Dawson, Toohey and Gaudron JJ; Re Theatre Freeholds Ltd (1996) 132 FLR 235 at 243 per Young J; Re NRMA Ltd (No 2) (2000) 156 FLR 412 at 440 to 442 per Santow J.
However, there is also a well-established qualification to that proposition. This was recognised in the written submissions of counsel for the Company in these terms:
A scheme of arrangement may be approved although it is inconsistent with the company’s constitution, but not if it is inconsistent with the Act. In Glendale Land Development (in liq) [at 568], McLelland J said in relation to s.315 of the Companies (New South Wales) Code, being the equivalent to s.411 of the Act:
“I accept that s 315 embraces arrangements which may over-ride or be inconsistent with the articles of association of the company …, but no such arrangements could effectively make provision for a mode of alteration of the articles of association which is inconsistent with the code.”
Whilst the Scheme proposes an arrangement to override clause 28.5(4) of the 2007 Constitution, nothing in the Scheme is inconsistent with the Act.
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.
…
Counsel for the objectors sought to rely on this principle as a reason for refusing approval to the scheme, although he too failed to draw my attention to Australian Securities Commission v Marlborough Gold Mines Ltd. He relied on an earlier passage of the judgment of Martin J in Re International Harvester Co of Australia Pty Ltd in which his Honour had noted that the statutory equivalent of s 411 “still does not permit a company to do something under it which other provisions of the Act require shall be done in another manner …”. Counsel for the objectors was, however, unable to identify any provision of the Act with which the scheme was inconsistent and instead submitted that the scheme was against some more broad conception of public policy.
After the matter had been argued, I drew to the parties’ attention that the Company had sought to enter into the scheme to overcome, amongst other things, the obstacle imposed by the operation of s 246B(2) of the Act and that I regarded it to be a critical question whether, if s 246B(2) applied, the Act did permit that course in relation to the Company. I invited further submissions on: (1) whether the Constitution of the Company was to be interpreted as creating class rights and therefore as having engaged s 246B; and (2) whether, in light of the principle identified in Australian Securities Commission v Marlborough Gold Mines Ltd, s 411 may be taken to have authorised the approval of the scheme.
I received further written submissions from counsel for the objectors which contended –
(a)the Constitution was to be interpreted as creating class rights and therefore as having engaged s 246B;
(b)the scheme sought to effect a variation or cancellation of the class rights contrary to the protections conferred by s 246B; and
(c)s 411 should not be taken to have authorised approval of such a scheme.
Counsel for the Company submitted to the contrary. He submitted there was no inconsistency with s 246B:
… because the ultimate purpose of the Scheme is not to amend the constitution of the Company, or to vary or cancel class rights within the meaning of s.246B, or to override the provisions of s.246B; but rather to wind up the Company in a manner that preserves the benefit of the sale contemplated by the Scheme.
…
The way in which class rights will be affected by the Scheme are incidental to that ultimate end, but that is not the purpose or the substance of the Scheme.
He submitted that –
5. … if the Scheme is not approved …, the Company will be wound up, in the usual way:
(a) pursuant to s.461(1)(a) (as Jackson J identified); or
(b) pursuant to s.461(1)(k) on the “just and equitable” ground either because:
(i) upon the building failing structurally, the substratum of the Company will fail; or
(ii) there is deadlock between the members of the Company, or the board of directors and the members of the Company; or
(c) pursuant to ss.459A and 459P, on the ground that the Company is insolvent as it cannot afford to make the necessary repairs to the building.
6. Were the company to be wound up on any of those grounds, then:
(a) there is no suggestion that s.246B would be engaged; and
(b) the effect on the members, both [as] residents and as holders of shares to which rights attach, will be the same.
7. The only difference between the sale/winding up mechanism proposed by the Scheme and winding up the Company in the usual way on one of the above grounds is that under the latter:
(a) the benefit of the sale contemplated by the Scheme will be lost; and
(b) control of the process, which under the Scheme is retained by the Company as much as possible, will be ceded to liquidators.
For the following reasons I conclude that that the Company’s submission must be rejected. The scheme is in substance an attempt to override the class rights provisions of s 246B of the Act without complying with s 246B and, for that reason, is to be regarded as inconsistent with the Act and, accordingly, incapable of being approved.
First, in my view each distinct parcel of shares which gave the holder of that parcel the right to occupy a unit within the building was properly treated as a class of shares for the purpose of the application of the s 246B rules about variation or cancellation of class rights. For the following reasons, I agree with the Company’s assumption to that effect which had been made in the lead up to the application[3]:
[3]I note that no submission to the contrary was made in response to my invitation for further submissions.
(a)The question whether the capital has been divided into classes of shares is one of construction of the particular constitution concerned. Thus, in Wilson v Meudon Pty Ltd [2005] NSWCA 448 Bryson JA, with whom Handley and Hodgson JJA generally agreed[4], stated (at [53]):
… Whether the company has by its articles or in some other way divided capital into classes does not depend on the use of any particular means, formula or language. Article 6 attaches special rights to each group of shares in a clear way. The question whether the treatment in Art 6 of groups of shares is an event by which the company divided the capital into different classes is, in my view, a question of construction to be resolved by considering the meaning of the language used. I see no way in which it could be doubted, in terms of the ordinary meaning and usage of language, that by Art 6 the company divided the capital into different classes, that is into the different groups referred to. In a similar way I regard it as clear that s 246B(1) and its reference to rights attached to shares in a class of shares applies to Art 54 and to the groups of shares referred to in Art 6.
(b)If a category of shares is sufficiently different, in terms of rights, benefits, disabilities or other incidents, to make it distinguishable from other shares in the company, then the capital of the company will be taken to be divided into classes of shares[5]. In Re A. Ffrost & Co Pty Ltd [1993] 1 Qd R 1, Ryan J referred with approval to the approach taken by Scott J in Cumbrian Newspapers Group Ltd v Cumberland & Westmorland Herald Newspaper & Printing Co Ltd [1987] Ch 1. Cumbrian Newspapers Group was also approved by Bryson JA in Wilson v Meudon Pty Ltd as illustrative of the kind of construction exercise which was required. Ryan J held (at 3 and 4, emphasis added):
In Cumbrian Newspapers Group Ltd v. Cumberland & Westmorland Herald Newspaper & Printing Co. Ltd [1987] Ch. 1 at 21 Scott J. in speaking of s. 125(1) of the Companies Act 1985 (U.K.) which refers to “the rights attached to any class of shares in a company where share capital is divided into shares of different classes”, said that “if specific rights are given to certain members in their capacity as members or shareholders, then these members become a class”.
[4]Handley and Hodgson JJA expressed some reservations as to aspects of the reasoning of Bryson JA which are not presently relevant.
[5]R P Austin and A J Black, LexisNexis Australia, Austin & Black’s Annotations to the Corporations Act (at March 2011) at [2F.246B], citing Clements Marshall Consolidated Ltd v ENT Ltd [1988] Tas R (NC) N1; (1988) 13 ACLR 90 at 93; TNT Australia Pty Ltd v Normandy Resources NL (1989) 53 SASR 156; 15 ACLR 99 at 108.
…
The effect of this decision is that class rights can arise even though the company’s share capital is not divided into two or more different classes, provided that specific rights are conferred on shareholders as such. In this case, I consider that the special rights conferred on the Governing Director were conferred on her as a shareholder; the rights in question attached to the particular shares held by the Governing Director.
(c)In the present Constitution, cl 10 (quoted at [26] above) is the only clause which is specifically directed to the question of shares and class of shares. Plainly it does not divide the Company’s share capital into two or more different classes because it classifies “all Shares of the Company” as ordinary shares and the reference to “this class of share” is obviously a reference to the single class of ordinary shares. But the question arises whether, nevertheless, the Company’s share capital should be regarded as divided into sub-classes of shares smaller than the class of ordinary shares, in light of Cumbrian Newspapers Group, Re A. Ffrost & Co Pty Ltd and Wilson v Meudon Pty Ltd.
(d)In my view the reasoning in those cases applies in relation to the Constitution of the Company because of the terms of cll 5 and 6 of the Constitution, to which I have referred at [22] to [24] above. Although the share capital in cl 10 is classified entirely as ordinary shares, cll 5 and 6 make it clear that the share capital is also divided into sub-classes of shares, namely the 49 separate parcels, each of which was associated with and expressly said to be “attached to” a lease of one of 49 units in the building as I have earlier described. The class rights include the right to exclusive possession of a particular unit pursuant to the provisions of the lease in respect of that unit. They include the right to insist that any sale of the land which is the subject of the lease be authorised only if the shareholder does not dissent from the proposal. At a more fundamental level, they include the right to continue to be the holder of the shares in that parcel and of the lease attached to it.
(e)It does not matter that all the shares in the class might be held by a single person: Cumbrian Newspapers Group at 22, referred to with approval by Bryson JA in Wilson v Meudon Pty Ltd at [51].
(f)It would follow that the distinct rights afforded to a member by virtue of holding the share parcel and the related lease would be regarded as class rights within the meaning of s 246B and entrenched against alteration unless the holders of the share parcel participated in the alteration in the way provided for by s 246B.
Second, s 246B(2) provides that class rights “may be varied or cancelled only by” following the special and exclusive procedure there set out. The legislative purpose of s 246B is to deal comprehensively with the manner by which rights attached to shares in a class of shares could be varied or cancelled: cf per Scott J in Cumbrian Newspapers Group at 14 and 21 with reference to s 125 of the Companies Act 1985 (UK).
Third, the scheme must be taken as effecting a variation or cancellation of the class rights, in the sense that language is used in s 246B(2). That must be so because it subjects the shares to a process which ultimately authorises the directors of the Company to transfer all the shares in the class and surrender the lease attached to the shares notwithstanding the opposition of the class rights holder, thereby abrogating the rights completely: cf Re Village Roadshow Ltd (2003) 176 FLR 436 at [28]. That consequence is not avoided, but confirmed by the fact that the class rights holder is given the replacement right to a proportionate pecuniary pay out.
Fourth, self-evidently the scheme does not follow the s 246B(2) procedure for effecting such a variation or cancellation of class rights. Indeed, the Company proposed the scheme as the means by which it could overcome the obstacle posed by compliance with that procedure.
Fifth, I reject the submission by the applicant’s counsel that winding up is the purpose of the scheme and, as winding up would be inevitable anyway if the scheme was not approved, I should approve the scheme because it gives a better outcome. As to this:
(a)It is true that the ultimate outcome of the successful implementation of the scheme after approval by me would be sale to a developer; delivery of most of the purchase price on completion of that sale; and delivery of the remainder of the purchase price as a final distribution on winding up of the Company: see cl 6 of the terms of the scheme.
(b)However, my attention was not drawn to evidence which supported the submission that winding up would be inevitable if I refused approval to the scheme.
(c)In fact, the letter from the Chair of the Company to the shareholders in support of the scheme did not put it that way at all, he wrote:
if the Scheme is not implemented:
·the value of the individual units may decline with the decline in condition of the Building; and
·White Horses Shareholders may lose their ability to occupy their homes or investment properties with the continued decline in the condition of the Building;
(d)Nor did the scheme booklet suggest that winding up was the inevitable, or even the likely, outcome of the scheme not being implemented: see Part 2 Frequently Asked Questions pp 15 to 16 “What happens if the Scheme is not implemented?” and Part 5 “Considerations relevant to Vote” pp 22 to 23. It suffices to quote from the former reference:
What happens if the Scheme is not implemented?
If the Scheme is not implemented:
• White Horses will not be able to enter into the Contract for the sale of the Land and Building with Nielson Properties and the Put and Call Option Agreement will terminate;
• White Horses Shareholders will not receive the Scheme Consideration;
• unless significant investment is made through the sinking fund, which contributions need to be approved at a general meeting, the Building is expected to continue to deteriorate;
• the White Horses Directors anticipate that a repeat of the 2009 Council enforcement action may occur unless substantial investment is made by shareholders;
• if approved at a general meeting, the sinking fund levies will increase taking into consideration the costs listed in the Engineer’s Report;
• at worst, the costs and timeframes outlined in the Engineer’s Report could lead to over a 200% increase in levies per year over the next ten years; and
• there is a risk, if concrete spalling is significant, that the value of your unit will decline considerably and your ability to access your unit may cease if the Building were to be condemned.
(e)I accept, however, that it is a foreseeable possibility that an application for a winding up order might be made in the event that I refused to approve the scheme. It is possible that an attempt might be made to pass a special resolution that the Company be wound up by the Court, thereby engaging s 461(1)(a). It is possible that one of the disappointed scheme proponents might bring an application to wind up the Company on the just and equitable ground pursuant to s 461(1)(k). It may even be possible that someone might seek to demonstrate actual insolvency pursuant to ss 459A and 459P. But there is no evidence before me that anyone has a present intention of taking any of those courses. And such an application might well be opposed on substantive grounds.
(f)Finally, even if I were persuaded (which I am not), that a winding up order would be inevitable, I do not find the argument that the ends justifies the means to be a persuasive reason to authorise the abrogation of class rights contrary to what I perceive to be the intendment of the Act and the approach taken by the High Court in Australian Securities Commission v Marlborough Gold Mines Ltd.
The result is that I conclude that the scheme is not a scheme which is capable of being approved by the Court pursuant to s 411. I reject the submissions of the Company that there is nothing in the scheme inconsistent with the Act because in my view provisions of the scheme are inconsistent with the terms of s 246B(2). For the reasons identified by the High Court in Australian Securities Commission v. Marlborough Gold Mines Ltd, s 411 cannot be taken to authorise approval of such a scheme.
That conclusion is sufficient to justify refusing the Company’s application. However, in case I am wrong in that view, I will proceed to express my view in relation to the other matters which are relevant to the question whether the scheme should be approved.
Was the proposal fair and reasonable?
The question is whether the proposal is fair and reasonable so that an intelligent and honest member of the relevant class, properly informed and acting alone might approve it. This question is to be approached by me upon the basis that my jurisdiction is supervisory only. I am not to impose my commercial judgment on the assessment of the merits of the scheme and I am to keep in mind that members are likely to be better judges of what is in their commercial interests than is the Court.
It is appropriate to identify the key considerations which were set out in the scheme booklet provided to shareholders.
As to reasons to vote in favour of the scheme:
(a)An independent expert, Hall Chadwick, had concluded that the scheme was fair and reasonable and in the best interests of shareholders, in the absence of a superior offer. The report was part of the scheme booklet.
(b)An independent structural engineer had provided three reports on the building’s structural integrity. Those reports were part of the scheme booklet. The engineer opined that the building had widespread deterioration affecting structural and fabric elements which would involve very expensive rectification works. He concluded that the building was reaching the end of its life. Maintenance costs would escalate or the owners would be exposed to ever increasing risk of structural failure or injury or forced evacuation. With rectification, the present high risk of an incident causing injury or death due to structural failure could be reduced to medium risk, but not to low risk. The report provided an estimate of rectification costs of between $1,523,000 and $3,343,000. The amount could lead to a 200% increase per year in contributions.
(c)A valuer had been engaged to provide a report on the value of the land and building if sold as a whole and if sold as individual units. The report was part of the scheme booklet. The scheme consideration represented a premium when compared to the market value, whether value was assessed by reference to sale of the land and building as a whole or sale of individual units.
(d)The scheme offered certainty as to the fact and timing of receiving value on a sale. On the other hand, if the scheme was not implemented, that certainty would be absent.
(e)The Board thought it was unlikely that any superior offer was likely to emerge.
As to reasons to vote against the scheme:
(a)The directors of the Company and the independent expert had made judgments in favour of the scheme based on the valuation evidence they had obtained. Market value cannot be predicted with certainty and which may prove to be inaccurate. Individual shareholders might take a different view than that taken by the directors or the independent expert, including in relation to value and the quantum of premium to which they might think they were entitled.
(b)Implementation of the scheme would mean that shareholders would cease to be able to occupy their units on settlement of the contract for the sale of the land and would be required to surrender their leases and vacate the building.
(c)Implementation of the scheme would preclude the Company from accepting any other offers. And given the conditional nature of the put and call option agreement, it is possible that it might be terminated and no settlement would eventuate.
(d)Tax consequences may not suit the individual circumstances of shareholders. The implementation of the scheme would require shareholders to assess potential consequences with their own tax advisers.
(e)The earliest settlement date for the sale was 1 September 2017. If the scheme was implemented it would likely be difficult to deal with shares or units in the period between implementation and settlement.
The objectors contended that the hypothetical intelligent and honest shareholder could not have approved the scheme. Such a person would have concluded that the scheme, proposing as it did that the return to shareholders would be proportionate to their shareholding entitlements, was unfair. The elements of that argument were as follows:
(a)The consideration returned to shareholders under the scheme was proportionate to the number of shares held. But the objectors contended that the allocation of shareholdings was neither quantitatively nor proportionately linked to the value of shareholder's leasehold interests derived from those shareholdings.
(b)The proposition was demonstrated by an example. Units A3 and A4 shared similar attributes with respect to layout, car parking, aspect and views. Indeed the scheme valuation report valued both units at $290,000. However Unit A3 had a shareholding of 4950 shares whilst Unit A4 had a shareholding of 3800 shares. Adopting the net present value of $84 under the proportionate distribution under the scheme, the owner of Unit A3 would receive approximately $415,800 whilst Unit A4 would receive approximately $319,200, a significant differential of $96,600.
(c)Accordingly, the proposed proportionate entitlements under the proposed scheme were not fair and equitable between different shareholders. An honest and reasonable person acquainted with the terms of the scheme would not be prepared to enter into them, due to the anomalous nature of the allocation of shares on incorporation.
For its part, the Company said that the argument was far too narrow an assessment of the considerations to which the hypothetical intelligent and honest shareholder would have regard. First, it said that the decision was being made in relation to a building which had the very considerable structural deficiencies identified by the evidence, which deficiencies would necessitate the incurrence of considerable pecuniary and other liability if no sale eventuated. Second, it said that the evidence demonstrated that the quantum of the consideration involved in the scheme was such that each shareholder would be getting a premium on the objective value of their shares.
In my view the Company’s contention must be accepted. The hypothetical intelligent and honest shareholder would regard the question as requiring a consideration of more than just “plus side” value. Downside risk in terms of pecuniary and other liability would be just as significant. In that context, I do not think that such a person would necessarily be troubled by the fact that some people might get more of a premium than others. In any event, in that regard the objectors’ contention is essentially another way of stating the consideration which was in fact identified as the first reason why someone might reject the scheme: see [58](a) above. It seems to me that the disparity and lack of proportionality to which the objectors refer would have been obvious and necessarily something which would have been taken into account.
In my view an intelligent and honest member of the relevant class, properly informed and acting alone might approve the scheme.
For completeness, I should note that the objectors sought to rely on –
(a)valuation evidence in relation to two units which suggested that their value might have been understated in the report contained in the scheme document; and
(b)engineering opinion evidence which differed in some respects from the engineering reports contained in the scheme document,
but conceded that it did not form part of the objectors case to seek to persuade me that the objectors’ expert opinion ought to be accepted by me in preference to the opinions contained in the scheme booklet.
There were, in any event, real problems with the reliability of that evidence.
The Company pointed out the valuation evidence was qualified in a way which suggested that the valuer had not taken into account the structural defects in the building. The valuations stated:
(a)“Our valuation is prepared on the following basis: … That there are no latent defects or orders concerning the subject unit or the subject building that would adversely affect the value of the unit”; and
(b)“The unit appeared to be in good condition internally and no major defects were noted at the time of inspection. Valuers are not building and/or structural engineering experts and as such are unable to advise or comment upon the structural integrity or soundness in the improvements.”
I agree with the Company’s submission that by virtue of those qualifications it is not appropriate to rely upon those valuations to make good any submissions in relation to reasonableness of the scheme or the consideration to be paid under it.
As to the engineering evidence on which the objectors relied:
(a)The author formed a more positive view as to the structural stability of the building than did the first engineer. However the Company pointed out that –
(i) the author was prepared to respond without undergoing a detailed inspection of the building;
(ii) the author responded only to the first of the 3 engineering reports which were contained in the scheme booklet and it was later 2 reports which considered risk in greater detail; and
(iii) insofar as the objector’s engineer opined on costs of rectification, his figure of $1.2 million was not very different from the lower estimate contained in the scheme booklet.
(b)The report was commissioned by the objectors in advance of the meeting at which the members considered whether or not to approve the scheme, was obviously capable of being taken into account by those who commissioned it, and was capable of being taken into account by the meeting, but was not in fact placed before the meeting by those who commissioned it.
(c)I am unable to see how any of this could be probative against the proposition that an intelligent and honest member of the relevant class, properly informed and acting alone might approve the scheme.
The result is that I am satisfied that the proposal was fair and reasonable in the sense required by the authorities.
Has there been full and fair disclosure to the shareholders?
The order made by Jackson J on 28 April 2016 provided, amongst other things, that:
(a)the applicant should convene a meeting of its shareholders for the purpose of considering whether to approve the scheme in the form set out in an identified scheme booklet;
(b)the meeting would be convened by sending to the shareholders the scheme booklet, a notice of meeting in a particular form and a proxy form; and
(c)the explanatory statement contained in the scheme booklet was approved, so long as it was amended to state that the directors propose to vote in favour of the scheme and that no director holds any marketable securities in the proposed buyer.
His Honour’s approval of the explanatory statement was necessary. One of the considerations which is relevant at the first hearing is a consideration of the adequacy of disclosure in the explanatory statement. In his judgment, Jackson J observed about the explanatory statement (citations omitted):
[44] … It explains the effect of the scheme and it states the material interests of the directors as directors and members of the applicant. It sets out information material to the making of a decision by the members whether or not to agree to the arrangement. It contains a unanimous recommendation by the directors recommending acceptance of the scheme. It sets out the number of marketable securities of the company held by or on behalf of each director. It sets out the directors intentions as to the non-continuation of the business.
[45]It is not clearly stated that the directors by whom (or on whose behalf) shares in the company are held propose to vote in favour. It is not clearly stated that no director holds any marketable securities in the proposed buyer.
[46]There is no requirement for this scheme that the explanatory statement be accompanied by any expert reports. Nevertheless, the application for an order for the court to convene the scheme meeting is supported by a number of expert reports, which are to be included in the scheme booklet. There is an engineering report that details the risks associated with the building in its present condition and the range of costs for repairs. There is a valuation report of the land and buildings. There is an expert’s report as to whether the offer is fair and reasonable or in the best interests of the members. There is a tax advice.
[47]The form of the proposed scheme booklet is complex. Nevertheless, it is not misleading in any way that requires significant amendment, in my view. …
The objectors seek to persuade me that there was not full and fair disclosure. It is appropriate to examine their contentions under the headings used in their written submissions and I do so below.
Failure to acknowledge disparity in shareholder interests and qualification of valuation report
This argument was related to the issue discussed at [59] to [68] above.
It is impossible to conceive that the shareholders did not appreciate that the consideration which would be obtained upon implementation of the scheme was an amount per share. It is also impossible to conceive that they were not capable of working out what the return meant for them and for others.
I reject the notion that the failure of the scheme booklet or the independent expert report to acknowledge the disparities which are the subject of the objectors’ argument is a basis on which I should conclude that there was any failure to make full and fair disclosure.
Failure to acknowledge cost of discharging Letting/Caretaking Agreement
The scheme material did not explicitly deal with the possibility that implementation of the scheme might create a liability to the caretaker, because it would amount to breaking the agreement between the Company and the caretaker. However, the scheme did contain a contingency amount and there was no admissible evidence before me which could persuade me that regarding the potential liability to the caretaker as coming under an estimate for contingencies was inappropriate or misleading. I do not think this issue assists the objectors.
Misleading communication to shareholders by Chairman of the Board of Directors
Obviously enough, the purpose of having the Court consider and approve an explanatory statement is capable of being subverted if scheme proponents send unapproved material to scheme participants after having obtained Court approval.
In Re Coates Hire Ltd (No 2) [2007] FCA 2105 at [6], Emmet J observed:
… Where the Court orders that a document in a particular form be sent to shareholders, the documents should not be accompanied by any further document that has not itself been approved by the Court. If it is proposed that other documents, such as covering letters, be sent, a draft of those other documents should be put before the Court at the time of the application for the order that the meeting be convened. The other documents can then be incorporated into the Court’s order.
In Re Centro Retail Ltd [2011] NSWSC 1321 at [13] to [16], Barrett J confirmed that the Court had wide power to give a direction sanctioning the provision of additional material in advance of the meeting.
Recently, in Re Signature Capital Investments Ltd [2016] FCA 258, Farrell J referred to Coates Hire and Centro Retail as cases in which courts had:
… emphasised the importance of maintaining the integrity of the “message” in the Scheme Booklet approved at the first court hearing…
Consistently with the cases, ASIC has dealt with the question in “Regulatory Guide 60 Schemes of Arrangement”:
(a)Relevantly RG60.91 of the guide is in these terms:
If a scheme company proposes to amend the terms of a scheme, or otherwise provide supplementary information to its members, after the explanatory statement has been dispatched, that supplementary information will need to be given to ASIC for review prior to being given to the court for approval. We will apply the same principles in reviewing supplementary information as we do when reviewing explanatory statements: see RG 60.93 for the timing required for the dispatch of supplementary information.
(b)RG60.93 provides:
It will generally be appropriate for scheme participants, including those voting by proxy, to be given at least 10 days to consider any supplementary documentation distributed before being required to vote on the scheme
The foregoing considerations suggest that the course which should be taken in assessing the significance of unauthorised communications is analogous to the course which should be taken in assessing the adequacy of disclosure of material facts to the shareholders in the first place. Materiality and propensity to mislead are the critical considerations.
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).
The first of the communications about which ASIC was concerned occurred in this way. On 29 April 2016, which was the day after Jackson J had made the order convening the scheme meeting, the applicant’s solicitor settled a communication to be sent to all shareholders by the applicant’s managing director. The communication was sent on 3 May 2016 and provided (emphasis added):
Dear Shareholders
I’m pleased to advise that yesterday our submission to the Supreme Court of Queensland was accepted. We are able to proceed with our process towards selling the complex.
The Court has set down a date for an EGM of 28th of May for the Shareholders to formally approve the Scheme of Arrangement (the legal approach accepted by the Court). If 75% of shares are cast in support of the Scheme at this time then we will be able to proceed with our agreement with Nielsen’s Properties.
Next week you will receive all the material relevant to the EGM. Please ensure that your contact details are correct. If you do not receive any material by the end of the week contact Archers immediately.
This is a terrific opportunity for the shareholders of White Horses. The ongoing determined commitment and support from the vast majority of our shareholders has helped put us in this position and will help us navigate these last few steps and challenges.
Regards
Daniel
Daniel Weule Managing Director
The second of the communications about which ASIC was concerned occurred in this way. On 11 May 2016, the applicant’s solicitor settled a further a communication to be sent to all shareholders by the applicant’s managing director. The communication was sent on 12 May 2016 and provided (emphasis added):
COMMUNICATION TO SHAREHOLDERS
Dear Shareholders,
I’m writing to you to make some final points before the May 28th EGM. You will be voting to accept the Scheme of Arrangement or not. The Directors of the company strongly recommend you VOTE YES.
We firmly believe that voting YES will provide ALL shareholders with the very best return possible for their shareholding.
Those that oppose the sale of the land and building may be in contact with you in an attempt to influence you to vote no.
I would encourage you to consider the following points in light of any argument placed in front of you.
1. No actual evidence, report or documentation of any kind has been submitted by anyone opposing the sale.
2. The argument against the sale is speculative, emotional and only aims to be critical of the case to sell. No alternative has been put forward by the no case, other than keeping things the way they are.
3. The Supreme Court of Queensland agreed with the argument we prepared to proceed with the sale of the complex. Those opposing the sale, were advised of their opportunity to submit their argument to the court and had ample time to do so yet faced with the need to submit proof that supported their case they did not submit anything.
Without any facts, the only course of action for the no case is to ‘divide and conquer’ the shareholder group through continued misinformation and speculation about price, deal structure and the market and so forth.
I urge you to resist any unsupported criticism.
I also encourage you to seek the informed guidance you need to make a logical decision. Start with reading the Scheme of Arrangement it includes a number of reports from the appropriate professionals who specifically analysed and examined the unique circumstances relating to White Horses as a Company Title entity.
As it is an option for you to vote by proxy it’s important for you to understand this option fully. If you select this option you must use the forms supplied.
If you wish to appoint a proxy, please be sure you either direct your vote deliberately or fully and clearly understand how your vote will be cast and that it is inline with your intentions. If you are unsure and still wish to vote by Proxy you can indicate your vote and appoint the Chair as your proxy.
If you have any concerns about proxies or supporting the Scheme of Arrangement please get in touch to provide us the opportunity to discuss this with you. (Provide your details to Kim Cullen (Kim [email protected] or 07 55520705) at Archers and the most appropriate person will be in contact)
This is a great opportunity for shareholders of White Horses.
Regards,
Chairman of the Board of Directors
Daniel Weule
It seems that the genesis of the second communication was that the signatory (who was the Chair of the Company’s board) had, based on what he had been told, developed concerns that some of the Company’s shareholders who were opposed to the scheme had been lobbying other shareholders for support and were being overly aggressive and were spreading unsubstantiated or misleading information relating to the scheme. There appears to have been a reasonable basis for his concern. The signatory deposed to not being aware of ASIC Regulatory Guide 60 when he prepared and sent the communication.
The solicitor who settled the communications deposed in relation to the second communication that it “was intended as a personal piece of correspondence from Mr Weule as a Shareholder of White Horses Pty Ltd to the shareholder group.” He stated “I did not consider paragraph 60.91 in the ASIC Regulatory Guide 60 when I settled the communication as I understood the communication was personal correspondence.”
What view should I form concerning the unauthorised communications in this case?
The objectors refer only to the second of the two communications and submit that it misrepresented the Court’s attitude to the “no” case. They submitted that it may have led to shareholders having a serious misapprehension that the Court had made a determination against the merits of the “no” case. They also submitted that the shareholders might have had a serious misapprehension that they could not subsequently approach the Court to voice an objection.
Ultimately their contention was that the misleading nature of the communication might have, and in their submission likely had, the effect of positively influencing shareholders prior to the scheme meeting, prejudicing the vote so that shareholders were unable to properly make an informed decision.
My evaluation of this issue is as follows:
(a)I am satisfied that there was no intentional non-compliance.
(b)It is equivocal whether the statements concerning the position of the Court were misleading. However, on balance, I do not think that they can be taken to have accurately described the attitude of the Court to the scheme. They are capable of giving the impression that the Court agreed with the argument on the merits, in the absence of anything else being put. That impression would be wrong.
(c)However, in the present circumstances, their impact was sufficiently ameliorated by the fact that the scheme booklet had already put the Court’s position in its correct perspective and identified that there was opportunity to object at the second court hearing; and the communication which contained the impugned equivocal statement concluded by requesting that the shareholder seek informed guidance and start with reading the scheme (which I take to mean a reference to the scheme booklet).
(d)Ultimately I do not think that the communications would have caused the shareholders to vote under a serious misapprehension of the position.
Deficiencies in the Engineer’s report
I have already mentioned that the objectors relied on the report which they had obtained from another engineer to contest both the correctness of the expression of opinion contained the engineer’s reports in the scheme booklet concerning the lifespan of the building and the relative expertise of that engineer to express such opinions.
Based on the fact of that new engineering opinion evidence, they sought to persuade me that I should form the view that the scheme booklet contained information which was likely to mislead shareholders.
I reject this contention.
The fact that a second engineer subsequently retained by the objectors has a different view on engineering matters does not necessarily establish that the provision of the first engineer’s opinions was misleading. It does not provide any reason to think that the first engineer’s opinions were not honestly held or reasonably based. Especially is that so when the objectors disclaimed any intention to seek to have me accept the second engineer’s report in preference to the first.
In oral argument, counsel for the objectors advanced a similar argument in relation to the valuation evidence which the objectors had obtained. I reject that argument for the same reasons.
Conclusion
I find that there has been full and fair disclosure to shareholders.
Would minority shareholders be oppressed by the scheme?
Counsel for the objectors submitted that, having regard to the inherent nature of the scheme and the disconnect between the proportionate value proposed to shareholders under the scheme and the commercial value of their leasehold interests derived from their shareholding, I should form the view that minority shareholders would be oppressed by the scheme.
The considerations said to justify the conclusion of oppression were the considerations which I have identified and discussed at [59] to [61] above. I think that, for the same reasons I identified in those paragraphs as being reasons why an intelligent and honest member of the relevant class, properly informed and acting alone might approve the scheme, I should reject the suggestion that minority shareholders would be oppressed by the scheme. A particularly important consideration is the evidence that demonstrated that the quantum of the consideration involved in the scheme was such that each shareholder would be getting a premium on the objective value of their shares.
Would the scheme offend against public policy?
First, the objectors placed reliance on the observations by Martin J in Re International Harvester Co of Australia Pty Ltd in the manner I have identified at [42] above. I have addressed that issue already.
The objectors contended that approval of the scheme would offend public policy. Their argument had these elements:
(a)The effect of the restrictions in the Constitution was that if that which has sought to be done by scheme had been sought to be done by resolution, it would have had to be done by resolution without dissent. Similar constraints had earlier appeared in the articles of association.
(b)There was at least some evidence that shareholders of the applicants knew and relied on such constraints when becoming members.
(c)It is adverse to the public interest to facilitate, by approval of the scheme, the circumvention of contractual rules governing the private interests of persons whom it must be presumed entered into those terms having regard to their commercial interests in full knowledge and of their own free will. To do so would erode public confidence in the perception of the protections afforded under the constitutions of companies.
If, contrary to the view which I have taken, I had found no inconsistency between the scheme and s 246B(2), then that would have meant that the public policy embodied in the Act permitted of the possibility that the private class rights might be varied or cancelled by scheme of arrangement pursuant to s 411. Indeed it is fundamental to s 411 that it is a mechanism which, subject to the scrutiny for which it provides, permits an agreement to be made binding on a company and its members notwithstanding that one or more members do not join in that agreement. It is commonplace that schemes provide for acquisition of shares from members, notwithstanding that they might dissent. I would not find any offence against public policy for the reasons contended.
I would find further support in my conclusion concerning public policy in the considerations addressed earlier as reasons why I would not conclude that the scheme was oppressive of the minority shareholders.
The position of ASIC
Section 411(17) provides:
(17) [Approval of compromise by court] The Court must not approve a compromise or arrangement under this section unless:
(a) it is satisfied that the compromise or arrangement has not been proposed for the purpose of enabling any person to avoid the operation of any of the provisions of Chapter 6; or
(b) there is produced to the Court a statement in writing by ASIC stating that ASIC has no objection to the compromise or arrangement;
but the Court need not approve a compromise or arrangement merely because a statement by ASIC stating that ASIC has no objection to the compromise or arrangement has been produced to the Court as mentioned in paragraph (b).
ASIC has advised the Company that it is not in a position to provide a statement of no objection under s 411(17)(b) because of the view which it took as to the correspondence sent contrary to ASIC Regulatory Guide 60 and the principles stated in Re Coates Hire Ltd (No 2) at [6] and Re Centro Retail Ltd at [11]. I have discussed above the problem caused by that correspondence, and determined that I should not regard it as a reason to withhold my approval to the scheme.
However – as the Company concedes – the absence of a s 411(17)(b) letter means that I am obliged not to approve the scheme unless I am satisfied in the terms set out in s 411(17)(a). That means that the Company is required to establish, to the Court’s satisfaction, that the scheme had not been proposed for the purpose of avoiding the operation of any provisions of chapter 6 of the Act. In this regard I have to consider the purpose, rather than the effect, of the scheme and to do so as a matter of substance and fact: see Re Ranger Minerals Ltd; Ex parte Ranger Minerals Ltd (2002) 42 ACSR 582 at 589 per Parker J.
The Company contends that I must be so satisfied, having regard to –
(a)the fact that s 602 makes clear that the chapter is concerned with the acquisition of control over voting shares in a listed company, in an unlisted company with more than 50 members, in a listed body or voting interests in a listed managed investments scheme; and
(b)the Company is an unlisted company with less than 50 members, and, accordingly, the chapter could have no application to the Company.
I agree. I am satisfied that the scheme had not been proposed for the purpose of avoiding the operation of any provisions of chapter 6 of the Act.
The orders I should make
I have formed the view that I should not make an order approving the scheme because I think that the scheme is a means by which variation or cancellation of class rights is sought to be achieved, but is inconsistent with the means by which, in the present circumstances, the Act requires such a variation or cancellation to be achieved, namely the means set out in s 246B(2). However, but for that view, I would have made an order approving the scheme under s 411(4)(b).
I order that the application be dismissed.
It was common ground that if the application was dismissed, a costs order should be made in favour of the objectors. Accordingly, I also order that the applicant pay the objectors’ costs of the application.
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