StateWest Credit Society Limited v Home Building Society Limited
[2005] FCAFC 273
•23 DECEMBER 2005
FEDERAL COURT OF AUSTRALIA
StateWest Credit Society Limited v Home Building Society Limited
[2005] FCAFC 273Corporations Act 2001 (Cth) ss 9, 256C(2), 411, 411(1), 411(6), 1322(4), 1322(6)
Clearyv Australian Cooperative Foods Ltd (1997) 32 ACSR 582
Re Hills Motorway Ltd (2002) 43 ACSR 101
Re Fountain Health Care Ltd (2002) 42 ACSR 252STATEWEST CREDIT SOCIETY LIMITED (ACN 71 087 651 885) v HOME BUILDING SOCIETY LIMITED (ACN 72 051 900 380), PATRICK JOSEPH KIRWAN, THOMAS ROSSER, MICHAEL WOODFORD, LEWIS LOUTHEAN and GEORGE KEENAN
WAD 388 of 2005
LEE, NICHOLSON and LANDER JJ
23 DECEMBER 2005
PERTH
IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIA DISTRICT REGISTRY
WAD 388 OF 2005
ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA
BETWEEN:
STATEWEST CREDIT SOCIETY LIMITED
(ACN 71 087 651 885)
APPELLANTAND:
HOME BUILDING SOCIETY LIMITED
(ACN 72 051 900 380)
FIRST RESPONDENTPATRICK JOSEPH KIRWAN, THOMAS ROSSER, MICHAEL WOODFORD, LEWIS LOUTHEAN AND GEORGE KEENAN
SECOND RESPONDENTSJUDGES:
LEE, NICHOLSON and LANDER JJ
DATE OF ORDER:
23 DECEMBER 2005
WHERE MADE:
PERTH
THE COURT ORDERS THAT:
1. The appeal be dismissed.
2. The appellant pay the second respondents’ costs with certificate for two counsel.
3. There be no order for Home Building Society Limited’s costs.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIA DISTRICT REGISTRY
WAD 388 OF 2005
ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA
BETWEEN:
STATEWEST CREDIT SOCIETY LIMITED
(ACN 71 087 651 885)
APPELLANTAND:
HOME BUILDING SOCIETY LIMITED
(ACN 72 051 900 380)
FIRST RESPONDENTPATRICK JOSEPH KIRWAN, THOMAS ROSSER, MICHAEL WOODFORD, LEWIS LOUTHEAN AND GEORGE KEENAN
SECOND RESPONDENTS
JUDGES:
LEE, NICHOLSON and LANDER JJ
DATE:
23 DECEMBER 2005
PLACE:
PERTH
REASONS FOR JUDGMENT
THE COURT:
The appellant, which was the plaintiff before the primary judge, is a public company limited by shares. It carries on the business of a provider of banking and financial services.
The appellant applied to this Court for an order pursuant to s 411(1) of the Corporations Act 2001 (Cth) (‘the Act’) convening a meeting of the appellant’s members to be held on 31 January 2006 to approve a proposed transaction by way of scheme of arrangement for the appellant to merge with the first respondent. It also sought an order that the Court approve the explanatory memorandum which it proposed accompany the notice of the meeting. Lastly, it sought the Court’s approval to the scheme of arrangement after the members had approved the scheme. The application therefore contemplated two separate hearings: the first interlocutory, the second final.
The matter came on before the primary judge on 12 December, initially on an interlocutory application for an order convening the meeting and approving the explanatory memorandum. At that hearing it appears the second respondents sought leave to be joined as respondents. They also sought to be heard on the interlocutory application in opposition to the orders sought.
The matter entailed some urgency. As we have said, it was proposed by the appellant that the meeting be held on 31 January 2006. If the meeting were to be held on that date a number of matters needed to be attended to which made the application urgent. The appellant needed to arrange to have the notice of meeting, the scheme booklet, a letter accompanying the notice of motion, a proxy form and a share sale facility instruction form printed and posted to the appellant’s members in sufficient time to allow them to consider the contents of that document prior to 31 January. The appellant needed to insert the necessary advertisements in newspapers circulating in Western Australia and nationally, again in sufficient time to allow anyone reading those advertisements to obtain the documents previously referred to.
On 14 December 2005 the primary judge made the following orders:
‘1.Leave be granted to Patrick Kirwan, Thomas Rosser, Michael Woodford, Lewis Louthean and George Keenan to be heard in these proceedings.
2.The plaintiff’s interlocutory application dated 25 November 2005 for the making of orders convening the meeting of members of the plaintiff is refused.
3.The plaintiff’s originating application dated 25 November 2005 be adjourned sine die.
4.Costs be reserved.’
We think paragraph 1 of the orders meant that the second respondent be treated as being joined as respondents to the originating process. That is how the parties, including the appellant, have treated the order.
On 16 December 2005 the primary judge gave his reasons for the orders made two days earlier. At that time, the appellant, rightly recognising that the orders made by the primary judge were interlocutory, sought leave to appeal against those orders from the primary judge. The primary judge gave leave to appeal.
Again, because of the urgency of the matter, which, as we have said, was brought about by the appellant seeking to have the meeting convened for 31 January 2006, this Court sat three days later to hear that appeal.
The appellant’s Constitution requires the appellant to carry on its business on the basis of certain Principles of Mutuality which are set out in the preamble to the appellant’s Constitution. Only the appellant’s members can be customers of the appellant.
In July 2005 the first respondent, Home Building Society Limited (‘Home’) proposed a merger between the appellant and it. It proposed that the appellant reduce its capital by cancelling its entire existing member shares, at the same time issuing one share to Home. The appellant would therefore become a wholly owned subsidiary of Home. The existing members of the appellant would receive, in exchange for their cancelled shares in the appellant, a special dividend from the appellant of about $219 and approximately 240 shares in Home. The merger could not be effected without the members approving, in general meeting, the cancellation of the existing shares.
The merger proposal is, of course, inconsistent with the Principles of Mutuality which are presently enshrined in the appellant’s Constitution. Appendix 5 to the Constitution, however, provides for a Demutualisation Approval Procedure which must be complied with before the appellant convenes a meeting of its members to vote on a proposed modification or repeal of the Constitution. Rule A5-3(1) provides:
‘(1)If this Appendix applies, the Credit Society must comply with the procedure set out in Sections 2 and 3 of this Appendix before:
(a)convening a meeting of members to vote on the proposed modification or repeal of the Constitution set out in items (1) and (4) of the Table in Rule A5-1(1);
(b)issuing the securities or admitting the members as set out in item (2) of the Table and Rule A5-1(1); or
(c)either convening, or where relevant, applying for a court or other order to convene, one or more meetings (whichever is the earlier) to vote on the proposed restructure…as set out in item (3) of the Table in Rule A5-1(1).’
Rule A5-3(1)(a) requires the appellant to comply with the procedures in Sections 2 and 3 before convening a meeting of members to vote on the proposed modification or repeal of the Constitution, and applying for a court to convene a meeting to vote on the proposed restructure.
Rule A5-3(2) of Appendix 5 provides:
‘(2)If a meeting of members approves a proposed modification of the Constitution set out in items (1) and (4) of the Table in Rule A5-1(1):
(a)the resolution is of no effect until the procedure set out in Sections 2 and 3 is complied with; and
(b)the Credit Society must send each member a notice that the resolution has been passed in breach of this Appendix, together with the other documents required to be sent in Rule A5-5.’
The effect of this Rule is that any resolution which is passed by a meeting of members is of no effect until the procedure referred to both in this Rule and the previous Rule in Sections 2 and 3 has been complied with.
Section 2, referred to in the two Rules set out above, relevantly provides:
‘A5-5 Disclosure Documents Sent With Ballot Paper
The Credit Society must send the following documents with the ballot paper that it must send each member under Rule A5-14:
(a) a disclosure statement as described in Rule A5-6;
(b)a director’s statement from each director as described in Rule A5-7; and
(c) …
A5-6 Disclosure Statement
(1)The disclosure statement must adequately set out or explain the following (if relevant):
(a)the procedural steps required in relation to the proposed transaction;
(b)how members’ rights will change as a result of the proposed transaction and the consequences of the proposed transaction for members, including any:
(i) loss of rights;
(ii)change as to voting rights and rights to participate in the reserves and profits of the Creditor Society;
(c)what benefits (if any) will be offered to members if the proposed transaction occurs, and why the benefits are considered appropriate, taking into account, among other things, the extent to which the benefits compensate the members for loss of rights;
(d)the basis upon which members’ entitlement to the benefits will be determined, including:
(i)any minimum period of membership that a member must satisfy to receive benefits;
(ii)whether members must pay any amount or provide other value to receive benefits;
(e)any preferential allocation of benefits to members, or a class of members, and how that allocation is to be determined;
(f)any benefits that officers of the Credit Society (including retiring officers) or any associates of any officers may receive (whether directly or indirectly) in connection with the proposed transaction, other than in their capacity as a member on the same terms as are available to other members, including without limitation:
(i) any money or goods;
(ii) any preferential allocation of securities;
(iii) any retirement or superannuation benefits;
(iv) any compensation for loss of office;
(v)any concession loans or other favourable or non-arms length transactions.
(g)the implications of the proposed transaction in relation to:
(i) the continuation of the Credit Society’s business; and
(ii)any major changes to be made to the Credit Society’s business; and
(iii) changes to benefits, product and services;
(iv)the future employment of the present employees of the Credit Society;
(h)whether the Credit Society’s financial position has changed materially since the last balance sheet put before members at the last AGM;
(i)the availability and consequences of other alternatives; and
(j)any other information that the members and their professional advisers would reasonably require to make an informed assessment whether to approve the proposed transaction.’
Relevantly, for the purpose of this appeal, the appellant in order to comply with Appendix 5 of its Constitution must, before convening a meeting of members or before applying for a court to convene a meeting, comply with Section 2. Put shortly, it is a condition precedent to an application to this Court pursuant to s 411(1) of the Act that the appellant complies with the procedure in Section 2. In order to comply with Section 2, it must hold a ballot of its members and send with the ballot paper the Disclosure Statement containing the information proscribed in Rule A5-6.
The members must be advised of the manner in which their rights will be affected and the consequences to them of the implementation of the proposed transaction. They must be told of the benefits to them and any preferential allocation to any class of members.
Most importantly, for the purpose of this appeal, the Disclosure Statement must adequately set out any benefits that officers of the appellant may receive in connection with the proposed transaction other than in their capacity as a member and, in particular, must include the matters referred to in Rule A5-6(1)(f)(i)-(v).
There are other documents that need to be provided to the members. The appellant must provide the members with a Director’s Statement: Rule A5-5(b).
‘A5-7 Director’s Statement
The director’s statement must contain:
(a) a statement:
(i)recommending that the proposed transaction be approved or not approved, and giving reasons for the recommendation; or
(ii)giving reasons why a recommendation is not made;
(b)a statement whether the director proposes to approve or not approve the proposed transaction;
(c)a statement confirming that neither the director not any associate of the director will receive any pay, other valuable consideration or any other benefit in connection with the proposed transaction other than as disclosed in the disclosure statement; and
(d)particulars of any agreement between the director and any other person in connection with, or conditional upon, the outcome of the proposed transaction.’
The Chief Executive Officer of the appellant is Mr Greg Wall. He is not a director.
The appellant accepted that it had to comply with the Demutualisation Approval Procedure before implementation of the merger proposal. On 14 October 2005 the appellant posted to its members a Disclosure Statement in accordance with its obligations under Section 2 Rule A5-6 of Appendix 5. The Disclosure Statement set out the terms for the demutualisation proposal. A ballot paper was also forwarded to the members in order the members might vote on the demutualisation proposal. Voting closed at 10.00 am on 18 November 2005.
The Disclosure Statement addressed Rule A5-6(1)(f) and included the following:
‘3.26StateWest’s officers will receive the following benefits upon commencing to hold office with Home:
3.26.1StateWest CEO Greg Wall will become the Managing Director of the Merged Entity, and will enter into a contract with Home, however the terms of the contract are yet to be determined. Further information in relation to the contract will be provided in the Scheme Documents.
3.26.2Trevor Halliday, Roderick Cooper and Katrina Burton will become non-executive directors of Home, and will be entitled to share in the amount of the Home Directors’ fees fixed by the Home Board from time to time, subject to the maximum amount of the Home Director’s fees approved by Home Shareholders. The current maximum amount of Home Directors’ fees approved by Home Shareholders is a total of $500,000.
3.26.3Greg Wall, Trevor Halliday, Roderick Cooper and Katrina Burton will also receive Permanent A Class Shares in the share capital of Home. These Permanent A Class Shares can only be held by directors of Home (or authorised transferees), and have special voting rights and dividend entitlements (refer to paragraph 3.27). These special rights were due to expire on 26 February 2006, however ASX has agreed that the expiry date may be extended to 26 February 2008 (refer to paragraph 3.24.4 for details).’
Fifty-two per cent of the appellant’s members who were eligible to vote in respect of the demutualisation proposal voted. 27,185 members voted in favour, and 2,721 members voted against the demutualisation proposal. Therefore, of the 52 per cent of the members who voted, 90.9 per cent voted in favour of the demutualisation proposal.
The second respondents sought leave in respect of four separate grounds of objection. We will set out the four grounds of objection advanced by the second respondents although, as it happens, only the first is important for this appeal.
First, the second respondents contended that the appellant had not complied with its obligations to make disclosure of the benefits attaching to Mr Wall in connection with the proposed transaction pursuant to Rule A5-6(1)(f) of the Demutualisation Approval Procedure. It was contended that, because of the provisions of Rules A5-3(1) and A5-3(2), the appellant was thereby precluded from convening a meeting or seeking to have the Court convene a meeting.
Secondly, the second respondents contended that the appellant’s directors had acted in contravention of the appellant’s Constitution by accepting monies provided by Home and using those monies to pay up amounts outstanding in respect of members’ partly paid shares. It was also contended as part of this objection that the directors had contravened the appellant’s Constitution by issuing shares to members who, by some historical anomaly, had not been issued shares when becoming members of the appellant.
Thirdly, it was put by the second respondents that after the merger proposal had been announced, the appellant’s directors ‘accepted persons as customers who were not members and thereby acted in breach of the Rules in the Constitution which provided that all customers had to be members of the plaintiff’.
Fourthly, the second respondents argued that the proposed resolution to cancel the appellant’s shares by way of reduction of capital was a selective reduction which could not be implemented in accordance with s 256C(2) of the Act.
The appellant accepted that leave should be given to the second respondents to be heard in respect of the fourth objection but that otherwise leave should be refused.
As has been observed already, the primary judge granted leave to the second respondents to be heard in the proceedings generally. The appellant contends, on this appeal, that leave should not have been granted.
The appellant argued, before the primary judge, that it was not appropriate to grant leave to members of the appellant. It was argued that, because the objections raise issues of fact, the second respondents should bring separate proceedings seeking to enjoin the appellant from convening its meeting and, if successful on that application, give the usual undertaking as to damages.
The second respondents argued that they ‘were content to have their objections considered by reference only on the affidavit evidence which is already before the Court’. They argued that there was no code which required objections of this kind to be commenced in separate proceedings to those proceedings seeking to convene a meeting under s 411 of the Act. The second respondents contended that the Court had a supervisory function under s 411(1) of the Act which could be assisted by the presence of the second respondents.
The primary judge said:
‘24 The observations of Austin J in Cleary [Cleary v Australian Cooperative Foods Ltd (1997) 32 ACSR 582] referred to by counsel for the objectors show that there is a degree of flexibility as to whether the objections raised by objectors which have the potential to affect the approval of a scheme of arrangement, can be pursued within scheme approval proceedings, or by way of separate proceedings. Each case must depend on its own circumstances. In my view, however, the issues which have been raised by the objectors, particularly the issue as to whether there has been compliance with the disclosure regime in the Demutualisation Approval Procedure in respect of Mr Wall, are narrow in ambit. Further, in light of counsel for the objectors’ concession that he is content to have the objections dealt with on the basis of the affidavit evidence before the Court, the consideration of the objections will not involve any factual disputes. In those circumstances, there is no reason why the objections cannot be determined within these proceedings.
25 I will, accordingly, grant leave for the objectors to be heard in these proceedings.
26 The invitation of the plaintiff to make orders for the convening of the meeting and leave the objectors to decide whether to pursue their objection in separate proceedings also does not take into account the supervisory role of the Court in these types of applications. Because of the supervisory role of the Court in these applications, it seems to me that once the attention of the Court has been drawn to a potentially fatal flaw in the implementation of the Scheme, the Court cannot simply ignore that element in determining whether to grant approval for the convening of the meeting, and that the Court would in any event, have to take that matter into account when applying the principles in Hills Motorway [Re Hills Motorway Ltd (2002) 43 ACSR 101] and Foundation Health Care [Re Fountain Health Care Ltd (2002) 42 ACSR 252] referred to above.
27 In light of the conclusions to which I have come, it is only necessary for me to deal with the first of the objections raised by the objectors.’
It is clear enough that the primary judge gave leave to the second respondents ‘to be heard in these proceedings’ because the primary judge concluded that the first objection raised by the second respondents was factually uncomplicated and fatal to the appellant’s application.
The primary judge found against the appellant in respect of the second respondents’ first objection and therefore dismissed the appellant’s application to the Court to convene a meeting under s 411(1) of the Act. He has not ruled on the other three objections.
That is no criticism of the primary judge. Indeed, he was called upon to make an urgent decision because the proposal was to convene this meeting for the 31 January 2006. Indeed, this Full Court has sat as a matter of urgency to determine whether the primary judge was correct in his opinion in relation to the first objection. The other three objections have been raised on a Notice of Contention in support of the primary judge’s orders. However, in view of the fact that we are of the opinion that the appeal should be dismissed because the primary judge did not err in his decision to uphold the first objection, it is not necessary to consider those other three objections.
On the interlocutory application the second respondents tendered an Explanatory Memorandum which was sent by Home to its members with a notice of Home’s Annual General Meeting dated 10 October 2005. Although the notice was dated 10 October 2005, there was evidence, which the primary judge accepted, that the notice was not sent until 28 October 2005.
The Explanatory Memorandum referred to Mr Greg Wall’s future employment with Home should the merger occur. It provided:
‘11.2Key details of Greg Wall’s employment agreement
In addition to the Managing Director Option Plans, Greg Wall’s negotiated total remuneration package is $400,000 per annum which includes the statutory superannuation contributions required to be paid by the relevant legislation.
Greg Wall also has the ability to earn a performance bonus payment of up to $120,000 per annum subject to meeting key performance indicators to be agreed within 1 month of him commencing his employment as Managing Director and which will be reviewed annually. This performance bonus is in addition to the remuneration package and the Managing Director Option Plan.
11.3Key details of Managing Director Options
Key details of the Managing Director Options to be granted by the Company to Greg Wall are set out below:
Number of Managing Director Options Consideration for Managing Director Options Expiry Date 250,000 No consideration is payable by the Managing Director in respect of the grant of a Managing Director Option by the Company. Any Managing Director Options not exercised within the period commencing on the date which is 3 years after the Managing Director takes up the position of Managing Director of the Company (“Commencement Date”) and concluding 12 months from the Commencement Date will automatically lapse. Exercise Details ■The Exercise Period commences on the Commencement Date and concludes on the date which is 12 months from the Commencement Date.
■Subject to the Automatic Exercise Events, Greg Wall will not be entitled to exercise the Managing Director Options unless:
▼he has been in continuous employment as Managing Director of the Company for a period of three years leading up to the commencement of the Exercise Period; and
▼ the relevant Performance Hurdles have been met.
■The Managing Director Options are exercisable at the Exercise Price during the Exercise Period in the tranches specified below, when the average market price per Home Share (weighted by reference to volume) of the Home Shares traded on ASX is at the specified price or higher for a period of at least 5 consecutive ASX trading days during the Exercise Period:
▼ 50,000 Managing Director Options at $12.50;
▼ 100,000 Managing Director Options at $14.50; and
▼ 100,000 Managing Director Options at $15.00.
■The Exercise Price is $8.32 per Managing Director Option. The Exercise Price is the average market price per Home Share (weighted by reference to volume) of the Home Shares traded on ASX during the 5 trading days ending on 22 August 2005 (being the day before the Merger was announced to ASX).
A summary of the terms and conditions of the Managing Director Option Plan are set out in Appendix A to this Explanatory Memorandum.’
Those details were disclosed to Home’s members because it was proposed that the members approve Home issuing 250,000 Managing Director Options to Mr Wall to provide ‘a strong incentive to align with the Company’s strategic plan focusing on seeking improved performance, the growth of the Company and better returns for Home Shareholders’.
Evidence was tendered from the Managing Director of Home, Mr Craig Coleman, that the contract of employment alluded to in paragraph 11.2 above was negotiated between 23 August 2005 and 27 October 2005. There was no other evidence to the contrary. That probably explains why the notice dated 10 October 2005 was not sent until 28 October 2005.
The second respondents relied upon the fact that on 28 October 2005 Home was able to advise its members of the terms of the proposed contract of employment with Mr Wall, but on 14 October 2005 the appellant was not able to identify those terms.
It may have been, of course, that when the Disclosure Statement was sent by the appellant to its members the terms of the contract of employment had not been agreed. If, however, they had been agreed by 27 October 2005 it was not disputed that the appellant’s members were not advised of the terms of that contract of employment before voting closed on 18 November 2005.
There was no dispute on the evidence that the appellant has not at any time advised its members of the matters referred to in paragraph 11.2 of Home’s explanatory memorandum.
The second respondents contended that the appellant had not made disclosure in accordance with its obligations under Demutualisation Approval Procedure by not providing the members with the Disclosure Statement which adequately set out the benefits which Mr Wall might receive in connection with the proposed transaction other than in his capacity as a member. It was contended that the appellant had not complied with Rule A5-6(1)(f).
The appellant’s primary submission before the primary judge was that it was inappropriate to allow the second respondents to be heard on any aspect of the interlocutory application because the second respondents were under an obligation to bring separate proceedings if they wished to challenge the appellant’s conduct in relation to the Demutualisation Approval Procedure and seek an injunction restraining the appellant from proceeding to submit the merger proposal to its members. Thus, it was argued, the second respondents would be obliged if such an interlocutory order were made to proffer an undertaking as to damages.
It was further contended that if the second respondents were heard on the interlocutory application, the contention that the appellant had breached Rule A5-6(1)(f) should be rejected because if it were accepted and the interlocutory application dismissed such that the meeting not go ahead, the second respondents would obtain what was in the nature of an interlocutory injunction without ever having offered an undertaking as to damages.
That submission was made a number of times to the primary judge. Clearly, in making the orders to which we have referred, his Honour rejected that argument.
The appellant argued before the primary judge there was no evidence that Mr Wall was an officer of the appellant within the meaning of that term in s 9 of the Act. ‘Officer’ is not defined in the appellant’s Constitution. Rule 1.2(1)(c) of the Constitution provides, however:
‘1.2 Interpretation
(1) In this Constitution, unless the context requires otherwise:
(a) …
(b) …(c)words and expressions defined in the Corporations Act have the same meaning in this Constitution;’
It would follow that s 9 of the Act would regulate whether Mr Wall was an officer of the appellant.
‘[O]fficer is defined in s 9 of the Act:
‘officer of a corporation means:
(a) a director or secretary of the corporation; or
(b) a person:(i)who makes, or participates in making, decisions that affect the whole, or a substantial part, of the business of the corporation; or
(ii)who has the capacity to affect significantly the corporation’s financial standing; or
(iii)in accordance with whose instructions or wishes the directors of the corporation are accustomed to act (excluding advice given by the person in the proper performance of functions attaching to the person’s professional capacity or their business relationship with the directors or the corporation); or
(c)a receiver, or receiver and manager, of the property of the corporation; or
(d)an administrator of the corporation; or
(e)an administrator of a deed of company arrangement executed by the corporation; or
(f)a liquidator of the corporation; or
(g)a trustee or other person administering a compromise or arrangement made between the corporation and someone else.’
The primary judge rejected the appellant’s argument. He held there was sufficient evidence from which it might be inferred that Mr Wall was an officer of the appellant. In that regard he relied upon the Disclosure Statement itself and other evidence which he did not identify.
The appellant next contended before the primary judge that in complying with Rule A5-6(1)(f) of the Demutualisation Approval Procedure it only had to disclose relevant information. In that regard, it only had to disclose that Mr Wall was to be the Managing Director of Home. Alternatively, it had no obligation to disclose any benefits which would be conferred on the officer by the appellant and not by a third party.
The primary judge rejected that contention. He said:
‘35 In my view, on a proper construction of r A5‑6(1)(f) of the Demutualisation Approval Procedure, it was incumbent upon the plaintiff to fully disclose the amount of the remuneration and other financial benefits which Mr Wall would receive as Managing Director of Home. The Disclosure Statement did not make that statement. It is no answer to say that at the time that the directors of the plaintiff chose to send out the Disclosure Statement they were not then in a position to make a full disclosure. The obligation was an absolute obligation. If the plaintiff, through its directors, was not in a position to set out the information required to be disclosed under r A5‑6(1)(f) of the Demutualisation Approval Procedure, it was required to withhold issuing the Disclosure Statement until such time as it was in a position to meet its disclosure obligations.
36 Further, the plaintiff took no action to disclose the terms of Mr Wall’s remuneration even after the employment contract was concluded on 27 October 2005.
37 Had this been the second hearing of the application to approve the Scheme, after the requisite majority had been obtained at the meeting, on the evidence which is before me, I would have found that there had not been adequate compliance by the plaintiff with the disclosure requirements in r A5‑6(1)(f) of the Demutualisation Approval Procedure, with the attendant consequence that an essential precondition to the implementation of the Scheme had not been met. I would, therefore, not have made final orders approving the Scheme. The evidence which is currently before the Court is unlikely to change between now and the date of the second hearing.
38 Accordingly, on the evidence currently before the Court, there is a real likelihood that the Court will find, at the second hearing, even if the necessary majority is obtained, that the disclosure in respect of Mr Wall’s benefits, was inadequate, with the consequence that the Demutualisation Approval Procedure was not complied with; with the further consequence that one of the essential preconditions for the implementation of the Scheme has not been complied with. Such a finding would mean that the Court would not approve the Scheme. It follows that, I am not satisfied that if the meeting is held and the necessary majority is obtained, that it is likely that the Court would approve the Scheme. In accordance with the principles to be applied to determine whether to make the orders for the convening of a meeting, I am, therefore, not able to make the orders for the convening of the meeting sought by the plaintiff.’
The appellant contended on this appeal that it had been denied procedural fairness by the primary judge in two respects. First, the primary judge had allowed the second respondents to be heard and to defeat the appellant’s interlocutory application without calling upon the second respondents to give an undertaking as to damages. Secondly, the primary judge had made two final findings on the interlocutory application. In that regard, it complained of the judge’s finding that Mr Wall was an officer of the appellant. Secondly, it complained of the construction arrived at by the primary judge in [35] of his reasons recited above.
In our opinion, the first argument in relation to procedural fairness is an argument of form over substance. In many cases, it would not be appropriate to allow members of a corporation to object to an order of the Court convening a meeting under s 411 in the proceedings brought by the corporation for that order. But that is not to say that it would never be appropriate that the members be heard on such an application. This much is accepted by the appellant in respect of the fourth of the objections of the second respondents.
The order made by the primary judge did not finally determine the issue. It did have the result that the meeting will not be convened until the appellant has complied with its Demutualisation Approval Procedure Rules. If, however, the second respondents had proceeded, as it was argued they should and obtained an interlocutory injunction, the practical result would have been likely to be the same.
The meeting would not have taken place because the Court would have been satisfied that the second respondents had established that there was a serious question to be resolved and that is that the appellant had not complied with its Demutualisation Approval Procedure Rules and the balance of convenience favoured the conclusion that the meeting not proceed. The injunction would stand. Of course, that would have been an interlocutory injunction but, in practice, it would have had to remain in place until the appellant complied with its Rules.
In this case, there was evidence before the primary judge that if the meeting were to go ahead it would be at a cost of some $650 000. The primary judge was entitled, in the exercise of his discretion, to allow the second respondents to be heard in respect of the order convening the meeting. That was especially so because, in this case, there was no dispute about what the appellant had disclosed and what information was available as at 28 October to be disclosed.
In those circumstances, we are not persuaded that the primary judge erred in adopting the procedure he did. All his Honour had to do was to deal with the two arguments advanced by the appellant. First, on the evidence, as to whether Mr Wall was an officer and, secondly, as to the construction of Rule A5-6(1)(f).
In support of the second limb of the argument that the appellant had been denied procedural fairness, the appellant directed this Court’s attention to [35] of his Honour’s reasons. It was contended that his Honour had reached a final conclusion in relation to the proper construction of Rule A5-6(1)(f). It was submitted that his Honour had fallen into error.
In our opinion, that involves too literal a reading of [35] of his Honour’s reasons. We think it is clear, when his Honour’s reasons are read as a whole, that his Honour treated the matter as the parties had as being an interlocutory application and he addressed the second respondents’ objection on the basis as to whether it was reasonably arguable. We think that is clear from [38] where his Honour makes it clear that he was deciding the matter on the evidence available to the Court. He was not thereby precluding further evidence being led at some later time in support of an interlocutory application for an order to convene the meeting.
On this appeal the appellant, whilst not conceding the correctness of that part of the primary judge’s reasons which found Mr Wall to be an officer, did not press any argument to the contrary. It was put:
‘18. The judge concluded that there was evidence that Wall was an officer of the appellant, within the definition of “officer” in s 9 of the Corporations Act, that was not applied in the Constitution. Although not conceded by the appellant, this issue was not raised in this appeal.’
This Court has not heard any argument that Mr Wall was not, on the evidence, an officer of the corporation. We have, however, been directed to the argument which was put to the primary judge. In our opinion, the primary judge was correct to find that Mr Wall was, on the evidence, an officer of the appellant. He was the appellant’s Chief Executive Officer. He reported to the Board. He attended Board Meetings. He was a person who participated in making decisions that affected the whole of the business of the corporation. The appellant held him out as an officer. That follows from the appellant’s own Disclosure Statement. It follows, in our opinion, that the appellant was right not to raise that issue on this appeal.
On this appeal, the appellants argued that the opening words in Rule A5-6(1) limited the disclosure that needed to be made in Rule A5-6(1)(f). In particular, in its written submissions it contended:
‘22.There are two presently relevant aspects of the proper construction of clause A5-6(1)(f) of the appellant’s constitution – the opening phrase and the reference to “benefits” that an officer “may receive … in connection with the proposed transaction”.
23.The use of the words “adequately” and “if relevant” in the opening phrase clearly manifest an intention that the required disclosure be determined according to the applicable circumstances.
24.Moreover, adequacy and relevance will be informed by the intention of the provision, which is that there should be disclosure of benefits which could constitute a conflicting personal interest of officers of the appellant whose duties include decision making in relation to a proposed transaction.’
Before addressing the appellant’s contentions, it would be convenient to address Rule A5 in general terms.
Rule A5-3 makes it mandatory upon the appellant, if it wishes to have its members repeal the principles relating to mutuality, to comply with Sections 2 and 3 of the Appendix. It is, as has already been said, a condition precedent to an application to this Court for convening a meeting that the appellant comply with Sections 2 and 3. The obligation imposed upon the appellant is reinforced by Rule A5-3(2) which makes any resolution passed, if Sections 2 and 3 have not been complied with, of no effect.
The purpose of Rules A5-5, A5-6 and A5-7 is to ensure that the members are fully informed of all matters relevant to their decision. Rules A5-6 requires the appellant, through its directors, to provide full detail of how the proposed transaction will affect the members and, in particular, whether any members or class of members will benefit either to the exclusion of other members or in preference to other members. It requires the appellant to bring to the attention of members any benefits that its officers may receive either directly or indirectly. That Rule requires the appellant to make proper enquiries as to any benefit that might flow to its officers. It would require the appellant to insist that the party with which it is negotiating provide details of any benefits of the kind mentioned in Rule A5-6(1)(f). The extensive obligations which are imposed upon directors are also made clear by Rule A5-7 and, in particular, Rule A5-7(c) and (d). One of the evident purposes of Section 2 is therefore to ensure that if any benefits are to flow to any members or officers, all directors or members are acquainted with that fact.
The appellant put forward three separate contentions which it said were relevant to determining whether there was an argument or case that Rule A5-6(1)(f) had not been complied with.
The appellant contended that Mr Wall was not a director. The benefit was not provided by the appellant. The information as to the benefits flowing to Mr Wall was not of a kind which the appellant had any right to obtain.
None of these matters seem to us to be relevant to a determination of what information needed to be included in the circumstances of this case.
The appellant was not a director but that is not relevant to determining what information needed to be given. The officers referred to in Rule A5-6 must include persons who are not directors of the appellant.
Mr Wall was an officer. The information that was required to be included was at least that in placita (i)-(v) of Rule A5-6(1)(f).
It is irrelevant that the benefit was to be provided by a party other than the appellant. Rule A5-6(1)(f) does not limit disclosure to benefits received from the appellant. The intention of the Disclosure Statement is to ensure that the members are fully informed of all matters which might be relevant to their decision. That can only be done by full disclosure. Any benefit received by an officer from the party proposing the transaction would be relevant to that decision.
The appellant had the right to require its officers, if that officer had been involved in negotiating the proposed transaction, to divulge to it the details of any benefits that the officer was to receive from the party proposing the transaction. Conversely, the appellant had the obligation to insist upon Home disclosing to it the details of any agreement, arrangement or understanding which it had or intended to negotiate with one of the appellant’s officers so that the appellant could comply, as the appellant was obliged, with Rule A5-6(1)(f).
But even if it did not have those rights, the appellant in fact had the information.
It was further contended that Mr Wall was not to receive a benefit in connection with the demutualisation and the merger. It was put:
‘29.The nature of the nexus requirement is affected by the use of the word “receive”, the ordinary meaning of which conveys a significant degree of immediacy: “to take into one’s hand or one’s possession … to have (something) bestowed, conferred … to get …”: Macquarie Dictionary.
30.The transaction here was demutualisation, as a step towards the proposed merger. Assuming (without conceding) that the object of the demutualisation forms part of the relevant transaction, the only arguable “benefit” that Wall may “receive” therefrom is the opportunity of employment with the first respondent.
31.Wall will not “receive” salary and other employment consideration “in connection with” the demutualisation and merger. He may only receive that by making a contractual commitment to the first respondent and by satisfactorily providing services to it, in the future, under the proposed employment contract.
32.These events are substantial, additional occurrences which are not aspects of the demutualisation and merger and do not result from them. They are not related to the demutualisation and merger in a practical commercial sense. The implementation of the merger will not bestow the fruits of the proposed employment contract on Wall.’
The obligation to produce the Disclosure Statement arises not only because the members are being asked to vote on demutualisation but because of a ‘proposed transaction’ which will take place as a consequence of that demutualisation.
The disclosure required relates to the proposed transaction. In this case, it is the proposed merger. In that merger the appellant’s Chief Executive Officer will, it is said, obtain the benefits referred to in paragraphs 11.2 and 11.3 of Home’s Explanatory Memorandum. Those benefits are a consequence of the merger. There is causal connection between the proposed transaction and the benefits Mr Wall will obtain.
The information which had to be disclosed under that Rule is to be gleaned from the Rule itself. The construction which was put upon the Rule by the appellant is, in our opinion, untenable. The purpose of the Rule is to require the appellant to disclose all benefits that its officers might receive in connection with the proposed transaction. Those benefits are not limited by the placita in Rule A5-6(1)(f) but the extent of the disclosure can be gleaned from those placita.
Mr Wall will receive a benefit in connection with the proposed transaction. The benefit is a contract of employment with Home. That contract of employment includes the payment of remuneration. In our opinion, the appellant was under an obligation to disclose the terms of Mr Wall’s proposed contract of employment.
It is no answer for the appellant to contend that at the time the Disclosure Statement was created those terms were still unclear. The Demutualisation Approval Procedure had to be complied with. The members should not have been asked to vote upon the demutualisation proposal until such time as the appellant was able to comply with the information required to be included in the Disclosure Statement. In any event, the terms of Mr Wall’s proposed contract of employment were finally agreed by 27 October. At no time after that date and before voting concluded on 18 November, did the appellant provide its members with the further information which was available to the Chief Executive Officer and to the appellant.
The primary judge was right, therefore, in our opinion, to conclude that the appellant had failed to comply with its Constitution in respect of the Demutualisation Approval Procedure. Because the appellant had failed to comply with its disclosure obligations in Section 2 of Appendix 5, it thereby did not satisfy the condition precedent for applying to this Court for an order convening a meeting to approve the proposed merger. It followed that the appellant would be in breach of Rule A5-3(1) by convening a meeting of members or applying to a court before complying with Sections 2 and 3 of the Appendix. It also follows that if a meeting did take place and approved the proposed modifications to the Constitution, Rule A5-3(2) would operate to negate the effect of the resolution until there had been compliance with Sections 2 and 3 of the Constitution.
The primary judge concluded that if the meeting took place it would have refused to give approval when called upon to consider granting approval to the scheme of arrangement under s 411(6). In those circumstances, his Honour thought it appropriate to not accede to the application for the convening of a meeting.
His Honour also considered whether the members voting at the meeting, after full disclosure required under Rule A5-6(1)(f) might remedy the previous lack of disclosure. He concluded, however:
‘40 However, the Demutualisation Approval Procedure is a self contained process which requires, as a mandatory condition, a postal vote of members after adequate disclosure. The meeting which would be held pursuant to any Court orders that I would make would not fulfil the requirements of s 3 of the Demutualisation Approval Procedure which calls for the postal ballot and not a meeting process. Accordingly, I cannot rely upon a prospect of the members voting at the meeting in favour of the Scheme after adequate disclosure, as being a basis upon which to draw the requisite degree of satisfaction, which would permit me to allow the meeting to proceed. Further, and in any event, the terms of the Demutualisation Approval Procedure require that an effective demutualisation approval process be carried out prior to the application being made to Court and prior to the holding of any meeting.’
We consider, with respect, the primary judge was right in his conclusion. The Demutualisation Approval Procedure requires the convening of a meeting for the members to vote on that issue. Rule A5-3(2) contemplates that a resolution might be made prior to the procedures set out in Sections 2 and 3 having been complied with. It also contemplates that if the procedure is thereafter complied with, the resolution will take effect: Rule A5-3(2)(a).
However, the procedure to which that Rule provides requires the numbers to be provided with a Disclosure Statement which complies with Rule A5-6(1)(f). It is the procedure which must be complied with to regularise the resolution which has been passed in contravention of the Demutualisation Approval Procedure.
In any event, there was no evidence before the primary judge that the appellant was intending to provide its members with the information which would have complied with Rule A5-6(1)(f).
It was put faintly by the appellant, and forcefully by Home which supported the appellant’s application and appeal, that the primary judge had not taken into account the application of s 411(6) or s 1322(4) of the Act.
As to the first, it was put that the primary judge could have imposed conditions upon the appellant; one of which was it divulge the information contained in paragraph 11.2 of Home’s explanatory memorandum. It was never put to the primary judge that conditions should be imposed upon the appellant in relation to the convening of a meeting on 31 January 2006. Indeed, the appellant maintained before the primary judge, as it did before this Court, that the second respondent should not have been heard but that if they were to be heard there was no substance in the second respondents’ argument that the appellant had not complied with its Constitution. It was not for the primary judge to fashion orders to suit the appellant.
In any event, it would not have been sufficient for the primary judge to impose such conditions. It still would have been the case that the appellant had not complied with the condition precedent in Appendix A5-3(1)(a). The appellant would still have been in breach of its Constitution. Section 411(6) therefore would not have assisted the appellant, even if the appellant had relied upon it, which it did not.
Home argued that the primary judge should have considered s 1322(4). Again, it was not put to the primary judge that he ought to make an order under the subsection so as to excuse the appellant from its failure to comply with its Constitution. Indeed, as we have said, the only argument put to the primary judge was that there had been compliance with the Demutualisation Approval Procedure.
However, in any event, the appellant at no time addressed the provisions of s 1322(6) which needed to be addressed before an order could have been made under s 1322(4). The appellant has taken a very determined stand in this matter. When it became apparent that a complaint was to be made that it had not complied with Section 2 of Appendix 5, it could have sought a declaration that it had so complied or, in the alternative, sought an order under s 1322(4) excusing its failure to comply. Indeed, it could still do that and if either the declaration were granted or an order made under s 1322(4) then seek from the Court an order convening a meeting to put the proposed transaction to the members.
However, it has not done that. It has at all times maintained that the second respondents had no standing to make the application but, if they did, there had not been a failure to comply with the Demutualisation Approval Procedure. Thus it is in the position that it is.
For all those reasons, in our opinion, the primary judge was right to refuse to accede to the appellant’s application.
In those circumstances, like the primary judge, this Court does not have to consider the further objections made by the second respondents in the Notice of Contention.
The appeal should be dismissed.
The appellant should pay the second respondents’ costs. There should be no order for costs in relation to Home.
I certify that the preceding ninety-seven (97) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Lee, Nicholson and Lander. Associate:
Dated: 23 December 2005
Counsel for the Appellant: CL Zelestis QC with A Robertson Solicitor for the Appellant: Phillips Fox Counsel for the First Respondent: MJ Buss QC with CD Belyea Solicitor for the First Respondent: Clayton Utz Counsel for the Second Respondents: N McKerracher QC with SJ Penrose Solicitor for the Second Respondents: Tottle Partners Date of Hearing: 19 December 2005 Date of Judgment: 23 December 2005
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