Re White Horses Pty Ltd (No 2)

The applicant in this matter, a home unit company, sought an order pursuant to s 411 of the Corporations Act 2001 (Cth) approving a scheme of arrangement between it and all of its members.

Specifically, each of those shareholders held a parcel of shares attached to a lease conferring the right of occupation for a particular home unit. The applicant’s board assessed the premises as being at risk of serious dilapidation and was of the view that considerable expenditure would be needed to return it to a safe state.  [30]. The proposed scheme of arrangement was intended to facilitate a sale of the assets to a developer; the surrender of all 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. [2]–[3]. At a subsequent meeting to consider the proposal, at which 100% of the shareholders were present either in person or by proxy, the resolution in favour of the scheme was passed by the requisite majority. [4]–[6].

Six shareholders, representing 8.941% of the total voting shares, argued against the application for approval. [9].

In considering the matter, his Honour had regard to the legal requirements which apply before an order approving a scheme can be made (see Re Queensland Professional Credit Union Ltd (No 2) [2016] QSC 105 at [8]):

(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.

He was of the view that the first three requirements had been plainly satisfied. [12]. With regard to the fourth and fifth, the following factors were noted:

(a)Subject to one caveat, it was apparent that the meeting had been convened in accordance with the terms of a previous order of Jackson J, made pursuant to s 411(1) of the Corporations Act 2001 (Cth);

(b)The caveat was 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; 

(c)The resolution in favour of the scheme was passed by majority; and

(d)The court’s discretion as to whether to approve the scheme had been enlivened. [13].

In exercising the court’s supervisory jurisdiction his Honour had regard to the considerations identified in Re Seven Network Ltd (No 3) (2010) 267 ALR 583 at [31] to [45] per Jacobson J, in particular whether the scheme was capable of being accepted; whether the proposal should be regarded as fair and reasonable in the requisite sense; whether there had been full and fair disclosure to the shareholders; whether the scheme offended public policy; whether minority shareholders would be oppressed by the scheme; and the attitude of ASIC to the scheme. [14]–[15].

Was the scheme capable of being accepted?

A scheme of arrangement may override the constitution of a company where there is inconsistency (see Ashton Millson Investments Ltd v Colonial Ltd (2003) 48 ACSR 581), but not if it is inconsistent with the Act (see Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485 at 500 to 501). [39], [41].

The applicant submitted that whilst the scheme proposed an arrangement to override a clause of the Constitution, nothing in it was inconsistent with the Act. [40]. In that regard it was argued that s 411(1) of the Corporations Act 2001 (Cth) amounts to 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”. [41].

Ultimately, his Honour characterised the scheme as being an attempt to override the class rights provisions of s 246B of the Act without complying with it, and, accordingly inconsistent with the Act and incapable of being approved by the Court pursuant to s 411 (see Australian Securities Commission v. Marlborough Gold Mines Ltd (1993) 177 CLR 485 at 500 to 501). [47], [53].

Was the proposal fair and reasonable in the requisite sense?

After considering the key considerations contained within the scheme booklet provided to shareholders, both in favour and against the scheme, [57]–[58], his Honour determined that an intelligent and honest member of the relevant class, properly informed and acting alone might approve it. [62]. In forming that view he observed that there were “real problems” with both the valuation evidence and engineering opinion evidence which the objectors sought to rely upon. [63], [64]. He was satisfied that the proposal was fair and reasonable in the sense required by the authorities. [68].

Was there full and fair disclosure to shareholders?

After evaluating each individual disclosure and communication made to shareholders, his Honour formed the view that full and fair disclosure had taken place. [98]. In particular, he was satisfied that there was no admissible evidence that a potential liability to the caretaker as coming under an estimate for contingencies was inappropriate or misleading; [75] that unauthorised material which was sent to scheme participants by the proponents would have caused the shareholders to vote under a serious misapprehension of the position; [92] nor that the scheme booklet contained information which was likely to mislead shareholders on the basis that another engineer retained by the objectors expressed a different view on certain matters. [95].

Would minority shareholders be oppressed by the scheme?

His Honour dismissed the suggestion that minority shareholders would be oppressed by the scheme, observing that the evidence indicated that the quantum of the consideration involved in the scheme was such that each shareholder would obtain a premium on the objective value of their shares. [100].

Did the scheme offend public policy?

The objectors submitted that approval of the scheme would offend public policy, since: 

1. The effect of the applicable restrictions in the Constitution was that if that which was sought to be done by the scheme had been sought to be done by resolution, it would have had to be passed without dissent;
2. There was at least some suggestion that shareholders knew and relied on those constraints when becoming members;
3. It is adverse to the public interest to facilitate, by approving a scheme, the circumvention of contractual rules governing the private interests of persons. [102].

In relation to this matter, his Honour cogently stated:

“If … 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.”  [103].

The attitude of ASIC to the scheme

ASIC had previously advised the applicant that it did not intend to provide a statement of no objection under s 411(17)(b) due to the correspondence sent contrary to ASIC Regulatory Guide 60. [106]. In any event, his Honour was duly satisfied that the scheme had not been proposed for the purpose of avoiding the operation of any provisions of Ch 6 of the Act (see Re Ranger Minerals Ltd; Ex parte Ranger Minerals Ltd (2002) 42 ACSR 582 at 589). [109].

Orders

Given the incomplete conformity with the considerations identified in Re Seven Network Ltd (No 3) (2010) 267 ALR 583, his Honour concluded that he should not make an order approving the scheme, observing  that it was a means by which variation or cancellation of class rights was sought to be achieved, but was inconsistent with s 246B(2).  The application was dismissed and a costs order was made in favour of the objectors.  [110]–[112].