FEDERAL COURT OF AUSTRALIA STATEWEST CREDIT SOCIETY LIMITED ACN OR ARBN 71 087 651 885, IN THE MATTER OF STATEWEST CREDIT SOCIETY LIMITED [2005] FCA 1837 CORPORATIONS – Scheme of Arrangement – application for orders under s 411(1) of the Corporations Act 2001 (Cth) for the convening of a meeting – whether it was likely that orders approving the Scheme of Arrangement would be made at the second hearing – orders refused Corporations Act 2001 (Cth), ss 9, 411, 411(1), 256C(2) Re Foundation Health Care Ltd (2002) 42 ACSR 252 applied Re Hills Motorway Ltd (2002) 43 ACSR 101 applied Cleary v Australian Cooperative Foods Ltd (1997) 32 ACSR 582 cited IN THE MATTER OF STATEWEST CREDIT SOCIETY LIMITED ACN OR ARBN 71 087 651 885 and STATEWEST CREDIT SOCIETY LIMITED WAD 358 OF 2005 SIOPIS J 14 DECEMBER 2005 (Date of Order) 16 DECEMBER 2005 (Publication of Reasons) PERTH IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY WAD 358 OF 2005 IN THE MATTER OF STATEWEST CREDIT SOCIETY LIMITED ACN OR ARBN: 71 087 651 885 STATEWEST CREDIT SOCIETY LIMITED PLAINTIFF JUDGE: SIOPIS J DATE OF ORDER: 14 DECEMBER 2005 WHERE MADE: PERTH THE COURT ORDERS THAT: 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. 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 358 OF 2005 IN THE MATTER OF STATEWEST CREDIT SOCIETY LIMITED ACN OR ARBN: 71 087 651 885 STATEWEST CREDIT SOCIETY LIMITED PLAINTIFF JUDGE: SIOPIS J DATE OF ORDER: 14 DECEMBER 2005 PUBLICATION OF REASONS: 16 DECEMBER 2005 PLACE: PERTH REASONS FOR JUDGMENT 1 This is an application pursuant to s 411(1) of the Corporations Act 2001 (Cth) ('the Act') for the approval by the Court of the convening of a meeting of members of the plaintiff and the distribution of the draft Scheme booklet in respect of a proposed Scheme of Arrangement ('the Scheme') propounded by the plaintiff. On 14 December 2005 I made orders refusing to authorise the convening of the meeting of members of the plaintiff and the distribution of the proposed Scheme booklet. I delivered brief oral reasons and said that I would provide full written reasons later. These are the reasons. Background 2 The plaintiff is incorporated as a public company limited by shares. The plaintiff is the product of a series of mergers between several credit union societies during the period 1995 to 2004. The plaintiff is governed by a Constitution which provides that the company is organised on the basis of certain principles of mutuality. The principles of mutuality are set out in the Preamble to the Constitution and these principles take effect through certain provisions in the Constitution. These provisions include rules that customers must be members of the plaintiff, a person can only become a member by subscribing for a member's share and that a member share confers the right to one vote and only one vote. 3 In June 2005, the plaintiff received a merger proposal from Home Building Society Limited ('Home'). It is the implementation of this merger proposal which gives rise to the application by the plaintiff for this Court's approval of the Scheme. In general terms, the merger proposal has the following elements. It is proposed that there be a reduction of capital of the plaintiff by the cancellation of the shares of its members, and the issue of a single share to Home. The members of the plaintiff will then receive, pursuant to the proposed Scheme, shares in Home and a special dividend from the plaintiff. Thus, in essence, the members will cancel their shares in the plaintiff, the plaintiff will become a wholly owned subsidiary of Home and the members of the plaintiff will be issued shares in Home and also will receive a payment from the plaintiff. There is, therefore, an interrelationship between the Scheme and the proposed reduction of capital by the cancellation of shares. It follows that for the Scheme to be implemented, it will be necessary for the members to approve the cancellation of shares by resolution at an Annual General Meeting. 4 The implementation of the merger proposal is inconsistent with the principles of mutuality. The Constitution of the plaintiff provides that the members of the plaintiff must approve the demutualisation of the plaintiff. The Constitution provides for a procedure whereby this approval is to be obtained. This procedure is called the Demutualisation Approval Procedure ('the Demutualisation Approval Procedure'). It is Appendix 5 to the Constitution ('the Appendix'). The Constitution emphasises the importance of the Demutualisation Approval Procedure being followed. It provides at r A5‑3(1) of the Appendix: '(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).' 5 Rule A5‑3(2) of the Appendix says: '(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.' 6 Section 2 of the Appendix 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) … (c) … A5‑6 Disclosure Statement (1) The disclosure statement must adequately set out or explain the following (if relevant): … (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'. 7 For the merger proposal to be implemented, several resolutions are required to be passed at the Annual General Meeting of the plaintiff to demutualise the plaintiff, and this Court must order the convening of a meeting of members of the plaintiff under s 411 of the Act. By reason of these matters, r A5‑3 of the Demutualisation Approval Procedure, is engaged and its terms must be complied with. This means that the plaintiff must comply with the disclosure procedure in s 2 of the Demutualisation Approval Procedure; and it must carry out a vote of members in terms of s 3 of the Demutualisation Approval Procedure. This provides for a postal ballot of all members. 8 The board of directors of the plaintiff recognised that it was an essential precondition to the implementation of the Scheme, and the associated reduction of capital, that the members of the plaintiff approve the demutualisation of the plaintiff; and that this must be done pursuant to the Demutualisation Approval Procedure. Accordingly, on 14 October 2005, the plaintiff posted to each of its members the Disclosure Statement referred to in s 2 of the Demutualisation Approval Procedure setting out the terms of the demutualisation proposal; and a ballot paper in furtherance of the postal vote provisions referred to in s 3 of the Demutualisation Approval Procedure. The last day for receipt of postal ballot votes on the demutualisation proposal was 10.00 am, 18 November 2005. 9 There was a section in the Disclosure Statement which dealt with the disclosure of benefits that officers of the plaintiff would receive in connection with the demutualisation. Under the heading 'StateWest's Officers Benefits', the Disclosure Statement states: '3.25 … 3.26 StateWest's officers will receive the following benefits upon commencing to hold office with Home: 3.26.1 StateWest 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. 3.26.2 Trevor 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 Director's 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.' 10 The postal ballot provided for in the Demutualisation Approval Procedure was completed. The results showed that 29,906 members, comprising approximately 52 per cent, of the members of the plaintiff who were eligible to vote in respect of the demutualisation proposal, voted. Further, 27,185 members voted in favour, and 2,721 members voted against, the demutualisation proposal. Accordingly, 90.9 per cent of the members who voted, voted in favour of the demutualisation proposal. Principles to apply 11 In the case of Re Foundation Health Care Ltd (2002) 42 ACSR 252 ('Foundation Health Care') French J considered the role of a Court when considering an application under s 411 of the Act for orders convening a meeting. He said at 263, at [36]: '… It is however important to bear in mind that, by granting leave to convene the meeting, the court does not give its imprimatur to the proposed scheme. If the arrangement is one that seems fit for consideration by the meeting of members or creditors and is a commercial proposition likely to gain the Court's approval if passed by the necessary majorities, then leave should be given: Re ACM Gold Ltd (1992) 34 FCR 530. …' 12 In the case of Re Hills Motorway Ltd (2002) 43 ACSR 101 at 103 ('Hills Motorway') Barrett J said at 103, at [5]: 'The task of the court, in deciding whether to make orders under s 411 convening a meeting of members, has been expressed in various ways. According to the formulation adopted by Santow J in Re NRMA Insurance Ltd (2000) 33 ACSR 523, the court must see, on the material placed before it, that the proposal fits within the statutory concept of arrangement or compromise, that there will be available to members all the main facts relevant to the exercise of their judgment, that ASIC has had a reasonable opportunity to examine the proposal and that the scheme is so conceived and presented as to that structure, purpose and effect that there is no apparent reason, so far as can be foreseen, why it should not, in due course, receive the court's approval if the necessary majority of members' votes is achieved. To substantially similar effect are the recent observations of Austin J in Re GIO Building Society Ltd and Australian Securities and Investments Commission (2001) 39 ACSR 77, French J in Re Foundation Health Care Ltd (2002) 42 ACSR 252 and Parker J in Re Ranger Minerals Ltd; Ex parte Ranger Minerals Ltd (2002) 42 ACSR 582.' 13 I accept that these observations set out the appropriate principles to apply in determining whether to approve the convening of a meeting under s 411(1) of the Act. Objectors 14 Five members of the plaintiff applied for leave to be heard in opposition to the making of the orders. These members are Mr Patrick Kirwan, Mr Thomas Rosser, Mr Michael Woodford, Mr Lewis Louthean and Mr George Keenan ('the objectors'). 15 The objectors relied on four grounds of objection. 16 Firstly, the objectors say that the Scheme cannot be approved because there has not been compliance with one of the essential preconditions on which the implementation of the Scheme depends, namely, the approval by the members of the plaintiff of the demutualisation of the plaintiff in accordance with the terms of the Constitution. The objectors say that there was no such approval because there was not adequate disclosure of the benefits which Mr Wall, the Chief Executive Officer of the plaintiff, would receive in connection with the proposed demutualisation, in the Disclosure Statement which was sent to the members of the plaintiff. There was a failure to comply with r A5‑6(1)(f) of the Demutualisation Approval Procedure. This meant that the plaintiff is constitutionally precluded from passing the necessary resolutions at the Annual General Meeting to effect the demutualisation; and also from applying to the Court for the convening of the meeting necessary to effect the Scheme. 17 Secondly, the objectors say that the directors of the plaintiff acted in breach of the Rules of the Constitution by using monies provided by Home, to pay, on behalf of members without their request, the amounts outstanding in respect of their partly paid shares; and, also, to issue shares to members who, by a historical anomaly, had not been issued shares on becoming members of the plaintiff. 18 Thirdly, the objectors complain that after the announcement of the merger proposal, the directors of the plaintiff 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. 19 Fourthly, the objectors said that the proposed resolution to cancel the shares in the plaintiff by way of reduction of capital in conjunction with the Scheme is a selective reduction which is not capable of being implemented in accordance with s 256C(2) of the Act. 20 Senior counsel for the plaintiff accepted that leave should be given to the objectors in respect of the fourth objection advanced by the objectors, but that otherwise leave should be refused. 21 Senior counsel for the plaintiff argued that the objectors should pursue the claims made in the objections by commencing separate proceedings, that in the meanwhile the Court should make the orders for the convening of the meeting, and that, in the event, the objectors chose to institute the separate proceedings they would be at liberty to bring an injunction to restrain the holding of the meeting once they were at risk by having furnished an undertaking for damages to the Court. Senior counsel argued that it was inappropriate for the Court to deal with the objections in these proceedings because they raised disputes of fact particularly in relation to the second and third objections ‑ which impugned the purpose for which the directors exercised their power. 22 Another ground which senior counsel for the plaintiff relied upon was in relation to the first ground of objection. He said that there was no evidence before the Court that Mr Wall was an 'officer' of the plaintiff and, therefore, within the range of persons in respect of whom there was any obligation on the plaintiff to make disclosure under r A5‑6(1)(f) of the Demutualisation Approval Procedure. Therefore, he said, no findings could be made in these proceedings in respect of the objection founded on lack of adequate disclosure of the benefits that Mr Wall would receive as Managing Director of Home. 23 Counsel for the objectors said that the objectors were content to have their objections considered by reference only on the affidavit evidence which was already before the Court. Further, counsel for the objectors referred to the observations of Austin J in the case of Cleary v Australian Cooperative Foods Ltd (1997) 32 ACSR 582 at 589, at [26]‑[27] ('Cleary'), in support of his contention that it was not necessary for the objections to be pursued in separate proceedings. Counsel also submitted that the Court had a supervisory function under s 411(1) of the Act in relation to whether the meeting should be convened, and that it was proper for the objectors to raise, at this stage, matters which could affect the prospect of the Court ultimately approving the Scheme, before the plaintiff incurred considerable expenditure in printing the Scheme booklet and distributing it to the members. There was evidence before the Court that the costs to the plaintiff of printing and distributing the Scheme booklet and holding the meeting would be in the vicinity of $650 000. 24 The observations of Austin J in Cleary 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 the 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 and Foundation Health Care 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. The objection founded on the failure to disclose the benefits to be received by Mr Wall 28 The objectors have produced in evidence an Explanatory Memorandum which was sent to the shareholders of Home with a notice of Home's Annual General Meeting dated 10 October 2005. The Explanatory Memorandum provided details of the employment agreement between Home and Mr Wall in respect of his position of Managing Director. The details of the employment agreement were provided to the shareholders because there was on the agenda of the Annual General Meeting a resolution to grant Mr Wall 250,000 Managing Director options. Clause 11.2 of the Explanatory Memorandum provides: '11.2 Key details of Greg Wall's employment agreement In addition to the Managing Director Option Plan, 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. …' 29 The 'Managing Director Option Plan' was described in the Explanatory Memorandum as a plan, subject to shareholder approval, to grant 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'. 30 The unchallenged evidence of Mr Craig Evan Coleman, the Managing Director of Home, is that the contract of employment between Home and Mr Wall was negotiated during the period 23 August 2005 and 27 October 2005, the date on which the employment contract was signed. Further, the unchallenged evidence of Ms Fiona Marie Mondello, a solicitor acting on behalf of Home, was that although the notice of the Annual General Meeting was dated 10 October 2005, the notice was actually sent to the members of Home on 28 October 2005. There is no evidence that at any time after 27 October 2005 and prior to 18 November 2005, the last date for the receipt of postal ballot votes for the demutualisation proposal, the directors of the plaintiff made any disclosure of the terms of the employment agreement between Mr Wall and Home, to the members of the plaintiff. Nor was it contended by the plaintiff that there had been any such disclosure. 31 I do not accept the argument of senior counsel for the plaintiff that there is no evidence to establish that Mr Wall is an 'officer' of the plaintiff within the meaning of that term in s 9 of the Act. That conclusion can be inferred from the fact that Mr Wall is already mentioned in the Disclosure Statement as an officer of the plaintiff in respect of whom it is necessary to make disclosure. There is other evidence available in the evidence before the Court from which that fact can be inferred. 32 Senior counsel for the plaintiff argued that it was sufficient disclosure under r A5‑6(1)(f) of the Demutualisation Approval Procedure that the Disclosure Statement referred to the fact that Mr Wall was to be the Managing Director of Home. 33 Senior counsel submitted that on a proper construction of r A5‑6(1)(f) of the Demutualisation Approval Procedure, it was only necessary to disclose information so far as it is 'relevant'. Senior counsel says further that it is necessary to examine the types of information which are listed in r A5‑6(1)(f)(ii)‑(v) to determine the 'relevant' information which is required to be disclosed. Senior counsel says that the items of information listed in those subparagraphs, are confined to benefits that would be conferred on an officer by the plaintiff and not by a third party. It was, therefore, said senior counsel, not necessary for the plaintiff to disclose the remuneration and financial benefits which Mr Wall was to receive in his capacity as Managing Director of Home. 34 I am unable to accept the argument of senior counsel. In my view, the extent of the disclosure required goes further than that submitted by senior counsel. The argument advanced by senior counsel does not take account of the fact r A5‑6(1)(f)(i) requires disclosure of 'any money or goods' which the officer may receive in connection with the demutualisation without limitation as to the source of the benefit; nor that the five items of information referred to in r A5‑6(1)(f)(i)‑(v) appear under the rubric 'including but not limited to', which implies that the disclosure obligations are not confined to those benefits. 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. 39 I have considered whether the Court could rely upon the prospect of a majority of the members approving the Scheme after a full disclosure of the benefits to be obtained by Mr Wall, as a means of remedying the earlier lack of disclosure, and, thereby, founding a basis upon which the Court could have the necessary degree of satisfaction that the Scheme would in those circumstances be likely to be approved. 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. 41 It follows that the plaintiff's application is refused. I certify that the preceding forty‑one (41) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Siopis. Associate: Dated: 16 December 2005 Counsel for the Plaintiff: Mr C L Zelestis QC and Ms A Robertson Solicitor for the Plaintiff: Phillips Fox Counsel for Home Building Society: Mr M J Buss QC and Mr C D Belyea Solicitor for Home Building Society: Clayton Utz Mr S J Penrose Counsel for Objectors: Solicitor for Objectors: Tottle Partners Date of Hearing: 12 December 2005 Date of Order: 14 December 2005 Publication of Reasons: 16 December 2005