Supreme Court New South Wales Medium Neutral Citation: In the matter of Ellerston Global Investments Limited [2020] NSWSC 879 Hearing dates: 15 May, 21 May, 26 May, 10 June 2020 Date of orders: 10 June 2020 Decision date: 08 July 2020 Jurisdiction: Equity - Corporations List Before: Black J Decision: Orders made convening scheme meeting. Catchwords: CORPORATIONS – Arrangements and reconstructions – Schemes of arrangement or compromise – Application under s 411 of the Corporations Act 2001 (Cth) for orders convening meeting of members to consider and, if thought fit, approve a proposed scheme of arrangement – Whether requirements to order scheme meeting are satisfied – Performance risk – Consideration transferred to custodian for shareholders who have not yet provided KYC information at implementation. Legislation Cited: - Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth), s 32 - Corporations Act 2001 (Cth), ss 210, 249S, 411, 1362, Ch 2E - Public Health Act 2010 (NSW) - Public Health (COVID-19 Restrictions on Gathering and Movement) Order 2020 - Supreme Court (Corporations) Rules 1999 (NSW) - Securities Act 1933 (US), s 3(a)(10) Cases Cited: - Centrebet International Ltd [2011] FCA 870 - F T Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 - First Pacific Advisers LLC v Boart Longyear Ltd (2017) 320 FLR 78 - Re Abacus Funds Management Ltd (2006) 24 ACLC 211 - Re APN News & Media Ltd (2007) 62 ACSR 400 - Re Atlas Iron Ltd (2016) 112 ACSR 554 - Re BIS Finance Pty Ltd Finance Pty Ltd [2017] NSWSC 1713 - Re Brambles Industries Ltd (2006) 59 ACSR 501 - Re CSR Ltd (2010) 183 FCR 358 - Re Duet Finance Ltd [2017] NSWSC 415 - Re Foundation Healthcare Ltd [2002] FCA 742; (2002) 42 ACSR 252 - Re Healthscope Ltd [2019] FCA 542 - Re Hills Motorway Ltd [2002] 43 ACSR 101 - Re Macquarie Capital Alliance Ltd (2008) 67 ACSR 484 - Re SAI Global Ltd [2016] FCA 1312 - Re SFE Corporation Ltd (2006) 59 ACSR 82 - Re Simavita Holdings Ltd [2013] FCA 1274 - Re Staging Connections Group Ltd [2015] FCA 1012 - Re TPG Ltd [2020] NSWSC 772 - Re Villa World Ltd [2019] NSWSC 1207 at [15] - Sovereign Life Assurance Co v Dodd [1892] 2 QB 573 Texts Cited: - T Damien & A Rich, Schemes, Takeovers and Himalayan Peaks: The Use of Schemes of Arrangement to Effect Change of Control Transactions, [5.5.2] Category: Principal judgment Parties: Ellerston Global Investments Limited Representation: Counsel: M Oakes SC (Plaintiff) Solicitors: MinterEllison (Plaintiff) File Number(s): 2020/118320 Judgment 1. By Originating Process filed on 20 April 2020, the Plaintiff, Ellerston Global Investments Ltd ("EGI") sought an order under s 411 of the Corporations Act 2001 (Cth) that it convene a meeting of its ordinary shareholders for the purpose of considering a scheme of arrangement. The matter was adjourned on several occasions and several amendments were made to the proposed scheme of arrangement to address the somewhat complex issues that arose from the commercial structure of the scheme. I have, in this judgment, focused upon the final version of the scheme and explanatory memorandum as put before the Court on 10 June 2020, when I made orders convening the scheme meeting. Affidavit evidence 1. I should first refer to several affidavits on which EGI relies, although I will largely not address those affidavits to the extent that they involve aspects of the scheme that are no longer pressed and matters that are no longer relied on in the application. 2. First, EGI relies on an affidavit dated 20 April 2020 of its solicitor, Mr Sommer, which refers to the fact that it is a listed company and to an announcement that it made on 17 February 2020 to the Australian Securities Exchange ("ASX") that it had entered into a Scheme Implementation Deed with an associated entity, Ellerston Capital Limited ("ECL") in its capacity as responsible entity of the Ellerston Global Mid Small Cap Fund ("Fund"), under which it is proposed that ECL will acquire all of the issued share capital of EGI in consideration for an issue of units in the Fund, by way of a scheme. I will refer below to the somewhat complex arrangements that are necessary to bring about that result, given the "know your customer" ("KYC") obligations that attach to ECL in respect of the issue of such units. 3. EGI relied on an affidavit dated 14 May 2020 of its company secretary, Mr Kelly, which exhibited the then draft Explanatory Booklet and described the structure of that booklet and the verification process in conventional terms, and referred to the manner in which the explanatory booklet and other materials would be sent to EGI's shareholders, and also addressed the position of a particular foreign holder, Mirabella Financial Services LLP. 4. A further affidavit dated 12 May 2020 of Mr Collins, a partner in KPMG, exhibited a draft report which found that the scheme, in its then form, was fair for scheme shareholders, by comparing the value of shares in EGI to the value of units in the Fund. The independent expert's report specifically addressed the impact of the COVID-19 pandemic on the valuation of EGI and the scheme consideration, and fairly recognised that the impact on value is consistent across both EGI and the scheme consideration which both reflect the assets comprised in the EGI portfolio. 5. An affidavit dated 12 May 2020 of Mr Colla, a partner in MinterEllison who is acting for ECL and EGI, who referred to correspondence with the Australian Securities and Investments Commission ("ASIC") in respect of the proposed scheme and referred to an occasion, nearly 20 years ago, on which the Supreme Court of Victoria had permitted a transfer of shares to an acquirer even though payment of scheme consideration was conditional, although it appears that no reasons had then been given for that approach. I would have obtained little assistance from that matter, which it is not necessary to address further given amendments that have now been made by EGI and ECL to the proposed scheme. 6. An affidavit dated 12 May 2020 of Mr O'Hagan, a client relationship manager with Link Market Services Ltd, EGI's share registry provider, deals with the proposed conduct of a virtual meeting, a form of meeting that has been adopted in other schemes in the context of the COVID-19 pandemic and causes no difficulty for the proposed scheme. An affidavit dated 14 May 2020 of Mr Forde, the head of operations at ECL addressed the verification process proposed to be undertaken by ECL, as responsible entity, in respect of the scheme. By his affidavit dated 12 May 2020, Mr William Best consented to act as alternate chair of the scheme meeting. 7. By an affidavit dated 14 May 2020, Mr Dortkamp, who is chair of the independent board committee of EGI established for purposes of this scheme ("Independent Board Committee") and the proposed chair of the scheme meeting, described the then proposal for the issue of units in the Fund to EGI shareholders, which was then subject to shareholders providing KYC information before such units could be issued. Mr Dortkamp noted the requirements applicable to ECL as responsible entity of the Fund, because that Fund and its units are not listed or quoted on ASX. As I will note below, Ellerston has since amended the scheme to ensure that units in the Fund are issued not only to shareholders in EGI who have provided KYC information, but also to an independent custodian in respect of shareholders who have not yet provided that information, before they are required to dispose of their shares in EGI under the scheme, addressing the performance risk concerns to which I refer below. 8. Mr Dortkamp also addressed the role of the independent board committee in developing the proposal, provided information about EGI and the Fund and referred to the Scheme Implementation Deed and a Deed Poll in its then form. Mr Dortkamp also addressed other aspects of the scheme, including exclusivity arrangements which have since been deleted from the scheme and the process for provision of KYC information. Mr Dortkamp also referred to the proposed payment of an Early Termination Fee by EGI to ECL, discounted to an extent from the amount provided under a Management Agreement between those entities. Payment of that fee would fall within the scope of Ch 2E of the Corporations Act 2001 (Cth). Although Mr Dortkamp's evidence is that that fee was negotiated at arm's length between the Independent Board Committee of EGI and ECL, EGI has since fairly accepted that it could not point to comparable transactions that would demonstrate the amount of that fee was an arm's length terms or better. That issue has now been addressed by providing for shareholder approval of that fee as a condition precedent to the scheme. 9. By a further affidavit dated 19 May 2020, Mr Colla referred to further correspondence with ASIC and also addressed the privacy policy that would be applied by the Fund's share registry provider in respect of KYC procedures for the issue of units in the Fund. As matters have developed, those issues will now be addressed by an independent custodian on ECL's behalf. By two affidavits dated 18 May 2020, in substantial identical form, Mr O'Sullivan and Mr Robertson led evidence to seek to establish that the management fees payable by EGI under the Management Agreement with EL negotiated in 2014 were at arm's length terms. That proposition would not have assisted with the question whether the termination fee that had recently been negotiated between EGI and ECL was on arm's length terms or better, but that question need not be addressed further where shareholder approval will now be sought for that aspect of the transaction under Ch 2E of the Corporations Act. 10. By a second affidavit dated 18 May 2020, Mr Kelly addressed a Deed Poll dated 18 May 2020 by which ECL agreed to waive any rights to enforce certain exclusivity provisions under the then Scheme Implementation Deed. He also addressed negotiations in relation to the management fee payable by EGI under the Management Agreement and publicly available information in relation to management fees of other ASX listed investment companies. Again, that evidence was not to the point so far as establishing that the termination fee now proposed to be paid by EGI to ECL was on an arm's length terms or better, but that question again need not be addressed further where shareholder approval will now be sought for that aspect of the transaction under Ch 2E of the Corporations Act. 11. By a further affidavit dated 21 May 2020, Mr Colla addressed further correspondence with ASIC and set out, at length, further information concerning the matter to which I referred in paragraph 6 above. Mr Colla also exhibited the then draft of the Explanatory Booklet in respect of the scheme to his affidavit, which elaborated on the treatment of several EGI shareholders who were resident in Singapore. 12. By further submissions dated 26 May 2020, EGI identified two further amendments which were proposed to the scheme. One of those amendments, which I have noted above, was to provide for shareholder approval of the termination fee under Ch 2E of the Corporations Act. The second foreshadowed the introduction of provisions to address a performance risk that arose in respect of EGI shareholders who had not provided KYC information before the implementation date of the scheme, if their shares were to be acquired by ECL on that date, in its capacity as responsible entity of the Fund, without units in the Fund being allotted to them, and in consideration for a promise to allot such units in the future if they in future complied with KYC requirements. EGI then proposed a somewhat complex structure which would introduce, first, a condition precedent to the scheme that KYC information had been received from EGI shareholders holding at least 75% of the total number of shares on issue by a specified date, so that the scheme would not proceed if the threshold was not achieved by that date; and, second, provide for the allocation of units to an independent professional nominee company appointed by EGI, on specified terms, for the benefit of EGI shareholders who had not provided KYC information, if that information was provided for at least 75% of the total number of shares on issue, but for less than 90% of the total number of shares on issue; and, third, the scheme would proceed if KYC information was received for at least 90% of the total number of shares on issue, but shareholders who had not provided that information would then not receive their units until they did so. Happily, by the time of the hearing on 10 June 2020 at which orders were made convening the scheme meeting, that structure had been simplified to retain only the condition precedent and the independent nominee company structure. 13. By a fourth affidavit of Mr Colla sworn 10 June 2020, he addressed further correspondence between MinterEllison and ASIC, addressing revised drafts of the explanatory booklet which had implemented the changes to which I have referred above. He exhibited letters received from ASIC which advised that, based upon its examination of the terms of the scheme and the draft explanatory booklet, it did not propose to appear to make submissions or intervene to oppose the scheme at the hearing, and also advised that it would provide additional relief necessary for the despatch of the scheme booklet. He also referred to a further email from ASIC indicating that it had no comments on the draft explanatory booklet for the purposes of Ch 2E of the Corporations Act, and would consent to an abridgement of the 14 day review period for the explanatory booklet for the purposes of Ch 2E of the Act. 14. Mr Colla also provided further information as to the manner in which the explanatory booklet would be despatched to EGI shareholders, and referred to EGI's engagement of a shareholder services advisory firm to remind EGI shareholders of the requirements as to KYC information. It seems to me that that engagement was likely to be helpful, given the particular complexities arising from the need for ECL to comply with KYC requirements in respect of the scheme. Mr Colla also referred to a reminder process that would be undertaken by EGI in respect of KYC information before the implementation date, and a second round reminder process that would be undertaken after the implementation date, but before the custodian exercised withdrawal rights from the Fund in respect of former shareholders in EGI who had not provided KYC information. Mr Colla also addressed the steps which would be taken if redemption proceeds were ultimately not claimed, if former EGI shareholders had not provided KYC information within a period of, in substance, 14 months after the implementation date to allow those monies to be paid to them. 15. The exhibit to Mr Colla's affidavit indicated that, appropriately, ASIC had engaged closely with the amendments to the explanatory booklet which addressed the issues of shareholder approval for the Early Termination Fee and the structure to be adopted in respect of KYC information. By an email dated 29 May 2020 ASIC had fairly raised the questions whether the condition precedent for shareholder approval as to the Early Termination Fee, which was necessary to comply with Ch 2E of the Corporations Act, could have a coercive impact on EGI shareholders and whether EGI could remit cash proceeds of the redemption of units in the Fund to EGI shareholders who had not provided KYC information after the initial period contemplated by the revised scheme. 16. MinterEllison responded to ASIC's questions in detail by a letter dated 1 June 2020. In respect of the first question, MinterEllison fairly pointed out that the conditionality of the scheme reflected a single integrated proposal for the scheme consisting of the share acquisition, the termination of the current management agreement, the payment of a negotiated Early Termination Fee and a two year waiver of management fees by ECL which had been announced in connection with earlier announcements of the proposed scheme to ASX. MinterEllison also fairly noted that shareholder approval was being sought as a result of the question whether the arms-length exception under s 210 of the Corporations Act would be available in respect of the Early Termination Fee, and that the amount involved represented a relatively small proportion of EGI's current market capitalisation, and the scheme resolution in any event had a higher voting threshold than the Ch 2E resolution, so that scheme shareholders who did not consider the benefits of the scheme outweighed any detriment connected with the early termination fee would have the ability to vote against the scheme. MinterEllison also addressed, in detail, the proposed structure in respect of the provision of KYC information, and fairly noted that ECL and the independent custodian could not pay out the proceeds of redemption of the units without first receiving KYC information, where doing so may constitute an avoidance of ECL's or the independent custodian's obligations under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) ("AML/CTF Act"). 17. The position subsequently adopted by ASIC suggests that it has, in substance, accepted that position and, by its letter dated 9 June 2020, ASIC noted that the nominee process now adopted by EGI and ECL, regardless of the percentage level of shareholders who had provided KYC information above 75% would "go some way towards mitigating any performance risks that may arise", and all shareholders would need to provide KYC information at some point to receive units in the Fund or the proceeds of a withdrawal from the Fund by the custodian on their behalf. It seems to me that EGI's and ECL's approach does address the relevant performance risk, so far as it ensures that shares of EGI shareholders are not acquired by ECL unless it has allocated units to those shareholders who have provided KYC information, or to the independent custodian on behalf of EGI shareholders where they have not provided that information. The combination of that structure, and the procedures which will be adopted to remind EGI shareholders of the importance of providing such information, seems to me to avoid any performance risk, since an EGI shareholder will only not receive units in the Fund or the proceeds of a withdrawal of units from the Fund if it chooses not to provide KYC information for an extended period. It seems to that that is the unavoidable consequence of the AML/CTF Act in circumstances that the Fund is an unlisted trust. 18. By a second affidavit of Mr Dortkamp dated 10 June 2020, he addressed the Second Amended Scheme Implementation Deed which provided for the general meeting of EGI shareholders to approve payment of the Early Termination Fee for the purposes of Ch 2E of the Act, and the proposed amendments to the scheme in respect of the condition precedent concerning KYC information, which I have addressed above. He also referred to the treatment of any foreign scheme shareholders under the scheme and to the structure of the custody agreement between EGI and the independent custodian appointed to implement the arrangements to which I have referred above, and the manner in which the relevant meetings would be convened and the scheme consideration would be provided to EGI shareholders. The amended explanatory booklet 1. EGI and ECL subsequently entered into a Second Amending Deed that amended the Scheme Implementation Deed to introduce a condition that the Early Termination Fee be separately approved by shareholders for the purposes of Ch 2E of the Corporations Act and a condition that KYC information be received from the specified percentage of EGI shareholders shortly before the scheme was due to be implemented. 2. By the time of the hearing on 10 June, EGI had also further revised the explanatory booklet to include further disclosure as to the proposed resolution to approve the payment of an Early Termination Fee to ECL for the purposes of the proposed meeting under Ch 2E of the Corporations Act. The explanatory booklet was also amended to outline the structure which would be adopted in respect of the receipt of KYC information, including a condition precedent in the scheme as to the 75% threshold for provision of that information; and, if the 75% threshold was satisfied, the procedure for allotment of units in the Fund to shareholders who had provided such information and, for shareholders who did not, to an independent custodian, to be held on behalf of those EGI shareholders for a further period in which such information could be provided and, if that did not occur within that period, for the independent custodian to request withdrawal of units on behalf of shareholders who did not provide that information and hold the withdrawal proceeds on their behalf for a further period. The explanatory booklet made clear that, under that arrangement, EGI shares would be transferred to ECL as responsible entity of the Fund on the Implementation Date, but on terms that the units would then have been allocated directly to EGI shareholders who had provided the KYC information and to the independent custodian in respect of EGI shareholders who had not then done so. 3. The explanatory booklet also explained, in some detail, the reason that KYC information was required by ECL as responsible entity of the Fund, before issuing units to EGI shareholders, by reason of requirements under the AML/CTF Act. The explanatory booklet disclosed that, under s 32 of the AML/CFT Act, ECL as responsible entity of the Fund was required to obtain KYC information from every person to whom it provided a "designated service", which would include the issue of units in the Fund to EGI shareholders under the scheme, and also the issue of units to EGI shareholders who applied for additional units under an associated unit offer. That requirement arose, in the present case, because the Fund was an unlisted unit trust. The explanatory booklet also set out, at length and with a degree of unavoidable complexity, the provisions which were to be applied to EGI shareholders who did not provide KYC information. 4. The explanatory booklet also disclosed the possibility that, in respect of scheme shareholders in foreign jurisdictions other than the United States and Singapore, units would be issued to the independent custodian on the implementation date, with the independent custodian then to exercise withdrawal rights. There are presently no shareholders to whom that arrangement would apply. 5. The explanatory booklet referred to independent directors' belief that the expected benefits of the scheme outweighed its potential disadvantages and risks and their assessment that the scheme was in the best interests of EGI shareholders, in the absence of a superior proposal. It also referred to the conclusion reached by KPMG Corporate Finance, as an independent expert, that the scheme was fair and reasonable and in the best interests of EGI shareholders. The explanatory booklet also outlined the process which would be adopted for voting at virtual meetings, addressing the risk that physical meetings would not be possible by reason of issues arising from the COVID-19 pandemic. The explanatory booklet also referred to independent directors' recommendation that EGI shareholders vote in favour of the scheme resolution, in the absence of a superior proposal, and also vote in favour of the early termination fee resolution since the scheme is conditional on the passage of that resolution. Applicable principles 1. It is, of course, well-established that the Court will order the convening of a scheme meeting and approve a draft explanatory statement if it is satisfied that the plaintiff is a Part 5.1 body; the proposed scheme is an arrangement within the meaning of s 411 of the Corporations Act; the scheme booklet will provide proper disclosure to members; the scheme is bona fide and properly proposed; ASIC has had a reasonable opportunity to examine the terms of the scheme and the scheme booklet and make submissions and has had 14 days' notice of the proposed hearing date; the procedural requirements of the Supreme Court (Corporations) Rules 1999 (NSW) have been met; and there is no apparent reason why the scheme should not, in due course, receive the Court's approval if the necessary majority of votes is achieved: Re Staging Connections Group Ltd [2015] FCA 1012 at [19]-[20]; Re Atlas Iron Ltd (2016) 112 ACSR 554 at [30]; Re Duet Finance Ltd [2017] NSWSC 415 at [15]; Re Villa World Ltd [2019] NSWSC 1207 at [15]. 2. The Court will not ordinarily summon a meeting at the first court hearing unless the scheme is of such a nature and cast in such terms that, if it receives the statutory majority at the meeting, the Court would be likely to approve it on the hearing of a petition which is unopposed: F T Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 at 72, approved in Australian Securities Commissions v Marlborough Gold Mines Ltd (1993) 177 CLR 485 at 504. In Re Foundation Healthcare Ltd [2002] FCA 742; (2002) 42 ACSR 252 at [36] and [44] (cited with apparent approval in Re CSR Ltd (2010) 183 FCR 358 at [58]), French J observed 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; 107 ALR 359; 7 ACSR 231; 10 ACLC 573 (O'Loughlin J). The court is not required to give close consideration to the effects of the scheme upon individual members of the classes of members or creditors affected. So to do would be to "introduce burdensome and to a large extent ineffectual consideration at this interlocutory stage": Re Jax Marine Pty Ltd [1967] 1 NSWR 145 at 148 (Street J). … The court at the stage of ordering a meeting to approve a scheme does not ordinarily go very far into the question of whether the arrangement is one which warrants the approval of the court … That question is to be answered when the scheme returns to the court for final approval. That is not to exclude the possibility that a scheme may appear on its face so blatantly unfair or otherwise inappropriate that it should be stopped in its tracks before going any further." 1. At the first hearing, the Court is not concerned with whether final approval should be given to the scheme, but whether the scheme is one which is adequately explained to those who have a financial interest in it, and whether there is any obvious flaw in the scheme, such that it would be inappropriate even for it to be submitted for consideration: Re Abacus Funds Management Ltd (2006) 24 ACLC 211 at [23]; Re Villa World above at [18]. The Court is also not required to be satisfied that no better scheme could have been proposed, but with whether sensible business people might consider the arrangement proposed is of benefit to members: Centrebet International Ltd [2011] FCA 870 at [29]; Re SAI Global Ltd [2016] FCA 1312 at [18]; Re BIS Finance Pty Ltd Finance Pty Ltd [2017] NSWSC 1713 at [22]. Particular aspects of the scheme Conduct of virtual scheme meeting 1. In opening submissions, Mr Oakes addressed the steps which would be taken to allow for online attendance at a virtual scheme meeting, having regard to the COVID-19 pandemic and the restrictions then imposed on public gatherings under State Public Health Act 2020 (NSW) and Regulations. Mr Oakes submits and I accept, that the process proposed for a virtual scheme meeting is consistent with steps taken to authorise online meetings by the Corporations (Coronavirus Economic Response) Determination (No 1) 2020 (Cth) made under s 1362A of the Corporations Act. The Court has also permitted virtual meetings in other matters, most recently in Re TPG Ltd [2020] NSWSC 772. I also note that s 249S of the Corporations Act and cl 35.4 of EGI's constitution permit general meetings to be held at two or more venues simultaneously using any technology that gives EGI shareholders as a whole a reasonable opportunity to participate. I have referred above to the evidence led as to the process for online attendance at the scheme meeting, and I am satisfied that that process provides a proper means for EGI shareholders to attend the relevant meeting. Performance Risk 1. A particular issue in this application involved the question of "performance risk", namely any risk that the acquirer will not comply with its obligation to pay the scheme consideration to shareholders of the scheme company: Re SFE Corporation Ltd (2006) 59 ACSR 82 at [4]; Re Brambles Industries Ltd (2006) 59 ACSR 501 at [9]; Re APN News & Media Ltd (2007) 62 ACSR 400 at [23]; Re Macquarie Capital Alliance Ltd (2008) 67 ACSR 484 at [43]; Re Simavita Holdings Ltd [2013] FCA 1274 at [43]-[44]. The authors of a leading text, T Damien & A Rich, Schemes, Takeovers and Himalayan Peaks: The Use of Schemes of Arrangement to Effect Change of Control Transactions, [5.5.2] refer to a practice which has developed to address performance risk, by which the transfer of target shares to an acquirer is conditional on the payment of the consideration to target shareholders, and refer to numerous cases which have endorsed that practice. A transfer of EGI shares to ECL, prior to the transfer of consideration to EGI shareholders who had not provided KYC information, would have been radically inconsistent with the Court's concern as to performance risk and that well-establish practice. 2. By further submissions dated 26 May 2020, Mr Oakes addressed the way in which the proposed structure of the amended scheme (then involving two alternatives, since simplified to one as noted above) addressed performance risk. He noted that ECL as responsible entity for the Fund was obliged to comply with s 32 of the AML/CTF Act before issuing Class B units to EGI shareholders; the Fund was not listed and the Class B units would not be quoted on any prescribed financial market so the concessions available to listed funds under the AML/CTF Act were not available; the use of an unlisted fund was part of the commercial structure of the scheme, directed to eliminating a net asset value discount for the benefit of EGI shareholders, so they could achieve an exit on a timely basis at a price close to the net asset value per unit of Class B units; the requirements for the provision of KYC information by EGI shareholders were not extensive or unduly onerous; and, implicitly, the proposed structure would sufficiently address the question of performance risk. By further submissions dated 9 June 2020, Mr Oakes addressed the further refinements in the structure of the scheme, including as to the treatment of KYC requirements. 3. It seems to me that the structure which has now been adopted by EGI and ECL, while complex, sufficiently addresses the issue of performance risk. As I have noted above, no transfer of EGI shares to ECL will take place unless the 75% condition precedent is satisfied; second, where EGI shareholders provide KYC information, the transfer of shares to them will take place before their shares are transferred to ECL; and, where ECI shareholders do not provide that information, the transfer of units in the Fund to an independent custodian will take place before their shares are transferred to ECL, and that independent custodian will after the specified period request a withdrawal from the Fund and transfer the proceeds to those EGI shareholders who by then provide KYC information, or treat that consideration as unclaimed funds if it is not provided within the specified maximum period. It seems to me that that structure sufficiently protects EGI shareholders against the risk that their shares would be transferred without consideration being provided to them, while recognising the constraints of the AML/CTF Act and avoiding the risk that the scheme fails because a single shareholder or small number of shareholders does not provide KYC information. Class Issues 1. Mr Oakes also addresses the question whether there should be only one class of EGI shareholders for voting purposes at the scheme meeting and notes that the test whether members are required to be divided into different classes addresses the question whether the rights of shareholders are so dissimilar as to make it impossible to consult together with a view to their common interest: Sovereign Life Assurance Co v Dodd [1892] 2 QB 573 at 583; Re Hills Motorway Ltd (2002) 43 ACSR 101 at [12]; First Pacific Advisers LLC v Boart Longyear Ltd (2017) 320 FLR 78; Re Healthscope Ltd [2019] FCA 542 at [118]. Mr Oakes recognises the fact that Mr Ashok Jacob is both a non-executive director of EGI and a director and shareholder of ECL, that matter prompted the formation of the independent board committee to negotiate the terms of the scheme on behalf of EGI, including the amount of the Early Termination Fee, and Mr Jacob has a significant shareholding in EGI; and ECL also holds a significant number of EGI shares as responsible entity of a separate fund, the Ellerston Global Equity Managers Fund. I am satisfied that neither Mr Jacob nor ECL as responsible entity of the Ellerston Global Equity Managers Fund should be treated as a separate class for present purposes, although EGI properly indicates that it will "tag" the votes of both Mr Jacob and ECL in that capacity at the scheme meeting which will allow the impact of their votes to be assessed at the second Court hearing. Treatment of ineligible foreign shareholders 1. I have addressed the treatment of ineligible foreign shareholders under the scheme above, although there are apparently no shareholders presently falling within this category. Mr Oakes submits and I accept that the proposed approach for treatment of ineligible foreign scheme shareholders in this scheme is generally consistent with the approach taken in previous cases. This matter does not give rise to any reason not to convene the scheme meeting and any ineligible foreign shareholders do not constitute a separate class for that meeting: Re Hills Motorway Ltd [2002] 43 ACSR 101 at 104. Several other matters 1. It is not necessary to address any question as to exclusivity arrangements, where those arrangements are not included in the amended scheme. The scheme contains "deemed warranties" given by EGI shareholders in a common form, which do not provide any reason not to approve the scheme. Mr Oakes also addressed, in submissions, the terms of the ECL unit offer, which permits EGI shareholders (other than ineligible foreign shareholders) who participate in the scheme to subscribe for additional class B units in the Fund. I have had regard to the terms of that offer and the disclosure of relevant information in the explanatory booklet and nothing in that matter provides any reason not to convene the scheme meeting. 2. Although s 411(1) of the Act provides that the Court may approve the explanatory statement, if it has made an order convening a meeting or meetings of members or creditors, and the Court has made such an order as a matter of practice, there are differing practices of Courts in this respect. EGI did not seek such an order, and it is therefore not necessary to make it. Subsection 411(17) of the Act provides that the Court must not approve a scheme unless satisfied it is not proposed for the purpose of enabling avoidance of the takeovers provisions in Chapter 6 of the Act or ASIC provides a statement that it has no objection. This matter is properly deferred for consideration at the second Court hearing. 3. EGI shareholders whose registered address is in the United States are not treated as ineligible foreign shareholders and may participate in the scheme and the Ellerston unit offer. EGI and ECL note that they intend to rely on an exemption from the registration requirements of the Securities Act 1933 (US), under s 3(a)(10) of that Act, in connection with the scheme and the issue of Ellerston units under the scheme and the Ellerston unit offer, if the Court approves the scheme at the second Court hearing. That exemption requires that the Court be advised, before any hearing at which the scheme is approved, that ECL will rely on that exemption based on the Court's approval if the scheme is approved. There is disclosure of that matter in the explanatory booklet and I note that the Court has been advised of that matter, which will be raised again at the second Court hearing. Conclusion 1. In summary, Mr Oakes submitted that the Court should make orders convening the scheme meeting where EGI shareholders will be presented with the independent expert's analysis of the transaction and its advantages and disadvantages and with the unanimous recommendation of the independent board committee; the explanatory booklet meets the statutory requirements and has been verified by EGI and ECL; and there is no reason why the scheme, if considered and agreed to by the requisite majority of members, is of such a nature as it would not be likely approved by the Court at the second hearing. 2. I am satisfied that the proposed scheme, as amended over the several hearings before me, is of such a nature and cast in such terms that, if it receives the statutory majorities at the meeting of members, the Court would be likely to approve the scheme on the hearing of an unopposed application. Relevant factors include the nature of the scheme; the sufficiency of the disclosure of the terms of the scheme in the scheme booklet and the verification process outlined in the affidavit evidence; the steps that have been taken to address performance risk arising from the need for EGI shareholders to provide KYC information in order to be issued units in the Fund; and the conclusion reached by the independent expert that the scheme is fair and reasonable and in the best interests of EGI shareholders. For these reasons, I made orders in the form proposed by EGI at the conclusion of the first Court hearing on 10 June 2020. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 08 July 2020