Supreme Court New South Wales Medium Neutral Citation: In the matter of Crestone Holdings Limited [2022] NSWSC 433 Hearing dates: 22 March 2022 Date of orders: 22 March 2022 Decision date: 12 April 2022 Jurisdiction: Equity - Corporations List Before: Black J Decision: Order made convening scheme meeting and approving the scheme booklet for distribution to shareholders. 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, to agree to proposed scheme of arrangement – Whether requirements to order scheme meeting are satisfied. Legislation Cited: - Corporations Act 2001 (Cth), s 411 Cases Cited: - Australian Securities Commissions v Marlborough Gold Mines Ltd (1993) 177 CLR 485 - Cavendish Square Holding BV v Makdessi; Parking Eye Ltd v Beavis [2015] 3 WLR 1373; [2015] UKSC 67 - F T Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 - Re Abacus Funds Management Ltd (2006) 24 ACLC 211 - Re Adelaide Bank Limited [2007] FCA 1582 - Re APN News & Media Ltd (2007) 62 ACSR 400 - Re Arthur Yates & Co Ltd (2001) 36 ACSR 758 - Re BINGO Industries Ltd [2021] NSWSC 798 - Re BIS Finance Pty Ltd [2017] NSWSC 1713 - Re Bolnisi Gold NL (No 2) (2007) 65 ACSR 510 - Re Centrebet International Ltd [2011] FCA 870 - Re Coca-Cola Amatil Ltd [2021] NSWSC 270 - Re CSR Limited (2010) 183 FCR 358; (2010) 265 ALR 703; (2010) 77 ACSR 592; [2010] FCAFC 34 - Re DUET Finance Ltd [2017] NSWSC 415 - Re Ellerston Global Investments Ltd [2020] NSWSC 879 - Re Foundation Healthcare Ltd (2002) 42 ACSR 252; [2002] FCA 742 - Re Macquarie Private Capital A Ltd [2008] NSWSC 323 - Re Mosaic Oil NL [2010] FCA 98 - Re Patersons Securities Ltd [2019] FCA 1438 - Re Permanent Trustee Co Ltd (2002) 43 ACSR 601 - Re SAI Global Ltd [2016] FCA 1312 - Re Signature Gold Ltd [2017] FCA 766 - Re Spark Infrastructure RE Ltd [2021] NSWSC 1385 - Re Villa World Ltd [2019] NSWSC 1207 Category: Principal judgment Parties: Crestone Holdings Limited (Plaintiff) Representation: Counsel: D F C Thomas SC (Plaintiff) P M Wood (Bidder) Solicitors: Allens (Plaintiff) Corrs Chambers Westgarth (Bidder) File Number(s): 2022/7377 Judgment 1. By Originating Process filed on 23 December 2021, the Plaintiff, Crestone Holdings Ltd ("Crestone") seeks an order under s 411 of the Corporations Act 2001 (Cth) ("Act") that it convene a meeting of all holders of its fully paid ordinary shares in respect of a proposed scheme of arrangement, by which it is proposed that LGT Holdings (Australia) Pty Ltd ("Bidder") will acquire all of its shares, and associated orders. 2. By way of background, Crestone is an unlisted public company limited by shares. The Crestone Group is an investment advisory firm with approximately $25 billion of client assets under management. It was created following the acquisition, in 2016, of UBS Wealth Management Australia Ltd. Crestone has approximately 145 shareholders, over 90% of whom are currently employed by or associated with an employee or director of the Crestone Group. Under the proposed scheme, the Bidder, which is an indirect wholly-owned subsidiary of LGT Group Foundation ("LGT Group") will acquire all fully paid ordinary shares in Crestone. LGT Group is a private banking and asset management group that is controlled by the Princely Family of Liechtenstein. The consideration payable for each Crestone share under the proposed scheme is a cash amount of $5.15 for each Crestone share ("Initial Scheme Consideration") less the amount of any Initial Dividend (as defined); and the right for each Crestone shareholder (other than Excluded Earn Out Shareholders, as defined) to receive a variable uncapped amount payable depending on Crestone achieving or exceeding its current business plan for the 2024-2026 financial years ("Business Plan Earn Out Amount"); and a variable amount capped at $25 million payable depending on Crestone achieving certain margin lending targets ("Margin Lending Earn Out Amount") (together, "Earn Out Scheme Consideration"). 3. I made the orders sought by Crestone at the end of the first Court hearing in respect of the matter. These are my reasons for doing so. I have drawn on the helpful submissions of Mr Thomas, who appears for Crestone in the application, in this judgment. Affidavit evidence 1. Crestone reads several affidavits in support of the application. Crestone relies on the affidavit dated 23 December 2021 of Kiara Di Carlo, a solicitor acting for Crestone in relation to the scheme, which refers, inter alia, to a media release issued by Crestone in connection with the scheme dated 15 December 2021 and to the Scheme Implementation Deed ("SID") dated 14 December 2021. 2. By his affidavit dated 22 February 2022, Mr Richard Clifford, the independent chair and a non-executive director of Crestone, confirms his willingness to act as chair of the scheme meeting. By her affidavit also dated 22 February 2022, Ms Barbara Ward, an independent non-executive director of Crestone, confirms her willingness to act as chair of the scheme meeting if Mr Clifford is unable to do so. 3. By his affidavit dated 21 March 2022, Mr Michael Chisolm, the chief executive officer of Crestone, summarises the proposed transaction and deals with the verification of the information contained in the scheme booklet for which Crestone is responsible. He describes the nature of Crestone's business, and notes that over 90% of Crestone shares are held by shareholders who are currently employed or associated with an employee or director of the Crestone Group, and over 5% of those shares are held by Crestone shareholders that were previously employed by or previously a director of or associated with a former employee or director of the Crestone Group. Mr Chisholm also refers to the nature of the business of the LGT Group, and outlines the proposed transaction and the scheme consideration, including the Earn Out Scheme Consideration and the measures which have been taken to mitigate the risk of non-payment of that consideration. Mr Chisholm also outlines the scope of the scheme booklet and addresses the drafting and verification process which was adopted in respect of the scheme booklet, exclusivity provisions and a break fee in respect of the scheme and the conditions precedent to the scheme. 4. By an affidavit dated 17 March 2022, Mr Jordan Foster, a customer success director at Automic Pty Ltd, which has been engaged by Crestone to provide services in connection with the scheme. He notes that Crestone has only approximately 145 shareholders, and outlines the steps to be taken for the dispatch of scheme materials, the conduct of the scheme meeting virtually by a combination of Zoom and an online software platform operated by Automic, and also deals with registration and attendance at the scheme meeting, and the production of a poll report. 5. By his affidavit dated 21 March 2022, Mr Craig Edwards of Lonergan Edwards & Associates Ltd addresses his independent expert's report in respect of the proposed scheme, and confirms that he holds the opinion expressed in the draft independent expert report, that he has made the inquiries that he believes are desirable and appropriate for the purpose of preparing that report and no matters of significance that are relevant have been omitted, and that he has not become aware of any facts or circumstances which would cause him to change the opinions expressed in it. An affidavit dated affirmed 11 March 2022 of Mr Martin Hall, a director of Lonergan Edwards, addresses the value of the Earn Out Scheme Consideration and a bank guarantee given by the LGT Bank to secure payment of that consideration. 6. By an affidavit dated 22 March 2022, Mr Thomas Story, a partner in the firm of solicitors acting for Crestone, deals with the provision of the draft scheme booklet and other materials to the Australian Securities & Investments Commission ("ASIC"), an application for relief made to ASIC and ASIC's qualified confirmation that it does not currently propose to appear to make submissions or intervene at the first Court hearing. Crestone also tendered a letter dated 22 March 2022 from ASIC confirming that it has had at least 14 days' notice of the hearing of the application and has had a reasonable opportunity to examine the terms of the scheme, and indicating that it did not currently propose to appear to make submissions or intervene to oppose the scheme at the first hearing. ASIC there noted the structure of the consideration to which Crestone shareholders would be entitled under the scheme, including the Earn Out Scheme Consideration and I address its comments in that regard below. 7. By his affidavit dated 18 March 2022, Mr Urs Gaehwiler, who is a director of LGT Holding (Australia) Pty Ltd and general counsel of LGT Group, refers to the entry into the SID and to the structure of LGT Foundation and its indirect wholly owned subsidiary, LGT Bank Ltd, and to the regulation and long term credit rating of that entity. He also refers to the execution of documentation in respect of the scheme, including a deed in favour of Crestone shareholders (Deed Poll") and an arbitration deed dated 17 March 2022 ("Arbitration Deed"), a Note Trust Deed; a LGT Bank Guarantee, and the negotiation of exclusivity provisions and a break fee in connection with the scheme. 8. By an affidavit dated 18 March 2022, Mr Patrick Hunger who is the head, group legal corporate & transactions of LGT Group, deals with the verification of the information contained in the scheme booklet for which the Bidder is responsible. By an affidavit dated 21 March 2022, Mr Andreas Batliner, a partner in a law firm in Liechtenstein, provides an opinion regarding the due execution and enforceability of the Deed Poll and Arbitration Deed under Liechtenstein law. Applicable principles 1. Mr Thomas summarise the familiar principles which are applied in determining whether to convene a scheme meeting at the first Court hearing in respect of a scheme. The Court will order that a scheme meeting be convened and approve the draft explanatory memorandum under s 411 of the Act if it is satisfied that the plaintiff is a Pt 5.1 body; the proposed scheme is an arrangement within the meaning of s 411 of the 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, and make submissions in respect of, the terms of the scheme and the scheme booklet and has had 14 days' notice of the proposed first Court 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 DUET Finance Ltd [2017] NSWSC 415 at [15]; Re BIS Finance Pty Ltd [2017] NSWSC 1713 at [20]; Re Villa World Ltd [2019] NSWSC 1207 at [15]. 2. Mr Thomas rightly points out that, at a first Court hearing, the Court will not ordinarily summon a scheme meeting unless the scheme is of such a nature and cast in such terms that if it received the statutory majority at the scheme 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. He also refers to the often-cited observation of French J in Re Foundation Healthcare Ltd (2002) 42 ACSR 252; [2002] FCA 742 at [36] and [44], quoted with apparent approval in Re CSR Limited (2010) 183 FCR 358; (2010) 265 ALR 703; (2010) 77 ACSR 592; [2010] FCAFC 34 at [58] that: "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; 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. Mr Thomas also points out that, at the first Court hearing, the Court is concerned not with whether final approval should be given to the scheme, but whether the scheme 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 not required to be satisfied that no better scheme could have been proposed, and the question is whether it is reasonable to suppose that sensible business persons might consider the arrangement proposed is of benefit to members: Re Centrebet International Ltd [2011] FCA 870 at [29]; Re SAI Global Ltd [2016] FCA 1312 at [18]; Re DUET Finance Ltd above at [14]; Re BIS Finance Pty Ltd above at [22]. 2. Mr Thomas submits and I accept that the formal requirements for a scheme are established. Crestone is a Pt 5.1 body as defined in s 9 of the Act; the scheme is designed to effect an acquisition by one company of shares in another, and falls within the concept of a "compromise or arrangement" within the meaning of s 411(1) of the Act; Crestone has applied, in the appropriate way, for orders under s 411(1) of the Act; ASIC was given sufficient time to review a draft of the scheme booklet and notice of the first Court hearing, as it has recognised in the letter noted above; and the matters prescribed by the Supreme Court (Corporations) Rules are satisfied. 3. The proposed scheme meeting would take place as a virtual meeting which Crestone shareholders and their proxies, attorneys or corporate representatives may attend online, cast an online vote and ask questions online. A meeting in that form is permitted by s 253Q of the Act where, as here, the technology used gives members as a whole a reasonable opportunity to participate without physically being present in the same place. 4. Mr Thomas points out that Crestone's directors unanimously recommend that Crestone shareholders vote in favour of the scheme, in the absence of a superior proposal, and subject to the independent expert continuing to conclude that the scheme is in the best interests of Crestone shareholders. The independent expert, Mr Edwards, has expressed the view that the scheme is fair and reasonable and therefore in the best interests of Crestone shareholders, in the absence of a superior proposal. I am satisfied that there is no reason to doubt that the scheme booklet provides proper disclosure to Crestone shareholders, and there has been a verification and due diligence process. Subject to the particular issues which I address below, there is no reason to doubt that the proposed scheme is bona fide and properly proposed and could be approved at the second Court hearing if it receives the requisite shareholder approvals, and I am satisfied that the orders sought should be made in respect of the proposed scheme. Particular aspects of the scheme 1. Mr Thomas draws several aspects of the scheme to the Court's attention, in the manner contemplated by Barrett J in Re Permanent Trustee Co Ltd (2002) 43 ACSR 601 at 603. Issues arising from the Earn Out Scheme Consideration 1. First, Mr Thomas points out that 90.7% of Crestone shares are held by Crestone shareholders that are either currently employed by or associated with an employee of the Crestone Group, or are a director or associated with a director of the Crestone Group and 5.1% of those shares are held by Crestone Shareholders that were previously employed by or a director of or associated with a former employee or former director of Crestone Group. He submits, and I accept, that the position differs from that of a scheme of arrangements for listed entities with substantial cohorts of retail investors, where the shareholder class is here a closed class of current and former financial advisers, which may be expected to be reasonably sophisticated and to have experience in assessing and evaluating the likely future performance of a business. He submits and I accept that these characteristics are relevant when the Court assesses the Earn Out Scheme Consideration, to which I referred above and to which I will return below. 2. Second, Mr Thomas refers to the components of the scheme consideration comprising, as I noted above, the Initial Scheme Consideration and Earn Out Scheme Consideration. ASIC drew particular attention to this issue in the letter to which I referred above, observing that Crestone shareholders would be asked to vote on the scheme where there was "considerable uncertainty" as to the Earn Out Scheme Consideration they may ultimately receive, and also recognised that the Earn Out Scheme Consideration was subject to eligibility conditions and that Crestone shareholders would not be eligible to receive it if they engaged in disqualifying conduct as set out in section 3.7(b) of the scheme booklet. 3. ASIC noted that it had "general concerns" about the uncertainty of the scheme consideration that may ultimately be paid and that it: "also has serious concerns as to whether it is appropriate, as a matter of public policy, that the consideration offered to shareholders under the Scheme be contingent on the Disqualifying Conditions which resemble restraints of trade that would typically be negotiated between a company and its employees." 1. However, ASIC also noted that it had determined not to pursue those concerns further in this case, observing that: "● Crestone is a closely held unlisted public company, with a share register comprised mostly current employees, directors and officers (and their associates) and the remainder being former employees, directors and officers of Crestone (and their associates). Crestone has indicated that the overwhelming majority of Crestone shareholders work in the Crestone business. We have also been advised that Crestone shareholders are currently party to a shareholders agreement that contains a 'bad leaver' concept under which a compulsory transfer obligation in respect to a shareholder's holding is triggered on the shareholder becoming a 'bad leaver'. This distinguishes Crestone from a widely held listed public company where the impact of our concerns may differ. ● Lonergan Edwards & Associates (expert) has concluded that the Scheme is fair, reasonable and in the best interests of Crestone shareholders based on the Initial Scheme consideration of $5.15 to be paid to shareholders. The expert has determined the Earn Out Consideration merely enhances the consideration offered to Crestone shareholders under the Scheme." 1. ASIC there reserved its discretion to factor in concerns in relation to those matters in ASIC's no objection statement and similar arrangements in future matters. It seems to me that the distinction which ASIC has drawn between the particular features of this scheme, where the scheme consideration would largely be received by current and former employees, directors and their associates, and schemes of arrangements involving widely held public companies and listed companies, is well founded. 2. Mr Thomas points out that the commercial purpose of providing the Earn Out Scheme Consideration, in addition to the Initial Scheme Consideration, is to provide additional potential consideration to Crestone shareholders if the business performs well and becomes more valuable as a result of that performance. He recognises that the Earn Out Scheme Consideration is an example of deferred consideration that is contingent on the outcome of future events and submits, by reference to authority that, provided that the nature of the consideration is sufficiently disclosed, the fact that some consideration for scheme shares is deferred is not a reason to decline approval of the scheme: Re Centrebet International Ltd above at [17]-[26]; Re Signature Gold Ltd [2017] FCA 766 at [14], [47] – [53]; Re Spicers Ltd [2019] FCA 731 at [26]; Re Patersons Securities Ltd [2019] FCA 1438 at [8]; Re BINGO Industries Ltd [2021] NSWSC 798 (permitting an 'earn out' to target members after the implementation of the scheme at a price based on the future performance of the target's business). Mr Thomas submits and I accept that the contingent and deferred nature of the Earn Out Scheme Consideration is sufficiently disclosed in the scheme booklet. Mr Thomas also points out that the independent expert has concluded that the Initial Scheme Consideration is within the assessed valuation range for Crestone shares on a controlling interest basis, without the need to include the Earn Out Scheme Consideration to reach that result. 3. Third, Mr Thomas recognises (as ASIC also noted in the letter to which I referred above) that a Crestone shareholder will or may cease to be entitled to the Earn Out Scheme Consideration if he or she (or the Relevant Employee, as defined in the SID, associated with that shareholder) engage in Disqualifying Conduct (as defined). This condition is disclosed in sections 3.7(b) and 7.5(c) of the scheme booklet. "Disqualifying Conduct" comprises specified actions undertaken between the scheme implementation date and the date on which the Earn Out Scheme Consideration is calculated which, as ASIC has noted, are the kind of matters that might be addressed in a restraint of trade in an employment agreement, which would potentially undermine the goodwill of the Crestone business. 4. Mr Thomas submits and I accept that the conditionality of the Earn Out Scheme Consideration on the conduct of Crestone shareholders is not a reason to decline to convene a scheme meeting or subsequently approve the scheme. The conditionality of that consideration is clearly disclosed in the scheme booklet, and individual Crestone shareholders can make an assessment of the likelihood of their engaging in Disqualifying Conduct in the future, where that is within their own control. Mr Thomas submits and I also accept that this condition serves a legitimate commercial purpose, where the overwhelming majority of Crestone shareholders work in the Crestone business and, collectively, are crucial to its ongoing performance; the Earn Out Scheme Consideration likewise depends on the successful performance of the Crestone business over time; and Disqualifying Conduct (as defined) by Crestone shareholders (or by the Relevant Employee (as defined) associated with the Crestone shareholder) may adversely affect the ability of the Crestone business to realise its full value, and therefore reduce the total consideration Crestone shareholders will be paid for the sale of their Crestone shares. Mr Thomas also points out that affected shareholders are able to seek the consent of the Crestone board to engage in Disqualifying Conduct and that consent may not be unreasonably withheld. 5. Mr Thomas also submits, and I accept, that the legitimate commercial purpose of the condition is reinforced where, under the current Shareholders' Agreement, Crestone shareholders are subject to a "bad leaver" regime, under which a compulsory share transfer obligation is triggered on the shareholder becoming a "bad leaver", and Class A ordinary shareholders are also subject to restrictions on a range of activities, including the direct or indirect carrying on of a competing business and the solicitation of Crestone's customers and employees. He points out that a procedure for dealing with any dispute in relation to whether a Crestone shareholder has engaged in Disqualifying Conduct is also set out in Schedule 1 to the proposed scheme, which provides for an Independent Counsel (as defined) determining the dispute in a manner that is final and binding on the relevant parties, and the costs of the dispute process is borne by Crestone. He also points out that, as I have noted above, the Initial Scheme Consideration received by a Crestone shareholder is within the independent expert's assessed valuation range for Crestone shares, even if he or she does not receive the Earn Out Scheme Consideration. 6. Mr Thomas also submits that no issue of public policy arises in relation to the content of the Disqualifying Conduct condition, so far as it qualifies an entitlement to the payment of money at a future point in time. It is not necessary to determine that question, although I note that a clause of a somewhat similar character was considered by the Supreme Court of the United Kingdom in Cavendish Square Holding BV v Makdessi; Parking Eye Ltd v Beavis [2015] 3 WLR 1373; [2015] UKSC 67. I accept that there is limited scope for a Court to decline to approve a scheme at the second hearing, or decline to convene the scheme at the first hearing, by reason of matters of public policy: Re CSR Limited above at [51]. Mr Thomas also points out that the Court has previously approved deferred consideration arrangements in circumstances where actual restraints of trade were imposed on shareholders, although without detailed review of that question: Re BINGO Industries Limited above. I accept that the approach taken to Disqualifying Conduct in the scheme does not provide reason for the Court not to convene the scheme meeting. I also accept that that matter does not require separate classes at the meeting, where the condition applies to all Crestone shareholders and the legal rights of Crestone shareholders in relation to the Earn Out Scheme Consideration are the same, although shareholders' age and personal circumstances may differ. 7. Fourth, Mr Thomas draws attention to the valuation of the Earn Out Scheme Consideration for tax purposes. He notes that the independent expert was asked to assess the present day value of the right to receive potential Earn Out Scheme Consideration, which is disclosed in section 7.5 of the scheme booklet and implies an estimated valuation of $0.67 for that consideration per Crestone share. The scheme booklet was also amended in the course of the hearing to include a copy of the independent expert's report concerning the Earn Out Scheme Consideration, which supported the mid-point valuation of $0.67 for that consideration for each Crestone share, and to refer to Crestone's application for a class ruling from the Australian Taxation Office ("ATO") in respect of that valuation, and it fairly discloses that the ATO may form a different view as to the market value of the right to receive potential earn out consideration compared to the independent expert's view. That amendment was desirable where that report is relevant to shareholders determining the tax payable on the current value of the Earn Out Scheme Consideration and how they should treat that matter in their tax returns. 8. Fifth, Mr Thomas notes that Ch 2L of the Act requires the Bidder as the issuer of the "Notes" (being the right to receive the Earn Out Scheme Consideration) to enter into a trust deed that complies with s 283AB of the Act and appoint an independent trustee to protect the interests of Crestone Shareholders in respect of the right to receive the Earn Out Scheme Consideration, should it arise, as represented by the Notes. He notes that the Bidder, LGT Bank and Crestone will enter into the Note Trust Deed with an independent corporate trustee prior to the second Court hearing and the agreed form of the Note Trust Deed is included in the scheme booklet. The Note Trustee is in turn obliged to enforce the payment obligation for the Earn Out Scheme Consideration against the Bidder under the Note Trust Deed and under s 283DA of the Act and is entitled to draw down on the LGT Bank Guarantee should there be any failure to pay in accordance with the scheme. 9. I also note that LGT Group, the Bidder, Crestone and the Note Trustee agree to have any disputes in connection with the Deed Poll resolved by arbitration in accordance with the Australian Centre for International Commercial Arbitration's Arbitration Rules 2021, with the seat of any arbitration to be in Sydney, and the Deed Poll, Note Trust Deed and LGT Bank Guarantee contain arbitration clauses to similar effect. The scheme booklet was also amended, in the course of this hearing, to clarify the process which would be adopted to enforce the LGT Bank Guarantee if it became necessary to do so, by obtaining an Australian arbitral award that could be enforced in Liechtenstein against LGT Bank under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards ("New York Convention"). 10. Mr Thomas points out that this course has been taken where the courts of Liechtenstein are not superior courts nominated in the Foreign Judgments Act Regulations 1992 (Cth), and Liechtenstein a not party to an agreement that enables a simple process of enforcing Australian judgments in that country. However, Liechtenstein is a party to the New York Convention and, if an Australian arbitral award is obtained, the award could be enforced in Liechtenstein with less difficulty than an Australian judgment. I accept that this addresses a difficulty which might otherwise arise in this respect and that Australian law has recognised arbitration as an effective means of dispute resolution, particularly in commercial disputes: TCL Air Conditioner (Zhongshan) Co Ltd v Judges of the Federal Court of Australia (2013) 251 CLR 533 at [45]. This also raises no reason to refuse to convene the scheme meeting or ultimately approve the scheme. Performance risk 1. Sixth, Mr Thomas addresses the question of performance risk in relation to the Initial Scheme Consideration. He observes that, as noted in Re Ellerston Global Investments Ltd [2020] NSWSC 879 at [29], a practice 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. That practice has been followed in this scheme in relation to the Initial Scheme Consideration. In accordance with cl 4(b) of the scheme, Crestone Shares will only be transferred to the Bidder if the Bidder has satisfied its obligations in cl 5.2 which requires the deposit of the aggregate Initial Scheme Consideration into the Trust Account (as defined) by no later than 5.00pm on the business day before the Scheme Implementation Date (as defined). The Bidder has also executed a Deed Poll in favour of each Crestone shareholder that relevantly obliges it to observe and perform its obligations under the scheme, including the relevant obligations relating to the provision of the Initial Scheme Consideration, and LGT Group has guaranteed that Bidder will provide the Initial Scheme Consideration in accordance with the scheme. I am satisfied that these provisions sufficiently address this matter. 2. Seventh, Mr Thomas addresses the question of performance risk in relation to the Earn Out Scheme Consideration, which will only be paid to relevant shareholders approximately six months following the end of the 2026 financial year. He points out that measures have been put in place to substantially mitigate the risk that the Earn Out Scheme Consideration will not be paid if it becomes due, as summarised in section 3.7(e) of the scheme booklet. These include the Bidder's covenant under the Deed Poll in favour of each Crestone Shareholder and the Note Trustee that it will observe and perform the Earn Out Scheme Shareholder Deposit Obligations (as defined in the Note Trust Deed) of the Bidder under the scheme in accordance with the terms of the scheme; the provision of a Bank Support Instrument (as defined in the Note Trust Deed) to the Note Trustee as security for payment of the Earn Out Scheme Consideration, under cl 27.1 of the Note Trust Deed. Section 5.4 of the scheme booklet indicates that the Bidder intends to satisfy its obligations to provide a Bank Support Instrument by the provision of an irrevocable and unconditional bank guarantee from LGT Bank in favour of the Note Trustee ("LGT Bank Guarantee") and the proposed form of that guarantee is summarised in section 8.9 of the scheme booklet. The scheme booklet also includes information about LGT Bank in section 5.4, which indicates it is an entity of substance, and there is evidence that it is unlikely that the Earn Out Scheme Consideration will exceed the value of the LGT Bank Guarantee. Mr Thomas also addresses the enforcement steps that are available if the Bidder fails to comply with its obligations to pay the Earn Out Scheme Consideration. 3. Mr Thomas submits, and I accept, that the performance risk associated with the Earn Out Scheme Consideration being paid after the transfer of Crestone Shares to the Bidder should not result in the Court declining to convene a meeting of Crestone shareholders where that risk is mitigated by the Deed Poll and LGT Bank Guarantee; that risk is sufficiently disclosed in the scheme booklet, so that the Crestone shareholders, who are a closed and likely sophisticated group, are able to make a commercial assessment of the level of performance risk in relation to the earn out; the Earn Out Scheme Consideration serves a legitimate commercial purpose to retain Crestone shareholders in the Crestone business, and assist the Crestone business to realise its full value; and, as I noted above, the Initial Scheme Consideration that will be paid into the Trust Account prior to the transfer of Crestone Shares is within the independent expert's assessed valuation range for Crestone shares on a 100% controlling interest basis. Funding of the scheme consideration 1. Eighth, Mr Thomas points to the funding of the scheme consideration, which is payable in cash and will be funded by a loan to be obtained from LGT Bank and equity subscriptions into the Bidder from LGT Group Holding, funded by available cash reserves within the LGT Group. I accept that the scheme consideration will, in substance, be self-funded by entities from within the LGT Group and does not raise any issue as to consortium funding or external conditional debt or equity funding of the kind discussed in Re Spark Infrastructure Ltd [2021] NSWSC 1385. This matter gives rise to no reason not to convene the scheme meeting. Exclusivity provisions and break fee 1. Ninth, Mr Thomas addresses exclusivity provisions and break fee. He points out that cl 10 of the SID contains "no-shop", "no talk" and "no due diligence" restrictions on Crestone (cl 10.2); an obligation on Crestone to notify the Bidder of any third party competing proposal (cl 10.5); and a "matching right" in favour of the Bidder in respect of any competing proposal (cl 10.6). The "no talk" and "no due diligence" restrictions in cl 10.2 of the SID are subject to a "fiduciary carve-out" (cl 10.3 of the SID), if not taking certain actions would likely be inconsistent with Crestone's directors' duties under applicable law. Mr Thomas submits and I accept that exclusivity provisions in this form are now commonplace in schemes under s 411 of the Act; these restrictions are consistent with the terms recognised in the Takeovers Panel's Guidance Note 7: Lock-up devices; and neither the Guidance Note nor prior authority requires a fiduciary carve-out with respect to "no-shop" provisions. Mr Thomas recognises that the Court will consider whether such exclusivity restrictions are in effect for no more than a reasonable period capable of precise ascertainment, and that they be clearly disclosed in the information provided to shareholders: Re Arthur Yates & Co Ltd (2001) 36 ACSR 758 at [9]. He points out that, here, the "Exclusivity Period" is defined in cl 1.1 of the SID and is not out of the periods accepted in the case law and the exclusivity provisions are prominently disclosed in the scheme booklet. There is evidence that the exclusivity provisions in the SID were the product of negotiations between the parties at arm's length. 2. Tenth, a break fee of $4,700,000 is potentially payable by Crestone to the Bidder in specified circumstances as set out in cl 11.2 of the SID and summarised in section 8.11(e) of the scheme booklet. That break fee is not triggered solely by Crestone shareholders failing to approve the scheme, and is not a disincentive to shareholders in their consideration of the proposal: Re Adelaide Bank Limited [2007] FCA 1582 at [31]; Re Bolnisi Gold NL (No 2) (2007) 65 ACSR 510 at 513 at [12]. Mr Thomas points out that that break dee was negotiated between the parties in the course of negotiations at arm's length, in which all parties were represented by experienced advisers, and the application is supported by evidence of those negotiations of the kind referred to in Re APN News & Media Ltd (2007) 62 ACSR 400 at 411 [55]. The break fee represents approximately 1% of the total scheme consideration being paid for the Crestone shares, if specified outcomes are achieved. It obviously represents a higher percentage if those outcomes are not achieved. Mt Thomas submits, and I accept that, where Crestone's shares are not traded on any listed market, it was necessary for the parties to make their own assessment of Crestone's equity value in negotiation the SID and any break fee, and it was reasonable to treat the total consideration potentially payable under the transaction as a reasonable proxy for the equity value of the company whose shares are being acquired. I accept that payment of break fees of this magnitude are also commonplace in schemes of this kind: Re Mosaic Oil NL [2010] FCA 985 at [19]. This also does not give rise to any reason not to convene the scheme meeting. Deemed warranty 1. Eleventh, Mr Thomas notes that the scheme provides for a deemed warranty by Crestone shareholders that their shares will be free from encumbrances, and that deemed warranty is disclosed in the scheme booklet. I am satisfied that that matter is conventional and sufficiently disclosed. Electronic despatch of scheme materials 1. Twelfth, Mr Thomas points out that Crestone proposes to adopt a process for the dispatch of scheme materials, to be undertaken by Automic, which is consistent with that adopted in the scheme considered in Re Coca-Cola Amatil Ltd [2021] NSWSC 270 at [26]. This process also raises no concerns. Section 411(17) 1. Mr Thomas also submits and I accept that the appropriate time for the Court to address the question posed by s 411(17) of the Act is on an application to approve a scheme at the second Court hearing: Re Macquarie Private Capital A Ltd [2008] NSWSC 323 at [25]-[37]. I defer that question to that time. Orders 1. For these reasons, I was satisfied that the scheme was an arrangement for the purposes of s 411 of the Act and that, having regard to the evidence and matters to which I referred above, an order should be made convening the scheme meeting and approving the scheme booklet for distribution to shareholders. I made the orders sought by Crestone at the conclusion of the first hearing. ********** 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: 14 April 2022