[1999] 158 FLR 321 Reported Decision : [1999] 33 ACSR 438 [2000] 18 ACLC 62 New South Wales Supreme Court CITATION : Tiger Investment Company Limited and the Corporations Law [1999] NSWSC 1290 CURRENT JURISDICTION : Equity FILE NUMBER(S) : 4826/99 HEARING DATE(S) : 15/12/1999 JUDGMENT DATE : 23 December 1999 PARTIES : Tiger Investment Company Limited (ACN 062 759 077) (Applicant) JUDGMENT OF : Santow J COUNSEL : J T Gleeson (Applicant) C Gionis (Sol) (ASIC) SOLICITORS : Freehill Hollingdale & Page (Applicant) CATCHWORDS : CORPORATIONS LAW — Selective reduction of capital voted under s256C(2) of the Corporations Law to effect takeover — Who may caste vote where consideration is shares emanating from a third party — Meaning of phrases "caste vote" and "who is to receive consideration as part of the reduction" — Unanimity not required under s256C(2)(b) as procedures comply with s256C(2)(a) — Distinction between reduction and scheme with latter required together with class meetings with and without third party — Scheme required because shareholders bound to take up shares in third party issued under scheme to compensate for cancellation.; WORDS AND PHRASES — "caste vote" and "who is to receive consideration as part of the reduction" Corporations Law s137, s256B, s256C ACTS CITED : Company Law Review Bill 1997 Company Law Review Act 1998 First Corporate Law Simplification Bill 1994 Re Advance Bank (1997) 22 ACSR 513 CASES CITED : Re Etrade Australia Ltd (1999) 30 ACSR 516 Westchester Financial Services Pty Ltd v Acclaim Exploration NL (1999) 32 ACSR 499 DECISION : Meetings convened. IN THE SUPREME COURT OF NEW SOUTH WALES IN EQUITY SANTOW J No. 4826/99 In the matter of TIGER INVESTMENT COMPANY LIMITED (ACN 062 759 077) and the Corporations Law TIGER INVESTMENT COMPANY LIMITED (ACN 062 759 077) Plaintiff JUDGMENT 23 December 1999 Facts 1 The Plaintiff, Tiger Investment Company Limited ("T"), is a publicly listed company registered under the Corporations Law. T's business largely involves investing in Asian assets. 2 Under the current corporate structure of T, 50.321% of T is owned by Metals Exploration Limited ("M") and its subsidiary, "MI", and the remaining 49.689% is owned by the public. 3 The proposal, in substance, involves the public shareholders of T having their shares in T cancelled and being issued by M with shares in M on a 5 for 6 basis. Those M shares do not at any time vest in T for onward transfer to the T shareholders but come from M direct. Thus the "consideration" for the reduction — the M shares — emanates from M not T. M, for its part, will (with MI) "inherit the earth" by becoming at the conclusion of these steps the sole shareholder in T, so that it receives value for the issue of its shares. The proposal is to be achieved by the combination of a fully interdependent selective reduction of capital and a scheme of arrangement to be put to the members of T at a series of court ordered meetings causing the T shareholders to take up the M shares without further consent than the scheme meetings. 4 The shares of all T shareholders other than those of M and MI will also be cancelled pursuant to a reduction of capital under s256B. 5 The following meetings will be convened for the purpose of approving this capital reduction: (a) a meeting of members of T to consider two special resolutions to selectively reduce T 's share capital; and (b) a meeting of T 's members (excluding M and MI ) to pass a special resolution to selectively reduce T 's share capital by cancelling shares held by the Scheme Shareholders. 6 In addition there will be the three scheme of arrangement meetings with and without M and MI (see 43 below) 7 After the proposed scheme of arrangement and reduction of capital, M and MI will own 100% of the shares in T. Issues 8 The legal issue which arises in the present case is the operation of s256C(2) of the Corporations Law in relation to such a capital reduction made in association with a scheme of arrangement. 9 In this case, unlike in Re Etrade Australia Ltd (1999) 30 ACSR 516, where I held that the reduction of capital was an equal reduction, it is conceded by the Plaintiff that the reduction of capital is selective. The present case is also distinguishable from Etrade in that the consideration to shareholders whose shares are proposed to be reduced does not move from the company to which the capital reduction relates, but from a third party. 10 My comments in Etrade concerning the operation of s256C(2) were therefore obiter in suggesting that, because of the drafting of s256C(2) of the Corporations Law, a selective reduction required all ordinary shareholders to vote for it so that, if correct, this would leave any greenmailer, even holding only one share, in an unassailable position. It is necessary to consider how the section operates in the circumstances of the present case and I have had cause to revise the views I earlier expressed as dicta. 11 As the reduction here would not be within the definition of equal reduction, it would be deemed to be a "selective reduction". As a selective reduction, s256C(2) would apply and is in these terms: " 256C(2) Special shareholder approval for selective reduction . If the reduction is a selective reduction, it must be approved by either: (a) a special resolution passed at a general meeting of the company, with no votes being cast in favour of the resolution by any person who is to receive consideration as part of the reduction or whose liability to pay amounts unpaid on shares is to be reduced, or by their associates; or (b) a resolution agreed to, at a general meeting, by all ordinary shareholders. If the reduction involves the cancellation of shares, the reduction must also be approved by a special resolution passed at a meeting of the shareholders whose shares are to be cancelled." 12 For present purposes, the issues which arise in relation to s256C(2) relate to the first of the two meetings mentioned above, namely, the meeting to consider the two special resolutions to selectively reduce T's capital; these are identical in their terms save as to whose role may be accepted. 13 M and MI have indicated their intentions not to vote in favour of the first resolution of this meeting. The notice of this meeting also notes that the public shareholders of T "may vote against resolution 2, but are not required to vote on resolution 2. If any shareholders other than M and MI vote in favour of resolution 2 those votes will not be accepted due to requirements under the s256C(2) of the Corporations Law." 14 The submissions of the Plaintiff raise two issues for consideration in the context of s256C(2)(a). 15 First, whether the shareholders of a company to which the proposed capital reduction relates will be prevented from voting because they receive any consideration "as part of the reduction", (employing the words used in s256C(2)). This must be considered in relation to the two separate classes of shareholders - the public whose shares in T are to be cancelled, and M and MI, who as a consequence of the capital reduction will become the sole shareholders of T. It will be appreciated that if one but not the other class can vote in conformity with s256C(2)(a), then one of the identical resolutions will be passed. If neither class can thus vote, then neither resolution will be passed. If both classes can thus vote, then again the resolution will be passed. 16 Second, if one determines in relation to the above issue that shareholders do receive consideration "as part of the reduction", what is meant by the words "no votes being cast" in s256C(2)(a). In particular does "cast" mean the act of voting, or the result of counting the vote? Is a vote made but not counted nonetheless cast? Submissions on first issue 17 As to the first issue, the submission put by the Plaintiff was that the word "consideration" in the quoted phrase in s256C(2)(a) refers only to consideration moving from the company in which the reduction of capital is to occur. The Plaintiff submitted that "consideration" in this context does not include consideration from a third party, not the company, moving as part of an interdependent scheme of arrangement. 18 Counsel for the Plaintiff provided the court with the following reasons in support of this submission: · Section 256C(2)(a) seeks to preserve the capital of a company and regulates the procedure in relation to a return of capital. The section is not intended to regulate schemes of arrangement. This interpretation of s256C(2)(a) is consistent with s256B(1)(b), which allows a company to reduce its share capital in a way not otherwise authorised by law, provided the reduction does not materially prejudice the company's ability to pay its creditors. Counsel for the Plaintiff has made the point that in the present circumstances, given that no there is no liberation of T's assets to its public shareholders as part of the reduction, there is no prejudice to the creditors of T. · Although the proposed selective reduction of T's shares ought to be said to have the effective result of a successful takeover bid by M for T's shares, the Plaintiff submits that Division 1 of Pt 2J.1, Chapter 2J of the Corporations Law (in which s256B and C appear) does not prohibit such a result. The concern of the Division is rather to ensure fairness between T's shareholders inter se in relation to the liberation of company assets via a reduction, not fairness in every conceivable aspect (including, for example, in relation to the consideration moving from a third party). · The phrase "as part of the reduction" in s256C(2)(a) should not be read so broadly as to include what occurs pursuant to the scheme of arrangement, as the scheme and reduction are separate and distinct mechanisms that operate in different ways under different parts of the Corporations Law. This is so even if both a scheme and a reduction are connected via their expressed interdependence, as in the present case. Thus the reduction (if validly voted upon) effects cancellation of the shares, whilst the scheme of arrangement effects the compulsion upon a shareholder to accept an allotment of shares (here allotted directly by M, a third party); see my decision in Re Advance Bank (1997) 22 ACSR 513 at 528 to 533 especially at 532. · Accordingly, the Plaintiff submits that neither the public nor M receives consideration "as part of the reduction". In short this is so because the only consideration that the public receives comes from the company and comes from the scheme, not the reduction. In the case of M, this is so because the consideration it receives is not a part of the reduction but the consequence of the cancellation of shares taking effect. 19 If these submissions of the Plaintiff were correct, then the result would be that all the shareholders could vote on the special resolution for capital reduction (though not for the scheme resolutions). The first of the proposed resolutions is not inconsistent with this analysis. Simply, M will be choosing not to exercise the right it has to vote on the special resolution. 20 However, what the Plaintiff has done is to propose that the resolution will be put twice. On the first resolution, because M will not vote, it will meet the possibility that M is receiving consideration under the reduction. For the second resolution, what the Plaintiff proposes is that the public will be told that although they may vote against the resolution, any vote in favour of the resolution by them will not be accepted. This is indicated on the notice of meeting, the proxy form and it is what the Chairman intends to do at the meeting. This second resolution is designed to meet the argument that the public receives consideration under the reduction. 21 However, this then raises the second issue, which is precisely what is meant by "no votes being cast" in s256C(2)(a). Submissions on second issue 22 The second issue involves the question of when one "casts" a vote in the sense relevant in s256C(2). During argument, Counsel for the Plaintiff brought my attention to a modification to the proxy form proposed to be used for the relevant meeting, the effect of which would be to preclude certain shareholders appointing a proxy from instructing their proxy to vote in favour of the resolution to be passed pursuant to s256C(2)(a). 23 While superficially an attractive solution (subject to the requirements of the company's constitution), it would not deal with the possibility of a shareholder receiving consideration as part of the reduction from attending the meeting and voting in favour of the resolution thereby preventing the relevant approval from being obtained. There may also be a question whether a proxy can be validly provided by the company in such a form. 24 The Plaintiff's submission was that the words "no votes being cast" in s256C(2)(a) operate only at the stage of the counting of the votes for the particular purposes of that section. 25 The section permits and, it was submitted, requires the company not to count the votes of those who receive consideration but nevertheless cast a vote in favour of the resolution to reduce the company's capital. The section does not prohibit those shareholders from voting either in favour of or against the resolution (cf Owen J's obiter and shorthand comment that such shareholders "cannot vote" on the resolution in Westchester Financial Services Pty Ltd v Acclaim Exploration NL (1999) 32 ACSR 499 at 502). Nor is the section a self-denying ordinance such that the resolution is invalidated if any shareholder who is not entitled to cast a vote under the section votes in favour of it. 26 As this submission was put, the effect of the section is that the special resolution will not be invalidated merely because any one or more shareholders receiving consideration as part of the reduction vote in favour of it; rather, the company has a statutory mandate to disregard their votes in determining whether a special resolution has been passed for the purposes of this particular section. It may be that for other purposes, such as the company's constitution, a special resolution is required, on which everyone can vote. If that be so, then the votes cast in favour of the resolution by the shareholder receiving consideration as part of the reduction can be counted for that other purpose, but have not been "cast" in favour of the reduction resolution, as not able to be counted for that purpose. 27 However, against this further possibility that this argument may not be accepted, the Plaintiffs have agreed to call a general meeting to amend their articles of association and, for precaution, to hold that meeting the day before the meeting to consider the resolutions for the reduction of capital. The latter step is taken in view of s137(1)(a) of the Corporations Law, which states that a special resolution adopting, modifying or repealing a company's constitution takes effect, if no later date is specified in the resolution, on the date on which the resolution is passed. The effect of holding the meeting in relation to the alteration of T's articles one day before the meeting to consider the capital reduction ensures that any resolution to amend T's articles takes effect before the resolution to reduce T's capital is put to the meeting and passed. 28 Although it is not necessary for me to consider the form of the amendment to the articles, I have been informed that it will be broadly along these lines: "Notwithstanding any other Article, where: (a) the Corporations Law requires that a matter must be approved by a resolution at a general meeting with no votes being cast in favour of the resolution by any person who is to receive a benefit or who is treated in a particular way, or by their associate (each an "excluded person"); and (b) a general meeting is convened to approve such a matter, then; (c) an excluded person whose vote in favour of the resolution would preclude the requirement of the Corporations Law being satisfied is not permitted to vote in favour of the resolution; and (d) any vote purported to be cast by or on behalf of such an excluded person shall not be accepted and shall be treated as not cast." History and analysis of section 256C 29 The explanatory memorandum to the Company Law Review Bill 1997 which introduced s256C explained: "A reduction of capital that is not an equal reduction is a selective reduction (Bill Schedule 5 Item 18 s256B(2)), and must be approved by either: (a) a special resolution passed at a general meeting of the company, or (b) a resolution agreed at a general meeting to by all ordinary shareholders (Bill Schedule 5 Item 18 s256C(2)). Selective reductions require a special resolution, or unanimous shareholder agreement at a general meeting, because they have the capacity to advantage some shareholders over others. Where a selective reduction is approved by a special resolution, a vote may not be cast in favour of the resolution by a person who is to receive consideration as part of the reduction, or whose liability in respect of amounts unpaid on shares is to be reduced (Bill Schedule 5 Item 18 s256C(2)(a)). This is intended to ensure that the resolution's approval reflects the wishes of the company's disinterested shareholders and corresponds to the approach taken in section 257D of the Bill in relation to shareholder approval for a selective share buy-back. The Bill also includes a procedure to protect minority shareholders against their shares being cancelled under the guise of a capital reduction. In addition to the other shareholder approval requirements, a reduction of capital that involves the cancellation of shares will require approval by a special resolution passed at a meeting of the shareholders whose shares are to be cancelled (Bill Schedule 5 Item 18 s256C(2))." 30 The scheme of s256C can be seen as one designed to protect two classes of shareholder. 31 Section 256C(2)(a) seeks to exclude shareholders who will receive consideration as part of the reduction (or whose liability to pay amounts on unpaid shares will not be reduced) or their associates from a consideration of the special resolution to approve the selective reduction. The logic of this exclusion is clear. The remaining shareholders could be disadvantaged if the capital reduction were too generous. The exclusion ensures that the resolution is not passed by reason of the influence of shareholders that stand specially to benefit from the capital reduction. These shareholders whose shares are to be cancelled are protected by the requirement in the last paragraph of section 256C for a special resolution to be passed in a general meeting of these shareholders. 32 Although it is not necessary to decide the point at this stage, there is merit in the argument that neither class of shareholder is precluded from voting because the reduction involves no liberation of the company's assets and therefore no risk that it is too generous to one class of shareholders over another. 33 It is unfortunate that such a cumbersome mechanism as that in s256C(2)(a) should have been used. The reference to "no votes being cast in favour of the resolution by any person who is to receive consideration" may, at first glance, seem an economic way of convening and regulating meetings. However, the effect of this is that, rather than protecting a class of shareholders it may give a veto right to any shareholder who is to receive consideration as part of the reduction to prevent the reduction from being passed. The opportunity for an approval under s256C(2)(b) would be to no avail because it requires unanimity at the general meeting by all ordinary shareholders (presumably being those ordinary shareholders who are present in person or by proxy and vote at the general meeting). 34 The second protection afforded by s256C(2) is that if the reduction involves a cancellation of shares, the reduction must be approved by a special resolution passed at a meeting of shareholders whose shares are to be cancelled. In extending the potential protection to shareholders under this subsection, s256C(2) contemplates a meeting in which only those shareholders whose shares are to be cancelled are present. 35 Similar drafting to that contained in s256C can be found in s257D(1)(a) (which deals with buy-backs) and by s260(D)(1)(a) (which deals with financial assistance approval). 36 In relation to buy-backs, s257D(1)(a) was inserted by the Company Law Review Act 1998 in replacement for the former s206E(1) which is in similar terms. The explanatory memorandum on the introduction of s206E(1) of the Corporations Law, which was introduced as part of the First Corporate Law Simplification Bill 1994 stated: "5.9 Selective buy-backs can only proceed if they are approved by all shareholders, or by a special resolution of the company on which no vote is cast by selling shareholders or their associates ( Schedule 1, proposed subsection 206E(1) ). 5.10 Selling shareholders and their associates may not vote in favour of a special resolution to approve a selective buy-back ( Schedule 1, proposed paragraph 206E(1)(a) )." 37 There was no relevant comment in the explanatory memorandum relating to the introduction of the current s257D. 38 On the introduction of s206(D)(1)(a) the Explanatory Memorandum stated: "Shareholder approval of a financial assistance transaction may be given by: (a) a special resolution passed at a general meeting of the company, with no vote being cast in favour of the resolution by the person acquiring the shares or units of shares, or their associates, or (b) a resolution agreed to by all ordinary shareholders (Bill s260B(1)). The restriction on persons acquiring shares from voting in favour of the resolution is intended to avoid the vote on a special resolution being controlled by those who will directly benefit from the financial assistance. The procedure for approval by resolution agreed to by all ordinary shareholders has been added, to avoid a situation where all shareholders are prohibited from voting in favour of a resolution to approve the financial assistance." 39 It is perhaps unfortunate that the Corporations Law has not adopted a similar approach to the drafting of such shareholder protection as the Australian Stock Exchange Listing Rules. For instance, the standard voting exclusion statement contained in Listing Rule 14.11 makes it clear that the entity seeking shareholder approval must only: "disregard any votes cast on a resolution by · the (named) person (or class of persons) excluded from voting; and · an associate of that person (or those persons)." 40 If votes are cast, those votes do not go to the validity of the resolution but rather those votes are simply excluded in determining the results of the resolution. 41 Although it is unnecessary for me to decide the point at this stage, there is some merit in the argument that the provisions in the Corporations Law were intended to operate in the same way as the more clearly worded ASX rules. Indeed it would be desirable for that to be placed beyond doubt by a clarifactory amendment for the future. Conclusion 42 It is not necessary at this stage of making orders convening the scheme meetings in this case finally to resolve all of the issues exposed above in what is essentially a takeover proceeding by an interdependent selective reduction and scheme. In the present case, through the combination of two resolutions, with their different voting requirements and the prior amendment to the articles, the Plaintiff contends, and I accept, that the requirements of s256C should be able to be met, whatever view is taken on the meaning of the section. 43 Indeed if the exclusion from casting votes does not apply, because the consideration emanates from a third party rather than T then it may well be the case that only one resolution was needed so that either resolution would have sufficed. That still leaves the necessity, which only a scheme of arrangement lays down, for the three class meetings for the scheme of arrangement (that is with all T shareholders, all T shareholders without M and MI and only M and MI). It also provides the fairness appraisal mandated for a scheme of arrangement; contrast an equal reduction which has no fairness appraisal and a selective reduction where the fairness appraisal might be arguably most concentrated on creditors. Clearly for Scheme purposes different classes for voting are here involved as between M and MI on the one hand, and all the rest who receive their consideration in M shares. They so vote by virtue of the scheme, not by virtue of the reduction, doing so after cancellation of their T shares by the reduction. 44 That begs the question, would a cash takeover masquerading as a selective reduction of capital, but not associated with a scheme, fall foul of the decision in Gambotto v WCP Limited (1995) 182 CLR 432? The argument would be that such a selective reduction of capital would amount to expropriation without the Court appraisal of fairness mandated for a scheme. In Gambotto (supra) at 446 the High Court impliedly excludes schemes, or other statutory regimes for compulsory acquisition, which have the safeguards of a fairness appraisal. However, these are questions for another day. 45 Without foreclosing any argument that may be made by any other party in this matter at a later stage or any submissions then by ASIC, I am prepared to make orders convening the scheme meetings on the basis that the Plaintiff will proceed in the manner referred to above being satisfied that the proposal may thus proceed to the next stage. Meantime I express my indebtedness to Mr J Gleeson of Counsel for T for assistance by way of comprehensive submissions. ********** Last Modified: 12/23/1999 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.