ETRADE Australia Limited (Application of) [1999] NSWSC 254

Reported Decision : [1999] 30 ACSR 31 [1999] 17 ACLC 695

New South Wales Supreme Court CITATION : ETRADE Australia Limited (Application of) [1999] NSWSC 254 revised - 30/03/99 CURRENT JURISDICTION : Equity FILE NUMBER(S) : 1355/99 HEARING DATE(S) : 22 March 1999 JUDGMENT DATE : 22 March 1999

PARTIES : ETRADE Australia Limited JUDGMENT OF : Santow J

COUNSEL : T F Bathurst, Qc SOLICITORS : Gilbert & Tobin (Pl) CATCHWORDS : SCHEME OF ARRANGEMENT Distinction between scheme of arrangement and reduction of capital where compulsion to take up shares transferred in second company; Distinction between scheme and reduction under 1998 amendments to the Corporations Law; Effect of ss256B and C as regards shareholder voting; Distinction between 'equal reduction' and 'selective reduction'. ACTS CITED : Corporations Law ss256B and C CASES CITED : Re Hunter Resources Ltd (1992 34 FCR 418 DECISION : Orders made to convene meeting

- 3 - IN THE SUPREME COURT OF NEW SOUTH WALES IN EQUITY

SANTOW J

No. 1355/99 In the application of ETRADE Australia Limited (ACN 003 042 082) and the Corporations Law s411 ETRADE Australia Limited (ACN 003 042 082) Plaintiff

JUDGMENT 22 March 1999

1 The only novel feature of the scheme of arrangement and associated reduction of capital presently before me relates to the effect of recent amendments to the Corporations Law brought down in 1998 dealing with reductions of capital. These amendments in the form of ss256B and C, now define "equal reductions". This is on the basis that any capital reduction that is not an equal reduction is a "selective reduction", with the former no longer required to be by special resolution. Section 256B(2) is in these terms: "256B (2) [Equal reduction or selective reduction] the reduction is either an equal reduction or a selective reduction. The reduction is an equal reduction if: (a) it relates only to ordinary shares; and (b) it applies to each holder of ordinary shares in proportion to the number of ordinary shares they hold; and (c) the terms of the reduction are the same for each holder of ordinary shares. Otherwise, the reduction is a selective reduction ." 2 Prior to these amendments it was often unclear the precise point at which the reduction of capital ceased its work and an associated scheme of arrangement took over. It was however well settled that a scheme of arrangement was needed wherever the reduction of capital involves the shareholder being compelled to acquire shares ( Re Hunter Resources Ltd (1992) 34 FCR 418 where the shares, as here, were in another company), and a scheme was thus employed for that purpose, overlapping with the reduction. The present proposal involves just these features, but the amended legislation requires more precise differentiation between scheme and reduction, for reasons I will explain. 3 The present proposal before me might be thought to involve a reduction of capital by way of transfer of shares owned by the company effecting the reduction. (There is also the usual provision for shareholders with foreign addresses having their pro rata allocation of shares allotted or transferred to a nominee for sale and the proceeds accounted for to the shareholder with the foreign address.) However, that characterisation would not be an accurate statement of what in fact is brought about by the reduction of capital. The reduction of capital in legal terms allocates cash pro rata according to the formula in the documentation. Only after that, and solely by force of the scheme, that cash is required to be applied in purchasing ICM shares previously acquired by the scheme company, ETRADE Australia Limited. The two steps are telescoped, so that the shareholder never physically receives the cash, but they remain conceptually distinct. 4 In those circumstances, there is clearly enough what s256B(2) defines as an "equal reduction". That is to say, the reduction relates only to ordinary shares including those created by virtue of the exercise of pre-existing options, it applies in proportion to the number of ordinary shares held and "the terms of the reduction are the same for each holder of ordinary shares". Being thus an equal reduction, it may now be effected merely by an ordinary resolution. 5 Had the reduction not been within that 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 an equal 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. 6 The effect of that definition in the present circumstances would have been to give rise to the absurdity that in practical terms the necessary resolution could not have been passed unless there were total unanimity, inviting corporate blackmail. This is because no shareholder could vote under paragraph (a) - as all shareholders receive consideration as part of the reduction. That renders paragraph (b) applicable, requiring unanimity of all ordinary shareholders at the meeting. Even one dissenting shareholder could thus scuttle the proposal. Attention should be given by the legislature to this anomaly. It arises wherever you have all shareholders of a class receiving consideration, but some even minor differentiation precluding the terms of the reduction being precisely the same. 7 There is nothing in the other matters before me which prevents my making the necessary orders to convene the necessary meetings. **********