Reported Decision : 56 ACSR 663 (2006) 24 ACLC 290 New South Wales Supreme Court CITATION : Citect Corporation Ltd [2006] NSWSC 143 HEARING DATE(S) : 05/12/05, 30/01/06, 31/01/06, 20/02/06, 10/03/06 JUDGMENT DATE : 10 March 2006 JURISDICTION : Equity Division Corporations List JUDGMENT OF : Barrett J EX TEMPORE JUDGMENT DATE : 03/10/2006 DECISION : Orders under s.411(4)(b) CATCHWORDS : CORPORATIONS - arrangements and reconstructions - Part 5.1 schemes of arrangement involving acquisition of all shares by another party and cancellation of all options - applications for approval under s.411(4)(b) - Chapter 6 off-market takeover bid launched by third party after s.411(1) orders made - procedure for incorporation of more favourable terms into proposed Part 5.1 schemes - inability of company unilaterally to alter proposed Part 5.1 schemes - 15 per cent shareholding acquired by the third party - undertaking given to Takeovers Panel prevents voting of that shareholding at scheme meeting - whether court should consider how such votes might have been exercised - evidence of third party's intentions - whether court should be influenced by possibility of further increase in third party's takeover bid Australian Securities and Investments Commission Act 2001 (Cth), Part 10, s.201A LEGISLATION CITED : Corporations Act 2001 (Cth), Chapter 6, Part 5.1, s.411(1), 411(4), 411(17), 623, 657A Supreme Court (Corporations) Rules 1999, r 3.4 Cleary v Australian Co-operative Foods Ltd (Nos 2 and 3) (1999) 32 ACSR 701 Re Adams International Food Traders Pty Ltd (1988) 13 ACLR 586 Re Australian Energy Ltd [2006] FCA 155 CASES CITED : Re A W Allen Ltd [1930] VLR 251 Re Chevron (Sydney) Ltd [1963] VR 248 Re Minster Assets plc [1985] BCLC 200 Re Savoy Hotel Ltd [1981] Ch 351 PARTIES : Citect Corporation Limited - Plaintiff FILE NUMBER(S) : SC 5788/05 COUNSEL : Mr M.B. Oakes SC - Plaintiff Mr T.F. Bathurst QC - SEAH SOLICITORS : Mallesons Stephen Jaques - Plaintiff Freehills - SEAH IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST BARRETT J FRIDAY 10 MARCH 2006 5788/05 - CITECT CORPORATION LTD JUDGMENT 1 I have before me an application by Citect Corporation Limited ("Citect") for orders under s.411(4)(b) of the Corporations Act 2001 (Cth) approving two schemes of arrangement, one between Citect and its members and the other between Citect and the class of its creditors consisting of holders of options to subscribe for unissued shares. In accordance with the line of cases of which the decision of Lindgren J on 23 February 2006 in Re Australian Energy Ltd [2006] FCA 155 is the most recent, option holders are treated as creditors for these purposes. 2 It is desirable, at the outset, that I set out part of s.411: "(1) Where a compromise or arrangement is proposed between a Part 5.1 body and its creditors or any class of them or between a Part 5.1 body and its members or any class of them, the Court may, on the application in a summary way of the body or of any creditor or member of the body, or, in the case of a body being wound up, of the liquidator, order a meeting or meetings of the creditors or class of creditors or of the members of the body or class of members to be convened in such manner, and to be held in such place or places (in this jurisdiction or elsewhere), as the Court directs and, where the Court makes such an order, the Court may approve the explanatory statement required by paragraph 412(1)(a) to accompany notices of the meeting or meetings. … (4) A compromise or arrangement is binding on the creditors, or on a class of creditors, or on the members, or on a class of members, as the case may be, of the body and on the body or, if the body is in the course of being wound up, on the liquidator and contributories of the body, if, and only if: (a) at a meeting convened in accordance with an order of the Court under subsection (1) or (1A): (i) in the case of a compromise or arrangement between a body and its creditors or a class of creditors—the compromise or arrangement is agreed to by a majority in number of the creditors, or of the creditors included in that class of creditors, present and voting, either in person or by proxy, being a majority whose debts or claims against the company amount in the aggregate to at least 75% of the total amount of the debts and claims of the creditors present and voting in person or by proxy, or of the creditors included in that class present and voting in person or by proxy, as the case may be; and (ii) in the case of a compromise or arrangement between a body and its members or a class of members—a resolution in favour of the compromise or arrangement is: (A) passed by a majority in number of the members, or members in that class, present and voting (either in person or by proxy); and (B) if the body has a share capital—passed by 75% of the votes cast on the resolution; and (b) it is approved by order of the Court. …" 3 The first scheme of arrangement, if approved and implemented, will bring about a compulsory transfer of each member's entire shareholding in Citect to Schneider Electric Australia Holdings Pty Ltd ("SEAH"), in circumstances where each member will have received a so-called special dividend of 5 cents per share from Citect and will receive payment at the rate of $2.15 per share from funds provided by SEAH. In the case of the options scheme, implementation will entail cancellation of each option and receipt by the option holder of a payment provided by SEAH. 4 The terms I have outlined differ, to the advantage of members and option holders, from those provided for in the proposed schemes by reference to which orders under s.411(1) were made on 5 December 2005. Those proposed schemes involved payments of smaller amounts than those I have mentioned, being, in the case of the members' scheme, $1.50 per share together with the 5 cents dividend. On two subsequent occasions, first on 31 January 2006 and again on 20` February 2006, the court made further orders with respect to the meetings directed by the orders of 5 December 2005 to be convened. This occurred in circumstances where, after that date (specifically, on 6 January 2006), another party, TCEP Australia Pty Ltd ("TCEP"), announced an intention of making off-market takeover bids under Chapter 6 of the Corporations Act in respect of the shares and options of Citect at prices more favourable to members and option holders than the consideration envisaged by the Pt 5.1 schemes as originally proposed. In the case of the shares, the price proposed by TCEP was $1.70 per share but, as I shall mention presently, that was later increased. 5 On 30 January 2006, Citect approached the court seeking, in effect, variation of the terms of each proposed scheme by increasing the consideration to a level above that envisaged by the announced Chapter 6 takeover bid. The increased consideration for the shares was $1.85 per share (apart from the proposed dividend of 5 cents per share). Appearances on that occasion were the same as they had been on 5 December 2005. Mr Oakes SC appeared for Citect and Mr Bathurst QC appeared for SEAH. ASIC indicated by letter that it did not wish to be heard on the matters raised by Citect at that time. The matter was not concluded on 30 January and was adjourned to the next morning. 6 When the matter came before the court on 30 January, Citect made it clear that it readily accepted the existence of an obligation to give members and option holders information about the foreshadowed Chapter 6 takeover bids and the directors' decision to continue with the scheme of arrangement proposals at higher prices. Mr Oakes referred, in that connection, to Cleary v Australian Co-operative Foods Ltd (Nos 2 and 3) (1999) 32 ACSR 701. To that end, the directors of Citect prepared a supplementary scheme booklet containing, among other things, recommendations and advice of the directors, a further report of the expert whose favourable report had been circulated with the original documents, and a summary of the amendments to the contracts between Citect and SEAH relating to the proposal which committed them to the higher consideration. 7 The orders Citect sought included an order adjourning the scheme meetings to a specified date and time and orders approving the supplementary scheme booklet for distribution and directing its dispatch with a notice of adjourned meeting and a new proxy form. 8 As submissions progressed on 30 January, however, it became clear that it was Citect's intention that each security holder constituency should, at the adjourned meeting, be afforded an opportunity to vote for or against a motion for the approval of a compromise or arrangement different from that in respect of which notice was given in accordance with the orders of 5 December 2005 – the only difference being, however, increase in the consideration in accordance with the revised agreements between Citect and SEAH. But the procedure by which this objective was to be achieved appeared not to have been addressed. 9 The notice of meeting dispatched to members, in accordance with the orders of 5 December 2005, stated the purpose of the meetings as follows: "The purpose of the meeting is to consider and, if thought fit, to agree (with or without modification) to a scheme of arrangement proposed to be made between Citect and the holders of Shares referred to above." 10 I emphasise the words "with or without modification". 11 There then followed a form of proposed resolution, the operative words of which were: "… the arrangement ... as contained in and more particularly described in the scheme booklet accompanying the notice convening the meeting is agreed to." 12 There was corresponding content in the notice convening the meeting of option holders. 13 In the course of argument on 30 January, I expressed the view, to which I adhere, that a meeting convened pursuant to an order under s.411(1) to consider a particular compromise or arrangement cannot, simply at the behest of the company, consider some different compromise or arrangement. It is not open to the company simply to invite members or creditors to vote at such a meeting on some different compromise or arrangement. The meeting must have before it the compromise or arrangement that the court has directed should be submitted for consideration of members or creditors. Nor can the court, except upon a renewed application for orders under s.411(1), order that a different compromise or arrangement be placed before a meeting of members or creditors. But once the compromise or arrangement identified in an order under s.411(1) comes before the meeting that the court has required be convened, the meeting itself may address the question of modification of the compromise or arrangement. This is particularly so where, as here, the notice convening the meeting states the meeting's purpose as being "to consider and, if thought fit, to agree (with or without modification) to" the proposed compromise or arrangement. 14 The meeting's ability to resolve upon some modification is made clear in the judgment of Young J in Re Adams International Food Traders Pty Ltd (1988) 13 ACLR 586 at pp.590 to 591: "The court always looks carefully at amendments made at the meeting. There are various reasons for this. The first is that the court puts particular stress on notifying all members or creditors as the case may be, of what is to happen at the meeting so that a proper decision can be made whether or not to attend the meeting and whether or not to entrust a proxy to the chairman or somebody else or whether or not to leave it up to the majority who actually attend to make a decision. This matter is accentuated because experience shows that only relatively few people in the end do actually attend the meeting: see eg Re Dorman Long & Co Ltd [1934] Ch 635 at 657. Thus, if there is a material change not notified to the non attending shareholders, the court does not sanction the scheme unless satisfied that no reasonable shareholder would alter his decision as to how to act on the scheme if the changes had been disclosed: Re Minster Assets plc [1985] BCLC 200 and see also Re Jessel Trust Ltd [1985] BCLC 119. The other main consideration is that if what is discussed at the meeting is too far removed from what the creditors thought from the notices of meeting would be discussed, it might hardly be said to be a court convened meeting to consider the scheme which the court thought proper to put to creditors. Even if the amendments only go to mechanics it may be that they reach the stage where they are so numerous and so radical that the court would virtually have to recast the scheme in which case sanction is refused: see Re Premier Permanent Building Association (1899) 20 ALT 225 at 227." 15 Young J's discussion centred upon the function of the court in granting or withholding approval of the scheme under s.411(4)(b). As he observed by reference to the decision in Re Minster Assets plc [1985] BCLC 200, approval will be refused if, at the meeting, changes are made which are of such a nature that a member might alter his or her decision as to how to act on the scheme if the changes had been disclosed. The ability of the meeting to alter the scheme was thus recognised and, as I have said, that possibility was, in the present case, expressly mentioned in the notice convening the meeting. 16 The correct approach to a situation of the kind that arose in this case is, it seems to me, for the meeting to have before it the scheme as originally formulated and referred to in the s.411(1) orders, together with information about the updated position that will enable the meeting to make an informed decision on several questions, namely, acceptance or rejection of that original formulation, alteration of the original formulation (provided of course that any alteration is one that the company itself supports and accepts so as to accommodate the fundamental principle recognised in Re Savoy Hotel Ltd [1981] Ch 351) and, if some alteration is favoured, approval or rejection of the compromise or arrangement in the altered form the meeting itself has seen fit to debate. 17 The approach taken in the orders of 31 January was accordingly to facilitate Citect's placing before members and option holders updated information relevant to a foreshadowed proposal for amendment to be placed before and considered by each adjourned meeting, with the proposed schemes to which the s.411(1) orders related as the basis against which the amendment proposal would be advanced and considered by each meeting. 18 The material forwarded to members and option holders in accordance with the orders of 31 January gave notice of two proposed resolutions. In the case of the members' scheme, these were as follows (there being corresponding forms of resolution for the options scheme): "1. ' That the scheme of arrangement proposed between Citect and the holders of the fully paid ordinary shares, designated the 'Share Scheme', as contained in and more particularly described in the Scheme Booklet dated 6 December 2005 is amended by changing the Scheme Consideration as therein defined from $1.50 per Share to $1.85 per Share.' 2. 'That pursuant to and in accordance with the provisions of section 411 of the Corporations Act, the arrangement proposed between Citect and the holders of its fully paid ordinary shares, designated the "Share Scheme", as contained in and more particularly described in the Scheme Booklet (and as amended pursuant to resolution 1 of the meeting), is agreed to and the Board of Directors of Citect are authorised to agree to such alterations or conditions as are thought fit by the Court and, subject to approval of the Share Scheme by the Court, to implement the Share Scheme with any such alterations or conditions.' " 19 The orders of 31 January were, as I have said, made in a context where Citect and SEAH had entered into further contractual arrangements by reference to the increased consideration, those being contractual arrangements under which Citect was to put the proposal for amendment before the members and option holders. 20 Citect came back before the court again on 20 February, following increase to $2 per share of the consideration offered by the Chapter 6 bidder, TCEP. Further orders of the same kind as had been made on 31 January were again made but, on that occasion, to facilitate informed consideration by each meeting of a proposal for amendment of the proposed schemes as originally formulated so as to increase the consideration to the levels I mentioned at the beginning of these reasons, they being levels more advantageous to security holders than those then applying under TCEP's revised Chapter 6 takeover bids. 21 The adjourned scheme meetings proceeded to business and were concluded yesterday, 9 March. Citect today applies for orders approving the two schemes of arrangement in the amended forms the respective meetings resolved to consider and in due course approved. 22 The evidence shows that the various orders of the court with respect to the meetings were observed and implemented and that the necessary forums were duly created in such a way that the appropriate information was available and the appropriate decision making opportunity was provided. 23 At the adjourned meeting of members, the first resolution, that is the resolution to amend the originally proposed scheme so as to cause it to refer to the increased consideration at the rate of $2.15 per share (apart from the special dividend of 5 cents per share), was approved by 96.05 per cent of the members who voted, whether in person or by proxy, and the votes of those members accounted for 81.4 per cent of the total votes cast, whether in person or by proxy. On the second resolution, that is the resolution to approve the scheme as thus amended, the corresponding figures were 95.68 per cent and 81.39 per cent. In relation to the creditors scheme involving option holders, there were again two resolutions and the relevant percentages were, on the first resolution, 90.7 per cent and 93.07 per cent respectively and on the second resolution, the same percentages, 90.7 per cent and 93.07 per cent. 24 In relation to each proposed compromise or arrangement identified in the s.411(1) orders of the court, the relevant meeting thus did two things. First, it considered whether that proposed compromise or arrangement should be altered so as to incorporate the increased consideration most recently agreed between Citect and SEAH. Then, having determined that the alteration should be made, the meeting decided that the compromise or arrangement in its altered form should be agreed to. Each such decision was approved by a majority satisfying the applicable sub-paragraph of s.411(4)(a). Because the amended terms, as eventually agreed to, entailed no disadvantage to Citect and were more favourable to members and optionholders than the terms reflected by the proposed schemes identified in the s.411(1) orders, there is no room for the kind of concern or reservation to which Young J referred in the Adams International case. 25 While each scheme, as amended, was agreed to by a majority, according to both head count and number of votes, satisfying s.411(4)(a), there is a particular matter requiring examination. 26 TCEP, in accordance with the announcement made by it on 6 January, proceeded with its Chapter 6 takeover bids for all Citect shares and options. The bids were subject to conditions, including the 50.1 per cent minimum acceptance condition and a condition that "the SEAH Proposal does not proceed". 27 On 10 February, TCEP announced that its indirect parent company, TCEP Australia LLC, had purchased 15.1 per cent of the shares in Citect for a cash consideration of $2 per share under unconditional off-market contracts with institutional sellers. In announcing that to the market, TCEP recognised that the Chapter 6 provisions operated automatically to cause the price under its takeover bid in respect of Citect shares to be increased to $2 per share (see s.651A). 28 On 27 February, the Takeovers Panel constituted under Part 10 of the Australian Securities and Investments Commission Act 2001 (Cth) announced a finding that the acquisition of the 15.1 per cent shareholding interest constituted or gave rise to a contravention of s.623 of the Corporations Act ("Collateral benefits not allowed") because the purchases were made off-market. The specific exception in s.623(3)(b) for purchases in the ordinary course of stock market trading (where, at least in theory, all shareholders wishing to participate have the opportunity to do so) did not apply. The Takeovers Panel made a declaration of "unacceptable circumstances" under s.657A and an order that TCEP declare its bid free from all conditions. As part of the resolution of the proceedings before it, the Takeovers Panel accepted from TCEP an undertaking given pursuant to s.201A of the Australian Securities and Investment Commission Act that it would not exercise (or enable to be exercised on its behalf) at the scheme meeting of members of Citect any votes attaching to the 15.1 per cent shareholding. The holder or holders of those shares did not vote on either of the resolutions passed at the adjourned scheme meeting of Citect's members on 9 March. 29 The TCEP shareholding represents, of course, a significant portion of the voting power that was exercisable at that meeting, where the rule of one vote per share applied for the purposes of in s.411(4)(a)(ii)(B). Citect has on issue 53,319,800 ordinary shares. The TCEP shareholding consists of 8,029,200 shares. At the adjourned scheme meeting of Citect's members, votes were cast by the holders of 29,286,049 shares upon each of the two resolutions. On the first resolution there were 23,839,892 votes in favour and 5,446,722 votes against. On the second resolution there were 23,836,202 votes in favour and 5,449,847 votes against. Had the TCEP shares been voted against each resolution, the result, according to the number of votes cast, would have been that each resolution was supported by less than the 75 per cent of votes required by s.411(4)(a)(ii)(B), that is to say, only some 63.9 per cent. 30 It is of course well established that the court may, as it were, look behind the actual voting figures and is not bound to give approval under s.411(4)(b) in every case where the statutory voting threshold is crossed. As Macarthur J said at first instance in Re A W Allen Ltd [1930] VLR 251 at p.258, it may be unfair to impose the wishes of the majority on the minority, even assuming that the necessary statutory majority has been obtained. Re Chevron (Sydney) Ltd [1963] VR 248 is probably the case most often cited in connection with the proposition that the existence of divergent interests may cause the court to treat the actual result of voting as not truly representing the wishes of the relevant constituency. In the present case, the freezing of a significant proportion of the voting power may mean that the actual result did not represent the wishes of the relevant constituency. 31 It is arguable that the undertaking given by and observed by TCEP caused the result of voting, according to the number of votes cast, to represent a material departure from the result that would have pertained had the undertaking not been given and honoured. I say it is arguable because there can, of course, be no certainty that the TCEP shares would have been voted against the adoption of each resolution. By the time voting occurred at the adjourned meeting yesterday, a period of some weeks had passed during which TCEP and the market generally had been on notice of Citect's intention to seek shareholders' approval of an amendment of the proposed scheme to increase the value to an effective $2.20 per share, that is 5 cents special dividend plus $2.15 cash consideration. TCEP had not, during that period, taken steps to increase its own takeover bid (involving a consideration of $2.00 per share) to some level above $2.20. The possibility that TCEP, if not constrained by the undertaking, may have cast its votes in a way calculated to defeat the scheme of arrangement thus co-exists with the possibility that TCEP was of a mind not to pursue its own acquisition ambitions further and was content to participate under the scheme of arrangement in respect of its shareholding. 32 I do not have any direct evidence about TCEP's position. But I do have before me evidence from which relevant inferences may be drawn. Ms Gibson, a partner of Mallesons Stephen Jaques, Citect's solicitors, gave oral evidence this morning that Mr Mutton of Phillips Fox, TCEP's solicitors, was present at yesterday's meetings. I note that it was Mr Mutton who, on TCEP's behalf, signed the undertaking given to the Takeovers Panel. A transcript of the address delivered by Mr Mortimer, the chairman of each meeting, is in evidence. Mr Mortimer said at each meeting that, if the voting outcome was positive, Citect would return to the court at 9.30am today seeking orders approving the amended schemes. Mr Mutton must have heard this. 33 Ms Gibson also gave evidence of a conversation she had with Mr Mutton on the previous day, 8 March. Because she was concerned to know whether a 9.30 fixture before me this morning would allow sufficient time for the matter to be dealt with, she asked Mr Mutton whether TCEP intended appearing on the hearing of the applications for approval under s411(4)(b). She received a negative answer from Mr Mutton. 34 Mr Webb, the chief executive officer of Citect, was at both meetings yesterday. He deposes in an affidavit sworn yesterday that no one at the meeting spoke of an intention of coming to court today to object to the approval of either scheme. He also deposes that Citect has not been served with any court documents or been notified of any intention to make an application in respect of the schemes. 35 This hearing was duly advertised in accordance with rule 3.4 of the Supreme Court (Corporations) Rules 1999. The notice, in Form 6, gave Citect's address for service as the office of Mallesons Stephen Jaques and gave the name of another partner of that firm, Ms Mills, as the person to be contacted. Ms Mills deposes in an affidavit sworn this morning that she has not received any notice of appearance or other process or any indication from any person of an intention to appear at this hearing or otherwise to object to the application. The matter was called outside the court when it came on for hearing this morning. No one but Citect and SEAH has appeared or sought to be heard. 36 The inference I draw from all of this is that TCEP is not today actively opposed to the approval and implementation of the schemes, as amended. I further infer that it was also of that mind yesterday and therefore that negative votes would not have been cast in respect of the 8,029,200 shares had exercise of voting rights not been prevented by the undertaking. In those circumstances, I am content that the court may proceed on the footing that there exists, both on paper and in substance and reality, the measure of support for the amended schemes upon which s.411(4) is predicated. 37 The aspects involving TCEP cause me to mention one other matter. The TCEP takeover bid remains open for acceptance until 5 pm on Monday next, 13 March. The bid is unconditional. It is therefore capable of being varied, both by extension of the bid period and increase of the consideration, at any time before 5 pm on 13 March. Approval of the scheme today will, as a practical matter, preclude those possibilities. 38 I am of the opinion, however, that this does not represent a valid reason for withholding the court's approval of the schemes. The theoretical chance that Citect security holders will receive a better offer from TCEP is, I think, illusory in the circumstances. Had TCEP any intention of improving its bid, it would have acted before now. In particular, it would not have let this hearing pass without making some attempt to prevent approval by the schemes. Added to that, of course, is the reality that the Citect security holders voted as they did yesterday, notwithstanding the existence of the theoretical chance to which I have referred. 39 It remains to mention only two matters. First, I have evidence before me of the due satisfaction of the various conditions precedent so that it can be seen that the scheme will take effect unconditionally once it is approved. Second, ASIC has issued a statement under s.411(17) that it has no objection to the schemes. This makes it unnecessary for the court, of its own motion, to consider the question whether there is exists a purpose of avoiding any provision of Chapter 6. 40 In the result, therefore, Citect has made out a case for the grant of approval under s.411(4)(b) in respect of each scheme, as amended at the relevant meeting, and I will make orders accordingly. 41 I make orders 1 to 5 in the short minutes of order which I initial and date. ********** 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.