FEDERAL COURT OF AUSTRALIA

Challenger Group Holdings Limited [2003] FCA 1356

CORPORATIONS – holders of existing options to acquire units in unit trust – corporatisation of public company – options to acquire units to be converted by scheme of arrangement to options to acquire shares – scheme meeting to take place subsequent to meeting of unitholders to vote on redemption of units by issue of shares.

Corporations Act 2001 (Cth) s 411, 664A

Re Matine Ltd & Ors (1998) 28 ACSR 268

Re SDR Apparel Pty Ltd and the Companies Act (1977) 3 ACLR 162

Re NRMA Ltd (2002) 33 ACSR 595

BTS Bearings Pty Ltd v Transmission Supplies Pty Ltd (1983) 1 ACLC 923

Re Asia Oil and Minerals Limited and the Companies (NSW) Code (1986) 5 NSWLR 42

Re Gasweld Pty Ltd (1986) 5 NSWLR 494

Re Gwalia Consolidated Limited (1998) 16 ACLC 970

CHALLENGER GROUP HOLDINGS LIMITED

IN THE MATTER OF CHALLENGER GROUP HOLDINGS LIMITED(formerly known as Challenger International Limited) (ABN 50 002 993 302)

N 3067 OF 2003

CONTI J

21 NOVEMBER 2003

SYDNEY

THE COURT ORDERS THAT:

1.         Pursuant to section 411(1) of the Corporations Act, the applicant (CGHL) convene a meeting (theOptionholders Meeting) of the holders of options (CGHLOptionholders) to subscribe for ordinary shares in CGHL (CGHL Options) for the purpose of considering, and if thought fit, agreeing (with or without modification) to a scheme of arrangement being the scheme substantially in the form of the draft, a copy of which is Appendix 1 to Exhibit ‘DHS-A’ (the Scheme).

2.         The Optionholders Meeting be held at 10.00 am on 16 December 2003 at The Main Conference Room, Level 41, Aurora Place, 88 Phillip Street, Sydney, New South Wales.

3.         On or before 28 November 2003 there be (a) personally served on, or (b) despatched by prepaid ordinary post, to each CGHL Optionholder appearing in the register of CGHL Optionholders, a document substantially in the form or to the effect of Exhibit ‘DHS-A’ (the Scheme Booklet) together with the proxy form that accompanies the Scheme Booklet and the Disclosure Document which is Exhibit ‘DHS-E’.

4.         The Chairman of the Optionholders Meeting be Mr Garry Besson and in his absence Mr Timothy Foster.

5.         The Chairman appointed to the Optionholders Meeting has the power to adjourn the meeting in his absolute discretion.

6.         All voting at the Optionholders Meeting be by poll as declared by the Chairman.

7.         Pursuant to section 411(1) of the Corporations Act, the explanatory statement for the scheme, a copy of which forms part of the documents comprising Exhibit ‘DHS-A’, be approved.

8.         CGHL advertise the Optionholders Meeting in the form of the attached document in The Australian newspaper no later than 1 December 2003.

9.         CGHL publish a notice of hearing of any application to approve the Scheme on or before 17 December 2003 and CGHL shall otherwise be exempted from compliance with the requirement to publish such notice at least 5 days before the date fixed for the hearing of the application pursuant to Rule 3.4(3)(b) of the Federal Court (Corporations) Rules 2000 (Cth).

10.       The proceedings be stood over to 19 December 2003 at 10.15am before Conti J for the hearing of any application to approve the scheme.

11.       Liberty to restore on two days’ notice.

12.       These Orders to be entered forthwith.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

challenger group holdings limited

abn 50 002 993 302

NOTICE OF MEETING

Take notice that pursuant to Orders of the Federal Court of Australia a meeting of the holders of options granted by Challenger Group Holdings Limited (CGHL) has been convened to consider and, if thought fit, approve a Scheme of Arrangement between CGHL and the holders of options which have been granted by CGHL (CGHL Options).

The meeting will be held on 16 December 2003 at 10.00am at The Main Conference Room, Level 41, Aurora Place, 88 Phillip Street, Sydney.

A copy of the Scheme of Arrangement, the Explanatory Statement, the Notice convening the Meeting and the proxy form may be obtained from the registered office of CGHL which is located at Level 41, Aurora Place, 88 Phillip Street, Sydney between the hours of 9.00am and 5.00pm.

REASONS FOR JUDGMENT

Introduction

1                     This is an application made pursuant to s 411 of the Corporations Act 2001 (Cth) (‘the Corporations Act’) for orders that Challenger Group Holdings Limited (‘CGHL’), formerly known as Challenger International Limited, convene a meeting of all holders of options in CGHL for the purpose of considering, and if thought fit agreeing, with or without modification to a scheme of arrangement proposed to be made between CGHL and its optionholders.

2                     The issued capital structure of CGHL, as at 18 November 2003, comprised 292,402,595 shares, 37,500,000 convertible notes issued by CGHL at an issue price of $2 and having an expiry date of 31 December 2003, and 4,234,541 outstanding options (the original number was 4,295,000). The options include a term that the same are not transferable. Of those outstanding options, the same are held mainly by 64 employees of CGHL. The balance of 537,041 are held by 57 representatives of Garrisons Limited a company related to CGHL. There has been no recording of any transfer of options on the CGHL register since the issue thereof.

3                     The terms and conditions of the options held by the 64 employees of CGHL may be summarised as follows:

(i)         One-third thereof to vest with the recipient on 30 June 2002, a further one-third thereof to vest on 30 June 2003 and a further one-third thereof to vest on 30 June 2004, each option relating to one share, each option being exercisable on or before 31 July 2004 at a fixed price of $3.66 per option;

(ii)        In the meantime, exercise may be effected, in relation to parcels of not less than 500 options, on the last day of each calendar month on and from 30 June 2002 up to and including 31 July 2004, or otherwise as determined by the directors of CGHL in its absolute discretion; and

(iii)       Options to be only transferable with the prior written consent of CGHL, and the right of exercise to cease if the employment with CGHL of the optionholder is to be terminated by CGHL for any reason, lawfully or unlawfully, or if options are not exercised within 30 days of CGHL receiving notice of the resignation of the relevant director or executive (as the case may be).

There has not taken place any exercise of these options.

4                     The terms and conditions of the options issued to representatives of Garrisons Limited, pursuant to the so-called Garrisons Share Sale Agreement dated 5 November 1999, relate to shares in CGHL equivalent to 0.325 percent of the increase in funds under management attributable to the recipient in the relevant period since the funds under managementcalculation date, being respectively 31 December 1999, 30 June 2000, 31 December 2000, 30 June 2001 and 31 December 2001. It was additionally stipulated as a condition of options issued to the Garrisons representatives that if the level of funds under management attributable to the recipient on the exercise date was to exceed that of the funds under managementattributable to the recipient on the date of grant thereof, the recipient would be entitled to exercise the options on each exercise date, but if that level was less than any such benchmarks, the recipients could not exercise the relevant options, which thereupon became subject to cancellation at the discretion of CGHL. The option exercise price in each case was to be determined by the weighted average market price of the shares for the five trading days prior to the date of grant of the options.

5                     The whole of the issued share capital of CGHL is held by the Challenger Financial Services Group (‘Challenger Group’), a listed managed investment scheme. The responsible entity of the Challenger Group is CPH Management Limited (‘CPH Management’).

6                     On 27 June 2003, Justice Gyles of this Court approved three schemes of arrangement involving respectively CGHL shares, options and convertible notes. Until those schemes of arrangement took effect, CGHL was a listed public company. Those schemes duly took effect on 1 July 2003. Pursuant to the CGHL share scheme of arrangement, CGHL shareholders transferred their shares in CGHL to CPH Management, as responsible entity of the Challenger Group, in consideration of the issue of Challenger Group units, the relevant conversion being 4.5 Challenger Group units for every one CGHL share. There was also a scheme of arrangement relating to CGHL convertible notes. Although the details of that scheme are not relevant to these proceedings, it may be observed that CPH Management as responsible entity of Challenger Group owns, or has agreed to purchase, all of the CGHL convertible notes. Finally there was a scheme of arrangement between CGHL and the holders of CGHL options.

7                     The CGHL options scheme of arrangement required the optionholders, when exercising the same, to transfer their CGHL shares to CPH Management in its capacity as responsible entity of the Challenger Group, in consideration of the issue of the 4.5 Challenger Group units. Thus the exchange ratio under the 27 June 2003 option scheme of arrangement mirrored the exchange ratio under the 27 June 2003 share scheme of arrangement.

8                     The present corporate structure of the Challenger Group is represented in the following diagram:

9                     CPH Management now proposes a restructure of the Challenger Group which effectively involves the corporisation thereof upon the basis represented diagrammatically as follows:

10                  In short:

(i)         all units in the Challenger Group would be redeemed in consideration of the issue of shares in a new company, to be called Challenger Financial Services Group Limited (‘Challenger Financial Services’), which would become the Australian Stock Exchange listed head entity of what may be described as the Challenger Group; the exchange ratio is to be one for one; and

(ii)        Challenger Financial Services would own all issued units in the Challenger Group if the restructure is approved and implemented.

11                  It is proposed that the restructure be approved at a CGHL unitholders meeting to be held on 22 December 2003; the proposed disclosure document, said to comply with the prospectus provisions of the Corporations Act, was tendered in evidence. The disclosure document is to accompany the option scheme booklet to be sent to CGHL optionholders.

12                  The proposed restructure is subject to a number of conditions. One is that the proposed option scheme of arrangement be approved, or alternatively, that Australian Securities and Investments Commission (‘ASIC’) grants modifications to the Corporations Act to permit the compulsory acquisition of CGHL options pursuant to s 664A(3) of the Corporations Act, if the modifications would allow Challenger Financial Services to treat CGHL options as though the same were convertible into Challenger Group units. As a result of the restructure being approved, all of the Challenger Group units would be acquired by Challenger Financial Services, which would be the holder of all Challenger Group units for the purposes of the operation of s 664A. Without the modification however, Challenger Financial Services could not acquire the CGHL options, since they are not convertible to Challenger Group units. Under the 27 June 2003 Option Scheme, they would remain convertible into CGHL shares, albeit that those shares would be compulsorily transferred to CPH Management in consideration of the issue of 4.5 Challenger Group units for each share so transferred.

13                  The option scheme now proposed is to be subject to the condition that the restructure foreshadowed above be approved and takes effect. The earliest that this could happen is 22 December 2003, when it is proposed that the unitholders vote on the restructure proposal, assuming that all other conditions, including regulatory conditions, of the restructure are approved by that time, which as indicated by the evidence is likely.

14                  The essence of the new option scheme is as follows:

(i)         each CGHL option holder who exercises CGHL options would hold the CGHL shares issued in consequence as bare trustee for Challenger, and must transfer to Challenger those shares free of any encumbrance, security or third party interest;

(ii)        Challenger would issue to each CGHL optionholder 4.5 Challenger shares (with appropriate adjustments to take account of capital reorganisations and fractional entitlements) for every CGHL share transferred to Challenger;

(iii)       Challenger to facilitate the transfer of CGHL shares to Challenger, and the issue of Challenger shares, by causing to be executed on behalf of each CGHL optionholder any document which is required to be executed in order to give effect to the CGHL optionholders’ entitlements under the new option scheme; and

(iv)       the terms and conditions of CGHL options held by each CGHL optionholder would be amended to include the provisions of the option scheme, which are to prevail in the event of any inconsistency, including any inconsistency which would result from giving effect to the 27 June 2003 Option Scheme, which would become inoperative as and when the present option scheme becomes effective.

15                  Those terms would vary the 27 June 2003 option scheme, in that the same required that:

(i)         the CGHL shares, to be issued on the exercise of CGHL options, be transferred to CPH Management as responsible entity of the Challenger Group, presently the listed entity, rather than as presently proposed in favour of Challenger Financial Services, which would be the new listed entity if the restructure is approved; and

(ii)        the CGHL optionholder who had exercised a CGHL option was to have an entitlement to 4.5 Challenger units, for every CGHL option exercised, under the 27 June 2003 option scheme, whereas under the new option scheme, the entitlement would be 4.5 Challenger Financial Services shares, being shares in the new listed entity if the restructure is approved.

Issues raised for consideration

16                  A number of issues have arisen for consideration in the light of the present application, each of which has been properly raised by the applicant’s legal representatives.

17                  The first is the status of the optionholders. Senior Counsel for CGHL submitted that for the purpose of convening a meeting of CGHL to consider, and if thought fit approve the new option scheme, the holders of existing options may be characterised as creditors of CGHL and thus be bound by a scheme of arrangement approved by the Court. That proposition is correct: Re Asia Oil and Minerals Limited and the Companies (NSW) Code (1986) 5 NSWLR 42.

18                  There are a number of conditions of the new option scheme that purport to either amend the operation of the 27 June 2003 option scheme, or to override the operation of that scheme, to the extent of any inconsistency with the new option scheme. Subsection 411(6) of the Act provides that the Court may grant its approval to a compromise or arrangement subject to such alterations or conditions as it thinks just. Senior Counsel for CGHL acknowledged that although the Court may amend a scheme of arrangement after the meeting of creditors approving the same, but prior to giving the same final approval (Re Matine Ltd & Ors (1998) 28 ACSR 268), the Court does not have power to make an order terminating or amending a scheme of arrangement once approved (Re SDR Apparel Pty Ltd and the Companies Act (1977) 3 ACLR 162; BTS Bearings Pty Ltd v Transmission Supplies Pty Ltd (1983) 1 ACLC 923). In BTS Bearings, Needham J held that the power of the Court under the then equivalent provisions of s 411(6) of the Act to grant approval to a compromise could not be justifiably construed as applicable to any decision of the Court, other than what his Honour described as ‘its initial approval to the compromise’.

19                  However Senior Counsel for the applicant distinguished that kind of situation addressed by Needham J, by recourse to Re Gasweld Pty Ltd (1986) 5 NSWLR 494, where McLelland J (as he then was) held that a subsisting scheme of arrangement between a company and one class of its creditors was effectively terminated by a subsequent scheme of arrangement between the same parties which contained a clause to the effect that immediately upon the latter being approved by the Court, the first scheme should be deemed to have been terminated or amended. At 495, McLelland J distinguished SDR Apparel and BTS Bearings upon the following basis:

‘… However, neither of these decisions determines the present question, which is whether a scheme can terminate an earlier scheme. In my view a scheme of arrangement duly approved under s 315 can effectively terminate or, indeed, amend, an earlier scheme operating pursuant to an earlier approval given under that section. There is nothing in the section to suggest that a scheme cannot have that effect and there is no reason to read into the section any implied limitation of that kind. The question as to what a scheme can achieve as between the parties to it is quite different from the question as to what the Court can do by means of an order…’

20                  Upon that footing, it was submitted that although the effect of the kind of provision in the scheme for which approval was sought in Gasweld was to terminate the prior scheme in its entirety, the provisions of the presently proposed scheme to amend the 27 June 2003 options scheme, and to override that scheme to the extent of any inconsistency between it and the new options scheme was permissible, once the latter is approved in accordance with the requirements of the Act. So much is in fact made clear by clauses 1.6(d), 3.2(e) and 7.1 of the presently proposed scheme. I think that the submission is correct.

21                  The other matter of potential controversy is the proposal of CGHL that the second Court hearing be held on 19 December 2003, following approval of the option holders scheme meeting proposed for 16 December 2003, but prior to the unitholders meeting proposed for 22 December 2003. To obviate that conceivable difficulty, CGHL proposed that at the second Court hearing, the scheme be approved by the Court upon the undertaking of the applicant’s solicitor not to lodge the orders with ASIC unless and until the approval of the unitholders meeting proposed for 22 December 2003, and all the conditions of the restructure be otherwise satisfied. In that regard, s 411(10) of the Act provides that an order of the Court, for the purposes of s 411(4)(b) of the Act, approving a scheme of arrangement does not take effect until an office copy of the order is lodged with ASIC, and that upon being so lodged, the order takes effect or is taken to have taken effect, on and from the date of lodgment, or such earlier date as the Court may determine and specify in the order.

22                  It was submitted on behalf of CGHL that authority for that proposed course was to be found in Re NRMA Ltd (2002) 33 ACSR 595 at 613, where Santow J (as he then was) approved interrelated schemes of arrangement containing conditions subsequent, notwithstanding, as his Honour observed, that the conventional scheme route involved qualification for approval only after all conditions were to be satisfied. At 647 of his Honour’s reasons for judgment, Santow J reasoned as follows:

‘Clarity and certainty are thus the touchstones. Provided that clarity and certainty are present on the face of the scheme and no new decision making process intrudes after court approval, it does not matter that different results may emerge in different (but clearly identified) eventualities. A key question is whether the scheme is, according to its own terms, self-executing in the sense that certain results follow in certain defined events.’

23                  In the circumstances of that case, the return to the status quo without adverse consequences to the members, should the conditions subsequent not be fulfilled, was an important factor in the conclusions of his Honour. The same regime is proffered by CGHL. I see no good reason why I should not adopt here a similar course. To so provide in the present circumstances is in my opinion to reflect a condition subsequent that is fair and equitable for the following reasons:

(i)         at the time of any approval to the scheme, the optionholders would have all information placed before them as to the possible outcomes and impact upon their options, and in any event, that the new option scheme is to be subject always to the condition that the restructure is approved by all classes upon the conditions set out in the scheme, and further that until that condition is wholly satisfied, the new option scheme would not impact upon any right of a CGHL optionholder to exercise a CGHL option; in particular, there would be no realistic prejudice to optionholders to allow ASX trading in Challenger shares to commence on the day following approval of the restructure at the unitholders meeting;

(ii)        moreover if the CGHL optionholders meeting of 22 December 2003 should fail to approve the Challenger Group corporatisation, the status quo would be maintained, such that no prejudice would be occasioned to optionholders;

(iii)       the new option scheme, as in the case of the 27 June 2003 option scheme, has some features in common with the scheme earlier approved by Santow J in Re Gwalia Consolidated Limited (1998) 16 ACLC 970, where his Honour declared an options scheme to be a valid creditors’ scheme, for the following reasons:

            (a)        an optionholder may be treated as a contingent creditor of a company, in circumstances where the option contract grants in effect a conditional prospective right to damages for breach of the option based on an attempted exercise of the option followed by the company’s breach; consequently an options scheme such as that thereby constituted could be treated as a creditors scheme;

            (b)        under conventional non-option creditors schemes, those creditors must be ascertained by the meeting date, if not the date of scheme approval by the court; in that case however, the prohibitions on transfer removed any potential for later purchasers of the options becoming bound by the scheme; and

            (c)        nevertheless at the time the scheme would take effect, the optionholders would remain in that capacity and be bound prospectively in relation both to their options and what they would receive upon the exercise thereof; consequently it would be artificial to sever as outside the scope of a creditors’ scheme the post-exercise stage of the scheme dealing with the compulsory exchange of shares, as the scheme would still deal with the rights of the optionholders in a way sufficiently connected with the option contracts.

24                  In the present circumstances, CGHL options are held by 64 employees, and include a term that the same are not transferable. CGHL options are also held by 57 representatives of Garrisons Limited (see again [2] above), and presently comprise 537,041 in number; those latter representatives are financial planners. Although the 537,041 options are not explicitly expressed to be non-transferable, it was submitted that from the terms of issue thereof, they were implicitly granted personally to those financial planners, and that they alone are able to exercise the same. As I earlier indicated, no such transfers have been recorded.

25                  In any event, I would accept the submission of Senior Counsel for CGHL that even if the CGHL options were transferable, that should not be a factor disentitling the Court from approving the subject scheme of arrangement. There is substance in the contention that it is both appropriate and equitable for the Court to adopt, in relation to creditors’ schemes of arrangement involving options and like securities, a similar approach to that adopted in connection with members’ schemes of arrangement, where the Court is concerned to ensure that the shares the subject of the scheme are identified by no later than the date of the scheme meeting. Particularly should that be so, where the Court need not realistically be concerned about the identity of shareholders, given that there may well take place stock exchange trading in shares after the scheme meeting, and before the final approval of the scheme by the Court takes effect. That will mean of course some change in identity of the members who will be bound by the scheme, though not the number of shares to be covered by the scheme, which do not alter as a consequence of such trading.

26                  The present scheme of arrangement has been well and effectively conceived in somewhat unique circumstances. The orders sought by the applicant should be made.

Associate:

Dated:              25 November 2003