FEDERAL COURT OF AUSTRALIA

Wellcom Group Limited, in the matter of Wellcom Group Limited [2019] FCA 1655

ORDERS

OTHER MATTERS:

A.    The Court notes that the Australian Securities and Investments Commission (ASIC) was provided with at least 14 days' notice of the hearing of this application.

B.    The Court is satisfied that ASIC has had a reasonable opportunity to:

a.    examine the terms of the proposed scheme of arrangement to which the application relates and a draft explanatory statement relating to that arrangement; and

b.    make submissions to the Court in relation to the proposed scheme of arrangement and the draft explanatory statement.

C.    The Court notes the letter from ASIC to the Directors of Wellcom Group Limited ACN 114 312 542 dated 3 October 2019 at Annexure ‘BOV4’ to the affidavit of Bernard Frederic Oude-Vrielink sworn on 4 October 2019 (Third Oude-Vrielink Affidavit).

THE COURT ORDERS THAT:

1.    Pursuant to rule 2.13(1) of the Federal Court (Corporations) Rules 2000 (Cth) (Rules), Innocean Worldwide Inc has leave to be heard in the proceeding without becoming a party to it.

2.    Pursuant to section 411(1) of the Corporations Act 2001 (Cth) (Act), the Plaintiff, Wellcom Group Limited ACN 114 312 542 (Wellcom), convene and hold a meeting (Scheme Meeting) of holders of fully paid ordinary shares in Wellcom, other than SIDCOM Pty Ltd (ACN 635 070 049) (Wellcom Shareholders):

(a)    to consider and, if thought fit, to approve (with or without modification) the scheme of arrangement (Scheme) proposed to be made between Wellcom and Wellcom Shareholders, the terms of which are set out in Annexure B to these Orders;

(b)    to be held at 10.00am (Melbourne time) on Friday, 8 November 2019 at the offices of Minter Ellison, Rialto Towers, 525 Collins Street, Melbourne, Victoria.

3.    The Scheme Meeting be convened by sending on or before 9 October 2019:

(a)    in the case of Scheme Shareholders who have elected to receive shareholder communications electronically by way of email (Email Shareholders), and whose registered address is in Australia, an email substantially in the form at Annexure ‘CA14’ to the affidavit of Charles Arthur Anzarut sworn 2 October 2019 (Anzarut Affidavit) and which contains links to:

(i)    an electronic copy of a document substantially in the form of the explanatory booklet, a draft of which is at Annexure 'BOV6' to the Third Oude-Vrielink Affidavit (Scheme Booklet), which contains, among other things, the Notice of Scheme Meeting at Appendix 3 to the Scheme Booklet; and

(ii)    an online portal or website that is accessible by the Email Shareholder and which enables the Email Shareholder to lodge their proxy for the Scheme Meeting and voting instructions online; and

(b)    in the case of Email Shareholders, and whose registered address is outside Australia, an email substantially in the form at Annexure ‘CA14’ to the Anzarut Affidavit, and which contains links to:

(i)    an electronic copy of a document substantially in the form of the Scheme Booklet, which contains, among other things, the Notice of Scheme Meeting at Appendix 3 to the Scheme Booklet; and

(ii)    an online portal or website that is accessible by the Email Shareholder and which enables the Email Shareholder to lodge their proxy for the Scheme Meeting and voting instructions online; and

(c)    in the case of Scheme Shareholders who are not Email Shareholders and whose registered address is in Australia, the following documents by pre-paid post addressed to the relevant addresses recorded in Wellcom’s register:

(i)    a document substantially in the form of the Scheme Booklet, which contains, among other things, the Notice of Scheme Meeting at Appendix 3 to the Scheme Booklet;

(ii)    a personalised proxy form for the Scheme Meeting, substantially in the form at Annexure ‘CA15’ to the Anzarut Affidavit (Proxy Form); and

(iii)    a reply paid envelope for the return of the Proxy Form;

(d)    in the case of Scheme Shareholders who are not Email Shareholders and whose registered address is outside Australia, the following documents by airmail addressed to the relevant addresses recorded in Wellcom’s register:

(i)    a document substantially in the form of the Scheme Booklet, which contains, among other things, the Notice of Scheme Meeting at Appendix 3 to the Scheme Booklet;

(ii)    a personalised Proxy Form; and

(iii)    a return envelope for the return of the Proxy Form.

4.    Voting on the resolution to approve the Scheme is to be conducted by way of a poll.

5.    A Proxy Form in respect of the Scheme Meeting will be valid and effective if, and only if, it is completed and delivered in accordance with its terms by 10.00am (Melbourne time) on Wednesday, 6 November 2019.

6.    Mr Charles Arthur Anzarut, or failing him, Ms Janette Anne Kendall, be Chairman of the Scheme Meeting.

7.    The Chairman of the Scheme Meeting shall have the power to adjourn the meeting to such time, date and place as he or she considers appropriate.

8.    Compliance with rule 2.15 of the Rules be dispensed with.

9.    Compliance with rule 3.4 and Form 6 of the Rules be dispensed with.

10.    Wellcom publish in The Australian newspaper once on or before 30 October 2019 an advertisement substantially in the form of Annexure A to these Orders.

11.    The further hearing of the Originating Process be adjourned to a hearing before the Honourable Justice O'Bryan on 13 November 2019 at 10.15am (Melbourne time) or as soon thereafter as the business of the Court allows.

12.    There be liberty to apply.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Annexure A

Notice of second Court hearing

Notice of hearing to approve compromise or arrangement

TO all the members of Wellcom Group Limited (ACN 114 312 542) (Wellcom)

TAKE NOTICE that at 10.15am (Melbourne time) on 13 November 2019 the Federal Court of Australia (Victorian Registry) at 305 William Street, Melbourne, Victoria 3000 will hear an application by Wellcom seeking the approval of a compromise or arrangement between Wellcom and its members if agreed to by a resolution to be considered, and, if thought fit, passed at a meeting of such members to be held on 8 November 2019 at MinterEllison, Rialto Towers, 525 Collins Street, Melbourne, Victoria 3000, commencing at 10.00am (Melbourne time).

If you wish to oppose the approval of the compromise or arrangement, you must file and serve on Wellcom a notice of appearance, in the prescribed form, together with any affidavit on which you wish to rely at the hearing. The notice of appearance and affidavit must be served on Wellcom at its address for service by 5.00pm on 12 November 2019.

The address for service of Wellcom is: c/o MinterEllison, Rialto Towers, 525 Collins Street, Melbourne, Victoria 3000, Attention: Bart Oude-Vrielink.

Annexure B

Scheme

[The Order entered is available on the Commonwealth Courts Portal, which attaches the Scheme.]

REASONS FOR JUDGMENT

O’BRYAN J:

A.    Introduction

1    By originating application dated 17 June 2019, the plaintiff (Wellcom) seeks orders pursuant to ss 411(1) and 1319 of the Corporations Act 2001 (Cth) (Act) convening a meeting of the holders of its fully paid ordinary shares, excluding SIDCOM Pty Ltd (SIDCOM), for the purpose of them considering and, if thought fit, agreeing to a proposed scheme of arrangement (Scheme) between them and Wellcom.

2    Wellcom is an Australian advertising and marketing production business specialising in digital marketing, omni-channel content production and innovative technology. The company was founded in 2000 by Mr Wayne Sidwell, the current Chairman of the company, and was admitted to the official list of the Australian Securities Exchange (ASX) in 2005. As at 4 October 2019, Wellcom had on issue 39,229,356 fully paid ordinary shares and 443,915 performance rights. Mr Sidwell holds an interest in 18,312,878 shares, comprising approximately 46% of the issued share capital of the company. Of those shares, 5,950,991 are held by SIDCOM, a company controlled by Mr Sidwell, comprising approximately 15% of the issued share capital in Wellcom. The other directors of the company have relatively small shareholdings in Wellcom.

3    Wellcom's market capitalisation on 31 July 2019 (being the last trading day before the Scheme was announced to the ASX on 31 July 2019) was approximately $206 million (represented by 39,229,356 shares multiplied by the $5.25 closing share price on that date). Wellcom's market capitalisation as at 25 September 2019 was approximately $270 million (based on the closing price of $6.89 per share on the ASX on 25 September 2019). For the financial year ended 30 June 2019, Wellcom generated revenue of approximately $160.9 million and recorded earnings before interest, tax, depreciation and amortisation (EBITDA) of approximately $23.4 million.

4    Innocean Worldwide Inc (Innocean) was incorporated on 17 May 2005 under the laws of the Republic of Korea. Together with its subsidiaries, Innocean provides a range of marketing and communication services. On 17 July 2015, Innocean listed its shares on the Korea Exchange (KRX).

5    The Scheme, if implemented, will result in the acquisition of approximately 85% of the shares in Wellcom by Innocean and the subsequent delisting of Wellcom. The remaining 15% of shares, being the shares held by SIDCOM, will not participate in or vote on the Scheme and will not be acquired by Innocean pursuant to the Scheme. Those shares are referred to as the excluded shares.

6    The Scheme meeting is proposed to be held at 10.00am (Melbourne time) on Friday, 8 November 2019 at the offices of Minter Ellison, Rialto Towers, 525 Collins Street, Melbourne, Victoria. It is proposed that Mr Charles Arthur Anzarut will chair the meeting unless he is unable to do so, in which case Ms Janette Anne Kendall will chair (both are non-executive directors of Wellcom).

7    On 4 October 2019, I made orders convening the Scheme meeting. These are my reasons for making those orders.

B.    Overview of the Scheme

8    Wellcom entered into a Scheme Implementation Deed with Innocean on 31 July 2019. The Scheme Implementation Deed provides that Wellcom is to propose and implement a scheme of arrangement substantially in the terms set out in a schedule to the Deed. The Scheme provides for the transfer of all of the shares in Wellcom to Innocean, other than the excluded shares, in consideration for a cash payment by Innocean of $6.70 per share. Relevantly, the excluded shares are defined as the shares held by SIDCOM, which comprise approximately 15% of the issued share capital of Wellcom. Thus the shares participating in the Scheme (defined as the Scheme shares) comprise approximately 85% of the issued share capital in Wellcom. Accordingly, if the Scheme is implemented, Wellcom will become an (approximately) 85% owned subsidiary of Innocean and will be delisted from the ASX. Subject to the required Court and shareholder approvals, it is anticipated that the Scheme will be implemented on 27 November 2019.

9    The excluded shares are the subject of separate arrangements with Innocean which are connected to a proposed employment arrangement between Innocean and Mr Sidwell. On 31 July 2019, contemporaneously with entering into the Scheme Implementation Deed, Innocean entered into a Standstill Deed with SIDCOM and Well.com Pty Ltd (Well.com). As noted above, SIDCOM is a company controlled by Mr Sidwell and is the registered holder of the excluded shares (being 5,950,991 Wellcom shares). SIDCOM holds those shares as bare trustee for Well.com, which in turn is the trustee of the Well.com Discretionary Trust in which Mr Sidwell and several of his family members have an interest. The Standstill Deed records three interconnected agreements which concern those shares.

10    First, Well.com and SIDCOM have agreed, from the date of the Deed, not to dispose of the excluded shares to any person other than Innocean without Innocean’s prior written consent. That obligation continues until the earlier of the following dates: (i) the termination of the Scheme Implementation Deed; (ii) the transfer of the excluded shares to Innocean; and (iii) a period of 7 years following the implementation of the Scheme. Thus the obligation falls away if the Scheme is not implemented.

11    Second, Well.com, SIDCOM and Innocean have agreed take all steps reasonably necessary to procure that Wellcom and Mr Sidwell enter into a new employment agreement (or a similar agreement setting out the terms on which Wellcom will engage Mr Sidwell) on or before the Scheme implementation date under which Mr Sidwell will be employed by or provide services to Wellcom on and from the Scheme implementation date. The material terms of the proposed employment agreement are as follows:

(a)    annual base salary of $300,000 (including superannuation);

(b)    Mr Sidwell must carry out duties customary for an Executive Chairman, including the management, operation and control of Wellcom and its subsidiaries;

(c)    either party may terminate the agreement upon giving the other party 6 months’ written notice and Wellcom may terminate Mr Sidwell’s employment without notice in particular circumstances, including for a serious breach or misconduct by Mr Sidwell; and

(d)    Mr Sidwell will be restrained for up to 1 year in all countries in which Wellcom and its subsidiaries have an operating business or presence and China, and for 2 years in the United States.

12    Third, Well.com, SIDCOM and Innocean have agreed to enter into an Option Deed in relation to the excluded shares on the Scheme implementation date. Under the Option Deed, Innocean will grant a put option to Well.com, and Well.com and SIDCOM will grant a call option to Innocean, over the excluded shares. The put option will be exercisable by Well.com and SIDCOM in the following periods:

(a)    for up to 50% of the excluded shares, between 3 and 5 years after the Scheme implementation date (first put period); and

(b)    for all remaining excluded shares, from the period immediately after the first put period and ending 7 years after the Scheme implementation date (second put period).

13    The call option, exercisable by Innocean, may only be exercised over all of the excluded shares and will be exercisable in the following periods:

(a)    during the second put period; or

(b)    if Mr Sidwell ceases to be employed by the Wellcom Group prior to the first put period.

14    The exercise price payable for each excluded share by Innocean upon exercise of the options depends on the circumstances of the exercise and the financial performance of Wellcom. If Innocean exercises the call option because Mr Sidwell ceases to be employed by the Wellcom Group prior to the first put period, the exercise price will be $6.70 per share (that is, the same price as payable to the Scheme shareholders pursuant to the Scheme). If the put or call option is otherwise exercised in accordance with their terms, the exercise price will be a minimum price of $6.70 or a higher price if stipulated EBITDA growth targets for Wellcom have been achieved. The formula for the exercise price is considered in more detail below.

15    The Scheme Implementation Deed permits Wellcom to declare and pay a fully franked final dividend of up to $0.11 per share and a special dividend of up to $0.10 per share (together, the dividends) at any time prior to the implementation of the Scheme. The Scheme Implementation Deed provides that the payment of either or both of a final and a special dividend will not affect the Scheme consideration. On 20 August 2019, the Board of Wellcom declared a fully franked final dividend of $0.11 per share and a fully franked special dividend of $0.10 per share. The dividends will be paid on the Scheme implementation date to those holders of Wellcom shares listed on Wellcom’s share register as at 6 November 2019. Payment of the dividends is not conditional on the Scheme and the excluded shares are eligible to receive the dividends.

16    The Scheme Implementation Deed also contemplates that the performance rights that have been issued by Wellcom to certain executives of the company will convert into Wellcom shares prior to the Scheme record date (currently proposed to be 7pm on 21 November 2019) and that the Wellcom shares issued in respect of those performance rights will constitute Scheme shares for the purposes of the Scheme. The proposed treatment of the performance rights is considered further below.

17    The Scheme is conditional on the satisfaction of the following conditions precedent (as set out in cl 3 of the Scheme):

(a)    all the conditions precedent in cl 3.1 of the Scheme Implementation Deed (other than the condition precedent relating to Court approval of the Scheme) have been satisfied or waived in accordance with the terms of the Scheme Implementation Deed by 8am on the date of the second court hearing (currently proposed to be Wednesday, 13 November 2019);

(b)    neither the Scheme Implementation Deed nor the Deed Poll have been terminated as at 8am on the date of the second court hearing; and

(c)    the Court has approved the Scheme pursuant to s 411(4)(b) of the Act, including any alterations made or required by the Court under s 411(6) of the Act.

18    Innocean is not a party to the Scheme and cannot be directly bound by it (relevantly, under s 411 of the Act, a scheme is between a company and its members: Re Westfield Holdings Ltd (2004) 49 ACSR 734 at 739). The established practice in these circumstances is to require the entity providing the Scheme consideration to execute a Deed Poll in favour of Scheme shareholders. That practice has been followed in this case. The Scheme Implementation Deed requires Innocean to execute a Deed Poll in a prescribed form prior to the dispatch of the Explanatory Booklet to shareholders. Under the Deed Poll, Innocean covenants in favour of the holders of Scheme shares to perform the actions attributed to it under the Scheme and otherwise to comply with the Scheme as if Innocean were a party to it and undertakes in favour of each Scheme shareholder to provide the Scheme consideration to each of them in accordance with the terms of the Scheme.

19    The draft Explanatory Booklet (which includes the explanatory statement required by s 412 of the Act) provides a description of the Scheme and its advantages and disadvantages. It has been provided to and reviewed by the Australian Securities and Investments Commission (ASIC). On 3 October 2019, ASIC provided Wellcom with a letter in the usual form, known as a “preliminary no objection letter”. The letter states that, based on ASIC’s examination of the terms of the Scheme and the draft Explanatory Booklet, ASIC does not currently propose to appear to make submissions or intervene to oppose the Scheme at the first court hearing. Consistently with the terms of the letter, ASIC did not appear at the first court hearing.

20    The draft Explanatory Booklet records the recommendation of all the Wellcom directors, including Mr Sidwell, that shareholders vote to approve the Scheme, in the absence of a superior proposal, and that all Wellcom directors intend to vote in favour of the Scheme. The draft Explanatory Booklet also explains the nature of Mr Sidwell’s interest in the excluded shares (through his control of SIDCOM) and that the excluded shares will not participate in or vote on the Scheme and will not be acquired by Innocean if the Scheme is implemented. The draft Explanatory Booklet also explains the arrangements set out in the Standstill Deed entered into by SIDCOM, Innocean and Well.com Pty Ltd and the employment agreement proposed to be entered into by Wellcom and Mr Sidwell. The Explanatory Booklet further explains that, despite these arrangements, Mr Sidwell and the Board of Wellcom consider that it is appropriate for Mr Sidwell to make a recommendation on the Scheme given his position as Chairman of Wellcom and his status as the company’s largest shareholder.

21    An independent expert’s report has been obtained from PricewaterhouseCoopers (PwC), which is to be included as an annexure to the Explanatory Booklet. In the opinion of PwC, the Scheme is fair and reasonable and in the best interests of Wellcom’s shareholders.

22    It should also be noted that, on 3 April 2019, Wellcom established an Independent Board Committee (IBC) with overall responsibility for the evaluation, negotiation and implementation of the proposed Scheme. The members of the IBC are the non-executive directors of Wellcom other than Mr Sidwell, being Charles Anzurat (who acts as chair of the IBC), Kerry Brian-Smith and Janette Kendall. The IBC was formed in recognition that Mr Sidwell held an interest in approximately 46% of the share capital of Wellcom. The board considered it was appropriate for the directors other than Mr Sidwell to take responsibility for consideration of the proposed Scheme to ensure that the best interests of Wellcom and its shareholders as a whole were advanced through the development and evaluation of the proposed Scheme. As chair of the IBC, Mr Anzurat provided instructions on behalf of Wellcom to the company’s external legal, financial, accounting and other advisers in respect of the proposed Scheme.

C.    Power to make orders under section 411

23    Part 5.1 of the Act provides a procedure whereby an arrangement between a company and its members (a scheme) can be made binding on all members. Section 411 is the principal provision. The procedure involves three main steps:

(a)    an application to the Court for orders to convene a meeting or meetings of members to consider a resolution approving the scheme (s 411(1));

(b)    if such an order is made, the holding of the meeting or meetings of members (s 411(4)(a)); and

(c)    if the resolution is passed by the requisite majority, an application to the Court for an order approving the scheme (ss 411(4)(b) and 411(6)).

24    Section 411(1) of the Act confers a discretion on the Court to make an order convening a Scheme meeting if the following requirements are satisfied:

(a)    an arrangement is proposed between a Part 5.1 body and its members (or any class of them): see s 411(1);

(b)    an application for the order is made in a summary way by that body: see s 411(1);

(c)    14 days’ notice of the hearing of the application has been given to ASIC (or such lesser period as the Court or ASIC permits): see s 411(2)(a); and

(d)    the Court is satisfied that ASIC has had a reasonable opportunity to:

(i)    examine the terms of the proposed arrangement to which the application relates and a draft explanatory statement relating to the proposed arrangement; and

(ii)    make submissions to the Court in relation to the proposed arrangement and the draft explanatory statement: see s 411(2)(b). The explanatory statement referred to is that required by s 412: s 411(3).

25    In addition to these requirements of s 411, the procedure is regulated by s 412 and reg 5.1.01 and Schedule 8 to the Corporations Regulations 2001 (Cth) (the Regulations), and by the Federal Court (Corporations) Rules 2000 (Cth) (Rules). The Regulations and the Rules prescribe certain information which is required to be sent to the members about the Scheme.

26    I am satisfied that these requirements are met and that the Court’s power to make the convening orders is enlivened.

27    First, Wellcom, being a company registered under the Act, is a “Part 5.1 body”. It is well established that a scheme designed to effect an acquisition by one company of the shares in another may be an “arrangement” for the purposes of s 411(1) of the Act: see Re Foundation Healthcare Ltd (Re Foundation Healthcare) (2002) 42 ACSR 252 at 264 [39] per French J.

28    Second, Wellcom has made this application to the Court.

29    Third, Wellcom lodged a draft Explanatory Booklet (which included the explanatory statement for the Scheme required by s 412(1) of the Act) with ASIC on 16 September 2019. A stamped copy of the originating process was also sent to ASIC on 16 September 2019. Accordingly, the 14 day notification requirement has been met. As noted above, on 3 October 2019, ASIC provided Wellcom with a “preliminary no objection letter” stating that ASIC considers that it has had a reasonable opportunity to examine the terms of the proposed Scheme and the draft explanatory statement and to make submissions to the Court.

30    Fourth, as to compliance with the Rules:

(a)    in evidence is an historical search of Wellcom from the records of ASIC conducted on 14 August 2019, being no earlier than 7 days before the originating process was filed as required by r 2.4(2) of the Rules;

(b)    the Chairman and the alternate Chairman nominated for the proposed Scheme meeting have each made an affidavit containing the matters required by r 3.2 of the Rules; and

(c)    the proposed draft order for the convening of the Scheme meeting identifies the Scheme as required by r 3.3(1) of the Rules.

D.    Exercise of the Court’s discretion

31    The function of the Court in an application to convene a meeting is supervisory. In Re Amcor Ltd [2019] FCA 346 (Re Amcor), Beach J described the Court’s role at the first court hearing as follows (at [47]):

My function on an application to order the convening of a meeting is supervisory. At this stage I should generally confine myself to ensuring that certain procedural and substantive requirements have been met including dealing with adequate disclosure, with limited consideration of issues of fairness. But having said that, it is appropriate to consider the merits or fairness of a proposed scheme at the convening hearing if the issue is such as would unquestionably lead to a refusal to approve a proposed scheme at the approval hearing, that is the proposed scheme appears now to be on its face 'so blatantly unfair or otherwise inappropriate that it should be stopped in its tracks before going any further' (Re Foundation Healthcare Ltd (2002) 42 ACSR 252 at [44] per French J).

32    Before ordering a meeting, the Court needs to be satisfied of two matters:

(a)    first, that the scheme is fit for consideration by the proposed meeting in the sense that it is “of such a nature and cast in such terms that, if it achieves the statutory majority at the […] meeting the court would be likely to approve it on the hearing of a petition which is unopposed”: FT Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 at 72 per Street CJ; ASC v Marlborough Gold Mines Ltd (1993) 177 CLR 485 at 504; Re Coles Group Ltd (2007) 25 ACLC 1380 at [29]-[36] per Robson J; and

(b)    second, that “the members [are to be] properly informed as to the nature of the scheme before the Scheme meeting”: Re NRMA Insurance Ltd (No 1) (2000) 156 FLR 349 at [30]; 33 ACSR 595 (Re NRMA Insurance (No 1)); Re Foundation Healthcare at [38].

D.1    The Scheme is fit for consideration

33    The Scheme involves the transfer of 85% of the shares in Wellcom to Innocean in return for cash consideration. The question whether or not to accept particular consideration for shares is quintessentially a commercial matter for the members of the company to assess: Re Amcor at [50]. Members ought not be prevented from having the opportunity to do so provided that the Court can be satisfied that they are “acting on sufficient information and with time to consider what they are voting about”: Re English, Scottish and Australian Chartered Bank [1893] 3 Ch 385 at 409 per Lindley LJ, cited with approval in Re ACM Gold Ltd (1992) 34 FCR 530 at 534 per O’Loughlin J.

34    The draft Explanatory Booklet sets out reasons why members might vote for or against the Scheme. The Explanatory Booklet also contains:

(a)    a recommendation from all directors, including Mr Sidwell, that shareholders vote in favour of the Scheme;

(b)    a statement that all directors, including Mr Sidwell, intend to vote in favour of the Scheme; and

(c)    an independent expert report from PwC that the Scheme is fair and reasonable and in the best interests of Wellcom shareholders.

35    Notwithstanding those recommendations, the Court will also scrutinise the terms of a scheme to satisfy itself that there is no element of unfairness in those terms that would be likely to preclude the approval of the scheme if it came before the Court at a second hearing for approval.

36    In this case, the following particular features of the Scheme have been drawn to the attention of the Court:

(a)    the related transactions comprising the Standstill Deed and the proposed Option Deed and employment agreement with Mr Sidwell;

(b)    Mr Sidwell’s recommendation that Wellcom shareholders vote in favour of the Scheme;

(c)    any performance risk associated with the payment of the Scheme consideration to members;

(d)    the proposed treatment of the performance rights on issue;

(e)    other terms of the Scheme Implementation Deed (being the exclusivity provisions and the break fees); and

(f)    the deemed shareholder warranties in the Scheme.

37    For the reasons set out below, I am satisfied that none of these matters provide a reason for the Court to refrain from making an order convening the Scheme meeting.

The related transactions

38    As noted above, transactions related to the Scheme have been (or are proposed to be) entered into with Mr Sidwell, who is the founder of Wellcom, the largest shareholder and the current Chairman, and entities associated with Mr Sidwell. The commercial effect of those transactions is that certain shares in Wellcom in which Mr Sidwell has an interest (the shares held by SIDCOM) will be treated differently to the other shares in Wellcom.

39    All of the shares in which Mr Sidwell has an interest, other than the shares held by SIDCOM, will participate in the Scheme in like manner as all other shares and will be eligible to be voted at the Scheme meeting. Those shares comprise approximately 31% of the issued shares in Wellcom. However, the shares held by SIDCOM will be excluded from the Scheme and will not be eligible to be voted at the Scheme meeting. Those shares are the subject of the Standstill Deed, described above. If the Scheme is implemented, the Standstill Deed will continue in force and the shares will become subject to the Option Deed, also described above. Further, if the Scheme is implemented, it is intended that Innocean will enter into an employment agreement with Mr Sidwell.

40    A question arises whether the related transactions directly or indirectly confer additional benefits on Mr Sidwell that will not be enjoyed by other shareholders pursuant to the Scheme such that Mr Sidwell and the other shareholders do not have a common interest when meeting to consider the Scheme. The question is significant because Mr Sidwell controls a large number of shares that are eligible to participate in the Scheme and be voted at the Scheme meeting, comprising approximately 31% of Wellcom’s capital. At the same time, Mr Sidwell will be directly or indirectly party to other commercial arrangements if the Scheme is approved and implemented, being principally the Option Deed and the proposed employment agreement. A question arises whether there is a need for the holders of shares who are independent of Mr Sidwell to meet as a separate class from the holders of shares controlled by Mr Sidwell in order to consider and vote on the proposed Scheme in accordance with the requirements of s 411 of the Act.

41    Sub-sections 411(1) and (4) of the Act refer to a compromise or arrangement between, relevantly, members or a class of members. The word “class” is not defined in s 411. As observed by Bowen LJ in Sovereign Life Assurance Co v Dodd [1892] 2 QB 573 at 583:

The word 'class' is vague, and to find out what is meant by it we must look at the scope of the section, which is a section enabling the court to order a meeting of a class of creditors to be called. It seems plain that we must give such a meaning to the term 'class' as will prevent the section being so worked as to result in confiscation and injustice, and that it must be confined to those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to a common interest.

42    The relevant question is whether the legal rights and obligations of members are so dissimilar as to prevent them consulting together with a view to a common interest. Divergent commercial interests extrinsic to share membership do not warrant separate class meetings: Re NRMA Insurance (No 1) at [79] per Santow J; Re Opes Prime Stockbroking Ltd (No 2) (2009) 179 FCR 20 (Re Opes Prime (No 2)) at [64] per Finkelstein J. Even if members receive different treatment or benefits under or as a result of the Scheme, it does not necessarily follow that separate class meetings are required. It is a question of degree. As observed by Barrett J in Re Hills Motorway Ltd (2002) 43 ACSR 101 at [12]; (2003) 21 ACLC 35:

The test is thus not one of identical treatment. It is one of community of interest. The court must ask itself whether the rights and entitlements of the different groups, viewed in the totality of the scheme's context, are so dissimilar as to make it impossible for them to consult together with a view to their common interest. The focus is not on the fact of differentiation but on its effects. The extent and nature of the differentiation must be measured in terms of the effect on the ability to consult together in a common interest or, in other words, the ability to come together in a single meeting and to debate the question of what is good or bad for the constituency as a whole and where the common good lies. Only if the differentiation destroys that ability — the word used by Bowen LJ is “impossible” — does class distinction come to prevail.

43    The courts have also recognised that the “splitting” or “fracturing” of classes into smaller groups can undermine the object of obtaining decision by a large majority, by giving one group an effective veto over the wishes of the majority: Nordic Bank Plc v International Harvester Australia Ltd [1983] 2 VR 298 at 302; Re NRMA Insurance (No 1) at [80]; Re Opes Prime (No 2) at [66].

44    I am satisfied in the present case that s 411 does not require there to be separate class meetings. That is because the additional benefits to be received directly or indirectly by Mr Sidwell if the Scheme is implemented through the related transactions are not such as to preclude Mr Sidwell and the other members of Wellcomm having a community of interest in the Scheme proposal.

45    The first aspect of the related transactions is the proposed employment agreement between Innocean and Mr Sidwell, pursuant to which Mr Sidwell will continue on with the business as Executive Chairman. It is apparent that the commercial purpose of the proposed agreement is to enable Innocean, as the new owner of Wellcom, to benefit from Mr Sidwell’s knowledge of the business of Wellcom, skills and experience for a period of 3 years after the acquisition. The remuneration that will be payable to Mr Sidwell under the proposed agreement was the subject of affidavit evidence from Mr Paul Baillie who is a solicitor employed by Minter Ellison and holds the position of principal consultant, remuneration governance within that firm. Mr Baillie has extensive experience in advising companies, including a number of ASX 200 companies, in relation to executive remuneration and pay benchmarking. Mr Baillie prepared a report reviewing the remuneration proposed for Mr Sidwell as Executive Chairman against market data for that role in other ASX listed companies. Mr Baillie expressed the opinion that the remuneration proposed to be paid to Mr Sidwell for the Executive Chairman role is not unreasonable because it is within a competitive range to the median compared to remuneration for Executive Chairman roles in companies of a similar market capitalisation and it is significantly below remuneration levels for this role compared to a comparator group. On the basis of that evidence, I am satisfied that the remuneration proposed to be paid to Mr Sidwell reflects the work to be performed by him in the role of Executive Chairman and does not confer additional benefits such as to undermine a commonality of interest with other shareholders at the proposed Scheme meeting.

46    The second aspect of the related transactions is the put and call options over the excluded shares (being the shares held by SIDCOM) in the Option Deed. The issue to be considered on this aspect is the potential amount payable to SIDCOM upon exercise of either of the options. As noted earlier, the exercise price payable for each excluded share by Innocean upon exercise of the options depends on the circumstances of the exercise and the financial performance of Wellcom. If Innocean exercises the call option because Mr Sidwell ceases to be employed by the Wellcom Group prior to the first put period, the exercise price will be $6.70 per share, which is the same price as that which is payable for the Scheme shares pursuant to the Scheme. Accordingly, if the option were exercised in that circumstance, no benefit would be conferred upon SIDCOM that would not also be enjoyed by other shareholders. If the put or call option is otherwise exercised in accordance with the terms of the Option Deed, the exercise price will be a minimum price of $6.70 per share or a higher price if the stipulated EBITDA growth target for Wellcom is achieved. Again, if the growth target is not achieved and the minimum price becomes payable, no benefit is provided that is not also enjoyed by other shareholders.

47    That leaves for consideration the exercise price payable upon achievement of the EBITDA growth target. The target is satisfied if the compound annual growth rate of Wellcom's “Adjusted EBITDA” over the three financial years preceding the exercise of the option is more than 10%. The Adjusted EBITDA is Wellcom’s EBITDA adjusted for certain (generally non-recurring) revenues and expenses and is defined in the Option Deed. If the target is satisfied, the exercise price per share is the average of the Adjusted EBITDA over the three financial years preceding the exercise of the option multiplied by an agreed EBITDA multiple (being 12.4) divided by the total shares on issue. It follows that, if during the 7 year option period Wellcom’s EBITDA increases and achieves a compound annual growth rate over the three financial years preceding the exercise of the option of more than 10%, the exercise price payable for the excluded shares will exceed the $6.70 per share payable pursuant to the Scheme. However, I do not consider that that higher exercise price constitutes an additional benefit, indirectly received by Mr Sidwell, such as to undermine a commonality of interest with other shareholders at the proposed Scheme meeting. That is for three principal reasons. First, PwC assessed that an appropriate EBITDA multiple for the valuation of Wellcom shares is in the range of 11.5 to 12.5. The EBITDA multiple of 12.4 that is used to calculate the higher option exercise price in the Option Deed is in that range. Second, PwC assessed the value of Wellcom shares in the range of $5.87 to $6.38, with the value of $6.38 being based on an implied EBITDA multiple of 12.5. It follows that the Scheme consideration of $6.70 per share has an even higher implied multiple (approximately 13.1). Therefore, the EBITDA multiple of 12.4 that is used to calculate the higher option exercise price in the Option Deed is lower than the implied multiple being received by shareholders pursuant to the Scheme. Third, while the excluded shares have the opportunity to benefit from any EBITDA growth achieved by Wellcom over the term of the Option Deed, the growth is not assured and SIDCOM must forego the opportunity of receiving cash consideration pursuant to the Scheme that could be reinvested.

48    In my view, therefore, the interests of Mr Sidwell in the related transactions do not require separate class meetings.

Mr Sidwell’s recommendation to Wellcom shareholders

49    As noted above, the draft Explanatory Booklet states that Mr Sidwell has provided, along with the other directors of Wellcom, a recommendation to Scheme shareholders that they vote in favour of the Scheme. The interests of Mr Sidwell in Wellcom, and the related transactions to which he will become party, were set out in the Chairman’s letter in the Explanatory Booklet in the following terms:

To assist in the transition to Innocean ownership and to maintain 'business as usual' for current and future clients of Wellcom, I am continuing on at Wellcom under Innocean's ownership as [Executive Chairman] and as a shareholder. I propose to enter into an employment agreement with Wellcom. I will retain an interest in the Excluded Shares equal to 15% of the total issued share capital of Wellcom on a fully diluted basis which are legally held by SIDCOM, subject to the Standstill Deed and Option Deed. Refer to Sections 10.6(b) and 10.6(c) for further information on the Standstill Deed and the Option Deed (under which SIDCOM may receive more than $6.70 per share in 3 to 7 years in the future if (and only if) certain future EBITDA CAGR targets are achieved by Wellcom and my employment with Wellcom continues until the date that SIDCOM is paid for its shares) and to Section 10.6(d) for the proposed material terms of my employment agreement. The Excluded Shares are eligible to receive the Dividends but will not participate in or vote on the Scheme and will not be acquired by Innocean if the Scheme is implemented. I also have an interest in 12,361,887 Wellcom Shares which I intend to vote or procure are voted in favour of the Scheme. You should have regard to these arrangements when considering my recommendation on the Scheme, which appears throughout this Explanatory Booklet. I, and the Wellcom Board, consider that, despite these arrangements, it is appropriate for me to make a recommendation on the Scheme given my position as Chairman of Wellcom and Wellcom's largest shareholder (through my controlled or related entities).

50    Information to that effect is also set out in the following sections of the draft Explanatory Booklet: (i) the section titled 'Overview of this Explanatory Booklet'; (ii) the section titled 'Key reasons to vote in favour of the Scheme'; (iii) section 1.3 titled 'Directors' recommendation and intentions'; (iv) section 2.2 titled 'Directors' recommendation and intentions'; (v) section 2.6 titled 'What are your choices?'; (vi) the answer to the frequently asked questions 'What do the Wellcom Directors recommend?' and 'Do any Wellcom Directors have an additional interest in the Scheme?'; (vii) section 4.2 titled 'Your vote is important'; (viii) section 5.7(c) titled 'Substantial shareholders'; (ix) section 10.3 titled 'Directors' interest and dealings in Wellcom Securities'; and (x) section 10.6 titled 'Directors' interest in agreements connected with or conditional on the Scheme'.

51    In a number of recent decisions, courts have considered whether a director who is to receive an additional financial benefit if a Scheme is approved should make a recommendation to members about voting in favour of the Scheme. Some divergence in views has emerged, although the divergence may be more apparent than real.

52    In Re SMS Management and Technology Limited [2017] VSC 257 (Re SMS Management), Robson J concluded that, in the circumstances of that case, it was appropriate for the managing director of the company to make a recommendation notwithstanding that he stood to receive an additional payment if the Scheme was approved (at [26]). Justice Robson considered that the disclosure of the managing director’s additional benefit was sufficiently prominent that it enabled members to understand that he stood to benefit from the Scheme.

53    In Re Gazal Corporation Limited [2019] FCA 701 (published on 24 May 2019) (Re Gazal), Farrell J expressed reservations about that approach (at [29]-[34]). Her Honour expressed the view that the better practice is for a director who stands to receive an additional benefit from the Scheme to decline to make a recommendation to shareholders as to how they should vote and to explain that the reason for that is that the director will receive a benefit which other shareholders will not receive if the Scheme is approved. The director could, and should, put forward reasons why a member might vote in favour a Scheme (along with reasons why they might not) and state what the director’s own voting intentions are, but without making a recommendation to members as to how they should vote. Her Honour noted the practice that had emerged for the Scheme Implementation Deed to contain a covenant that the Scheme company would ensure that the Explanatory Booklet contained a statement that each director recommends that members approve the Scheme, but observed that that practice does not eliminate the director’s individual obligation to consider whether he or she has an interest different from other shareholders which would properly preclude making a voting recommendation (at [32]). Despite the reservations expressed by Farrell J in that case, ultimately her Honour approved the Scheme.

54    The same issue arose again before Farrell J in Re Ruralco Holdings Limited [2019] FCA 878 (published on 11 June 2019) (Re Ruralco) where her Honour convened a Scheme meeting. Her Honour observed (at [28]) that it was an issue for the interested director to decide whether to make a recommendation or to decline to do so and explain why, but it was for the Court to be satisfied that the disclosure in the Scheme Booklet was adequate and not misleading. In that case, her Honour was satisfied that the disclosure of the director’s interest was sufficient.

55    Farrell J’s observations in Re Gazal were referred to with approval by Vaughan J in Re Nzuri Copper Ltd [2019] WASC 189 (published on 5 June 2019) at [83]-[89] and Re Navitas Ltd (No 2) [2019] WASC 218 (published on 21 June 2019) at [31]-[38], and subsequently by me in Re Spicers Ltd (No 2) [2019] FCA 1110 (published on 19 July 2019) at [44]. However, in Re Kidman Resources Ltd [2019] FCA 1226 (Re Kidman) (published on 7 August 2019), O'Callaghan J expressed disagreement with certain of the observations of Farrell J in Re Gazal and concluded that the correct position was explained by Robson J in Re SMS Management (at [105]). His Honour observed that the combined effect of s 412(1)(a) of the Act, reg 5.1.01(1)(b) and item 8301(a) of Schedule 8 to the Regulations is such that, ordinarily, a director is required to make a recommendation to members (at [110] and [111]). His Honour concluded that the appropriate way to deal with additional benefits that may be received by directors is to ensure that the benefits are sufficiently disclosed to members in the scheme booklet (at [115]).

56    The issue was revisited by Vaughan J in Re Mod Resources Ltd [2019] WASC 326 (Re Mod Resources) (published on 10 September 2019). After referring to the recent decision of O’Callaghan J in Re Kidman, his Honour observed (at [86]):

It is apparent that there is now a divergence of views as to the appropriateness of an individual director joining in a unanimous board resolution to support a scheme in circumstances where, by reason of a bonus or similar benefit, the director has an additional and different interest to the members in the approval of the scheme. This is not an appropriate occasion to enlarge or seek to reconcile that debate. To the extent necessary I have already described my views in Re Nzuri Copper Ltd; Ex parte Nzuri Copper Ltd and Re Navitas Ltd; Ex parte Navitas Ltd [No 2]. In my view the issue is fact sensitive.

57    A day later in Re Villa World Ltd [2019] NSWSC 1207 (Re Villa World) (published on 11 September 2019), after referring to the above cases, Black J expressed the following views on the issue (at [38]-[40]):

On balance, and for three reasons, I prefer the approach adopted in Re SMS Management & Technology Ltd above and Re Kidman Resources Ltd above to the approach adopted in Re Gazal Corporation Ltd above and Re Navitas Ltd (No 2) above. First, it seems to me that reg 8301(a) of Schedule 8 of the Corporations Regulations contemplates that a director should make a recommendation and give reasons for doing so, unless he or she does not feel justified in doing so; and, as I will note below, there would be real inconsistency in a director at once supporting a scheme as a member of the board and then taking the position in the scheme booklet that he or she was not justified in making a recommendation about it to shareholders.

Second, I am not persuaded that there is or should be any general rule or principle that it is preferable that a director should not make a recommendation to shareholders on the basis of an interest in the outcome of the scheme arising from incentive or performance rights or the like. It seems to me that in many, or most cases, shareholders will benefit from such a recommendation, with appropriate disclosure as to the nature of the interest to allow them to assess the weight to be given to it. The importance of such disclosure was, of course, recognised in each of the cases to which I have referred above and, in Re Ruralco Holdings Ltd above, Farrell J made orders convening a Scheme meeting although a director had there recommended to shareholders that they vote in favour of the scheme, where the director would receive an immediate cash payment under an executive performance plan as a result of implementation of the scheme.

Third, there will be many cases where an executive director of a scheme company, who has an interest in the outcome of a scheme arising from incentive or performance rights or the like, would properly participate in the board's decision whether to go forward with the proposed scheme, as distinct from any decision as to how his or her incentive or performance rights should be treated if the scheme is implemented. Possibly rarely, a director in that situation may be entitled to participate in board decisions concerning the proposed scheme because the benefit arising from any incentive or performance rights or the like that would arise from implementation of the scheme is not a material personal interest for the purposes of s 195 of the Corporations Act, and the company's constitution permits his or her participation after he or she has disclosed his or her interest. Second, a director in that situation may be entitled to participate in such board decisions because that interest falls within an exception in s 195(1A), where it is not required to be disclosed under s 191 of the Act [footnote omitted], and the company's constitution permits his or her participation. Third, a director in that situation may be entitled to participate in such board decisions because other directors have authorised his or her participation in them in the manner contemplated by s 195(2) of the Corporations Act. It seems to me that, where a director was entitled to and did participate in a decision that a company should go forward with a scheme, there would be little utility and real inconsistency in then preventing that director from making a recommendation to shareholders consistent with the view that he or she took as a member of the board, subject to appropriate disclosure of his or her personal interest in the explanatory materials for the scheme.

58    As was the case before Vaughan J in Re Mod Resources, this is not an appropriate occasion to seek to reconcile the apparent divergence in views on this issue. That is for two reasons. First, on either view, I do not consider that Mr Sidwell’s interests, manifested in the related transactions set out above, are of such a nature that ought to preclude him from making a voting recommendation to members. The evidence shows that the remuneration payable to Mr Sidwell for his services as Executive Chairman is reasonable. The evidence also shows that the price payable for the excluded shares (being the shares held by SIDCOM) pursuant to the Option Deed will either be the same as that received by members pursuant to the Scheme or will be calculated on a broadly equivalent (indeed lower) basis in terms of earnings multiple. It is also relevant that Mr Sidwell will participate in the Scheme in respect of approximately two thirds of the shares in which he has an interest. In those circumstances, Mr Sidwell has a common interest with other members in the Scheme and the related transactions do not undermine his ability to make a recommendation in the interests of members generally. I am also satisfied that the benefits to which Mr Sidwell is entitled pursuant to the related transactions have been adequately disclosed in the draft Explanatory Booklet. The second reason is that I have not heard full argument on the issue. Given the views I have expressed on the facts of this case, it was unnecessary for Senior Counsel for Wellcom to argue the point comprehensively at the hearing. Further, there was no contradictor at the hearing and therefore I would not have had the benefit of full argument in any event.

59    With those qualifications, I will make a few short observations directed to my view that the divergence in the authorities may be more apparent than real. The Court’s supervisory jurisdiction with respect to the approval of schemes of arrangement under s 411 of the Act is broad. It is concerned with both the commercial substance of the proposed arrangement, including any related transactions, and the procedural steps to be taken in convening and conducting the required members’ meeting including information disclosed to members. The making of voting recommendations by directors to members in the explanatory statement is likely to be influential when members consider a scheme. It is for that reason that reg 8301 of the Regulations requires the explanatory statement to include such a statement from each director, subject to specified exceptions including where the director does not consider himself or herself justified in making a voting recommendation. The voting recommendation is typically given considerable prominence in the explanatory statement. In my view, the Court’s supervisory jurisdiction under s 411 extends to the content of any such voting recommendation and the circumstances in which the recommendation is made. There may be circumstances in which a director of the company ought not to make a voting recommendation to members about a proposed scheme because of the nature and extent of additional benefits that will be received by the director if the scheme is implemented. The circumstances may be such that it is unrealistic to consider that a director can bring an unbiased mind to the voting recommendation, and it would be unfair to members to sanction such a recommendation being made in the context of a scheme meeting. In some circumstances, disclosure of the additional benefits may not be sufficient. As Vaughan J observed in Re Mod Resources, the question is fact sensitive. I do not understand Farrell J to be saying anything different in Re Gazal and I do not read Robson J’s reasons in Re SMS Management as precluding the exercise of the Court’s supervisory jurisdiction in that manner.

60    Contrary to the view recently expressed by Black J in Re Villa World, I respectfully do not understand there to be any inconsistency in a director supporting a scheme as a member of the board (if the director is permitted to do so notwithstanding the additional benefits to be received by the director) and then taking the position in the scheme booklet that he or she is not justified in making a voting recommendation to members. The decision to support a scheme as a director is no more and no less than a decision to put the scheme to members for their consideration. The approval of a scheme is a decision for the members, not a decision for the board. Board approval certainly carries with it an opinion that the approving directors consider that the scheme is worthy of consideration by members. A director may hold that opinion while also recognising that the director’s view on whether members should vote to approve the scheme may not be unbiased by reason of additional benefits to be received by the director.

Performance risk

61    In considering whether to approve a scheme involving the participation of a person other than the plaintiff company and its members (here, Innocean), it is important to ensure that the other party is bound to perform the role assigned to it and that its obligations are able to be enforced: see for example Re Amcor at [53].

62    The obligation of Innocean is to pay cash consideration for the shares in Wellcom being transferred to it pursuant to the Scheme. The maximum Scheme consideration is $225.9 million based on the amount of $6.70 per share multiplied by the number of Wellcom shares anticipated to be on issue on the Scheme record date. Section 6.5 of the draft Explanatory Booklet explains that the proposed funding of the Scheme consideration payable by Innocean is through a combination of cash and cash equivalents held by Innocean. As at 30 June 2019, Innocean held KRW 686 billion (approximately AUD $835 million) in cash, cash equivalents and short-term financial instruments globally, including KRW 320 billion (approximately AUD $389 million) in cash and cash equivalents alone. Section 6.5 of the Explanatory Booklet states that Innocean considers it has reasonable grounds, on the basis of these arrangements, to believe that it will be able to meet its obligations to fund the Scheme consideration if the Scheme is approved. Mr Tae Young Kim, the Senior Vice President of Innocean, gave evidence by affidavit that the statement in the draft Explanatory Booklet concerning the cash and cash equivalents held by Innocean is verified by Innocean’s annual report. On the basis of that evidence, I am satisfied that the financial position of Wellcom is such that it would, in the ordinary course, be able to satisfy its obligation to pay the Scheme consideration if the Scheme is approved.

63    Wellcom has also adopted accepted safeguards to address the performance risk arising from the obligation of Innocean to pay the Scheme consideration. First, Innocean has executed a Deed Poll by which it is bound to perform the roles assigned to it under the Scheme with respect to the provision of the Scheme consideration. Further, as Innocean is a foreign corporation, an opinion has been obtained from Kang-Ho Jhe of the law firm Kim Chang & Lee as to the proper execution and enforceability of the Deed Poll in the Republic of Korea. Second, the terms of the Scheme are such as to prevent any transfer of shares to Innocean unless and until the Scheme consideration has been paid to Wellcom and received by Scheme shareholders: clauses 4.2, 4.3, 4.4(a) and 7.7(a) of the Scheme.

64    I am therefore satisfied that Innocean is legally bound to perform its obligations to pay the Scheme consideration, it has sufficient funding in order to do so, and the Scheme and the Scheme Implementation Deed contain effective provisions to ensure that any transfer of shares to Innocean will not take place unless and until the Scheme consideration has been received by Wellcom and paid to Scheme shareholders.

Performance rights

65    Wellcom has issued a total of 443,915 performance rights to five executives of Wellcom, the details of which are set out in section 8.6 of the draft Explanatory Booklet. The performance rights were issued under Wellcom’s Long Term Incentive Plan. The performance rights are not quoted on the ASX or any other financial market. In essence, if the performance rights vest in the holder (which is dependent on satisfaction of stipulated vesting conditions), they entitle the holder to be issued a fully paid ordinary share in Wellcom on a one for one basis.

66    Under the Scheme Implementation Deed, Wellcom and Innocean have agreed that, subject to the Scheme being approved by shareholders, the holders of the performance rights will be entitled to exercise those rights and to be issued shares in Wellcom prior to the Scheme becoming effective and thereby to participate in the Scheme in respect of the newly issued shares. The agreement of Wellcom is consistent with clause 12 of the Long Term Incentive Plan Rules which govern the performance rights, which empowers the board of Wellcom to determine how performance rights will be treated in the circumstances of a change in ownership of the company, including by waiving vesting conditions. In those circumstances, the agreed treatment of the performance rights does not raise any issues in respect of the Court’s approval of the Scheme.

Exclusivity arrangements

67    The Scheme Implementation Deed contains various provisions by which Wellcom has granted a degree of exclusivity to Innocean in relation to the proposed acquisition of its shares. These are set out in cl 16 of the Scheme Implementation Deed and comprise:

(a)    a “no shop” restriction (cl 16.2);

(b)    a “no talk” restriction (cl 16.3);

(c)    a “no due diligence” restriction (cl 16.4);

(d)    the “notification” right (cl 16.6); and

(e)    the “matching” right (cl 16.7).

68    Such provisions are now commonly found in merger implementation agreements: Re Toll Holdings [2015] VSC 123 at [36] and in Re Skilled Group Ltd (No 1) (2015) 113 ACSR 525 at [50].

69    I am satisfied that the exclusivity arrangements agreed between Wellcom and Innocean are reasonable and have been adequately disclosed in the draft Explanatory Booklet, consistently with the principles stated by Santow J in Re Arthur Yates & Co Ltd (2001) 36 ACSR 758 at [9] and in Re Healthscope Ltd [2010] VSC 367 at [19]-[22] per Davies J. Accordingly, they do not prevent the Court from making an order to convene a meeting of members to vote on the Scheme.

Break Fees

70    Wellcom and Innocean have agreed the payment to each other of break fees in certain circumstances. As I recently observed in Re DuluxGroup Ltd [2019] FCA 961 (Re DuluxGroup) at [31]:

Break fees have become a common feature of commercial transactions of this nature. The effect of such fees on the interests of shareholders has been considered by the courts in connection with schemes of arrangement and by the Takeovers Panel in connection with share acquisitions, the control of companies and the purposes of Chapter 6 of the Act. In general terms, the courts and the Takeovers Panel accept that break fees can be justified by reference to the costs incurred by the offeror and the benefit that an offer may confer on the members of the target company by increasing its value. However, such fees may adversely affect the interests of shareholders if the amount of the fee is such that it is likely to coerce shareholders into agreeing to a scheme or to deter the making of a competing offer for the company’s shares: see Re SFE Corporation Ltd (2006) 59 ACSR 82 at [7] per Gyles J; Re APN News & Media Ltd (2007) 62 ACSR 400 at [37]-[55] per Lindgren J; Re Toll Holdings Ltd [2015] VSC 123 at [27]-[30] per Robson J; Takeovers Panel, Guidance Note 7 – Lock Up Devices (Issue 4, 11 February 2010) at [7]. In its current Guidance Note, the Takeovers Panel has stated that, in the absence of other factors, a break fee not exceeding 1% of the equity value of the target is generally not unacceptable. The 1% guideline is not, of course, decisive and courts have ordered a meeting to consider a scheme notwithstanding a break fee that exceeds that level: Re Cytopia Ltd [2009] VSC 560 at [12]-[18] per Davies J (in that case, the fee of $500,000 was approximately 4.57% of the equity value of the target).

71    Under clause 14 of the Scheme Implementation Deed, Wellcom has agreed to pay Innocean a break fee of $2.4 million (exclusive of GST) if the Scheme is not implemented by reason that: (i) the Wellcom directors change their recommendation (other than by reason of a Court order or the independent expert forming the opinion that the Scheme is not in the best interests of shareholders); (ii) Wellcom accepts a competing proposal; (iii) a competing proposal is announced and is ultimately successful; or (iv) Innocean has terminated the Deed by reason of default or breach of warranty by Wellcom. The break fee is not payable merely because the Scheme is not approved by members or the Court. The Scheme Implementation Deed also provides that the break fee payable by Wellcom to Innocean will be the maximum liability of Wellcom to Innocean and payment by Wellcom of the break fee represents the sole and exclusive remedy of Innocean (and its subsidiaries) in connection with the Deed (cl 14.3(e)).

72    I am satisfied that the terms of the break fee payable to Innocean is not such as to render the Scheme unfair to members. Importantly, payment of the fee is not triggered if the Scheme is rejected by Wellcom shareholders and therefore the fee should not influence their decision. Further, as the fee is about 0.9% of the equity value of Wellcom, it would not be expected to deter a competing offer being made for the shares. Mr Anzurat gave evidence that the Wellcom IBC ultimately determined that the break fee amount of $2.4 million (exclusive of GST) was reasonable and appropriate in the circumstances. The Wellcom IBC believes that the implementation of the Scheme will provide benefits to Wellcom and its shareholders and that it was appropriate for Wellcom to agree to the break fee to secure lnnocean's participation in the Scheme and to enable the Scheme to be submitted to shareholders for their consideration.

73    Clause 15 of the Scheme Implementation Deed provides that Innocean must pay Wellcom a break fee of $2.4 million (exclusive of GST) if Wellcom terminates the Deed by reason of default or breach of warranty by Innocean, or if Innocean fails to pay the Scheme consideration in accordance with the terms of the Scheme Implementation Deed and the Deed Poll. I do not consider that the break fee payable by Innocean and the limitation of Innocean’s liability for default to payment of the break fee is commercially unfair to shareholders such that the Court should refrain from making an order convening the Scheme meeting.

Shareholder warranties

74    Clause 7.2(b) of the Scheme provides that each Scheme shareholder is taken to have warranted to Wellcom, in its own right and for the benefit of Innocean, that:

(a)    all of its shares which are transferred to Innocean under the Scheme will be fully paid and free from all encumbrances and restrictions on transfers of any kind;

(b)    it has full power and capacity to transfer its shares to Innocean together with any rights attaching to those shares; and

(c)    it has no existing right to be issued any Scheme shares or any other form of Wellcom securities, other than, in the case of any Scheme shareholder who is also the holder of performance rights, the right to be issued Wellcom shares on the exercise of those performance rights before the Scheme record date in accordance with their terms.

75    The warranties are in the usual form for a transaction of this nature and are acceptable as long as they are sufficiently disclosed in the explanatory statement to shareholders: Re Hostworks Group Ltd (2008) 26 ACLC 137; Re Macquarie Private Capital A Ltd (2008) 26 ACLC 366; Re Dyno Nobel Ltd [2008] VSC 154; Re Biosceptre International Limited [2013] FCA 1429 at [22]. I am satisfied that the warranties have been sufficiently disclosed in section 1.7 of the draft Explanatory Booklet.

D.2     Will Wellcom shareholders be properly informed?

76    The second matter relevant to the exercise of the Court's discretion to convene the Scheme meeting is the adequacy of the information to be provided to shareholders. There are three aspects to the requirements of s 412(1) of the Act.

77    First, the explanatory statement must explain the effect of the compromise or arrangement and, in particular, state any material interest of the directors and the effect on those interests of the compromise or arrangement in so far as it is different from the effect on the like interests of other persons: see s 412(1)(a)(i). These matters are addressed in sections 10.3 to 10.6 of the draft Explanatory Booklet.

78    Second, the explanatory statement must set out the prescribed information. That prescription is in reg 5.1.01 and Schedule 8 (Part 3) of the Regulations. Mr Oude-Vrielink, a partner of Minter Ellison, the solicitors for Wellcom, and Mr Anzarut adduced in evidence a checklist showing the specific requirements of the Act, the Regulations and ASIC Regulatory Guide 60 and the location in the draft Explanatory Booklet of the statements which comply with those requirements.

79    Third, the explanatory statement must set out any other information that is material to the making of a decision whether or not to agree with the compromise or arrangement, being information which is within the knowledge of the directors and has not previously been disclosed: see s 412(1)(a)(ii). Mr Oude-Vrielink and Mr Anzarut gave evidence concerning the verification procedures undertaken by Wellcom to ensure that the information in the Explanatory Booklet concerning Wellcom is complete and accurate in all material respects, is not misleading or deceptive in any material respect and that there is no material omission which renders that information misleading or deceptive in any material respect. Mr Tae Young Kim gave similar evidence in relation to the information in the draft Explanatory Booklet concerning Innocean.

80    Wellcom proposes to send the Explanatory Booklet either by hard copy post or by email to shareholders. Of the 1,180 shareholders listed on the Wellcom register as at 25 September 2019, 748 have elected to receive notices of meeting and other shareholder communications by email. Wellcom intends to dispatch an electronic copy of the Explanatory Booklet to the shareholders who have made that election.

81    As the Scheme is purely a members' scheme, it is necessary that the explanatory statement be registered by ASIC before the notice of meeting is sent to Wellcom shareholders: see s 412(6). Before registering the statement, ASIC must conclude that it appears to comply with the requirements of the Act and must form the opinion that the statement does not contain any matter that is false in a material particular or materially misleading in the form and context where it appears: see ss 412(7) and 412(8). Wellcom has provided the draft Explanatory Booklet to ASIC, together with all amendments.

82    Schemes of arrangement are not required to be the subject of a report by an independent expert unless the parties have a common director or the acquiring company controls 30% of the scheme company: see reg 5.1.01 and Sch 8, cl 8303 of the Regulations. Neither is applicable to the Scheme in this case. Nevertheless, Wellcom has obtained a report from an independent expert, PwC, as to whether, in its opinion, the Scheme is in the best interests of Wellcom shareholders. PwC opines that the Scheme is fair and reasonable and in the best interests of Wellcom shareholders.

83    Sub-section 411(1) provides that, if the Court has made an order convening a meeting or meetings of members or creditors, the Court “may approve the explanatory statement.” The practice of courts varies in this respect. Consistent with recent practice in this Court, I have not made an order approving the Explanatory Booklet: see Re Amcor at [114]-[115]; Re Verdant Minerals Ltd [2019] FCA 556 at [84]; Re Healthscope Ltd [2019] FCA 542 at [189]; Re DuluxGroup at [63].

E.    Conclusion

84    In conclusion, I am satisfied that the Scheme is of such a nature and cast in such terms that, if it achieves the statutory majorities at the Scheme meeting, the Court would be likely to approve it and that it is therefore appropriate to make the orders sought by Wellcom.

Associate:

Dated:    18 October 2019