Federal Court of Australia

3Q Holdings Limited, in the matter of 3Q Holdings Limited (No 2) [2022] FCA 1359

ORDERS

THE COURT NOTES THAT:

1.    There has been produced to the Court a statement in writing by the Australian Securities and Investments Commission (ASIC) in accordance with s 411(17)(b) of the Corporations Act 2001 (Cth) stating that ASIC has no objection to the Scheme of Arrangement between the plaintiff and its shareholders (excluding Elabrook Pty Limited), which was agreed to at the Scheme Meetings held on 4 November 2022.

THE COURT ORDERS THAT:

2.    Pursuant to s 411(4)(b) of the Act the Scheme of Arrangement made between the plaintiff and its shareholders (excluding Elabrook Pty Limited) be approved in the form of Annexure D of the Scheme Booklet which was tendered and marked Exhibit 1 at the first court hearing on 13 October 2022.

3.    The plaintiff lodge with ASIC a copy of the approved Scheme of Arrangement at the time of lodging a copy of these orders.

4.    Pursuant to section 411(12) of the Act, the plaintiff be exempted from compliance with the requirement of section 411(11) of the Act.

5.    These orders be entered forthwith.

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

REASONS FOR JUDGMENT

CHEESEMAN J:

INTRODUCTION

1    These reasons relate to the second court hearing in the application by 3Q Holdings Limited under s 411(4) of the Corporations Act 2001 (Cth) for approval of the Scheme of arrangement between 3Q and holders of its ordinary shares excluding Elabrook Pty Ltd (Scheme Shareholders). The Scheme is directed to Vela Software Group Pty Ltd, a wholly owned subsidiary of Constellation Software Inc. (CIS), a company incorporated in Canada, acquiring all of the Scheme Shares.

2    On 13 October 2022, I made convening orders for a General Scheme Meeting and an Employee Scheme Meeting for the purpose of the Scheme Shareholders considering and, if thought fit, approving the Scheme: 3Q Holdings Limited, in the matter of 3Q Holdings Limited [2022] FCA 1259 (3Q (No 1)). The Scheme Meetings were held on 4 November 2022 and Scheme Shareholders voted in favour of the Scheme in the requisite statutory majorities.

3    On 9 November 2022, the day of the second court hearing, I made orders approving the Scheme under s 411(4)(b) of the Act, substantially in the form sought by 3Q. These are my reasons for doing so.

THE SCHEME

4    The Scheme and the Elabrook Sale, which is a precondition to the Scheme, are described in 3Q (No 1) at paragraphs [13] to [36]. That detail is not repeated here. Familiarity with 3Q (No 1) is assumed for the purpose of these reasons. For present purposes, it suffices to repeat that the Scheme is complicated: 3Q (No 1) at [13]. Unless otherwise indicated, defined terms used in these reasons have the same meaning as in 3Q (No 1).

RELEVANT PRINCIPLES

5    I gratefully adopt the recent summary of the applicable principles in respect of approving a scheme of arrangement by O’Callaghan J in Re PayGroup Limited (No 2) [2022] FCA 1350 at [29] to [30]:

29     The role of the court in approving a scheme of arrangement is supervisory. The court is not bound to approve it merely because it previously made orders for the convening of a meeting or because the statutory majorities were achieved. That said, as Jacobson J observed in Re Seven Network Limited (No 3) [2010] FCA 400; (2010) 267 ALR 583 at 588 [32], “the court will usually approach the task upon the basis that the members are better judges of what is in their commercial interests than the court”.

30 The cases establish that the following matters should be taken into account, namely that:

(a) the orders of the court convening the scheme meeting were complied with;

(b)     the resolution to approve the scheme was passed by the requisite majority, and whether other statutory requirements have been satisfied;

(c) all conditions to which the scheme is subject (other than court approval and lodgement of the court’s orders with ASIC) have been met or waived;

(d) the scheme is fair and reasonable so that an intelligent and honest shareholder, properly informed and acting alone, might approve it;

(e) there was full and fair disclosure to shareholders of all information material to the decision whether to vote for or against the scheme;

(f)     the plaintiff has brought to the attention of the court all matters that could be considered relevant to the exercise of the court’s discretion; and

(g) the court is satisfied under s 411(17) that the scheme has not been proposed to avoid Chapter 6 of the Act, or that the plaintiff has a statement from ASIC that it has no objection to the scheme.

CONSIDERATION

6    I now turn to consider, in the context of the present application, each of the matters relevant to making orders to approve the Scheme under s 411(4)(b) of the Act.

Outcome of the Scheme Meetings

7    The evidence adduced by 3Q demonstrated that the requisite majorities for the purposes of s 411(4)(a)(ii) of the Act were attained at both Scheme Meetings.

8    The General Scheme Meeting and the Employee Scheme Meeting were held at 10:00 am and 10:30 am respectively on 4 November 2022.

9    The results of the votes cast at the General Scheme Meeting were:

10    The results of the votes cast at the Employee Scheme Meeting were:

11    As foreshadowed at the first court hearing, 3Q “tagged” the votes of Shaun and David Rosen and the entities related to them. Shaun and David Rosen and entities associated with them hold approximately 4.4% of the 3Q Shares. Shaun and David Rosen and entities associated with them voted at the Employee Scheme Meeting in favour of the resolution agreeing to the Scheme. At the second court hearing, the Court has a discretion to discount or discard the tagged votes. The result of the Employee Scheme Resolution, excluding the tagged votes, would have been the same, even if the tagged votes were disregarded. Excluding the tagged votes, 100% of the shareholders who voted at the Employee Scheme Meeting and 100% of votes cast on the Employee Scheme Resolution were in favour of the resolution. Accordingly, the requisite majorities would have been achieved without the votes cast by Shaun and David Rosen or their related entities.

12    Elabrook was an excluded shareholder and was not eligible to vote at the Scheme Meetings. Elabrook did not vote at the Scheme Meetings either in person or by proxy.

13    The Scheme was very strongly approved by the members who voted in person or by proxy at each of the Scheme Meetings. The requisite statutory majorities were attained at each of the Scheme Meetings.

14    It is convenient to next address the issue of voter turnout.

Shareholder turnout

15    In the present case, shareholder turnout at the General Scheme Meeting was low. The percentage of eligible shareholders who voted at the General Scheme Meeting was 9.09% (being 16 of 176 eligible shareholders), and the percentage of eligible shares that were voted was 29.77% (being 20,407,057 of 68,557,162 eligible shares).

16    The turnout at the Employee Scheme Meeting was significantly better. The percentage of eligible shareholders that voted at the Employee Scheme Meeting was 27.38% (being 23 of 84 eligible shareholders), and the percentage of eligible shares that were voted was 81.79% (being 19,610,944 of the 23,977,441 eligible shares).

17    At the second court hearing, the Court usually considers the number of shareholders who attended the scheme meeting (or in this case, meetings). Where there has been low shareholder turnout, the Court will scrutinise whether this indicates that there has been a procedural irregularity: Re TriAusMin Limited (No 2) [2014] FCA 833 at [10]-[11]. In doing so, it is relevant to consider whether members have been deterred from attending or voting at the meeting: Re Cape plc [2006] EWHC 1446 at [20].

18    The Court will not presume that an apathetic shareholder who chooses not to vote is antagonistic to the scheme or in need of protection: Re Matine Ltd (1998) 28 ACSR 268 at 295, cited with approval in Re Seven Network (No 3) [2010] FCA 400; 267 ALR 583 at [61].

19    Shareholder turnout must be viewed in the context of the particular company’s corporate history. Where the turnout represents a comparative increase on attendance levels at previous annual general meetings that is a relevant consideration: Re Auzex Resources Limited (No 2) [2012] QSC 101 at [18].

20    Here, the shareholder turnout at the Scheme Meetings represents an increase on the annual general meetings of 3Q held in 2020 and 2021. Specifically (excluding Elabrook):

(1)    the percentage of eligible holders voting in the Scheme (9.09% at the General Scheme Meeting, and 27.38% at the Employee Scheme Meeting, respectively) is higher than the comparable percentages in the last two annual general meetings, where the figure for all shareholders was 4.9%; and

(2)    the percentage of eligible shares voting in the Scheme (29.77% at the General Scheme Meeting, and 81.79% at the Employee Scheme Meeting, respectively) is higher than the percentages in the 2020 and 2021 annual general meetings (20.23% and 20.66% respectively).

21    In the circumstances, I was satisfied that there was no basis for inferring that there was any flaw in the convening procedure or that shareholder turnout was any cause for concern. This was because:

(1)    the percentage of votes cast which were in favour of the scheme resolutions was high;

(2)    save for a minor error which is addressed at paragraph [27] below, there is no evidence to suggest any irregularity in the dispatch of the Scheme Booklet affected shareholder turnout;

(3)    those voting at each of the Scheme Meetings represented a mix of shareholders who had elected to receive email communications, and those who had elected to receive postal communications, which suggests that both the email and postal communications were received in time to allow shareholders to vote if they wished to do so;

(4)    the number of 3Q Shareholders who voted at the Scheme Meetings exceeded the number of shareholders who voted at the two preceding annual general meetings;

(5)    a significant majority of shareholders, by number, who voted at the Scheme Meetings voted in favour of the scheme resolutions; and

(6)    there was no evidence of any issue that would have deterred voters from voting at, or from attending, the Scheme Meetings.

22    For these reasons, notwithstanding that shareholder turnout of 9.09% at the General Scheme Meeting was low, I concluded that it was appropriate to approve the Scheme. In doing so, I note that 3Q identified a number of cases in which schemes were approved where there was low shareholder turnout: Re TriAusMin Limited (No 2) (10.94%); Re Decimal Software Limited (No 2) [2018] FCA 2040 (5.21%); Re Amcor Ltd [2019] FCA 842 (6.70%); and Re Vimy Resources Ltd (No 2) [2022] WASC 257 (6.03%).

Satisfaction of condition precedent relating to Elabrook Sale

23    As noted, a condition precedent of the Scheme was for the Scheme Shareholders to approve the Elabrook Sale at the General Meeting. The General Meeting was held at 11:00 am on 4 November 2022. Excluding Elabrook, Shaun and David Rosen and the entities associated with them, the Scheme Shareholders voted in favour of approving the Elabrook Sale:

24    The condition precedent in relation to approval of the Elabrook Sale by the members in the General Meeting was satisfied.

Compliance with convening orders

Scheme Booklet

25    The Scheme Booklet was registered and the convening orders were lodged with the Australian Securities and Investments Commission (ASIC) on 14 October 2021 as required by s 412(6) of the Act and r 3.5 of the Federal Court (Corporations) Rules 2000 (Cth). The version of the Scheme Booklet that was lodged with ASIC for registration was in substantially the same form as that approved by the Court on 13 October 2022, save for changes which were required by the Court and some minor typographical and formatting changes.

26    Computershare Investor Services Pty Ltd was engaged to dispatch the relevant documents to 3Q Shareholders in relation to the Scheme Meetings and General Meeting as required by the convening orders and to provide other services in connection with the Scheme Meetings including to review and collate proxy forms received and oversee voting at the Scheme Meetings. The version of the Scheme Booklet dispatched to Scheme Shareholders was in the same form as that registered with ASIC.

27    3Q brought to the Court’s attention an error that was made in the dispatch of the materials which resulted in four shareholders being incorrectly sent the General Scheme Meeting materials instead of the Employee Scheme Meeting materials. Upon discovery of that error, the correct materials were dispatched to the affected shareholders. This was done promptly and sufficiently in advance of the Scheme Meetings. I was satisfied on the evidence before me that the Scheme Booklet and accompanying materials were dispatched to Scheme Shareholders substantially in accordance with the convening orders and that prejudice was not occasioned by the error which was identified and corrected.

Conduct of the Scheme Meetings

28    The Scheme Meetings were held at the time and place specified in the convening orders and Ms Kristy Dixon acted as chairperson of the Scheme Meetings as required by the convening orders. Mr Richard Powell of Computershare acted as returning officer and scrutineer for the poll. Mr Powell gave evidence of the registration, voting and poll procedures at the Scheme Meetings and in relation to the receipt and review of proxy forms prior to the Scheme Meetings. I was satisfied that the Scheme Meetings were conducted in accordance with the convening orders.

Advertisement of second court hearing

29    Pursuant to the convening orders, 3Q was required to place an advertisement in The Australian newspaper publicising the place, date, time and purpose of the second court hearing. The form of the advertisement was annexed to the convening orders made at the first court hearing, having been amended at the instigation of the Court, to, amongst other things, correct erroneous dates in the draft advertisement. The advertisement which 3Q was required to cause to be published should have listed the date and time of the second court hearing as 10:15am on 9 November 2022.

30    For reasons which counsel for 3Q could not explain, and which were not addressed in the affidavits of 3Q’s legal representatives, 3Q did not place an advertisement in the form required by the convening orders. Instead, 3Q placed an advertisement that listed the date and time of the second court hearing as 9:00am on 9 November 2022. 3Q similarly promoted the incorrect details in respect of the second court hearing on its website. No indication was given as to whether 3Q’s legal representatives had taken any steps to attend at Court at 9:00am on 9 November 2022 for the purpose of informing any interested person who may have turned up of the correct commencement time. 3Q did not inform the Court until the matter was called on at 10:15am on 9 November 2022 that it had promoted the commencement time as being at 9:00am, a time when the courtroom was not yet open to the public. The conduct of the legal representatives in this respect is unsatisfactory. The error, if it was an error in the sense of being inadvertent or careless, should have been explained, including as to when the error was discovered. It should have been drawn to the Court’s attention promptly and before 9:00am on the day of the hearing so that steps could have been taken to avert, and if necessary remedy, any confusion occasioned.

31    Although I was troubled by the approach taken by 3Q and its advisers, in all of the circumstances, I was satisfied that 3Q’s publication of the incorrect description of the commencement time was unlikely to have caused any prejudice. That was for three reasons. First, the daily court list published by the Court had the correct listing details and anyone seeking to attend is likely to have consulted that list to ascertain in which courtroom the hearing was to take place, and in doing so, would have seen the correct commencement time. Secondly, by the time of the second court hearing, 3Q had received no indication that any shareholder or other interested party would seek to oppose the Scheme or otherwise seek to be heard at the second court hearing. Finally, the results of the voting at the Scheme Meetings indicate that of the 39 shareholders who voted, only one shareholder voted against the Scheme. Although 3Q did not apply for an order under s 1322 of the Act, in the circumstances, I was satisfied that to the extent the error was accidental it was a procedural irregularity that would be capable of remediation under that section.

No person sought to be heard against the approval of the Scheme

32    As mentioned, as at the date of the second court hearing, 3Q had not received any notice of appearance by any person communicating an intention to appear at the hearing to oppose the application.

ASIC had no objection to the Scheme

33    ASIC issued a statement in writing in accordance with s 411(17)(b) of the Act stating that it has no objection to the Scheme. Accordingly, while it does not follow that the Court must necessarily approve the Scheme, it was open for the Court to do so. Given ASIC’s position, it was not necessary for the Court to be separately satisfied under s 411(17)(a) that the Scheme was not proposed for the purpose of enabling any person to avoid the operation of Chapter 6 of the Act.

Scheme in good faith

34    On the evidence before me, and for the reasons previously given in 3Q (No 1) at [54], I was satisfied that there was nothing to suggest that the Scheme was proposed other than in good faith. Nor was there anything to suggest that the Scheme Shareholders voted other than in good faith. The voting results at the Scheme Meetings demonstrate that those who voted in person or by proxy overwhelmingly supported the Scheme.

Other relevant matters

35    3Q brought a number of matters to the Court’s attention at the first court hearing relevant to the approval of the Scheme. Each of these matters was considered in 3Q (No 1). The matters raised included the relevant conditions precedent (3Q (No 1) at [78] to [86]); the performance risk attendant on the payment of the Scheme Consideration (3Q (No 1) at [87] to [92]); the exclusivity or deal protection provisions in the Scheme Implementation Deed (3Q (No 1) at [93] to [97]); the reimbursement fee payable by 3Q and Vela Software in certain circumstances (3Q (No 1) [98] to [104]); the recommendation of the Scheme by the 3Q Directors where two of the 3Q Directors will benefit by structuring the sale of the Elabrook 3Q Shares via the Elabrook Sale and not via the Scheme (3Q (No 1) at [105] to [106]); and the provision of a deemed warranty that shares will be fully paid and free from security interests and restrictions on transfer (3Q (No 1) at [107]). These matters were disclosed in the Scheme Booklet. As at the date of the first court hearing, none of these matters were such as to prevent approval of the Scheme. Additional evidence was adduced at the second court hearing which bore on some of these matters.

Conditions precedent satisfied

36    As to satisfaction of the conditions precedent, 3Q tendered certificates under cl 2.2 of the Scheme demonstrating that all of the relevant conditions precedent had been satisfied or waived, other than conditions relating to Court approval of the Scheme, and lodgement of the orders with ASIC. Accordingly, I am satisfied that all conditions precedent to the Scheme other than the Court’s approval and the lodgement of the Court’s approval order with ASIC, have been satisfied or waived and that any future doubt as to the binding nature of the Scheme has been removed: Re Vault Intelligence Ltd (No 2) [2020] FCA 1504 at [25].

Collateral benefit to some 3Q Directors

37    In relation to the collateral benefit to two of the three 3Q Directors, as mentioned above, evidence was adduced in relation to the tagging of their votes at the Employee Scheme Meeting which demonstrated that the requisite majority would have been obtained on the Employee Scheme Resolution even if the tagged votes had been disregarded.

Performance Risk

38    In relation to the performance risk associated with the Holdback Amount, ESOP Distribution Bonus and the Distributed ESOP Loan Amount, that risk is adequately addressed by the escrow regime that has now been put in place, evidence of which was adduced at the second court hearing.

39    An Escrow Deed was executed by Computershare, 3Q and Vela Software which provides that:

(1)    Vela Software and 3Q must pay into an escrow account certain Contribution Amounts upon entering into the Escrow Deed. The Contribution Amounts do not go to Scheme Shareholders, but broadly go towards funding the costs of the escrow arrangement and certain tax obligations of 3Q; and

(2)    Vela Software must pay into the escrow account the maximum Aggregate Holdback Amount, the aggregate ESOP Distribution Bonus and the aggregate Distributed ESOP Loan Amount (collectively, the Holdback Escrow Amount) on the Implementation Date.

40    Under cll 4.2 and 4.3 of the Escrow Deed, any instruction to Computershare to release all or part of the Escrow Amount (as defined in the Escrow Deed) must be given in writing and signed by authorised signatories (Release Notice). The authorised signatories must comprise one of the specified representatives of Vela Software and one of the 3Q Directors acting in their capacity as Shareholders’ Representatives. The Release Notice must provide that the Holdback Escrow Amount is to be deposited into a specified trust account. That trust account is the account into which, and out from which, the Initial Amount is to be paid.

41    An Escrow Side Deed has been executed as a deed poll by 3Q, Vela Software and each of the 3Q Directors (acting as Shareholders’ Representatives) in favour of each Scheme Participant. Vela Software and the Shareholders’ Representatives undertake to agree, sign and issue the Release Notice in respect of the Holdback Escrow Amount payable on the Holdback Release Date. The Escrow Side Deed is enforceable by Scheme Shareholders. The Shareholders’ Representatives’ rights to enforce, and their obligations under the Escrow Side Deed, are held on trust for the Scheme Shareholders. Computershare acts as trustee and operates the trust account in respect of the scheme arrangements. Computershare has no presently existing obligation to pay any amount to Scheme Shareholders, but will become subject to a trust obligation to pay relevant amounts to Scheme Shareholders on the Holdback Release Date.

42    As a condition of approving the Scheme, I adjourned the second court hearing so that 3Q could provide to the Court a written record of the trust arrangements contemplated as part of the escrow arrangements involving Computershare. A letter was provided later that day from Mr Paul Walton, chief operating officer – Issuer Services Australia, Computershare, to 3Q dated 9 November 2022 and admitted into evidence. In its letter, Computershare acknowledges that it had established a Computershare-managed trust account on 3Q’s behalf for the purposes of processing the payment of Scheme Consideration to Scheme Participants. Computershare confirmed that upon the receipt into the trust account of the Holdback Escrow Amount, Computershare will hold the said funds on trust for the Scheme Participants to be paid in accordance with the terms of the Scheme. The Shareholders’ Representatives are entitled to enforce the proper calculation of those sums and the release of those funds from the escrow account into the trust account. Each of the Shareholders’ Representatives has a personal interest in enforcing the arrangements. Once the relevant sums are paid into the trust account, they will be held on trust for, and distributed to, Scheme Shareholders by Computershare in the same way as applied in respect of the Initial Amounts on the Implementation Date.

43    Based on these arrangements, I was satisfied that the performance risk issues identified by 3Q in respect of the component parts of the Holdback Escrow Amount had been adequately managed.

44    The performance risk in relation to the Excess Amount was not managed by the entry into the escrow arrangements. The position in relation to the Excess Amount is described in 3Q (No 1) at [89] to [92] and is not repeated here. The submission made by 3Q to the effect that there was a relatively low probability that an Excess Amount would be payable was not supported by evidence and I have weighed it accordingly. I remain satisfied that the performance risk in relation to the Excess Amount has been sufficiently addressed for the reasons given at paragraph [92] in 3Q (No 1).

45    At the second court hearing, two additional matters of substance were raised. The first was in relation to whether the Scheme involved the issue of debentures. The second was in relation to communications with shareholders, which were not approved by the Court.

Debenture issue

46    At the first court hearing, 3Q flagged an issue as to whether the arrangements in respect of the payment of the second tranche of the Scheme Consideration on the Holdback Release Date involved the issue of debentures for the purposes of the Act: see 3Q (No 1) at [57] to [61]. The two-stage payment of the Scheme Consideration is set out in 3Q (No 1) at [33] and is not repeated here. It suffices for present purposes to note that the second tranche of payments on the Holdback Release Date comprise the Holdback Escrow Amount and the Excess Amount (if any). As noted above, escrow arrangements had been put in place in relation to the Holdback Escrow Amount by the time of the second court hearing. The parties did not enter into any escrow arrangement in relation to the Excess Amount. Payment of the Excess Amount was contingent on whether, following the preparation of the Closing Statement, and resolution of any dispute arising thereto, Adjustment Tangible Assets exceeded Adjustment Tangible Liabilities by more than a target of $400,000. Whether an Excess Amount would be payable – and, if so, how much – would not be known until after finalisation of the Closing Statement.

47    The significance of the issue was that if the mechanism for the payment of the second tranche of the Scheme Consideration involved the issue of debentures, s 283AA of the Act would apply and Vela Software would be required, amongst other things, to enter into a complying debenture trust deed. 3Q’s position was that the Scheme did not involve or result in the issue of a debenture. Vela Software’s position throughout was that it did not propose to enter into a complying debenture trust deed if the Scheme was approved on the basis that it was not necessary to do so.

48    The debenture issue properly fell to be considered at the second court hearing: 3Q (No 1) at [61]. At the time of the first court hearing, the relevant escrow agreements were not in place and it was not yet known if ASIC would seek to be heard on the debenture issue at the second court hearing: 3Q (No 1) at [61]).

49    3Q did not seek an exemption from ASIC from compliance with the debenture provisions in Chapter 2L of the Act. This was an avenue open to 3Q, and it is one which has been utilised in the past where part of the scheme consideration payable to shareholders was to be paid up to 12 months after implementation of the scheme, subject to reductions if the net asset value of the target was lower than a stated benchmark: see ASIC relief instrument [04/0185] dated 2 March 2004; Re Cashcard Australia Ltd [2004] FCA 223; 48 ACSR 738. 3Q did, however, engage with ASIC on the debenture issue. The last correspondence with ASIC in respect of the debenture issue was in April 2022, in which 3Q answered a question from ASIC requesting the advice 3Q had received from its counsel on the issue. 3Q submitted that ASIC had not raised with 3Q any further queries in relation to the debenture issue subsequent to that communication. ASIC did not seek to be heard at either the first or second court hearing and, as indicated, has provided a “no objection” letter under s 411(17)(b) of the Act.

50    Having regard to the terms of the Act, and the mechanics of the Scheme, including the escrow arrangements that have now been finalised, and the uncertainty as to the payment of any Excess Amount, I was satisfied that the way in which the second tranche of payments on the Holdback Release Date have been structured did not result in the issue of debentures, which would necessitate compliance with the requirements in Chapter 2L of the Act. My reasons for reaching this conclusion are as follows.

Legislative framework

51    Section 283AA(1), contained in Chapter 2L of the Act, relevantly provides:

(1)     Before a body:

…

(c)     issues debentures in this jurisdiction or elsewhere under a compromise or arrangement under Part 5.1 approved at a meeting held as a result of an order under subsection 411(1) or (1A);

regardless of where any resulting issue, sale or transfer occurs, the body must enter into a trust deed that complies with section 283AB and appoint a trustee that complies with section 283AC.

…

52    Section 9 of the Act defines a debenture in the following terms:

“debenture” of a body means a chose in action that includes an undertaking by the body to repay as a debt money deposited with or lent to the body. The chose in action may (but need not) include a security interest over property of the body to secure payment of the money. However a debenture does not include:…

53    The definition continues in subparagraphs (a) to (f) to list a number of exclusions, none of which are relevant for present purposes. The definition concludes with a chaussure which includes the following deeming provision:

For the purposes of this definition, if a chose in action that includes an undertaking by a body to pay money as a debt is offered as consideration for the acquisition of securities under an off-market takeover bid, or is issued under a compromise or arrangement under Part 5.1, the undertaking is taken to be an undertaking to repay as a debt money deposited with or lent to the body.

54    In the present context, because of the deeming provision, the definition will be engaged and the provisions in Chapter 2L will apply to the Scheme if it includes “an undertaking by [Vela Software] to pay money as a debt” which “is issued under” an “arrangement under Part 5.1” even though the arrangement does not otherwise involve repaying as a debt money deposited with or lent to Vela Software. The critical feature of the definition in the present circumstances is whether Vela Software has undertaken to “pay money as a debt”.

55    3Q submitted, and I accept depending on the relevant context, that a debenture can include a contingent debt. 3Q relied on s 124(1)(b) of the Act, Lemon v Austin Friars Investment Trust Limited [1926] 1 Ch 1 at 15 and 19, and Burns Philp Trustee Co Ltd v Commissioner of Stamp Duties (NSW) (1983) 83 ATC 4,477 at 4,479. I would add to the authorities cited by 3Q, the discussion of this issue, albeit in the context of a highly complex financial product, by the Full Court in ABN AMRO Bank NV v Bathurst Regional Council [2014] FCAFC 65 at [667] to [669].

56    3Q further submitted that a contingent debt is considered to be a debt where a company has subjected itself to a conditional but unavoidable obligation to pay a sum of money at a future time, relying on Hawkins v Bank of China (1992) 26 NSWLR 562 at 572, 576 and 578.

57    In ABN AMRO, the Full Court observed (at [684]):

…it is true that a debt is capable of including a debt that is repayable on a contingency. But the word “debt” is not one of precise and inflexible denotation. It must be applied in a practical and common sense fashion, consistent with its context and statutory purposes: Hawkins v Bank of China (1992) 26 NSWLR 562 at 572. Similarly, any attempt to formulate a universally applicable definition of a contingent debt is difficult, if not impossible. What is, or what is not, a contingent debt depends largely upon the statutory context and the commercial usages in which the question arises.

The Full Court continued at [689]:

As the High Court said in Handevel at 196, not every document creating or acknowledging a debt of a company was a debenture. Similarly, not every chose in action which includes an undertaking to make payment of a sum of money, dependent upon any form of contingency, constitutes a debenture of the type contemplated by the definition in s 9.

58    3Q submitted that the payment of the ESOP Loan Amount and the Holdback Amount (if any) to Scheme Shareholders and of the ESOP Distributed Bonus to Current Employee Shareholders on the Holdback Release Date were not extant obligations of Vela Software to pay money “as a debt” under the Scheme because Vela Software’s obligations in respect of these payments were deemed to have been discharged on the Implementation Date by the payment by Vela Software of the Holdback Escrow Amount into the escrow account. A subsidiary submission was that some of the amounts, namely, the Holdback Amount and the Excess Amount, were not sufficiently certain to fall within the concept of debt, even though 3Q accepted that the concept of paying money as a “debt” in the definition in s 9 would include a contingent debt.

59    3Q’s submissions in relation to the component parts of the Holdback Escrow Amount were as follows.

60    First, in relation to the Holdback Amount, 3Q made two submissions. 3Q submitted that there is no presently existing obligation to pay the Holdback Amount. The Holdback Amount could be an amount between zero and $0.017 per 3Q Share. The Holdback Amount is payable if certain of 3Q’s net tangible assets exceed certain of 3Q’s net tangible liabilities by $400,000 as at the date on which the Scheme becomes Effective. That the Holdback Amount may never be payable, and if payable, cannot be quantified pending future events, namely, preparation of the post-implementation Closing Statement and the dispute resolution process in respect of the same, count against construing the Scheme as giving rise to a conditional but unavoidable obligation to pay the Holdback Amount as a debt so as to fall within the definition of debenture.

61    3Q further submitted that Vela Software’s obligation to pay the Holdback Amount, if any, must be read with cll 4.2 and 6.2 of the Scheme and cl 4.4 of the Scheme Implementation Deed which together have the following effect. Vela Software is required on the Implementation Date to deposit the Aggregate Holdback Amount into the escrow account to be held on trust for the Scheme Shareholders subject to the regime in schedule 4 to the Scheme Implementation Deed. Vela Software’s obligation to pay the Holdback Amount is “deemed to be satisfied” by such deposit. Thereafter, the escrow agent is obliged to perform the trust by paying the relevant Holdback Amount as determined under schedule 4 to the Scheme Implementation Deed to each Scheme Shareholder. The result is that, on the Implementation Date, and prior to the transfer of the 3Q Shares, Vela Software’s obligation to pay the Holdback Amount will be deemed to have been satisfied by Vela Software depositing the amount on escrow for the Scheme Shareholders. That amount is then held in escrow and thereafter distributed by the trustee in accordance with the terms of the Scheme. I accept 3Q’s submissions. I am not persuaded that the Scheme, as ultimately structured, involves an undertaking by Vela Software to pay the Holdback Amount as a debt.

62    The position in relation to the ESOP Distribution Bonus and the Distributed ESOP Loan Amount is the same, even though those amounts will be known and not contingent on the Implementation Date. However, as with the Holdback Amount these amounts will be paid on the Implementation Date into the escrow account and Vela Software’s obligation to pay these amounts on the later Holdback Release Date will be deemed to be satisfied on this date: see paragraph [61] above.

63    Whether the obligation to pay the Excess Amount is a debenture involves a similar analysis in respect of the degree of contingency and lack of certainty as for the Holdback Amount. On the Implementation Date there will be no presently existing obligation to pay the Excess Amount. Whether any Excess Amount is payable and, if so, how much, will only be ascertained following the provision of the Closing Statement. The Excess Amount is only payable if 3Q’s Adjustment Tangible Assets exceed its Adjustment Tangible Liabilities by more than $400,000 and will be calculated on a pro rata basis in respect of any such excess. The obligation in relation to the payment of the Excess Amount does not involve a conditional but unavoidable obligation to pay a sum certain “as a debt” under the Scheme.

64    For these reasons, I was satisfied at the level of principle that the deferred receipt of part of the Scheme Consideration by the Scheme Shareholders on the Holdback Release Date does not have the effect that debentures are issued under the Scheme. In addition, I note that, in practical terms, the Deed Polls, escrow arrangements and distribution pursuant to the trust obligations assumed by Computershare protect the Scheme Shareholders in a manner that is similar to the requirements of s 283AB, although less formal than those that would apply if s 238AA was engaged.

Communications with shareholders

65    3Q, through its subsidiary, AdvanceRetail Technology Ltd (a company based in New Zealand), sent a series of emails and Microsoft Teams communications in relation to the Scheme to 15 ordinary 3Q Shareholders who were eligible to vote in the Employee Scheme Meeting (NZ Employee Shareholders). The communications were made by Mr Mark McGeachen, the chief executive officer of AdvanceRetail. Mr McGeachen was involved in the due diligence process that preceded the Scheme being proposed. The communications were not reviewed or approved by the Court. Neither 3Q nor AdvanceRetail applied to the Court for approval to make the communications.

66    Only information approved by the Court for dispatch to shareholders should be provided to members where a meeting has been convened under s 411(1): Re Associated Advisory Practices Limited [2013] FCA 979 at [8]. That is because, as the scheme meeting is convened in accordance with a Court order, and the Court has approved the explanatory statement, the court-approved “message” should not be interfered with by unilateral supplementation by the company: Re Centro Retail Limited [2011] NSWSC 1321 at [11]. In the event that supplementary information or explanatory material is necessary, it should not be sent without first obtaining approval from the Court: Re Dealt Holdings Ltd (No 2) [2022] FCA 1266 at [29].

67    The messages in issue were not sent by 3Q directly but were sent by a related party. The communications are in evidence, as is an explanation on affidavit by Mr McGeachen. In determining whether to approve a scheme, a court can take into consideration communications sent by related parties: Re Walsh & Company Investments Ltd [2020] NSWSC 1746 at [66]. The ultimate question is whether the communications compromised the integrity of the voting process: Re Walsh & Company at [67] and Re Dealt Holdings at [30].

68    ASIC raised concerns with 3Q’s lawyers about Mr McGeachen’s supplementary shareholder communications via Microsoft Teams. ASIC noted that the language used by Mr McGeachen could amount to “advocacy [of the Scheme] outside the confines of the scheme booklet”. 3Q responded to ASIC asserting, amongst other things, that Mr McGeachen’s comments were “mechanical” in the sense used by Markovic J in Re Xplore Wealth Ltd (No 2) [2021] FCA 166, in that the essence of Mr McGeachen’s communications was to provide the NZ Employee Shareholders with their certified holder numbers so that they could log in to the Computershare platform to vote and/or change their banking details. 3Q also maintained that to the extent that Mr McGeachen engaged in advocacy, the communication was fair and honest. Following 3Q’s response, ASIC made no further comments.

69    I was satisfied that the information provided by Mr McGeachen to the NZ Employee Shareholders after the Scheme Booklet had been dispatched was consistent with the disclosures in the Scheme Booklet and did not contain any new information or information that was misleading for the following reasons:

(1)    at the time of the communications, Mr McGeachen was concerned that there may be postal delays between Australia and New Zealand (I interpolate to note that the materials were not ultimately delayed);

(2)    the information provided by Mr McGeachen was based on the information contained in the Scheme Booklet, namely, that Employee Shareholders would have their loans discharged and receive cash bonuses;

(3)    the main purpose of Mr McGeachen’s emails and his communications on Microsoft Teams was to provide the NZ Employee Shareholders with the means to log in to the Computershare platform to obtain the Scheme Booklet to vote and to update their banking details;

(4)    Mr McGeachen expressly encouraged the NZ Employee Shareholders to download the Scheme Booklet; and

(5)    Mr McGeachen did not directly encourage the NZ Employee Shareholders to vote for the Scheme.

70    Having perused the terms of Mr McGeachen’s communications, the high point is an email sent to NZ Employee Shareholders on 17 October 2022 which purports to describe the effect of the Scheme. The relevant part of that communication is as follows (as written):

…Should the sale go through the good news is the loan on your staff shares will be paid off as a form of bonus payment, meaning you will receive the full value of your shares in cash – this payment is set out in the Scheme Booklet as happening approximately 3 month after the sale date….

71    3Q submitted that Mr McGeachen’s communication accurately reflected the payment of the ESOP Distribution Bonus to Current Employee Shareholders as disclosed in the Scheme Booklet. I accept that is correct, notwithstanding that the reference to the payment being made “approximately 3 month[s] after the sale date” may prove to be optimistic if the dispute resolution process is engaged. Mr McGeachen’s inclusion of the word “approximately” is sufficient to qualify the statement as to the time of payment. On balance, notwithstanding that Mr McGeachen’s communication bordered on advocacy, I was satisfied that the communications, when considered in context, did not compromise the integrity of the voting process.

CONCLUSION

72    For the reasons given, I made orders substantially in the terms sought by 3Q on the day of the second court hearing.

Associate:

Dated:    24 November 2022