• Unlike the wide discretionary power ASIC has in relation to the takeover provisions, ASIC does not have the power to modify, or exempt a person from the requirements of, the scheme of arrangement provisions.
  • However, the Supreme Court of New South Wales (the Court) has recently indicated that, in appropriate cases, it may make orders to ‘cure’ advertent technical breaches of the scheme provisions.
  • Such orders could be made in the future to overcome the impracticalities caused by ASIC’s lack of modification and exemption powers in relation to schemes, thus providing even greater structuring flexibility to those contemplating a scheme.

Background

Unlike the wide discretionary power ASIC has in relation to the takeover provisions, ASIC does not have the power to modify, or exempt a person from the requirements of, the scheme of arrangement provisions in Part 5.1 of the Corporations Act 2001 (Cth) (Corporations Act). Calls to extend ASIC’s modification and exemption powers in relation to schemes of arrangement were, surprisingly, rejected by the Corporations and Markets Advisory Committee (CAMAC) when it delivered its report on potential reforms to the scheme of arrangement regime in 2009.

In the recent scheme which effected a restructure of the DUET Group (DUET scheme), a novel approach was taken by the scheme entities to avoid the requirement to send a copy of the scheme booklet to all security holders. This approach could be taken in the future to ‘cure’ other technical breaches of the scheme provisions and to overcome the impracticalities currently caused by ASIC’s lack of modification and exemption powers in relation to schemes.

A closer look at the DUET scheme

At the first court hearing in the DUET scheme, the scheme entities informed the Court that they did not want to send a copy of the scheme booklet to a security holder resident in Malaysia or to the two security holders resident in Thailand (Foreign Security Holders) as this could constitute an offer of securities requiring regulatory approval in each of those jurisdictions.

The Foreign Security Holders held a very small number of securities. However, if the scheme entities did not send a copy of the scheme booklet to them, they would breach the provisions in the Corporations Act which require a scheme booklet to be sent to all security holders.

As such, the scheme entities flagged to the Court at the first court hearing that they would apply for orders under s1322(4) of the Corporations Act at the final court hearing to effectively excuse (or cure) that breach.

Section 1322(4) states that the court can make an order declaring that any act or proceeding of a procedural nature is not invalid, even if the act or proceeding breaches the Corporations Act, provided that:

  • the person acted honestly or it is just and equitable for the court to make the order, and
  • no substantial injustice has been or is likely to be caused.

The scheme entities sent a letter to the Foreign Security Holders explaining why they were not able to be sent the scheme booklet and telling them that a scheme booklet could be sent to them if they had a postal address outside Malaysia and Thailand. The letter also stated that further information on the DUET Group and the schemes would continue to be available on the ASX and DUET Group website and that they could object to the schemes by appearing at the final court hearing.

At the final court hearing, the Court made the requested orders under s1322(4) and confirmed that:

  • an advertent breach of the Corporations Act may be validated by the court under s1322(4), and
  • an act may be undertaken honestly, or it may be just and equitable to validate it, notwithstanding that a technical defect is known at the time it takes place.

Commentary

The Court’s pragmatic approach in this scheme is significant. As far as the authors are aware, in the past, the courts have only been asked by scheme entities to make orders under s1322(4) to cure inadvertent (as opposed to advertent) breaches of the Corporations Act. For example, when shareholders are given less than the requisite 28 days’ notice of the scheme meeting due to printing issues and mailing errors.

As such, the Court’s approach in the DUET scheme raises interesting questions as to how s1322(4) might be used in the future and, in particular, how broad its reach may be. Such orders could be made in the future to overcome the impracticalities caused by ASIC’s lack of modification and exemption powers in relation to schemes, thus providing even greater structuring flexibility to those contemplating a scheme.

Currently, the Court has no jurisdiction to approve a particular scheme if shareholders have been marshalled into incorrect classes for voting purposes. This is the case even if the scheme would still have been agreed to by the shareholders if the classes had been correctly constituted, resulting in a considerable waste of time and expense. The possibility of such an outcome caused CAMAC to propose in its 2009 report that the courts be given an express curative power to approve a scheme at the final court hearing even if classes have been incorrectly constituted. However, following the DUET decision, there is now the possibility that a court may consider exploring whether such an irregularity could be cured by making an order under s1322(4), assuming, of course, that no substantial injustice is likely to be caused.