Calling all shareholders: Australian Court rejects CEO’s call script for a scheme of arrangement

An Australian Court has refused to allow one-on-one communications initiated by a CEO to shareholders in respect of a scheme of arrangement, despite the proposed use of a script for the call.

IN BRIEF

• In Re ResApp Health Ltd¹, the Supreme Court of New South Wales was asked to allow one-on-one calls to be made by the chief executive of the scheme company to shareholders in respect of a scheme of arrangement on the basis that the calls would follow a script produced to the Court.
• The Court declined to allow this on the basis that such communications could be performed neutrally by a shareholder communication service and to allow the CEO to do it could readily result in implied advocacy for the scheme.

BACKGROUND

The starting position for scheme companies seeking to communicate pre-scheme meeting with its shareholders in relation to a scheme is to have those communications first approved by the Court.

The rationale for this position is that, in circumstances where the Court has approved an explanatory statement being sent to shareholders, the “Court approved ‘message’ should not be interfered with by unilateral supplementation by the company”.²

It is one of the strict rules that apply when a scheme of arrangement is used. Issuing materials to shareholders without prior court approval runs the risk of the Court refusing to approve the scheme at the final court hearing.

We have seen some latitude given in two recent demerger schemes of arrangement where Court approval was obtained for proposed investor roadshow briefing presentations to be made to shareholders ahead of the relevant scheme meeting.³

CALL SCRIPT IN THE RESAPP HEALTH SCHEME

In Re ResApp Health Ltd, the scheme company sought Court orders approving the dispatch of a supplementary explanatory booklet and further communications to its shareholders in relation to an increase in the consideration payable under the proposed scheme of arrangement.

The Court approved the communications but declined to approve calls that were proposed to be made by the chief executive of the scheme company to its shareholders on a one-on-one basis.

The Court was not persuaded of the need for, or the desirability of, such calls, at least in any systematic way, because:

1. a campaign of outbound calls to shareholders could be performed neutrally by a shareholder communication service (which, in our experience, is the usual approach for telephone campaigns in respect of schemes); and
2. to allow the chief executive of the scheme company to perform the calls could, because of the unusualness of such conduct, readily become implied advocacy for the scheme, even where what was said offered a balanced account of the scheme.

For those reasons, the Court did not approve the use of the script for the direct communications between the chief executive and individual shareholders in respect of the scheme.

Black J said:

“… ResApp also sought approval for a “one on one” conversation script for use by Dr Keating, which could at least potentially be used in his calling individual ResApp shareholders. My attention was not drawn to any authority in which a Court has approved a script for one-on-one communications initiated by a chief executive to shareholders in respect of a scheme and I was not persuaded of the need for or the desirability of such communications, at least in any systematic way. There was no convincing explanation of why it would be necessary for the chief executive officer, rather than a shareholder communication service, to undertake such communications with shareholders in any systematic way, if all that was intended was to communicate information concerning the scheme in a neutral manner. It seems to me that a chief executive officer undertaking a campaign of outbound calls to shareholders (if that was what was intended) could readily become implied advocacy for the scheme, arising from the unusualness of such conduct, even where what was said offered a balanced account of the advantages and disadvantages of the scheme. For that reason, I did not approve the script for direct communications between Dr Keating and individual shareholders in respect of the scheme.”

COMMENTARY

This decision shows the Court’s readiness to reject scheme related communications outside of the scheme booklet in circumstances where those communications could amount to advocacy of the scheme. Interestingly, it was not the content of the call script that the Court took issue with, which was said to provide a balanced account of the scheme, but rather the fact it was being unusually delivered by the chief executive of the scheme company to individual shareholders.

In our view, the method of communication should rarely of itself preclude a scheme company from attempting to engage with its shareholders. Rather, we think that all forms of communication in relation to schemes should be encouraged, provided those communications are not misleading and do not, in any material respect, deviate from the message in the scheme booklet.

Further, if there were concerns about whether the chief executive would stay on script, it would have been open to the Court to require that records of the conversations be kept and those records be made available to ASIC before the final court hearing and to the Court itself. This approach would have been consistent with the guidance adopted by ASIC in its latest corporate finance report, which we have discussed previously,³ while also promoting the investor protection goals of the legislation.

1. Re Centro Retail Ltd and Centro MCS Manager Ltd in its capacity as responsible entity of the Centro Retail Trust [2011] NSWSC 1321 at [10] – [11].
2. See our article on investor roadshow briefing presentations in Australian schemes of arrangement dated 7 July 2022.
3. [2022] NSWSC 1090.