There has been a recent shift in the appropriateness of directors’ recommendations in the context of schemes of arrangement.

Importantly, the decision by Farrell J in Re Gazal Corporation Limited [2019] FCA 701 (Re Gazal) has brought into question the suitability of a director in making a recommendation to shareholders in situations where the director stands to receive an additional benefit (other than as a shareholder) on implementation of a scheme.

In Re Gazal, Gazal Corporation’s managing director was to receive a significant cash bonus upon a scheme becoming effective. Farrell J required Gazal Corporation to revisit whether it was appropriate for the director to make a recommendation in the circumstances and required sufficient and adequate disclosure of the cash bonus in the scheme booklet. Farrell J opined that directors who stand to receive a bonus or benefit only if the scheme proceeds should exercise caution in making recommendations, and, generally should not do so.

Subsequent to the Re Gazal decision, Steinepreis Paganin has advised both companies and directors regarding scheme recommendations. While there is currently no settled position, subsequent judgements have detailed appropriate considerations for directors to contemplate before making a recommendation to shareholders. Key considerations for directors contemplating an opportunity to be acquired through a scheme include the nature of any benefit to be received in the context of a scheme, the appropriateness of making a recommendation to shareholders and whether the interest will be adequately and sufficiently disclosed to shareholders.

If you are a director of a company contemplating a scheme of arrangement and have any queries regarding the recent shift in the attitude of the Courts or its impact on your ability (or your fellow directors’ ability) to make a recommendation, please contact us  in our Perth office on +61 8 9321 4000 or our Melbourne office on  +61 3 9111 9400 to discuss.