CW Group Holdings Limited, in the matter of CW Group Holdings Limited

This case arose from a proposed merger between CW Group Holdings Limited and Sigma Healthcare Limited. CWG was described by the Court as a leading Australian retail pharmacy franchisor that owns the Chemist Warehouse and My Chemist brands. Its Australian business included providing intellectual property and support services and supplying goods to a network of franchised pharmacies. Sigma was described as a national full-line pharmaceutical wholesaler, distributor and pharmacy franchisor listed on the ASX.

The transaction was to be implemented through a members' scheme of arrangement. That meant the Court was asked to supervise a process under which CWG shareholders would vote on a proposal for Sigma to acquire all issued shares in CWG. If the scheme were implemented, CWG would become a wholly owned subsidiary of Sigma, while Sigma would remain listed on the ASX. The merged group would then be owned 85.75% by former CWG shareholders and 14.25% by existing Sigma shareholders.

At this stage, the Court was not deciding whether the merger should finally proceed. This was the first court hearing only. The question was whether the legal and procedural requirements had been met so that CWG shareholders could be convened to vote on the proposal.

The judgment is particularly useful because it explains that the consideration was formula-based. CWG shareholders were to receive both cash and new Sigma shares for each scheme share they held, subject to an exception for ineligible foreign shareholders. This was not a simple fixed-price acquisition.

The cash component was based on $700 million, adjusted up or down for any "Leakage" by CWG or Sigma up to implementation, then divided by the number of scheme shares on issue at the scheme record date. Leakage was defined to include things such as dividends, distributions or other payments to shareholders. The Court recorded that if Sigma leakage was greater than CWG leakage, the cash consideration would increase. If CWG leakage was greater than Sigma leakage, the cash consideration would decrease.

The share component was also determined by formula. The fixed objective of the formula was that former CWG shareholders would hold 85.75% of the merged group and existing Sigma shareholders would hold 14.25%. But the exact number of new Sigma shares to be issued for each CWG share depended on the total number of fully diluted Sigma shares on issue and the total number of scheme shares on issue at the scheme record date.

The Court also set out the implementation mechanics. If the scheme became effective, Sigma had to deposit the aggregate cash consideration into a trust account operated by CWG as trustee for scheme shareholders on the business day before implementation. On the implementation date, CWG had to pay the cash consideration from that trust account, Sigma had to issue the share consideration, and then the scheme shares would be transferred to Sigma, subject to the provision of the consideration.

The Court applied the usual first-hearing approach for schemes of arrangement. It emphasised that the Court's role at this stage is not to decide whether the transaction is commercially attractive or to substitute its own judgment for that of shareholders. Instead, the Court asks whether there is adequate disclosure, whether the legal requirements have been met, and whether the scheme is sufficiently fair and reasonable on its face to be put to members for approval or rejection.

That involved two broad questions. First, were the statutory prerequisites satisfied? Secondly, should the Court exercise its discretion to convene the meeting? On the statutory side, the Court considered whether CWG was a Part 5.1 body, whether the application had been properly made, whether ASIC had at least 14 days' notice of the hearing, whether ASIC had a reasonable opportunity to examine the proposed scheme and draft explanatory statement and make submissions, and whether the procedural rules and evidence requirements had been met.

The Court also considered the disclosure requirements under section 412 of the Corporations Act and the Corporations Regulations. It accepted that the scheme booklet explained the effect of the scheme, addressed directors' material interests, contained the prescribed information, and together with the independent expert report gave shareholders enough information to form their own view.

On discretion, the Court considered whether the scheme was fit for consideration by members and whether members were to be properly informed. The judgment notes that the parties' submissions addressed performance risk, scheme consideration, director interests and benefits, and reimbursement fees and exclusivity. The Court accepted that these matters did not justify stopping the proposal at the first-hearing stage.

The most commercially useful part of the judgment is the Court's treatment of directors' interests and benefits. This is often where scheme transactions become complicated, especially in founder-led, franchise and distribution businesses where the same people may have several roles at once.

The scheme booklet disclosed that each CWG director held shares in CWG and had a relevant interest in Sigma shares by virtue of CWG's indirect holding in Sigma through a CWG group company. It also disclosed that, in their capacity as CWG franchisees, each director had an interest in supply contracts with Sigma and in a software licence agreement with a Sigma subsidiary that was yet to be entered into. In addition, Mario Verrocchi, Jack Gance and Damien Gance were to be appointed to the board of the merged group following implementation and would receive remuneration in those capacities and be entitled to enter into a deed of access, indemnity and insurance with the merged group. The Court also noted that otherwise no payment or other benefit was proposed to be made or given to any CWG director that was conditional upon, or related to, the scheme.

The Court said these interests raise two distinct issues. The first is whether shareholders with those interests should vote in a separate class. The second is whether directors with those interests can appropriately recommend the scheme to shareholders.

On separate classes, the Court accepted that no separate class was required. The key reasoning was that all CWG shareholders would participate in the scheme on the same basis and receive the same consideration as all other shareholders. Because of that, they could consult together with a view to their common interest. The Court also accepted that the directors did not have the kind of extraneous or divergent interests that would require class separation. It specifically noted that none of the directors would receive a material collateral benefit from the bidder if the scheme proceeded.

On recommendations, the Court accepted that the directors' interests and benefits did not undermine their ability to recommend the scheme. The reason was not that the interests were irrelevant. It was that they were fully and prominently disclosed in the scheme booklet, including wherever the directors' recommendation was referred to, so shareholders could take those matters into account when deciding how to vote.

Moshinsky J held that the statutory prerequisites were satisfied and that it was appropriate to exercise the Court's discretion to convene the scheme meeting. The Court was satisfied that ASIC had been given at least 14 days' notice and a reasonable opportunity to examine the proposed scheme and draft explanatory statement and make submissions. A letter from ASIC dated 13 December 2024 was produced at the hearing.

The Court accepted that the scheme booklet was clear and comprehensive and, together with the independent expert report, contained a detailed evaluation of the scheme in a way that enabled CWG shareholders to form their own view. The independent expert, Kroll Australia Pty Ltd, had concluded that the scheme was fair and reasonable and therefore in the best interests of CWG shareholders in the absence of a superior proposal.

The Court also accepted that the scheme was fit for consideration by members. It was not on its face so unfair or inappropriate that it should be stopped before a vote. The issues raised in submissions, including performance risk, scheme consideration, director interests and benefits, and reimbursement fees and exclusivity, did not justify refusing to convene the meeting.

Orders were made for the scheme meeting to be held on 29 January 2025 at 6.00 pm Melbourne time, both in person at the Olympic Hotel in Preston, Victoria, and virtually via an online platform. The Court also listed the further hearing for 3 February 2025 at 10.15 am Melbourne time for any application to approve the scheme.

Importantly, this was not final approval of the merger. The judgment only cleared the way for shareholders to vote and for the matter to return to Court if the required approvals were obtained.

For business owners, this case is a practical reminder that major transactions are judged not only by price and strategy but also by process. If a deal is being implemented through a scheme, the Court will expect a disciplined approach to disclosure, evidence and transaction mechanics. Formula-based consideration, adjustment mechanisms and implementation steps need to be explained clearly enough for members to understand what they are voting on.

The case is especially relevant to franchise and distribution groups. Those businesses often involve overlapping relationships between founders, directors, franchisees, suppliers and related entities. This judgment shows that overlap does not automatically derail a transaction. But it does need careful legal analysis. The central questions are whether all shareholders are being treated on the same basis under the scheme, whether any insider is receiving a materially different or collateral benefit, and whether the disclosure is prominent enough for members to assess the recommendation for themselves.

Even outside formal schemes of arrangement, the same governance discipline is useful. If your business is planning a sale, merger, capital raise or internal restructure, identify early any side arrangements, future board appointments, supply or software arrangements, equity interests in counterparties, or other benefits that could affect how owners view the deal. Record them, analyse them and disclose them properly.