Adelaide Bank Limited, in the matter of Adelaide Bank Limited ACN 061 461 550 [2007] FCA 1582

Pursuant to section 411(1) of the Corporations Act the plaintiff convene a meeting (Ordinary Share Scheme Meeting) of its members holding Adelaide Bank Ordinary Shares (Ordinary Shareholders) for the purpose of considering and, if thought fit, approving (with or without modification) a scheme of arrangement for the transfer of all the Adelaide Bank Ordinary Shares to Bendigo Bank in consideration for the issue of ordinary shares in Bendigo Bank, being the scheme substantially in the form of the draft, a copy of which is at Appendix 2 to the draft Adelaide Bank Scheme Book, (Ordinary Share Scheme).
Pursuant to section 411(1) of the Corporations Act the plaintiff convene a meeting (Step Up Preference Share Scheme Meeting) of its members holding Adelaide Bank Step Up Preference Shares (Step Up Preference Shareholders) for the purpose of considering and, if thought fit, approving (with or without modification) a scheme of arrangement for the transfer of all the Adelaide Bank Step Up Preference Shares to Bendigo Bank in consideration for the issue of step up preference shares in Bendigo Bank, being the scheme substantially in the form of the draft, a copy of which is at Appendix 3 to the draft Adelaide Bank Scheme Book, (Step Up Preference Share Scheme).

REASONS FOR JUDGMENT (First Court hearing) 1 On 9 August 2007 the plaintiff and Bendigo Bank Limited (Bendigo Bank) jointly announced to the Australian Stock Exchange (ASX) their intention to merge their respective businesses. The merger is to be effected by way of schemes of arrangement whereby the Bendigo Bank will acquire all of the plaintiff's shares and the plaintiff will become a subsidiary of Bendigo Bank. 2 The proposed schemes of arrangement require the approval of this Court pursuant to s 411 of the Corporations Act 2001 (Cth) (the Corporations Act) because it is a compromise or arrangement between a Part 5.1 body and its members and its classes of members. 3 The plaintiff has on issue three classes of shares, Ordinary Shares; Step Up Preference Shares; and Reset Preference Shares. Separate schemes are proposed for each class of securities. 4 The Ordinary Share Scheme is not conditional upon the Step Up Preference Share Scheme or the Reset Preference Share Scheme being approved by the holders of those securities. However, the Step Up Preference Share Scheme and the Reset Preference Share Scheme are each conditional upon the Ordinary Share Scheme being approved by the members holding the Ordinary Shares, although neither is conditional upon the other being approved. 5 The plaintiff is a public company and one of Australia's top 150 companies listed on the ASX. It has a market capitalisation of approximately $1.6 billion. As its name suggests, it is a bank which has as its principal banking activities the provision of mortgages, business loans, consumer loans, margin loans, savings and investment products. As at 30 June 2007 it had assets of approximately $32.4 billion and loans under management of approximately $27.5 billion. 6 Bendigo Bank, which is also listed on the ASX, has a market capitalisation of approximately $2.3 million. It is one of Australia's top 100 companies listed on the ASX. It is also, of course, a bank which provides a range of banking and other financial services to both retail customers and small to medium size businesses. It conducts similar but not the same activities as the plaintiff. Its products are distributed through a retail network. 7 The Ordinary Share Scheme of the merger proposal involves the Ordinary Shareholders of the plaintiff receiving 1.075 shares in the new merged bank in exchange for each ordinary share they currently hold in the plaintiff company. 8 The Step Up Preference Share Scheme and the Reset Preference Share Scheme provide that the holders of those securities in the plaintiff will receive one fully paid Step Up Preference Share and one Reset Preference Share in the merged bank for each Step Up Preference Share or Reset Preference Share held. 9 The plaintiff and Bendigo Bank entered into a Merger Implementation Agreement on 9 August 2007. It was a term of that agreement that Bendigo Bank's obligations to the plaintiff's shareholders (of all classes) would be secured by Bendigo Bank entering into a deed poll which, in fact, it did on 3 October 2007. 10 The purpose of today's hearing is for the plaintiff to obtain orders under s 411 of the Corporations Act to convene meetings of the three classes of members and for the Court to approve the Explanatory Statement which is proposed to be sent to those members as required by s 412(1)(a) of the Corporations Act. Consequential orders are also sought. 11 The plaintiff proposes that the three scheme meetings will take place separately on 12 November 2007 at the Adelaide Convention Centre, North Terrace, Adelaide, commencing with the Ordinary Share Scheme Meeting at 9.30 am, the Step Up Preference Share Scheme Meeting at 10.45 am and the Reset Preference Share Scheme Meeting at 11.30 am. 12 I have been provided with the draft Explanatory Statement which has been described by the plaintiff as the Draft Scheme Book. In this case, the plaintiff's solicitors provided me, in a timely fashion, with all the documents upon which the plaintiff intended to rely to allow me to study the necessary documents in advance of today's hearing. 13 The Court has a discretion to make the orders sought by the plaintiff where a plaintiff satisfies the criteria in s 411(1) itself and is not disqualified under s 411(2). Section 411(1) is engaged where a Part 5.1 body has proposed a compromise or arrangement with its members or any class of them. 14 I am satisfied that that criteria has been established. The plaintiff is a Part 5.1 body as defined in s 9 of the Corporations Act. A scheme of arrangement of the kind proposed is a compromise or arrangement within the meaning of s 411: Re Bank of Adelaide (1979) 22 SASR 481. Subject therefore to the other subsections of ss 411 and 412, the plaintiff is entitled to seek the exercise of the Court's discretion and make the orders. 15 Two preconditions for the exercise of the power in s 411 are provided for in s 411(2). First, pursuant to s 411(2)(a), the Court is not entitled to make an order under s 411(1) unless 14 days notice of the hearing of the application, or such lesser period of notice as the Court or ASIC permits, has been given to ASIC. I am satisfied on the evidence that 14 days notice of the application has been given to ASIC. 16 Secondly, s 411(2)(b) of the Corporations Act prevents the Court from making an order unless satisfied that ASIC has had a reasonable opportunity to examine the terms of the proposed compromise or arrangement and to make submissions to the Court in relation to the proposed compromise or arrangement, and the draft Explanatory Statement. 17 The Explanatory Statement was first provided to ASIC on 14 September 2007. The evidence discloses that ASIC has considered the Explanatory Statement over the period between 14 September and 4 October, and has required the plaintiff to make certain amendments to the Explanatory Statement. 18 On 4 October 2007 ASIC advised the plaintiff in writing that "... after examining the documentation for each scheme ASIC does not currently propose to appear to make submissions, or intervene to oppose the schemes the first hearing of which is scheduled for Friday 5 October 2007." 19 I am therefore satisfied that ASIC has been given the opportunity required under s 411(2)(b). It follows that s 411(2) does not preclude the Court making the orders sought under s 411(1). 20 There are two orders to be made. First, an order for the convening of meetings and, secondly, an order approving the Explanatory Statement. Both orders sought involve the exercise of discretion. 21 In theory, the Court might make an order convening a meeting but refuse to make an order approving the Explanatory Statement. That, however, would be unlikely. If the Court were not satisfied that the Explanatory Statement was appropriate to be sent to the members it would be unlikely to convene a meeting. On the other hand, the Court would not approve the Explanatory Statement but refuse to convene a meeting. It follows, because in all but the most exceptional case the Court is called upon to make both orders, that the Court must be satisfied that the members will be fully informed so that they may make a fully informed decision on the proposals of the schemes of arrangement. 22 It is proposed that three separate meetings take place for the three separate classes of members. That appears to me to be appropriate especially where, as is the case here, different benefits flow from the proposed merger to the different classes. It is also appropriate, having regard to the fact that the Step Up Preference Share Scheme Meeting and the Reset Preference Share Scheme Meeting are dependent upon the ordinary shareholders having first approved the scheme of arrangement insofar as they are affected at the first scheme meeting. It is appropriate that the three scheme meetings be held separately and sequentially as proposed by the plaintiff. 23 I am satisfied that proper arrangements have been proposed for the holding of the three meetings. The evidence discloses that two of the present directors of the plaintiff have made themselves available as chair and alternative chair of those meetings and that those persons do not have any conflict of interest. 24 Of course, it is not the case that the Court is presently concerned to pass any final opinion on whether any of the schemes that are proposed should be approved: s 411(17) of the Corporations Act. On the other hand, it would be unlikely that the Court would convene a meeting under s 411 unless it was satisfied that the nature of the compromise or arrangement, in this case a scheme of arrangement, is of such a kind that if it were to be approved by the members it would also be later approved by the Court. In doing so, the Court does not make its own commercial judgment as to the appropriateness of the proposal in the schemes of arrangement. That is a matter for the members. 25 Rather, at this first hearing, the Court needs to be satisfied that all of the statutory criteria have been met and that the proposed schemes of arrangement are legitimate commercial arrangements in the sense that they are not designed to avoid other provisions of the Corporations Act but are schemes of arrangement within the statutory concept of an arrangement or compromise. I am satisfied of both those matters. 26 The Court will have regard to the directors' recommendations and the independent expert's opinion. In this case, the directors have unanimously recommended that the members approve the schemes and become shareholders in Bendigo Bank. 27 The plaintiff has obtained an independent expert's report from KPMG Partnership. Mr Donald Manifold, an executive director of KPMG Corporate Finance (Aust) Pty Ltd, had the responsibility, together with two other employees of KPMG, of preparing separate reports in relation to the three separate schemes. In respect of each of the schemes, the authors opined that, in the absence of a superior proposal, on balance the schemes are in the best interests of the Adelaide Bank shareholders. 28 The Court needs to be satisfied that the Explanatory Statement has sufficient information to allow the members to make a commercial judgment. It also has to be satisfied that the Explanatory Statement does not apparently contain any matter that is false or misleading in any material particular. 29 I am satisfied that the plaintiff has negotiated each of the terms of the merger implementation agreement at arm's length with Bendigo Bank and that the terms which have been arrived at are commercially appropriate. 30 On the hearing of this application today, Mr Bathurst QC, who led for the plaintiff, brought to my attention three particular aspects of the proposed schemes of arrangement. First, he drew my attention to the exclusivity transaction and the "no shop/no talk" provision of the proposed merger. He also drew my attention to the fiduciary carve-out provision within the merger implementation agreement. The "no shop/no talk" provision is an unremarkable term commercially. It satisfies the criteria Santow J adduced in Re Arthur Yates & Co Ltd (2001) 36 ACSR 758. In my opinion, it is not a term which would make the proposed scheme of arrangement such that it ought not be submitted to its members. 31 Secondly, he brought to my attention the terms of the agreement relating to a break fee. In relation to the break fee, he emphasised that there was a break fee payable by both parties to the transaction. Both the plaintiff and the Bendigo Bank must pay a break fee in the sum of $15 million if the transaction does not go ahead for any of the reasons given in the proposed scheme. The break fee is less than 1% of the plaintiff's market capitalisation of $1.6 billion which is within the Australian Takeovers Panel's Guidance Notes: Guidance Note 7: Lock-up Devices (2nd issue, 2005). In any event, the break fee is not payable in circumstances where the members vote not to implement the scheme. In those circumstances, the break fee is not a disincentive to the shareholders in their consideration of the proposed merger. 32 Lastly, he brought to my attention the provision in the agreement which deems the ordinary shareholder to have warranted to Bendigo Bank that their ordinary shares are fully paid and free from encumbrances. The purpose of the clause was adverted to by Lindgren J in Re APN News & Media Limited (2007) 62 ACSR 400 at [59]-[60]: 59 In substance, the purpose of the deemed warranty is to prevent a shareholder whose shares are subject to encumbrances from receiving the same scheme consideration as that to be received by those whose shares are free from encumbrances, without any obligation, in effect, to refund to INMAL the amount required to discharge the encumbrance. It is not practicable for amounts secured by encumbrance to be deducted from the scheme consideration payable to the relevant scheme participants on the implementation date. 60 The warranty will be deemed to have been given, not only by those offeree shareholders who vote to agree to the scheme, and who, therefore, can be seen to be consenting to give it, but also those who do not vote at all or who vote against the scheme. However, I do not think that this matters. What is important, in my view, is that the deemed warranty is no more than a device directed to ensuring that a scheme participant whose shares are subject to an encumbrance is not unfairly advantaged. The amount of the damages payable for breach of the warranty is the amount required to discharge the encumbrance. 33 All three matters raised by Mr Bathurst QC were addressed by Lindgren J in this Court in Re APN News and Media Limited 62 ACSR 400. In all three instances, his Honour found that similar clauses in similar transactions were no bar to the implementation of the proposed transactions. I respectfully agree with his Honour's reasons. 34 I am further satisfied that the directors have unanimously recommended the schemes of arrangement to all three classes of members of the plaintiff and that in doing so they have not acted otherwise than in accordance with their duties. I am satisfied that an appropriate independent expert's report was obtained and that the opinion expressed is that held by the author. 35 I am also satisfied that the plaintiff put in place a due diligence committee which has rigorously examined the proposed merger. 36 I am satisfied that proper consultation has been had with ASIC and that ASIC does not oppose the orders sought on this occasion for the convening of the meetings and the approval of the Explanatory Statement. 37 The Explanatory Statement describes the merger implementation agreement and the proposed merger in sufficient detail so as to enable the members to make a fully informed decisions in relation to the proposal. I have not been able to detect any false or misleading statement within the Explanatory Statement. I am satisfied that the Explanatory Statement explains the effect of the schemes of arrangement. It discloses the directors' material interests as required under s 412(1)(a)(i). It also sets out the information which is proscribed by reg 5.1.01 of the Corporations Regulations 2001 (Cth) (the Regulations) and Schedule 8 of those Regulations. 38 The criteria referred to by Emmett J in Re Central Pacific Minerals N.L. [2002] FCA 239 and approved by Conti J in Re CSR Ltd (2003) 45 ACSR 34 at 36-37 have been met. The plaintiff has conformed with Santow J's test in Re NRMA Insurance Ltd (2003) 33 ACSR 523. 39 The plaintiff proposes to rely upon s 3(a)(10) of the Securities Act of 1933 (US) (US Securities Act) for exemption from the registration requirements of the US Securities Act. I therefore record, to facilitate that event occurring, that the Court has been advised that the Court's order will be relied upon for the purpose of s 3(a)(10) of the US Securities Act. 40 I should, for completeness, mention one final matter lest it be thought it had been overlooked. The proposal in the schemes of arrangement does not allow certain foreign resident shareholders to obtain the benefit of the shares offered by Bendigo Bank. Instead, in their case, if the schemes are implemented, the shares will be issued to a nominee and sold and the proceeds remitted to those foreign shareholders. That class of shareholders is less than 1% in each of the three classes of securities and therefore only comprise a small fraction of the shareholders in the three separate classes. It seems to me that the manner in which those shareholders' interests are dealt with is appropriate having regard to the proposed transaction. 41 I am satisfied, as Conti J was in Re CSR Ltd 45 ACSR 34, that the marginally different treatment of the ineligible foreign shareholders does not raise an issue as to the proper formation of classes of members affected by the scheme. 42 For those reasons, it would be appropriate to make the orders sought on the application and to appoint a further date for the consideration as to whether the Court should, if the members have so resolved, approve the schemes of arrangement. 43 For those reasons, I make the orders in the short minutes of order this day initialled by me. I certify that the preceding forty-three (43) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Lander.

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