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[2017] FCA 643
Federal Court of Australia
2017-05-17
Gleeson J
Original judgment source is linked above.
JUDGE: GLEESON J DATE OF ORDER: 17 MAY 2017
GLEESON J: 1 On 17 May 2017, I made orders pursuant to s 411(1) of the Corporations Act 2001 (Cth) ("Act") after a first hearing in relation to two schemes of arrangement. The evidence in each proceeding was ordered to be evidence in the other proceeding. These are my reasons for making the orders in both proceedings.
BACKGROUND 2 EcoBiotics Limited ("EcoBiotics") sought orders to convene a meeting of its members ("EcoBiotics scheme participants") for the purpose of considering and, if thought fit, agreeing (with or without modification) to a scheme of arrangement proposed to be made between EcoBiotics and its members ("EcoBiotics scheme"). 3 QBiotics Limited ("QBiotics") sought orders to convene a meeting of its members other than EcoBiotics ("QBiotics scheme participants") for the purpose of considering and, if thought fit, agreeing (with or without modification) to a scheme of arrangement proposed to be made between QBiotics and its members ("QBiotics scheme"). 4 EcoBiotics is an unlisted public company, established in 2000, engaged in discovery and early-stage development of bio-active compounds from Australia's tropical rainforests for application as pharmaceuticals, nutraceuticals and cosmetic ingredients. 5 QBiotics is an unlisted public company, established in 2004, developing products for the treatment of solid tumours and wound healing. QBiotics was founded by EcoBiotics to develop and commercialise natural medicinal discoveries that EcoBiotics made in the rainforests where it conducts its research. 6 QBiotics was a controlled entity of EcoBiotics up until December 2015 following shareholder approval for the demerger/distribution of 80% of its shareholding in QBiotics. EcoBiotics is QBiotics largest shareholder currently holding 10.7% of all the issued capital in QBiotics. 7 The directors of both QBiotics and EcoBiotics have agreed to merge the two companies through a newly formed company, QBiotics Group Limited ("QGL"). That decision follows steps taken by QBiotics to prepare for an initial public offering, which ultimately was not pursued. 8 As a merger would not be possible without approval of both schemes, the two schemes are interdependent. Neither scheme will proceed unless the other is approved.
Proposed schemes 9 The proposal is that: (1) Under the EcoBiotics scheme, each member of EcoBiotics who hold shares as at the record date for the EcoBiotics scheme will be issued shares in QGL at a ratio of one EcoBiotics share to 0.21 QGL shares. (2) Under the QBiotics scheme, each member of QBiotics (other than EcoBiotics) who holds shares as at the record date for QBiotics scheme (a defined term) will be issued shares in QGL at a ratio of one QBiotics share to one QGL share. (3) Upon the consolidation of the shares of EcoBiotics and QBiotics into the ownership of QGL, the shares in QGL will be held as follows: Shareholders in QGL QGL shares Weighting (a) Former EcoBiotics shareholders: 55,154,696 16.75% (b) Former QBiotics shareholders: 274,055,765 83.25% Total 329,210,461 100.00%
EVIDENCE 10 The plaintiffs read the following affidavits and tendered the following exhibits in support of the applications: (1) affidavit of Sylvia Fernandez, partner of Thomson Geer, the solicitors for Ecobiotics, sworn on 8 May 2017; (2) a second affidavit of Ms Fernandez also sworn on 8 May 2017, in her capacity as solicitor for QBiotics; (3) affidavit of Steven Martin Ogbourne, non-executive director of EcoBiotics, sworn on 10 May 2017; (4) affidavit of Graham Ross Caldwell, non-executive director of EcoBiotics, sworn on 12 May 2017; (5) affidavit of Roderic Holliday-Smith, non-executive director of QBiotics, sworn on 12 May 2017; (6) affidavit of Ross Walker, chartered accountant and director of Pitcher Partners Corporate Finance Pty Ltd, who was retained by EcoBiotics and QBiotics to provide an independent expert's report in relation to the two proposed schemes, sworn on 12 May 2017 and the accompanying exhibit "RW1"; (7) affidavit of Paul Warren Reddell, director and chief executive officer of EcoBiotics, sworn 11 May 2017, and the accompanying exhibit "PWR1"; (8) affidavit of Victoria Anne Gordon, director and chief executive officer of QBiotics, affirmed 12 May 2017, and the accompanying exhibit "VG1"; (9) affidavit of Dan Kramer, partner of Thomson Geer, sworn on 16 May 2017 and the accompanying exhibit "DK1"; (10) affidavit of Roberta Pamela Bozzoli, partner of Thomson Geer, sworn on 16 May 2017 and the accompanying exhibit "RPB1"; and (11) a copy of the draft explanatory statement titled "Scheme Booklet for the acquisition of QBiotics Limited and EcoBiotics Limited" to be sent to the shareholders of EcoBiotics and QBiotics ("Scheme Booklet"). 11 Dr Gordon and Dr Reddell are the co-founders of EcoBiotics and are directors of both EcoBiotics and QBiotics. They are also directors of QGL. Dr Gordon and Dr Reddell each verified that nothing material has been omitted from the Scheme Booklet and that all of the statements of fact in the Scheme Booklet are true and correct, save to the extent that they anticipate the making of court orders or the lodgement of the Scheme Booklet for the scheme for registration with ASIC.
Schemes are recommended by independent board committees 12 The directors of EcoBiotics and QBiotics established independent board committees ("IBC") so as to avoid commonality of directors and limit the prospect of conflicting interests in the consideration of the terms of the proposed merger and the decision making concerning whether each IBC should endorse the merger proposal to the shareholders of each respective entity. 13 The IBCs of EcoBiotics and QBiotics each unanimously recommend that the EcoBiotics scheme participants and the QBiotics scheme participants vote in favour of the EcoBiotics scheme and the QBiotics scheme, respectively, in the absence of a superior proposal. 14 Subject to the same qualification, each of the members of the IBCs of EcoBiotics and QBiotics intend to vote in favour of the EcoBiotics scheme and the QBiotics scheme, respectively.
Independent expert report 15 Pitcher Partners Corporate Finance Limited ("Pitcher Partners"), the independent expert appointed by the directors of EcoBiotics and the directors of QBiotics to assess the schemes, has prepared a report which contains its opinion with respect to whether each scheme is fair and reasonable and therefore in the best interests of the scheme participants. 16 Pitcher Partners evaluated the EcoBiotics scheme on a change of control basis because the effect of the EcoBiotics scheme is that the EcoBiotics scheme participants will hold approximately 16.75% of the issued shares in QGL. In evaluating whether the EcoBiotics scheme was fair, Pitcher Partners compared the value of a share in EcoBiotics prior to the implementation of the EcoBiotics scheme, on a controlling interest basis, against the scheme consideration that QGL is required to furnish on implementation (0.21 QGL shares for each EcoBiotics share, assessed on a minority interest basis). Based on that analysis, Pitcher Partners concluded that the EcoBiotics scheme was fair, which led it to conclude that it was reasonable and in the best interests of the EcoBiotics scheme participants. 17 Pitcher Partners separately evaluated the QBiotics scheme on a minority interest basis because the effect of the QBiotics scheme is that the QBiotics scheme participants will hold approximately 83.25% of the issued shares in QGL. In evaluating whether the QBiotics scheme was fair, Pitcher Partners compared the value of a share in QBiotics prior to the implementation of the QBiotics scheme, on a minority interest basis, against the scheme consideration that QGL is required to furnish on implementation (one QGL share for each QBiotics share, assessed on a minority interest basis). Based on that analysis, Pitcher Partners concluded that the QBiotics scheme was fair, which led it to conclude that it was reasonable and in the best interests of the QBiotics scheme participants. 18 In the case of both the schemes, Pitcher Partners concluded that, aside from their assessment of fairness, the perceived advantages of implementing both schemes outweighed the perceived disadvantages.
Jurisdictional requirements 19 There are three stages to an application under s 411 of the Act for approval of a members' scheme of arrangement. First, the application to the Court to approve the convening of a scheme meeting and the explanatory statement to be sent to members concerning the scheme. Secondly, the holding of the scheme meeting at which members (or a relevant class of members) vote on the proposed scheme. Thirdly, the application to the Court to approve the proposed scheme: cf. Re CSR Ltd [2010] FCAFC 34; (2010) 183 FCR 358 at [7] per Keane CJ and Jacobson J; Amcom Telecommunications Limited, re Amcom Telecommunications Limited [2015] FCA 341 at [8] per McKerracher J ("Amcom"); Central Pacific Minerals NL [2002] FCA 239 at [6] per Emmett J. 20 The following matters are required to be proved at the first stage (Orion Telecommunications Ltd, re Orion Telecommunications Ltd [2007] FCA 1389 at [5]): (1) the plaintiff is a "Part 5.1 body"; (2) the proposed scheme is an "arrangement" within the meaning of s 411 of the Act; (3) the explanatory statement will provide proper disclosure to members; (4) the scheme is bona fide and properly proposed; (5) ASIC has had reasonable opportunity to examine the proposed scheme and the explanatory statement, to make submissions and has had 14 days' notice of the proposed hearing date of the first court hearing; and (6) any other procedural requirements have been met, such as r 3.2 of the Federal Court (Corporations) Rules 2000 (Cth) as to the nomination of a chairperson for the scheme meeting. 21 The approach of the Court at the first court hearing is that "the court will not ordinarily summon a meeting unless the scheme is of such a nature and cast in such terms that, if it achieves the statutory majority at the ... meeting the court would be likely to approve it on the hearing of a petition which is unopposed": per Street CJ (with whom Hutley and Samuels JJA agreed) in FT Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 ("FT Eastment") at 72. The High Court approved this observation in Australian Securities Commission v Marlborough Gold Mines Ltd [1993] HCA 15; (1993) 177 CLR 485 at 504. The FT Eastment approach has been consistently followed. 22 In Re DUET Finance Ltd [2017] NSWSC 415 at [14], Black J noted: The Court does not substitute its commercial judgment for that of the members to whom the scheme is directed, but considers whether the scheme is one that sensible businesspeople might conclude is of benefit to members: Re Prime Infrastructure Holdings Ltd [2010] NSWSC 1104; (2010) 80 ACSR 193 at [13]; Re AXA Asia Pacific Holdings Ltd [2011] VSC 4 at [13]; Re Aspen Group Ltd [2015] NSWSC 1718 at [11]. 23 The second court hearing is where the court makes its "final determination", and is the most important hearing if the matter becomes contested, but in practice the first court hearing is where the court intervenes if it has any concerns: cf. Re Archaean Gold NL (1997) 23 ACSR 143 at 146-147). 24 At both court hearings there is a duty of disclosure which falls on the plaintiff and its counsel, as set out in the dictum of Barrett J in Permanent Trustee Company [2002] NSWSC 1177; (2002) 43 ACSR 601 at [7]: The fact that the application is ex parte is not without some significance. The absence of any defendant or contradictor sharpens the duty of the applicant. While a case such as the present is distinguishable from one where an interlocutory injunction is sought in the absence of the defendant (in that there is here no defendant as such) I think it is fair to say that an applicant in this kind of situation, like an applicant ex parte for an injunction, carries the responsibility of bringing to the court's attention all matters that could be considered relevant to the exercise of its discretion.
Part 5.1 body 25 The term "Part 5.1 body" is defined in s 9 of the Act to mean, relevantly, a company.
"Arrangement" 26 The term "arrangement" is of wide import. In NRMA Limited (Application of); NRMA Insurance Limited (Application of) [2000] NSWSC 82; (2000) 156 FLR 349, Santow J said (at [20]): Generally speaking, unless the arrangement is ultra vires the company or seeks to deal with a matter for which a special procedure is laid down by the Corporations Law or to evade a restriction imposed by the Corporations Law, almost any arrangement otherwise legal which touches or concerns the rights and obligations of the company or its members or creditors, and which is properly proposed, may come under s411; compare Re International Harvester Co of Australia Pty Ltd [1953] VLR 669 at 672 per Lowe ACJ. 27 In AGL Energy Services (Queensland) Pty Ltd v AGL Energy Services Pty Ltd [2010] FCA 452 at [13], Emmett J identified a distinction between the compromise or arrangement contemplated by s 411 and a scheme for the reconstruction or amalgamation of bodies as contemplated by s 413. At [15], his Honour said, relevantly: The element of compromise or arrangement that is necessary to satisfy s 411 need not be of any great magnitude or significance, so long as what is proposed can fairly be characterised as a compromise or arrangement between a company, on the one hand, and its members, on the other. That will suffice to enliven the Court's powers under s 413, so long as the compromise or arrangement is proposed for the purposes of, or in connection with, a scheme for the reconstruction or amalgamation. 28 An arrangement to which s 411(1) relevantly applies is one between a company and its members or any class of them. Section 411 does not define the term class. In Amcom, at [21], McKerracher J stated that the term ought to be given such a meaning: … as will prevent the section being so worked as to result in confiscation and injustice, and that it must be confined to those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest. citing Bowen LJ in Sovereign Life Assurance Co v Dodd [1892] 2 QB 573 at 583.
Part 5.1 bodies 29 The evidence confirms that each of EcoBiotics and QBiotics is a Part 5.1 body.
Proposed schemes are "arrangements" 30 The schemes are expressed to be arrangements between EcoBiotics and its shareholders and QBiotics and the QBiotics scheme participants respectively. 31 In the case of each scheme, there is a single class of members.
Explanatory statement 32 Dr Gordon and Dr Reddell have given evidence of the process undertaken for the scheme for the preparation and verification of the Scheme Booklet, and (as set out at [11] above) have verified that nothing material has been omitted from the Scheme Booklet and that all of the statements of fact in the Scheme Booklet are true and correct, save to the extent that they anticipate the making of court orders or the lodgement of the Scheme Booklet for the scheme for registration with ASIC. The Scheme Booklet includes the explanatory statement for each of the schemes. 33 On the basis of this evidence, I am satisfied that there is prima facie evidence that the Scheme Booklet will provide proper disclosure to the shareholders of EcoBiotics and QBiotics.
Scheme is bona fide and properly proposed 34 The scheme implementation agreement dated 5 May 2017, between EcoBiotics, QBiotics and QGL by which the parties agree to implement the schemes upon and subject to the terms of the scheme implementation agreement provides prima facie evidence that the scheme is bona fide and has been properly proposed.
Notice to ASIC 35 There is evidence that ASIC has had a reasonable opportunity to examine the proposed scheme and the explanatory statement. 36 By letters dated 16 May 2017, ASIC informed each of EcoBiotics and QBiotics that it had examined the terms of the relevant scheme and the draft explanatory statement in accordance with its policy in Regulatory Guide Schemes of Arrangement ("RG60"). ASIC stated that it did not propose to appear to make submissions, or intervene to oppose the schemes at the first hearing. ASIC did not appear at the first hearing.
Other procedural requirements have been met 37 Consents to act as chairman and alternate chairman at the scheme meetings have been obtained. I was satisfied that the various procedural requirements for making the orders sought were met.
Particular aspects of the schemes 38 The plaintiffs drew attention to the following matters:
Ineligible Foreign Shareholders 39 Ineligible foreign shareholders are not entitled to receive shares in QGL and on the implementation date (as defined in the scheme implementation agreement) the new QGL shares to which that ineligible foreign shareholder would otherwise have been entitled will issue to a selling agent appointed by EcoBiotics and QBiotics who will dispose of the shares and remit the net proceeds of sale to each ineligible foreign shareholder (cl 4.1 of the scheme implementation agreement).
Performance risk 40 Adequate safeguards against "performance risk" have been provided for in the EcoBiotics scheme and the QBiotics scheme as follows: (1) subject to the conditions precedent set out in cl 2 of each of the EcoBiotics scheme and the QBiotics scheme, on the implementation date, the scheme shares will be transferred to QGL (cl 4.1 of each of the EcoBiotics scheme and the QBiotics scheme); (2) on the implementation date, as soon as practicable after QBiotics' and EcoBiotics' receipt of the executed share transfers from QGL, QBiotics and EcoBiotics will enter, or procure the entry of, the name and address of QGL in their respective registers of members as the holder of all the scheme shares (cl 4.1 of the EcoBiotics scheme and the QBiotics scheme); and (3) QGL will provide the scheme consideration to the EcoBiotics scheme participants and the QBiotics scheme participants (cl 4.2 of each of the EcoBiotics scheme and the QBiotics scheme). 41 QGL has entered into Deeds Poll in favour of each EcoBiotics scheme participants and the QBiotics scheme participants in which it covenants to observe and perform all obligations contemplated of it under the EcoBiotics scheme and the QBiotics scheme respectively (cl 4 of each of the Deeds Poll). The Deeds Poll have been included in the Scheme Booklet.
Deemed warranty 42 The EcoBiotics scheme and the QBiotics scheme include deemed warranties by the EcoBiotics scheme participants and the QBiotics scheme participants respectively that their shares will be free from encumbrances (at cl 6.4 of each scheme) and that they have the full power and capacity to sell and transfer their shares to QGL. 43 Clauses to this effect are now common place and have been approved in other schemes where they are disclosed to the relevant security holders. Specific disclosure of, and appropriate prominence is given to, these deemed warranties in Sections 4, 7 and 12 of the Scheme Booklet. 44 I was satisfied that there was no order sought which goes beyond current accepted practice.
Conclusion 45 Finally, I was satisfied that the proposed schemes are of such a nature and are cast in such terms that, if approved at the scheme meetings, the Court would be likely to approve the schemes on the hearing of an unopposed application. I certify that the preceding forty-five (45) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gleeson.
AGL Energy Services (Queensland) Pty Ltd
AGL Energy Services Pty Ltd
[2011] VSC 4
(1993) 177 CLR 485
(2000) 156 FLR 349
(2010) 183 FCR 358