AIRR Holdings Ltd, in the matter of AIRR Holdings Ltd [2019] FCA 2180 - FCA 2019 case summary — Zoe

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AIRR Holdings Ltd, in the matter of AIRR Holdings Ltd [2019] FCA 2180

[2019] FCA 2180

Federal Court of Australia|2019-10-29|Before: Besanko J

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Court

Federal Court of Australia

Decision date

2019-10-29

Before

Besanko J

Source

Original judgment source is linked above.

Judgment (26 paragraphs)

[1]

INTRODUCTION 1 This proceeding involved two applications under s 411 of the Corporations Act 2001 (Cth) (the Act). I made two sets of orders on 16 September 2019 and 29 October 2019 respectively. These are my reasons for making those orders.

[2]

APPLICATION FOR ORDERS UNDER SECTION 411(1) OF THE CORPORATIONS ACT 2001 (CTH) - ORDERS MADE ON 16 SEPTEMBER 2019

[3]

Introduction 2 By Originating process filed on 10 September 2019, AIRR Holdings Ltd (AIRR) sought an order pursuant to s 411(1) of the Act that a meeting (Scheme Meeting) of the holders of its fully paid ordinary shares (AIRR Members) be convened for the purposes of considering and, if thought fit, approving, with or without modifications, the scheme of arrangement proposed between AIRR and AIRR Members (the Proposed Scheme). 3 AIRR is an unlisted public company registered in Victoria. It was incorporated on 2 February 2008. It is a member based buying and marketing group that stocks and supplies rural merchandise and pet and produce stores with products to sell to end users. Its operating model is that it sells products as a wholesaler to both member retailers (which are retailers who pay a yearly fee to AIRR to, among other things, access discounted prices on the products sold by AIRR) and other wholesale customers located throughout Australia. 4 AIRR's managing director is Mr Peter Law. Its chairman is Mr Craig Farrow. Mr Glenn Pearsall, Mr Lachlan Cox and Mr Graeme Jolly are non-executive directors. 5 As at 31 July 2019, AIRR had a total issued share capital of 14,500,000 shares and 200 shareholders. 6 The Proposed Scheme, if implemented, will result in the acquisition of all of the shares in AIRR by Elders Ltd (Elders). AIRR will become a wholly owned subsidiary of Elders and will continue to operate as a standalone business. 7 It was proposed that the Scheme Meeting be held at 11:00am (AEST) on Friday, 25 October 2019 at Bayview on the Park, 52 Queens Road, Melbourne, Victoria. 8 On 16 September 2019, I made orders convening the Scheme Meeting.

[5]

Scheme Consideration 12 Under the Proposed Scheme, Elders proposes to acquire all of the shares in AIRR for a total consideration payable by Elders of $10.85 per share (the Scheme Consideration). The Scheme Consideration comprises 50% cash and 50% shares. 13 The total cash consideration payable by Elders is approximately $79 million or $5.425 per share in AIRR. This includes the amount of any "Permitted Special Dividend" and any "Final Dividend" (the Dividends). 14 The board of AIRR proposes to declare a fully franked Permitted Special Dividend of up to $2.60 per share at a meeting of directors on 25 October 2019. If the board of AIRR resolves to declare a Permitted Special Dividend, then the amount of that dividend will be provided to AIRR by Elders in the form of an unsecured, interest free loan. If the board of AIRR does not resolve to declare a Permitted Special Dividend, or resolves to declare a Permitted Special Dividend but for an amount less than $2.60 per share, Elders will increase the cash component payable to AIRR Members by a corresponding amount. 15 The board of AIRR also declared a fully franked Final Dividend of $0.25 per share on 20 August 2019. This is to be paid on 27 September 2019 regardless of whether the Proposed Scheme is implemented. 16 AIRR Members will also receive, if available to them, the benefit of franking credits attached to the Dividends of $1.22 per share. 17 The total cash consideration also includes the balance of the cash consideration of $2.575 per share. 18 The total consideration payable by Elders by way of the issue of shares is approximately $79 million. This is comprised of the issue of 13 million shares in Elders at an agreed value of $6.03 per share. Those shares were trading at $6.78 per share at the close of trade on 9 September 2019. 19 The maximum cash consideration is $79 million (including the Dividends) and the maximum share consideration is 13 million Elders shares. 20 AIRR Members may elect to receive the Scheme Consideration (after the payment of the Dividends) in cash or shares. If, as a result of elections by AIRR Members, the ratio of cash consideration to share consideration exceeds 50:50, an adjustment will be made. If a member does not make an election then the member will receive the "default" consideration of $5.425 in cash (reduced by the Dividends) and $5.425 in Elders shares. 21 Elders will also assume AIRR's liabilities in the amount of approximately $30 million.

[8]

The Formal Requirements 29 At the first stage, the Court must be satisfied that: (1) AIRR is a Pt 5.1 body; (2) the Proposed Scheme is an "arrangement" within s 411(1) of the Act; (3) there has been or will be proper disclosure to AIRR members; (4) the Proposed Scheme is bona fide and properly proposed; (5) the Australian Securities and Investments Commission (ASIC) was given 14 days' notice of the hearing of the application made pursuant to 411(1) and has had a reasonable opportunity to examine the terms of the Proposed Scheme and the draft explanatory statement and to make submissions; and (6) any other procedural requirements have been complied with. 30 With respect to the above matters, I reached the following conclusions. 31 First, I was satisfied that AIRR is a Pt 5.1 body within the meaning of s 9 of the Act. It is a company registered under the Act. 32 Secondly, I was satisfied that the Proposed Scheme is an "arrangement" within the meaning of s 411(1) of the Act. It is a scheme of arrangement designed to effect the acquisition of the shares of AIRR by Elders: see Re Foundation Healthcare Ltd [2002] FCA 742; (2002) 42 ACSR 252 at [39] per French J; DuluxGroup, in the matter of DuluxGroup Ltd [2019] FCA 961; (2019) 136 ACSR 546 (DuluxGroup (No 1)) at [17] per O'Bryan J. 33 Thirdly, I was satisfied, having regard to the first affidavit (including exhibits) of Mr Farrow affirmed on 10 September 2019 and to the first affidavit (including exhibits) of Mr Peter Hastings affirmed on 13 September 2019, that there has been proper disclosure to AIRR Members. Mr Farrow gave evidence that he believed that the statements of fact relating to AIRR in the explanatory booklet are correct. Mr Hastings gave evidence that Elders had verified that the statements made about Elders in the explanatory booklet are correct. Further, Mr Farrow gave evidence that KPMG Financial Advisory Pty Ltd, which were engaged by AIRR to act as an independent accountant, provided an opinion that nothing had come to their attention that caused them to believe that the "Combined Group Unaudited Pro Forma Financial Information" was not properly complied with. 34 Fourthly, I was satisfied that the Proposed Scheme is bona fide and has been properly proposed. I accepted AIRR's submission that the Implementation Deed entered into by AIRR and Elders, pursuant to which the parties agreed to implement the Proposed Scheme upon, and subject to, the terms of the Deed, is prima facie evidence of those facts: see EcoBiotics Limited, in the matter of EcoBiotics Limited [2017] FCA 643 at [34] per Gleeson J. 35 Fifthly, I was satisfied that ASIC has been provided with more than 14 days' notice of the hearing. ASIC has also had a reasonable opportunity to examine the terms of the Proposed Scheme and the draft explanatory booklet. ASIC was provided with a copy of the draft explanatory booklet on 26 August 2019 and the updated draft explanatory booklet on 2 September 2019. At the hearing, AIRR tendered a bundle of emails and a table which was marked as exhibit A1. In those emails, ASIC set out the following "material concerns" with the draft explanatory booklet: Firstly, we are concerned that the statements relating to "all cash" or "all share" elections may potentially be misleading given the likelihood of shareholders who make either an "all cash" or "all share" election actually receiving all cash or all shares. Offers that provide for an "all cash" or "all share" alternative are not normally subject to scaleback. … Secondly, we are concerned that the additional tables that were inserted into section 2.6.3 of the draft scheme booklet provided to us last Friday, are not in the form contemplated and suggested to you last Thursday, based on the Asciano Limited scheme of arrangement. … The tables enable shareholders to see the impacts of the shareholder elections for maximum cash or maximum shares subject to scaleback on a % basis. The tables in section 2.6.3 of the AIRR draft scheme booklet [do] not appear to contemplate both axis [sic] for possible elections. The purpose of this information is for shareholders to be able to see the likelihood (if any) of them receiving maximum cash or maximum shares depending on their election and to better understand the possible scheme consideration they may actually receive before the time when notice of the outcome of elections is provided. We consider this information to be of assistance to shareholders given the very complicated calculations that are required in order to consider the possible permutations under the scheme terms. 36 With respect to the first concern, AIRR proposed to include an amendment to the orders it sought to the effect that the explanatory booklet be approved, subject to the use of the words "All Cash" and "All Shares" in relation to the Scheme Election being deleted and replaced with "Maximum Cash" and "Maximum Shares". With respect to the second concern, AIRR proposed to include an amendment to the orders it sought to the effect that the explanatory booklet be approved, subject to any minor amendments required or approved by ASIC for registration under s 412(6) of the Act. I was satisfied that these amendments were appropriate and included them in the orders I made. 37 As to the final matter, I was satisfied that, having regard to the annexure to AIRR's written outline of submissions, the relevant procedural requirements have been satisfied. Mr Farrow has consented to being nominated as chairperson at the Scheme Meeting and Mr Jolly has consented to being nominated as an alternate chairperson.

[9]

The Exercise of the Court's Discretion 38 If the Court is satisfied of the formal requirements, its discretion to make an order under s 411(1) of the Act is enlivened. 39 With respect to the role of the Court in exercising its discretion under s 411(1), Barrett J said the following in Re Westfield Holdings [2004] NSWSC 458; (2004) 49 ACSR 734 at [4]: The court's role on a s 411 application of this kind has been described in a number of cases. According to the formulation adopted by Santow J in Re NRMA Insurance Ltd (2000) 33 ACSR 523, the court must see, on the material placed before it, that the proposal fits within the statutory concept of arrangement or compromise, that there will be available to members all the main facts relevant to the exercise of their judgment, that ASIC has had a reasonable opportunity to examine the proposal and that the scheme is so conceived and presented as to that structure, purpose and effect that there is no apparent reason, so far as can be foreseen, why it should not, in due course, receive the court's approval if the necessary majority of members' votes is achieved. To substantially similar effect are observations of Austin J in Re GIO Building Society Ltd (2001) 39 ACSR 77, French J in Re Foundation Healthcare Ltd (2002) 42 ACSR 252 and Parker J in Re Ranger Minerals Ltd (2002) 42 ACSR 582. Slightly different, but by no means conflicting, are the criteria enunciated by Emmett J in Re Central Pacific Minerals NL [2002] FCA 239 and repeated in the following terms by Conti J in Re CSR Ltd (2003) 45 ACSR 34: (i) the likelihood or otherwise that the court will approve the scheme of arrangement, if the statutory majority of shareholders is achieved at the proposed scheme meeting; (ii) whether there has been compliance with such preliminary matters as are relevant to the holding of the meeting; (iii) where [sic] there will be sufficient disclosure, to those persons and entities who will be affected by the scheme of arrangement, of its detail and effects; and (iv) whether there has been reasonable opportunity for the commission to examine the terms of the scheme of arrangement. 40 It is well-established that the Court does not consider the business or commercial efficacy of the scheme of arrangement at the first stage, and that it will not substitute its commercial judgment for that of the members: Re ACM Gold Ltd (1992) 34 FCR 530; (1992) 7 ACSR 231 at 235-236 per O'Loughlin J; Adelaide Bank Limited, in the matter of Adelaide Bank Limited [2007] FCA 1582 at [24] per Lander J. 41 AIRR referred me to the following statement of Beach J in Amcor Limited, in the matter of Amcor Limited [2019] FCA 346 at [47]: My function on an application to order the convening of a meeting is supervisory. At this stage I should generally confine myself to ensuring that certain procedural and substantive requirements have been met including dealing with adequate disclosure, with limited consideration of issues of fairness. But having said that, it is appropriate to consider the merits or fairness of a proposed scheme at the convening hearing if the issue is such as would unquestionably lead to a refusal to approve a proposed scheme at the approval hearing, that is, the proposed scheme appears now to be on its face "so blatantly unfair or otherwise inappropriate that it should be stopped in its tracks before going any further" (Re Foundation Healthcare Ltd (2002) 42 ACSR 252 at [44] per French J). (emphasis in original) 42 AIRR raised the following matters as relevant to the exercise of the discretion: (1) performance risk; (2) the break fee; (3) the exclusivity provisions; and (4) the Proposed Scheme is not fair but is reasonable.

[10]

Performance Risk 43 In DuluxGroup (No 1), O'Bryan J said the following (at [25]): … [T]he entity that will be providing the Scheme Consideration is not party to the Scheme and is not (and cannot be) directly bound by it. As such, its obligations do not depend upon s 411 of the Act, which is confined to the obligations of the plaintiff company and its members: Re Westfield Holdings Ltd (2004) 49 ACSR 734 at 739. In considering whether to approve a scheme involving the participation of a person other than the plaintiff company and its members (here, Nippon Paint), it is important to ensure that that other party is bound to perform the role assigned to it and that its obligations are able to be enforced. In this context, the courts have considered the "performance risk" as regards the obligations to be performed by the non-scheme party: see for example Re Amcor Ltd [2019] FCA 346 at [53]; Re Coles Group Ltd (2007) 25 ACLC 1380 at 1386 [38]; Re Lonsdale Financial Group Ltd [2007] VSC 394 at [42]; Re KAZ Group Ltd [2004] FCA 738 at [4]-[5]; Re Healthscope Ltd [2010] VSC 367 at [31]-[32]; Re Mitchell Communication Group [2010] VSC 423 at [30]-[31]; Re AWB Ltd [2010] VSC 456 at [16]; and Re AXA Asia Pacific Holdings Ltd [2011] VSC 4 at [21]-[25]. 44 Under the Proposed Scheme, if it becomes effective, Elders will, in consideration of the transfer of the "Scheme Shares", provide or procure the provision of the "Scheme Consideration" to "Scheme Shareholders" in accordance with the terms of the Proposed Scheme. Critically, the effect of clause 4.2 of the Proposed Scheme is such that the transfer of Scheme Consideration by Elders is to precede the transfer of the Scheme Shares by Scheme Shareholders. 45 Further, the obligations of Elders will be secured by its entry into a Deed Poll in favour of the AIRR Members. Under the Deed Poll, which is annexed as Sch 2 to the Implementation Deed, Elders has undertaken to: (1) perform the actions and obligations attributed to it under the Proposed Scheme; and (2) provide the "Scheme Consideration" to each "Scheme Shareholder" in accordance with the terms of the Proposed Scheme. 46 I was satisfied that the above provisions mean that AIRR Members are adequately protected against any performance risk: see ABB Grain Ltd, in the matter of ABB Grain Ltd [2010] FCA 1309 at [33].

[11]

Break Fee 47 Under the Implementation Deed, AIRR and Elders agree that if they enter into the Implementation Deed and the Proposed Scheme is subsequently not implemented, Elders will incur significant costs. In those circumstances, the Implementation Deed provides that AIRR is required to pay to Elders a break fee of $1,537,250 (exclusive of GST) in certain prescribed circumstances. It is significant that the break fee is not payable simply because the AIRR Members do not approve the Proposed Scheme pursuant to s 411(4)(a)(ii) of the Act. 48 In DuluxGroup (No 1), O'Bryan J said the following (at [31]): Break fees have become a common feature of commercial transactions of this nature. The effect of such fees on the interests of shareholders has been considered by the courts in connection with schemes of arrangement and by the Takeovers Panel in connection with share acquisitions, the control of companies and the purposes of Chapter 6 of the Act. In general terms, the courts and the Takeovers Panel accept that break fees can be justified by reference to the costs incurred by the offeror and the benefit that an offer may confer on the members of the target company by increasing its value. However, such fees may adversely affect the interests of shareholders if the amount of the fee is such that it is likely to coerce shareholders into agreeing to a scheme or to deter the making of a competing offer for the company's shares: see Re SFE Corporation Ltd (2006) 59 ACSR 82 at [7] per Gyles J; Re APN News & Media Ltd (2007) 62 ACSR 400 at [37]-[55] per Lindgren J; Re Toll Holdings Ltd [2015] VSC 123 at [27]-[30] per Robson J; Takeovers Panel, Guidance Note 7 - Lock Up Devices (Issue 4, 11 February 2010) at [7]. 49 I was satisfied that the break fee in this case was not of such magnitude that it could influence voting or that there were other unusual circumstances. 50 The break fee represents approximately 1% of the total equity value of AIRR based on the Scheme Consideration of $10.85 per share. In its current Guidance Note 7: Lock-up Devices, the Takeovers Panel has stated that, in the absence of other factors, a break fee not exceeding 1% of the equity value of the target does not generally give rise to unacceptable circumstances. 51 I was also satisfied, having regard to the first affidavit of Mr Farrow sworn on 10 September 2019, that the break fee was agreed to as the result of arm's length negotiations between AIRR and Elders. 52 With respect to the commercial basis for the break fee, AIRR submitted that the courts and the Takeovers Panel, when considering schemes of arrangement and share acquisitions, have accepted that break fees can be justified by reference to the costs incurred by the offeror and the benefit of an offer to the members of the target company by increasing its value. It also submitted that such fees may adversely affect members if the amount of the fee is likely to coerce members into agreeing to a scheme or deter a competing offer. AIRR referred me to DuluxGroup (No 1) at [31]. 53 Clause 13.2(a) of the Implementation Deed, which addresses the basis for the break fee, provides the following: 13.2 Costs Incurred by [Elders] (a) The fee payable under clause 13.3 has been calculated to reimburse [Elders] for the following: (i) fees for legal and financial advice in planning and implementing the Proposed Transaction; (ii) reasonable opportunity costs incurred in engaging in the Proposed Transaction or in not engaging in other alternative acquisitions or strategic initiatives; (iii) costs of management and directors' time in planning and implementing the Proposed Transaction; (iv) out of pocket expenses incurred in planning and implementing the Proposed Transaction; (v) costs associated with the financing arrangements in respect of the Proposed Transaction; and (vi) any damage to [Elders]'s reputation associated with a failed transaction and the implications of those damages if [Elders] seeks to execute alternative acquisitions in the future, (vii) in each case, incurred by [Elders] directly or indirectly as a result of having entered into this deed and pursuing the Proposed Transaction. (b) The parties agree that: (i) the amount of fees, costs and losses referred to in this clause 13.2 is inherently unascertainable and that, even after termination of this deed, the costs will not be able to be accurately ascertained; and (ii) the amount of the costs payable under clause 13.3 is a genuine and reasonable pre-estimate of those fees, costs and losses (it being acknowledged by the parties that the costs would most likely be in excess of this amount). 54 Elders also submitted that it has undertaken an equity raising and entered into arrangements with financiers to have funds in place as contemplated by the conditions precedent to the transaction. It submitted that this is sufficient evidence to satisfy the Court that the break fee has been arrived at on an appropriate basis. 55 I also note that the break fee was clearly disclosed in the explanatory booklet. 56 In the circumstances, I was satisfied that the terms of the break fee do not amount to a reason to decline to make an order under s 411(1) of the Act.

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The Exclusivity Provisions 57 The Implementation Deed contains the following exclusivity provisions: (1) "no existing discussions" (clause 15.1); (2) "no shop" restriction (clause 15.2); (3) "no talk" restriction (clause 15.3); and (4) "no due diligence" (clause 15.4). 58 In Re Arthur Yates & Co Ltd [2001] NSWSC 40; (2001) 36 ACSR 758 at [9], Santow J said, by reference to a "no shop provision", that an exclusivity provision should satisfy the following requirements: (1) it should be for no more than a reasonable period capable of precise ascertainment, hence the need to ensure that any exclusivity period is properly defined, (2) while an exclusivity clause may differentiate between actively soliciting an alternative merger proposal or simply dealing with an unsolicited one, in either case it is important that such an exclusivity clause be framed so that it is subject to the overriding obligation not to breach the directors' fiduciary duties or be otherwise unlawful, and (3) there should be adequate prominence given to that constraint in the explanatory memorandum sent to shareholders. (original formatting retained.) 59 I was satisfied that the exclusivity period was capable of precise ascertainment and was for a reasonable period. The exclusivity period is defined in the Implementation Deed as commencing on the date of the Implementation Deed, being 15 July 2019, and ending on the earliest of 31 December 2019, the date the Proposed Scheme becomes effective, or the date the Implementation Deed is terminated in accordance with its terms. 60 Under the Implementation Deed, the "no talk" and "no due diligence" exclusivity provisions are subject to a "fiduciary carve-out". Clause 15.5 provides that: 15.5 Exceptions Clauses 15.3 and 15.4 do not apply if the [AIRR] Board, acting in good faith, determines: (a) where there is a written Competing Proposal, that the Competing Proposal is a Superior Proposal or the steps which the [AIRR] Board proposes to take may reasonably be expected to lead to a Competing Proposal which is a Superior Proposal; and (b) after receiving written legal advice from [AIRR]'s external legal advisers, that failing to respond to the Competing Proposal may constitute a breach of its fiduciary or statutory duties. 61 ASIC raised a concern in relation to the use of the "reasonableness limitation" in the fiduciary carve-out. In an email to Mr Brett Cowell and Ms Anna Young on 10 September 2019, Priti Joshi of ASIC stated that: Clause 15.5 limits the board's fiduciary obligations with a "reasonableness limitation". In ASIC's view, requiring a target's board to act "reasonably" when discharging its fiduciary duties can undermine the board's ability to carry out its duties and can impact on the takeover process. We consider that the word "reasonably" should be removed from sub-clause (a). For further information, please see ASIC report 612. 62 In response to this email, Mr Cowell provided by email a memo to ASIC that addressed this concern on 12 September 2019. AIRR submitted that the concern is a misapprehension on ASIC's part because the word "reasonably" in clause 15.5 does not qualify or fetter the fiduciary duty. It referred me to the decision of Ross Human Directions Limited [2010] ATP 8 in which the Takeovers Panel considered (at [35]-[36]) that wording identical to that in clause 15.5 addressed its concerns in relation to the fiduciary carve-out. Elders also submitted that the Court could be satisfied that the fiduciary carve-out is in an appropriate form consistent with practice and authority. 63 In my opinion, the submission of AIRR was correct. On a fair reading of clause 15.5, the word "reasonably" does not require the AIRR board to act reasonably when discharging its fiduciary duties. Additionally, as Elders submitted, the fiduciary carve-out is in an appropriate form consistent with practice and authority. I note that in any event, the concern on the part of ASIC does not appear to be a continuing one. ASIC has not responded to or addressed Mr Cowell's email or memo of 12 September 2019. 64 I was otherwise satisfied that the fiduciary carve-out is appropriate in the circumstances. Although the "no-shop" provision was not subject to the fiduciary carve-out, I did not consider this to be inappropriate: see Re Healthscope Ltd [2010] VSC 367 at [19]-[22] per Davies J. 65 I was also satisfied, having regard to the first affidavit of Mr Farrow, that the exclusivity provisions were agreed to as a result of arm's length negotiations between AIRR and Elders. 66 Further, it is clear that the exclusivity provisions were given adequate prominence in the information provided to AIRR Members. The substance and effect of the provisions and the fiduciary carve-out were summarised in the explanatory booklet in a section entitled "Considerations relevant to your vote" and set out in more detail in section 4.1. 67 In the circumstances, I did not consider there to be any reason why the exclusivity provisions should lead me to decline to make an order under s 411(1) of the Act.

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The Proposed Scheme is not fair but is reasonable 68 In or around early June 2019, AIRR engaged Leadenhall Corporate Advisory Pty Ltd (Leadenhall) to prepare an independent expert report setting out its opinion as to whether the Proposed Scheme was fair and reasonable and in the best interests of AIRR Members. 69 Leadenhall concluded that the Proposed Scheme is not fair but is reasonable to AIRR Members and is therefore in their best interests. 70 With respect to the fairness of the Proposed Scheme, Leadenhall set out its opinion in its report that: (1) AIRR had a maintainable Earnings Before Interest and Tax (EBIT) of between $21.5 million and $23.5 million and an EBIT multiple of 9.5 times to 10.5 times; (2) the assessed value of AIRR's shares was between $12.41 and $15.34 per share; and (3) the assessed value of the Scheme Consideration was between $11.50 and $11.95. 71 With respect to (3), Leadenhall noted that the value range for AIRR's shares represented a 40-46% premium to the volume weighted average price for the last six months of trading of AIRR's shares. Additionally, Leadenhall did not consider the value of franking credits on the Dividends as part of its assessment, but noted that, to the extent that individual shareholders may use those franking credits, it may increase the attractiveness of the offer. Leadenhall also noted that their assessed value represents a control premium of between 37.9% and 70.5% which it said was at the higher end of what it would consider to be reasonable. 72 Leadenhall concluded that the Proposed Scheme is not fair because the assessed value range of the Scheme Consideration is below the assessed value range of an AIRR share. 73 With respect to the reasonableness of the Proposed Scheme, Leadenhall considered that the Proposed Scheme had the following advantages: (1) Liquidity event: the Proposed Scheme would provide for liquidity in the form of a partial cash payment as well as shares that are traded on a public market, in circumstances where AIRR shares have historically been "extremely illiquid"; (2) Succession planning: the Proposed Scheme provides for the medium to long term transition of Mr Law (the CEO and largest shareholder of AIRR) out of the business with the assistance of Elders' experienced managerial team; (3) Retained exposure to rural sector: the offer of Elders' shares allows AIRR Members to retain exposure to the rural sector if they wish to do so; (4) Permitted Special Dividend: the payment of the Permitted Special Dividend as part of the Scheme Consideration may increase the attractiveness of the Proposed Scheme to AIRR Members who can use the associated franking credits; (5) Limited number of alternate buyers: there is a limited number of alternate buyers with likely only one other strategic buyer in Australia, being Ruralco; (6) No superior alternative offer: Leadenhall was not aware of any competing proposals to acquire AIRR by any third party; 74 Leadenhall considered the Proposed Scheme to have the following disadvantages: (1) Synergy benefits: notwithstanding the fact that Elders identified a significant amount of "revenue synergies", Leadenhall did not consider the Scheme Consideration to include a material amount related to synergy benefits on the basis that the Scheme Consideration is below Leadenhell's assessed value of an AIRR share excluding synergy benefits (although Leadenhall did note that it is common for the consideration not to include potential synergy benefits where there are no competing offers); (2) Tax implications: the Proposed Scheme gives rise to varying tax implications for different shareholders with some shareholders potentially incurring a tax liability as a result of the proposed Scheme; and (3) Break free: AIRR will have to pay a break fee in the circumstances set out in the Implementation Deed. 75 Leadenhall gave its opinion that the Proposed Scheme was reasonable on the basis that the advantages outweighed the disadvantages to AIRR Members. 76 AIRR referred me to Blackgold International Holdings Ltd, in the matter of Blackgold International Holdings Ltd [2017] FCA 601 (Blackgold). That case involved an independent expert report which concluded that the scheme consideration in question was not fair but was reasonable. Justice Siopis considered whether such a conclusion would preclude the Court from making final orders at the second court hearing. At [18]-[19], his Honour said: 18. The shareholders will make of the expert report what they make. However, in my view, this is a case where the observations of French J (as he then was) in Re Foundation Healthcare (2002) 42 ACSR 252 at 265 are pertinent. At [44], French J observed: The court at the stage of ordering a meeting to approve a scheme does not ordinarily go very far into the question of whether the arrangement is one which warrants the approval of the court: Re NRMA Ltd at FLR 359; ACSR 605. That question is to be answered when the scheme returns to the court for final approval. That is not to exclude the possibility that a scheme may appear on its face so blatantly unfair or otherwise inappropriate that it should be stopped in its tracks before going any further. The court is not required to be satisfied either at the convening or approval stage that no better scheme could have been devised. The scheme, on the face of it, is not obviously unfair or otherwise inappropriate. If there are interests adversely and unfairly affected then the probability is that the question will arise at either or both the scheme meetings or the final approval stage. 19. In my view, the expert report does not warrant the Court coming to the view that the scheme is so obviously unfair or unreasonable that it should not be allowed to go to a meeting. It will always be open to an objecting shareholder, or group of shareholders, to make submissions opposing the approval of the scheme at the second hearing. 77 AIRR contended that I ought to adopt the same approach in the present case because: (1) the trading history of AIRR shares, including their volume and price, and the valuations prepared by CoggerGurry, AIRR's auditors, up to the year ended 30 June 2018 (which valued the shares at $7.89 per share as at 30 June 2018 using a multiple of between 6.4 and 6.8); the premium offer for AIRR shares under the Proposed Scheme (see [71] above); and (2) the conclusion by Leadenhall that the Scheme Consideration is reasonable (but is not fair) and was in the best interests of AIRR Members. 78 In my opinion, the independent expert's opinion was an unusual feature of the Proposed Scheme, but not one which I think should have precluded the Court from making an order under s 411(1) of the Act. The Proposed Scheme was not so obviously unfair or unreasonable that it should not be allowed to go to the Scheme Meeting for consideration by AIRR Members: see Blackgold at [19].

[18]

Section 411(4) of the Corporations Act 2001 (Cth) 85 Section 411(4) of the Act provides that an arrangement is binding on a company and its members only if: (1) at a meeting of members convened in accordance with an order made by the Court under s 411(1), it is agreed to by a majority of members present and voting (in person or by proxy) and by 75% of the votes cast; and (2) it is approved by order of the Court. 86 Section 411(6) provides that the Court may grant its approval to the arrangement subject to such alterations or conditions as it thinks just. 87 The Court will ordinarily have regard to the following matters when considering whether to make an order granting approval of a scheme of arrangement: (1) whether the orders of the Court relating to the meeting of members convened in accordance with an order made by the Court under s 411(1) of the Act have been complied with; (2) whether the meeting of members convened by the orders of the Court has approved the scheme with the requisite majority under s 411(4)(b); (3) whether all other requirements of the Act have been satisfied; (4) whether the scheme is fair and reasonable; (5) whether there has been full and fair disclosure to members of all information material to the decision whether to vote for or against the proposed scheme; and (6) whether the plaintiff has brought to the attention of the Court all matters that could be considered relevant to the exercise of the Court's discretion. (see Re Hostworks Group Limited (No 2) [2008] FCA 248 at [10]-[23] per Mansfield J; Re Solution 6 Holdings Ltd (2004) 50 ACSR 113 at [18]-[24] per Jacobson J; Re Permanent Trustee Co Limited (2002) 43 ACSR 601 at [8]-[10] per Barrett J; Re Central Pacific Minerals NL [2002] FCA 239 (Re Central Pacific Minerals) at [8]-[14] per Emmett J; Re Signature Capital Investments Ltd (No 2) [2016] FCA 385; DuluxGroup Limited, in the matter of DuluxGroup Limited (No 2) [2019] FCA 1225 at [10] per O'Bryan J). 88 It is well-established that the role of the Court at this stage is supervisory: see Re Central Pacific Minerals at [13]. The Court retains a residual discretion to withhold its approval of the scheme notwithstanding the satisfaction of and compliance with all procedural matters and orders, although the role of the Court does not extend to usurping the views of members: Re Sierra Mining Ltd, in the matter of Sierra Mining Ltd [2014] FCA 694 (Re Sierra Mining) at [32]; Mantra Group Limited, in the matter of Mantra Group Limited (No 2) [2018] FCA 805 at [7].

[21]

The Proposed Scheme is not fair but is reasonable 95 Earlier in my reasons, I considered the issue of whether the Proposed Scheme was fair and reasonable and in the best interests of AIRR Members (at [68]-[78]). I reached the conclusion that, despite the opinion of the independent expert engaged by AIRR that the Proposed Scheme was not fair but was reasonable, the Proposed Scheme was not so obviously unfair or unreasonable that it should not be allowed to go to the Scheme Meeting for consideration by AIRR Members. 96 AIRR referred me to Re Sierra Mining in which Gilmour J considered an independent expert's opinion that the consideration for the scheme in question was not fair but was reasonable. His Honour referred (at [43]) to the following passage from Zenyth Therapeutics Ltd v Smith [2006] VSC 436; (2006) 60 ACSR 548 at [109]-[114] (per Dodds-Streeton J): [109] In Re Rancoo Ltd [(1995) 17 ACSR 206] Hayne J referred to ASIC Policy Statement 75 and expressed reservations about the attribution of different meanings to the concepts "fair" and "reasonable". He acknowledged the difficulty in accepting that an offer which was not fair could still be reasonable. [110] Hayne J stated: Policy Statement 75 expresses the views of the commission about the expression "fair and reasonable". It does so in a way that seeks to attribute different meanings to the words "fair and reasonable". The policy statement does not treat the expression "fair and reasonable" as a single portmanteau statement conveying a meaning to the listener but, rather, seeks to take each element of the expression and attribute a different meaning to it. Thus, the policy statement expressly contemplates the circumstance that an expert might conclude that a particular offer is not fair but nevertheless is reasonable. I must say that, for myself, I find the proposition that an offer may be "not fair" and yet still "reasonable" one which presents some difficulty. Perhaps that view stems from the impression I have that the expression "fair and reasonable" is but a single expression intended to convey a single overall meaning which is not to be identified by reference to particular constituent elements. [111] Hayne J observed that "the net effect of the two transactions is thus, an effect which leads to the overall benefit of the remaining shareholders of Rancoo by a considerable sum, and it is on that basis that the expert concluded that the selective capital reduction is reasonable". [112] Despite his reservations, Hayne J confirmed the reduction of capital, which was unopposed. He stated that "Thus the reduction that has been proposed is a step that is to be taken, as a part of that overall transaction". [113] There is great force in Hayne J's reservations about an offer which, although not fair, is nevertheless reasonable. Although Re Rancoo Ltd constitutes an example of a reduction of capital which was recognised to be such, persuasive applications of the distinction are likely to be rare. [114] Courts should adopt a cautious approach to the approval of any scheme which the independent expert considers "not fair", particularly when it may involve expropriation at an undervalue. In my opinion, a scheme involving an offer of an undervalue, which is not fair, should generally not be considered reasonable unless it is accompanied by some positive compensatory feature. The fact that the security holders are unable to exact fair, or better, consideration through any avenue alternative to the scheme would not necessarily render an unfair scheme reasonable in the relevant sense. (Footnotes omitted.) 97 AIRR submitted that in Re Sierra Mining, although the inability of the security holders to extract fair or better consideration through an alternative to the scheme would not necessarily render an unfair scheme reasonable, Gilmour J ultimately held that the scheme in question was reasonable because: (1) the independent expert expressed more precisely the basis of the opinion that the scheme was not fair but was reasonable and therefore in the best interests of security holders; (2) ASIC was content with the independent expert report and the form of the explanatory booklet, and this was disclosed at the first court hearing; (3) having regard to the vote at the respective meetings of security holders, there was no suggestion that the scheme was not proposed in good faith or that it was commercially immoral; and (4) the reasons underlying the scheme were clearly stated and put to all security holders. (see Re Sierra Mining at [44]-[47].) 98 AIRR submitted that each of the above matters was applicable in the present case and that AIRR Members had voted overwhelmingly in favour of the Proposed Scheme at the Scheme Meeting and obviously had determined that it was in their best interests to accept the offer. AIRR also made reference to Blackgold in which Siopis J observed (at [75]) that "the shareholders will make of the expert report what they make" (see [76] above). 99 In my opinion, the matters identified by Gilmour J in Re Sierra Mining at [44]-[47] have been satisfied in the present case. I was satisfied that the Proposed Scheme was at least so far fair and reasonable that an intelligent and honest person who is an AIRR Member, properly informed and acting alone, might approve the Proposed Scheme: see Re Sierra Mining at [32]. It was therefore appropriate to exercise the Court's residual discretion to approve the Proposed Scheme.