Australian Capital Television Pty Ltd v Minister for Transport and Communications

JACKMAN J 1 This is an application by Blackmores Ltd (Blackmores) for orders to convene a meeting of its ordinary shareholders (Blackmores Shareholders) to consider a scheme of arrangement between Blackmores and Blackmores Shareholders (the Scheme) pursuant to s 411 of the Corporations Act 2001 (Cth) (the Act). 2 Blackmores is an Australian public company limited by shares and listed on the Australian Securities Exchange (ASX). It is a manufacturer and distributor of natural health products across the Asia-Pacific region. 3 The Scheme is being proposed to effect the acquisition of 100% of Blackmores' ordinary shares by Kirin Health Science Australia Pty Ltd (Kirin Sub), a wholly owned subsidiary of Kirin Holdings Company, Limited (Kirin), which is a Japanese company listed on the Tokyo Stock Exchange that operates in the food and beverages, pharmaceuticals and health sciences sectors. 4 Under the proposed Scheme, Kirin Sub will acquire all of the outstanding shares in Blackmores for all-cash consideration of $95.00 per Blackmores share less the cash amount of any special dividend which may be paid by Blackmores prior to implementation of the Scheme (Scheme Consideration). The maximum aggregate amount payable by Kirin Sub as Scheme Consideration, having regard to Blackmores' current issued share capital and assuming Blackmores does not pay a special dividend in connection with the Scheme, will be approximately $1,858 million. 5 The effect of the Scheme will be to make Blackmores a wholly owned subsidiary of Kirin. It is proposed that Blackmores will be delisted from the ASX following implementation of the Scheme. 6 Blackmores and Kirin entered into a Scheme Implementation Deed (SID) on 26 April 2023, under which they agreed to implement the Scheme subject to the satisfaction, or waiver, of various conditions precedent. 7 If those conditions precedent are satisfied or waived (as applicable), the Scheme will be implemented in the following manner: (a) by no later than the business day before the Implementation Date (currently expected to be 10 August 2023), Kirin or Kirin Sub will deposit (or will procure the deposit) into an Australian dollar denominated trust account with an authorised deposit taking institution in Australia, operated by Blackmores or Computershare (Blackmores' share registry) as trustee for the Blackmores Shareholders, an amount equal to the aggregate Scheme Consideration to be provided to Blackmores Shareholders (clause 5.1(a) of the Scheme); (b) Blackmores will, on the Implementation Date, pay the Scheme Consideration to each Scheme Shareholder (clause 5.1(b) of the Scheme); and (c) subject to and following the Scheme Consideration being provided to the Scheme Shareholders, all of the Blackmores shares held by Blackmores Shareholders will be transferred to Kirin Sub (clause 4.2(a) of the Scheme). 8 The evidence in support of the application for the orders sought at the first Court hearing has been modelled closely on my reasoning in Re Vita Group Ltd [2023] FCA 400. That is unsurprising in light of the fact that a number of partners of Herbert Smith Freehills, the solicitors for Blackmores, have been leaders in the public debate as to improving the efficiency of scheme hearings, notably Mr Tony Damian and Mr Andrew Rich. The evidence may be summarised as follows: (a) the affidavit of Blackmores' solicitor, Mr Hastings, affirmed 16 May 2023, exhibiting an ASIC company search for Blackmores obtained from ASIC on 16 May 2023, which provides formal evidence that Blackmores is a Part 5.1 body; (b) the affidavit of Blackmores' Group General Counsel and Company Secretary, Ms Mediati, sworn 6 June 2023, giving evidence of: (i) the business and capital structure of Blackmores; (ii) verification of the factual information related to Blackmores in the Scheme Booklet; (iii) notification to ASIC of the hearing and provision to ASIC of a draft of the Scheme Booklet and the Scheme more than 14 days ago; (iv) the ability and willingness to act as the proposed chairperson and alternate chairperson of the proposed Scheme Meeting, for the purposes of r 3.2 of the Federal Court (Corporations) Rules 2000 (Cth), given on information and belief (and I note at this point that I dispense with the requirement under r 3.2(b)(ii), consistently with Re Vita Group Ltd at [22]); (v) the amount of the break fee contemplated by the SID as a percentage of the implied equity value of Blackmores based on the Scheme Consideration; and (vi) exhibiting the SID and the draft Scheme Booklet. (c) tender of the "usual letter" from ASIC, which provides evidence that it has had a reasonable opportunity to examine the terms of the Scheme and the draft explanatory statement, and that it does not propose to appear at the first Court hearing; and (d) the affidavit of Kirin's Deputy General Manager, Corporate Strategy Department, Mr Yamazaki, giving evidence of verification of the factual information related to Kirin in the Scheme Booklet. 9 It is proposed that the Scheme meeting be held on 18 July 2023 at 11.00am, in person at Blackmores' Warriewood Campus, 20 Jubilee Avenue, Warriewood, New South Wales (Scheme Meeting). The Scheme Meeting will not be conducted as a virtual meeting or "hybrid meeting", although a webcast will be available online to allow Blackmores Shareholders to view (but not participate in) the Scheme Meeting. Blackmores Shareholders can also vote by lodging a proxy. 10 The Blackmores directors unanimously recommend that Blackmores Shareholders vote in favour of the Scheme, in the absence of a superior proposal, and subject to the independent expert continuing to conclude that the Scheme is in the best interests of Blackmores Shareholders. Subject to the same qualifications, each Blackmores director intends to vote all Blackmores shares held or controlled by him or her in favour of the Scheme. 11 Blackmores has obtained a report from Kroll Australia Pty Ltd (Kroll) as to whether, in the expert's opinion, the Scheme is fair and reasonable and in the best interests of Blackmores Shareholders. Kroll opines that the Scheme is fair and reasonable and in the best interests of Blackmores Shareholders in the absence of a superior proposal. The basis of Kroll's assessment is set out in the report at Annexure 1 to the Scheme Booklet. There is no affidavit by the author of that report, consistently with Re Vita Group Ltd at [19]. 12 As I said in Re Vita Group Ltd at [41], the question which the Court must deal with is whether the arrangement proposed is of such a nature and is cast in such terms that, if the arrangement receives approval by the statutory majority at the relevant meeting, the Court would be likely to approve the arrangement on the hearing of any application that is unopposed, including the need to ensure that there is sufficient disclosure to those who will be affected by the arrangement of its details and effect. 13 The Scheme is a conventional all-cash acquisition scheme and follows well-established practice. There is nothing in the terms of the Scheme, or in its effect on Blackmores Shareholders, that would warrant the Court declining to permit its consideration by members. 14 Consistent with the expectations of the Court which I referred to in Re Vita Group Ltd at [18] and [42], there are a number of aspects of the Scheme that have properly been brought to the Court's attention. These are outlined below.

Execution of Deed Poll by foreign corporation 15 The SID, or Deed Poll, has been executed by both Kirin and Kirin Sub. Kirin is a company incorporated in Japan. 16 Where a deed poll is executed by a foreign company, a practice has developed in recent years of providing an affidavit from an appropriately qualified lawyer in the foreign jurisdiction of incorporation proving due execution of the deed poll. That practice can be traced to Re Simavita Holdings Limited [2013] FCA 1274 at [44], where Farrell J indicated that it was necessary for the scheme company to provide evidence of Canadian law that a Canadian company had duly executed the deed poll and that the scheme company shareholders would be entitled to enforce it in Canada in accordance with its terms. The reasoning for that requirement was not recorded in the judgment. However, a reason was suggested by Gleeson J in Re Staging Connections Group Limited [2015] FCA 1012 at [44]-[48], namely that the statutory assumption of due execution in s 129(5) of the Act is not available in respect of a deed executed by a foreign company. 17 The practice of providing foreign law evidence of enforceability of the deed poll in the foreign jurisdiction, as distinct from evidence of due execution, generally ceased following the decision of Yates J in Re Veda Group Limited [2015] FCA 1506 at [30]-[33], which held that evidence of foreign enforceability was not required where (as in the present case) the deed is governed by the law of an Australian jurisdiction and contains a submission to the jurisdiction of Australian courts. Although the deed poll in Re Veda Group Limited contained an exclusive jurisdiction clause in favour of Australian courts, the reasoning of Yates J in Re Veda Group Limited has been applied to deeds poll conferring non-exclusive jurisdiction on Australian courts: Re Investa Listed Funds Management Limited [2018] NSWSC 1766 at [14] (Black J); Re 3P Learning Limited [2020] NSWSC 1573 at [14] (Black J). 18 Blackmores has not led foreign law evidence proving due execution by Kirin of the Deed Poll. Mr Williams SC submits, and I accept, that such evidence is unnecessary and the asserted requirement for such evidence, tracing its origins to Re Simavita Holdings Ltd, is wrong in principle and should no longer be followed. 19 First, in an acquisition scheme such as this, it is the near universal practice that bidders are required to deposit the scheme consideration into a trust account maintained by the scheme company or its share registry on trust for scheme shareholders, and for the transfer of the scheme securities from shareholders to the bidder to occur only after the consideration is received on trust or distributed to shareholders. The Scheme in this case contains such a mechanism: cll 4.2(a), 5.1(a) and (b) of the Scheme as described above. This mechanism comprehensively addresses performance risk by preventing the transfer of any scheme securities before the consideration has been provided in full by the bidder. There will be no circumstance in which Blackmores Shareholders will need to sue on the Deed Poll to recover payment for shares already transferred under the Scheme and no performance risk arising from the possibility that the Deed Poll was not validly executed by Kirin. The only conceivable risk to Blackmores Shareholders is in relation to the remote possibility that, if the Deed Poll were breached by a decision by Kirin and Kirin Sub not to comply with their obligations under it before paying the amount of the Scheme Consideration, Blackmores Shareholders may want to claim damages for the loss of expectation of receiving the premium above the undisturbed market value of their shares which would be conferred by the Scheme Consideration, although I am not aware of any case in which that has ever occurred. 20 Second, although the assumption in s 129(5) of the Act applies only to companies registered under the Act, scheme shareholders have the benefit of the "indoor management rule" at common law (the rule in Turquand's case, being Royal British Bank v Turquand (1856) 119 ER 886). Sections 128 and 129 of the Act are not a code and the common law rule continues to apply: Australian Capital Television Pty Ltd v Minister for Transport and Communications (1989) 86 ALR 119 at 157 (Gummow J). The effect of the rule is that persons dealing with a company in good faith may assume that acts within its constitution and powers have been properly and duly performed and are not bound to inquire whether acts of internal management have been regular: Northside Developments Pty Ltd v Registrar-General (1990) 170 CLR 146 at 154-5 (Mason CJ), 171 (Brennan J), 192 (Dawson J), 207 (Toohey J). Scheme shareholders, unless on notice of some irregularity in the execution of the deed poll, have the benefit of that rule and would be entitled to enforce the deed poll in an Australian court even if there were some defect in the due execution of the deed poll under the bidder's internal regulation not apparent on the face of the document. Even if the applicable law on a question in an Australian court as to reliance by external parties on the appearance of due execution by a Japanese company is Japanese law (and I express no opinion on that issue), I presume in the absence of evidence to the contrary that Japanese law in relation to the subject matter of s 129(5) of the Act and the rule in Turquand's case is the same as Australian law: Neilson v Overseas Projects Corporation of Victoria Ltd [2005] HCA 54; (2005) 223 CLR 331 at [125] (Gummow and Hayne JJ), [249] (Callinan J). This does not seem to me to be an area of law (such as the avoidance or evasion of capital gains tax) which could not be assumed to be a field resting on great and broad principles likely to be part of any given legal system: see Damberg v Damberg [2001] NSWCA 87; (2001) 52 NSWLR 492 at [162] (Heydon JA, with whom Spigelman CJ and Sheller JA agreed). 21 Third, the practical experience of requiring foreign law evidence of due execution over the past decade is that the evidence is so highly qualified as to make it of negligible utility in any event. The lack of utility is reinforced by the fact that the evidence of foreign law has typically been given by the lawyer acting for the bidder in the transaction, and, in the highly unlikely event that the lawyer has given erroneous advice as to the requirements for due execution, the error would most probably be repeated in the opinion on foreign law by that same person. 22 The risk to scheme shareholders if a foreign bidder has not properly executed the deed poll is therefore almost entirely, if not completely, theoretical. The costs of obtaining foreign law opinions can be substantial, often reflecting the reluctance of foreign lawyers to act as expert witnesses, and the evidentiary benefit of those opinions is negligible. Those costs should no longer be imposed by the Court as a transaction cost on the parties.

Blackmores Equity Incentives 23 As set out in section 9.2 of the Scheme Booklet, Blackmores: (a) operates long-term and short-term incentive plans under which share rights may be granted to employee participants (including senior management); (b) operates a "salary sacrifice" plan under which eligible Blackmores employees and directors may be granted share rights through sacrificing a portion of their remuneration; and (c) from time to time grants share rights as sign-on incentives to newly hired senior managers and one-off grants of share rights to individual senior managers in recognition of their role and contribution to Blackmores. (Blackmores Equity Incentives.) 24 Clauses 3.1(j) and 4.4 of the SID require that, as a condition precedent to the Scheme, by the second Court hearing Blackmores must take steps so that there will be no Blackmores Equity Incentives on issue upon implementation of the Scheme. The manner in which Blackmores intends to satisfy this condition is described in section 9.2(b) of the Scheme Booklet. Rights granted under the salary sacrifice plan will be cancelled and participants refunded amounts previously contributed by way of salary sacrifice. All other categories of Blackmores Equity Incentives will be notionally accelerated and cash settled on a full vesting of performance conditions and partial vesting of time conditions basis and cancelled. 25 Mr Williams SC submits, and I accept, that holders of performance rights or similar rights to receive Blackmores shares who are also Blackmores Shareholders are not in a separate class of members by reason only that they also hold such rights: Re Cashcard Australia Limited [2004] FCA 223; (2004) 48 ACSR 738 (Jacobson J). 26 Mr Symington (Blackmores' Managing Director and CEO) holds Blackmores Equity Incentives. In consideration for the cancellation of his unvested incentives he will receive a cash payment of $6,305,720. It has been recognised that where a director will receive a substantial benefit in relation to a scheme which other shareholders will not receive, that benefit should be disclosed as a matter for shareholders to take into account when considering that director's recommendation: Re Kidman Resources Limited [2019] FCA 1226 at [104]-[115] (O'Callaghan J); Re Villa World Limited [2019] NSWSC 1207; (2019) 139 ACSR 550 at [27]-[40] (Black J). A director's recommendation is acceptable if sufficient disclosure of the relevant director's interest in the scheme is provided to shareholders: Re DWS Limited [2020] FCA 1590; (2020) 148 ACSR 616 at [41]-[49] (Beach J). Mr Symington's interest is prominently disclosed in the Chairperson's letter and in section 9.1(b) of the Scheme Booklet.

Break Fee 27 Under clause 11.4 of the SID, Blackmores must pay Kirin a "Reimbursement Amount" of $18,478,103 (exclusive of GST) in certain circumstances (Break Fee). The circumstances in which the Break Fee is payable do not depart from standard practice: see clause 11.4 of the SID. No Break Fee is payable merely because the resolution submitted to the Scheme Meeting in respect of the Scheme is not approved by the majorities required under s 411(4)(a)(ii) of the Act: see clause 11.6(b) of the SID. 28 The Break Fee represents approximately 1% of the implied equity value of Blackmores (based on the Scheme Consideration), which accords with the 1% guideline in the Australian Takeovers Panel "Guidance Note 7: Lock-up devices". The calculation of this percentage is expressed at paragraphs 21 and 22 of Ms Mediati's affidavit, and is based on the 19,450,635 fully paid ordinary shares in the capital of Blackmores on issue. The limited evidence on this topic follows my reasoning in Re Vita Group Ltd at [24]-[26].

Special dividend 29 As noted above, if the Scheme is approved and implemented, Blackmores Shareholders will receive Scheme Consideration of $95.00 cash for each Scheme Share held, less the cash amount of any special dividend which may be paid by Blackmores prior to implementation of the Scheme. The Blackmores Board may determine to pay a fully-franked special dividend of up to $3.34 per Blackmores share subject to (among other things) the availability of franking credits, sufficient cash or funds available, and confirmation from the Australian Taxation Office in respect of any dividend. 30 The special dividend is a tax effective means of distributing cash to Blackmores Shareholders in connection with the Scheme. It does not involve financial assistance for the purpose of s 260A of the Act, as Beach J has held in a series of cases: Re Citadel Group Limited [2020] FCA 1580; (2020) 148 ACSR 598 at [47]-[53]; Re RXP Services Limited [2021] FCA 38 at [49]-[57]; Re Uniti Group Limited [2022] FCA 671; (2022) 160 ACSR 602 at [50]-[61]; Re Oz Minerals Limited [2023] FCA 197 at [7] and [18]. 31 The Scheme Booklet states that the final decision of the Blackmores Board regarding the payment of any special dividend will be communicated to Blackmores Shareholders by way of an ASX announcement before the second Court hearing (section 4.3(b)). In relation to other schemes, the announcement as to the payment of such a dividend has often been made before the cut-off time for proxies to be lodged in advance of the scheme meeting. In my view, this is entirely a matter for the directors of the scheme company to decide. Provided that the intended timing of the announcement is disclosed in the explanatory statement, it is no part of the Court's function to encourage or force the scheme company into an alternative timeframe which the Court might regard as preferable in the interests of shareholders. The prospect that shareholders may have to cast their votes before they know for certain whether the special dividend will be paid does not strike me as a matter which would cause the Court to refuse to approve the Scheme if the statutory majorities are obtained.

Voting Deed between Kirin and Marcus Blackmore 32 As disclosed in the Chairperson's letter and section 9.6 of the Scheme Booklet, Mr Marcus Blackmore (who has a relevant interest in approximately 18.08% of Blackmores shares) has entered into a Voting Deed with Kirin. A copy of the deed was released to the ASX on 28 April 2023. Under the deed, Mr Blackmore has agreed with Kirin to vote the Blackmores shares held or controlled by him in favour of the Scheme, unless otherwise directed by Kirin. 33 The Voting Deed requires Mr Blackmore to vote the Blackmores shares held or controlled by him against any resolution to approve a competing proposal, although he may terminate the deed if the Blackmores' Board recommends a competing transaction and Kirin has not accepted an offer to purchase his shares at a price equal to the consideration payable under the recommended competing transaction or made a takeover offer at or above that consideration. 34 Mr Williams SC submits, and I accept, that Mr Blackmore and the entity through which he holds certain of his shares do not constitute a separate class. The Scheme does not affect his rights against the company differently from those of other Blackmores Shareholders: First Pacific Advisers LLC v Boart Longyear Ltd [2017] NSWCA 116; (2017) 121 ACSR 136 at [80] (Bathurst CJ, with whom Beazley P and Leeming JA agreed).

Proposed Communications with Shareholders 35 Ms Mediati gives evidence that Blackmores has engaged Georgeson Shareholder Communications Australia Pty Ltd (Georgeson) to: (a) operate a shareholder information telephone line for any Blackmores Shareholders who have questions about the Scheme or disclosure in the Scheme Booklet; and (b) prepare a form of presentation that Blackmores may provide to proxy advisers to assist them in understanding the Scheme and its terms, and assist Blackmores in responding to queries and research reports from proxy advisers in relation to the Scheme. 36 Georgeson has been instructed: (a) in responding to queries from Blackmores Shareholders who call the shareholder information telephone line; and (b) in preparing any presentation for proxy advisers and responding to queries and research reports from proxy advisers, to provide and include (as applicable) information which reflects and is consistent with the information contained in the Scheme Booklet, and to instruct the persons operating the shareholder information telephone line and engaging with any proxy advisers not to depart from the information in the Scheme Booklet in any material way during those inbound calls or proxy adviser engagements. 37 As I said in Re Vita Group Ltd at [32], it is neither necessary nor desirable for the Court to consider whether it should approve such communications, unless a supplementary explanatory statement is required. Blackmores does not seek such approval, and I regard that as the correct approach.

Conclusion 38 Accordingly, I am satisfied that the Scheme is of such a nature and is cast in such terms that, if it achieves the statutory majorities at the Scheme Meeting, the Court would be likely to approve it. It is therefore appropriate to make the orders sought by Blackmores. I certify that the preceding thirty-eight (38) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Jackman.