Australian Leaders Fund Ltd v Equity Trustees Ltd, in the matter of Australian Leaders Fund Ltd

Australian Leaders Fund Ltd v Equity Trustees Ltd, in the matter of Australian Leaders Fund Ltd - [2021] FCA 834 - FCA 2021 case summary — Zoe

[3]

Scheme of arrangement 4. Pursuant to ss 411(1) and 1319 of the Corporations Act 2001 (Cth) (Act): (a) the Plaintiff convene a meeting (Scheme Meeting) of the holders of its fully paid ordinary shares (Shareholders) for the purpose of considering, and if thought fit, agreeing (with or without modification) to the proposed scheme of arrangement to be made between the Plaintiff and its Shareholders (Scheme) in the form sent electronically to the court by the plaintiffs at 5.54 pm on 16 July 2021 which has been tendered and marked Exhibit 1 in these proceedings (Scheme Booklet); (b) the Scheme Meeting be held on 23 August 2021 virtually and in person at Level 9, 40 St Georges Terrace, Perth, Western Australia 6000 commencing at 12 noon (Perth time); (c) the time for determining eligibility to vote at the Scheme Meeting be fixed at 5:00pm (Perth time) on 21 August 2021; (d) the chairperson of the Scheme Meeting be Henry Shiner, or failing him, Ron Shaul Zuckerman; (e) the chairperson appointed to the Scheme Meeting has the power to adjourn or postpone the Scheme Meeting in his absolute discretion for such time and to such date as the chairperson considers appropriate; (f) the chairperson appointed to the Scheme Meeting be permitted to attend and chair the meeting by video-conferencing technologies; (g) at the Scheme Meeting, the resolution to approve the scheme be decided by way of a poll; (h) the Scheme Booklet be approved for distribution to Shareholders, together with: (i) a proxy form for the Scheme Meeting (substantially in the form of the pro forma copy which is Annexure IL-7 to the Affidavit of Ido Levanon affirmed 14 July 2021 in these proceedings) (Proxy Form); (ii) (for a Shareholder whose registered address is in Australia) a bank account update form (substantially in the form of the pro forma copy which is Annexure IL-8 to the Affidavit of Ido Levanon affirmed 14 July 2021 in these proceedings) (Australian Bank Account Form); (iii) (for a Shareholder whose registered address is outside Australia) a bank account update form (substantially in the form of the pro forma copy which is Annexure IL-9 to the Affidavit of Ido Levanon affirmed 14 July 2021 in these proceedings) (Overseas Bank Account Form); and (iv) an Israeli withholding tax declaration (substantially in the form of the pro forma copy which is Annexure IL-10 to the Affidavit of Ido Levanon affirmed 14 July 2021 in these proceedings) (IWHT Form). 5. Pursuant to s 1319 of the Act, the Plaintiff is to cause to be issued on or before 22 July 2021: (a) to each Shareholder who, in accordance with the Act, has nominated an electronic address for the purposes of receiving notices of meeting from the Plaintiff, at such address, an email substantially in the form of the document which is Annexure HHJ-10 to the Affidavit of Helen Hui Jin affirmed 16 July 2021 in these proceedings, including: (i) an electronic hyperlink to download the Scheme Booklet; (ii) an electronic hyperlink to the webpage where that Shareholder can electronically lodge proxies for the Scheme Meeting; and (iii) attaching a copy of the IWHT Form and either (for a Shareholder whose registered address is in Australia) the Australian Bank Account Form or (for a Shareholder whose registered address is outside Australia) the Overseas Bank Account Form; (b) to each Shareholder (other than those referred to in 2(a) above) by pre-paid post, or in the case of a Shareholder whose registered address is outside Australia, by pre-paid air mail, addressed to that Shareholder's address set out in the register of members of the Plaintiff: (i) a letter with the URL address to the Scheme Booklet substantially in the form of the document which is Annexure HHJ-11 to the Affidavit of Helen Hui Jin affirmed 16 July 2021 in these proceedings; (ii) a Proxy Form, an IWHT Form and either (for a Shareholder whose registered address is in Australia) the Australian Bank Account Form or (for a Shareholder whose registered address is outside Australia) the Overseas Bank Account Form; and (iii) a reply paid envelope addressed to the Plaintiff. 6. Pursuant to s 1319 of the Act, the Plaintiff shall by no later than 16 August 2021, and may at any other time, cause to follow up those Shareholders who have not returned their IWHT Form or otherwise complied with the Israeli Withholding Tax Ruling in Annexure B of the Scheme Booklet, by either: (a) if such Shareholder has, in accordance with the Act, nominated an electronic address for the purposes of receiving notices of meeting from the Plaintiff, sending to such address, an email substantially in the form of the document which is Annexure HHJ-12 to the Affidavit of Helen Hui Jin affirmed 16 July 2021 in these proceedings; and/or (b) issuing a letter to such Shareholder by pre-paid post, or in the case of a Shareholder whose registered address is outside Australia, by pre-paid air mail, a letter substantially in the form of the document which is Annexure HHJ-13 to the Affidavit of Helen Hui Jin affirmed 16 July 2021 in these proceedings. 7. Pursuant to s 1319 of the Act, the Plaintiff may cause to follow up those Shareholders who have not returned their IWHT Form or otherwise complied with the Israeli Withholding Tax Ruling in Annexure B of the Scheme Booklet, by calling such Shareholder, provided the caller follows a script substantially in the form of the document which is Annexure HHJ-14 to the Affidavit of Helen Hui Jin affirmed 16 July 2021 in these proceedings. 8. Rule 2.15 of the Federal Court (Corporations) Rules 2000 (Cth) shall not apply to the Scheme Meeting. 9. Notice of the hearing of the application pursuant to subsection 411(4)(b) of the Corporations Act for orders approving the Scheme be published once in "The Australian" newspaper, by advertisement substantially in the form of Annexure "A" to these orders, such advertisement to be published on or before 24 August 2021, and the Plaintiff otherwise be exempted for compliance with the requirement to publish a notice of the hearing of the application pursuant to rule 3.4 of the Federal Court (Corporations) Rules 2000 (Cth). 10. The proceeding be stood over to 10:15am on Monday, 30 August 2021 for the hearing of any application to approve the Scheme. 11. There be liberty to apply. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. ANNEXURE A Dragontail Systems Limited ACN 614 800 136 Notice of hearing to approve scheme of arrangement TO all the creditors and members of Dragontail Systems Limited (ACN 614 800 136) (Dragontail). TAKE NOTICE that at 10:15am (Sydney time) on 30 August 2021, the Federal Court of Australia at Law Courts Building, 184 Phillip Street, Queens Square, Sydney NSW 2000, Australia will hear an application by Dragontail seeking the approval of a compromise or arrangement between Dragontail and its ordinary shareholders (Shareholders) as proposed by a resolution passed at a meeting of Shareholders held on 23 August 2021. If you wish to oppose the approval of the compromise or arrangement, you must file and serve on Dragontail a notice of appearance, in the prescribed form, together with any affidavit on which you wish to rely at the hearing. The notice of appearance and affidavit must be served on Dragontail at its address for service at least 1 day before the date fixed for the hearing of the application. The address for service of Dragontail is: c/- Thomson Geer, Level 14, 60 Martin Place, Sydney NSW 2000, Australia (Attention: Jason Marcus). Jason Marcus, Thomson Geer Solicitor for Dragontail Systems Limited

[5]

Evidence relied upon by DTS 5 The application is supported by an affidavit of Ido Levanon affirmed on 14 July 2021. Mr Levanon is the managing director of DTS. In his affidavit, Mr Levanon: (a) explains that DTS is a provider of software and analytical solutions for the optimisation of the food preparation and delivery industry; (b) annexes copies of the constitution of DTS, its latest annual report and a company search of DTS and also describes its capital structure; (c) explains the negotiation of the Scheme Implementation Deed with Bidco (Scheme Implementation Deed) and the content of the booklet that has been prepared for the Scheme (Scheme Booklet); (d) explains the content and rationale for the inclusion in the Scheme of the exclusivity provisions and the break fee of approximately 1% of the maximum consideration payable for the acquisition of the Scheme Shares; (e) identifies the steps that DTS proposes to take to bring the Israeli withholding tax issue to the attention of shareholders; (f) explains the due diligence and verification process undertaken by the DTS board for the Scheme; (g) confirms that the DTS board unanimously recommends to shareholders that they vote in favour of the Scheme in the absence of a superior proposal; and (h) describes the process for the dispatch of the Scheme Booklet to shareholders. 6 DTS also relies on the following affidavits: (a) six affidavits of Helen Hui Jin, a solicitor employed by the law firm representing DTS, affirmed on 25 June, 9 July, 15 July (two affidavits) and 16 July (two affidavits) 2021, attaching company searches and communications with the Australian Securities and Investments Commission (ASIC), including a copy of ASIC's usual first court hearing letter; (b) an affidavit of Sally Mills Glover, a director of Bidco, affirmed on 15 July 2021 providing information about Bidco and the verification process undertaken by Bidco; (c) an affidavit of Henry Shiner, a non-executive director of DTS, affirmed on 13 July 2021 confirming that he had agreed to chair the Scheme Meeting; (d) an affidavit of Ron Shaul Zuckerman, a non-executive director of DTS, affirmed on 13 July 2021 confirming that he had agreed to act as an alternate chairperson for the Scheme Meeting; (e) an affidavit of David John McCourt, a director of BDO Corporate Finance (East Coast) Pty Ltd, affirmed on 15 July 2021 annexing his independent expert's report in which he concludes that the proposed Scheme is fair and reasonable and, as a result, is in the best interests of the shareholders of DTS at the time of writing his report; (f) an affidavit of Eng Hua Ng, a director of BDO Corporate Tax (WA) Pty Ltd, affirmed on 12 July 2021 annexing his letter that was included in the Scheme Booklet addressing the Australian taxation implications for the proposed Scheme; (g) an affidavit of Oz Liberman, a tax partner of Kost, Forer, Gabbay & Kasierer, annexing his letter that was included in the Scheme Booklet addressing the Israeli withholding tax issues; and (h) an affidavit of Ester Copley, a Hebrew to English translator accredited by the National Accreditation Authority for Translators and Interpreters, affirmed on 9 July 2021 confirming that she had checked and confirmed the English translation of the Israeli withholding tax ruling that was included in the Scheme Booklet.

[7]

Relevant principles for the exercise of discretion 10 The Court will not ordinarily make orders for the convening of a scheme meeting unless the scheme is of such a nature and cast on such terms that if it receives the statutory majority at the meeting, the Court would be likely to approve it on the hearing of an application that was not opposed: FT Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69, 69 and 72 (Street CJ, with whom Hutley and Samuels JJA agreed); approved in Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485; [1993] HCA 15 at 504; Re Central Pacific Minerals NL [2002] FCA 239 at [8]; and CSR Limited, in the matter of CSR Limited (2010) 183 FCR 358; [2010] FCAFC 34 at [12]. 11 At the first court hearing, the Court exercises its supervisory jurisdiction in order to review the scheme and the explanatory statement and to raise any queries that it might have with the plaintiff: Alstom Signalling Solutions Pty Ltd, in the matter of Alstom Signalling Solutions Pty Ltd v Alstom Transport Australia Pty Limited [2016] FCA 838 at [21] (Gleeson J). The Court needs to be satisfied that there are no obvious flaws in the scheme and that there is an adequate explanation provided to persons who have a financial interest in the proposed scheme: In the matter of Coca-Cola Amatil Limited [2021] NSWSC 270 at [13] (Black J) (Coca-Cola Amatil). 12 The Court should consider at the first court hearing whether the proposed scheme is not inappropriate and whether it is one that sensible business people might consider is of benefit to its members: Leaders Fund at [15] citing Re Sonodyne International Ltd (1994) 15 ACSR 494 at 499 per (Hayne J); Integra Mining Limited, in the matter of Integra Mining Limited [2012] FCA 1414 at [11] (McKerracher J); and Amcon at [10]. 13 The Court does not need to be satisfied that no better scheme could have been proposed and ultimately that is a question for the members themselves to determine at the scheme meeting: Associated Advisory Practices Limited, in the matter of Associated Advisory Practices Limited [2013] FCA 761 at [22] (Farrell J); Coca-Cola Amatil at [13]; and Leaders Fund at [15]. 14 Although the second court hearing is when the Court makes its final determination, in practice, the first court hearing is where the Court will typically intervene if it has concerns. A reason that has been advanced for this is that the market views the approval by the Court of the convening of scheme meetings as providing assurance that the scheme, at least in form and substance, has received a preliminary clearance by the Court and that trading in the company's securities thereafter will proceed on that basis: Re Archaean Gold NL (1997) 23 ACSR 143 at 147; and Leaders Fund at [15].

[9]

Performance risk and Israeli withholding tax 17 In considering whether to approve a scheme involving the participation of persons other than the company and its members, the Court typically wishes to ensure that those persons (commonly referred to as outsiders) are bound to perform the role assigned to them and that those obligations are able to be enforced. The obligations of outsiders are not captured by s 411 of the Act, which is confined to the plaintiff company and its members, unless the outsider is formally joined to the proceedings: Westfield Holdings Limited (2004) 49 ACSR 734; [2004] NSWSC 458 at 739 (Barrett J). 18 In this case the relevant outsiders are Bidco, an entity acting as the Paying Agent and an entity acting as the Withholding Agent. 19 The obligations of Bidco are secured by a deed poll in favour of the Scheme Participants executed on 27 May 2021. 20 In the present case, the Israeli withholding tax obligations need to be satisfied. While not all Scheme Participants will be subject to those tax obligations, it will be necessary for each of them to satisfy the Israeli tax authority that they are either exempt or have paid the amount owed. 21 The Scheme provides that the consideration received from Bidco will be paid into a trust account of the Paying Agent. The Paying Agent is responsible for collecting documentation from Scheme Participants necessary to establish their entitlement to an exemption from paying Israeli withholding tax. The Paying Agent is required to then remit any Israeli withholding tax payable to the Withholding Agent, which in turn is required to remit the funds to the Israeli Tax Authority. 22 In Re Buka Minerals NL (1983) 8 ACLR 507 at 510, McLelland J considered how best to secure the obligations of outsiders to a scheme, including by use of a deed poll or a trustee arrangement. The deed poll alternative has since emerged as the primary method to secure obligations of outsiders: see by way of example, Leaders Fund at [22]; and Coca-Cola Amatil at [17]. 23 A trustee arrangement rather than a deed poll to secure the obligations of outsiders has been accepted by the Court: see by way of example, In the matter of BINGO Industries Limited [2021] NSWSC 798 at [27] (Black J) (BINGO Industries). 24 The obligations of the Paying Agent and the Withholding Agent are secured by deeds executed on 8 July 2021 pursuant to which each entity is expressed to be a trustee for the Scheme Participants, thus establishing a direct trustee-beneficiary relationship between each entity and the Scheme Participants. 25 Israeli withholding tax will be deducted in an amount equal to 25% of any Scheme Consideration received by Scheme Participants, unless they provide documentation that establishes that they are exempt. In those circumstances it is important that this matter is specifically brought to the attention of Scheme Participants. The existence of the Israeli withholding tax issue is disclosed in the Scheme Booklet. These disclosures include prominent "health warnings", as described by Mr Oakes SC, and are contained in: the "Frequently Asked Questions" in sections 4.7 and 4.8, with cross-references to the further comprehensive explanations provided in section 2.2; the Israeli tax letter in section 12; the Israeli withholding tax ruling in annexure B; and cl 5 of the Scheme Implementation Deed contained in Annexure D. I am satisfied that these disclosures, including the amendments to the "health warnings" in response to concerns that I raised in the course of the hearing and the revised form of the orders providing for the follow up to Scheme Participants who have not returned the exemption documentation, are sufficient to draw the Israeli withholding tax issue to the attention of the Scheme Participants.

[11]

Break fee 29 Pursuant to cl 12 of the Scheme Implementation Deed, DTS must pay Bidco a break fee of $935,000 in the circumstances there prescribed (DTS Break Fee). 30 Break fees are not uncommon features in schemes of arrangement and have not been an obstacle to the making of orders under s 411(1) of the Act. They have been justified by reference to the costs incurred by the bidder, the benefit the bidder confers on scheme participants by increasing the value of the target company and the desirability, from the perspective of members, of the making of takeover offers to them: APN News & Media Limited, in the matter of APN News & Media Limited (2007) 62 ACSR 400; [2007] FCA 770 (APN News) at [43]-[44] (Lindgren J). 31 No entitlement to the break fee arises if the shareholders do not approve the Scheme by the requisite majorities. I am therefore satisfied that it does not give rise to an inappropriate disincentive to Scheme Participants in their consideration of the proposed merger: Adelaide Bank Limited, in the matter of Adelaide Bank Limited [2007] FCA 1582 at [31] (Lander J); and BINGO Industries at [23]. 32 The DTS Break Fee is approximately 1% of the equity value of DTS, which is consistent with the Takeovers Panel's guideline that break fees should not exceed 1% of the target's equity value: Guidance Note 7 at [9]; and APN News at [46]-[55]. 33 I am also satisfied that the DTS Break Fee was arrived at as a result of negotiation between DTS and Bidco and that the directors of DTS consider that the amount of the break fee was reasonable and appropriate in the circumstances to secure the benefits to DTS and the Scheme Participants from the Scheme. 34 Further, the triggers for the payment of the DTS Break Fee, such as a change in the directors' recommendation or the completion of a competing proposal, are consistent with the principles set forth in the Guidance Note 7 at [9]. 35 Finally, I note that the existence of the DTS Break Fee is prominently disclosed in section 13.1(e) of the Scheme Booklet.

[14]

Hybrid Meeting of Shareholders 42 Given the impact of the COVID-19 pandemic on the holding of meetings in person, courts have been prepared to approve the holding of virtual meetings of scheme participants to approve schemes: In the matter of Ellerston Global Investments Limited [2020] NSWSC 879 at [28] (Black J). 43 In light of the continuing uncertainties caused by COVID-19 restrictions, including lockdowns in response to the Delta variant of the virus, it is proposed that a hybrid meeting of DTS shareholders be convened where the face-to-face part of the meeting is to be held in Perth, but it is to be chaired remotely from New South Wales. An order permitting the chair or alternate chair of the meeting to attend and chair a meeting by video link technology was made by Farrell J in Palladium Group Holdings Pty Ltd, in the matter of Palladium Group Holdings Pty Ltd [2020] FCA 1123, a matter in which senior counsel for the plaintiff in the present case appeared. 44 It is also proposed that "hard copy shareholders" will be sent a hard copy letter with an electronic link to access the Scheme Booklet online, rather than a hard copy of the Scheme Booklet. Significantly, the proposed hard copy letter concludes with the statement: If you would like to receive a hard copy Scheme Booklet or if you have any questions, please call the DTS Share Registry on +61 8 9389 8033 Monday to Friday between 9.00am and 5.00pm (Perth time). 45 The provision of an electronic link to the Scheme Booklet is consistent with the procedure that was provided for in s 5(1)(f) of the Corporations (Coronavirus Economic Response) Determination (No. 3) 2020 (Cth) (Coronavirus Determination). This was a special arrangement instituted to cover the COVID-19 pandemic. It contained a sunset clause, but this has not been extended. I note, however, that on 29 March 2021, ASIC issued a media release in which it announced that it would adopt a "no-action" position with respect to the convening and holding of virtual meetings, notwithstanding that the Coronavirus Determination ceased to have effect on 21 March 2021. 46 An order was recently made in Coca-Cola Amatil providing for the distribution of scheme documents through the provision of an URL link in an email to shareholders who had an email address recorded with the share registry. The documents accessible by the link comprised the scheme booklet, a personalised proxy form and a scheme meeting online guide which contained instructions regarding how to best participate in a virtual meeting: Coca-Cola Amatil at [26]. 47 In any event, as Banks-Smith J found in Asaleo Care Limited, in the matter of Asaleo Care Limited [2021] FCA 406 at [77], ss 411 and 1319 of the Act provide the Court with power to make an order that a meeting take place virtually. As noted by her Honour, ss 411 and 1319 have been relied upon in an environment where COVID-19 risks must be taken into account, citing by way of example the decision of Moshinsky J in Sienna Cancer Diagnostics Limited, in the matter of Sienna Cancer Diagnostics Limited [2020] FCA 899 at [102]-[111].

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