Australian Securities Commission v Marlborough Gold Mines Limited

Federal Court of Australia|2010-03-16|Before: Ms J, Jacobson J

REASONS FOR JUDGMENT 1 On Friday, 12 March 2010, I had before me the first Court hearing of an application under s 411 of the Corporations Act 2001 (Cth) ("the Act") in relation to a proposed scheme of arrangement between Seven Network Limited ("Seven") and its shareholders as well as a further scheme involving the holders of complex security interests known as Transferable Extendable Listed Yield Shares ("TELYS3"). I was asked to make orders convening meetings of the holders of shares in Seven and the holders of TELYS3. 2 The usual course at the first hearing is for the application to the Court to proceed ex parte without the presence of a contradictor. However, in this matter, I raised with Mr Bathurst QC, who appears for Seven, the possibility of appointing counsel amicus curiae to assist me in determining whether I ought to exercise my power to order that the meetings be convened. 3 I made this suggestion because it seemed to me that the proposed schemes are different from those that usually come before the Court in that, at the risk of oversimplification, the acquirer of the Seven shares already holds approximately 48% of the shares in Seven. 4 Moreover, the scheme is proposed in order to give effect to a merger of two entities between whom there are no apparent business synergies and under which the merged entity has some degree of borrowings which do not exist in Seven. The new entity will have gross borrowings of approximately $500 million and a cash balance of $507 million whereas Seven currently has minimal borrowings and a significant cash balance slightly in excess of $1 billion. 5 It is true that these matters, and the associated risks appear to be fully disclosed in the scheme booklet. Also, as Mr Bathurst pointed out, there is a statement of related party interests at a prominent place on the first page of the booklet. Indeed, shareholders are told to read the booklet and the independent expert's report carefully in view of the potential for conflicts of interest. 6 Nevertheless, it is the related party aspect of the transaction which underscores the need for me to consider whether to depart from the role ordinarily adopted by the Court on the hearing of this sort of application.

The Role of the Court 7 The role of the Court in reviewing scheme documents and approving the convening of scheme meetings has been established in a long line of authorities. The following essential propositions are to be gleaned from the case law. 8 First, it is not for the Court to substitute its commercial judgment for that of the properly informed shareholders, hence the emphasis is upon ensuring full disclosure: Re NRMA Ltd (2000) 33 ACSR 595 at [16]. 9 Second, the absence of a contradictor sharpens the duty of an applicant and imposes a heavy responsibility of bringing to the Court's attention all matters that could be considered relevant to the exercise of the Court's discretion: Re Permanent Trustee Co Ltd (2002) 43 ACSR 601 at [7]. 10 Third, by granting leave to convene the meeting, the Court does not give its imprimatur to the scheme but if the arrangement is one that is fit for consideration by the meeting of shareholders (or creditors) and is a commercial proposition that is likely to gain the Court's approval if passed by the statutory majorities, leave should ordinarily be given; see the authorities referred to in Re Statewest Credit Society Ltd (2006) 56 ACSR 453 at [11] - [12]. 11 Fourth, a further factor to be taken into account is that the Court should be satisfied that the Australian Securities and Investments Commission ("ASIC") has had a reasonable opportunity to examine the proposal: Re Statewest Credit Society Ltd at [12]. 12 In a Report given in December 2009 entitled "Members' Schemes of Arrangement", the Corporation and Markets Advisory Committee ("CAMAC") referred in some detail to the role of the Court and ASIC in the review of scheme documents and the calling of scheme meetings. CAMAC did not suggest that there ought to be a departure from the current practice. 13 CAMAC observed, in particular, that the bulk and complexity of many scheme documents and the exigencies of time add to the burden of the Court which is necessarily reliant on the diligence of counsel for the applicant. Counsel is required to anticipate the disclosure that is properly required and draw attention to any aspects of the scheme that are "potentially problematic": see CAMAC Report at [2.3.2]. 14 CAMAC also pointed out that ASIC does not appear in Court to make submissions at the first Court hearing, unless it opposes the scheme or has concerns about it, but ASIC will provide a letter stating whether it proposes to intervene. In addition, ASIC has indicated the circumstances in which it will appear at the hearing in Regulatory Guide 60. This morning, ASIC was represented before me and referred me to its role at Regulatory Guide paragraph 60.4. It is unnecessary to set out that paragraph, but I have taken it into account in the conclusions that I have reached. 15 Importantly, the role of ASIC has been referred to by the High Court which observed that its predecessor, the Australian Securities Commission, has an obligation to assist the Court by presenting argument if it deems that course necessary or desirable: Australian Securities Commission v Marlborough Gold Mines Limited (1993) 177 CLR 485 ("Marlborough Gold Mines") at 506; Re Advance Bank Australia Limited (1997) 136 FLR 281 at 287.

The Seven Scheme 16 The central part of the present application is the proposal announced by Seven on 22 February 2010 for the combination of the businesses of Seven and WesTrac Holdings Pty Limited, which is in turn owned by Australian Capital Equity Pty Limited ("ACE"). The entities described in the scheme booklet as the WesTrac Group, including ACE, appear to be 100% owned by interests associated with Mr Kerry Stokes AC. 17 The WesTrac Group is an authorised Caterpillar dealer in Western Australia, New South Wales and the Australian Capital Territory. It is also an authorised Caterpillar dealer in North Eastern China. 18 The scheme booklet states that the WesTrac Group is a market leading business with significant growth prospects. 19 The proposal, which is recommended by the independent directors of Seven, provides for the merger of Seven and WesTrac Group in a new entity to be called Seven Group Holdings Ltd ("SGH"). 20 Seven shareholders will receive one SGH share for each Seven share that they hold and ACE will receive 115 million SGH shares as consideration for the transfer of the WesTrac Group business. This will result in a dilution of the shareholding of Seven shareholders in SGH compared to their current majority holding of 51.3% of Seven. 21 If the scheme is approved, interests associated with Mr Stokes will hold 67.9% of SGH compared to their current ownership of 48.7% of Seven. The former majority owners of Seven will be diluted to 32.1% of SGH. 22 If the scheme is implemented, Seven will apply to the ASX for termination of the official quotation of Seven shares and SGH will become the listed entity. 23 SGH's obligation to Seven shareholders under the scheme will be secured by entry into a share scheme deed poll. 24 The share scheme booklet states on the first full page that the independent expert has concluded that the scheme is fair and reasonable and an explanation is set out on page 23 under the heading "Independent Expert's Conclusion". 25 It is there pointed out that the independent expert, Deloitte Corporate Finance Pty Limited ("Deloittes") has valued the SGH shares on a minority basis in the range of $7.09 to $8.57 with a midpoint of $7.83. 26 Deloittes' valuation of the fair market value of the Seven shares on a control basis is said to be in the range of $7.63 to $9.51 with a midpoint of $8.57. 27 The scheme booklet then states that the low end of Deloittes' value range for the SGH shares of $7.09, on a minority basis, is below the low end of its value range for Seven of $7.63 on a control basis but that Deloittes' report notes that: "… there is a 50% overlap between its value range for a SGH share and the value range for a Seven share which the Independent Expert considers is sufficient to conclude that the Share Scheme is fair." 28 This is further explained in the full text of the Deloittes report which runs to more than 250 pages, including appendices. 29 The report explains that Deloittes have estimated the fair market value of Seven Network on a control basis by aggregating the fair value of the underlying assets and liabilities on a sum of the parts ("SOTP") basis. The report also explains that no additional premium for control has been included. The explanation for this appears to be that, in view of Mr Stokes' 48.7% stake in Seven, it would be unlikely for a control premium to be realised except through a transaction supported by him. 30 To say this is to recognise the fairly obvious fact that Mr Stokes' 48.7% stake in Seven, though not a majority holding, is more than sufficient to give him control of Seven. Deloittes recognise this by pointing to the likely discounted trading price of shares in a company with one significant shareholder because this is likely to be a reflection of the lack of liquidity and potential conflict of interest between the major shareholder and other shareholders; see page 9 of draft Deloittes report.

The TELYS3 Scheme 31 The TELYS3 scheme provides an opportunity for the holders of these securities to participate in the restructure of Seven by exchanging their TELYS3, which are issued by Seven, for TELYS4 which will be issued by SGH. 32 TELYS3 are a form of hybrid perpetual security issued by Seven. The TELYS3 scheme is conditional upon the approval of the Seven scheme but the Seven scheme is not conditional upon the approval of the TELYS3 scheme. 33 If the Seven share scheme is implemented and the TELYS3 scheme is not, this will have an impact on the TELYS3 which may make them a less attractive security. 34 If both the share scheme and the TELYS3 scheme are approved, TELYS3 will be exchanged for TELYS4 to be issued by SGH on similar terms to the existing TELYS3. 35 To safeguard against the risk that the TELYS3 scheme does not proceed, whilst the share scheme does, an offer described as the TELYS4 offer is to be made. This is at least in part because, in the absence of such an offer, holders of TELYS3 would hold securities in an unlisted entity, Seven being a wholly owned subsidiary of SGH on the implementation of the share scheme. 36 The TELYS4 offer would allow TELYS3 holders to elect to exchange their TELYS3 for TELYS4 on a one for one basis. The TELYS4 offer is conditional on: · the share scheme proceeding and the TELYS3 scheme not becoming effective; and · minimum acceptance levels being achieved for the TELYS4 offer so as to permit some level of liquidity for the newly listed securities. 37 Any TELYS3 which is not exchanged for a TELYS4 under the TELYS4 offer will remain on issue and be quoted on the ASX. 38 The advantages of the TELYS3 scheme are said to include benefits of a larger and more diverse asset portfolio and business mix arising from the merger of the WesTrac Group's business into Seven's existing business and investments. 39 The TELYS3 scheme booklet refers to the disadvantages to the TELYS3 holders if the share scheme is approved but the TELYS3 scheme is not. The booklet sets out the steps which Seven will take to mitigate some of the potential downside to TELYS3 holders. 40 The steps are quite complex. They are separate from the TELYS4 offer to which I referred above. They include in particular an alteration to the terms of the issue of the TELYS3 to provide that the dividends payable will be similar to cumulative dividends, and Seven will have the ability in certain circumstances (which may or may not be remote) to delay the payment of dividends for a period of up to 80 years. 41 The independent expert, Deloittes, has concluded that the TELYS3 scheme is fair and reasonable and therefore in the best interests of TELYS3 holders.

Discussion 42 Transactions such as these are critical to the operation of fair and fully informed markets. Their fairness, and the disclosures that are involved, are fundamental to the integrity of the operation of the market and public confidence in it. 43 A recently retired judge of the Court with great experience in this area has said, writing extra-judicially, that the Court must ensure that shareholders are fully informed and, to the extent that it can do so, that they will not be deceived; the Court relies heavily on the legal representations of the target company who appear before it: see Lindgren KE, "Private Equity and Section 411 of the Corporations Act 2001 (Cth)" (2008) 26 Company and Securities Law Journal 287 at 303. 44 In the present case, Senior Counsel of the highest standing appearing for both the target and the acquirer have assured me that all necessary disclosures have been made. This assurance, in particular from Mr Bathurst QC who bears the majority of the heavy burden, is a factor which I have taken into account in the conclusion I have reached but it is not the only factor. 45 Ultimately, I am persuaded that I ought to make the orders without the assistance of amicus curiae counsel for the following four reasons. 46 First, as the High Court observed in Marlborough Gold Mines, this is an interlocutory application to convene the meetings. The order convening the meetings does not carry with it the inevitable conclusion that I will approve the scheme at the second Court hearing. 47 There may be matters raised at the meetings, or which follow from the votes cast at the meetings which will bear upon whether Court approval is given to the schemes. 48 It is true that the schemes which are proposed appear on a preliminary consideration to fall within the scope of s 411 of the Act and that it may well be that if they are unopposed at the second Court hearing, I will give the necessary approval. 49 However, there are commercial matters and other considerations to which I will refer below that may affect the fairness of the schemes. These may be addressed at the meetings and at the second Court hearing. 50 Second, ASIC has had a full opportunity to consider the schemes and has issued its standard letter stating that it does not currently propose to intervene to oppose the schemes and that this is based on information provided to date. ASIC's legal representative appeared today and did not add to the letter. 51 There is evidence before me of detailed correspondence between the solicitors for Seven and ASIC with extensive commentary on matters of concern to it. The correspondence runs to approximately 100 pages and includes a series of queries from ASIC about the independent expert's report. Indeed, ASIC wrote directly to Deloittes to raise its queries. 52 The matters of concern to ASIC included the sufficiency of disclosure that the transaction involves related parties, the extent to which the merger of unrelated forms of business may impact on the share price and the level of disclosure of that issue, as well as the absence of a control premium. 53 The fact that significant amendments to the scheme documents had to be prised out of the proponents of the scheme, sometimes over the opposition of those who act on the instructions of their clients, shows that vigilance is required in the consideration of these transactions. But in this case it appears that, as Mr Bathurst submits, the regulator has been very much on the job. 54 In these circumstances, I can be satisfied that the regulator has given close attention to the schemes and does not object to the calling of the scheme meetings. 55 This is obviously an important consideration in my decision to permit the schemes to proceed to the first stage. 56 As CAMAC observed at [6.4] of its Report, the role of ASIC in reviewing schemes and in providing "objection" or "no objection", in particular at the second Court hearing is not insignificant. CAMAC noted that the Court is able to request ASIC to appear at any stage of a scheme application to assist the Court. That is a matter which I will consider before the second Court hearing. My present view is that I would wish to hear from ASIC rather than rely upon its usual "no objection" letter. 57 Third, as I have already emphasised, I have relied on counsel on the question of disclosure. But it must be borne in mind that even the most capable and experienced counsel are fallible. CAMAC referred at paragraph [2.3.2], footnote 62, to a well-known example where, at the second Court hearing (without any fault of counsel) the Court was misinformed of material matters. 58 Nevertheless, it is significant that CAMAC did not suggest any amendment to the existing procedures, notwithstanding that experience. 59 Fourth, it is not for the Court to substitute its judgment on commercial matters for that of the shareholders. This is not a case in which I can say at the first hearing, to paraphrase the words of French J (as his Honour then was) in Re Foundation Healthcare Ltd (2002) 42 ACSR 252 at 265 that the scheme is so blatantly unfair or inappropriate that it should be stopped in its tracks. 60 However, as I have said, there may be matters which the shareholders may wish to raise at the meetings. These are likely to include further consideration of the maters raised by ASIC and perhaps other matters relating to the TELYS3 scheme. But it is relevant to the exercise of my discretion at this stage that no shareholder has come forward to oppose the orders or to raise any matter of unfairness. 61 Having said that, it is important to bear in mind that these schemes and the explanatory material supporting them are bulky and contain complexities which may not be apparent other than to the most sophisticated shareholders. That is a further reason for the exercise of caution both here and at the second Court hearing. Recent experience in global capital markets highlights the need for caution in considering complex transactions especially those that involve related parties. 62 Finally, there is one matter as to which I consider that further disclosure should be made in the scheme booklet. This concerns releases given by SGH and Seven to the directors in respect of a wide range of claims. 63 It is true as Mr Bathurst submits that I should not work on the assumption that Mr Ritchie and Professor Wells are anything but independent. Nevertheless, the existence of releases given to the independent directors is a factor which may be material to the exercise of the shareholders' judgment as to whether to accept their recommendations. Recent global experience also points to questions about the role of independent directors and independent experts and this is a matter which is likely to bear upon the exercise of the shareholders' judgment. 64 I am satisfied, so far as I can be, that all other appropriate disclosures have been made for reasons mentioned in Mr Bathurst's oral submissions, as well as in Seven's written submissions which I have marked MFI 1. 65 For these reasons I propose to make orders substantially in the form of the short minutes. I certify that the preceding sixty-five (65) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jacobson.

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