Australian Securities Commission v Marlborough Gold Mines Ltd

[1] FRYBERG J: This application for an order to convene a meeting of members of a company under s 411 of the Corporations Act 2001 (Cth) ("the act") was heard on 9 February 2007. I then made the orders set out in Annexure A. I said that I would deliver the reasons for those orders at a later date. These are those reasons.

[2] The applicant ("Mincom") is an unlisted public company incorporated in 1979. Its business, according to Mr Mathews, its chief executive officer, is the provision of "software services and licences, consulting services for utilisation of technology and streamlining process, IT infrastructure and systems outsourcing and software maintenance and support". It has offices throughout Australia and North and South America and offers services in more than 40 countries. In 2006 its total revenue was just short of $200,000,000. It employs approximately 1,300 staff. It was founded by employees and many of its current shareholders and option holders are employees or former employees.

[3] Mincom has three classes of fully paid ordinary shares on issue to 170 shareholders: 16,685,761 (59.4%) A class, 3,150,000 (11.2%) B class and 8,274,570 (29.4%) C class. All of the B class shares are held by Caterpillar Inc, a corporation incorporated in Delaware USA, and all of the C class shares are held by Colonial First State Investments Ltd and related companies. Of the 59.4% of capital in A class shares, 45.2% is held by the top eight shareholders, all of whom are named individuals. I assume that none of these individuals is associated with any holder of B or C class shares, as I was not told of any association and the application was treated as if made ex parte. No other person holds 1% or more of the shares. In addition, nearly 5.7 million options have been issued to employees; there are currently 212 option holders. Each class of shares has a number of special rights and limitations and there are provisions restricting their transfer.

[4] On 18 January 2007 Mincom entered into an agreement with EAM Software Finance Pty Ltd ("EAM"). That is a special purpose company incorporated on 3 January 2007 and promoted by a body called Francisco Partners II, L.P., which is apparently a limited partnership created in the United States. It is recorded in the ASIC database as the ultimate holding company of EAM, but not even its address is known.[1] Mr Mathews deposed that Francisco Partners (not necessarily the same partnership) is a global private equity firm focused exclusively on investments in technology and technology-enabled services businesses. It is said to have approximately US$5 billion under management and to have invested approximately US$3 billion to date in equity in more than 25 technology and technology-related companies. Negotiations between Mincom and Francisco Partners were underway from August 2006. On 31 August 2006 the parties executed a confidentiality and exclusivity deed which continues to bind them. That deed is not in evidence.

[5] In its form as subsequently amended[2] the agreement recorded that the parties had agreed to effect a transaction by means of a scheme of arrangement pursuant to which the EAM (called Francisco in the agreement) would acquire all of the ordinary shares in Mincom, and that they had agreed in good faith to implement the scheme on the terms of the agreement. By the agreement Mincom agreed to propose the scheme of arrangement in the form set out in schedule 2 and Francisco agreed to assist Mincom to do so. In particular it agreed that the scheme would provide for all of the shares in Mincom to be transferred to Francisco and that it would promptly prepare an explanatory statement in respect of the scheme in compliance with the requirements of the act. Francisco covenanted that in consideration for the transfer it would provide shareholders a cash amount of A$8.77 per share and was required to enter into a Deed Poll in favour of shareholders to perform its obligations. Mincom was required to make a public announcement following the execution of the agreement stating that the board (in the absence of a superior proposal by a third party) unanimously recommended that ordinary shareholders approve the scheme. It warranted that no member of the board would make a public statement suggesting that the scheme was no longer recommended unless the board had obtained written advice from its lawyers stating that the members of the board were required in accordance with their fiduciary obligations to withdraw the recommendation. Francisco's obligation to provide consideration was to be satisfied by dispatching a cheque by prepaid post to the registered address of the shareholders.[3]

[6] Within two business days after the scheme comes into effect, Francisco must send the option holders offers to purchase their options for $8.76. Options are not dealt with under the proposed arrangement, but the obligation to make that offer arises only if it should become effective. By their terms the options must be exercised within 15 days from the date of a notice from the company of a change in control of Mincom or they lapse. It is intended to give that notice immediately the arrangement comes into effect. It seems to be envisaged that the option period will expire before the record date (registration on which entitles a shareholder to receive the $8.77 per share) which is 17 days after the effective date.

[7] Section 7 of the agreement was titled "Exclusivity". All but one of the paragraphs in that section are relevant:

"7.1 Exclusivity

Subject to clauses 7.3 and 7.4, during the Exclusivity Period, Mincom must not, and must use its best endeavours to ensure that its representatives do not, except with the prior consent of Francisco;

(a) solicit, encourage or invite, directly or indirectly, any enquiries, discussions or proposals in relation to, or which may reasonably be expected to lead to, a Third Party Proposal;

(b) initiate or continue any discussions or negotiations in relation to, or which may reasonably be expected to lead to, a Third Party Proposal or which might otherwise lead to the Scheme not proceeding;

(c) enter into any agreement, arrangement or understanding in relation to or which may reasonably be expected to lead to a Third Party Proposal (other than confidentiality arrangements on ordinary commercial terms in relation to the Third Party Proposal); or

(d) communicate to any person an intention to do any of the things referred to in clauses 7.1(a) to (c).

Where, in accordance with clause 7.1(b), Mincom has discontinued discussions or negotiations, Mincom will demand the return of all confidential information provided to any person in connection with those discussions or negotiations.

7.2 Notification of approaches

During the Exclusivity Period, Mincom will promptly advise Francisco of:

(a) any written proposal made to Mincom or any of its representatives with respect to any Third Party Proposal, whether unsolicited or otherwise;

(b) any request for information relating to Mincom or any of its Related Entities or any of their businesses or operations or any request for access to the books or records of Mincom or any of its Related Entities, which Mincom has reasonable grounds to suspect may relate to a current or future Third Party Proposal;

(c) any provision by Mincom or any of its representatives of any information relating to Mincom or any of its Related Entities or any of their business or operations to any person in connection wit or for the purposes of a current or future Third Party Proposal; and

(d) any action by Mincom, or any intention of Mincom to take any action, in reliance on clause 7.4.

It is worth noting that section 7 contains no provision similar to that in para 8.1(b), reciting that without those provisions, Francisco would not have entered into the agreement.

[8] Section 8 provided for Mincom to pay Francisco a reimbursement fee of $3.15 million if (simplifying it) a third party should acquire Mincom or its assets; Francisco should terminate the agreement for breach; any Mincom director should withdraw recommendation of the arrangement, or the court should fail to approve the arrangement as a result of a material non-compliance by Mincom with any of its obligations under the agreement, unless the fee be determined to be unlawful. Mincom was prohibited from making or permitting any application in relation to a determination of that question. That fee was said to be a genuine and reasonable pre-estimate of the cost and loss that would actually be suffered by Francisco in the circumstances set out. Mincom's consolidated profit for 2005 was about $1.35 million and for 2006 about $9.7 million.

[9] The agreement was subject to a number of conditions precedent, but it is not necessary to enumerate all of them. One was the approval of the arrangement by shareholders. Another was the passage of the special resolution to amend Mincom's constitution to waive all pre-emptive and similar rights under the constitution in relation to the transfer of shares under the arrangement at duly convened meetings of each class of shareholders. Mincom was also required immediately prior to the implementation date to provide Francisco with a certificate confirming that a number of matters are in order.

[10] The arrangement (described in the documents as a scheme) itself provides for the transfer of the shares and payment of the consideration as already described. Under it Mincom is irrevocably appointed attorney for each shareholder for the purpose of executing any document necessary to give effect to the arrangement, including an instrument of transfer of shares. Mincom is required to deliver a duly completed and executed share transfer form to Francisco on the next business day after the record date described below. Francisco is to execute and re-deliver the form and Mincom to enter the name of Francisco as the holder of the shares in the share register. Thereupon all of the shares will be transferred "without any further act by any Scheme Shareholder". Under the arrangement Mincom is to give the court a certificate confirming the satisfaction or waiver of all of them except those relevant to the period between the second court hearing and the implementation date. The shareholders are deemed to consent to Mincom doing all things necessary or incidental to the implementation of the arrangement, which binds them, "including those who do not attend the scheme meetings or vote at the scheme meetings".

[11] The arrangement is conditional on the satisfaction or waiver of the conditions precedent to the implementation agreement and also to a condition subsequent, being the provision of the certificate referred to in para [9]. Section 6(d) provides as follows:

"(d) Each Scheme Shareholder is deemed to have warranted to Francisco that all such Scheme Shareholder's Scheme Shares transferred to Francisco under the Scheme will as at the date of the transfer be fully paid and free from all mortgages, charges, liens, encumbrances pledges, security interests and other interests of third parties of any kind, whether legal or otherwise, that will bind Francisco and that such Scheme Shareholder has full power and capacity to sell and to transfer such Scheme Shareholders' Scheme Shares to Francisco under the Scheme."

[12] In accordance with its obligation under the implementation agreement, Mincom caused a draft explanatory statement to be prepared and it was placed before me. I shall not attempt to summarise it; the major features of the implementation agreement and arrangement already described are set out in it. I shall refer only to those parts which may be problematic.

[13] It appears from it that to implement the arrangement Mincom proposes to hold seven meetings on Monday 5 March 2007. There will be a meeting of each class of shareholders to approve the arrangement, a meeting of each class of shareholders to approve the amendment of the constitution and an extraordinary general meeting of all shareholders for the same purpose. In relation to the three "scheme meetings" the explanatory statement provides:

"The Scheme must be approved at each Scheme Meeting by a majority in number (ie more than 50%) of Mincom Shareholders in the relevant class, present and voting (in person or by proxy) who hold at least 75% of the votes cast at that Scheme Meeting."

In relation to the three class meetings it provides:

"The Constitution Amendment Resolution must be approved at each Class Meeting by Mincom Shareholders in the relevant class, present and voting (in person or by proxy) who hold at least 75% of the votes cast at that Class Meeting."

In relation to the extraordinary general meeting it provides:

"The Constitution Amendment Resolution must be approved at the Extraordinary General Meeting by Mincom Shareholders, present and voting (in person or by proxy) who hold at least 75% of the votes cast at the Extraordinary General Meeting."

[14] Mincom has seven directors, six of whom are non-executive directors. Two of the six hold no shares in Mincom and none of the other four holds more than 0.11%. In accordance with the implementation agreement they have unanimously recommended that shareholders vote in favour of the arrangement in the absence of a superior proposal. (Mr Mathews, the executive director, made no recommendation due to a conflict of interest.) The recommendation is recorded in the explanatory statement, which also records that no superior proposal has been put to the directors at the date of the statement. No indication of the directors' estimation of the prospects of any such proposal being made is given. No information is provided regarding what efforts the directors have made to elicit another proposal.

[15] Section 2 of the statement details reasons why shareholders might vote in favour of the arrangement and why they might vote against the arrangement. The reasons in favour occupy 21/2 pages and includes an extensive summary of the risks inherent in Mincom's business and in the industry generally. The reasons against occupy less than a page and are coolly treated. Doubtless Mincom would say that this reflects the strength of the case in favour of the arrangement. One reason to reject the arrangement has been omitted. It is a reason which might be thought material at least by those shareholders who are or might wish to become employees. It is the voting against the proposal might enhance their employment prospects. This may be of particular importance in this case, where many of the shareholders and option holders are employees. Elsewhere in the statement (14 pages later) there is half a page on EAM's intentions. There it is stated that if the arrangement is implemented it is the current intention of EAM that the existing businesses will continue to be carried on in the manner in which they are presently conducted under the existing management and executives; that no major changes will be made to those businesses; and that the present employees will continue to be employed subject to a detailed review to be undertaken following implementation of the scheme. These statements are qualified by the assertion:

"These statements of present intention based on the information concerning Mincom ... and the general business environment which is known to EAM at the time of preparation of this Scheme Booklet. Final decisions will only be made once EAM undertakes a detailed review of Mincom's activities to evaluate their long-term profitability and prospects. Accordingly, the statements set out in this section are statements of present intention only which may change as new information becomes available or circumstances change."

Shareholders are told that Francisco Partners is a global private equity firm, but told nothing of the nature of private equity, global private equity, private equity takeovers or the manner in which private equity takeovers generate profit for the new owners. Such information could well affect decisions by any shareholders who are also employees.

[16] All of the reasons canvassed relate to the value of the shares only. This reflects the introductory assertion:

"The key decision for Mincom Shareholders in considering whether to vote in favour of the Scheme is whether they may expect to derive greater value in a reasonable time period by remaining Mincom Shareholders or by receiving the Scheme Consideration, having regard to all relevant factors, including the risks inherent in Mincom's business and other industry risks."

There are however non-financial reasons why shareholders might wish to vote against the proposal. These include a desire to maintain a major source of advanced, innovative software in Australia and to maintain a point of attraction for foreign software engineers in this country. I express no opinion about whether there is any need to mention matters of this sort.

[17] Section 7 of the explanatory statement deals with four key terms of the implementation agreement, the full agreement being annexed to the statement. Paragraph 7.3, headed "'No shop' and 'No talk'" obligations, is as follows:

"No-shop

Mincom must not solicit, encourage or invite any discussions, or enter into any agreement or understanding, which may lead to a Third Party Proposal.

No talk

Subject to the Board's fiduciary duties, Mincom must not continue any discussions or negotiations which may lead to a Third Party Proposal or which might otherwise lead to the Scheme not proceeding.

Notification of approaches

Mincom must promptly advise EAM of:

(b) any request for information which Mincom suspects may relate to a Third Party Proposal;

(c) the provision by Mincom of information in connection with a Third Party Proposal; or

(d) the Board relying on the fiduciary carve-out to Mincom's 'no talk' obligation."

"The Implementation Agreement imposes 'no talk' and 'no shop' obligation on Mincom, which commenced on 18 January 2007 (when the Implementation Agreement was executed).

However, the Implementation Agreement does not prevent a third party from making an alternative proposal and does not prevent the Directors from responding to an unsolicited proposal if, and to the extent, necessary to discharge their fiduciary duties as Directors."

There is no information about the confidentiality and exclusivity agreement made on 31 August 2006. Paragraph 7.4 sets out information about the reimbursement fee.

[18] The application was made under s 411(1) of the act. The only respondent was EAM, which supported the applicant. Because the application was not served on shareholders, counsel approached the hearing as though it was being conducted ex parte. Senior counsel for Mincom submitted that there were no procedural issues of concern and senior counsel for EAM did not suggest otherwise. One procedural prohibition is contained in s 411(2):

"(2) The Court must not make an order pursuant to an application under subsection (1) or (1A) unless:

(a) 14 days notice of the hearing of the application, or such lesser period of notice as the Court or ASIC permits, has been given to ASIC; and

(b) the Court is satisfied that ASIC has had a reasonable opportunity:

(i) to examine the terms of the proposed compromise or arrangement to which the application relates and a draft explanatory statement relating to the proposed compromise or arrangement; and

(ii) to make submissions to the Court in relation to the proposed compromise or arrangement and the draft explanatory statement."

A copy of the application was given to ASIC on 2 February 2007, less than the time required under that section, but ASIC consented to less than 14 days notice of the hearing. The requirements of para (a) were therefore satisfied. As to para (b), counsel's submission was doubtless based on an affidavit made by Mr Pocock, a partner in the solicitors for Mincom. Mr Pocock deposed that on 29 January 2007 a copy of the draft explanatory statement was given to ASIC, and on 8 February 2007 he received a letter from ASIC stating, among other things, that it had had the opportunity to review the draft explanatory statement and did not propose to appear at the first hearing. I made the order in reliance on counsel's submission.

[19] Upon examining the letter to which Mr Pocock referred, I found that it did not state that ASIC had had the opportunity to review the draft explanatory statement. It expressed no view on that question. Perhaps that is unsurprising, since ASIC received the amended explanatory statement and accompanying arrangement documents only on 7 and 8 February, the day of the letter. The extent of the amendments is unclear. Had I been aware of the evidence as I now understand it, I would not have been satisfied under para (b).

[20] Mr Pocock's mistake is unfortunate, and should have been detected. However I do not think that the circumstances warrant my setting the order aside at this stage. There will be an opportunity for ASIC to intervene at the time of any second hearing, and it may do so earlier if it believes that urgent action is required. I shall consider what course should be taken at the time of any second hearing.

"(1) Where a compromise or arrangement is proposed ... between a Part 5.1 body and its members or any class of them, the Court may, on the application in a summary way of the body ... order a meeting or meetings ... of the members of the body or class of members to be convened in such manner, and to be held in such place or places (in this jurisdiction or elsewhere), as the Court directs and, where the Court makes such an order, the Court may approve the explanatory statement required by paragraph 412(1)(a) to accompany notices of the meeting or meetings."

[22] A number of what Santow J described as "threshold requirements"[4] may be dealt with shortly. What is here proposed is plainly an "arrangement" in the sense in which that word has been used in this context and the proponent, Mincom, is plainly a "Part 5.1 body". The arrangement has been proposed by the bringing of the application. It has been held that the section gives jurisdiction only where the arrangement is properly proposed. It may be that an arrangement which attempted to override the limitations on transferability and other restrictions in Mincom's constitution would be held not to be properly proposed; but the present arrangement is subject to the condition precedent that the constitution be appropriately amended. I therefore see no reason to think that it is not properly proposed. It is proposed that the meetings be held in Brisbane and that plainly is the appropriate venue: the company was incorporated in Queensland, its registered office and principal place of business have always been in Brisbane, and a substantial majority of shareholders have their registered addresses and probably their residences in Brisbane.[5]

[23] What remains to be addressed are the two exercises of discretion called for under s 411(1): should the court order meetings and should it approve the explanatory statement.

[24] In relation to the former, the issues as I presently perceive them are:

•

Has the applicant demonstrated that, if the arrangement is passed by shareholders, there is a reasonable chance the court will not be required to refuse approval under s 411(17)?

•

Has the applicant demonstrated that, if the arrangement is passed by shareholders, there is a reasonable chance the court will approve it, or approve it subject to alterations and/or conditions, having regard to a possible breach of fiduciary duty by the directors?

•

Has the applicant demonstrated that, if the arrangement is passed by shareholders, there is a reasonable chance the court will approve it, or approve it subject to alterations and/or conditions, having regard to the terms of section 6(d) of the arrangement?

[25] This statement of the issues does not refer to matters relating to the adequacy of disclosure to members of the major features of the arrangement. It has been said that the court's task when ordering the convening of scheme meetings requires it to be satisfied, at least at a prima facie level, "that there has been proper disclosure with nothing misleading or deceptive in any material sense";[6] and that "of paramount importance at that stage is the need to ensure that there will be sufficient disclosure, to those who will be affected by the arrangement, of its detail and effect".[7] No doubt that is so; but in practice it may be expected that such matters will be dealt with in considering whether to approve the explanatory statement. It is unusual for an applicant who otherwise complies with the requirements for the convening of a meeting to refuse to amend a draft statement after discussion at the first hearing. That is not the position in the present case, but it is nevertheless convenient to defer consideration of this class of question until the statement is considered.

[26] If there is much appellate authority on the approach which should be adopted in exercising the discretion on the first hearing of an application under s 411, I was not referred to it. Perhaps that is not surprising. Different considerations will arise in cases where only members are affected by the proposed arrangement (such as the present) from those which arise when creditors are affected. Probably there are also differences between cases where the first hearing is an adversarial and contested procedure and cases which are determined ex parte. In addition decisions will be influenced by the particular circumstances of the case. These considerations may explain some slight variety in the formulations adopted by various judges at first instance to explain their approach.[8] I take as my starting point a statement by Street CJ in F T Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd:

"The court will not ordinarily summon a meeting unless the scheme is of such a nature and cast in such terms that, if it achieves the statutory majority at the ... meeting the court would be likely to approve it on the hearing of a petition which is unopposed." [9]

That passage was approved by the High Court in Australian Securities Commission v Marlborough Gold Mines Ltd,[10] where the Court went on to observe:

"No doubt at the s 411(1) stage, when the Court decides whether it will grant leave to summon a meeting or meetings, the Court should be alive to the difficulties which may arise subsequently when it is called upon to decide whether the arrangement should be approved."

"(17) The Court must not approve a compromise or arrangement under this section unless:

(a) it is satisfied that the compromise or arrangement has not been proposed for the purpose of enabling any person to avoid the operation of any of the provisions of Chapter 6; or

(b) there is produced to the Court a statement in writing by ASIC stating that ASIC has no objection to the compromise or arrangement;

but the Court need not approve a compromise or arrangement merely because a statement by ASIC stating that ASIC has no objection to the compromise or arrangement has been produced to the Court as mentioned in paragraph (b)."

[28] The first point to be made about that subsection is that it is expressed in the negative. In other words the default position is non-approval. Unless there is proof of compliance with one or other of the lettered paragraphs, the court must not grant its approval at the second hearing. Such proof is not required at the first hearing. However that does not mean that the subsection can be ignored. There is an onus at this stage on the applicant to demonstrate that at the second hearing the court would be likely to approve the arrangement if the application be unopposed.[11] That onus cannot be satisfied if there is a complete absence of evidence in respect of either lettered paragraph.

[29] It is ASIC's policy not to provide statements under s 411(17) until the second hearing. Consistently with that policy it rejected Mr Pocock's request that it provide, prior to (as opposed to at) the second hearing, an indication of whether it expected to be able to provide such a statement. It wrote in its letter of 8 February, "This is because ASIC will not be in a position to advise the court properly until it has had an opportunity to observe the entire scheme process." Consequently there was no evidence to support a conclusion that a statement from ASIC was likely to be forthcoming.

[30] Mincom therefore led evidence designed to demonstrate that it was likely to be able to satisfy the court that the arrangement had not been proposed for the purpose of enabling any person to avoid the operation of any of the provisions of ch 6. The existence of any such purpose must be a question of fact in each case: "whether such a purpose does, or does not, exist is a matter of objective assessment".[12] It is the purpose of or behind the proposal to which the subsection refers. Sometimes that will be the same as the purpose of the proposer, but it need not necessarily be so. For example, where the proposer is merely a catspaw for another person, it would doubtless be necessary to determine the purpose of that person. Often it will be necessary to have regard to the purpose of both the proposer and another person in order to determine the purpose of the proposal. That is the approach adopted by the parties in the present case, doubtless because EAM had expressly agreed to assist Mincom to propose the arrangement. Mincom referred to various documents exhibited to affidavits filed on its behalf and called oral evidence from Mr Pocock and another solicitor, Mr Heading; EAM read an affidavit made by a director, Mr Agrewal.

[31] I do not propose to discuss that evidence in detail. Any person interested in intervening at any second hearing will be able to obtain copies of it. It would be undesirable to make a finding affecting credit at this stage of the proceedings, as further evidence is likely to be called at any second hearing. I am far from satisfied that a full disclosure of all the matters affecting this question has been made. As White J once said in a different context, "The factual cards must not be played close to the chest but laid face up on the table in good lighting conditions."[13] At the first hearing the evidence was not all one way. It must be remembered that the task at that stage was to determine whether, if the arrangement be passed by the requisite majority of shareholders, the court would be likely to approve it at the second hearing, if unopposed. On balance I was satisfied that this test was satisfied.

[32] I should add that in my judgment the question of avoidance of the provisions of ch 6 does not completely vanish even if ASIC makes a statement under para (b). In this regard Santow J has expressed the view[14] that the ASC's (now ASIC's) statement precludes the court from withholding approval to the arrangement where the ground for doing so is under s 411(17)(a). Taken literally there can be no dissent from that view. Subsection (17) prohibits approval unless one or other of two conditions is satisfied. If one of them is satisfied, there is no scope for the non-fulfilment of the other to operate as a mandatory prohibition. It appears that this was his Honour's intended meaning.[15] In the present case counsel submitted that his Honour meant that the existence of the statement by ASIC thereafter rendered any purpose of avoidance irrelevant. Subsection (17) does not say that upon the satisfaction of one of those conditions the other ceases to be relevant to the exercise of the discretion to approve. As Santow J observed in a later case, "[C]ourts have been alive to the fact that schemes of arrangement frequently are but an alternative means to effectuate a takeover".[16] In cases where the effect of an arrangement is to deprive shareholders of their property in shares, the existence of a purpose of avoiding the prohibitions contained in ch 6, coupled with the fact that when that chapter is employed, compulsory acquisition under ch 6A is generally possible only after obtaining 90% of the shares, must in my view remain a consideration relevant to any decision under s 411(4)(b) or (6). A statement by ASIC deprives any such purpose of conclusive effect and, depending upon its terms,[17] may provide significant support for the application.

[33] It is trite law that directors are under a duty, both statutory[18] and fiduciary, to exercise their powers and discharge their duties in good faith in the best interests of the company. The "interests of the company" undoubtedly include the interests of existing members.[19] In the context of a company takeover, that must mean, other things being equal, that the directors have a duty to secure for shareholders the best possible price for their shares. However it is easier to state that duty than to give it content. "The issue of practical constraints upon alternative merger proposals is a difficult one."[20] In the present case a number of factors combined to suggest the possibility of a breach of that duty:

•

the covenant in section 7.1 of the implementation agreement for Mincom to use its best endeavours to ensure that its representatives did not initiate discussions toward or solicit a third-party proposal

•

the virtual impossibility under section 7.4 of that agreement of Mincom's considering unsolicited third-party proposals

•

the prohibition in section 7.5 thereof on Mincom's making any application to a court in relation to a determination that this part of the implementation agreement was unlawful

•

the fact that the director's recommendation and the financial adviser's report were qualified by the words "in the absence of a superior proposal"

•

the fact that the price proposed in the arrangement was only at the middle of the range recommended by Mincom's expert report, not at the top

•

the absence of any evidence as to the likelihood of an alternative proposal being found by active solicitation on the part of the directors

•

the absence of any evidence of steps taken by the directors to obtain an alternative proposal prior to disabling themselves from doing so

•

the paucity of the evidence regarding the extent of publicity given to the present proposal.[21]

[34] Mr Heading gave some evidence on this topic. He testified that Francisco had spent a tremendous amount of money on the due diligence process over some months. It had required a "no shop, no talk" clause, but with a fiduciary carve out. He thought it quite usual to agree to this. Mincom was not particularly concerned about it. Once the offer was announced a superior offer could still eventuate. He understood that news of the offer had been in trade magazines and he thought the IT industry would have known about it the day after it was announced. There was still time for an offer to emerge. In his opinion the board acted quite properly. However without instructions he did not wish to reveal what efforts the board had made to obtain alternative offers, as that information was confidential.

[35] On balance I came to the conclusion that the possible breach of fiduciary duty did not negate the likelihood that the court would grant the application at the second hearing if it were unopposed. I did so on the basis that there was no evidence of any realistic likelihood of an alternative proposal during the period of the implementation agreement, ie from 18 January 2007. I was, unfortunately, not aware of the existence of the confidentiality and exclusivity agreement of 31 August 2006.

[36] In this regard there is in my view an important role for ASIC to play before any second hearing. In deciding whether it should make a statement that it has no objection to the arrangement under s 411(17), ASIC would no doubt wish to form a view about any possible breach of fiduciary duty underlying the proposal. Perhaps it could discover what efforts the board had made to procure alternative offers, by confidential discussions or otherwise. On this question also the court could be considerably assisted by ASIC at any second hearing. It has been said that the role of the court is to a degree inquisitorial in dealing with an application under s 411(1);[22] but as Gillard J has observed, procedures in our courts are not well adapted to such a role.[23] That applies equally to the position at any second hearing. ASIC has investigatory powers which the court lacks.

[37] It will be necessary for this question to be reconsidered at any second hearing. That reconsideration would take into account what has been said by Santow J on this topic:

"It is important that an exclusivity clause satisfy the following concerns:

(a) 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;

(b) 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

(c) there should be adequate prominence given to that constraint in the explanatory memorandum sent to shareholders."[24]

Section 6(d) of the arrangement

[38] It is well settled that in exercising its discretion at the second hearing, the court does not determine the business or commercial efficacy of the arrangement, nor does it attempt to second-guess the decision of the shareholders. Nonetheless, the court must satisfy itself, as O'Loughlin J wrote,

"that the arrangement is one that warrants the approval of the court. As to this latter duty, Maugham J cited with approval the remarks of Bowen LJ in Re Alabama, New Orleans, Texas and Pacific Junction Railway Co [1891] 1 Ch 213:

'A reasonable compromise must be a compromise which can, by reasonable people conversant with the subject, be regarded as beneficial to those on both sides who are making it ... I have no doubt at all that it would be improper for the court to allow an arrangement to be forced on any class of creditors, if the arrangement cannot reasonably be supposed by sensible business people to be for the benefit of that class as such ...'

Those remarks apply with equal force to arrangements between a company and its members."[25]

[39] Section 6(d) of the arrangement is set out above.[26] Unfortunately my attention was not drawn to this paragraph during the hearing and I did not then notice it myself. As presently advised my impression is that the arrangement should not be approved while that paragraph remains in it. It is onerous, unreasonable and calculated to catapult unsuspecting shareholders who have not read the small print of the arrangement in the schedule to the explanatory statement into a state of breach of warranty. It is unfortunate that this point was not raised during the hearing, as it may then have been possible to amend the arrangement before its presentation to shareholders.

[40] I see no need to interfere with the order which I made. I shall hear counsel at any second hearing on this question and if it is then necessary, it will be possible to make an alteration under s 411(6).

[41] The concluding words of s 411(1) empower the court to "approve the explanatory statement required by paragraph 412(1)(a)" where it makes an order convening a meeting. The condition for the exercise of that power having been fulfilled, I approved the explanatory statement placed before the court.

[42] I was not referred to any authority on what considerations ought to be taken into account in granting the approval. It seems obvious that one question is whether the statement satisfies the requirements of s 412. However I doubt that this is the only question. One would expect that the court should review the statement to ensure that it makes a full and true disclosure of all material matters and is not substantially misleading or deceptive in any material sense. The power to approve is puzzling. In a legal sense nothing seems to turn upon whether approval is given or not. There is no need to pursue this issue in the present case.

"(1) Where a meeting is convened under section 411, the body must:

(a) with every notice convening the meeting that is sent to a creditor or member, send a statement (in this section called the explanatory statement):

(i) explaining the effect of the compromise or arrangement and, in particular, stating any material interests of the directors, whether as directors, as members or creditors of the body or otherwise, and the effect on those interests of the compromise or arrangement in so far as that effect is different from the effect on the like interests of other persons; and

(ii) setting out such information as is prescribed and any other information that is material to the making of a decision by a creditor or member whether or not to agree to the compromise or arrangement, being information that is within the knowledge of the directors and has not previously been disclosed to the creditors or members."

[44] Subject to what follows, I was satisfied that the draft explanatory statement explained the effect of the arrangement. As to the particular issue raised in sub-para (i), only one director had any material interest other than as a relatively minor shareholder. That was Mr Mathews, and his position was adequately stated. The statement was required to comply with the requirements of sch 8, pt 3 of the Corporations Regulations 2001. I was and remain satisfied to accept senior counsel's assurance that to the extent that the regulations were applicable, the statement complied with them.

[45] Associated with the question of breach discussed above[27] is the question whether the explanatory memorandum accurately referred to the key terms of the implementation agreement. The relevant parts of each document have already been quoted.[28] In several respects the explanatory statement may be deficient:

•

it does not disclose that compliance with the "no shop" and "no talk" obligations may constitute a breach of the board's fiduciary duties;

•

it does not disclose whether the directors have obtained legal advice about the existence or otherwise of any such breach between August 2006 and the date of the statement;

•

it does not disclose the date, existence or effect of the confidentiality and exclusivity deed of 31 August 2006;

•

it states simply that the "no talk" obligation is subject to the board's fiduciary duties.

That last statement is misleading. The "no talk" obligation is modified only if a court, arbitral tribunal or the takeovers panel determines that the obligation constitutes a breach of fiduciary duty; Mincom would still be bound even if it had advice from senior counsel that the directors were in breach. Moreover Mincom is prohibited from making or permitting any application in relation to a determination of that matter; and it is obliged to submit in any relevant proceedings that no such determination should be made.

[46] Unfortunately the third and fourth of these listed points were not drawn to my attention at the hearing and I did not consider them when I decided that the other points did not warrant withholding approval of the statement. At any second hearing I shall hear counsel on these matters and give consideration to whether the approval should be rescinded because of them.

[47] Section 2 of the explanatory statement is described above.[29] Reasons for shareholders to vote one way or the other are set out. At the time of the hearing I thought they covered the major financial considerations affecting the decision. They are expressed not in an even-handed way, but in a manner which suggests a definite opinion is held by the author. That is not surprising, as the arrangement is recommended by the directors. Except possibly in an extreme case a mere lack of perfect balance in the presentation of the cases would not make the document misleading. For that reason I did not think this section warranted further discussion or ought to prevent the approval of the statement. Upon reflection I have realised that it could be argued that more information about job security should have been provided. This is of particular importance in a situation where the offeror in a takeover arrangement is a private equity company and many of the shareholders are employees or possibly prospective employees. Francisco Partners was said in the statement to have invested in more than 25 technology and technology-related companies. The fact that it is a private equity firm suggests that its investments would have been to obtain a dominant controlling interest, if not 100% acquisitions. It would be material to know whether in any of those cases substantial job losses occurred after the Francisco investment. It would also be material to know Francisco's strategic plan for Mincom. Alternatively (or perhaps additionally) it might be material to know something about how private equity takeovers operate and what needs to be done to generate profits for those behind them. Such information would enable inferences to be drawn by potentially unsophisticated shareholders about job security in Mincom. One would expect the directors, or a least some of them, to have acquired some knowledge of these matters. Even if they have not done so, the questions arise whether the omission of this information makes the explanatory statement misleading or deceptive or at least one which does not properly explain the effect of the arrangement. It must be remembered that EAM is obliged under the implementation agreement to provide information about itself (which would include information about its parent) to enable Mincom to prepare an explanatory statement which complies with the requirements of the act.

[48] These matters will be relevant not only to whether the approval of the explanatory statement should be rescinded, but also to the question whether the arrangement should be approved under s 411(4)(b).

[49] Another matter to which my attention was not drawn (and regrettably I did not notice it during the hearing) is a possible discrepancy between the information given in the explanatory statement as to the required majority at the various meetings[30] and the requirements of the act. The former specifies that an approving majority "at each Scheme Meeting" must hold "at least 75% of the votes cast at that scheme meeting". That does not seem to accord with s 411(5)(b), which provides that where the court orders two or more meetings of a class of members, the meetings are taken together to constitute a single meeting and the votes cast at each of the meetings are to be aggregated. I shall consider whether there has been an error and if so its significance and consequences at the time of the second hearing.

[50] I shall direct that a copy of these reasons be forwarded to ASIC, as they may affect not only its decision in relation to a statement in writing under s 411(17), but also whether it decides to appear at any second hearing and what attitude it takes at such a hearing. Regrettably it is probably too late for these issues to be considered in relation to the registration of the explanatory statement under s 412(6) - I assume that this has already occurred. At any such hearing the court would be grateful to have any evidence obtained by ASIC through its investigations placed before it and to be assisted by submissions made on ASIC's behalf. If ASIC does not have copies of the affidavits (including that filed in court by Mr Agrewal) the solicitors for the applicant would no doubt be willing to provide them. The transcript of the oral evidence of Mr Pocock and Mr Heading is available from the State Reporting Bureau.

1. Pursuant to subsection 411(1) of the Corporations Act 2001 (Cth):

(a) the Applicant, Mincom Limited ('Mincom') convene the following meetings for the purpose of considering, and if thought fit, agreeing (with or without modification) to a scheme of arrangement proposed between Mincom and it shareholders ('the Scheme') being the scheme substantially in the form of that contained in Annexure C of the explanatory memorandum in relation to the Scheme ('the Scheme Booklet'), which is annexure A to this order:

(i) a meeting of the Class A Mincom shareholders ('Class A Scheme Meeting');

(ii) a meeting of the Class B Mincom shareholders ('Class B Scheme Meeting'); and

(iii) a meeting of the Class C Mincom shareholders ('Class C Scheme Meeting');

(collectively, 'the Scheme Meetings').

(b) the Scheme Meetings be held on 5 March 2007 at the Auditorium, Mincom Central, Level 7, 193 Turbot Street, Brisbane at the following times:

(i) 10.00am for the Class A Scheme Meeting;

(ii) 9.00am for the Class B Scheme Meeting;

(iii) 9.30am for the Class C Scheme Meeting;

(c) the Chairperson of the Scheme Meetings be Robert Murray Savage and, in his absence, Alan Ross Baxter;

(d) the Chairperson appointed to the Scheme Meetings has the power to adjourn any of the Scheme Meetings in his or her absolute discretion;

(e) all voting at the Scheme Meetings be by poll as declared by the Chairperson;

(f) the Scheme Booklet is approved for distribution to Mincom shareholders.

2. The Applicant shall convene the Scheme Meetings by sending to all shareholders of Mincom no less than 21 days before the Scheme Meetings:

(a) the Scheme Booklet substantially in the form of Annexure to this Order;

(b) the notices of meeting substantially in the form of Annexure E to G of the Scheme Booklet, which is Annexure A to this order;

(c) the proxy forms substantially in the form of Exhibit 'RSM-10' to the Affidavit of Richard James Mathews filed 8 February 2007;

(d) a reply paid pre-addressed envelope.

3. On 28 February 2007, Mincom publish, in The Australian newspaper and The Courier Mail newspaper, a Notice of Hearing of any application to approve the Scheme to be heard on 6 March 2007.

4. The Applicant send to all shareholders of Mincom the audited financial results for the six months to 31 December 2006 on or before 28 February 2007.

5. Regulations 5.6.12 to 5.6.36A of the Corporations Regulations 2001 (Cth) shall not apply to the Scheme Meetings.

6. Subject to the orders herein, the Scheme Meetings otherwise be conducted as far as practicable in accordance with Mincom's Constitution.

7. The Scheme Booklet and the proxy forms shall be sent by ordinary pre-paid post to each shareholder at the address recorded in respect of that shareholder in the register of members at the time of posting.

8. The applicant shall cause the Scheme Booklet and the notices of meetings to be available for inspection by shareholders during normal business hours at the registered office of Mincom both prior to and during the Scheme Meetings and any adjournment of the Scheme Meetings or either of them.

9. The application is adjourned to 6 March 2007.

10. Liberty to the Applicant or the Australian Securities & Investments Commission apply on 2 days notice.

[1] An address for notices is specified in the agreement.

[2] The evidence does not include an executed copy of the amended agreement and it is unclear when the amendments were made.

[3] The agreement refers (cl 4.8) to Mincom's obligation to provide the consideration, but that is clearly an error in drafting.

[4] Re NRMA Ltd [2000] NSWSC 82; (2000) 33 ACSR 595 at p 603; [2000] NSWSC 82 at para [14].

[5] I infer this from the addresses of the top 20 A class shareholders set out in the enhanced historical company extract placed in evidence.

[6] Re NRMA Ltd [2000] NSWSC 82; (2000) 33 ACSR 595 at p 599; [2000] NSWSC 82 at para [3].

[7] Re Central Pacific Minerals NL [2002] FCA 239 at para 8; see also Re CSR Ltd (2003) 45 ACSR 34; [2003] FCA 82 at para 6.

[8] See the summary of the different views in Re NRMA Ltd [2000] NSWSC 82; (2000) 33 ACSR 595 at pp 606-7; [2000] NSWSC 82 at paras [32] - [41].

[9] (1977) 3 ACLR 69 at 72.

[10] (1993) 117 CLR 485 at p 504; [1993] HCA 15 at para 35.

[11] See para [26].

[12] Re ACM Gold Pty Ltd (1992) 34 FCR 530 at pp 538-9, per O'Loughlin J.

[13] Re Pheon Pty Ltd (1986) 11 ACLR 142 at p 156.

[14] Re Advance Bank Australia Ltd (1997) 22 ACSR 513 at p 519.

[16] Re NRMA Ltd [2000] NSWSC 82; (2000) 33 ACSR 595 at p 602; [2000] NSWSC 82 at para [16].

[17] For example in Re United Energy Ltd [2003] VSC 266 the notice stated that ASIC was satisfied that the arrangement had not been proposed for the purpose of enabling any person to avoid the operation of ch 6.

[19] R P Austin, H A J Ford and I M Ramsay, Ford's Principles of Corporations Law, (11th ed, 2003) 325.

[20] Re Arthur Yates and Co. Ltd [2001] NSWSC 40; (2001) 36 ACSR 758 at p 759; [2001] NSWSC 40 at para [4], per Santow J.

[21] Mr Mathews' affidavit exhibited what he described as an announcement to all Mincom shareholders. The document is in fact marked "media release", but there is no evidence of its distribution or the extent of its republication either in Australia and overseas. There is no specific evidence of any other publicity about the proposal. There is not even an indication of how many hits the proposal achieves on Google.

[22] Re NRMA Ltd [2000] NSWSC 82; (2000) 33 ACSR 595 at p 601; [2000] NSWSC 82 at para [12].

[23] Re United Energy Ltd [2003] VSC 266 at para [17].

[24] Re Arthur Yates and Co. Ltd [2001] NSWSC 40; (2001) 36 ACSR 758 at p 760; [2001] NSWSC 40 at para [9].

[25] Re ACM Gold Pty Ltd (1992) 34 FCR 530 at p 534.

[26] Paragraph [10].

[27] Paragraph [33].

[28] Paragraphs [7] and [17].

[29] Paragraph [15].

[30] Paragraph [13] above.