Australian Securities Commission v Marlborough Gold Mines Ltd

Nature of the application, background facts and affidavit evidence

1. By Originating Process filed on 2 September 2016, Intecq Ltd ("Intecq") seeks orders under s 411 of the Corporations Act 2001 (Cth) convening a meeting of shareholders for the purposes of considering and, if thought fit, agreeing to a proposed scheme of arrangement between Intecq and its members and approving the explanatory statement required to accompany the notice of the meeting in the form of a scheme booklet which is in evidence.
2. Intecq is a technology company listed on Australian Securities Exchange Limited and operates two business divisions, eBet and Odyssey Gaming, which provide technology solutions to gaming venues and integrated gaming technology solutions. It operates across Australia and the Asia-Pacific region and has over 800 customers. The annual reports for Intecq for the 2015 and 2016 financial years are in evidence (Ex IRJ-1, tabs 3 and 4). The proposed scheme provides for shareholders in Intecq to transfer their shares in Intecq to Tabcorp Gaming Holdings Pty Ltd ("Tabcorp Gaming"), which is a subsidiary of Tabcorp Holdings Ltd ("Tabcorp"). The consideration for each share transferred would be $7.15 in cash; payment of the scheme consideration is secured by a deed poll executed by Tabcorp and Tabcorp Gaming; and the scheme will bring about the acquisition of Intecq by Tabcorp and will result in Intecq becoming a subsidiary of Tabcorp.
3. The Chairman's letter contained in the scheme booklet notes that the scheme consideration of $7.15 in cash per Intecq share represents a premium to the share price of Intecq, as determined on several bases, and records that: "The Intecq Directors (collectively, reflecting approximately 7.8% of fully-diluted shares outstanding) unanimously recommend that you vote in favour of the Scheme Resolution and approve the Scheme in the absence of a Superior Proposal. Subject to that same qualification, each Intecq Director who holds Intecq Shares, or on whose behalf they are held, intends to vote in favour of the Scheme Resolution and approve the Scheme." The Chairman's letter also points to matters which the Intecq directors have taken into account in reaching that conclusion, including the premium payable to the Intecq trading price; the independent expert's conclusion that the transaction was fair and reasonable and therefore in the best interests of Intecq shareholders; their belief that Intecq shares are likely to trade below the scheme consideration if the scheme does not proceed; the certain cash value delivered by the scheme consideration; and the fact that no superior proposal had emerged since the announcement of the scheme.
4. Section 1 of the scheme booklet in turn sets out "key considerations" relevant to shareholders' decision, including several factors identified as reasons to vote in favour of a scheme, other reasons why shareholders might vote against the scheme and other relevant considerations. Section 2 of the scheme booklet addresses "Frequently Asked Questions" in conventional form, and includes an explanation of the break fees. Section 4 of the scheme booklet, which provides an overview of the scheme, contains a clear explanation of the obligations undertaken by Tabcorp and Tabcorp Gaming under the deed poll in respect of the scheme and of the warranties given by Intecq shareholders to the effect that their shares are free from encumbrances. Section 5 provides an overview of Intecq's business, section 6 identifies risk factors in respect of that business and section 7 provides information about Tabcorp and Tabcorp Gaming.
5. The scheme booklet also contains, as Annexure 2, a copy of the scheme of arrangement, which is subject to several conditions precedent (cl 2.1), which (other than in respect of the relevant court orders at the second hearing and their lodgement with ASIC) are to be satisfied or waived prior to the second court hearing. The scheme booklet also contains a copy of the deed poll made by Tabcorp and Tabcorp Gaming and the independent expert's report prepared by Mr Ferris and Ms Picciotta of Deloitte Corporate Finance Pty Limited, which indicates that the independent experts have assessed the fair market value of Intecq by applying a capitalisation of maintainable earnings method, and have cross-checked that valuation by alternative methods including an analysis of recent share trading in Intecq. That report concludes that the scheme is fair and reasonable and hence in the best interests of Intecq's shareholders.
6. Clause 2.2 of the scheme implementation agreement (Ex IRJ-1, tab 6) in turn provides for the effect of the scheme: "The parties acknowledge and agree that, subject to the Scheme becoming Effective, on the Implementation Date the general effect of the Scheme will be that all of the Scheme Shares will be transferred to [Tabcorp Gaming] and the Scheme Shareholders will be entitled to receive, for each Scheme Share held at the Record Date, the Scheme Consideration."
7. Clause 4.1 of the scheme implementation agreement sets out conditions precedent, including regulatory approvals; the issue of an independent expert's report which concludes that the scheme is in the best interests of Intecq's shareholders before the scheme document is registered by ASIC (which, it appears, has already occurred); shareholder approval for the scheme by the requisite majorities under s 411 of the Corporations Act; and Court approval for the scheme. There are also additional conditions precedent for the benefit of Tabcorp, including a no material adverse change provision and a provision as to representations and warranties given by Intecq, and conditions precedent for the benefit of Intecq as to the representations and warranties of Tabcorp.
8. The scheme consideration is specified in clause 5.1 of the scheme implementation agreement which also provides that, subject to clauses 4.1 (dealing with conditions precedent) and 11 (dealing with termination of the scheme implementation agreement), Tabcorp undertakes and warrants to Intecq that, in consideration of the transfer to Tabcorp Gaming of each scheme share, Tabcorp will procure that Tabcorp Gaming accepts the transfer of scheme shares on the implementation date and will procure the deposit by Tabcorp Gaming, in cleared funds, of an amount equal to the scheme consideration into the trust account operated by Intecq as trustee for scheme shareholders, by no later than the business day before the implementation date. Clause 9 of the scheme implementation agreement sets out the circumstances in which break fees in favour of Intecq and Tabcorp respectively have been included and provides for those break fees and clause 10.1 of the scheme implementation agreement contains an exclusivity provision.
9. Intecq relies on an affidavit dated 8 September 2016 of Mr Paul Oneile, one of its directors, by which he consents to act as chairperson of the scheme meeting. Intecq also relies on an affidavit dated 16 September 2016 of Mr Ian James, also one of its directors. Mr James sets out Intecq's history and the nature of its business; refers to relevant corporate documents including its constitution and its 2015 and 2016 annual reports; identifies the current shareholdings in Intecq; and sets out the terms of the proposed scheme of arrangement with Tabcorp, the conditions precedent to that scheme and the circumstances in which exclusivity and break fee provisions, to which I refer below, were negotiated. Mr James also refers to the terms of a deed poll executed by Tabcorp and Tabcorp Gaming, to which I also refer below, and outlines the verification and approval process that was adopted by Intecq in respect of the scheme booklet. A due diligence committee report to the directors of Intecq, signed by members of a due diligence committee, in respect of the preparation of the scheme booklet is also in evidence (Ex IRJ-1, tab 13). Mr James also indicates that he consents to act as alternate chairperson at the scheme meeting and outlines his interests in Intecq.
10. By affidavit dated 14 September 2016, Mr Stephen Ferris confirms that he held the opinions set out in his independent expert's report at the date it was signed and has not become aware of any facts or circumstances since that date which would cause him to change those opinions. By affidavit dated 16 September 2016, Mr Murray Taylor, who is a solicitor in the employ of Intecq's solicitors, gives evidence of lodgement of the draft scheme booklet with the Australian Securities and Investments Commission ("ASIC"). By affidavit dated 19 September 2016, Mr Joshua Hunt, who is Senior Legal Counsel with Tabcorp gives evidence of the verification and due diligence process undertaken by Tabcorp in respect of the information concerning Tabcorp contained in the scheme booklet.

The relevant legal principles

1. At a first court hearing in respect of a scheme, the court is required to determine whether to approve the convening of a scheme meeting and the explanatory statement. The matters that are required to be established at the first stage are that the plaintiff is a "Part 5.1 body"; the proposed scheme is an "arrangement" within the meaning of s 411 of the Corporations Act; the explanatory statement will provide proper disclosure to members; the scheme is bona fide and properly proposed; ASIC has had reasonable opportunity to examine the proposed scheme and explanatory statement, to make submissions and has had 14 days' notice of the proposed hearing date of the first court hearing; and any other procedural requirements have been met: Re Orion Telecommunications Ltd [2007] FCA 1389 at [5].
2. The approach of the court at the first court hearing is that "the court will not ordinarily summon a meeting unless the scheme is of such a nature and cast in such terms that, if it receives the statutory majority at the … meeting the court would be likely to approve it on the hearing of a petition which is unopposed": FT Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 ("FT Eastment") at 72; Australian Securities Commission v Marlborough Gold Mines Ltd [1993] HCA 15; (1993) 177 CLR 485 at 504; Re Sonodyne International Ltd (1994) 15 ACSR 494 at 497. Conversely, if the proposed arrangement is one that seems fit for consideration by a meeting of members and is a commercial proposition likely to gain the court's approval if passed by the necessary majorities, then leave should be given to convene the meeting: Re ACM Gold Ltd; Re Mt Leyshon Gold Mines Ltd (1992) 34 FCR 530 at 535. Although the court makes its final determination at the second court hearing, the court will raise any concerns at the first hearing since, as Santow J observed in Re Archaean Gold NL (1997) 23 ACSR 143 at 147: "… court approval to convene the scheme meetings is viewed by the market as giving assurance that the scheme is at least in form and substance such as warranted receiving such preliminary court clearance. It must not be forgotten that trading thereafter takes place on that basis."

Application of the relevant principles

1. As I noted above, the formal requirements as to which the court should be satisfied, in order to order the scheme meeting, are first that the proposed scheme is within the scope of s 411 of the Corporations Act; which includes being satisfied, as is the case, that Intecq is a Part 5.1 body for the purpose of the Corporations Act. In Re NRMA Insurance Ltd (No 1) [2000] NSWSC 82; (2000) 156 FLR 349 at [20], Santow J observed that: "Generally speaking, unless the arrangement is ultra vires the company or seeks to deal with a matter for which a special procedure is laid down by the Corporations Law or to evade a restriction imposed by the Corporations Law, almost any arrangement otherwise legal which touches or concerns the rights and obligations of the company or its members or creditors, and which is properly proposed, may come under s 411 ...". I am satisfied that the proposed scheme is an "arrangement" for the purposes of the Corporations Act, in a relatively common form.
2. The court must next consider the sufficiency of disclosure and whether the scheme is properly proposed. The scheme booklet contains the prescribed information required by s 412 of the Corporations Act; the evidence as to verification and due diligence, and the form of the draft scheme booklet and associated independent expert report allow the Court to be satisfied that there has been proper disclosure to shareholders; and the circumstances in which the scheme has arisen and the evidence indicate that it is proposed in good faith.
3. I am satisfied that ASIC has had a reasonable opportunity to examine the terms of the scheme and the draft explanatory statement and make submissions to the Court in relation to those matters for the purposes of s 411(2)(b) of the Corporations Act. By letter dated 21 September 2016, ASIC informed Intecq that it had examined the terms of the scheme and the draft explanatory statement in accordance with its policy in Regulatory Guide 60 Schemes of Arrangement. ASIC stated that it did not propose to appear to make submissions, or intervene to oppose the scheme at this hearing, and ASIC did not appear at this hearing. ASIC also indicated that it considered that it has had a reasonable opportunity to examine the scheme and has had notice of the hearing date. By a second letter dated 21 September 2016, ASIC waived the requirement for compliance with specified aspects of Pt 3 of Sch 8 of the Corporations Regulations 2001 (Cth) in relation to the scheme.
4. Section 411(17) of the Corporations Act provides that the court may not approve a compromise or arrangement unless it is satisfied that it has not been proposed for the purpose of enabling any person to avoid the operation of any of the provisions of Chapter 6 of Corporations Act, or there is produced to the court a written statement by ASIC indicating that it has no objection to the compromise or arrangement. The balance of the case law indicates that it is not necessary for the court to consider this matter at the convening stage and it should be deferred to the second hearing: Re Coles Group Ltd (No 2) [2007] VSC 523; (2007) 65 ACSR 494 at [16]-[24]; Re AXA Asia Pacific Holdings Ltd [2011] VSC 4 at [15]. I will therefore take that course.
5. Mr Oakes draws attention to the question of performance risk and to a deemed warranty given under the terms of the scheme. Several cases have identified the need to address performance risk by ensuring that there is a mechanism for scheme members to enforce the right to entitlements that are to be received under a scheme: Re SFE Corporation Ltd [2006] FCA 670; (2006) 59 ACSR 82; Re WebCentral Group Ltd [2006] FCA 937; Re Brambles Industries Ltd [2006] FCA 1273; (2006) 59 ACSR 501; Re APN News & Media Ltd [2007] FCA 770; (2007) 62 ACSR 400 at [23]. Tabcorp is bound by a deed poll in favour of scheme shareholders, which is at Annexure 3 to the scheme booklet, which enables scheme shareholders directly to enforce the obligation to provide the scheme consideration. Clause 3.2 of the scheme also provides for the scheme shares to be transferred only after provision of the share scheme consideration in accordance with cl 4.2(a), and the provision for the scheme consideration to be provided before the transfer of scheme shares occurs addresses the question of "performance risk". The scheme contains a deemed warranty by shareholders that their shares are unencumbered and transferred free from encumbrance. The draft explanatory statement refers to that warranty and provisions of this character have been accepted in the case law, on the basis that the purpose and effect of such a clause simply is to ensure that a scheme participant whose shares are subject to an encumbrance is not unfairly advantaged: Re APN News & Media Ltd above at [57]-[63]; Re Investa Properties Ltd [2007] FCA 1104; (2007) 25 ACLC 1186 at [21]; Re Dyno Nobel Ltd [2008] VSC 154 at [26]; Re Cytopia Ltd [2009] VSC 560 at [23]. I accept the submission that this matter is no obstacle to the court ordering the convening of a meeting.
6. Mr Oakes also draws attention to the fact that, under the scheme implementation agreement, Intecq has agreed (cl 9) to pay a break fee if the scheme does not proceed in specified circumstances. The amount of that break fee is $1.28 million (exclusive of GST) which is 1% of the approximate equity value of Intecq which is $128 million. Intecq has also agreed, in cl 10 of the scheme implementation agreement, to specified exclusivity arrangements. The break fee and exclusivity provisions are disclosed in the scheme booklet. Mr Oakes submits, and I accept, that the break fee is reasonable in the circumstances, since it does not exceed the 1% referred to under the Takeovers Panel Guidance Note 7 on lock up devices (Exhibit IRJ-1 Tab 12); a "reverse break fee" is provided in cl 9.3 of the scheme implementation agreement; the break fee was agreed after negotiation; and cl 9.1 of the scheme implementation agreement records that neither party would have entered into the scheme implementation agreement without the break fee, so that it was commercially sensible for Intecq to agree to the break fee to secure the scheme proposal for consideration by its shareholders. Mr Oakes also points out that the break fee is not payable if shareholders vote down the proposal and there is a "fiduciary carve out" from the exclusivity arrangements in clauses 10.2 and 10.5 of the scheme implementation agreement. I also do not consider that this matter provides any reason not to approve the scheme booklet or order the scheme meeting: compare Re SFE Corporation Ltd above at [7].
7. I am satisfied that the proposed scheme is of such a nature and is cast in such terms that, if approved at the scheme meeting, the Court would be likely to approve the scheme on the hearing of an unopposed application. The independent expert has here concluded that the scheme consideration is fair, in that the consideration is within the range of the value that the independent expert attributes to shares in Intecq, and reasonable in that, being fair, it is necessarily reasonable.
8. Consents to act as chairperson and alternate chairperson at the scheme meeting have been obtained and I am satisfied that the procedural requirements of the Supreme Court (Corporations) Rules 1999 (NSW) have been satisfied.

Electronic notification to shareholders

1. Mr Oakes also points out that Intecq proposes to email those shareholders who have elected to receive notices by email with links to the scheme booklet. Section 249J(3)(c) and (ca) of the Corporations Act provide for notices of meetings to members and r 3.3(2) of the Supreme Court (Corporations) Rules provides, in the absence of court orders to the contrary, that a meeting of members ordered under s 411 of the Corporations Act must be convened, held and conducted in accordance with the provisions of Part 2G.2 of the Corporations Act (in which s 249J appears) and the relevant company's constitution (to the extent that it is not inconsistent with Part 2G.2 Corporations Act). Article 26.1 of Intecq's constitution (Ex IRJ-1, tab 1) relevantly provides that a notice may be given by Intecq by sending it to an electronic address (if any) nominated by the member. Mr Oakes submits, and I accept, that that article permits electronic notification and is not inconsistent with s 249J(3) of the Corporations Act. As Mr Oakes points out, orders permitting notice of a scheme meeting to be given in such a manner have been made in several other cases, including Re Alinta Ltd (No 2) [2007] FCA 1378, Re Consolidated Media Holdings Ltd [2012] FCA 1186, Re Marengo Mining Ltd (No 2) [2012] FCA 1498 and Re David Jones Ltd [2014] FCA 530.

Orders

1. For these reasons, I made the orders sought in respect of convening the scheme meeting and approving the relevant explanatory statements.

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