Australian Securities Commission v Marlborough Gold Mines Ltd

Federal Court of Australia|2018-11-01|Before: Mr J, White J

Pursuant to s 411(1) of the Corporations Act 2001 (Cth), the Plaintiff (PrimeQ) may convene a meeting of its Ordinary Shareholders (Ordinary Share Scheme Meeting) for the purpose of considering and, if thought fit, agreeing (with or without modification) to the proposed scheme for the acquisition by Accenture Australia Holdings Pty Ltd (Accenture) of its ordinary shares (the Ordinary Share Scheme).
Pursuant to s 411(1) of the Corporations Act, PrimeQ may convene a meeting of its Performance Shareholders (Performance Share Scheme Meeting) for the purpose of considering, and if thought fit, agreeing (with or without modification) to the proposed scheme for the acquisition by Accenture of its performance shares (the Performance Share Scheme).
Pursuant to s 411(1) of the Corporations Act, the explanatory statement required by s 412(1)(a) of the Corporations Act to accompany the notices convening the Ordinary and Performance Share Scheme Meetings be substantially in the form of the scheme booklet annexed to the Affidavit of Andrew Charles Meurant Tually made 31 October 2018.
Pursuant to r 3.4(2) of the Federal Court (Corporations) Rules 2000 (the Rules), PrimeQ is relieved from compliance with r 3.4 of the Rules in respect of the Ordinary Share Scheme and Performance Share Scheme, conditional upon PrimeQ publishing once in The Advertiser and The Australian newspapers a notice in accordance with, or substantially in accordance with, the form of the notice which is Annexure "A" to these orders.
The proceedings are stood over to 7 December 2018 at 2:15pm for the hearing of any application to approve the Schemes.
There be liberty to apply. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

WHITE J: 1 At the conclusion of the hearing on 1 November 2018, I made orders pursuant to s 411(1) of the Corporations Act 2001 (Cth) for the convening of meetings of the shareholders of the plaintiff, PrimeQ Limited (PrimeQ), to vote on two schemes of arrangement. I also made an order, pursuant to s 411(1), approving the explanatory memorandum to accompany the notices of the meetings. I said that I would publish reasons later. The following are my reasons. 2 PrimeQ is an unlisted public company established in 2015 and the parent of PrimeQ Australia Pty Ltd and PrimeQ NZ Ltd. Its registered office and principal place of business is in Adelaide. Mr McAdams, PrimeQ's Chief Executive Officer and one of its directors, describes it as "an accredited Oracle specialist providing Oracle Cloud and Oracle on-premises solutions, software licensing, and managed services to a broad range of customers in Australia". 3 As at 12 October 2018, PrimeQ had issued securities as follows: (i) 84,882,179 ordinary shares (Ordinary Shares) and 60 million Class A performance shares (Performance Shares); (ii) 3,925,094 options over Ordinary Shares having various exercise prices and maturity dates (Options); and (iii) 1,043,500 convertible notes (Convertible Notes). There are approximately 212 Ordinary shareholders and approximately 96 Performance shareholders. All the holders of Performance Shares are also holders of Ordinary Shares, but, as is apparent, not all holders of Ordinary Shares hold Performance Shares. 4 The Performance Shares do not carry the same rights as Ordinary Shares and are convertible into Ordinary Shares on the satisfaction of certain performance conditions. The performance conditions for the financial year ending 30 June 2018 were not satisfied and, as a consequence, the Performance Shares with a conversion date of 30 June 2018 did not convert to Ordinary Shares and lapsed. Mr McAdams has deposed that the Board of PrimeQ considers it unlikely that the conditions for the conversion of the remaining Performance Shares into Ordinary Shares at 30 June 2019 and 30 June 2020 will be satisfied. 5 The five members of the senior executive team of PrimeQ (which includes two of its directors), who are sometimes referred to as "Founders", hold or control, between them, 45.03% of the total Ordinary Shares and 81.42% of the total Performance Shares on issue.

The Schemes 6 PrimeQ seeks the orders pursuant to s 411(1) in respect of two inter-dependent schemes: one relating to the Ordinary Shares and one relating to the Performance Shares. 7 Under the proposed schemes, Accenture Australia Holdings Pty Ltd (Accenture) will acquire all of the Ordinary Shares in PrimeQ for a cash consideration of $0.33492 per share and all of the Performance Shares for no consideration. PrimeQ will then become a wholly-owned subsidiary of Accenture. It is a subsidiary of Accenture PLC, a company listed on the New York Stock Exchange with a market capitalisation said to exceed USD 100 billion. That company is described as heading a global management consulting and professional services group providing services in strategy, consulting, digital technology and operations. 8 PrimeQ and Accenture entered into a Scheme Implementation Agreement (SIA) on 8 October 2018. The SIA relates to both proposed schemes. It provides that, in addition to the acquisition by Accenture of all the Ordinary and Performance Shares, all the share options issued by PrimeQ will be cancelled on the implementation date in consideration of the payment of a cash fee agreed between PrimeQ and the relevant option holder. The total to be paid to option holders is $660,059 and that sum is to be provided to PrimeQ by Accenture (cl 4.6). 9 The SIA also provides that all Convertible Notes on issue will be redeemed and the outstanding amount (including face value, capitalised interest and accrued unpaid interest payable to each note holder) will be converted into Ordinary Shares issued in PrimeQ on the record date. The Ordinary Shares issued as a result of the conversion of the Convertible Notes will comprise part of the overall number of Ordinary Shares to be acquired by Accenture on the implementation date for the cash price of $0.33492 per share.

The Court's approch 10 Chapter 5 of the Corporations Act provides for a three stage process in the approval by members of a company of schemes of arrangement of the present kind: Re CSR Ltd [2010] FCAFC 34; (2010) 183 FCR 358 at [7]. The three stages are: (a) the application to the Court for an order for the convening of scheme meetings and the approval of the explanatory statement to be sent to members concerning the schemes (s 411(1)); (b) the holding of the scheme meetings at which members (or a relevant class of members) vote on the proposed schemes (s 411(4)(a)); and (c) the application to the Court to approve the proposed schemes (s 411(4)(b)). 11 The principles which guide the Court's approach to applications under s 411(1) are well established. The Court's role is supervisory. Ordinarily, it will not order a meeting to be convened to consider a scheme 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 will be likely to approve it on the hearing of an unopposed application under s 411(4): FT Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 at 72; Australian Securities Commission v Marlborough Gold Mines Ltd [1993] HCA 15, (1993) 177 CLR 485 at 504. 12 Section 411(2) specifies matters concerning the involvement of ASIC about which the Court must be satisfied before making an order under s 411(1): (a) ASIC has been given at least 14 days' notice of the hearing (or such lesser period of notice as the Court or ASIC permits) (subpara (a)); (b) ASIC has had a reasonable opportunity to examine the terms of the proposed arrangement and the draft explanatory statement relating to it (subpara (b)(i)); and (c) ASIC has had a reasonable opportunity to make submissions to the Court in relation to the proposed arrangement and the draft explanatory statement (subpara (b)(ii)). 13 In addition, there are other matters about which the Court must be satisfied before making an order and giving an approval under s 411(1). They are: (i) the plaintiff is a "Part 5.1 body"; (ii) the proposed scheme is "an arrangement" within the meaning of s 411 of the Corporations Act; (iii) the explanatory statement will provide proper disclosure to the members of the plaintiff so that, amongst other things, they will have available all the main facts relevant to the making of their decision concerning the scheme; (iv) the scheme is bona fide and properly proposed; and (v) there has been compliance with the procedural requirements, including those set out in rr 3.2-3.4 of the Federal Court (Corporations) Rules 2000 (Cth). 14 The Court is not required at this stage to consider the business or commercial efficacy of the proposed scheme.

The evidence 15 PrimeQ relied on a number of affidavits as establishing the matters about which the Court must be satisfied. These are: (a) the affidavits of Mr McAdams made on 12 October 2018 and 26 October 2018; (b) the affidavit of Ian Silvanus White, a non-executive director and the Chairman of PrimeQ, made 17 October 2018; (c) the affidavit of Fiona Adrienne Hele, a non-executive director of PrimeQ, made 16 October 2018; (d) the affidavit of Fiona Geraldine Robson, the "M&A Counsel, Asia Pacific" for Accenture, made 26 October 2018; and (e) the affidavits of Andrew Charles Meurant Tually, PrimeQ's solicitor, made on 22 and 31 October 2018 and on 1 November 2018. 16 The affidavits indicated that PrimeQ is a "Part 5.1 body" and that the proposed schemes are "an arrangement" within the meaning of s 411. 17 Each of Mr McAdams and Mr Tually annexed to one of their affidavits a draft report from the independent expert (Leadenhall) retained by PrimeQ to report on the schemes. Leadenhall has not yet signed the report. The Court was told that it prefers not to do so until the explanatory memorandum in the form of the Scheme Booklet (of which it will form part) has been finalised. It was not clear why Leadenhall could not have finalised and signed its report so that the Court would have it when considering the present application. After some hesitation, I was persuaded to proceed by counsel's assurance that any change in the Leadenhall report from its draft form will be brought to the Court's attention before the Scheme Booklet is issued.

ASIC's involvement 18 Mr Tually's second affidavit annexed correspondence which PrimeQ's solicitors have received from ASIC dated 30 October 2018. In that letter, ASIC confirmed that, in accordance with its usual practice, it would not provide the confirmation contemplated by s 411(17)(b) of the Corporations Act until the second Court hearing. However, in the same letter, ASIC confirmed that it had been given at least 14 days' notice of the hearing on 1 November 2018; that it considered that it had had a reasonable opportunity to examine the terms of the schemes and the draft explanatory statement and to consider whether to make submissions to the Court; and that ASIC did not propose to attend at the hearing to make submissions or to intervene to oppose the schemes. By a separate letter dated 30 October 2018, ASIC informed PrimeQ's solicitors that it consented to the report substantially in the form of the draft Leadenhall Report accompanying the explanatory statement in relation to the schemes. 19 Accordingly, I am satisfied that the requirements of s 411(2) with respect to ASIC have been established. As foreshadowed by ASIC's letter, no representative of it attended the hearing.

Bona fide and properly proposed 20 All of the directors of PrimeQ recommend approval of the schemes and propose voting all the shares which they control in favour of the schemes. The Founders, who, as already indicated, hold or control 81.42% of the total Performance Shares, have bound themselves by Deed Polls to support approval of the Performance Share scheme. 21 Leadenhall assesses the underlying value of the Ordinary Shares to be in the range of $0.23-$0.31 and the value of the Performance Shares to be in the range $0.006-$0.008 per share. As the cash price to be paid under the scheme for each Ordinary Share exceeds the range of values for those shares, Leadenhall concludes that, in the absence of a superior proposal, the scheme with respect to the Ordinary Shares is fair and reasonable and in the best interest of the Ordinary shareholders. However, as no consideration is to be paid in respect of the Performance Shares, and it estimates that they have a value in the range of $0.006-$0.008 per share, Leadenhall concludes that the Performance Share Scheme is neither fair nor reasonable and, accordingly, not in the best interests of the Performance shareholders in their capacity as Performance shareholders. 22 Ordinarily, this circumstance would be a matter of concern on an application of the present kind. Amongst other things, the Court would be concerned as to whether the structure of the schemes is likely to disadvantage one class of shareholders to the benefit of another. 23 However, a number of matters allay that concern in the present case. 24 The first is that all Performance shareholders also hold Ordinary Shares in PrimeQ and will have the opportunity to vote on both schemes. 25 The second is that the scheme consideration offered by Accenture is for the Ordinary Shares only. If, as the Board of PrimeQ considers probable, the conditions for the conversion of the Performance Shares into Ordinary Shares will not be satisfied, those shares will have no value. Leadenhall also considers it unlikely that the conversion conditions will be satisfied. This is reflected in the low probability weighting it has applied to derive the values of between $0.006 and $0.008 per share. It is understandable in this circumstance that Accenture has not offered any payment with respect to the Performance Shares. 26 Thirdly, the overall scheme consideration is of the order of $31 million. Any portion of that sum paid in respect of the Performance Shares would reduce the amount to be paid in respect of the Ordinary Shares. As all Performance shareholders are also Ordinary shareholders, this would reduce the amount each would receive for their Ordinary Shares. 27 If there were shareholders whose holding of Performance Shares exceeds their holding of Ordinary Shares, there would be some potential for them to be disadvantaged by the structure of the scheme. However, with the exception of the Founders, there do not appear to be any in this category. The position of the Founders can be put to one side for this purpose because each, or the entity by which he holds his interest in PrimeQ, has executed a Deed Poll by which he agrees irrevocably (in the absence of a superior proposal) to forgo payment for his Performance Shares and to vote in favour of the schemes. 28 PrimeQ's share register indicates that the other shareholders who hold both Ordinary and Performance Shares do so in the ratio of 2:1 or in proportions which are close to that ratio. That proportionality means that there is no benefit or detriment as between the holders of Ordinary and Performance Shares themselves by reason that the consideration is being paid wholly with respect to the Ordinary Shares. 29 Fourthly, as Leadenhall points out, the total consideration under the two schemes to be received by the Performance shareholders will, on its estimates of value, exceed the value of their holdings in the aggregate. 30 These circumstances, including the inter-dependence between the two schemes, indicate that Performance shareholders could rationally conclude that it is in their interest to vote in favour of both schemes. Further, the Ordinary shareholders and the Performance shareholders will vote independently of one another in relation to each scheme. This being so, the Performance shareholders may choose to support both schemes in order that they receive the benefits under the Ordinary Share scheme. 31 For these reasons, I am satisfied that the absence of separate consideration for the acquisition of the Performance Shares should not lead the Court to conclude that the schemes, and in particular the Performance Share scheme, are not bona fide and properly proposed. 32 As mentioned earlier, all share options issued by PrimeQ are to be cancelled in consideration of a cash payment agreed between PrimeQ and the relevant option holder. PrimeQ has issued four categories of options. 33 The first were issued to PrimeQ's directors (Director Options) and were exercisable at $0.025 per option. The directors have each executed Option Cancellation Deeds with respect to the options held by them by which they agree to the cancellation of the Director Options in consideration of a payment which is the scheme price of $0.33492 per share less the exercise price of $0.025 per option. 34 The options in the second category were issued to PrimeQ's employees (Employee Options) and were also issued at an exercise price of $0.025 per option. Each of the employees holding these options has also executed a cancellation deed by which they agree to the cancellation of the options in consideration of a payment calculated in the same way as the payment for the Directors' Options. 35 The third and fourth categories, known as Taylor Collison 20 cent Options and Taylor Collison 40 cent options, were issued on 1 March 2016 and 6 December 2016 respectively to entities associated with Taylor Collison and had exercise prices of $0.20 and $0.40 per option respectively. PrimeQ and the option holders have entered into deeds for the cancellation of these options in consideration of a payment. The documents before the Court did not make apparent the manner of calculation of the payment. However, the documents do indicate that both the Taylor Collison $0.20 options and the Taylor Collison $0.40 options were issued to Taylor Collison in consideration for services rendered. It can be inferred that this circumstance, and the fact that the options are to be cancelled before their exercise date, explain why the Taylor Collison entities are to receive a significant payment, including for the Taylor Collison 40 cent options even though the exercise price for those options exceeds the scheme share price. 36 The conversion notes will convert into Ordinary Shares in accordance with the formula applicable to an "exit event" contained in the deed polls governing their issue. 37 I have not identified any other aspect of the schemes which may indicate that they are not advanced bona fide.

Proper disclosure 38 In Re Wesfarmers Ltd; Ex parte Wesfarmers Ltd [2018] WASC 308 at [54], Vaughan J summarised matters bearing upon the disclosure required: • The emphasis is on ensuring full disclosure so that the members are properly informed in their consideration of the proposed scheme. Thus the explanatory statement must provide proper disclosure conformable with s 411(3) and s 412 of the Act. • What is required is a statement of all the main facts as will enable shareholders to exercise their judgment on the proposed scheme. • The Court is also concerned with the notion of a fair picture being presented; there should not be an unbalanced presentation. The expectation is one of forthrightness. Cards must be placed on the table. • The Court must be satisfied, at least to a prima facie level, that there has been proper disclosure with nothing misleading or deceptive in any material sense. 39 The authorities also indicate that the extent of disclosure required is a question of fact and degree having regard to the circumstances of the scheme and the context in which it is advanced. The disclosure by the scheme proponents must be considered in a practical and commercially realistic way, having regard to the complexity of the proposed scheme: Re Wesfarmers at [55]. 40 The Scheme Booklet is in a conventional format. It contains detailed information about both schemes and an analysis, in objective terms, in respect of each scheme of the reasons why the respective classes of shareholders may decide to vote for or against each scheme. 41 Section 3 of the Scheme Booklet concerning the Performance Shares draws attention to the aspects of the scheme concerning the Performance Shares to which I referred earlier. In my view, Performance shareholders are provided with sufficient information to make an assessment of whether it is in their interest to approve the scheme despite the absence of any separate consideration with respect to the Performance Shares. 42 Mr McAdams has deposed to the detailed process by which PrimeQ's directors have satisfied themselves that all the information contained in the Scheme Booklet is accurate and satisfies all regulatory requirements with respect to the contents of such Scheme Booklets. Ms Robson has deposed to the process by which Accenture has sought to ensure the accuracy of the information relating to Accenture contained in the Scheme Booklet. 43 There is no reason to think that the Scheme Booklet will not disclose to shareholders all the matters relevant to their decision concerning the schemes.

Miscellaneous matters 44 The obligations of Accenture under the scheme, including their obligations with respect to payment, are supported by a deed poll given in favour of PrimeQ and its shareholders. It provides, in a conventional way, a safeguard to the shareholders of PrimeQ against so-called "performance risk". The deed poll indicates that it has been executed in accordance with s 127(1) of the Corporations Act. 45 The SIA does provide in cl 10 for a break fee of $310,000. This is approximately 1% of the total consideration to be paid by Accenture under the schemes. The principal circumstances in which the break fee will be payable will be if PrimeQ proceeds with a competing transaction or if a director of PrimeQ fails to support the schemes (unless the independent expert concludes that the schemes are not in the best interest of PrimeQ's shareholders). The break fee is disclosed in the Scheme Booklet. Mr McAdams has deposed to the manner in which the break fee was negotiated, including that it is the product of an arms-length negotiation and represents a genuine pre-estimate of Accenture's costs if the schemes do not proceed. The amount of the break fee is consistent with the guidelines contained in Guidance Note 7 - Lock-up devices issued by the Takovers Panel. 46 I am satisfied that the break fee in this case is not likely to be regarded by members of PrimeQ as being so onerous as to have a coercive effect in their consideration of the schemes. 47 Clause 9 of the SIA provides, in different ways, for Accenture to have exclusivity during the period in which its offer is current. These arrangements include a "no shop clause", a "no talk" clause" and a "no due diligence clause". I am satisfied that these clauses are operative for periods which do not extend beyond that which is reasonable in the circumstances. In addition, cl 10 provides for a carve out so as to accommodate the fiduciary duties of the directors during the periods involved. The exclusivity provisions are also consistent with the Takovers Panel guidelines.

Conclusions 48 Having regard to the content of the affidavits and the matters to which I have referred, I was satisfied that orders pursuant to s 411(1) were appropriate and that approval should be given to the explanatory memorandum. These are my reasons for the orders made on 1 November 2018. 49 The order on 1 November relieving PrimeQ from compliance with r 3.14 of the Federal Court (Corporations) Rules 2000 was made conditional, amongst other things, on PrimeQ publishing notice concerning the meeting on 7 December 2018 on the ASIC website. PrimeQ has since confirmed that the notice cannot be published on the ASIC website. Accordingly, I will vary Order 4 by excising the words "and on the ASIC Website" and direct that the orders made on 1 November 2018 be republished with these reasons with those words excised. I certify that the preceding forty-nine (49) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice White.

Corporations Act 2001(Cth)ss 127(1), 411

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