Australian Securities Commission v Marlborough Gold Mines Ltd

Affidavit and other evidence

1. ERM Power relied on the affidavit dated 29 August 2019 of its solicitor, Mr Luke Hastings. Mr Hastings refers to an announcement made by ERM Power to Australian Securities Exchange ("ASX") on 22 August 2019 that it had entered into a scheme implementation deed with Shell Energy Australia Pty Limited ("Shell Energy Australia") in respect of the scheme. Mr Hastings noted that, if implemented, the scheme would result in Shell Energy Australia acquiring all of ERM Power's share capital for $2.465 per share, less the amount of any dividends paid before the implementation date of the scheme.
2. Mr Hastings also referred to the nature of the business conducted by ERM Power, which undertakes an electricity sales, generation and energy solutions business, and to the establishment of an independent board committee to determine whether ERM Power should enter into the scheme implementation deed. Mr Hastings noted that the directors of ERM Power had unanimously recommended that scheme participants vote in favour of the scheme, conditional on there being no Superior Proposal (as defined in the scheme implementation deed) and the independent expert appointed by ERM Power concluding that the scheme was in the best interests of scheme participants.
3. By an affidavit dated 30 August 2019, Ms Julieanne Alroe, who is the independent non-executive chair of the board of ERM Power, consented to act as chair of the scheme meeting. By an affidavit dated 18 September 2019, Mr Antonino Iannello, who is an independent non-executive director of ERM Power, consented to act as chair of that meeting in place of Ms Alroe if she was unable to do so.
4. ERM Power also relied on the affidavit dated 2 October 2019 of Mr Philip Davis, who is the group general counsel and company secretary of ERM Power. Mr Davis also referred to the establishment of an independent board committee to consider the proposal from Shell Energy Australia which is to be implemented by the proposed scheme. That independent board committee included all of the directors of ERM Power other than Mr Philip St Baker, whose father, Mr Trevor St Baker, owns approximately 27.39% of the ERM Power shares on issue. Mr Davis noted that the independent board committee recommended to the ERM Power board, on 21 August 2019, that it approve ERM Power's entry into the scheme implementation deed, which the board did on the same date. ERM Power then entered into the scheme implementation deed with Shell Energy Australia and announced the proposed transaction to the ASX as noted above.
5. Mr Davis also referred to the engagement of Lonergan Edwards & Associates ("Lonergan Edwards") to prepare an independent expert's report in respect of the scheme, and I will refer to that report below. Mr Davis referred to the view formed by ERM's board that the scheme is in the best interests of ERM Power's shareholders, and their unanimous recommendation that shareholders vote in favour of the scheme, conditional upon there being no Superior Proposal (as defined) and the conclusion of the independent expert. Mr Davis also outlined the conditions precedent of the scheme, which are summarised in the scheme booklet. Mr Davis also referred to the existence of a reimbursement fee and exclusivity provisions in the scheme implementation deed, as is now common in corporate schemes.
6. Mr Davis also addressed the position in respect of long term incentives on issue to certain employees of ERM Power, including unvested performance rights, unvested units in an employee share trust, and unvested "phantom shares" issued to US employees of a US entity in the ERM Power group. Mr Davis noted that the only member of ERM Power's board who held ERM Power long term incentives was Mr Jon Stretch, ERM Power's managing director and chief executive officer. Mr Davis also referred to the proposed treatment of the long term incentives under the scheme, which is disclosed in the scheme booklet, as I will note below. Mr Davis noted the conclusion reached by the ERM Power board (excluding Mr Stretch) that it would be appropriate for Mr Stretch to make a recommendation on the scheme in the scheme booklet, given its importance, his role in ERM Power's operations and management and his industry knowledge. Mr Davis also referred to the steps to be taken by ERM Power's registry services provider for dispatch of the scheme booklet and to the process adopted for verification of the scheme booklet and to the proposed arrangements for the holding of the scheme meeting.
7. ERM Power also read the affidavit dated 2 October 2019 of its solicitor, Mr Andrew Rich, which referred to notice given to the Australian Securities and Investments Commission ("ASIC") of the proceedings and to the provision of a draft of the scheme booklet to ASIC for review. By his affidavit dated 2 October 2019, Mr Holt of Lonergan Edwards confirmed that he held the opinions expressed in Lonergan Edward's report and had not become aware of any facts or circumstances since the date of that report which would cause him to change his view. By an affidavit dated 2 October 2019, Mr Peter Lorbeer, associate counsel (M&A) of Shell Australia Pty Ltd ("Shell Australia") referred to material prepared by Shell Australia for inclusion in the scheme booklet, concerning that entity, and to the due diligence and verification process which had been adopted in that regard.

The nature of the proposed scheme

1. Mr Wood points out, and I accept, that the proposed scheme is relatively straightforward. Its effect, if agreed to by ERM Power's shareholders and approved by the Court, will be that all ERM Power shares be transferred to Shell Energy Australia for the scheme consideration, and ERM Power will then be a wholly-owned subsidiary of Shell Energy Australia and will apply to be delisted from the ASX.
2. As Mr Wood points out, ERM Power's board declared an ordinary dividend of A$0.045 per ERM Power share on 22 August 2019, in relation to the financial year ended on 30 June 2019. That ordinary dividend will be paid on 9 October 2019 and, under the terms of the proposed scheme, the cash price per ERM Power share payable by Shell Energy Australia to ERM Power shareholders will be A$2.42 per share, less the amount of any special dividend paid by ERM Power before the Implementation Date. That development has been reflected in an amended definition of "Scheme Consideration" in the scheme from that included in the previously agreed form of the scheme appended to the scheme implementation deed. Mr Wood points out that ERM Power also currently intends to pay the proposed special dividend prior to implementation of the scheme, if the scheme is approved by ERM Power shareholders and the Court, although the final decision of the ERM Power board whether or not to do so depends upon a number of factors. The decision of the ERM Power board with respect to the special dividend will be communicated to ERM Power shareholders by way of an ASX announcement before the second Court hearing. The scheme booklet advises ERM Power shareholders of the position if the special dividend is or is not paid.
3. The proposed scheme booklet is in evidence (Ex PAD-1, Tab 1, and, in a revised version, Ex 1). The scheme booklet includes a chairman's letter which refers to the terms of the scheme and the premium to market prices reflected by the consideration payable under the scheme. That letter also refers to the recommendation of ERM Power's directors and discloses Mr Stretch's interest arising from the treatment of long term incentives under the scheme. That letter was amended, in the course of the hearing, to make clear that the effect of the proposed scheme would be that Mr Stretch would receive a substantial cash payment, whether or not shareholders approved the award of performance rights for the 2020 financial year at ERM Power's annual general meeting. That is a matter which shareholders can take into account in determining whether to approve the scheme and, to the extent relevant, the Court can take into account at the second Court hearing. The chairman's letter also disclosed the creation of the independent board committee to consider the relevant proposal, and noted the intention of Mr St Baker, who has an interest in approximately 27.39% of ERM Power's shares on issue (as noted above) to vote in favour of the scheme, in the absence of a superior proposal and subject to the conclusion reached by the independent expert.
4. The scheme booklet also contains a summary of "key considerations" including reasons that shareholders might vote for or against the scheme and a "frequently asked questions" table, which again discloses Mr Stretch's interest in the scheme, which is also addressed elsewhere in dealing with voting in the scheme booklet. The scheme booklet in turn annexes the independent expert report prepared by Messrs Edwards and Holt of Lonergan Edwards, which expresses their opinion that the scheme is fair and reasonable and in the best interests of ERM Power's shareholders in the absence of a superior proposal.

The Court's role at the first Court hearing

1. Mr Wood submits, and I accept, that the Court will order the convening of the scheme meeting and approve the proposed scheme booklet if it is satisfied that ERM Power is a Pt 5.1 body; the proposed scheme is an arrangement within the meaning of s 411 of the Corporations Act; the scheme booklet will provide proper disclosure to members; the scheme is bona fide and properly proposed; ASIC has had a reasonable opportunity to examine the terms of the scheme and the scheme booklet and to make submissions, and has had 14 days' notice of the proposed hearing date of the first Court hearing; the procedural requirements of the Supreme Court (Corporations) Rules 1999 (NSW) have been met; and there is no apparent reason why the scheme should not, in due course, receive the Court's approval if the necessary majority of votes is achieved: Re Staging Connections Group Ltd [2015] FCA 1012 at [19]-[20]; Re Amcom Telecommunications Ltd [2015] FCA 341 at [12]; Re Wiggins Island Coal Export Terminal Pty Ltd [2018] NSWSC 1342 at [17]. Mr Wood also points out that, at a first Court hearing in respect of a scheme, "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": F T Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 at 72, approved in Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485 at 504; Re Foundation Healthcare Ltd [2002] FCA 742; (2002) 42 ACSR 252 at [36], [44]; Re CSR Ltd (2010) 183 FCR 358 at [57]-[58]; Re Boart Longyear Ltd [2017] NSWSC 567 at [24].
2. There is evidence that ERM Power is a Pt 5.1 body and the proposed scheme is an "arrangement" within the meaning of s 411 of the Act. There is no reason to doubt that the scheme booklet provides proper disclosure to shareholders, and I have referred to evidence of a verification and due diligence process above. There is no reason to doubt the scheme is bona fide and properly proposed. ASIC was given at least 14 days' notice of the hearing of the application and had had a reasonable opportunity to examine the terms of the scheme and draft explanatory statement and did not appear to make submissions or intervene to oppose the scheme at the first Court hearing. It seems to me that the proposed scheme, if passed by the requisite majorities of ERM Power shareholders, is likely to be approved by the Court on an uncontested application. Relevant matters include that, as I noted above, ERM Power's board unanimously supports the proposed scheme in the absence of a superior proposal; the proposed scheme consideration exceeds ERM Power's previous share price calculated on several bases; and the independent expert report has concluded that the scheme is fair and reasonable and therefore in the best interests of ERM Power's shareholders. There are no discretionary matters that warrant the refusal by the Court to convene the scheme meeting, although an issue noted below may require further consideration at the second Court hearing.

Specific matters drawn to the Court's attention

1. In accordance with common practice at a scheme hearing, Mr Wood has drawn several aspects of the scheme which should be drawn to the Court's attention. He submits, and I accept, that none of these prevent the grant of an order to convene the scheme meeting. Recommendation by a director who holds an interest under incentive arrangements
2. First, Mr Wood refers to an issue as to a recommendation made by a director in respect of a scheme, where that director has an interest in incentive arrangements which will be paid out in consequence of the scheme. That issue was considered in recent judgments of the Supreme Court of Victoria, the Federal Court of Australia and this Court in, inter alia, Re SMS Management & Technology Ltd [2017] VSC 257; Re Kidman Resources Ltd [2019] FCA 1226; Re Villa World Ltd [2019] NSWSC 1207; and Re GBST Holdings Ltd [2019] NSWSC 1280.
3. Mr Wood points out that ERM Power's directors have unanimously recommended the proposed scheme of arrangement and that one of the ERM Power directors, Mr Jon Stretch (who is ERM Power's managing director and chief executive officer) will receive a cash payment in lieu of his incentive arrangements if the scheme becomes effective. The details of the treatment of Mr Stretch's incentive arrangements (including, desirably, the amount of the cash payment that Mr Stretch will receive) are set out in the scheme booklet, as I noted above. An additional complexity arises in this application, since the issue of FY20 Performance Rights to Mr Stretch has not yet been approved by ERM Power's shareholders. That matter will be considered at the 2019 annual general meeting of ERM Power, and shareholder approval of that issue would be required under ASX Listing Rule 10.14. However, as I noted above, the effect of the scheme is that Mr Stretch would be paid out the value of the FY20 Performance Rights, even if their issue is not approved by shareholders. Although I recognise that that is, in some respects, an odd result, it is squarely disclosed in the scheme booklet, following amendments made in the course of the hearing, and shareholders can take it into account at the scheme meeting and the Court may have regard to it in determining whether to approve the scheme at the second Court hearing.
4. Mr Wood submits that the recommendation of the scheme given by Mr Stretch is, in the circumstances, both appropriate and expected. He refers to the consideration of that issue in Re Villa World Ltd above and in Re GBST Holdings Ltd above. I continue to hold the view, which I expressed in those cases that, where a director was entitled to and did participate in a decision that a company should go forward with a scheme, there would be little utility and real inconsistency in then preventing that director from making a recommendation to shareholders consistent with the view that he or she took as a member of the board, subject to appropriate disclosure of his or her personal interest in the explanatory materials for the scheme. I am satisfied that the scheme booklet appropriately discloses Mr Stretch's entitlements if the scheme is implemented, and this matter does not provide reason not to order the scheme meeting be convened to approve the scheme booklet. Whether separate class meetings are required
5. Mr Wood also addresses the question of whether voting in any separate classes is required at the scheme meeting. Mr Wood refers to the circumstances in which a separate class is required, as summarised by Bowen LJ in Sovereign Life Assurance Company v Dodd [1892] 2 QB 573 (at 583), if the interests of a shareholder and other shareholders are "so dissimilar as to make it impossible for them to consult together with a view to their common interest": see also Re Opes Prime Stockbroking Ltd [2009] FCA 813; (2009) 179 FCR 20 at [64]; Re Foster's Group Ltd (No 2) [2011] VSC 547 at [38]-[43]; Re Ardent Leisure Ltd [2018] NSWSC 1665 at [25].
6. Mr Wood submits that a separate class is not required in respect of ERM Power personnel who are ERM Power shareholders and have been awarded long term incentives which will vest early in the event the scheme is to be implemented. I am satisfied that these matters do not give rise to any relevant distinction between the rights of the position of holders of long term incentives and other ERM Power shareholders or any inability to consult together in determining whether or not to approve the scheme so as to require separate classes.
7. Mr Wood also submits that a separate class is not required for Mr Trevor St Baker, who consented to the inclusion in the scheme booklet of a statement (to which I referred above) confirming his intention to vote, or procure the vote of, his ERM Power shares in favour of the scheme, in the absence of a superior proposal to acquire all of the ERM Power shares, and subject to the independent expert continuing to conclude that the scheme is in the best interests of ERM Power shareholders. Mr Wood submits, and I accept, that a public statement to the effect that a shareholder intends to vote in favour of a scheme of arrangement in the absence of a superior proposal, will not, without more, cause that shareholder to form a separate class: Re Gerard Lighting Group Ltd [2012] FCA 941 at [2], [6]; Re Viralytics Ltd [2018] FCA 637; Re Tawana Resources NL [2018] FCA 1456 at [53]-[56].
8. Mr Wood also points out that the Shell group companies have a relevant interest in 349,283 ERM Power shares (approximately 0.14% of the total number of ERM Power shares), held through various Shell group companies, as disclosed in section 6.6(a) of the scheme booklet. The relevant Shell companies hold these shares in their capacity as manager or trustee of a Shell group pension fund. Mr Wood points out that the definition of "Scheme Shares" applies to all ERM Power shares, including those in which the Shell group companies have a relevant interest, which will be acquired by Shell Energy Australia under the scheme. Mr Wood submits, and I also accept, that the Shell group companies holding these ERM Power shares are properly to be treated as being in the same class as the other ERM Power shareholders as their rights are the same as, and they are not being treated differently to, other ERM Power shareholders: see Re The Trust Company Ltd [2013] NSWSC 1680 at [16]. I do not think it is necessary here to address the correctness of the different approach taken in Re Hellenic & General Trust Ltd [1975] 3 All ER 382, where the Court concluded that a wholly owned subsidiary of the bidder that held shares in the target should be in a separate class. T Damian and A Rich, Schemes, Takeovers and Himalayan Peaks: The Use of Schemes of Arrangement to Effect Change of Control Transactions (Herbert Smith Freehills, 3rd ed, 2013) 548-550 [10.2.4]. It will be sufficient for ERM Power to "tag" the votes of the Shell group companies, as it proposes, and inform the Court at the second Court hearing whether the votes made any difference to the outcome of the scheme vote. Performance risk
9. Mr Wood also addresses the question of performance risk, which is appropriately considered by the Court at the first Court hearing. He points out that cll 5.1(a)-(b) of the scheme provide for Shell Energy Australia to pay an amount equal to the aggregate amount of the scheme consideration into an Australian denominated trust account with an authorised deposit taking institution in Australia operated by ERM Power as trustee for the ERM Power shareholders, by no later than the Business Day before the Implementation Date (terms as defined) and for ERM Power to pay each ERM Power shareholder their respective Scheme Consideration (as defined) on the Implementation Date. Mr Wood points out that Shell energy Australia's obligations under the scheme are supported by a deed poll executed on 25 September 2019 given by it in favour of ERM Power shareholders (Annexure 3 to the scheme booklet). Importantly, the ERM Power shares are not transferred to Shell Energy Australia until the scheme consideration has been paid. Arrangements of this kind have often been accepted as appropriately addressing any "performance risk" issues: Re Coles Group Ltd [2007] VSC 389; (2007) 25 ACLC 1380 at [38]; Re APN News & Media Ltd [2007] FCA 770; (2007) 62 ACSR 400 at [23]; Re Hostworks Group Ltd [2008] FCA 64; (2008) 26 ACLC 137 at [32]; Re AXA Asia Pacific Holdings Ltd [2011] VSC 4 at [21]-[25]; Re GBST Holdings Ltd above at [18]-[19]. Exclusivity arrangements and reimbursement fee
10. As Mr Wood points out, cl 11 of the scheme implementation deed provides for exclusivity provisions which include a "no shop" restriction, a "no talk" restriction (subject to a fiduciary carve out), a "no due diligence" restriction (again, subject to a fiduciary carve out), an obligation that ERM Power notify Shell energy Australia if it is approached with a Competing Proposal (as defined), and matching rights for Shell Energy Australia. Clause 12 of the scheme implementation deed provides for a reimbursement fee to be paid by ERM Power to Shell Energy Australia in specified circumstances. Mr Wood notes that, in respect of exclusivity provisions, the Court will be concerned to ensure that any exclusivity period should be for no more than a reasonable period capable of precise ascertainment; an exclusivity clause directed at dealing with an unsolicited alternative merger proposal should be subject to a fiduciary carve out; and the provision must be clearly disclosed in the explanatory statement sent to shareholders: Re Arthur Yates & Co Ltd (2001) 36 ACSR 758 at [9]; Re Healthscope Ltd [2010] VSC 367 at [19]-[22]; Re AXA Asia Pacific Holdings Ltd above at [29]; Re Folkestone Ltd [2018] FCA 1412 at [31]. Mr Wood notes that the Courts have been prepared to accept both matching right provisions and the range of provisions that exist here: Re Wridgways Australia Ltd [2010] FCA 1187 at [13]-[25]; Re GBST Holdings Ltd above at [20]-[21]. Mr Wood submits, and I accept, that the exclusivity requirements in the proposed scheme are consistent with these principles.
11. Mr Wood also notes that cl 12 of the scheme implementation deed provides for a reimbursement fee of A$6,055,000, potentially payable by ERM Power to Shell Energy Australia in specified circumstances, as disclosed in section 9.4(k) of the scheme booklet. That fee is, properly, not triggered by ERM Power shareholders failing to approve the scheme, and is not a disincentive to ERM Power shareholders in their consideration of the scheme, or if ERM Power's directors terminate the scheme implementation deed if the independent expert concludes that the scheme is not or is no longer in the best interests of ERM Power shareholders (except where that conclusion is due to a Competing Proposal, as defined). Reimbursement or "break" fees are now common features in schemes of arrangement and will generally be permitted unless the amount is such that it could influence voting at the scheme meeting or if there are other unusual circumstances: Re APN News & Media Ltd above at [43]; Re Villa World Ltd above at [24]. The amount of that fee does not exceed the Takeovers Panel's guideline of up to 1% of equity value, which has been accepted in the case law, and is fairly disclosed in the scheme booklet: Guidance Note 7: Lock-up devices at [9]-[10]; Re APN News & Media Ltd above at [55]; Re Hostworks Group Ltd above at [40]ff; Re Coles Group Ltd above at [69]-[74]; Re Villa World Ltd above at [24]. Deemed warranties
12. Mr Wood also notes that cl 8.2(b) of the scheme provides that each Scheme Shareholder (as defined) is taken to have given various warranties to ERM Power and Shell Energy Australia, including that on the Implementation Date all their ERM Power shares are free from encumbrances and interests of third parties of any kind. As Mr Wood points out, the Courts have consistently expressed the view that there is no objection to such provisions but that the attention of shareholders should be drawn to them: Re Atlassian Corporation Pty Ltd [2013] FCA 1451 at [36]; Re Villa World Ltd above at [25]. The deemed warranties given by ERM Power shareholders are appropriately disclosed in section 4.13 of the scheme booklet. Electronic notification to ERM Power shareholders
13. ERM Power shareholders who have elected to receive communications electronically will be notified by email of the scheme meeting, containing links to the scheme booklet and a personalised proxy form. ERM Power's constitution permits notice of meetings to be given electronically (cl 30.1(a)(iii)) if a shareholder has notified an email address for that purpose. Mr Wood submits, and I accept, that orders of this kind are now commonly made in relation to scheme meetings: Re Staging Connections Group Ltd above at [49]-[52]; Re Intecq Ltd [2016] NSWSC 1429 at [21]; Re Ardent Leisure Ltd above at [27]. An ERM Power shareholder will be notified by post if the ERM Power shareholder has not elected to receive communications by email, or if attempts to provide them with notice by email have been unsuccessful (Nah 2.10.19 [12]-[15]). Section 411(17) of the Corporations Act
14. As Mr Wood points out, the question as to any application of s 411(17) of the Act to the scheme is properly deferred to be addressed at the second Court hearing: Re Macquarie Private Capital A Ltd [2008] NSWSC 323 at [23]-[31]; Re Mosaic Oil NL (No 2) (2010) 80 ACSR 281 at [31].

Orders

1. For these reasons, I am satisfied that there is no reason that the scheme should not be put to ERM Power shareholders for their consideration or that it could not be approved at the second Court hearing if it receives the requisite shareholder approvals, reserving the question as to payment of Mr Stretch's FY20 Performance Rights to that time as I noted above. The Court should therefore make orders convening the scheme meeting. I am also satisfied that the scheme booklet should be approved for distribution to ERM Power shareholders.
2. I therefore made orders in accordance with those proposed by ERM Power at the hearing on 4 October 2019.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 05 November 2019