Australian Securities Commission v Marlborough Gold Mines Ltd

The Court's power to make orders under s 411(1) of the Corporations Act

1. The relevant principles are well established and, in setting them out, I have drawn upon the submissions of Mr Oakes, who appears for CSG, and my summary of those principles in Re Bellamy's Australia Limited [2019] NSWSC 1671. Part 5.1 of the Corporations Act provides a procedure by which a compromise or arrangement between a company and its members can be made binding on all members by a specified process. Section 411(1) of the Act provides for the Court to order a meeting of members to be convened, and to approve the applicable explanatory statement, where a compromise or arrangement is proposed between a Pt 5.1 body and its members or any class of them; application for the order is made in a summary way by the body or by a creditor or member of the body; 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 the proposed scheme booklet provides proper disclosure to shareholders. In order to make such an order, the Court must also be satisfied that ASIC has had a reasonable opportunity to examine the terms of the proposed compromise or arrangement to which the application relates and a draft of the explanatory statement relating to the proposed compromise or arrangement and to make submissions to the Court in relation to the proposed compromise or arrangement and the draft explanatory statement.
2. Each of these matters has been satisfied with respect to the proposed scheme. CSG is a Pt 5.1 body as defined in s 9 of the Act and the proposed scheme falls within the concept of a "compromise or arrangement" within the meaning of s 411(1) of the Act. The Originating Process and a copy of a draft scheme booklet were provided to ASIC more than 14 days before this hearing and ASIC has confirmed that it does not currently propose to appear to make submissions or intervene to oppose the scheme. The Court therefore has power to convene the requisite scheme meeting.
3. As Mr Oakes points out, once the preconditions to the exercise of the power under s 411(1) of the Act are satisfied, it remains for the Court, in the exercise of a judicial discretion, to determine whether the power ought to be exercised. The Court will not ordinarily convene a scheme 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 an application that 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. In Re Foundation Healthcare Ltd [2002] FCA 742; (2002) 42 ACSR 252 at [36] and [44], cited with apparent approval in Re CSR Ltd [2012] FCAFC 34; (2010) 183 FCR 358 at [58], French J observed that: "… It is however important to bear in mind that, by granting leave to convene the meeting, the court does not give its imprimatur to the proposed scheme. If the arrangement is one that seems fit for consideration by the meeting of members or creditors and is a commercial proposition likely to gain the court's approval if passed by the necessary majorities, then leave should be given: Re ACM Gold Ltd (1992) 34 FCR 530 ; 107 ALR 359; 7 ACSR 231; 10 ACLC 573 (O'Loughlin J). The court is not required to give close consideration to the effects of the scheme upon individual members of the classes of members or creditors affected. So to do would be to "introduce burdensome and to a large extent ineffectual consideration at this interlocutory stage": Re Jax Marine Pty Ltd [1967] 1 NSWR 145 at 148 (Street J). The court at the stage of ordering a meeting to approve a scheme does not ordinarily go very far into the question of whether the arrangement is one which warrants the approval of the court … That question is to be answered when the scheme returns to the court for final approval. That is not to exclude the possibility that a scheme may appear on its face so blatantly unfair or otherwise inappropriate that it should be stopped in its tracks before going any further."
4. Mr Oakes submits that the proposed scheme is fit for consideration by a meeting of the scheme shareholders; that it reflects a commercial proposition that, if passed by the requisite majorities, is likely to be approved by the Court on an uncontested application; and that there are no discretionary matters warranting the refusal by the Court to convene the scheme meeting. He points out that, relevantly, CSG's directors of CSG have unanimously recommended that scheme shareholders vote in favour of the scheme in the absence of a superior proposal or the independent expert changing or qualifying its conclusion that the scheme is in the best interests of scheme shareholders; the scheme consideration represents a premium both to the one month volume weighted average price of CSG shares to close of trading on 23 October 2019 and to the closing price of CSG shares on 23 October 2019, the last trading day before the announcement of the scheme; and Lonergan Edwards & Associates Limited, the independent expert retained by CSG to consider the scheme, has concluded that the scheme is fair and reasonable and therefore in the best interests of scheme shareholders.
5. Having regard to these matters, the Court can be satisfied that the proposed scheme is of such a nature and cast in such terms that, if it receives the statutory majorities at the meeting of members, the Court would be likely to approve the scheme on the hearing of an unopposed application and that, subject to the matters addressed below, it should make the orders sought. I note, for completeness, that s 411(17) of the Act provides that the Court must not approve a scheme unless satisfied it is not proposed for the purpose of enabling avoidance of the takeovers provisions in Chapter 6 of the Act or ASIC provides a statement that it has no objection. This matter is properly deferred for consideration at the second Court hearing.

Particular issues

1. As is common in scheme applications, Mr Oakes draws attention to several particular matters that warrant the Court's attention in exercising the discretion conferred on it by s 411(1) of the Act.
2. First, the Court will consider the question of "performance risk", involving any risk that the acquirer will not comply with its obligation to pay the scheme consideration to shareholders of the scheme company, at the first Court hearing: Re SFE Corporation Ltd (2006) 59 ACSR 82 at [4]; Re Brambles Industries Ltd (2006) 59 ACSR 501 at [9]; Re APN News & Media Ltd (2007) 62 ACSR 400 at [23]; Re Macquarie Capital Alliance Ltd (2008) 67 ACSR 484 at [43]; Re Simavita Holdings Limited [2013] FCA 1274 at [43]-[44]. As Mr Oakes point out, performance risk is addressed by cl 4.2 of the scheme which provides that the proposed transfer of the scheme shares to Fuji Xerox Asia Pacific is subject to the scheme consideration having first been deposited by Fuji Xerox Asia Pacific into the Trust Account (as defined) for payment by CSG to the scheme shareholders. Substantially identical arrangements have been accepted in previous cases: Re APN News & Media Ltd above at [23]; Re Coles Group Limited (2007) 25 ACLC 1380 at [38]; Re Hostworks Group Ltd (2008) 26 ACLC 137 at [32]. The position of scheme shareholders is further protected by Fuji Xerox Asia Pacific's entry into a Deed Poll dated 12 December 2019 in favour of the scheme shareholders which is a common means of addressing performance risk.
3. Second, Mr Oakes draws attention to cl 10 of the scheme implementation deed which contains exclusivity provisions in favour of Fuji Xerox Asia Pacific. These provisions comprise "no shop", "no talk" and "no due diligence" restrictions that apply to CSG, and a "notification" obligation that applies to CSG and a "matching right" for the benefit of Fuji Xerox Asia Pacific. The "no talk" and "no due diligence" restrictions and "notification" regime are each subject to exceptions as to any action that would likely be inconsistent with fiduciary or statutory duties owned by CSG's directors. There is evidence, in a common form, that the exclusivity provisions were the outcome of commercial negotiations between CSG and Fuji Xerox Asia Pacific, in which CSG was assisted by external legal and financial advisers.
4. Provisions of this kind are now commonplace in schemes under s 411 of the Act, and the provisions adopted here do not infringe the principles indicated by the Takeovers Panel's Guidance Note 7: Lock-up devices; see also Re Macquarie Private Capital A Limited (2008) 26 ACLC 366 at [18]-[19]; Re Coles Group Limited above at [62]-[63]; Re Hostworks Group Ltd above at [34]-[37]; Re Investa Listed Funds Management Ltd as responsible entity for the Armstrong Jones Office Fund and the Prime Credit Property Trust [2018] NSWSC 1766 at [15]; Re Villa World Ltd [2019] NSWSC 1207 at [23]. The relevant exclusivity restrictions are in effect for no more than a reasonable period that is capable of precise ascertainment and that they are clearly disclosed in the explanatory statement sent to shareholders: Re Arthur Yates & Co Ltd (2001) 36 ACSR 758 at [9]. I am satisfied that these provisions do not provide reason not to convene the scheme meeting and otherwise make the orders sought.
5. Third, clause 11.3 of the scheme implementation deed provides for CSG to pay Fuji Xerox Asia Pacific a break fee of $1,408,196.84 (exclusive of GST) in prescribed circumstances, as summarised in the scheme booklet. That break fee is not payable merely because the scheme is not approved by the requisite majorities of shareholders at the scheme meeting and that fee should therefore have no influence on voting at the meeting: Re Adelaide Bank Limited [2007] FCA 1582 at [31]. The scheme implementation deed records an acknowledgement by CSG that its agreement to pay the break fee is an integral part of the transaction and that without that break fee, Fuji Xerox Asia Pacific would not have entered into the scheme implementation deed and that matter is also addressed in the affidavit evidence.
6. Break fees are now common features in schemes of arrangement and will be permitted unless "the amount of the break fee was such that it could influence voting at the meeting to be convened or if there were some other unusual circumstances": Re SFE Corporation Ltd above at [6]-[7]; Re APN News & Media Ltd above at [43]; Re Hostworks Group Ltd above at [40]; Re Investa Listed Funds Management Ltd as responsible entity for the Armstrong Jones Office Fund and the Prime Credit Property Trust above at [16]; Re Villa World Ltd above at [24]. The amount of that fee is consistent with the Takeovers Panel's guideline of a maximum of 1% of equity value set out in Guidance Note 7 above, which has been applied in the cases: Re APN News & Media Ltd above at [55]; Re Hostworks Group Ltd above at [40]ff; Re Coles Group Limited above at [69]-[74]. The break fee is also disclosed in the scheme booklet and the evidence addresses the matters relevant to its negotiation to which Lindgren J referred in Re APN News & Media Ltd above at [55]. Mr Oakes submits and I accept that the break fee does not represent a barrier to the convening of a meeting to consider the scheme.
7. Fourth, Clause 7.4(a) of the scheme contains 'deemed warranties', by which scheme shareholders are taken to have warranted to CSG and Fuji Xerox Asia Pacific that all their scheme shares are fully paid and free from all mortgages, charges, liens, encumbrances, pledges, security interests and interests of third parties of any kind, whether legal or otherwise, and restrictions on transfer of any kind. These deemed warranties are disclosed in section 4.10 of the draft scheme booklet and also in the "Frequently Asked Questions" set out in the draft scheme booklet. Clauses in these terms are permissible and are also now commonplace in schemes of arrangement: Re Macquarie Private Capital A Limited above at [14]; Re Mitchell Communication Group [2010] VSC 423 at [10]-[12]; Re Ardent Leisure Ltd [2018] NSWSC 1665 at [26]; Re Villa World Ltd above at [25]. The existence of the deemed warranty is disclosed in the scheme booklet, as contemplated by Re APN News & Media Ltd above at [63].
8. Fifth, Mr Oakes draws attention to the treatment of "CSG Performance Rights" which is addressed in the scheme booklet. A total of 19,087,499 CSG Performance Rights are on issue and are held by approximately 14 employees of CSG. CSG Performance Rights granted to employees of CSG other than Mr Bayliss (who is, as I noted above, the acting chief executive officer and managing director of CSG) will not vest in connection with the scheme and will lapse if the scheme becomes effective. Mr Campbell's evidence is that holders of those CSG Performance Rights will be entitled to retention payments in an aggregate amount of $3.125 million conditional on the scheme becoming effective and the relevant employee remaining in employment with the CSG Group at the relevant payment dates. The scheme booklet also discloses that Mr Bayliss holds 5,000,000 CSG Performance Rights which, if the scheme becomes effective, will vest in accordance with their terms and become scheme shares and participate in the scheme. Mr Bayliss also holds 5,136,364 shares in CSG.
9. Mr Oakes submits, and I accept, that the authorities establish that the holders of CSG Performance Rights who are also shareholders in CSG do not constitute a separate class for the purposes of s 411(1) of the Act, since these matters do not give rise to any relevant distinction between the rights of scheme shareholders: Re Opes Prime Stockbroking Limited (2009) 179 FCR 20 at [64]; Re Skilled Group Ltd (No 1) (2015) 113 ACSR 525 at [82]; Re Kidman Resources Ltd [2019] FCA 1226 at [93]-[95].
10. Mr Oakes also points out that the CSG's directors, including Mr Bayliss, have unanimously recommended that CSG shareholders vote in favour of the scheme at the in the absence of a superior proposal or the independent expert changing or qualifying its conclusion that the scheme is in the best interest of scheme shareholders. Mr Oakes points out that the interests of Mr Bayliss arising from his CSG Performance Rights and his CSG Shares are set out in the Chairman's letter in the scheme booklet, which disclosed the amount of the monetary benefit that Mr Bayliss would obtain on implementation of the scheme. That information is also disclosed elsewhere in the scheme booklet.
11. Mr Oakes recognises the case law that indicates that such a benefit should be fully and prominently disclosed as a matter for scheme shareholders to take into account when considering a director's recommendation: Re SMS Management & Technology Ltd [2017] VSC 257; Re Nzuri Copper Ltd [2019] WASC 189 at [88]; Re Kidman Resources Ltd above at [115]; Re MOD Resources Ltd [2019] WASC 326 at [93]; Re Villa World Ltd above at [31]. Mr Oakes also addresses the authorities that have considered whether a recommendation as to the scheme may properly be made by a director who benefit from its implementation. Mr Oakes also points out that none of the decisions have resulted in a court declining to approve the schemes and all interested directors in each of those recent schemes were able to issue voting recommendations to shareholders, subject to appropriate disclosures of the interest being made in the explanatory statements. Mr Oakes submits that it is open to Mr Bayliss to make a recommendation in the scheme booklet on the scheme given his position as acting chief executive officer and managing director of CSG and his skills and experience. It seems to me that, following the approach adopted in Re Villa World Ltd above and Re GBST Holdings Limited [2019] NSWSC 1280 at [26]ff, the clear disclosure of Mr Bayliss' interests and their value and their potential relevance to the directors' recommendation in the scheme booklet sufficiently addresses this issue.
12. Sixth, Mr Oakes noted that CSG proposes that proxy forms for the proposed scheme meeting be returned by 5.00pm (Sydney time) on Friday, 31 January 2020 ("Proxy Deadline") and that the scheme meeting commence at 10.00am (Sydney time) on Monday, 3 February 2020. This given rise to a difficulty which may commonly arise when a scheme meeting is held on a Monday. That difficulty is that s 250B(1) of the Act requires that proxy forms be received at least 48 hours before the meeting and cl 12.30 of CSG's constitution prescribes the same requirement, and a proxy deadline that would comply with a 48 hour requirement would fall on the morning of Saturday, 1 February 2020, which, as ASX pointed out, would in turn cause difficulty for any shareholder which sought to deliver a proxy in person.
13. CSG's addressed this difficulty by specifying a proposed Proxy Deadline that is 65 hours prior to commencement of the proposed scheme meeting. CSG seeks an order that a proxy form for the scheme meeting will be valid and effective if, and only if, it is completed and delivered in accordance with its terms by the proposed Proxy Deadline. Mr Oakes submits that the Court has power to make such an order under s 411(1) of the Act which provides that a scheme meeting is "to be convened in such manner … as the Court directs" and under s 1319 of the Act which authorises the Court to "give such directions with respect to the convening, holding or conduct of the meeting … as it thinks fit". Mr Oakes also points out that the proxy provisions only apply to a scheme meeting by operation of r 3.3(2) of the Supreme Court (Corporations) Rules 1999 (NSW), and the opening words of that rule recognise that the Court may make a contrary order. On balance, I am persuaded that the Court should make such an order, where any solution to this difficulty, including a change of the scheme meeting date, would have involved a significant degree of inconvenience.

Orders

1. For these reasons, I was satisfied that there was no reason that the scheme should not be put to CSG's shareholders for their consideration or that it could not be approved at the second Court hearing if it receives the requisite shareholder approvals. The Court therefore made orders convening the scheme meeting and ancillary orders in the form proposed by CSG at the hearing on 17 December 2019.

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