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 Goodman, who appears with Mr Williams for Webster, and my summary of those principles in Re Bellamy's Australia Limited [2019] NSWSC 1671 and Re CSG Limited [2019] NSWSC 1905. 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 Ordinary Scheme and Preference Scheme. Webster 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, on the basis of the undertakings given by Belfort and Verolot to which I have referred above. The Court therefore has power to convene the proposed scheme meetings.
3. 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. As Mr Goodman points out, the Court is not concerned at the first Court hearing with whether final approval should be given to the scheme, but whether the scheme is one which is adequately explained to those who have a financial interest in it, and whether there is any obvious flaw in the scheme, such that it would be inappropriate even for it to be submitted for shareholders' consideration and the Court is not required to be satisfied that no better scheme could have been proposed: Re BIS Finance Pty Ltd [2017] NSWSC 1713 at [22]; Re Villa World Ltd [2019] NSWSC 1207 at [18]. Subject to the matters noted below, including those arising from the Kooba Transaction, the Court can be satisfied that the proposed Ordinary Scheme and Preference Scheme are of such a nature and cast in such terms that, if they receive the statutory majorities at the meeting of members, the Court would be likely to approve them on the hearing of an unopposed application and that, subject to those matters, it should make the orders sought.

Kooba Transaction

1. As I noted above, the evidence indicates that an arrangement has been reached, which is disclosed in the explanatory memorandum for the scheme and documented by a deed poll, which provides that, if the Ordinary Scheme is implemented and (unless PSP waives this condition) the Preference Scheme is also implemented, or PSP compulsorily acquires all the preference shares, then PSP will cause Webster to sell specified assets to KoobaCo, which is an entity to be incorporated within the PSP group. As I noted above, PSP will then afford Belfort and Verolot the opportunity to subscribe for a 50.1 per cent interest in KoobaCo, although the arrangement does not require them to do so. That will occur prior to the second Court hearing, subject to the Ordinary Scheme being approved by the requisite majority of ordinary shareholders, excluding votes cast in favour of the scheme by Belfort and Verolot.
2. Webster fairly recognises, in submissions, that the potential interest of Belfort and Verolot in the Ordinary Scheme, namely that approval of that scheme would facilitate their subscribing for 50.1 per cent of the shares in KoobaCo, gives rise to a question whether they stand to obtain a collateral benefit if that scheme is approved and should be included in a separate class of ordinary shareholders for the purpose of voting in the ordinary scheme. Mr Goodman draws attention to relevant case law, including Re NRMA Limited (2000) 33 ACSR 595 and Re Opes Prime Stockbroking Limited [2009] FCA 813 at [64] and [71], which consider the approach to the constitution of classes identified in Sovereign Life Assurance Co v Dodd [1892] 2 QB 573. This issue has recently been addressed by the Court of Appeal in First Pacific Advisors LLC v Boart Longyear Limited [2017] NSWCA 116 and in a decision of the Federal Court of Australia in Re Healthscope Limited [2019] FCA 542, which Mr Goodman fairly notes may involve a difference at least in emphasis.
3. Mr Goodman points to several matters which Webster contends have the result that Belfort and Verolot need not constitute a separate class in respect of the meeting for the Ordinary Scheme. First, he submits that Mr Goodman submits that a separate class should not be required where there is no difference in the treatment of Belfort and Verolot and other ordinary shareholders under the Ordinary Scheme, which affects the rights of all ordinary shareholders in Webster in the same way, by transferring their ordinary shares to PSP in return for cash consideration of $2.00 per share. He submits that the Kooba Transaction is not a condition precedent to the Ordinary Scheme and sits outside the Ordinary Scheme, although he fairly recognises that that transaction is related to the Ordinary Scheme in the sense that implementation of the Ordinary Scheme is one of the conditions precedent to Belfort's and Verolot's right to invest in KoobaCo. Mr Goodman submits that Belfort's and Verolot's entitlement to subscribe for shares in KoobaCo is properly to be seen as collateral to the Ordinary Scheme and as not rendering it impossible for Belfort and Verolot to consult with other ordinary Scheme shareholders in Webster with a view to their common interest, and that any collateral benefit provided to Belfort and Verolot is a matter to be dealt with at the second hearing as part of the Court's discretion. This is a complex question, which raises an issue which received considerable attention in First Pacific Advisors LLC v Boart Longyear Limited above, as to what circumstances are such as to render the legal interests of shareholders so different that it would be impossible for them to consult, at least in a meaningful way. It is ultimately not necessary to decide that question in that form, since it has been addressed by the further arrangements to which I refer below.
4. Second, Mr Goodman submits that Belfort and Verolot do not stand to gain a collateral benefit if the ordinary scheme is approved, and he refers to a conclusion reached by the independent expert that the arrangement does not confer a "net benefit" on Belfort and Verolot, having regard to the benefit which Belfort and Verolot would acquire by subscribing for the shares in KoobaCo and the amount they will be required to pay for them. Mr Goodman submits that Courts have approached the question of whether there is a collateral benefit by asking whether the particular member or creditor stands to receive a "net benefit" having regard to a comparison of the value of the benefit to be received and any consideration payable by the member or creditor, consistent with the approach taken in the Takeovers Panel Guidance Note 21: Collateral Benefits; see also Re David Jones Ltd (No 2) (2014) 101 ACSR 381 at [23], [31]; Re iSOFT Group Limited [2011] FCA 680 at [9]. It might be noted that, even if these arrangements are economically neutral, in the sense that Belfort and Verolot obtain the right to subscribe for securities for their value, they nonetheless have a right to do so that other shareholders in Webster do not. That right, in turn, confers on them both the possibility of future benefits, if the affairs of KoobaCo are a success, and the risk of investment in that company. It is not necessary to decide whether this matter would be sufficient, in itself, to exclude a difference of rights that might have required different classes.
5. Third, and importantly, the arrangements between PSP and Belfort and Verolot are structured in a manner that depends on approval of the Ordinary Scheme by ordinary shareholders excluding any votes cast by Belfort and Verolot. Mr Goodman submits that: "Belfort and Verolot do not have any practical interest in the Ordinary Scheme resolution different from other Webster ordinary shareholders. This is because their separate interest (the right to subscribe for shares in KoobaCo) is conditional upon the Ordinary Scheme resolution being passed by the requisite majorities of Ordinary Scheme Participants excluding any votes cast in favour by Belfort or Verolot. Accordingly, their interest in the outcome of the Ordinary Scheme resolution is that it be passed by the remaining Ordinary Scheme Participants which, by definition, is not one which can be advanced by Belfort and Verolot voting on the Ordinary Scheme together with other Ordinary Scheme Participants."
6. Mr Williams, who addressed this question in oral submissions, also fairly pointed out that the Kooba Deed Poll provides that it is a condition precedent to Belfort's and Verolot's ability to subscribe for shares in KoobaCo that the Ordinary Scheme has been approved by the requisite majorities at the relevant scheme meeting, excluding Belfort and Verolot and any votes cast in favour by Belfort and Verolot. I understand that exclusion to address both the requirement as to the number of securityholders and the number of votes by which the scheme must be approved. The terms of that arrangement are in turn disclosed in paragraph 7.2 of the explanatory memorandum for the scheme.
7. That is not, strictly, a voting exclusion. However, it has the consequence that, if Belfort and Verolot were to vote in favour of the scheme (which, as I will note below, they will not in fact do for other reasons), then they would not advance their potential acquisition of an interest in KoobaCo by doing so, because their ability to acquire that interest depends on the vote of other holders of ordinary shares in Webster. The only circumstance in which they can benefit from that opportunity is where the requisite majorities of shareholders other than themselves have voted in favour of the scheme in a manner that will satisfy the requirements for approval of the scheme both by reference to number and value. It follows that, for Belfort and Verolot to benefit from that opportunity, the scheme must first have been attractive to the majority of shareholders by number and by value, who do not share any interest in the KoobaCo opportunity. That seems to me to be a significant factor in support of a view that ordinary shareholders can consult, within a single class, because any ability of Belfort and Verolot to advance a separate interest in obtaining an opportunity to invest in KoobaCo is neutralised by these matters.
8. Fourth, Belfort and Verolot have each expressed the view, which is disclosed in the explanatory material for the scheme, that they do not consider it appropriate to vote in favour of the ordinary scheme, given their interest in the other arrangements, although they reserve the right to vote against the scheme if they think fit to do so. Belfort and Verolot have also offered undertakings to ASIC in that respect, which at least prevent their voting in favour of the scheme in circumstances that a separate class is not ordered.
9. As Mr Goodman and Mr Williams point out in supplementary submissions as to this issue, made at the Court's request, the presence (or relevantly, absence) of motivation to vote in favour of a scheme by reason of a collateral benefit is relevant to whether a separate class should be required as well as to whether a scheme should be approved at a second Court hearing: Re Macquarie Private Capital A Ltd [2008] NSWSC 323; (2008) 26 ACLC 366 at [16]; Re Lehman Brothers International (Europe) [2018] EHWC 1980 (Ch). There is also English and Australian authority that indicates that the "structural disenfranchisement" of a potentially interested party can be effective in addressing or removing an issue as to class composition: Re SAB Miller plc [2016] EWHC 2153 (Ch) at [36]-[45]; Re Aston Resources Ltd [2012] FCA 229; Re Kangaroo Resources Ltd [2018] WASC 327 at [43]-[44]; Re URB Investments Ltd [2019] FCA 1977.
10. The Courts have also emphasised, in dealing with the constitution of classes, both the issue of the ability of shareholders to consult, to which I have referred above, and the importance of practical considerations, including the desirability of avoiding the multiplication of classes and particularly classes involving small numbers of shareholders. It seems to me that the arrangements to which I have referred at least have the consequence of neutralising the separate interests of Belfort and Verolot, to permit them to consult with other shareholders in respect of the Ordinary Scheme, and to avoid any risk that a meeting of shareholders would not provide an indication of the view of shareholders who do not have their separate interests in respect of the Ordinary Scheme. Another factor supports the existence of a single class, namely that there is no reason that Belfort and Verolot should not be entitled to vote against the scheme if they ultimately conclude that they should do so.
11. For these reasons, as I indicated in the earlier judgment, it seems to me that the Court can be satisfied as matters stand that the position adopted by Belfort and Verolot, as confirmed in the explanatory memorandum and the subject of their undertakings to ASIC, is such that holders of ordinary shares may properly consult with each other within a single class as to the Ordinary Scheme.

Other matters

1. As is common in scheme applications, Mr Goodman 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, Mr Goodman draws attention to a question as to the treatment of ELTIP Shares held by Mr Felizzi and other executives of Webster, to which I have referred above, and Mr Felizzi's recommendation as to the proposed schemes. The ELTIP Shares are subject to a restriction on sale until applicable vesting conditions are satisfied and (as I noted above) Mr Felizzi has an interest in 700,000 ELTIP Shares which remain subject to vesting conditions. The ELTIP rules provide that all unvested ELTIP Shares vest automatically on a change of control of Webster. Accordingly, currently unvested ELTIP Shares held by eligible executives will vest on the Effective Date (as defined) for the Ordinary Scheme and will be acquired by PSP under the Ordinary Scheme if it is implemented.
3. Mr Goodman submits, and I accept, that holders of ELTIP Shares who are also shareholders entitled to vote on the Ordinary Scheme are not in a separate class of Webster ordinary shareholders by reason only that they also hold ELTIP Shares, since these matters do not give rise to any relevant distinction between the rights of ordinary shareholders: Re Opes Prime Stockbroking Limited above at [64]; Re Foster's Group Ltd (No 2) [2011] VSC 547 at [38]-[43]; Re Skilled Group Ltd (No 1) (2015) 113 ACSR 525 at [82]; Re Kidman Resources Ltd [2019] FCA 1226 at [93]-[95].
4. Mr Goodman also submits that Mr Felizzi's recommendation, as one of two directors comprising the IBC, in favour of the schemes, where he has an interest in the outcome of the vote on the Ordinary Scheme by reason of the treatment under the schemes of his ELTIP Shares, should not cause the Court to decline to convene the Ordinary Scheme meeting. I have not neglected the fact that the impact of a conflict arising from this matter may be more acute where several other directors were also conflicted, and Mr Felizzi was one of the two directors constituting the IBC who has made the recommendation in favour of the schemes to Webster shareholders.
5. The case law that indicates that such the benefit that Mr Felizzi will or may obtain in respect of the ELTIP Shares should be fully and prominently disclosed as a matter for scheme shareholders to take into account when considering the IBC's and his 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]. The authorities have also considered whether a recommendation as to the scheme may properly be made by a director who benefit from its implementation. 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 disclosure of Mr Felizzi's interests and their value and their potential relevance to the directors' recommendation in the scheme booklet sufficiently addresses this issue, notwithstanding that the issue here presents in a more acute way because of the matters to which I referred in paragraph 31 above. I also accept that, for similar reasons, the potential vesting of Mr Felizzi's ELTIP Shares would not prevent Mr Felizzi acting as alternate chair of the scheme meetings.
6. Mr Goodman also points out that, under the terms of their employment contracts, Mr Felizzi and another similarly situated executive of Webster would each be entitled to a payment equal to two years of his total remuneration on implementation of the Ordinary Scheme. Mr Goodman points out that Webster will seek member approval of the payments to the relevant executives for all purposes including under, as applicable, ss 200B, 200E and 208 of the Act and the payments will not be made unless approved at that general meeting. Mr Goodman submits, and I accept, that Mr Felizzi and that other executive are not in a separate class of ordinary shareholders by reason only of their contractual entitlement to these payments, for the same reasons that executives holding rights in respect of ELTIP Shares are not a separate class for the meeting as to the Ordinary Scheme. He also submits, and I accept, that the exercise of those executive' votes at the Ordinary Scheme meeting does not, in itself, allow the benefit of these payments, which will only be made if approved by the other shareholders at the general meeting. I also accept, for the same reasons, that this potential payment to Mr Felizzi, which is also prominently disclosed in the scheme booklet, is not such that the Court should not convene the scheme meetings where he has made a recommendation as a member of the IBC.
7. Second, Mr Goodman draws attention to cl 11 of the Scheme Implementation Agreement which is an exclusivity provision including "no shop", "no talk" and "no due diligence" restrictions and "notification" and "matching right" obligations. The exclusivity arrangement is restricted to the specified "Exclusivity Period" which lasts from the date of the Implementation Agreement (3 October 2019) until the earlier of its termination and the "End Date", being 31 May 2020 unless some other date is agreed by the parties. The "no talk" and "no due diligence" restrictions and the "notification" obligation (in respect of the identity of the third party making an unsolicited approach) are subject to the overriding obligation not to breach the directors' fiduciary or statutory duties. There is evidence, in a common form, that the exclusivity provisions were the outcome of commercial negotiations between Webster and PSP.
8. 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 above at [18]-[19]; 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 above 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]. Mr Goodman also points out that, although the "matching right" is not subject to a fiduciary carve-out, matching rights are increasingly common in schemes of arrangement and are unlikely to be anti-competitive because the terms of a competing proposal would likely need to be disclosed by Webster in any event under its continuous disclosure obligations and the matching right process corresponds to the course that a prospective bidder would expect Webster to take, even without such a provision, in order to obtain the best possible offer if competing bidders emerged: Re DUET Finance Ltd [2017] NSWSC 415 at [24]. I am satisfied that these provisions do not provide reason not to convene the scheme meetings and otherwise make the orders sought.
9. Third, the Implementation Agreement provides for, and the scheme booklet disclosed, a break fee of $5.5 million (ex GST) potentially payable by Webster to PSP in specified circumstances. That break fee is not triggered solely by shareholders not approving the Ordinary Scheme or the Preference Scheme; it represents approximately 0.76% of the aggregate scheme consideration; and there is evidence that the break fee was negotiated between the parties in the course of negotiations in which all parties were represented by experienced advisers. 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 (2006) 59 ACSR 82 at [6]-[7]; Re APN News & Media Ltd (2007) 62 ACSR 400 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]. I accept that the break fee does not represent a barrier to the convening of meetings to consider the schemes.
10. Fourth, the Court will consider the question of "performance risk", involving a 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 above at [4]; Re Brambles Industries Ltd (2006) 59 ACSR 501 at [9]; Re APN News & Media Ltd above at [23]; Re Macquarie Capital Alliance Ltd (2008) 67 ACSR 484 at [43]; Re Simavita Holdings Limited [2013] FCA 1274 at [43]-[44]. Mr Goodman points out that a provision, in common from, for payment of the cash consideration to a trust account operated by Webster as trustee for the scheme participants, prior to transfer of their shares, addresses any risk that the scheme participants would suffer delay or default in the provision of the Scheme consideration after their shares had been transferred to PSP. 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 the deed polls in favour of the scheme shareholders which is a common means of addressing performance risk.
11. Fifth, the scheme contains "deemed warranties" by which scheme shareholders are taken to have warranted 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. 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 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].
12. Sixth, 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.

Orders

1. For these reasons, I was satisfied that there was no reason that the Ordinary Scheme and the Preference Scheme should not be put to Webster's shareholders for their consideration or that the Ordinary Scheme or both schemes could not be approved at the second Court hearing if it or they receive the requisite shareholder approvals. The Court therefore made orders convening the scheme meetings and ancillary orders in the form proposed by Webster's at the hearing on 12 December 2019.

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