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[2020] FCA 1342
Federal Court of Australia
2020-08-28
Mr P, O'Bryan J
Original judgment source is linked above.
Counsel for the Plaintiff: Mr P Crutchfield QC with Mr B Holmes
Solicitor for the Interested Party: Gilbert + Tobin
ORDERS VID 512 of 2020 IN THE MATTER OF VAULT INTELLIGENCE LIMITED BETWEEN: VAULT INTELLIGENCE LIMITED Plaintiff
DAMSTRA HOLDINGS LIMITED Interested Party
order made by: O'BRYAN J DATE OF ORDER: 28 August 2020
OTHER MATTERS: A. The Court notes that the Australian Securities and Investments Commission (ASIC) was provided with at least 14 days' notice of the hearing of this application. B. The Court is satisfied that ASIC has had a reasonable opportunity to: (i) examine the terms of the proposed scheme of arrangement to which the application relates and a draft explanatory statement relating to that arrangement; and (ii) make submissions to the Court in relation to the proposed scheme of arrangement and the draft explanatory statement. C. The Court notes the letter from ASIC to the Directors of Vault Intelligence Limited dated 27 August 2020 at Annexure JDL-7 to the affidavit of James David Lonie dated 28 August 2020 (Third Lonie Affidavit).
Schedule Annexure A - Scheme of Arrangement [The Order entered is available on the Commonwealth Courts Portal, which attaches the Scheme.] Annexure B - Advertisement Notice of Hearing Notice of hearing to approve compromise or arrangement TO all the creditors and members of Vault Intelligence Limited (ACN 145 040 857) TAKE NOTICE that at 2:15pm on Wednesday 7 October 2020, the Federal Court of Australia at Melbourne will hear an application by Vault Intelligence Limited seeking the approval of a compromise or arrangement between the above-named company and its members (other than ineligible foreign shareholders, as defined in the Scheme Booklet dated 28 August 2020) if agreed to by a resolution to be considered, and, if thought fit, passed at a meeting of such members to be held electronically through an online platform that can be accessed at https://agmlive.link/VLT20 on 2 October 2020 commencing at 10:00am (AEST). If you wish to oppose the approval of the compromise or arrangement, you must file and serve on the plaintiff a notice of appearance, in the prescribed form, together with any affidavit on which you wish to rely at the hearing. The notice of appearance and affidavit must be served on the plaintiff at its address for service at least 1 day before the date fixed for the hearing of the application. The address for service of the plaintiff is Attn: Jonathan Kramersh/Neil Perl C/- HWL Ebsworth Lawyers Level 26, 530 Collins Street Melbourne VIC 3000 Service via email will be accepted: nperl@hwle.com.au
Introduction 1 The plaintiff (Vault) is an Australian public company limited by shares. It is admitted to the official list of the Australian Securities Exchange (ASX) and its shares are quoted for trading on the stock market conducted by the ASX. 2 By originating application dated 31 July 2020, Vault seeks orders pursuant to s 411(1) of the Corporations Act 2001 (Cth) (Act) convening a meeting of the holders of its fully paid ordinary shares for the purposes of them considering and, if thought fit, agreeing to a proposed scheme of arrangement (Scheme) between them and Vault. 3 The Scheme, if implemented, will result in the acquisition of all the shares in Vault by Damstra Holdings Limited (Damstra), an Australian public company limited by shares which is also listed on the ASX. 4 The scheme meeting is proposed to be held at 10:00 am (Melbourne time) on Friday, 2 October 2020. As a result of the health risks associated with the COVID-19 pandemic, there will be no physical meeting. Instead, it is proposed that the meeting be held electronically through an online platform, which shareholders will be able to access by visiting a particular webpage address that is set out in the Notice of Meeting. That webpage will also be hyperlinked in the electronic copy of the Notice of Meeting. The online platform will enable participants to view the Scheme meeting live, vote on the relevant resolution in real time and ask questions online. These proposed arrangements are in accordance with the Federal and State government directions and restrictions with respect to non-essential gatherings of people and the Treasurer's determination regarding electronic shareholder meetings. In particular, paragraph 5 of Corporations (Coronavirus Economic Response) Determination (No. 1) 2020 modifies the relevant provisions of the Act to permit shareholder meetings to be held electronically without persons being physically present in the same place. 5 It is proposed that Mr Ross Jenkins, the non-executive chairman of Vault, will chair the meeting unless he is unable to do so, in which case Mr Robert Kirtlan, a non-executive director of Vault, will chair. 6 On 28 August 2020, I made orders convening the Scheme meeting. These are my reasons for making those orders.
Overview of the Scheme 7 Vault is a provider of environmental, health and safety risk software. Its business is focussed in the development of workforce performance technologies to assist its clients in managing risk, safety and the security of their workers whilst achieving productivity benefits. Vault's business comprises the sale of subscriptions to its cloud-based and mobile EHS software solutions to employers to enable them to monitor their workforce's health and safety remotely and the provision of consulting, training and data migration services. For the financial year ended 30 June 2020, Vault generated revenue of approximately $8 million. 8 Vault has on issue 127,997,024 fully paid ordinary shares and 14,340,000 options to acquire ordinary shares. As at 25 August 2020, the number of Vault shareholders on the register was approximately 1,132 and Vault's directors and senior management held in aggregate around 8% of all the ordinary shares. Many of these shares are held by Mr David Moylan, Managing Director and Chief Executive of Vault, who holds around 6.26% of all the ordinary shares. 9 Vault's market capitalisation as at 25 August 2020 was approximately $76.16 million (based on the closing price of $0.595 per share on the ASX on that day). 10 Damstra is a provider of integrated workplace management solutions to multiple industries via the development, sale and implementation of integrated hardware and software solutions to better track, manage and protect staff and contractors. As at 3 August 2020, Damstra had a market capitalisation of approximately $237.1 million. 11 On 8 July 2020, Vault entered into a Scheme Implementation Deed with Damstra by which Vault agreed to propose and implement the Scheme. The Scheme provides for the transfer of all of the shares in Vault (Scheme shares) to Damstra in consideration for the issue of shares in Damstra to each of Vault's shareholders, being one new fully paid ordinary share in Damstra for every 2.9 Vault shares held by the shareholder. For Vault shareholders whose registered address is shown in Vault's register of members as being outside of Australia or New Zealand, the Damstra shares that would otherwise have been issued to them will instead be issued to a nominee who will sell the Damstra shares and pay the Vault shareholder the net proceeds pro rata to the number of Scheme shares held by them. 12 If the Scheme is implemented, Vault will become a wholly-owned subsidiary of Damstra and will be delisted from the ASX. Subject to the required Court and shareholder approvals, it is anticipated that the Scheme will be implemented on 19 October 2020. 13 Damstra is not a party to the Scheme and cannot be directly bound by it (relevantly, under s 411 of the Act, a scheme is between a company and its members). The established practice in these circumstances is to require the entity providing the Scheme consideration to execute a Deed Poll in favour of Scheme shareholders. That practice has been followed in this case. The Scheme Implementation Deed requires Damstra to execute a Deed Poll in a prescribed form prior to the dispatch of the Scheme Booklet to shareholders. This Deed Poll was executed by Damstra on 27 August 2020. Under the Deed Poll, Damstra covenants in favour of Scheme shareholders to perform the actions attributed to it under the Scheme and otherwise to comply with the Scheme as if Damstra were a party to it and covenants in favour of each Scheme Shareholder to provide the Scheme consideration to each of them in accordance with the terms of the Scheme. 14 As noted above, Vault has issued a number of options to subscribe for shares in Vault to its employees, executives and directors. The options are not quoted on the ASX or any other financial market. The options are governed by the terms which accompanied the options when they were issued. In essence, if the options vest in the holder (which is dependent on satisfaction of stipulated vesting conditions), they entitle the holder to acquire a fully paid ordinary share in Vault on a one for one basis. One of the conditions precedent to the Scheme coming into effect is that, before 8:00 am on the second Court date, each holder of a Vault option has entered into an agreement with Vault and Damstra to deal with their Vault options on terms acceptable to Vault and Damstra (each acting reasonably), such that no Vault options are in existence from the implementation date. The steps taken to satisfy that condition are considered further below. 15 The Scheme is conditional on the satisfaction of the following conditions precedent (as set out in cl 3.1 of the Scheme): (a) all the conditions precedent in cl 3.1 of the Scheme Implementation Deed (other than the condition precedent relating to Court approval of the Scheme) have been satisfied or waived in accordance with the terms of the Scheme Implementation Deed by no later than 8:00 am on the day of the second Court hearing (currently proposed to be Wednesday, 7 October 2020); (b) neither the Scheme Implementation Deed nor the Deed Poll has been terminated as at 8:00 am on the day of the second Court hearing; (c) the Court has approved the Scheme pursuant to s 411(4)(b) of the Act, including with any alterations made or required by the Court under s 411(6) of the Act as are acceptable to Vault and Damstra; (d) such other conditions made or required by the Court under s 411(6) of the Act, as are acceptable to Vault and Damstra, have been satisfied or waived; and (e) the order of the Court made under s 411(4)(b) of the Act approving the Scheme becomes effective. 16 The draft Scheme Booklet (which includes the explanatory statement required by s 412 of the Act) provides a description of the Scheme and its advantages and disadvantages. It has been provided to and reviewed by the Australian Securities and Investments Commission (ASIC). On 27 August 2020, ASIC provided Vault with a letter in the usual form, known as a "preliminary no objection letter". The letter stated that, based on ASIC's examination of the terms of the Scheme and the Scheme Booklet, ASIC does not currently propose to appear to make submissions or intervene to oppose the Scheme at the first Court hearing. On 28 August 2020, after being provided with an updated version of the draft Scheme Booklet containing some amendments, ASIC confirmed by email that Vault may continue to rely on ASIC's preliminary no objection letter in relation to the updated Scheme Booklet. Consistently with the terms of the letter, ASIC did not appear at the first Court hearing. 17 The Scheme Booklet records the recommendation of all the Vault directors that shareholders vote to approve the Scheme, in the absence of a superior proposal, and that all Vault directors intend to vote in favour of the Scheme. 18 An independent expert's report has been obtained from Grant Thornton Finance Pty Ltd (Grant Thornton), which is to be included as an annexure to the Scheme Booklet. In the opinion of Grant Thornton, the Scheme is fair and reasonable and in the best interests of the Vault shareholders.
Power to make orders under section 411 19 Part 5.1 of the Act provides a procedure whereby an arrangement between a company and its members (a scheme) can be made binding on all members. Section 411 is the principal provision. The procedure involves three main steps: (a) an application to the Court for orders to convene a meeting or meetings of members to consider a resolution approving the scheme (s 411(1)); (b) if such an order is made, the holding of the meeting or meetings of members (s 411(4)(a)); and (c) if the resolution is passed by the requisite majority, an application to the Court for an order approving the scheme (ss 411(4)(b) and 411(6)). 20 In terms of the first step of obtaining orders to convene a scheme meeting, s 411(1) of the Act confers a discretion on the Court to make such an order if the following requirements are satisfied: (a) an arrangement is proposed between a Part 5.1 body and its members (or any class of them): see s 411(1); (b) an application for the order is made in a summary way by that body: see s 411(1); (c) 14 days' notice of the hearing of the application has been given to ASIC (or such lesser period as the Court or ASIC permits): see s 411(2)(a); and (d) the Court is satisfied that ASIC has had a reasonable opportunity to: (i) examine the terms of the proposed arrangement to which the application relates and a draft explanatory statement relating to the proposed arrangement; and (ii) make submissions to the Court in relation to the proposed arrangement and the draft explanatory statement required by s 412: see s 411(2)(b) and s 411(3). 21 In addition to these requirements of s 411, the procedure is regulated by s 412 and reg 5.1.01 and Schedule 8 to the Corporations Regulations 2001 (Cth) (the Regulations), and by the Federal Court (Corporations) Rules 2000 (Cth) (Rules). The Regulations and the Rules prescribe certain information which is required to be sent to the members about the Scheme. 22 I am satisfied that these requirements are met and that the Court's power to make the convening orders is enlivened. 23 First, Vault, being a company registered under the Act, is a "Part 5.1 body". It is well established that a scheme designed to effect an acquisition by one company of the shares in another may be an "arrangement" for the purposes of s 411(1) of the Act: see Re Foundation Healthcare Ltd (2002) 42 ACSR 252 at 264 [39] per French J. 24 Second, Vault has made this application to the Court. 25 Third, Vault lodged a draft Scheme Booklet (which included the explanatory statement for the Scheme required by s 412(1) of the Act) with ASIC on 13 August 2020, and subsequent amended versions were provided to ASIC up until 28 August 2020. A stamped copy of the originating process was also sent to ASIC on 13 August 2020. Accordingly, the 14 day notification requirement has been met. As noted above, on 27 August 2020, ASIC provided Vault with a "preliminary no objection letter" stating that ASIC considers that it has had a reasonable opportunity to examine the terms of the proposed Scheme and the draft explanatory statement and to make submissions to the Court. 26 Fourth, as to compliance with the Rules: (a) in evidence is a search of Vault from the records of ASIC conducted on 28 July 2020, being no earlier than 7 days before the originating process was filed as required by r 2.4(2) of the Rules; (b) the chairman and the alternate chairman nominated for the proposed Scheme meeting have each made an affidavit containing the matters required by r 3.2 of the Rules; and (c) the proposed draft order for the convening of the Scheme meeting identifies the Scheme as required by r 3.3(1) of the Rules.
Exercise of the Court's discretion 27 The function of the Court in an application to convene a meeting is supervisory. In Re Amcor Ltd [2019] FCA 346 (Amcor), Beach J described the Court's role at the first Court hearing as follows (at [47]): My function on an application to order the convening of a meeting is supervisory. At this stage I should generally confine myself to ensuring that certain procedural and substantive requirements have been met including dealing with adequate disclosure, with limited consideration of issues of fairness. But having said that, it is appropriate to consider the merits or fairness of a proposed scheme at the convening hearing if the issue is such as would unquestionably lead to a refusal to approve a proposed scheme at the approval hearing, that is the proposed scheme appears now to be on its face 'so blatantly unfair or otherwise inappropriate that it should be stopped in its tracks before going any further' (Re Foundation Healthcare Ltd (2002) 42 ACSR 252 at [44] per French J). 28 Before ordering a meeting, the Court needs to be satisfied of two matters: (a) first, that the scheme is fit for consideration by the proposed meeting in the sense that it 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": FT Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 at 72 per Street CJ; Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485 at 504; Re Coles Group Ltd (2007) 25 ACLC 1380 (Coles) at [29]-[36] per Robson J; and (b) second, that "the members [are to be] properly informed as to the nature of the scheme before the scheme meeting": Re NRMA Insurance Ltd (No 1) (2000) 156 FLR 349 at [30]; 33 ACSR 595; Re Foundation Healthcare (2002) 42 ACSR 252 at [38].
The Scheme is fit for consideration 29 As I observed in Re DuluxGroup Ltd [2019] FCA 961 (DuluxGroup) at [20] in respect of a scheme which also involved a transfer of shares to a third party: The question whether or not to accept particular consideration for shares is quintessentially a commercial matter for the members of DuluxGroup to assess: Re Amcor Ltd [2019] FCA 346 at [50]. Members ought not be prevented from having the opportunity to do so provided that the Court can be satisfied that they are "acting on sufficient information and with time to consider what they are voting about": Re English, Scottish and Australian Chartered Bank [1893] 3 Ch 385 at 409 per Lindley LJ, cited with approval in Re ACM Gold Ltd (1992) 34 FCR 530 at 534 per O'Loughlin J. 30 The Scheme is straightforward. It involves the transfer of all of the shares in Vault to Damstra in return for the issue of new ordinary shares in Damstra. The shares in both Vault and Damstra are listed on the ASX, providing a market valuation for the shares in each company both before and after the announcement of the Scheme and up to the date of the Scheme meeting. 31 The Scheme Booklet will contain an independent expert report by Grant Thornton that assess the fair market value of each of the companies. Grant Thornton opines that the Scheme is fair and reasonable and in the best interests of Vault shareholders. Grant Thornton's opinion is based upon a comparison of the fair value of each Vault share before the Scheme (which Grant Thornton assesses as between $0.52 and $0.58 per Vault share) to the value of the Scheme consideration of 1 new Damstra share per 2.9 Vault shares (which Grant Thornton assesses as between $0.55 to $0.59 per Vault share). As the value of the Scheme consideration is within the valuation range of Vault's shares, Grant Thornton has concluded that the Scheme is fair to the Scheme shareholders. 32 The Scheme Booklet also sets out reasons why members might vote for or against the Scheme and contains a recommendation from all directors that shareholders vote in favour of the Scheme and a statement that all directors intend to vote in favour of the Scheme. 33 Notwithstanding those recommendations, the Court will also scrutinise the terms of a scheme to satisfy itself that there is no element of unfairness in those terms that would be likely to preclude the approval of the scheme if it came before the Court at a second hearing for approval. 34 In this case, Vault raised the following particular features of the Scheme for the attention of the Court: (a) performance risk; (b) shareholder warranties; (c) break fee; (d) exclusivity arrangements; (e) Vault options; (f) ineligible foreign shareholders; and (g) the purpose of the Scheme (i.e. not to avoid Chapter 6 of the Act). 35 For the reasons set out below, I am satisfied that none of these matters provide a reason for the Court to refrain from making an order convening the Scheme meeting.
Performance Risk 36 As noted above, the entity that will be providing the Scheme consideration, Damstra, is not party to the Scheme and is not (and cannot be) directly bound by it. As such, its obligations do not depend upon s 411 of the Act, which is confined to the obligations of the plaintiff company and its members: Re Westfield Holdings Ltd (2004) 49 ACSR 734 at 739. In considering whether to approve a scheme involving the participation of a person other than the plaintiff company and its members, it is important to ensure that that other party is bound to perform the role assigned to it and that its obligations are able to be enforced. In this context, the courts have considered the "performance risk" as regards the obligations to be performed by the non-scheme party: see for example Re Amcor Ltd [2019] FCA 346 at [53]; Coles at 1386 [38]; Re Lonsdale Financial Group Ltd [2007] VSC 394 at [42]; Re KAZ Group Ltd [2004] FCA 738 at [4]-[5]; Re Healthscope Ltd [2010] VSC 367 at [31]-[32]; Re Mitchell Communication Group [2010] VSC 423 at [30]-[31]; Re AWB Ltd [2010] VSC 456 at [16]; and Re AXA Asia Pacific Holdings Ltd [2011] VSC 4 at [21]-[25]. 37 Vault has adopted safeguards to address the performance risk arising from the obligation of Damstra to issue shares as the Scheme consideration: Re Wellcom Group Limited [2019] FCA 1655 at [63]. First, clauses 4.2(a) and 5.1(a) of the Scheme prevents the transfer of any Vault shares to Damstra unless and until the Scheme consideration has been issued (see clauses 4.2(a) and 5.1(a) of the Scheme). Second, Damstra has executed a Deed Poll by which it is bound to perform the roles assigned to it under the Scheme with respect to the issue of the Scheme consideration and its obligations are able to be enforced. 38 I am satisfied that Damstra is legally bound to perform its obligations to issue the Scheme consideration and the Scheme and the Implementation Deed contain effective provisions to ensure that any transfer of Vault shares to Damstra will not take place unless and until the Scheme consideration has been received by the Scheme shareholders.
Shareholder Warranties 39 Clause 8.2(b) of the Scheme provides that each Scheme Shareholder is taken to have warranted to Vault, in its own right and for the benefit of Damstra, that as at the implementation date of the Scheme: (a) all of its shares which are transferred to Damstra under the Scheme will be fully paid and free from all encumbrances and restrictions on transfers of any kind; (b) it has full power and capacity to transfer its shares to Damstra together with any rights attaching to those shares; and (c) it has no existing right to be issued any other Scheme shares or any other Vault securities. 40 The warranties are in the usual form for a transaction of this nature and are acceptable as long as the warranties are sufficiently disclosed in the explanatory statement to shareholders: Re Hostworks Group Ltd (2008) 26 ACLC 137; Re Macquarie Private Capital A Ltd (2008) 26 ACLC 366 (Macquarie); Re Dyno Nobel Ltd [2008] VSC 154; Re Biosceptre International Limited [2013] FCA 1429 at [22]. I am satisfied that the warranties have been sufficiently disclosed in section 4.14 of the Scheme Booklet.
Break fee 41 Vault and Damstra have agreed to the payment to each other of a break fee of $500,000 if the transaction does not proceed for certain identified reasons, which have become usual in these sorts of transaction. As I recently observed in DuluxGroup at [31]: Break fees have become a common feature of commercial transactions of this nature. The effect of such fees on the interests of shareholders has been considered by the courts in connection with schemes of arrangement and by the Takeovers Panel in connection with share acquisitions, the control of companies and the purposes of Chapter 6 of the Act. In general terms, the courts and the Takeovers Panel accept that break fees can be justified by reference to the costs incurred by the offeror and the benefit that an offer may confer on the members of the target company by increasing its value. However, such fees may adversely affect the interests of shareholders if the amount of the fee is such that it is likely to coerce shareholders into agreeing to a scheme or to deter the making of a competing offer for the company's shares: see Re SFE Corporation Ltd (2006) 59 ACSR 82 at [7] per Gyles J; Re APN News & Media Ltd (2007) 62 ACSR 400 at [37]-[55] per Lindgren J; Re Toll Holdings Ltd [2015] VSC 123 at [27]-[30] per Robson J; Takeovers Panel, Guidance Note 7 - Lock Up Devices (Issue 4, 11 February 2010) at [7]. In its current Guidance Note, the Takeovers Panel has stated that, in the absence of other factors, a break fee not exceeding 1% of the equity value of the target is generally not unacceptable. The 1% guideline is not, of course, decisive and courts have ordered a meeting to consider a scheme notwithstanding a break fee that exceeds that level: Re Cytopia Ltd [2009] VSC 560 at [12]-[18] per Davies J (in that case, the fee of $500,000 was approximately 4.57% of the equity value of the target). 42 Clause 7.1 of the Implementation Deed states that the break fee (the fee payable by Vault to Damstra) and reverse break fee (the break fee payable by Damstra to Vault) provisions were agreed to in circumstances where: (a) each party believes it and its shareholders will derive significant benefits from the implementation of the Scheme; (b) each party has incurred and will further incur significant costs in connection with the Scheme, which will include significant opportunity costs if the Scheme is not implemented; (c) each party has requested that provision be made for the break fee payments and neither of them would have entered into the Implementation Deed had such provision not been made; (d) each party believes that it is reasonable and appropriate to agree to pay the break fees to secure the other party's entry into the Implementation Deed and each of the break fees represents a genuine and reasonable estimate of costs that would be incurred by either party (as applicable) if the Scheme is not implemented; and (e) each party has received separate legal advice in relation to the break fees. 43 Mr Jenkins, the Chairperson of Vault, gave evidence that he participated in commercial negotiations with Damstra on behalf of Vault in relation to the break fee and reverse break fee provisions and that, in so far as Vault is concerned, clause 7.1 of the Implementation Deed is accurate. Further, Mr Jenkins gave evidence that: (a) the terms of the break fee provisions (and exclusivity provisions, considered below) were disclosed by Vault in its ASX Announcement on 8 July 2020 and formed part of the proposed Scheme that the directors of Vault have unanimously recommended to Vault shareholders in that announcement; (b) the Vault board made this recommendation to Vault shareholders and considered it to be in the best interests of Vault to agree to the break fee and exclusivity provisions given: (i) the attractive implied premium offered by Damstra relative to Vault's recent historical trading price; (ii) the anticipation that the combined group will deliver material operating and strategic synergies which reinforce the confidence in the outlook for the combined group and the Scheme provides Vault shareholders with an opportunity to share in the benefits of those synergies and the improved position of the combined group; (iii) the fact that the Independent Expert has concluded that the Scheme is fair and reasonable and therefore in the best interests of Vault shareholders in the absence of a superior proposal; (iv) the likely costs that would be incurred by Damstra in pursuing the Scheme; and (v) that Damstra would not have entered into the Implementation Deed had provision for the break fee payable to Damstra not been made. 44 I am satisfied that the terms of the break fee payable by Vault to Damstra do not render the Scheme unfair to Vault shareholders. On the evidence, the fee has a commercial basis (to recover costs). Importantly, payment of the fee is not triggered if the Scheme is rejected by Vault shareholders and therefore the fee should not influence their decision. Further, as the fee is about 0.85% of the equity value of Vault, it would not be expected to deter a competing offer being made for the shares. 45 Having regard to the evidence of Mr Jenkins, I do not believe that the reverse break fee payable by Damstra, and particularly the limitation of Damstra's liability for default to the payment of the reverse break fee, is commercially unfair to Vault shareholders such that the Court should refrain from making an order convening the Scheme meeting.
Exclusivity arrangements 46 The Scheme Implementation Deed contains various exclusivity provisions which Vault has granted in favour of Damstra. These are set out in cl 6 of the Implementation Deed and comprise: (a) a "no existing discussions" warranty (cl 6.1); (b) a "no shop" restriction (cl 6.2); (c) a "no talk" restriction (cl 6.3); (d) a "no due diligence" restriction (cl 6.4); (e) the "notification" obligation (cl 6.5); and (f) the "matching" right (cl 6.7). 47 As noted by Robson J in Re Toll Holdings [2015] VSC 123 at [36] and in Re Skilled (No 1) (2015) 113 ACSR 525 at [50], such provisions are now ordinarily found in merger implementation agreements. In Re Arthur Yates & Co Ltd (2001) 36 ACSR 758 at [9], Santow J said that an exclusivity clause should meet the following criteria: (a) it should be for no more than a reasonable period which is capable of precise ascertainment; (b) it must be framed so that it is subject to an overriding obligation not to breach the directors' fiduciary duties or be otherwise unlawful; and (c) the exclusivity clause should be given adequate prominence in the explanatory statement sent to shareholders. 48 A "no shop" clause need not be subject to a fiduciary "carve-out": Re Healthscope Ltd [2010] VSC 367 (Healthscope) at [19]-[22] per Davies J. 49 For the following reasons, I am satisfied that the exclusivity arrangements are reasonable and do not prevent the Court from making an order to convene a meeting of members to vote on the Scheme. 50 First, each of the exclusivity provisions is summarised at section 12.1(d) of the Scheme Booklet. 51 Second, Mr Jenkins gave evidence that the exclusivity provisions were the outcome of commercial negotiations which took place between Vault and Damstra in which Vault was assisted by external legal and financial advisers to ensure that the terms of the Scheme Implementation Deed (including the exclusivity clauses) were in the best interests of Vault. 52 Third, the period of exclusivity is not unreasonable, being around six months from the period commencing on the date of the Scheme Implementation Deed (8 July 2020) and ending on the earlier of the End Date (being 7 January 2021) and the date that the Scheme Implementation Deed is terminated in accordance with its terms: cf. Re APN News & Media Limited (2007) 62 ACSR 400 at [31]; Re Veda Advantage Limited [2007] FCA 822 at [26]; Re Cytopia Ltd [2009] VSC 560 at [21]; Healthscope at [20]; Re AWB Ltd [2010] VSC 456; Re AXA Asia Pacific Holdings Ltd [2011] VSC 4 at [30(a)]. 53 Fourth, the "no talk" restriction and the "no due diligence" restrictions are subject to a "fiduciary carve out". 54 Fifth, the "matching" right provides that Damstra will have five business days to match or better any competing proposal. The Takeovers Panel considered the potential anti-competitive effects of matching rights in Ross Human Directions Ltd [2010] ATP 8 at [27]-[28] and [53]-[54] and concluded that a matching right with a duration of five business days was acceptable.
Vault Options 55 Vault has issued a number of options to subscribe for shares in Vault to its employees, executives and directors as follows: (a) 4,090,000 options issued to employees pursuant to the employee incentive plan (Employee EIP Options); (b) 1,750,000 options issued to Mr Todd Perkinson, Mr Miguel Nasar and Mr Verdon Kelliher (who are non-director executives of Vault) (Executive EIP Options); (c) 3,300,000 options issued to Mr Ross Jenkins and Mr Robert Kirtlan (who are non-executive directors) (Non-Executive Director Options); and (d) 5,200,000 options issued to Mr David Moylan and Mr David Rose (who are executive directors) (Executive Director Options). 56 As noted earlier, the options are not quoted on the ASX or any other financial market. The options are governed by the terms which accompanied the options when they were issued. In essence, if the options vest in the holder (which is dependent on satisfaction of stipulated vesting conditions), they entitle the holder to acquire a fully paid ordinary share in Vault on a one for one basis. 57 The Employee EIP Options and the Executive EIP Options were issued under the Vault employee incentive plan. The Non-Executive Director Options and Executive Director Options were issued on stand-alone terms approved by Vault Shareholders, other than 700,000 which were issued to David Rose and Robert Kirtlan in 2017 under the employee incentive plan. 58 One of the conditions precedent to the Scheme coming into effect is that, before 8:00 am on the second Court date, each holder of a Vault option has entered into an agreement with Vault and Damstra to deal with their Vault Options on terms acceptable to Vault and Damstra (each acting reasonably), such that no Vault options are in existence from the implementation date. On 8 July 2020, Vault and Damstra entered into an agreement in relation to this condition precedent. Clause 2.1 of this agreement sets out a number of terms which must be reflected in the individual agreements referred to in the condition precedent. 59 In relation to the Employee EIP Options, each optionholder has accepted an offer from Vault that, subject to the Scheme becoming effective, each of those options will be cancelled prior to the Scheme implementation date in return for a cash payment of $0.42 less the exercise price of the relevant options. This cash consideration will be paid within one business day of shareholder approval of the proposed Scheme, bringing forward the exercise period and providing certainty of value for the holders of those options. The cash payment of $0.42 is slightly less than the implied value of the consideration for each Vault share under the Scheme calculated immediately prior to the announcement of the Scheme. Taking the closing price of Damstra shares on 6 July 2020 (being the last trading day prior to the announcement of the Scheme), which was $1.345, and dividing by the exchange ratio of 2.9 new Damstra shares for each Vault share, generates an implied value of the Scheme consideration of $0.464. 60 In relation to the other three categories of options, Vault intends to enter into agreements with the holders of those options providing that, if the Scheme becomes effective, these options will be exchanged on the implementation date for Damstra options on the following terms: (a) the exchange ratio will be 1 new Damstra option for every 2.9 Vault options held; (b) the new Damstra options will be subject to the same vesting conditions as the Vault options for which they are exchanged; (c) the new Damstra options are to have the same expiry date as the Vault options for which they are exchanged; and (d) the exercise price for each new Damstra option will be equal to the exercise price of the relevant Vault options for which it is exchanged, multiplied by a factor of 2.9 (rounded down to the nearest cent). 61 ASX Listing Rules 6.23.2 and 6.23.4 require shareholder approval for certain actions in relation to options. In particular, ASX Listing Rule 6.23.2 requires shareholder approval for the cancellation of options for consideration, and ASX Listing Rule 6.23.4 prohibits the making of a change in relation to options, not otherwise prohibited by ASX Listing Rule 6.23.3, without obtaining approval from the holders of ordinary securities in the company. Vault is liaising with the ASX in relation to these matters, and has applied for a waiver from the requirements of shareholder approval to the extent necessary. 62 The proposed treatment of the Vault options pursuant is disclosed in section 4.8 of the Scheme Booklet. 63 Two questions arise for consideration in relation to the options held by employees and directors. 64 The first question is, in so far as any optionholder is also a shareholder, whether the proposed transactions relating to the options held by that person directly or indirectly confer additional benefits as a result of the Scheme that will not be enjoyed by other shareholders pursuant to the Scheme such that the optionholder and the other shareholders do not have a common interest when meeting to consider the Scheme. Sub-sections 411(1) and (4) of the Act refer to a compromise or arrangement between, relevantly, members or a class of members. The word "class" is not defined in s 411. As observed by Bowen LJ in Sovereign Life Assurance Co v Dodd [1892] 2 QB 573 at 583: The word 'class' is vague, and to find out what is meant by it we must look at the scope of the section, which is a section enabling the court to order a meeting of a class of creditors to be called. It seems plain that we must give such a meaning to the term 'class' as will prevent the section being so worked as to result in confiscation and injustice, and that it must be confined to those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to a common interest 65 In my view, s 411 does not require any of the optionholders to be treated as a separate class of shareholder. The optionholders who are also Vault shareholders will participate in the Scheme on the same basis and receive the same consideration as Vault shareholders who are not optionholders. The Employee EIP Options will be exchanged for cash consideration at a rate slightly less than the implied value of the consideration for each Vault share under the Scheme calculated immediately prior to the announcement of the Scheme. All other Vault options will be transferred to Damstra options on their existing terms, which will entitle the optionholders to acquire shares in Damstra having the same rights as all other shareholders. 66 The second question is, in so far as any optionholder is a director, whether the proposed transactions relating to the options held by the director confer additional benefits as a result of the Scheme such that it would be unfair to shareholders for the director to make a voting recommendation on the Scheme. For the reasons already given, the rights and benefits to be received by the directors on conversion of their Vault option to Damstra options are not such as to make it inappropriate for those directors to make a voting recommendation to members.
Ineligible foreign shareholders 67 Clause 5.3 of the Scheme stipulates that a Scheme Shareholder whose address is shown in the Vault register as a place outside Australia or New Zealand is designated an "ineligible foreign shareholder", unless Damstra and Vault agree that it is lawful and not unduly onerous or impracticable to issue that shareholder with new Damstra shares under the Scheme. 68 Ineligible foreign shareholders will not receive the Scheme consideration. Instead, the Scheme provides in clause 5.3 that the new Damstra shares that would otherwise have been issued to those shareholders under the Scheme will be issued to a sale agent on the Scheme implementation date. The sale agent will then sell all new Damstra shares issued to it in such a manner, at such a price and on such other terms as the sale agent reasonably determines. The sale agent will remit the sale proceeds to Vault, less applicable brokerage, stamp duty, currency conversion costs and other costs, taxes and charges. Vault will pay each ineligible foreign shareholder their pro rata proportion of the proceeds (in cash) as soon as practicable after the Scheme implementation date. 69 This proposed treatment of ineligible foreign shareholders under the Scheme accords with common practice adopted in schemes of arrangement where scrip comprises (or is a component of) the proposed Scheme consideration. In particular, there is a consistent line of authority to the effect that the issuing to a sale agent under a scheme of arrangement of scrip that would otherwise have been issued to ineligible foreign shareholders does not require those shareholders to meet together as a separate class for the purposes of considering the proposed scheme of arrangement: See Amcor at [41] per Beach J. I am satisfied that no separate class arises as regards the ineligible foreign shareholders.
Section 411(7) of the Corporations Act 70 The Court's power to approve a scheme is restricted by s 411(17) of the Act. This is a matter which affects the Court's discretion to ultimately approve the Scheme, rather than the discretion to order a meeting: Macquarie at 370 [27]. At the Scheme approval stage, the Court must be satisfied that there is no proscribed purpose as described in s 411(17)(a) or there must be produced to the Court a statement in writing by ASIC that it has no objection to the arrangement as per s 411(17)(b): Re Coles Group Ltd (No 2) (2007) 65 ACSR 494 at [16]-[24]. 71 ASIC's Regulatory Guide 60 - Schemes of arrangement (RG 60) states (at [104]) that ASIC will provide a statement under s 411(17)(b) if: (a) all material information relating to the proposed scheme has been disclosed to ASIC; (b) the standard of disclosure to all members fulfils the requirements under reg 5.1.01 and Schedule 8 of the Regulations; (c) the standard of disclosure to, and treatment of, all members is equivalent to the standard that would be required by the disclosure requirements and the principles in s 602 of the Act relating to the target securities in a takeover bid; and (d) there are no other reasons to oppose the scheme (e.g. public policy grounds) and the other matters referred to in RG 60 have been complied with. 72 If such a statement is provided by ASIC, it will not be provided until the second Court hearing: RG 60 at [106]. 73 Sub-section 411(17) does not present a bar to a meeting being convened if it seems likely that ASIC will produce the relevant statement at the second Court hearing. Where (as here) ASIC has indicated that it does not oppose the application for convening the meeting, it is appropriate to proceed on the basis that an application for approval would be unopposed by ASIC and that, in due course, ASIC will provide a statement for the purpose of s 411(17)(b): Re Lonsdale Financial Group Ltd [2007] VSC 394 at [31]-[40] per Robson J.
Summary 74 In summary, I am satisfied that the scheme is fit for consideration by the proposed meeting in the sense that it 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.
Will Vault shareholders be properly informed? 75 The second matter relevant to the exercise of the Court's discretion to convene the Scheme meeting is the adequacy of the information to be provided to shareholders. There are three aspects to the requirements of s 412(1) of the Act: (a) First, the explanatory statement must explain the effect of the compromise or arrangement and, in particular, state any material interest of the directors and the effect on those interests of the compromise or arrangement in so far as it is different from the effect on the like interests of other persons: see s 412(1)(a)(i). These matters are addressed in section 7 of the Scheme Booklet. (b) Second, the explanatory statement must set out the prescribed information. That prescription is in reg 5.1.01 and Schedule 8 (Part 3) of the Regulations. Mr Lonie, a solicitor acting for Vault, adduced in evidence a schedule showing the specific requirements of the Act, the Regulations and Part D of RG 60 and the location in the Scheme Booklet of the statements which comply with those requirements. (c) Third, the explanatory statement must set out any other information that is material to the making of a decision whether or not to agree with the compromise or arrangement, being information which is within the knowledge of the directors and has not previously been disclosed: see s 412(1)(a)(ii). 76 As to the third aspect, Mr Lonie gave evidence concerning the verification procedures implemented by Vault to ensure that the information in the Scheme Booklet concerning Vault is complete and accurate in all material respects, is not misleading or deceptive in any material respect and that there is no material omission which renders that information misleading or deceptive in any material respect. Mr Scholtz, a solicitor acting for Damstra, gave similar evidence in relation to the information in the Scheme Booklet concerning Damstra. 77 Vault proposes to send the Scheme Booklet by email with hyperlinks to a website which contains electronic copies of a Scheme Booklet substantially in the form of the draft Scheme Booklet, including attachments, and a personalised online proxy form in respect of the Scheme resolution, to each Vault shareholder registered on the Vault share register and who has named an electronic address for the purpose of receiving notices of meeting and proxy forms from Vault. To each other Vault shareholder, Vault will send the Scheme Booklet, a proxy form, and a pre-addressed reply paid envelope for the return of the proxy form by pre-paid post. 78 As the Scheme is purely a members' scheme, it is necessary that the explanatory statement be registered by ASIC before the notice of meeting is sent to Vault shareholders: see s 412(6). Before registering the statement, ASIC must conclude that it appears to comply with the requirements of the Act and must form the opinion that the statement does not contain any matter that is false in a material particular or materially misleading in the form and context where it appears: see ss 412(7) and 412(8). Vault has provided the draft Scheme Booklet to ASIC, together with all amendments. 79 Schemes of arrangement are not required to be the subject of a report by an independent expert unless the parties have a common director or the acquiring company controls 30% of the scheme company: see reg 5.1.01 and Sch 8, cl 8303 of the Regulations. Neither is applicable to the Scheme in this case. Nevertheless, Vault has obtained a report from an independent expert, Grant Thornton, as to whether, in its opinion, the Scheme is in the best interests of Vault shareholders. Grant Thornton opines that the Scheme is fair and reasonable and in the best interests of Vault shareholders. 80 Sub-section 411(1) provides that, if the Court has made an order convening a meeting or meetings of members or creditors, the Court "may approve the explanatory statement". The practice of courts varies in this respect. Consistent with recent practice in this Court, I have not made an order approving the Scheme Booklet: see Amcor at [114]-[115]; Re Verdant Minerals Ltd [2019] FCA 556 at [84]; Healthscope at [189]; DuluxGroup at [63].
Conclusion 81 In conclusion, I am satisfied that it is appropriate to make the orders sought by Vault. I certify that the preceding eighty-one (81) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice O'Bryan.
Australian Securities Commission
Marlborough Gold Mines Ltd
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(1993) 177 CLR 485
(2000) 156 FLR 349
(1992) 34 FCR 530