Australian Securities Commission v Marlborough Gold Mines Ltd

Background

1. By Originating Process filed on 10 August 2021, the Plaintiff, Templeton Global Growth Fund Limited ("TGG") applies, inter alia, for an order under s 411 of the Corporations Act 2001 (Cth) that it convene a meeting of its members to consider a proposed scheme of arrangement. On 25 August 2021, I made the orders sought at the conclusion of the first scheme hearing. These are my reasons for doing so. I have drawn on the helpful submissions of Mr Williams, who appears for TGG, in these reasons.
2. By way of background, TGG is an investment company that seeks to allow investors access to world equity markets, and which invests in equity stocks traded on international stock exchanges. Its investment portfolio is currently managed by a third party under an Investment Management Agreement and it also sources its administration functions to that third party and does not have any employees. On 6 October 2020, TGG announced a strategic review of its structure and operations with a view to maximising its value for TGG shareholders and, on 29 June 2021, TGG and the acquiring party, WAM Global Ltd ("WAM Global"), announced to the Australian Securities Exchange ("ASX") that they had entered into a Scheme Implementation Agreement ("SIA") which was subsequently amended on 22 August 2021.
3. The proposed scheme would effect a merger between TGG and WAM Global, which is a listed investment company managed by Wilson Asset Management with an actively managed diversified portfolio of undervalued international growth companies. It provides for WAM Global to acquire all of the issued TGG shares that it does not already own, other than any TGG shares which are to be bought back by TGG under a buy-back which will occur in parallel with the scheme. WAM Global would acquire those shares in consideration for the issue of ordinary shares and options in WAM Global based on the relative net tangible assets ("NTA") per share of TGG and WAM Global before deferred taxes ("Scrip Consideration"). In parallel, TGG would undertake an equal access buy-back of TGG shares which would enable TGG shareholders to elect to sell into the buy-back for cash equal to NTA per TGG share after current and deferred taxes and transaction costs ("Cash Consideration"). TGG shareholders can therefore either accept the buy-back offer and receive cash from TGG for their TGG shares or they can elect not to accept the buy-back offer and receive the Scrip Consideration under the proposed scheme. TGG would convene a general meeting to seek shareholder approval of the buy-back under s 257C(1) of the Corporations Act. The scheme and buy-back are inter-conditional such that neither will proceed unless TGG shareholders approve both the scheme and buy-back resolutions.
4. The NTA backings of TGG and WAM Global used to determine the Scrip Consideration and Cash Consideration would be calculated as at 30 September 2021 ("Calculation Date"), the day after the proposed scheme meeting (29 September 2021). Mr Williams rightly recognises that TGG shareholders would therefore not know the exact amount of the Scrip Consideration or Cash Consideration they would receive under the scheme and buy-back as at the date of the scheme meeting, although they would know the means by which it was calculated. The explanatory memorandum sets out the formula used to calculate the Scrip Consideration and Cash Consideration, together with worked examples. I will return to comments made by the Australian Securities & Investments Commission ("ASIC") in respect of that aspect of the proposed scheme below.

Affidavit evidence

1. TGG relies on the affidavit dated 10 August 2021 of its solicitor, Mr Morris, which attaches a company extract for TGG and refers to the preparation of a scheme booklet. The current version of that scheme booklet was tendered at the hearing (Ex 1).
2. By an affidavit dated 23 August 2021, Ms Joanne Dawson, who is an independent non-executive director of TGG and is currently the chair of its Audit and Risk Committee, outlined the nature of TGG's business. Ms Dawson also set out the steps that would be taken in implementation of the proposed transaction and addressed the treatment of ineligible overseas shareholders under the scheme. She also referred to exclusivity provisions in cl 9 of the SIA and the Amended SIA, and her evidence is that those provisions resulted from arm's length negotiations with WAM Global and that TGG's board agreed to them as they believed they would maximise the prospect that WAM Global would enter the SIA and the proposal could be successfully implemented. Ms Dawson also referred to a deed poll by which WAM Global covenants to perform its obligations under the scheme, to the independent expert's report obtained by TGG from Grant Thornton Corporate Finance Pty Ltd ("Grant Thornton") and to the proposed conduct of the scheme meeting and general meeting in respect of the proposed buy-back. Ms Dawson also addressed the preparation of the explanatory memorandum, the proposed dispatch of scheme documents and the due diligence and verification process which was adopted in respect of the scheme documents.
3. By his affidavit dated 23 August 2021, Mr Christopher Freeman, who is also an independent non-executive director of TGG and is the chair of its Review Committee and a member of its Audit and Risk Committee, consented to act as chair of the scheme meeting.
4. By an affidavit dated 23 August 2021, Jesse Hamilton, who is the company secretary of WAM Global and the chief financial officer of its investment manager, Wilson Asset Management (International) Pty Ltd, outlined the nature of WAM Global's business, referred to the exclusivity provisions in the SIA, outlined the steps taken to prepare and verify the information concerning WAM Global in the explanatory memorandum, and confirmed that entities within the Wilson Asset Management Group held approximately 14.95% of the issued shares in TGG, and would abstain from voting in relation to the proposed scheme and buy-back.
5. By an affidavit dated 24 April 2021, Mr Peter Renda, who is a relationship manager employed by Computershare Investor Services Pty Ltd ("Computershare"), refers to the manner in which key materials will be dispatched to TGG shareholders, by electronic and hard copy dispatch, and to the engagement of Lumi Technologies Pty Ltd ("Lumi") to provide a secured online platform for a virtual meeting of TGG's shareholders. By an affidavit dated 24 August 2021, Mr Oliver Bampfield, who is the managing director of Lumi in turn addresses the operation of the Lumi online AGM system, which will be used by TGG for the conduct of the scheme meeting. TGG also relies on the affidavit dated 24 August 2021 of Mr Andrea De Cian of Grant Thornton, which confirms that he holds the opinions expressed in the independent expert report as at the date of his affidavit.
6. By his affidavit dated 24 August 2021, Mr Jonathan Grant, who is a partner of the firm of solicitors acting for TGG, refers to correspondence with ASIC in respect of the explanatory memorandum. By its letter dated 24 August 2021 (Ex 2), ASIC indicated that it did not currently propose to appear or make submissions or intervene to oppose the scheme at the first Court hearing, although it identified an issue which I address below in dealing with TGG's submissions, which seems to me to be a matter to be determined at the second Court hearing, as follows: "ASIC notes that, under the proposed timetable, shareholders of [TGG] will be asked to vote on the Scheme before the exact [scrip] Consideration and Cash Consideration will be known. ASIC is of the view that information about the exact consideration members could expect to receive is fundamentally material to a shareholder's decision whether to vote for or against a scheme. The proposed timetable provides that the Scrip Consideration and Cash Consideration will not be announced by [TGG] to the ASX until the day before the second Court hearing. ASIC notes that the draft explanatory statement discloses that the exact scheme consideration will not be known at the time of the Scheme Meeting. ASIC understands that there are commercial and logistical reasons for the timing of calculating the Scrip and Cash Consideration after the Scheme Meeting. Namely, that the Buy-Back participation rate must be known to enable calculation of the Scrip and Cash Consideration, and requiring the scheme consideration to be calculated prior to the Scheme Meeting would necessitate a lengthy delay in holding the Scheme Meeting, which would in turn exacerbate the effects of any changes in the value of [TGG's] assets between the Calculation Date and the determination of the Scrip and Cash Consideration. ASIC is currently reserving its position regarding the matter. Although ASIC does not seek to alter the proposed timetable at this stage, if considered necessary, ASIC may request the date of the second Court hearing be postponed to provide sufficient time for ASIC, or other interested parties, to decide whether to appear and make submissions at the second Court hearing."

Applicable principles

1. Mr Williams rightly draws attention to the applicable legal principles. The Court will order that a scheme meeting be convened and approve the draft explanatory memorandum if it is satisfied that the plaintiff is a Part 5.1 body; the proposed scheme is an arrangement within the meaning of s 411; the explanatory memorandum will provide proper disclosure to members; the scheme is bona fide and properly proposed; ASIC has had a reasonable opportunity to examine the terms of the scheme and the explanatory memorandum and make submissions and has had 14 days' notice of the proposed hearing date; the procedural requirements of the Supreme Court (Corporations) Rules 1999 (NSW) have been met; and there is no apparent reason why the scheme should not, in due course, receive the Court's approval if the necessary majority of votes is achieved: Re Staging Connections Group Ltd [2015] FCA 1012 at [19]-[20]; Re Atlas Iron Ltd (2016) 112 ACSR 554; [2016] FCA 366 at [30]; Re DUET Finance Ltd [2017] NSWSC 415 at [15]; Re BIS Finance Pty Ltd [2017] NSWSC 1713 at [20]; Re Villa World Ltd (2019) 139 ACSR 550; [2019] NSWSC 1207 at [15].
2. Mr Williams points out that, at the first Court hearing, the Court will not ordinarily summon a 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 a petition which is unopposed: F T Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 at 72; Australian Securities Commissions v Marlborough Gold Mines Ltd (1993) 177 CLR 485 at 504; (1993) 10 ACSR 230; [1993] HCA 15. He also refers to the observations of French J in Re Foundation Healthcare Ltd (2002) 42 ACSR 252; [2002] FCA 742 at [36] and [44], cited with approval in Re CSR Ltd (2010) 183 FCR 358; (2010) 77 ACSR 592; [2010] FCAFC 34 at [58]) 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."
3. Mr Williams also points out that, at the first hearing, the Court is not concerned 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 consideration: Re Abacus Funds Management Ltd (2006) 24 ACLC 211; [2006] NSWSC 1309 at [23]; Re Villa World above at [18]. The Court is not required to be satisfied that no better scheme could have been proposed, and the question is whether it is reasonable to suppose that sensible business people might consider the arrangement proposed is of benefit to members: Centrebet International Ltd [2011] FCA 870 at [29]; Re SAI Global Ltd [2016] FCA 1312 at [18]; Re DUET Finance Ltd at [14]; Re BIS Finance Pty Ltd at [22].
4. I am satisfied, by reference to the evidence to which I referred above, 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. Mr Williams points out that TGG's directors have unanimously recommended that TGG shareholders vote in favour of the scheme and the buy-back, in the absence of a superior proposal, and subject to the independent expert continuing to conclude that the transaction is in the best interests of TGG shareholders. He also points out that Grant Thornton has prepared an independent expert's report as to whether the scheme and buy-back are in the best interests of TGG shareholders and compared the value of TGG shares on a control basis with the value of the Scrip Consideration and Cash Consideration. Grant Thornton there assessed the value of the Scrip Consideration to be higher than the value of the Cash Consideration and, its fairness opinion has been assessed by reference to the Scrip Consideration. On that basis, Grant Thornton concluded that the Scheme and buy-back are in the best interests of TGG Shareholders, in the absence of a superior proposal. The terms of the scheme, including its key features and advantages and disadvantages, are sufficiently disclosed in the scheme booklet.

Specific issues

1. As is common practice in scheme applications, Mr Williams draws attention to several matters that warrant the Court's attention in exercising the discretion conferred on it by s 411(1) of the Act.

Determination of Scrip Consideration and Cash Consideration

1. Mr Williams points out that, as I also noted above, the amount of the Scrip Consideration payable under the scheme to each TGG shareholder depends on the ratio of the NTA of WAM Global to the NTA of TGG as at the Calculation Date and the amount of Cash Consideration payable for each TGG share bought back under the buy-back also depends on the NTA of TGG as at the Calculation Date. He recognises that TGG shareholders will not know the precise amount of the Scrip Consideration or Cash Consideration at the time of the scheme meeting, since that meeting will be held on the day prior to the Calculation Date and it will take some time after the Calculation Date to finalise the NTA calculations. I have referred to ASIC's comments concerning that matter above.
2. Mr Williams points out that the fact that the amount of the Cash Consideration or Scrip Consideration will not be known with certainty until after the Calculation Date is prominently disclosed in the explanatory memorandum for the scheme in the Chairman's letter, section 1.4, section 2.2.2, and section 5.18.5(e), and that section 3 of the explanatory memorandum includes worked examples based on the relative NTA backing of WAM Global and TGG as at 30 June 2021 and a sensitivity analysis showing the impact on the exchange ratio of changes to the NTA backing of both WAM Global and TGG between 30 June 2021 and the Calculation Date. Mr Williams also explains the reasons for adopting the variable consideration formula, rather than a fixed ratio based on historical NTA. First, he points out that WAM Global and TGG are listed investment companies whose assets comprise liquid securities traded on stock exchanges; their respective NTA will vary, day to day, with the listed prices of the securities held in their respective investment portfolios; and setting the valuation and exchange parameters in close proximity to implementation of the transaction provides fair recognition of the current value of TGG and WAM Global shares at implementation and avoids the prospect that TGG shareholders are disadvantaged by a favourable movement in the value of TGG's investment portfolio relative to the performance of WAM Global's portfolio between a historical date (such as 30 June 2021) and implementation of the scheme. Second, he points out that the NTA for TGG, and the exchange ratio for determining the Scrip Consideration, also needs to take account of the impact of the buy-back on TGG's NTA backing, since TGG will need to realise assets within its portfolio to generate sufficient cash to pay the Cash Consideration to the TGG shareholders who take up the buy-back offer.
3. Mr Williams submits, and I accept, that variable consideration mechanisms of this character have been accepted in previous schemes involving listed investment companies, although they are not common in schemes generally: Re Scarborough Equities Limited [2009] FCA 24 at [2]; Re Scarborough Equities Limited (No 2) [2009] FCA 484; Re Premium Investors Ltd [2012] FCA 1211 at [3], where Jagot J accepted that the uncertainty in the precise figure for the consideration (as distinct from the formula by which it is determined) can be addressed by disclosure in the explanatory memorandum; Re Murchison Metals Ltd [2014] NSWSC 951. Mr Williams submits that there is nothing inherently unfair in the consideration being determined based on the most up-to-date NTA of both WAM Global and TGG and TGG shareholders will have little difficulty in comprehending the conceptual basis for the determination of both the Scrip Consideration and Cash Consideration. He also notes that there are other situations in schemes where the precise amount of consideration that members will receive if the scheme proceeds is not known at the date of the scheme meeting, for example, if the scheme company proposes to declare a special dividend between the date of the scheme meeting and the date of implementation of the scheme.
4. I am satisfied that I should follow the approach adopted in the case law to which I have referred, albeit not always with extended reasoning, on the basis that disclosure is sufficient to address this issue. It seems to me that TGG shareholders are properly informed in the explanatory memorandum of the methodology by which the amount they will receive by shares or options in WAM Global under the scheme, or cash under the buy-back is determined, and its relationship with the NTA of TGG and WAM Global as applicable, and as to the range of possible outcomes by the illustrations in the explanatory memorandum. If any issue then arises as to the implementation of that formula, including by any unexpected market developments which particularly affect either TGG or WAM Global, that is properly addressed at the second scheme hearing.

Whether TGG shareholders are a single class

1. Mr Williams notes that it is proposed that all TGG shareholders will comprise a single class for the purposes of voting on the scheme. He points out that, although TGG shareholders may elect either to receive the Cash Consideration by participating in the buy-back or the Scrip Consideration by electing not to participate in the buy-back, they will all receive their chosen form of consideration in return for the transfer of their TGG shares on the Implementation Date (as defined). He refers to First Pacific Advisors LLC v Boart Longyear Ltd (2017) 320 FLR 78; (2017) 121 ACSR 136; [2017] NSWCA 116, where Bathurst CJ (with whom Beazley P and Leeming JA agreed) described the class test as follows (at [80]): "The test seems to me to involve three questions. First, what are the rights which existing creditors (or members) have against the company and to what extent are they different. Second, to what extent are those rights differently affected by the scheme. Third, does the difference in rights or different treatment of rights make it impossible for the creditors (or members) in question to consider the scheme as one class."
2. Mr Williams submits, and I accept, that here any TGG shareholder may elect to receive the Cash Consideration by participating in the buy-back if they wish, where there is no "cap" on buy-back elections, and any TGG shareholder may alternatively receive the Scrip Consideration by not submitting a buy-back election and having their TGG shares acquired by WAM Global under the scheme. It seems to me that there is here no difference in rights or different treatment of rights that would make it impossible for TGG shareholders to consider the scheme as one class.

Treatment of Ineligible overseas shareholders

1. Mr Williams points out that a TGG shareholder whose registered address is in a jurisdiction where WAM Global would be prevented from issuing WAM Global shares and options pursuant to foreign securities regulations, or where it would be impractical to issue WAM Global shares or options to the TGG shareholder, is treated as an "Ineligible Overseas Shareholder" (as defined) under the scheme. An Ineligible Overseas Shareholder will not be entitled to receive the Scrip Consideration, and the Scrip Consideration to which that shareholder would otherwise have been entitled under the scheme will be issued to a nominee appointed by TGG as sale agent and sold on Australian Securities Exchange, and that sale agent will then remit the sale proceeds for that Scrip Consideration to TGG or Computershare, which will remit to each Ineligible Overseas Shareholder the sale proceeds attributable for the Scrip Consideration to which that Ineligible Overseas Shareholder would have otherwise been entitled. This mechanism is commonplace in schemes and I accept that the Ineligible Overseas Shareholders do not constitute a separate class: Re Hills Motorway Ltd (2002) 43 ACSR 101 at 104; [2002] NSWSC 897; Re SFE Corporation Ltd (2006) 59 ACSR 82; [2006] FCA 670 at [8].

Exclusivity provisions

1. Mr Williams points out that cl 9 of the Amended SIA is an exclusivity provision which includes "no shop", "no talk" and "no due diligence" restrictions, and a "notification" and "matching right" obligation. He also submits and I accept that exclusivity provisions in this form are now commonplace in schemes of arrangement and are not inconsistent with Guidance Note 7: Lock-up devices issued by the Takeovers Panel: Re Villa World Ltd above at [23]. In reviewing such provisions, the Court will consider whether any exclusivity period is for no more than a reasonable period capable of precise ascertainment; whether the exclusivity clause directed at dealing with an unsolicited alternative merger proposal is subject to a fiduciary carve out; and whether the provisions are clearly disclosed in the explanatory statement sent to shareholders.
2. Mr Williams submits and I accept that the period of the exclusivity clause is here capable of precise ascertainment and extends for a reasonable period, from the date of the SIA until the earlier of its termination and the "End Date", being 28 February 2022 or such other date as agreed by the parties. He points out that the "no talk" and "no due diligence" restrictions in cll 9.3 and 9.4 are subject to the overriding obligation not to breach the directors' fiduciary or statutory duties, under cl 9.5 of the Amended SID, and that fact that the "no shop" restriction is not subject to that carve-out is consistent with authority. He also recognises that the "matching right" is not subject to fiduciary carve-out, but points out that matching rights are increasingly common in schemes of arrangement and are unlikely to be anti-competitive: Re DUET Finance Ltd above at [24]. The exclusivity provisions are clearly disclosed in section 9.10.3 of the explanatory memorandum and I have referred above to the evidence that they were the product of arm's length negotiations between the parties. I am satisfied these matters do not provide any reason not to convene the scheme meeting or approve the explanatory memorandum. For completeness, the Amended SIA does not provide for the payment of any break fee and it is not necessary to address any issue in that respect.

Period between Scheme Meeting and second Court hearing

1. Mr Williams points out that the time between the date of the scheme meeting (29 September 2021) and the proposed date for the second Court hearing (19 October 2021) is longer than is typical in modern members' schemes to accommodate the process for determining the NTA values of TGG and WAM Global following the Calculation Date and to allow TGG to sell down part of its investment portfolio to realise cash proceeds to fund the required Cash Consideration payable to those TGG Shareholders who elect to participate in the buy-back. I accept that this is not a matter which ought prevent the Court convening the scheme meeting, where the length of that time period is a matter of practice and not legal principle and any material change in circumstances that occurs between the date of the scheme meeting and the second Court date can be addressed at the second Court hearing.

Deemed warranty

1. The proposed scheme also provides for a deemed warranty by TGG shareholders who do not participate in the buy-back that their shares will be free from encumbrances under cl 9.3(d) of the scheme. Appropriate prominence is given to the deemed warranty in sections 2.5.6 and 3.4.8 of the explanatory memorandum. That gives rise to no reason not to convene the scheme meeting or approve the explanatory memorandum: Re APN News and Media Ltd (2007) 62 ACSR 400; [2007] FCA 770 at [57]-[63]; Re Ardent Leisure Ltd [2018] NSWSC 1665 at [26].

Section 3(a)(10) of the US Securities Act of 1933

1. If the scheme is approved by the Court, WAM Global intends to rely on the Court's approval for the purpose of qualifying for exemption from the registration requirements of the Securities Act of 1933 (US), under s 3(a)(10) of that Act, in connection with the issue of Scrip Consideration under the scheme. I recognise that matter, which is a requirement of the exemption: Re Permanent Trustee Co Ltd (2002) 43 ACSR 601; [2002] NSWSC 1177 at [11]-[20]. Any further issue as to that exemption may be addressed at the second Court hearing.

Section 411(17) of the Corporations Act

1. As Mr Williams points out, the Court should address the question posed by s 411(17) of the Act on an application to approve a scheme at the second Court hearing: Re Macquarie Private Capital A Ltd [2008] NSWSC 323 at [25]-[37]. As I noted above, ASIC has indicated that it did not seek to appear at this hearing.

Orders

1. For these reasons, I made the orders sought by TGG at the conclusion of the first Court hearing in respect of the proposed scheme.

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DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 16 September 2021