Australian Securities Commission v Marlborough Gold Mines Ltd

Category: Principal judgment Parties: Intega Group Limited (Plaintiff) Representation: Counsel: J Williams SC/T O'Brien (Plaintiff) S Scott (Acquirers)

Solicitors: Gilbert & Tobin (Plaintiff) Ashurst (Acquirers) File Number(s): 2021/293195

Judgment

1. By Originating Process filed on 15 October 2021, the Plaintiff, Intega Group Limited ("Intega") applies, under s 411 of the Corporations Act 2001 (Cth) for orders in respect of a proposed scheme of arrangement between Intega and the holders of its ordinary shares.
2. By way of background, Intega is a public company listed on Australian Securities Exchange ("ASX") and provides engineering services including construction materials testing, subsurface utility engineering, environmental testing and geotechnical engineering and quality assurance. The proposed scheme would effect an acquisition of all of Intega's shares by Kiwa Australia 2 Pty Ltd ("Kiwa Australia"), an indirect wholly-owned subsidiary of Kiwa NV ("Kiwa"). Kiwa is a company headquartered in the Netherlands that specialises in testing, inspection and certification. Under the proposed Scheme, Kiwa Australia will acquire all of the shares in Intega for all-cash consideration of $0.90 for each Intega share. It is proposed that Intega will delist from the ASX following implementation of the Scheme. Intega and Kiwa entered into a Scheme Implementation Deed on 3 October 2021 ("SID"), under which they agreed to implement the scheme subject to the satisfaction, or waiver, of various conditions precedent, including Foreign Investment Review Board ("FIRB") approval of the transaction.
3. Intega engaged Lonergan Edwards & Associates Limited to prepare an independent expert's report in relation to whether the scheme is in the best interests of Intega shareholders, and Lonergan Edwards assessed the value of Intega shares on a control basis at between $0.80 and $0.90, being lower than or equal to the scheme consideration of $0.90. On that basis, Lonergan Edwards assessed the scheme consideration to be fair and therefore reasonable in the absence of a Superior Proposal (as defined), and also expressed the view that the scheme is in the best interests of Intega shareholders in the absence of a Superior Proposal. The Intega directors have unanimously recommended that Intega shareholders vote in favour of the scheme in the absence of a Superior Proposal and subject to the independent expert continuing to conclude that the scheme is in the best interests of Intega shareholders.
4. I made the orders sought by Intega at the end of the first Court hearing in respect of the matter. These are my reasons for doing so. I have drawn on the helpful submissions of Mr Williams and Mr O'Brien, who appear for Intega in respect of the application, and on my summary of the applicable principles in Re Australian Leisure and Entertainment Property Management Ltd [2021] NSWSC 1421 in this judgment.

Affidavit evidence

1. Intega relies on the affidavit dated 14 October 2021 of Mr Crispian Lynch, who is a partner in the firm of solicitors acting for it in the proceedings. Mr Lynch refers to the nature of Intega's business and to an announcement made by Intega on 4 October 2021 in respect of the proposed scheme.
2. By his affidavit dated 28 October 2021, Mr Neville Buch, who is chair of the board of directors of Intega, consented to act as chair of the proposed virtual scheme meeting. Mr Buch also there disclosed his interests in the scheme arising from the fact that he is a nominee director of the Crescent Capital Partners Shareholders (as defined in the scheme booklet) which hold about 52% of all of the shares in issue in Intega, and which have advised Intega's board that they intend to vote their shares in favour of the scheme, in the absence of a Superior Proposal. Mr Buch also noted that he was a partner of Crescent Capital Partners which, through a wholly owned subsidiary, managed the fund that owned the Crescent Capital Partners Shareholders, and had an indirect minority interest in a trust which also had a relevant interest in about 1.8% of Intega shares on issue; and that Crescent Capital Partners and its affiliates may be entitled to receive performance fees based on the overall performance of the relevant fund which, implicitly, might benefit from implementation of the scheme.
3. By his affidavit dated 28 October 2021, Mr Michael Alscher, who is the deputy chair of Intega and also a nominee director of the Crescent Capital Partners Shareholders, consented to act as chair of the scheme meeting if Mr Buch was unwilling or unable to do so, and made a similar disclosure as to his interests in the scheme arising from his association with the Crescent Capital Partners Shareholders.
4. By his affidavit dated 29 October 2021, Mr Matthew Courtney, who is the chief executive officer and managing director of Intega, referred to the nature of the businesses operated by Intega, the elements of the proposed scheme, the contents of the scheme booklet and the conditions precedent to the scheme. He referred to the circumstances in which a "Conditional Permitted Special Dividend" would be payable if there was a delay in implementation of the scheme, and noted that would not reduce the scheme consideration but would provide additional value to Intega shareholders if that delay occurred. He also referred to the exclusivity provisions and break fee in respect of the scheme, to which I refer below, and the view taken by Intega's board that it was in Intega's best interests to agree to the exclusivity provisions and the break fee for several reasons. Mr Courtney also addressed the interests of Mr Buch and Mr Alscher and Crescent Capital Partners Shareholders, to which I have referred above, and the position as to employee incentives held by eight employees of Intega, including Mr Courtney, and the manner in which they would be treated under the scheme. I return to that question below. Mr Courtney noted that Intega's board had unanimously recommended that Intega shareholders vote in favour of the scheme, in the absence of a Superior Proposal and subject to the independent expert continuing to conclude that the scheme was in the best interests of Intega shareholders, and also addressed the verification process which had been adopted in respect of the scheme booklet. A second affidavit dated 1 November 2021 of Mr Courtney corrected a typographical error in his first affidavit.
5. By his affidavit dated 29 October 2021, Mr Craig Edwards, who is the managing director of Lonergan Edwards & Associates Ltd, referred to the preparation of an independent expert's report in respect of the scheme and confirmed that he held the opinions expressed in the draft independent expert's report as at its date, that that report had been prepared in accordance with the Expert Witness Code of Conduct and he had had regard to regulatory guidance published by the Australian Securities and Investments Commission ("ASIC").
6. By his affidavit dated 1 November 2021, Mr Timothy Gordon, who is a partner in the firm of solicitors acting for Intega in respect of the scheme, referred to the provision of the proposed scheme booklet to ASIC and exhibited a letter dated 1 November 2021 from ASIC observing its position under s 411(17)(b) of the Act in the usual way and indicating that it did not currently propose to appear to make submissions or intervene to oppose the scheme.
7. By her affidavit dated 1 November 2021, Ms Jessie Yerma, who is a relationship manager at ComputerShare Investor Services Pty Ltd, which provides registry services for Intega, referred to the services which that firm was to provide to Intega in respect of the scheme, including in relation to the dispatch of the scheme booklet, the receipt and collation of completed proxy forms, the provision of the means to participate in a virtual scheme meeting by an online software platform provided by Lumi Technologies Pty Ltd, and other services relating to the conduct of the scheme meeting. Ms Yerma also referred to the manner in which scheme materials would be dispatched and outlined the way in which Intega shareholders would participate in the virtual scheme meeting. By a second affidavit dated 1 November 2021, Ms Yerma clarified an aspect of her evidence, relating to the treatment of shareholders whose names were recorded in the share register between 2 November 2021 and 30 November 2021 and then between 1 December 2021 and 4 December 2021.
8. By his affidavit dated 29 October 2021, Mr Veikko Rasanen, who is the Director of Business and Strategy Development and Mergers & Acquisitions at Kiwa, referred to the verification process which was adopted in respect of information relating to Kiwa in the scheme booklet, to the negotiation of exclusivity provisions and the break fee, and to the nature of the fees and costs incurred by Kiwa which were relevant to the amount of that break fee. Mr Rasanen also addressed the execution of a deed poll in favour of scheme shareholders by Kiwa and Kiwa Australia.

Matters relevant to convening the scheme meeting

1. The Court will order the convening of the scheme meeting and approve the draft explanatory statement for the scheme if it is satisfied that Intega is a Part 5.1 body; the proposed scheme is an arrangement within the meaning of s 411 of the Act; the scheme booklet will provide proper disclosure to members; the scheme is bona fide and properly proposed; ASIC has had a reasonable opportunity to examine the terms of the scheme and the explanatory statement 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].
2. The Court will not ordinarily summon a meeting unless a 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, although it "does not ordinarily go very far" into that question at the first Court hearing: 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; (1993) 112 ALR 627; (1993) 10 ACSR 230; [1993] HCA 15; Re Foundation Healthcare Ltd (2002) 42 ACSR 252; [2002] FCA 742 at [36] and [44]; Re CSR Ltd (2010) 183 FCR 358; (2010) 265 ALR 703; (2010) 77 ACSR 592; [2010] FCAFC 34 at [58]. The Court will assess at the first Court hearing 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; [2005] NSWSC 1309 at [23]; Re Ellerston Global Investments Ltd [2020] NSWSC 879 at [25]-[27]. 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: Re Centrebet International Ltd [2011] FCA 870 at [29]; Re DUET Finance Ltd above at [14].
3. I am satisfied that Intega is a Part 5.1 body, the proposed scheme is an arrangement within the meaning of s 411 of the Act and there is no reason to doubt that the scheme booklet provides proper disclosure to Intega shareholders. I have referred to evidence of a verification and due diligence process above. There is no reason to doubt that the proposed scheme is bona fide and properly proposed and could be approved at the second Court hearing if it receives the requisite shareholder approvals. Although ASIC has reserved its position as to s 411(17)(b) in accordance with its usual practice, the Court can address that question at the second Court hearing. I am satisfied that the orders sought should be made in respect of the proposed scheme.

Specific issues arising in respect of the proposed scheme Attitude of Intega's largest shareholder group

1. In accordance with the common practice at a first Court hearing in respect of a scheme, Mr Williams identified several aspects of the schemes which it is appropriate to bring to the Court's attention. First, Mr Williams pointed out that, as I noted above, the Crescent Capital Shareholders hold 52.1% of Intega's shares in aggregate; two of Intega's directors, Messrs Buch and Alscher, are partners of an associated entity; and the Crescent Capital Shareholders have notified Intega's board that they intend to vote in favour of the scheme in the absence of a Superior Proposal. There is evidence that Intega has not entered into any agreement or understanding obliging the Crescent Capital Shareholders to vote in favour of the scheme and the Crescent Capital Shareholders do not stand to derive any collateral benefit should the Scheme be implemented. Exclusivity provisions and break fee
2. Mr Williams points out that cl 8 of the SID includes "no shop", "no talk" and "no due diligence" restrictions, and a "notification" and "matching right" obligation. He submits, and I accept, that exclusivity provisions in this form are now commonplace in schemes of arrangement, and an exclusivity clause directed at dealing with an unsolicited alternative merger proposal should also be subject to a fiduciary carve-out, and exclusivity provisions must be clearly disclosed in the explanatory statement sent to shareholders: Re Arthur Yates & Co Ltd (2001) 36 ACSR 758; [2001] NSWSC 40 at [9]; Re Villa World Ltd [2019] NSWSC 1207 at [23]. Mr Williams points out that the "no talk" and "no due diligence" restrictions in cll 8.3 and 8.4 of the SID are subject to an overriding obligation not to breach the directors' fiduciary or statutory duties, under cl 8.6 of the SID and that the case law has accepted that a "no shop" restriction need not be subject to a fiduciary carve-out: Re DUET Management Company 1 Ltd [2013] NSWSC 817 at [24]; Re Bigair Group Ltd [2016] FCA 1296 at [21]; Re Aveo Group Limited and Aveo Funds Management Limited [2019] NSWSC 1348 at [44]. Mr Williams also recognises the "matching right" is not subject to a fiduciary carve-out. He submits, and I accept, that 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 Intega in any event pursuant to its continuous disclosure obligations and the matching right process under cl 8.7 corresponds to the course that a prospective bidder or merger proponent would expect Intega to take, even without such a provision, in order to obtain the best possible offer if competing bidders emerged: Re DUET Finance Ltd above at [24]. The exclusivity provisions are clearly disclosed in section 11.9 of the proposed scheme booklet and there is evidence that they were the subject of arm's length negotiations between the parties.
3. Mr Williams also points out that the Court will consider whether exclusivity provisions operate for no more than a reasonable period capable of precise ascertainment. He notes that the period for which the exclusivity provisions apply here is capable of precise ascertainment, and they apply from the date of the SID until the earlier of its termination and the "End Date", which is 6 months from the date of the deed (3 April 2022), or 31 July 2022 if the scheme is not implemented before 31 December 2021 as a result of FIRB approval not being obtained in certain circumstances, or such later date as agreed by the parties. Mr Williams submits, and I accept, that this is a reasonable period, and consistent with the period accepted in other cases. The exclusivity provisions do not provide any reason not to order the convening of the scheme meeting.
4. Mr Williams noted that cl 9 of the SID provides for the payment of a break fee in specified circumstances. That break fee is not triggered solely by Intega shareholders failing to approve the scheme and is not a disincentive to shareholders in their consideration of the proposal: Re Bolnisi Gold NL (No 2) (2007) 65 ACSR 510 at 513; [2007] FCA 2078. The break fee is 1% of the aggregate scheme consideration and is consistent with the Takeovers Panel's Guidance Note 7: Lock-up Devices. Mr Williams submits, and I accept, that payment of break fees of this magnitude are now commonplace in schemes of this kind: Re TPG Telecom Ltd [2020] NSWSC 772 at [24]. That break fee is disclosed in the frequently asked questions in section 4 and in section 11.9(e) of the scheme booklet. There is evidence that the break fee was negotiated between the parties in the course of arm's length negotiations in which all parties were represented by experienced advisers, consistent with the approach noted in Re APN News Media Ltd (2007) 62 ACSR 400; [2007] FCA 770. This matter also does not provide any reason not to order the convening of the scheme meeting. Performance rights and options
5. I have referred above to the evidence that eight employees of Intega have performance rights and/or options. Mr Williams points out that Intega has entered into cancellation deeds with these employees by which those performance rights and/or options are cancelled, subject to the scheme becoming effective, in exchange for a payment equal to the face value of the performance rights (being the amount of the scheme consideration for each right) and/or options (being the amount of the scheme consideration for each option less the exercise price), and some employees will receive an additional payment determined by the board if the scheme becomes effective. These matters are disclosed in section 11.3 of the scheme booklet. Mr Williams submits, and I accept, that these employees are not in a separate class of members by reason only that they also holds incentive rights: Re Foster's Group Ltd (No 2) [2011] VSC 547 at [38]-[43]; Re Villa World Ltd above at [29]. Recommendation by interested directors and interests of chair of scheme meeting
6. Mr Williams points to disclosure in the scheme booklet (including in the chairman's letter and section 11.3) that, if the scheme becomes effective, Mr Courtney will receive a payment of $2,500,000 for the cancellation of his performance rights and options, comprising the face value of those performance rights and options and an additional payment determined by the board, including by reference to the fact that Intega will not issue a new tranche of performance rights for the year ending 30 June 2022 if the scheme becomes effective. The scheme booklet also discloses the interests of Messrs Alscher and Buch as partners of Crescent Capital Partners, to which I have referred above, including in the chairman's letter and section 11.6(b) of the scheme booklet.
7. As in other recent decisions in this Court, I prefer the approach adopted in Re SMS Management & Technology Ltd [2017] VSC 257; Re Kidman Resources Ltd (2019) 375 ALR 760; (2019) 139 ACSR 122; [2019] FCA 1226; Re Villa World Ltd [2019] NSWSC 1207 and Re GBST Holdings Ltd [2019] NSWSC 1280 to that taken in Re Gazal Corporation Ltd [2019] FCA 701 and Re Navitas Ltd (No 2) [2019] WASC 218. I have also taken the former approach in Re Coca-Cola Amatil Ltd [2021] NSWSC 270 and Re BINGO Industries Ltd [2021] NSWSC 798, and the same view has recently been taken in the Federal Court of Australia in Re Citadel Group Ltd (2020) 148 ACSR 598; [2020] FCA 1580; Re RXP Services Ltd [2021] FCA 38 and Re Mainstream Group Holdings Ltd [2021] FCA 948. I accept that the interests of Messrs Courtney, Alscher and Buch do not prevent them from making a voting recommendation to Intega shareholders where that interest is sufficiently disclosed in the scheme booklet and Intega shareholders may take it into account in determining the weight to give to that recommendation. This matter also does not provide any reason not to order the convening of the scheme meeting.
8. Mr Williams also notes that Messrs Alscher and Buch are the proposed chairman and alternate chairman of the scheme meeting respectively. He submits, and I accept, that Messrs Alscher's and Buch's indirect interest in the scheme arises from the interest of the Crescent Capital Shareholders, which is in common with all other shareholders and does not raise a realistic concern that they could or would not impartially preside at that meeting. I also recognise that the conduct of the scheme meeting will be considered by the Court at the second Court hearing. Deemed warranty
9. Clause 9.4(a) of the scheme provides for a deemed warranty by Intega shareholders that their shares are fully paid, will be free from encumbrances and that they have full power to sell and transfer them, and that deemed warranty is sufficiently disclosed in section 4 and section 6.8 of the scheme booklet. The case law has recognised the legitimacy of deemed warranty provisions, provided that appropriate disclosure is made, since their purpose and effect is to ensure that a scheme participant whose shares are subject to an encumbrance is not unfairly advantaged: Re APN News & Media Ltd (2007) 62 ACSR 400; [2007] FCA 770 at [57]-[63]; Re ABB Grain Ltd [2010] FCA 1309 at [34]-[39]; Re Medical Australia Ltd [2017] FCA 1304 at [28]; Re DUET Management Company 1 Ltd above at [23]; Re Ardent Leisure Ltd [2018] NSWSC 1665 at [26]; Re Villa World Ltd above at [25]; Re Windlab Ltd [2020] NSWSC 571 at [21]; Re rhipe Ltd [2021] NSWSC 1170 at [26]. Performance Risk
10. The case law has addressed the question of "performance risk", namely any risk that the acquirer will not comply with its obligation to pay the scheme consideration to shareholders of the scheme company: Re Simavita Holdings Ltd [2013] FCA 1274 at [43]-[44]; Re Ellerston Global Investments Ltd above at [29]. Mr Williams submits, and I accept, that any performance risk is sufficiently addressed by the requirement that the scheme consideration be paid to a trust account held by Intega with an Australian ADI prior to the transfer of the Intega shares to Kiwa Australia. Mr Williams also points out that the obligations of Kiwa and Kiwa Australia under the scheme are supported by a deed poll given by Kiwa and Kiwa Australia in favour of scheme shareholders and that Intega proposes to lead evidence at the second Court hearing of the due execution of the deed poll by Kiwa in accordance with Dutch law. The execution of a deed poll in favour of scheme shareholders is a second means of managing performance risk by binding a non-party to the scheme to perform its obligations under the scheme by way of deed poll: Re Simavita Holdings Ltd above at [43]. Although evidence as to the enforceability of that deed poll under Dutch law would ordinarily be led at the first Court hearing and was not available at this hearing, I am satisfied that that question can be deferred to the second Court hearing, since Kiwa shareholders are not exposed to any risk of the transfer of their shares to Kiwa or its nominee prior to approval of the scheme at that second Court hearing. Conduct of virtual scheme meetings
11. Mr Williams notes that it is proposed that the scheme meeting will be held online, and that the Lumi platform will enable Intega shareholders to listen to the scheme meeting, cast an online vote and ask questions online, and that Intega shareholders can also vote by lodging a proxy. He submits, and I accept, that online attendance at the meetings is permitted by s 253Q of the Act provided the technology used gives members as a whole a reasonable opportunity to participate without physically being present in the same place, and a virtual meeting is also permitted by cl 16.6 of Intega's constitution. Section 411(17) of the Corporations Act
12. In accordance with the usual practice, the Court will address the question raised 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].

Orders

1. For these reasons, I was satisfied that an order should be made convening the scheme meeting and approving the scheme booklet for distribution to shareholders and I made the orders sought by Intega at the conclusion of the first hearing.

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: 10 November 2021