Australian Securities Commission v Marlborough Gold Mines Ltd

Nature of the application and affidavit evidence

1. By Originating Process filed on 18 October 2021, the Plaintiff, Home Consortium Developments Ltd ("HCDL") applies for orders under s 411 of the Corporations Act 2001 (Cth) that it convene a meeting of its members to consider and vote upon a proposed scheme of arrangement and consequential orders.
2. By way of background, the Home Consortium companies ("Home Consortium") are presently a stapled group, the securities in which comprise one fully paid ordinary share in HCDL and one fully paid ordinary share in an associated entity, Home Consortium Limited ("HCL"), and HCL and HCDL also have a common board of directors. Home Consortium is a fund manager which invests in real asset strategies on behalf of individuals, large institutions and superannuation funds, and is the responsible entity of the HomeCo Daily Needs REIT which focuses on convenience wealth retail and the HealthCo HealthCare and Wellness REIT which focusses on healthcare. It owns, develops and manages a property portfolio and also invests in and manages property funds.
3. HCDL relies on the affidavit dated 18 October 2021 of Mr Alexander Morris, a solicitor acting for it in the application, which annexed a current and historical company extract for HCDL as required by the Supreme Court (Corporations) Rules 1999 (NSW). By his affidavit dated 31 October 2021, Mr Christopher Saxon, who is an independent non-executive director of HCDL and HCL, indicated his consent to act as chair of the proposed scheme meeting and the interest which he held in Home Consortium stapled shares. By his affidavit dated 2 November 2021, Mr David Di Pilla, who is the managing director of HCDL and HCL, indicated his consent to act as chair of the scheme meeting if Mr Saxon did not do so, and indicated the extent of his interest in Home Consortium stapled shares.
4. By his affidavit dated 3 November 2021, Mr Andrew Selim, who is the company secretary of HCDL and HCL, provided information as to the background of the companies and to the terms of stapling of their securities, on the terms of a Stapling Deed dated 21 September 2019, and outlines the nature of Home Consortium's business. Mr Selim refers to the announcement on 18 October 2021 of a proposed simplification of Home Consortium's corporate structure, from a stapled company structure to a single company structure by which HCL would become a single head entity of Home Consortium and HCDL would become a subsidiary of HCL. Mr Selim identifies the steps necessary to implement the restructure, including the destapling of HCDL and HCL shares and the entry into the proposed scheme, with a subsequent consolidation of HCL shares. Mr Selim also describes a sale facility which would be available for Ineligible Foreign Shareholders (as defined), although it appears that no Home Consortium stapled shares are held by ineligible foreign shareholders as at 3 November 2021, and the practical likelihood may be that no such shareholdings will arise prior to implementation of the scheme, where the scheme has been publicly announced.
5. Mr Selim also refers to a deemed warranty in cl 5.6 of the scheme that scheme participants' HCDL shares will be fully paid and free from encumbrances as at the date of their transfer to HCL. He also refers to the treatment of rights granted under an employee equity plan and the non-executive director equity plan, established as part of Home Consortium's employee remuneration strategy, which will allocate HCL shares instead of Home Consortium stapled shares on a one-on-one basis, and does not involve any acceleration of rights on implementation of the proposed restructure. He refers to the conditions precedent to the scheme and to the proposed conduct of the scheme meeting and an associated extraordinary general meeting of HCL shareholders to address resolutions in relation to the destapling and share consolidation that are associated with the scheme. He notes that HCL had executed a deed poll by which it agreed, in favour of all scheme participants, to fulfil its obligations under the scheme, including the obligation to issue HCL shares to scheme participants, if the scheme became effective. Mr Selim also addresses the structure of the shareholder booklet, the manner of dispatch of the shareholder booklet and the verification process adopted in respect of the shareholder booklet, in customary terms.
6. By his affidavit dated 3 November 2021, Mr Aaron Calder, who is a senior client relationship manager with Link Market Services Limited, refers to the services that Link has been engaged by Home Consortium to provide in relation to the proposed restructuring, including in respect of the dispatch of the scheme documents to scheme participants, the receipt and collation of proxy forms and the recording of votes cast and providing the means for shareholders to attend, participate and vote at the proposed scheme meeting. Mr Calder also addresses the manner in which shareholder meetings would be dispatched in electronic and hard copy form and the means by which a virtual meeting would be conducted.
7. By an affidavit dated 3 November 2021, Mr Andrea De Cian, who is a director and authorised representative of Grant Thornton Corporate Finance Pty Ltd, referred to the independent expert report which Grant Thornton had prepared in respect of the proposed scheme, and confirmed that he held the opinions expressed in that report as at the date of that affidavit; and that the report had been prepared with regard to the applicable regulatory guides published by the Australian Securities and Investments Commission ("ASIC") and the Expert Witness Code of Conduct.
8. By an affidavit dated 3 November 2021, Mr Robert Kelly, who is a partner in the firm of solicitors acting for HCDL in the scheme, referred to correspondence with ASIC in respect of the scheme and also addressed HCL's application for certain waivers from Australian Securities Exchange ("ASX") in respect of the scheme. By a letter dated 4 November 2021, ASIC indicated that it did not propose to make submissions or intervene to oppose the scheme at the first hearing, but reserved its position as to s 411(17)(b) of the Act to the second Court hearing in the usual way.

Whether a scheme meeting should be convened

1. The Court will order the convening of the scheme meeting and approve the draft explanatory statement for the company scheme if it is satisfied that HCDL 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 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. The evidence establishes that HCDL 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 shareholders. There is no reason to doubt that the proposed company 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, subject to the specific issues that I address below, the orders sought should be made in respect of the proposed scheme.

Specific issues arising in respect of the proposed scheme Virtual scheme meeting and proxy deadline

1. In accordance with the common practice at a first Court hearing in respect of a scheme, Mr Arnott, who appears for HCDL, identified several aspects of the schemes which it is appropriate to bring to the Court's attention. First, Mr Arnott points out that, to minimise health risks arising from the COVID-19 pandemic, it is intended that the scheme meeting be held virtually. I have referred above to the evidence that Link Market Services has been engaged to provide virtual meeting facilities in the form of an online platform, through which shareholders will be able to attend, vote, ask questions, and participate electronically in the meetings in real-time.
2. Mr Arnott points out that the Treasury Laws Amendment (2021 Measures No. 1) Act 2021 (Cth) amends the Corporations Act with effect from 14 August 2021 until 31 March 2022 to allow for, relevantly, a meeting of a company's members to be conducted using virtual meeting technology, provided the technology gives the persons entitled to attend the meeting, "as a whole", a reasonable opportunity to participate without being physically present in the same place. Sections 253Q(2) provides that a reasonable opportunity to participate includes a reasonable opportunity to exercise a right to speak and s 253Q(4) provides that all persons participating must be given the opportunity to participate in the vote in real time. Mr Calder's affidavit establishes that the technology platform that Link Market Services will make available for the scheme meeting complies with these requirements. The Courts have made orders for virtual meetings throughout the pandemic: Re BINGO Industries Ltd [2021] NSWSC 798 at [29]. I am satisfied that the meetings are properly conducted in that way. Mr Arnott also points out that the proposed deadline for receipt of proxy forms (including proxy forms lodged online) or powers of attorney by Link is 10:30am on 8 December 2021, as disclosed in the Notice of Scheme Meeting and in the shareholder booklet. Scheme consideration
3. Mr Arnott submits, and I accept, that the transaction operates such that there will be no change in the economic interests of HCDL's shareholders, although trading in the new HCL Shares issued as consideration for the scheme will be conducted on a deferred settlement basis for a short period, as disclosed in the shareholder booklet. Performance risk
4. 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, and a deed poll executed in favour of scheme shareholders is one means of managing performance risk by binding a non-party to the scheme to perform its obligations under the scheme: Re Simavita Holdings Ltd [2013] FCA 1274 at [43]-[44]. Mr Arnott points out that the obligations imposed upon HCL by the scheme are supported by the deed poll given by HCL in favour of HCDL shareholders, and cl 5.2 of the proposed scheme operates to make the transfer of the scheme shares subject to the provision of the scheme consideration, namely the issue of HCL shares to the HCDL Shareholders, and written confirmation from HCL that this has occurred. It seems to me that this structure sufficiently addresses performance risk. Deemed warranty
5. Mr Arnott points out that, by cl 5.6 of the scheme, each scheme participant warrants to HCL and is deemed to have authorised HCDL to warrant to HCL as agent and attorney for the scheme participant that their HCDL shares are fully paid and free from all encumbrances and they have full power and capacity to sell and transfer those shares. Mr Arnott submits, and I accept, that the legitimacy of deemed warranty provisions such as these has been recognised by the Court, provided the appropriate disclosure is made, on the basis that their purpose and effect is to ensure that a scheme participant whose shares are subject to an encumbrance does not receive the same scheme consideration as scheme participants whose shares are free from encumbrance, without any obligation to refund the amount required to discharge the encumbrance: Re APN News & Media Ltd (2007) 62 ACSR 400; [2007] FCA 770 at [57]-[63]; Re Westfield Corporation Limited [2018] NSWSC 584 at [37]; Re Ardent Leisure Ltd [2018] NSWSC 1665 at [26]; Re Villa World Ltd [2019] NSWSC 1207 at [25]; Re Windlab Ltd [2020] NSWSC 571 at [21]. The deemed warranties are appropriately disclosed the shareholder booklet. Treatment of ineligible foreign shareholders
6. Mr Arnott notes that the Ineligible Foreign Shareholders, who are located in jurisdictions where it is not practicable to issue new HCL shares due to legal and other restrictions, will not be issued shares under the scheme, but will receive the proceeds of sale of their new HCL shares through a sale facility, and this is addressed in section 6.6 of the shareholder booklet. I addressed the evidence as to this matter above and noted that there are presently no Ineligible Foreign Shareholders. I accept that this matter does not give rise to any reason not to convene the scheme meeting and any ineligible foreign shareholders do not constitute a separate class for that meeting: Re Hills Motorway Ltd (2002) 43 ACSR 101 at 104; [2002] NSWSC 897; Re CSR Ltd (2003) 45 ACSR 34 at 36; [2003] FCA 82; Re Adelaide Bank Ltd [2007] FCA 1582 at [40]-[41]. Interests of directors and treatment of existing rights under equity plans
7. Mr Arnott points out that the interests of the directors in Home Consortium stapled shares are disclosed in the shareholder booklet which also discloses that those directors intend to vote any Home Consortium stapled shares that they hold or control in favour of the resolutions.
8. Mr Arnott notes that Home Consortium has two existing equity plans, one for non-executive directors and one for employees. While variations to the plans will occur so that participants will be allocated HCL shares if and after the scheme takes effect, rather than Home Consortium stapled shares, each participant will otherwise hold the same number of awards on the same terms as applicable before the scheme. This is disclosed in the shareholder booklet and does not give rise to any economic benefit to directors that might affect their ability to make a recommendation in respect of the scheme. Tax considerations
9. Mr Arnott points out that Home Consortium has applied to the Australian Taxation Office requesting a class ruling to confirm the key income tax implications of the scheme, and the tax considerations for the scheme are also set out in the shareholder booklet. ASIC's position as to s 411(17) of the Act and ASX's position
10. Subsection 411(17) of the Act provides that the Court must not approve a scheme unless satisfied it is not proposed for the purpose of enabling avoidance of the takeovers provisions in Chapter 6 of the Act or ASIC provides a statement that it has no objection. Mr Arnott submits and I accept that this matter is properly deferred to the second court hearing: Re Macquarie Private Capital A Ltd [2008] NSWSC 323 at [23]-[31]; Re Ellerston Global Investments Limited above at [25]. Mr Arnott points out that HCDL has also applied to the ASX for certain waivers and confirmations in respect of its Listing Rules, which are set out in section 7.1(b) of the shareholder booklet, and ASX has indicated that it will grant permission for the de-stapling of the HCDL shares and the HCL shares and it is not necessary for a resolution to be passed by HCDL shareholders to approve the delisting of HCDL.

Orders

1. For these reasons, I was satisfied that the scheme was an arrangement for the purposes of s 411 of the Corporations Act and that, having regard to the evidence and matters to which I referred above, an order should be made convening the scheme meeting and approving the scheme booklet for distribution to shareholders. I made the orders sought by HCDL at the conclusion of the first Court hearing.

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