- Australian Securities Commission v Marlborough Gold Mines Ltd

Specific issues arising in respect of the proposed scheme

Consistent with the Court's expectations noted by Barrett J in Re Permanent Trustee Co Ltd (2002) 43 ACSR 601 at 603; [2002] NSWSC 1177, Mr Jackman draws attention to several aspects of the scheme. He submits that none of these matters should be of concern to the Court to prevent the grant of an order to convene the scheme meeting.
First, Mr Jackman notes that, as disclosed in sections 1.2(a), 2 and 6.5 of the scheme booklet, the independent expert has expressed the view that the Carsome shares issued pursuant to the Sale Agreement (and to be issued pursuant to the Joint Bid Agreement) imply a value per iCar share of $0.61 based on the issue price of the Carsome shares issued. This implied value exceeds the scheme consideration of $0.53 of iCar share and, Mr Jackman recognises, the equality of opportunity principle in s 602(c) of the Corporations Act and the minimum bid price rule in s 621(3) of the Corporations Act may have been relevant if the acquisition of iCar shares occurred under a takeover bid. Mr Rich's affidavit refers to correspondence between iCar's solicitors and ASIC addressing that matter. On 3 December 2021, ASIC advised iCar's solicitors that: "Following on from our queries regarding the differences in consideration identified in the Scheme Booklet between iCar Shareholders and Catcha, we advise that we have no further comments in relation to the submissions provided. However, we consider that iCar should also address this point in its submissions to the court."
Mr Jackman submits, by reference to the position taken by iCar in correspondence with ASIC, that it is not appropriate to "rigidly" apply s 602 of the Corporations Act to schemes of arrangement. He points out that the, Corporations and Markets Advisory Committee, in its report "Members' schemes of arrangement", December 2009, at 107, expressed the view that it was not necessary to require the application of the Eggleston principles in s 602 of the Act to schemes, noting that: "These principles were developed in the context of Chapter 6 bids, to protect shareholders where a bidder can bypass the directors of the target company and make an offer directly to them. They are not necessarily appropriate in the context of schemes, even where control may be at stake. A scheme proposal comes from the company itself, whose directors have a duty to act in the best interests of the company in putting forward the scheme, and both the court and ASIC have a protective role. The fact that a scheme and a bid may have a similar ultimate outcome does not necessarily mean that the same form of protection is required." He points out that the cases have recognised that, obviously enough, s 602 of the Act has no direct application to schemes of arrangement and is found in Ch 6 of the Act which is concerned with takeovers: Re NetComm Wireless Ltd (No 2) [2019] FCA 1109 at [50]. He fairly accepts that the policies of s 602 may nonetheless be a relevant consideration for the Court when considering a scheme of arrangement and that, in assessing the fairness of a scheme of arrangement, the Court is entitled to have regard to, inter alia, the policy of the equality of opportunity principle in s 602(c). He submits and I accept that, if features of a scheme of arrangement are inconsistent with s 602(c), that would be one factor for the Court to consider and weigh up as part of its fairness discretion, along with the protections and safeguards available under the scheme process, which he addresses at some length. He also draws attention to the observation of Farrell J in Re David Jones Ltd (No 3) [2014] FCA 753 that: "The relevance [in a scheme of arrangement] of the principles set out in s602 goes to the question of fairness and the desirability of there being, so far as relevant and possible, neutrality between "acquisition" schemes and Chapter 6 takeovers."
The case law has generally accepted, and I also accept, that an issue as to the price at which the scheme company's shares were acquired by the acquiring party in the period prior to the scheme may be addressed by appropriate disclosure in the scheme booklet and with an independent expert's report which contains an opinion on the value of the scheme consideration: Re Ranger Minerals Ltd (2002) 42 ACSR 582 at 592; [2002] WASC 207; Re Anzon Australia Ltd [2008] FCA 309 at [14]; Re Goodman Fielder Ltd [2014] FCA 1449 at [19]-[20]. Mr Jackman also points to a, possibly somewhat distant, analogy with the approach taken under the shareholder approval regime in item 7 of s 611 of the Corporations Act, which allows disinterested shareholders, with full disclosure, to approve a proposed acquisition of a substantial interest although they will not receive an offer for their own shares.
Mr Jackman points out that, here, details of Carsome's pre-bid acquisition of iCar shares under the Sale Agreement and proposed acquisition of iCar shares under the Joint Bid Agreement, and the independent expert's assessment of the implied value of the consideration (being $0.61 per iCar Share), are disclosed in the scheme booklet, consistent with the approach contemplated by Re Ranger Minerals Ltd above), and that will allow independent iCar shareholders to assess the relevance of the pre-scheme acquisitions on their decision as to whether to vote in favour of the scheme. He also points out that details of the Sale Agreement and Joint Bid Agreement are disclosed in the independent expert's report and that expert has concluded that the scheme is fair and reasonable and therefore in the best interests of independent iCar shareholders, despite assessing the value of the consideration under the Sale Agreement and Joint Bid Agreement at $0.61 per iCar share; and iCar's independent board committee had regard to the Sale Agreement and Joint Bid Agreement when forming its recommendation to 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 independent iCar shareholders. Importantly, the iCar shares acquired under the Sale Agreement or to be acquired under the Joint Bid Agreement cannot be voted on at the scheme meeting, because the holder of those shares will fall within the definition of "Excluded Shareholders" for the purposes of the scheme, and the outcome of the scheme will be determined by a vote of independent iCar shareholders only. Mr Jackman also points to the matters noted by the independent expert in respect of the form of the consideration under the Sale Agreement and Joint Bid Agreement, which involves risks to which shareholders receiving cash consideration under the scheme are not exposed. I have also had regard to ASIC's ultimate position, after considering the submissions for iCar's solicitors, that it does not intend to appear and make submissions at the first Court hearing, which was treated as a relevant consideration in Re Anzon Australia Ltd [2008] FCA 309 at [14]. Consistent with the case law to which I have referred above, I am satisfied that this matter does not give rise to any reason not to convene the scheme meeting and approve the scheme booklet for distribution to iCar shareholders.
Second, Mr Jackman addresses Court's approach to recommendations by interested directors in scheme booklets. Mr Jackman refers to my decisions addressing this issue in Re Villa World Ltd [2019] NSWSC 1207; Re GBST Holdings Ltd [2019] NSWSC 1280; Re Windlab Ltd [2020] NSWSC 571; Re Coca-Cola Amatil Ltd [2021] NSWSC 270 and Re BINGO Industries Ltd [2021] NSWSC 798 and the decisions of Beach J in Re DWS Ltd [2020] FCA 1590 and Re RXP Services Ltd [2021] FCA 38 at [48] and of Perram J in Re Mainstream Group Holdings Ltd [2021] FCA 948 taking the same approach. Certain benefits that Messrs Chmiel and Stone may be entitled to receive if the scheme becomes effective are disclosed in the Chairman's letter and in the sections entitled "Key considerations relevant to your vote" and "Frequently Asked Questions" and in greater detail in sections 9.1-9.3 of the scheme booklet. Mr Jackman submits and I accept that, where these benefits are prominently disclosed in the scheme booklet, then iCar shareholders can take them into account in determining the weight to be given to the directors' recommendation, and the fact that Messrs Chmiel and Stone provide a recommendation in relation to the scheme does not give rise to any reason not to convene the scheme meeting or approve the materials to be dispatched to shareholders.
Third, Mr Jackman notes that iCar's chair, Mr Chmiel, holds 1,000,000 iCar options which vested on 31 December 2019 and will expire on 31 December 2021. Sections 9.1 and 9.2(b) of the scheme booklet disclose that iCar, Carsome and Mr Chmiel have entered into a tripartite deed dated 15 November 2021 under which, in consideration of Mr Chmiel not exercising those options, Carsome has agreed to pay him cash consideration on the Implementation Date for those options in the amount of $0.13 for each iCar option, being the equivalent of the scheme consideration less the exercise price of $0.40 for each iCar option (with a corresponding adjustment if the scheme consideration is increased), totalling $130,000. Those iCar options will then be cancelled and extinguished on the Implementation Date, subject to the scheme becoming effective. That deed nonetheless also provides that Mr Chmiel may exercise the iCar options on or before their expiry date of 31 December 2021 and provides that, if he does so, the tripartite deed will automatically terminate and be of no further force or effect. Mr Jackman submits that this approach places Mr Chmiel in the same economic position as he would have been in had he exercised his options, and the treatment of these options is disclosed in the scheme booklet. I accept that, consistent with the approach taken, albeit not on precisely the same facts, in Re Wameja Ltd [2021] FCA 878, this matter does not give rise to any reason not to convene the scheme meeting and approve the scheme booklet.
Fourth, Mr Jackman notes that iCar is obliged to pay any outstanding remuneration to iCar's directors in respect of the period prior to implementation of the scheme, in accordance with its remuneration arrangements in the ordinary course, and that, prior to entry into the SID, the iCar board determined the amount of remuneration payable to each iCar director for the full year of 2021 and the portion of 2022 prior to implementation of the scheme, and that that remuneration would be paid both by the issue of iCar shares and in cash, in accordance with iCar's remuneration arrangements in the ordinary course. The share component of that remuneration payable to each iCar director is set out in section 9.3(a) of the scheme booklet and, as contemplated by cl 4.4(a)(3) of the SID, iCar and Carsome have agreed that, instead of iCar issuing the iCar shares to which each iCar director would otherwise be entitled, iCar will, on the Implementation Date, pay cash consideration to each iCar director in the amount of $0.53 for each iCar share to which he or she would have been entitled (with an adjustment if the scheme consideration is increased). The cash amounts to which each iCar director are also disclosed in section 9.3(b) of the scheme booklet.
Mr Jackman submits that these arrangements are not "benefits" to be received in connection with the scheme as the iCar directors would be entitled to same value in accordance with iCar's remuneration arrangements in the ordinary course, regardless of whether the scheme was implemented. In any event, as he points out, the scheme booklet discloses these arrangements as a matter for shareholders to take into account when considering the directors' recommendation. I am satisfied that this matter also does not give rise to any reason not to convene the scheme meeting and approve the scheme booklet
Fifth, Mr Jackman refers to the Catcha Loan Agreement which I noted above, by which Catcha agreed to lend a total of $15 million in two tranches to iCar Singapore to fund the general working capital purposes of the iCar Group and any other purpose approved by Catcha. Mr Jackman also notes that the Catcha Loan Agreement is secured by a first ranking security over all of the assets of the iCar Group in favour of Catcha, and that "Tranche A" of the Catcha Loan Agreement is interest free; an interest rate of 12% per annum applies to amounts outstanding under "Tranche B" of the Catcha Loan Agreement; and outstanding amounts under the Catcha Loan Agreement must be repaid on 30 June 2023. He notes that iCar Singapore has drawn down the full $5 million available under "Tranche A" of the Catcha Loan Agreement and has drawn down $1 million under "Tranche B" of the Catcha Loan Agreement, which will be repaid out of funds loaned under a further loan agreement dated 23 November 2021 between iCar Singapore (as borrower) and Carsome (as lender) ("Carsome Loan Agreement"), to which I refer below. Details of the Catcha Loan Agreement are disclosed in section 9.5 of the scheme booklet.
Mr Jackman also notes that, under the Carsome Loan Agreement, Carsome has agreed to lend iCar Singapore US$12 million to fund the payment of costs, fees or expenses incurred by the iCar Group in connection with the acquisition of iCar by Carsome or as expressly contemplated in the SID (including certain fees payable to an investment bank in connection with the acquisition of iCar by Carsome); the repayment or prepayment of amounts outstanding under "Tranche B" of the Catcha Loan Agreement and the repayment or prepayment of amounts outstanding under "Tranche A" of the Catcha Loan Agreement; general working capital purposes of the iCar Group; and any other purpose approved by Carsome. The Carsome Loan Agreement is unsecured and an interest rate of 6% per annum applies to amounts outstanding under that agreement. Mr Jackman also address the scope of an "Event of Default" under that Agreement which relevantly provides that, if the Effective Date (as defined) for the scheme has not occurred, or will not occur, on or before the End Date (as defined), or if the SID is terminated, Carsome may, by written notice to iCar Singapore, immediately cancel any undrawn commitment under the Carsome Loan Agreement and require iCar Singapore to repay to Carsome outstanding amounts under the Carsome Loan Agreement by the date that is 6 months after the date of receipt of that written notice. Outstanding amounts under the Carsome Loan Agreement must otherwise be repaid 24 months after the date of signing. As at 2 December 2021, US$1.5 million (approximately AUD$2.11 million as at that date) had been drawn down under the Carsome Loan Agreement. Details of that Loan Agreement are disclosed in section 9.6 of the scheme booklet.
Mr Jackman submits and I accept that the Carsome Loan Agreement would not coerce target members into approving the proposed scheme of arrangement and does not operate as a lock-up device that would deter other potential bidders from making a competitive offer, by reference to relevant matters identified in Re Cortona Resources Ltd [2012] FCA 1295 at [43]; Re Anatolia Energy Ltd [2015] FCA 1134 at [44]; Re Black Range Minerals Ltd [2015] FCA 1162 at [18] and Re Decimal Software Ltd [2018] FCA 1647 at [43]. Importantly, that loan is not immediately repayable if members do not approve the proposed scheme and would likely allow sufficient time for the target company to refinance the loan: Re Anatolia Energy Ltd above at [45]; Re Beadell Resources Ltd (No 2) [2019] WASC 53 at [54]; Re Nzuri Copper Ltd [2019] WASC 189 at [70]; Re Creso Pharma Ltd [2019] WASC 472 at [92]. I also have regard to other relevant matters addressed in the case law, including the amount unpaid under the loan as at the date of the scheme meeting and the extent to which additional disclosures have been made about the loan agreement before the scheme meeting.
Mr Jackman points to Mr Stone's evidence that the Carsome Loan Agreement was negotiated between the parties in arm's length negotiations in which all parties were independently represented by experienced legal advisers; and he submits that the agreed interest rate of 6% per annum on amounts outstanding under the loan is an ordinary commercial rate and not unduly onerous or oppressive, although I give limited weight to interest rates accepted in other cases where such rates will very over time; the interest rate payable under that agreement is not affected by whether or not the scheme is approved and there is no financial penalty payable on the non-completion of the scheme; there is no requirement for the amounts outstanding under the Carsome Loan Agreement to be repaid immediately, if the scheme is not implemented or the SID is terminated; and he submits that the Carsome Loan Agreement does not operate to deter other potential bidders from making a competitive offer, where it is on arm's length terms and a long period has elapsed for a competing proposal to emerge, since the Autohome proposal was announced on 30 October 2020; and details of the Carsome Loan Agreement, including the amounts unpaid under the loan, are disclosed in section 9.6 of the scheme booklet. I am satisfied that this matter also does not give rise to any reason not to convene the scheme meeting and approve the scheme booklet.
Sixth, Mr Jackman addresses reimbursement (or "break") fees payable by Carsome and iCar. The case law has accepted reimbursement fees that are a genuine pre-estimate of the internal and external costs that would be incurred by an acquirer in respect of a scheme, including opportunity costs, and that are not payable if the shareholders did not vote in favour of the scheme and are unlikely to be a matter which could influence voting at the scheme meeting: Re Cytopia Ltd [2009] VSC 560; Re Webcentral Group Ltd [2020] NSWSC 1279 at [30]; Re Coca-Cola Amatil Ltd above at [24]. Mr Jackman points out that cl 11.2(a) of the SID provides that a reimbursement fee of $1,700,000 (including GST) ("Reimbursement Fee") may be payable by iCar to Carsome under specified circumstances, and that fee is not triggered by the failure of conditions precedent to be satisfied or waived (if capable of waiver), including the Court's not approving the scheme or independent iCar shareholders not approving the scheme at the scheme meeting. He submits and I accept that fee is not a disincentive to iCar shareholders in their consideration of the proposed scheme: Re Adelaide Bank Ltd [2007] FCA 1582 at [31]. The components of the out of pocket and opportunity costs that support the amount of the Reimbursement Fee is in turn addressed in Mr Cheng Kee Choon's affidavit, which I have addressed above. Carsome has agreed to pay an expense reimbursement amount of the same amount to iCar where iCar terminates the SID pursuant to clauses 12.1(a)(1) or 12.2(b) of the SID and the scheme is not implemented. These amounts represent approximately 0.7% of the equity value of iCar based on the scheme consideration offered to independent iCar shareholders of $0.53 per iCar Share, which is significantly less than the guideline figure indicated by the Takeovers Panel in Guidance Note 7. This matter also does not give rise to any reason not to convene the scheme meeting and approve the scheme booklet.
Seventh, Mr Jackman notes that cl 10 of the SID imposes "no talk", "no shop", "no due diligence", notification right and matching right obligations on iCar, and the "no talk" and "no due diligence" obligations are subject to a fiduciary exception as set out in cl 10.2 of the SID. Mr Jackman refers to my observation in Re TPG Telecom Ltd [2020] NSWSC 772 at [22] that: "the Court will be concerned to ensure that any exclusivity period should be for no more than a reasonable period capable of precise ascertainment; an exclusivity clause directed at dealing with an unsolicited alternative merger proposal should be subject to a fiduciary carve out; and the provisions must be clearly disclosed in the explanatory statement sent to shareholders."
Mr Jackman points out that the exclusivity period is here defined in the SID and capable of precise ascertainment, and lasts from and including the date of the SID to the earlier of specified dates, including the End Date, being the date which is 6 months after the date of the SID or such other date as agreed in writing by the parties. He submits and I accept that the exclusivity period of 6 months between the date of the SID and the "End Date" is a reasonable period and comparable with exclusivity periods in other schemes that have previously been accepted by the Courts. As I noted above, the "no talk" and "no due diligence" restrictions are subject to a fiduciary exception and the exclusivity provisions are clearly disclosed in the scheme booklet. I accept that similar provisions have been accepted in the case law including Re TPG Telecom Ltd above at [22] and Re Windlab Ltd above at [18].
Eighth, Mr Jackman points out that, having regard to the uncertainty and potential health risks associated with large gatherings during the COVID-19 pandemic, it is proposed that the scheme meeting be held virtually. He submits and I accept that s 249R of the Corporations Act permits meetings of members to be held, if virtual meeting technology is used in holding the meeting, in accordance with s 253Q of the Act; s 253Q of the Act provides that virtual meeting technology may be used in holding a meeting of a company's members, 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; and nothing in iCar's constitution would prohibit iCar from convening a scheme meeting in this manner. Virtual meetings are now commonplace in company and trust schemes, and give rise to no reason not to approve the schemes for the reasons noted in Re Vocus Group Ltd [2021] NSWSC 630 at [21]. The procedures for voting and participation in the meetings are disclosed in the scheme booklet.
Ninth, Mr Jackman addresses performance risk. He notes that scheme participants' ability to enforce their entitlements under a scheme is relevant to the Court's discretion whether to convene the scheme meeting and approve the scheme, and a similar consideration can arise in a trust scheme where a third party provides the consideration: Re SFE Corporation Ltd [2006] FCA 670 at [4]; Re Mirvac Funds Management Ltd [2014] NSWSC 1569 at [7]; Re Villa World Ltd above at [22]. He refers to my observation in Re Ellerston Global Investments Ltd above at [29] that a practice has developed to address performance risk, by which the transfer of target shares to an acquirer is conditional on the payment of the consideration to target shareholders, and there are numerous cases which have endorsed that practice.
Mr Jackman points out that, pursuant to cl 5.1(a) of the scheme, an amount equal to the aggregate amount of the scheme consideration payable to all scheme participants must be deposited, or procured to be deposited, by Carsome into an Australian dollar denominated trust account with an authorised deposit-taking institution operated by iCar as trustee for the scheme participants and, under cl 5.1(b) of the scheme, on the Implementation Date (as defined), iCar must pay, or procure to pay, each scheme participant such amount as is due to the scheme participant in respect of all of their iCar shares. He submits and I accept that these provisions sufficiently address performance risk.
Tenth, Mr Jackman addresses the means by which scheme documents will be sent to iCar shareholders. Eleventh, Mr Jackman points out that cl 8.2(b) of the scheme provides that each scheme participant is deemed to have given various warranties to iCar and Carsome, including that on the Implementation Date all their iCar shares are free from encumbrances and interests of third parties of any kind. As I have noted in earlier cases, 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 Ardent Leisure Ltd [2018] NSWSC 1665 at [26]; Re Villa World Ltd above at [25], Re Windlab Ltd above at [21]; Re Spark Infrastructure RE Ltd [2021] NSWSC 1385 at [34]. The deemed warranties of the scheme shareholders are here appropriately disclosed in the scheme booklet.
Twelfth, Mr Jackman notes that s 411(17) of the Act provides that the Court must not approve a scheme unless satisfied it is not proposed for the purpose of enabling avoidance of the takeovers provisions in Chapter 6 of the Act or ASIC provides a statement that it has no objection. 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]; Re Spark Infrastructure RE Ltd above at [48].

At a glance

Court

Decision date

Before

Catchwords

Source

Catchwords

Judgment (8 paragraphs)

Parties

Legislation Cited (2)

Cases Cited (49)

Cited By (3)