Australian Securities Commission v Marlborough Gold Mines Ltd

Introduction 1 On 27 September 2022, shortly after the conclusion of the first court hearing in this matter, I made orders under ss 411 and 1319 of the Corporations Act 2001 (Cth) (Act) that the plaintiff, MOQ Limited (MOQ), convene a share scheme meeting (Scheme Meeting) of its members to consider a proposed scheme of arrangement (Scheme) between MOQ and its ordinary shareholders, other than shareholders of companies in the bidder's group of companies or any associates of those companies (Participating Shareholders), and approving a scheme booklet to be distributed by MOQ to the Participating Shareholders. 2 The Scheme is a conventional cash acquisition scheme under which Participating Shareholders will receive $0.075 for every ordinary share held as at the record date for the Scheme (Scheme Consideration). 3 The Scheme, if implemented, will result in the acquisition of all the ordinary shares in MOQ (Scheme Shares) by Brennan VDI Pty Ltd (Brennan) and the subsequent delisting of MOQ from the Australian Securities Exchange (ASX). 4 MOQ was founded as Montech Holdings Limited following a recapitalisation of a shell company listed on the ASX in June 2015. MOQ has since focused on developing IT solutions, and specifically cloud-focused technology solutions, both internally and through acquisitions. It changed its name to MOQ Limited in July 2016. 5 MOQ's head office is located in Sydney, with other offices located in Brisbane, Melbourne and Perth in Australia and Colombo in Sri Lanka. MOQ employs approximately 394 staff, with 140 of these based in its Sri Lankan office, which serves as an offshore delivery centre that critically supports MOQ's managed services operations. 6 The commercial purpose of the Scheme is described in the proposed explanatory statement (Scheme Booklet) as providing compelling strategic benefits and value to Participating Shareholders.

Evidence relied upon by MOQ 7 The application is supported by the following affidavits: (a) the affidavit of Mr Peter Ward affirmed on 23 September 2022. Mr Ward is the director and Chief Executive Officer of MOQ. He gives evidence of MOQ's operations and capital structure, the details of the Scheme Implementation Deed with Brennan (SID), that the Scheme Booklet was lodged with the Australian Securities and Investments Commission (ASIC), the details of the exclusivity provisions and reimbursement fee in the SID, a deed poll undertaken by Brennan, the Scheme Consideration, MOQ's directors' interest in MOQ shares, the implementation of the Scheme, the proposed Scheme Meeting and the proposed despatch of the Scheme Booklet; (b) the affidavit of Mr Craig Edwards affirmed on 23 September 2022. Mr Edwards is the managing director of Lonergan Edwards & Associates (LEA). He annexes to his affidavit the expert report prepared by LEA (LEA Expert Report), in which LEA concluded that the Scheme is fair and reasonable and in the best interest of Participating Shareholders in the absence of a superior proposal; (c) the affidavit of Mr David William Stevens affirmed on 23 September 2022. Mr Stevens is the sole director and company secretary of Brennan, and gives evidence of Brennan's capital structure and in support of the orders sought; (d) two affidavits of Mr Timothy James Flahvin affirmed on 26 September 2022 and 27 September 2022. Mr Flahvin is a partner of Thomson Geer, the plaintiff's solicitors. In his 26 September affidavit, Mr Flahvin gives evidence of the lodgement of documents in relation to the Scheme with ASIC and correspondence relating to that lodgement. In his 27 September affidavit, Mr Flahvin gives evidence of amendments made to the Scheme Booklet and ASIC's comments in relation to those amendments. He also annexed ASIC's letter of intent dated 26 September 2022, confirming that ASIC did not propose to make any submissions at the first court hearing nor intervene to oppose the Scheme; (e) the affidavit of Mr David Shein affirmed on 26 September 2022. Mr Shein is a director and the non-executive chairman of MOQ. Mr Shein gives evidence of his consent to act as chairperson at the Scheme Meeting; and (f) two affidavits of Mr Alexander James White, both affirmed on 26 September 2022. Mr White is a non-executive director of MOQ. He gives evidence of his nomination to act as alternate chairperson of the Scheme Meeting and his express consent to do so.

Formal requirements to exercise s 411(1) power 8 Section 411(1) of the Act confers a power on the Court to order a meeting of members to be convened and to approve the relevant explanatory statement. 9 As stated by McKerracher J in Amcom Telecommunications Limited, in the matter of Amcom Telecommunications Limited [2015] FCA 341 (Amcom) at [12], the Court should order the convening of a scheme meeting and approve a scheme booklet if it is satisfied of the following matters: (a) the proposed scheme is an arrangement in respect of which the Court may order a meeting of the members: s 411(1) of the Act. That is, the scheme is an arrangement, the company is a Pt 5.1 Body, the participating shareholders are members of the company and the scheme meeting will be convened between members of the same class; (b) ASIC has had a reasonable opportunity to examine the terms of the scheme and the scheme booklet and make submissions to the Court in relation to those matters: s 411(2)(b) of the Act; (c) the scheme booklet provides adequate disclosure (s 412(1)(a)(i) of the Act) and contains the prescribed information: s 412(1)(a)(ii) of the Act, r 5.1.01; sch 8 cll 8301-8310 of the Corporations Regulations 2001 (Cth); (d) the procedural requirements of the Federal Court Rules 2011 (Cth) (Rules) have been met; and (e) there is no apparent reason why the scheme should not, in due course, receive the Court's approval if the necessary majority of votes are achieved: Integra Mining Limited, in the matter of Integra Mining Limited [2012] FCA 1414 (Integra Mining) at [12] (McKerracher J), and the cases cited therein. See also Xplore Wealth Limited, in the matter of Xplore Wealth Limited [2020] FCA 1868 at [23] (Markovic J). 10 I am satisfied that the evidence upon which MOQ relies is sufficient to establish that: (a) MOQ is a Part 5.1 body; (b) the Participating Shareholders are members of MOQ; (c) the Scheme Meeting will be convened between members of the same class; (d) the Scheme is bona fide and properly proposed; (e) ASIC has had a reasonable opportunity to examine the terms of the Scheme and the Scheme Booklet and make any submissions to the Court; (f) the Scheme Booklet provides adequate disclosure and contains the prescribed information; (g) the procedural requirements of the Rules have been met; and (h) there is no apparent reason why the Scheme should not receive the Court's approval if the necessary majority of votes are achieved. 11 Once the preconditions to the exercise of power under s 411(1) to order the convening of a meeting have been satisfied, it is then necessary to consider whether that power ought to be exercised pursuant to the Court's discretion.

Relevant principles for the exercise of discretion 12 In Dealt Holdings Ltd, in the matter of Dealt Holdings Ltd [2022] FCA 1104, I summarised at [22]-[26] the relevant principles for the exercise of the discretion to order the convening of a meeting to consider approving a proposed scheme of arrangement. For ease of reference, I set out below those paragraphs of that judgment. See also Absolute Equity Performance Fund Ltd, in the matter of Absolute Equity Performance Fund Ltd [2022] FCA 834 at [18]-[22] (Halley J); Dragontail Systems Limited, in the matter of Dragontail Systems Limited [2021] FCA 834 at [10]-[14] (Halley J). 13 The Court will not ordinarily make orders for the convening of a scheme meeting unless the scheme is of such a nature and cast on such terms that if it receives the statutory majority at the meeting, the Court would be likely to approve it on the hearing of an application that was not opposed: FT Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 at 72 (Street CJ, with whom Hutley and Samuels JJA agreed); approved in Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485; [1993] HCA 15 at 504; Re Central Pacific Minerals NL [2002] FCA 239 at [8]; CSR Limited, in the matter of CSR Limited (2010) 183 FCR 358; [2010] FCAFC 34 at [12]. 14 At the first court hearing, the Court exercises its supervisory jurisdiction in order to review the scheme and the explanatory statement and to raise any queries that it might have with the plaintiff: Alstom Signalling Solutions Pty Ltd, in the matter of Alstom Signalling Solutions Pty Ltd v Alstom Transport Australia Pty Limited [2016] FCA 838 at [21] (Gleeson J). The Court needs to be satisfied that there are no obvious flaws in the scheme and that there is an adequate explanation provided to persons who have a financial interest in the proposed scheme: In the matter of Coca-Cola Amatil Limited [2021] NSWSC 270 (Coca-Cola Amatil) at [13] (Black J). 15 The Court should consider at the first court hearing whether the proposed scheme is not inappropriate and whether it is one that sensible business people might consider is of benefit to its members: Australian Leaders Fund Ltd v Equity Trustees Ltd, in the matter of Australian Leaders Fund Ltd [2021] FCA 88 (Leaders Fund) at [15], citing Re Sonodyne International Ltd (1994) 15 ACSR 494 at 499 (Hayne J); Integra Mining at [11] (McKerracher J); and Amcom at [10] (McKerracher J). 16 The Court does not need to be satisfied that no better scheme could have been proposed and ultimately that is a question for the members themselves to determine at the scheme meeting: Associated Advisory Practices Limited, in the matter of Associated Advisory Practices Limited [2013] FCA 761 at [22] (Farrell J); Coca-Cola Amatil at [13]; and Leaders Fund at [15]. 17 Although the second court hearing is when the Court makes its final determination, in practice, the first court hearing is where the Court will typically intervene if it has concerns. A reason that has been advanced for this is that the market views the approval by the Court of the convening of scheme meetings as providing assurance that the scheme, at least in form and substance, has received a preliminary clearance by the Court and that trading in the company's securities thereafter will proceed on that basis: Re Archaean Gold NL (1997) 23 ACSR 143 at 147; Leaders Fund at [15].

Specific considerations 18 Given the ex parte nature of an application for orders pursuant to s 411(1) of the Act, the following matters on which practice is settled were specifically drawn to my attention by Mr Oakes SC, in the course of his oral and written submissions.

Performance risk 19 The conventional drafting of the Scheme to mitigate against any failure of Brennan to perform its obligations under the Scheme is present whereby the Scheme Consideration is provided before the share transfer occurs: cl 4.2(a) of the Scheme.

Exclusivity arrangements 20 The conventional "fiduciary carveout" is present for the "no shop" and "no talk" exclusivity provisions included in the Scheme: cl 11.5 of the SID and disclosed at s 9.7.3 of the Scheme Booklet.

Break fee 21 The break fee (cl 13 of the SID) payable to Brennan is less than 1% of the Scheme Consideration, the break fee is not payable if MOQ shareholders vote down the proposal and it is disclosed at s 9.7.5 of the Scheme Booklet.

Deemed warranty 22 The existence of a deemed warranty that the shares in MOQ are fully paid and free of encumbrances on the transfer of the Scheme Shares to Brennan appears in cl 8.2(b) of the Scheme and is disclosed at s 4.14 of the Scheme Booklet.

Hybrid meeting 23 Hybrid meetings of shareholders are now permitted by amendments made to the Act on 1 April 2022.

Other issues drawn to the Court's attention 24 Mr Oakes SC also drew to the Court's specific attention two other matters, which he submitted in substance, and I agree, were matters more by way of interest than ex parte disclosure matters. 25 First, s 2.2.3 of the Scheme Booklet discloses that the Scheme Consideration of $0.075 cash per MOQ share resulted from a series of competing bids from Atturra Limited and Brennan between 30 June 2022 and 16 August 2022. 26 Second, ASIC had queried the scope of the MOQ Material Adverse Change condition precedent (SID cl 3.1) and MOQ and Brennan had subsequently agreed to vary this clause to provide all parties, including Participating Shareholders, with more certainty as to the scope of the clause.

Issues raised at the first scheme hearing 27 During the course of the hearing on 27 September 2022, I queried the extent of the disclosure of the requirements that all MOQ options be exercised or cancelled for nil consideration before the Second Court Hearing and that the service levels of MOQ's service centre in Sri Lanka remain at or superior to the service levels that were provided on average over the six months preceding the date of the SID. I also queried the inclusion of a five trading day VWAP calculation in the Scheme Booklet given that the LEA Expert Report had not used this metric in its valuation of MOQ, and the inclusion of references to a reimbursement being paid by Brennan with respect to an event described as a "Brennan Competing Proposal", given that it was not possible to identify with any clarity how such a proposal could ever arise. 28 MOQ agreed to amend the Scheme Booklet to make the disclosure of the MOQ options and service level requirements more prominent and to delete the references to the five trading day VWAP calculation and the Brennan Competing Proposal. 29 The updated Scheme Booklet reflecting these amendments was annexed to the third affidavit of Mr Flahvin affirmed on 27 September 2022, and was tendered in these proceedings as Exhibit 1.

Disposition 30 On the basis of the material provided to the Court and the considerations outlined above, I was satisfied that the formal requirements contained in s 411 of the Act for the convening of a meeting of members to consider the Scheme and to approve the Scheme Booklet for circulation to Participating Shareholders had been met. I was satisfied that the discretion of the Court should otherwise be exercised to order the convening of a meeting of the shareholders of MOQ and to approve the Scheme Booklet for distribution to Participating Shareholders. I certify that the preceding thirty (30) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Halley.