- Australian Securities Commission v Marlborough Gold Mines Ltd

Supreme Court of NSW|2023-10-16|Before: Black J

Solicitors: Clayton Utz (Plaintiff) Allen & Overy (Bidder) File Number(s): 2023/305711

Nature of the application and background

By Originating Process filed on 26 September 2023, Healthia Ltd ("Healthia") applies under s 411 of the Corporations Act 2001 (Cth) ("Act") to convene a meeting to consider a proposed scheme of arrangement, and for associated orders under s 1319 of the Act.
By way of background, Healthia is a public company limited by shares which is listed on the Australian Securities Exchange ("ASX") and provides healthcare services, including networks of optometry, podiatry, physiotherapy and hand therapy clinics across Australia and New Zealand. On 31 August 2023, Healthia announced to the ASX that it had entered into a Scheme Implementation Deed (""SID") with Harold Bidco Pty Ltd ("Harold BidCo"), an entity owned by Harold TopCo Limited ("TopCo") which is in turn owned by funds advised by Pacific Equity Partners ("PEP").
The proposed scheme provides for Harold BidCo to acquire all of the fully diluted share capital in Healthia by way of the scheme and provides Healthia shareholders the option of receiving either $1.80 cash per Healthia share, unlisted scrip consideration or a combination of cash and unlisted scrip consideration, in each case subject to conditions and scale-back provisions. The proposed scheme provides for Healthia shareholders (other than those who make a valid election to receive a scrip consideration option) to receive $1.80 cash per Healthia share ("cash consideration") in respect of all their Healthia shares held on the Scheme Record Date (as defined). As an alternative to receiving the cash consideration, Healthia shareholders may elect to receive specified scrip consideration options. The options are, first, an all scrip consideration option under which a Healthia shareholder would receive 1 Class B share in TopCo for each Healthia share, subject to any scale-back to ensure that the total number of Class B shares do not exceed 30 per cent of the total share on issue in TopCo; or, second, a "mix and match" option, under which a Healthia shareholder would receive Class B shares in TopCo in exchange for between 30 per cent and 100 per cent of their Healthia shares (subject to the scrip scale-back provision) and $1.80 in cash for each of their remaining Healthia shares. Subject to the scheme becoming effective, TopCo must issue (or procure the issue of) the scheme scrip consideration to scheme participants who have made valid elections to receive the scheme scrip consideration in accordance with the scheme.

Affidavit evidence

Healthia reads the affidavit dated 26 September 2023 of Mr Dilip Ramaswamy, a solicitor acting for Healthia in the application, which refers to Healthia's announcement of the SID to the ASX and to the terms of the proposed scheme. Mr Ramaswamy's affidavit also annexes an extract of the records maintained by the Australian Securities & Investments Commission ("ASIC") relating to Healthia and the announcement made on 31 August 2023 by Healthia to the ASX which I noted above.
Healthia also reads the affidavit dated 13 October 2023 of Ms Julia Murfitt, who is the General Counsel and Company Secretary of Healthia. Ms Murfitt also refers to the SID entered into on 31 August 2023 between Healthia and Harold BidCo and to the announcement of that matter to the ASX on 31 August 2023. She also addresses the elections available to Healthia shareholders in respect of the scheme consideration and the conditions precedent to implementation of the scheme. Ms Murfitt outlines the structure of the scheme booklet and outlines the verification process which was adopted in respect of the Healthia Information (as defined) in the scheme booklet which was in customary form; the exclusivity provisions and break fee provisions in respect of the proposed scheme; the manner in which the scheme booklet will be dispatched to shareholders; and how shareholders may make an election to receive scrip consideration, if they wish to do so. Ms Murfitt also addresses the manner in which the scheme meeting will be conducted and sets out the interests of, and consent to act of, the proposed chair and alternate chair of the scheme meeting. She also addresses the directors' recommendation as to the scheme and directors' interests and the position as to performance rights issued by Healthia. Ms Murfitt also addresses proposed shareholder communications by Healthia prior to the scheme meeting, which include a shareholder information line to address inbound shareholder queries, an outbound call campaign and outbound email campaign. I have reviewed the scripts for those communications, which were helpfully made available in the exhibits to Ms Murfitt's affidavit, and I have no difficulty with them. Ms Murfitt also notes that Healthia will provide notification of the second Court date to Healthia shareholders by an announcement made on the ASX, in the manner that is now accepted in this Court in respect of listed companies.
By his affidavit dated 12 October 2023, Mr David Emmanuel, who is a director at Pacific Equity Partners, refers to Harold BidCo's entry into the SID with Healthia and to the process adopted for the verification of Bidder Information (as defined) in the scheme booklet, which was in customary form. Healthia also reads the affidavit dated 13 October 2023 of Mr Fergus Rees, who is also a solicitor acting for Healthia in the proceedings, which addresses lodgement of the draft scheme booklet and other documents with ASIC. Healthia also reads the second affidavit dated 16 October 2023 of Mr Ramaswamy, where he addresses amendments in the scheme booklet and in the proposed scripts and emails to be used in shareholder communications, and exhibits a letter dated 13 October 2023 from ASIC to Healthia which confirms that ASIC has had sufficient time to review the documents relating to the scheme, reserves its position in respect of s 411(17) of the Act in the usual way, and does not propose to appear to make submissions or intervene to oppose the scheme at the first Court hearing.
Healthia also tenders a deed poll dated 12 October 2023 given by Harold BidCo and TopCo in favour of shareholders in Healthia and a final version of the scheme booklet. I was taken through that scheme booklet by Mr Izzo in the course of oral submissions. The scheme booklet also contains an independent expert report prepared by Lonergan Edwards & Associates Ltd, which expresses the opinion that the scheme is fair and reasonable and in the best interests of Healthia shareholders in the absence of a superior proposal

Applicable principles

Mr Izzo points out that the principles governing an application for orders to convene a meeting of members under s 411(1) of the Act are well settled and refers to Re Kidman Resources Ltd (2019) 375 ALR 760; [2019] FCA 1226 at [22] in that regard. He notes, in summary, that the Court's discretion to make an order under s 411(1) of the Act is enlivened if a compromise or arrangement is proposed between a Part 5.1 body and its members (or any class of them); application for the order is made in a summary way by the body; 14 days' notice of the hearing of the application has been given to ASIC (or such lesser period as the Court or ASIC permits); and the Court is satisfied that ASIC has had a reasonable opportunity to examine the terms of the proposed compromise or arrangement to which the application relates and a draft explanatory statement relating to the proposed compromise or arrangement and make submissions to the Court in relation to the proposed compromise or arrangement and the draft explanatory booklet. Mr Izzo submits and I accept that each of these requirements is met in the present case. Healthia is a company registered under the Act and a Part 5.1 body for the purposes of s 411 and the proposed change of control transaction under the scheme is an 'arrangement' within the meaning of that section. ASIC has had notice of and been given an opportunity to consider the scheme and I have referred to its letter indicating its position above. Ms Murfitt's evidence, on information and belief, has confirmed the matters required by r 3.2(b) of the Supreme Court (Corporations) Rules 1999 (NSW) ("Rules") in respect of the chair and alternate chair nominated for the proposed scheme meeting.
As I noted above, Healthia has obtained a report from an independent expert, Lonergan Edwards & Associates Ltd as to whether, in the expert's opinion, the scheme is fair and reasonable and in the best interests of Healthia shareholders. The independent expert expresses the view that the scheme is fair and reasonable and in the best interests of Healthia shareholders in the absence of a superior proposal, for the reasons set out in the independent expert's report. The evidence also addresses verification of information concerning Healthia and Harold BidCo in the scheme booklet as I have noted above. Healthia proposes to give notice of the second hearing by an announcement on the ASX and an announcement on Healthia's website. I am satisfied that I should dispense with the requirement under r 3.4 of the Rules to publish an advertisement in a newspaper where such an ASX announcement will be made by Healthia before the second hearing, in accordance with paragraph 26(b) of the recently updated Practice Note SC Eq 4, which became effective on 18 October 2023 and implemented Practice Note - Harmonisation in schemes of arrangement as developed by the Committee for the Harmonisation of Rules of the Council of Chief Justices of Australia and New Zealand ("Harmonised Practice Note"). It seems to me that that course is more likely to draw that hearing to shareholders' attention than a newspaper advertisement: Re InvoCare Ltd [2023] NSWSC 1180 ("InvoCare") at [22]. That position is reinforced where Ms Murfitt's evidence is that Healthia's practice has been to communicate with its shareholders by way of ASX announcement for several years.
It is well-established that the Court "will not ordinarily summon a meeting unless the scheme is of such a nature and cast in such terms that, if it achieves the statutory majority at the creditors' 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, approved in Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485 at 504. In Re Foundation Healthcare Ltd (2002) 42 ACSR 252; [2002] FCA 742 at [36] and [44], cited with apparent approval in Re CSR Ltd (2010) 183 FCR 358; [2010] FCAFC 34 at [58], French J observed that: "… [i]t 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."
In Re Associated Advisory Practices Limited [2013] FCA 761 at [22], Farrell J summarised the principles to which I have referred above as follows: "[t]he court will not ordinarily convene a meeting of members to consider a scheme of arrangement unless the court is satisfied that the scheme is of such a nature and cast in such terms that, if it receives the statutory majority at the meeting of members, the court would be likely to approve the scheme on the hearing of an unopposed application: Re Central Pacific Minerals NL [2002] FCA 239 at [8]; Re CSR Ltd (2010) 183 FCR 358 at [12]; Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485 at 504. By granting leave to convene the meeting, the court does not give its imprimatur to the proposed scheme or foreshadow its approval at the second court hearing for the purposes of s 411(4)(b): Re Foundation Healthcare Ltd (2002) 42 ACSR 252 at [36]; Australian Securities Commission v Marlborough Gold Mines Ltd at 504-505. The question for the Court is whether it is reasonable to suppose that sensible business people might consider the arrangement proposed as being beneficial to members: In Re Alabama, New Orleans, Texas and Pacific Junction Railway Co [1891] 1 Ch 213 at 243; Re CSR Ltd at [80]. The court does not need to be satisfied that no better scheme could have been proposed: Re Foundation Healthcare Ltd at [44]. Ultimately, the question is for the members themselves: see FT Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 at 72."
I also summarised the principles to which I have referred above in Re Villa World Ltd [2019] NSWSC 1207 at [15]-[19] and Mr Izzo also cites Re PropTech Group Ltd [2022] FCA 1606 at [19] in that regard.
Mr Izzo submits and I accept that there is nothing in the terms of the proposed scheme that would warrant the Court declining to permit its consideration by members. He points out that a choice of scrip consideration (subject to a scale-back) is now common and has been accepted in other cases, including InvoCare (at [3]) and he notes that, as in Invocare (at [6]), the Healthia board makes no recommendation in relation to the scrip consideration options. He also points out that the scrip consideration option here takes the form colloquially known as "stub equity", under which shareholders of the target company are offered a minority interest in an acquiring entity; that (as disclosed at section 9.6(b) of the scheme booklet), shares in TopCo will be held through a custodian to ensure that TopCo has no more than 50 members; a structure of this kind was noted in Re Bingo Industries Ltd [2021] NSWSC 798 at [18]-[19]; and this arrangement complies with ASIC Corporations (Stub Equity in Control Transactions) Instrument 2020/734, where a public company is used as the stub equity vehicle and the TopCo shareholders deed contains conversion and termination provisions of the kind envisaged by that instrument, as disclosed in section 9.7 of the scheme booklet.

Particular issues in respect of the scheme

Mr Izzo also draws a number of aspects of the scheme to the Court's attention, consistent with the approach contemplated by Barrett J in Re Permanent Trustee Co Ltd (2002) 43 ACSR 601 at 603.
First, Mr Izzo addresses the question of performance risk and points out that the scheme adopts the conventional step, at cl 5.2(a) of the scheme of arrangement, of making the transfer of the scheme shares to Harold BidCo subject to the provision of the scheme consideration, so that no transfer of the scheme shares occurs unless and until the total scheme consideration to which scheme shareholders are entitled has been paid into a trust account for the benefit of those shareholders. He points out that Harold BidCo and TopCo have also executed a deed poll in favour of the scheme shareholders on 12 October 2023, as required by clause 6.3 of the SID, and this is also a well-established means of managing performance risk: Re ELMO Software Pty Ltd [2023] NSWSC 12 ("ELMO") at [27]-[28].
Mr Izzo recognises that issues may arise where a party to a deed poll is a special purpose vehicle which does not have capacity to perform its obligations under that deed poll without financial support from a holding company, and where funding from a third party is presently conditional: Re Spark Infrastructure RE Ltd [2021] NSWSC 1385 at [31]-[32]. He submits and I accept that those issues do not arise in the same way here where, although Harold BidCo is a special purpose vehicle, it has the benefit of a binding equity commitment letter which is subject to the scheme becoming effective and a binding debt commitment letter which is subject to conditions precedent customary for facilities of this kind, as set out in section 9.4 of the scheme booklet.
Second, Mr Izzo addresses the question of the break fee in respect of the scheme. I proceed on the basis now contemplated by paragraph 26(h) of the Harmonised Practice Note that: "[t]he Court expects a scheme proponent to lead evidence at the first Court hearing concerning any break fee as a percentage of the implied equity value of the scheme proponent and the general nature and length of any exclusivity provisions. Submissions as to these matters need not be extensive if the amount of the break fee and the nature and length of the exclusivity provisions do not raise novel issues."
Under cl 13 of the SID, and as disclosed in section 7.1(d) of the scheme booklet, Healthia must pay Harold BidCo a break fee of $2,600,000 (exclusive of GST) in specified circumstances, as summarised in paragraph 40 of Ms Murfitt's affidavit. Mr Izzo submits and I accept that the circumstances in which the break fee is payable do not depart from standard practice and, in particular, a break fee is not payable merely because the resolution submitted to the scheme meeting in respect of the scheme is not approved by the requisite majorities. The break fee represents approximately 1 per cent of the implied equity value of Healthia based on the maximum consideration of $1.80 per share which was payable under the SID, which implies an equity value of approximately $260 million, which accords with the guideline in Takeovers Panel Guidance Note 7: Lock-up devices. This matter also gives rise to no reason not to convene the scheme meeting.
Third, Mr Izzo addresses the question of exclusivity arrangements in respect of the scheme. He points out that cl 12 of the SID includes "no shop", "no talk" and "no due diligence" obligations, and the "no talk" and "no due diligence" obligations in cll 12.3 and 12.4 are subject to a fiduciary carve out in cl 12.5 of the SID. The "Exclusivity Period" as defined in clause 1.1 of the SID is the period from and including the date of the SID (being 31 August 2023) to the earlier of: (a) the date of termination of the SID in accordance with its terms; (b) the End Date (being 29 March 2024); and (c) the Implementation Date (as defined). Mr Izzo submits and I accept that the exclusivity arrangements are therefore capable of precise ascertainment. The exclusivity provisions are sufficiently disclosed in section 7.1(c) of the scheme booklet and I accept that the period of exclusivity is not out of the ordinary. This matter also gives rise to no reason not to convene the scheme meeting.
Fourth, Mr Izzo addresses the question of performance rights. Under cl 6.7 of the SID, Healthia must ensure that, prior to the Scheme Record Date, and subject to the scheme becoming effective, Healthia performance rights will vest in accordance with their terms and be exercised (if applicable), such that holders of the Healthia performance rights participate in the scheme and receive the scheme consideration. Mr Izzo points out that the Healthia board has resolved, subject to the scheme becoming effective, to amend the terms of the Healthia performance rights so that holders of those performance rights can participate in the scheme in respect of those performance rights if the scheme becomes effective. Mr Izzo submits and I accept that the benefits received by holders of Healthia performance rights, including in respect of early vesting, do not require that they be treated as a separate class in voting at the scheme meeting: Re Skilled Group Ltd (2015) 113 ACSR 525; [2015] VSC 789 at [60]-[86]; Re Oz Minerals Ltd [2023] FCA 197 at [50]-[53], [62]-[63].
Fifth, Mr Izzo notes that, as set out in sections 2 and 3.2(a) of the scheme booklet and the Frequently Asked Questions in section 4 of the scheme booklet, Healthia's directors unanimously recommend that Healthia shareholders vote in favour of the scheme. Mr Izzo points out that reference is made in that context to the shares and performance rights held by each director, as set out in section 3.2(a), 7.2 and 12.5 of the scheme booklet. I accept that, where those interests are fairly disclosed, they do not require the directors to refrain from making a recommendation: Kidman Resources at [115]; Re DWS Ltd [2020] FCA 1590 at [41]-[49]; Re Intega Group Ltd [2021] NSWSC 1434 at [22]; Re Kyckr Ltd [2022] NSWSC 1316 at [18]; Re Pendal Group Ltd (No 2) [2022] NSWSC 1648 at [25].
Sixth, Mr Izzo notes that several Healthia directors and key management personnel (identified and defined as "Key Rolling Shareholders" in the SID) have signed a letter in which they confirm to Healthia that they will elect to receive scrip consideration under the scheme in respect of particular shares controlled by them as set out in the table in each of the letters. Under cl 3.1(g) of the SID and cl 3.1(b) of the scheme of arrangement, it is also a condition precedent to the scheme becoming effective that valid elections are made to receive scrip consideration by Key Rolling Shareholders, representing not less than 15.74 million Healthia shares, and sections 3.2(a) and 12.5 of the scheme booklet refer to this matter. Mr Izzo submits and I accept that this matter does not have the effect that Key Rolling Shareholders need to be treated as a separate class for voting purposes at the scheme meeting, where the scrip option is here available to all shareholders and not only rollover shareholders although the latter have committed to accept it for part of their holdings: ELMO at [22]. Mr Izzo submits and I accept that a commitment to make a particular election does not give the Key Rolling Shareholders different rights to other shareholders, where it is only an advance election as to how they will exercise those rights: Re Lehman Brothers [2018] EWHC 1980 (Ch) at [80]; see also T Damian and A Rich, Schemes, Takeovers and Himalayan Peaks: The Use of Schemes of Arrangement (Herbert Smith Freehills, 4th ed, 2021) at [6.4.28].
Seventh, Mr Izzo notes that cl 8 of the scheme of arrangement provides for a "deemed warranty" that a scheme shareholder's shares are fully paid and free of encumbrances. These matters are disclosed in sections 3.4(d) and 7.3(k) of the scheme booklet and the inclusion of such a warranty does not prevent the making of orders under s 411(1) of the Act, provided that the clause is properly disclosed in the scheme booklet: ELMO at [32].
Eighth, Mr Izzo addresses the question of Healthia's communications with shareholders in respect of the scheme. In InvoCare at [25]-[26], I reviewed the case law and observed that: "[w]hile I am inclined to think that a scheme company's intended communications with securityholders should be disclosed at the first Court hearing, I would prefer to characterise that as an expectation of the Court rather than a requirement. It may be that little turns on the difference between the two, since it is not easy to see why scheme companies or their advisers would prefer to leave securityholder communications to be reviewed only at a second Court hearing and risk the prospect of failure of a scheme at that hearing if those communications have undermined the integrity of the securityholder vote, rather than making those communications available for review at the first Court hearing while there is still time to correct any difficulty with them."
Paragraph 26(k) of the Harmonised Practice Note now also notes that: "[t]he Court expects that the Court's approval should be sought for a supplementary explanatory statement to be sent to securityholders in a scheme. The Court also expects that the nature of the scheme proponent's intended communications with securityholders should be disclosed at the first Court hearing. Parties may also wish to continue the existing practice of drawing the Court's attention to material communications to securityholders after the first Court hearing, at least by a communication to the chambers of the judge hearing the application, to reduce the risk of difficulties arising at the second Court hearing."
Healthia has here engaged Link Market Services Ltd ("Link"), its share registry services firm, to receive inbound shareholder queries about aspect of the scheme and also proposes to establish an outbound call campaign and send outbound emails to all Healthia shareholders. Copies of the draft scripts and documents are in evidence and I have reviewed and have no difficulty with them. This also gives rise to no reason not to convene the scheme meeting.
Ninth, Mr Izzo notes that Healthia has engaged Link to despatch documents relating to the scheme meeting to Healthia shareholders once orders convening the scheme meeting are made, and the despatch of these material is sufficiently addressed by the proposed orders

Orders

For these reasons, I was satisfied that I should convene the scheme meeting and make the associated orders and I made orders, on the day of the hearing, in accordance with the short minutes of order initialled by me and placed in the file.

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: 31 October 2023

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