Australian Securities Commission v Marlborough Gold Mines Ltd [2024] NSWSC 1075 | Case summary

Role of the Court at the first Court hearing

Ms Ng recognises that the Court's role at the first Court hearing in respect of a scheme is to determine, in the exercise of its discretion, whether to approve the convening of a scheme meeting and the explanatory statement if it is satisfied of several matters, namely that the plaintiff is a Pt 5.1 body; the proposed scheme is an "arrangement" within the meaning of s 411 of the Act; the scheme is bona fide and properly proposed; ASIC has had a reasonable opportunity to examine the proposed scheme and explanatory statement, to make submissions and has had 14 days' notice of the proposed hearing date of the first court hearing; the procedural requirements under the Supreme Court (Corporations) Rules 1999 (NSW) ("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 Ellerston Global Investments Ltd [2020] NSWSC 879 at [25]; Re Vocus Group Ltd [2021] NSWSC 630 at [12]; Re Pacific Smiles Group Ltd [2024] NSWSC 812 at [9]ff, on which I have drawn for the summary of the applicable principles below.
Ms Ng also submits that, if the preconditions to the exercise of power under s 411(1) of the Act are satisfied, then it is necessary for the Court to consider whether the Court should in its discretion exercise its power under s 411(1) of the Act. She points out that the principles relevant to the exercise of that discretion are well established and refers to my summary of those principles in Re Origin Energy [2023] NSWSC 1246 at [21]-[23]. The Court will consider whether the proposed scheme is fit for consideration at the proposed scheme meeting, in the sense that it is of such a nature and cast in such terms that, if it achieves the statutory majority at the meeting, the Court would be likely to approve it on the hearing of a petition which is unopposed; and that members are to be properly informed as to the nature of the scheme before the scheme meeting: 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; 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]; Re InvoCare Ltd [2023] NSWSC 1180 at [16]-[17].
In Re Absolute Equity Performance Fund Ltd [2022] FCA 933 at [18]-[22], Halley J also summarised the applicable principles as follows: "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 Ltd, Re CSR Ltd (2010) 183 FCR 358; [2010] FCAFC 34 at [12] . 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, Re Alstom Signalling Solutions Pty Ltd v Alstom Transport Australia Pty Ltd [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: Re Coca-Cola Amatil Ltd [2021] NSWSC 270 at [13] (Black J) (Coca-Cola Amatil). 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, Re 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). 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 Ltd, Re Associated Advisory Practices Ltd [2013] FCA 761 at [22] (Farrell J); Coca-Cola Amatil at [13]; and Leaders Fund at [15]. 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; and Leaders Fund at [15]."
Ms Ng points out that the proposed scheme involves an all-cash acquisition scheme and she submits that there is nothing in the terms of the scheme, or in its effect on scheme shareholders, that would warrant the Court declining to permit its consideration by Vonex's shareholders. She submits, and I am satisfied that, each of the preconditions to the exercise of the Court's discretion in s 411 of the Act is satisfied in this case. Vonex is a company registered under the Act and a Pt 5.1 body and the scheme is an "arrangement" between Vonex and its shareholders as a single class. ASIC has accepted that it has had more than 14 days' notice as required under s 411(2) of the Act and indicates that it does not currently propose to appear to make submissions or intervene to oppose the scheme at this hearing. There is evidence as to the verification process in respect of the scheme booklet, which was in common form. The procedural requirements under the Rules have been met, where the company search required by r 2.4(2) has been tendered; the draft orders for the convening of the scheme meeting identify the proposed scheme as required by r 3.3 of the Rules; and I will dispense with the requirement for compliance with r 3.4 of the Rules to publish notice of the second Court hearing in a national newspaper, where Vonex will publish that notice on ASX in accordance with current scheme practice.
Ms Ng also points out that Vonex's directors unanimously recommend that, in the absence of a Superior Proposal (as defined in the SID) and subject to the independent expert continuing to conclude that the scheme is in the best interests of Vonex shareholders, Vonex shareholders (other than Excluded Shareholders) vote in favour of the scheme; and, subject to the same qualifications, each Vonex director who holds Vonex shares intends to vote, or cause to be voted, all of that Vonex director's Vonex shares in favour of the scheme. She also points out that the Vonex directors appointed Titan Partners to prepare a report as to whether, in the expert's opinion, the scheme is fair and/or reasonable and/or in the best interest of scheme participants. In the independent expert's report ("IER"), Titan Partners have assessed the value of Vonex shares on a 100% ownership and control basis to be in the range of $0.0186 (or 1.86 cents) and $0.0232 (or 2.32 cents) per Vonex share and have expressed the view that, as the scheme consideration exceeds the range of values for a Vonex share as assessed, the scheme is "fair" and "reasonable" and hence in the best interests of scheme participants in the absence of a Superior Proposal.
Subject to the particular matters that I address below, it seems to me that there is nothing in the terms of the scheme, or in its effect on Vonex shareholders, that would otherwise warrant the Court declining to approve the scheme at the second Court hearing, if it receives the statutory majorities required by s 411(4)(a)(ii) of the Act at the scheme meeting.

Particular matters

Ms Ng draws several aspects of the scheme to the Court's attention. First, she addresses the questions of funding of the scheme consideration and performance risk. MaxoTel has also executed a deed poll in favour of scheme participants undertaking that, subject to the scheme becoming effective, it will perform its obligations under the scheme (Blake [23]; Ex MB-1, 5-13). Ms Ng submits and I accept that the deed poll together with the provision of the scheme consideration to a trust account maintained by the scheme company are well established means of managing performance risk: Re ELMO Software Pty Ltd [2023] NSWSC 12 at [27]-[28]. Ms Ng also points out that, if the scheme becomes effective, the maximum amount of cash which MaxoTel is required to pay under the scheme will be approximately $14.11 million. The evidence indicates that MaxoTel intends to fund the scheme consideration through a bank bill business loan with a facility limit of $30 million with Westpac Banking Corporation (subject to meeting the condition precedents to drawdown) (Blake [26), and a copy of a debt commitment letter dated 25 June 2024 between MaxoTel and Westpac is in evidence (Blake [27]; Ex MB-1, 16-102). I am satisfied that the evidence sufficiently addresses the question of funding of the scheme consideration.
Second, Ms Ng addresses the question of Vonex equity incentives. She notes that Vonex operates a Vonex Performance Rights plan under which it has issued Vonex Performance Rights (Wilks [15]) which are held by Vonex directors as disclosed in section 9.3 of the scheme booklet. As at the date of the SID, the Vonex directors together held 7,236,573 Performance Rights. Under the terms of Vonex's Performance Rights plan, the Vonex board has a discretion to determine the treatment of any unvested Performance Rights. Under cl 5 of the SID, Vonex must ensure that by no later than the Effective Date (as defined in the SID), there are no outstanding Performance Rights. As disclosed in section 9.3 of the scheme booklet, in accordance with the Vonex Performance Rights plan, the Vonex board will, prior to the second Court hearing, exercise its discretion and determine that, subject to the scheme becoming effective, the Performance Rights will vest and Vonex shares be issued in respect of Performance Rights held by the Vonex directors prior to the Record Date. Section 9.3 of the scheme booklet includes a table indicating the number of Performance Rights held by the directors as at the date of the scheme, together with a breakdown of the estimated value of total benefits payable to each of them upon implementation of the scheme, and also indicates that, if the scheme is approved, the Vonex shares to be issued to the Vonex directors who held those Performance Rights will be acquired by MaxoTel under the scheme. The scheme booklet also discloses that some 8,000,000 Performance Rights were issued to the former chief executive officer of Vonex (Wilks [17]; scheme booklet section 9.3) and that the Vonex board does not intend to exercise its discretion to waive the performance milestones in relation to those rights or otherwise accelerate their vesting, and the Vonex board believes that those Performance Rights will automatically expire and lapse in accordance with their terms of issue, if the scheme becomes effective (Wilks [21]). It is not the Court's role to assess the fairness of that approach, so far as that former chief executive officer is concerned, in determining whether to convene a scheme meeting at the first Court hearing. I am satisfied that these matters are sufficiently disclosed in the scheme booklet and do not give rise to any reason not to convene the scheme meeting.
Third, Ms Ng addresses the question of MaxoTel's interests in Vonex. Mr Alex Rich, the sole director of MaxoTel holds or has a relevant interest in 15,880,268 Vonex shares representing 4.22% voting power in Vonex and is an Excluded Shareholder for the purposes of the scheme. Mr Michael Blake and Ms Elyse Rich (Mr Rich's sister) who are employees of MaxoTel also hold Vonex shares and are MaxoTel's proposed appointees to the Vonex board following completion of the scheme. These matters are properly disclosed in the scheme booklet.
Fourth, Ms Ng addresses exclusivity provisions. Clause 11 of the SID imposes a number of restrictions and obligations on Vonex and the Vonex board in relation to negotiations with third parties such as "no shop" (cl 11.2), "no talk" and "no due diligence" (cl 11.3) restrictions, a "notice of competing transaction" obligation (cl 11.4) and a "matching right" (cl 11.5), and the "no talk" and "no due diligence" restrictions are rightly subject to the Vonex board's fiduciary or statutory obligations (cl 11.6 of the SID). The "End Date" for the "Exclusivity Period" under the SID is 4 months after the date of the SID (being 25 October 2024) or another date as agreed between Vonex and MaxoTel, which I accept is not an unreasonable period. The exclusivity provisions are consistent with market practice and are sufficiently disclosed in section 8.5 of the scheme booklet.
Fifth, Ms Ng points out that cl 12.2 of the SID requires Vonex to pay a break fee of $350,000 to MaxoTel in specified circumstances, as also disclosed in section 8.5 of the scheme booklet. Clause 23.3 of the SID requires MaxoTel to pay Vonex a reverse break fee of the same amount in specified circumstances, which are also disclosed in section 8.5 of the scheme booklet. Neither break fee is payable merely because the resolution submitted to the scheme meeting in respect of the scheme is not approved by the majorities required under s 411(4)(a)(ii) of the Act. The amount of each break fee is approximately 2.48% of the total equity value of Vonex as implied by the scheme consideration, but approximately 1% of Vonex's enterprise value (Wilks [57]). Consistent with the approach taken in Re Webcentral Group Ltd [2020] NSWSC 1279 at [30]-[31], I accept that approach is acceptable and consistent with the Takeovers Panel's guidance where Vonex is highly geared and MaxoTel's actual costs incurred to date in relation to the scheme were in excess of $800,000, well in excess of that break fee (Blake [22(b)]). I accept that these break fees are not a reason not to convene the scheme meeting.
Sixth, Ms Ng addresses the manner of despatch of scheme materials, which is in conventional form and also do not give rise to any reason not to convene the scheme meeting.
Seventh, and somewhat more controversially, Ms Ng draws attention to the centralised but unscripted approach which Vonex will take to dealing with inquires by Vonex shareholders, admittedly in the context of a smaller acquisition in value, although Vonex does not expressly seek approval for that approach. The scheme booklet invites any Vonex shareholder who has any questions in relation to the scheme to call Vonex's company secretary on a specified number in business hours or contact him at an email address disclosed in the scheme booklet. The Vonex board has directed its company secretary to respond to any email queries by reference only to the scheme booklet, and Vonex will maintain a register of all inbound calls relating to the scheme, including how many calls were received from Vonex shareholders and details as to the responses provided to the Vonex shareholders (Wilks [72]).
I recognise that, for many years, scheme practice has generally involved the use of third party providers to respond to incoming shareholder calls in a scripted way. That approach was noted in Re Hills Motorway Ltd (2002) 43 ACSR 101; [2002] NSWSC 897, where Barrett J observed (at [15]-[16]) that: "…it is a fundamental premise of Pt 5.1 that the documents which go to members in accordance with the orders of the court (including, in a case such as this, those which concern them in their related capacity as holders of trust units) should be the only vehicle by which there is communication of the substantive message relevant to members' decision making. Registration of the explanatory statement by ASIC and its examination by the court are steps taken with a view to validating its integrity as a suitable communication vehicle. The reality nevertheless remains that, in matters of this kind, it can be helpful to members and conducive to their taking advantage of their rights to engage in decision making that they have a point of contact to which they can refer if uncertain about how to proceed in order to participate or about the core aspects of the scheme. It is proposed in this case that such a means of communication should be available through the share registry. The personnel at the registry who deal with enquiries will be restricted in what they can say and will work from a script which will be so tailored that it does not add to what is said in the explanatory statement and other documents which are only permitted vehicle for substantive communication. There is no harm in that confined and structured approach; indeed, it is a helpful one." His Honour there also observed (at [19]) that any controversy as to such communications "outside the formal documentary channels" may become a matter which "needs to be addressed upon any application for the Court's approval of the scheme".
However, in Re Westfield Holdings Ltd (2004) 49 ACSR 734; [2004] NSWSC 458 at [12], Barrett J noted, without disapproval, a practice by which inquiries to a shareholder information line would be escalated to company executives who would maintain a record of such conversations and observed that: "These arrangements are, in my view, sufficient to anticipate any issues that may arise on the second hearing if the matter proceeds that far, as to the effect that communication with members outside the four corners of the documents may have had. The arrangements are such that there should, if they are observed, be in existence a record of each conversation that can be taken into account if any such issue arises at that point." The approach taken by Vonex here is, in effect, to dispense with a shareholder information line and have all inquiries dealt with by the company secretary.
I also recognise, and Ms Ng fairly acknowledges that difficulties, can arise from unscripted communications between a scheme company and its shareholders. In Re ResApp Health Ltd [2022] NSWSC 1353, a matter where such difficulties ultimately did arise, I noted (at [44]) that: "to the extent that individual communications take place with shareholders, the preferable approach is for the Court to review the position in respect of such communications after the event, as a matter that is relevant to whether a scheme should be approved at the second Court hearing, rather than seeking to establish prescriptive rules for such communications or approving scripts for such communications in advance. … it may be appropriate for a company's chair, its directors or its executives to communicate with major shareholders in respect of a scheme, or with shareholders who feel strongly in respect of the scheme, in a particular case, although the practical risks of doing so in an unrestrained way are well illustrated by this matter." I also there accepted that any prescriptive rule would give rise to difficulties in distinguishing between legitimate responses to administrative inquiries in respect of a scheme and responses that had a more substantive character.
I also there observed (at [46]) that: "… as a matter of policy and as a matter of commerce, the Court should not seek to impose any "blanket embargo" on company officers responding to shareholder inquiries. I would add that the Court should particularly not seek to do so where there is no evidence before it as to the extent to which companies generally respond to such inquiries while a scheme is on foot. However, that observation does not displace the need for scheme companies to recognise the practical risks of such communications, which this matter again illustrates … I also accept that, as [Counsel in that case] submits, any attempt to constrain such communications might well exceed the Court's proper functions in respect of the approval of a scheme under s 411 of the Act and any initial approval of the explanatory statement and, by extension, the approval of systematic communications with shareholders which have the potential to interfere with or contradict a Court approved scheme booklet."
I also accepted (at [47]) a further submission that there would a real difficulty with setting prescriptive rules for communications with shareholders where the companies which propound schemes of arrangement differ in size, and there is a real distinction between, on the one hand, a scheme between a company and a large number of retail shareholders and, on the other hand, a scheme between a company and small number of sophisticated shareholders who already have a detailed understanding of its operation. Counsel there also pointed to the significance of ex parte disclosure obligations in a scheme of arrangement, and fairly accepted that reliance on those obligations will generally require counsel and solicitors acting in a scheme of arrangement to make inquiries as to the communications between the scheme company or the acquirer and shareholders in respect of the scheme. I also there accepted that the imposition of prescriptive limitations on a company's or directors' communications with shareholders would be potentially inconsistent with other obligations arising under the Act, including the directors' duties provisions.
I recently took the same approach in Re Altium Ltd [2024] NSWSC 736, where the scheme company proposed that a third party, acting on its behalf, and its directors or other advisers would meet with institutional shareholders in unscripted meetings to provide information about the scheme and answer any questions that institutional shareholders may have. That approach ultimately gave rise to no difficulty at the second Court hearing in that case. Consistent with that approach, Vonex's proposal to respond to shareholder inquires in an unscripted way, but consistent with the scheme booklet, does not give rise to any reason not to convene the scheme meeting. It will, however, require Vonex's advisers to give particular attention to their ex parte disclosure obligations at the second Court hearing, and will likely require that evidence of the content of those communications be led at the second Court hearing.

Australian Securities Commission v Marlborough Gold Mines Ltd

At a glance

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Judgment (7 paragraphs)

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Legislation Cited (2)

Cases Cited (22)