Australian Securities Commission v Marlborough Gold Mines Ltd [2024] NSWSC 1095 | Case summary

Role of the Court at the first Court hearing

Mr Williams 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 convene a scheme meeting and approve 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.
Mr Williams 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. 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]; Re Origin Energy [2023] NSWSC 1246 at [21]-[23]; Re Absolute Equity Performance Fund Ltd [2022] FCA 933 at [18]-[22].
Each of the preconditions to the exercise of the Court's discretion in s 411 of the Act is satisfied in this case. APM is a company registered under the Act and a Pt 5.1 body and the scheme is an "arrangement" between APM and its shareholders. 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 APM will publish that notice on ASX in accordance with current scheme practice.
As I noted above, the Recommending 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 APM shareholders, APM shareholders (other than Excluded Shareholders) vote in favour of the scheme. That recommendation is based on the quantum of the cash consideration of $1.45 per APM share, and those directors make no recommendation in relation to the scrip alternative. Mr Williams submits and I accept that that approach is a common one where a scheme includes alternative consideration in the form of "stub equity", which will likely have greater risk than a cash alternative, and where the appropriateness of acquiring stub equity will likely depend on the characteristics and risk profile of individual shareholders: Re Millennium Services Group Ltd [2024] NSWSC 307 ("Millennium") at [13]-[18]; Re McGrath Ltd [2024] NSWSC 555 ("McGrath") at [16]. Subject to the same qualifications, the Recommending Directors who hold APM shares all intend to vote, or cause to be voted, all of his or her APM shares in favour of the scheme.
The independent expert, Kroll, has concluded that the scheme is "fair" and "reasonable" and hence in the best interests of scheme participants in the absence of a Superior Proposal. Kroll has assessed the value of an APM share on a 100% ownership and control basis to be in the range of $1.40 to $1.74 per APM share and, where the all cash consideration of $1.45 per APM share falls within the range of values assessed by Kroll, Kroll has expressed the opinion that, on the basis of the all cash consideration only, the scheme is "fair" and "reasonable" and in the best interests of APM shareholders, in the absence of a Superior Proposal. Although Kroll's opinion is based only on the all cash consideration and Kroll makes no recommendation in relation to the scrip consideration or mixed consideration alternatives, Kroll also assesses the underlying value of the scrip consideration in the immediate or short term following implementation of the scheme and compares that value to the all cash consideration. Mr Williams also submits and I accept that it is common for an independent expert not to make a recommendation in respect of scrip alternatives, by reason of the difficulty in accurately valuing stub equity: McGrath at [17].
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 APM 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

Mr Williams draws several aspects of the scheme to the Court's attention. First, he points out that the scrip consideration involves the offer of "stub equity", and that APM shareholders have the option of electing to acquire shares in Ancora TopCo, an unlisted holding company which will be controlled by MDP, Quadrant and the Key Rolling Shareholders. He notes that APM shareholders who elect the scrip consideration are required to hold their shares in Ancora TopCo through a custodial arrangement, unless they are entitled to more than 10% of the voting shares in Ancora TopCo, and will be bound by the terms of Ancora TopCo's Constitution, a shareholders' deed and a nominee deed (unless they are entitled to hold Ancora TopCo shares directly). Mr Williams points out that ASIC Corporations (Stub Equity in Control Transaction) Instrument 2020/734 ("Instrument") modifies the operation of the Act so that bidders are permitted to make 'stub equity' offers using an Australian public company with compulsory custodial arrangements on specified conditions, namely that the custodian arrangement must provide that the arrangement will terminate and the beneficial owners will be registered as the holders of the securities if the company wishes to change to a proprietary company when it has more than 50 non-employee beneficial owners; and that this restriction can only be amended by special resolution of the beneficial holders whose securities are held by the custodian. He submits and I accept that this arrangement is structured to comply with the Instrument. I also accept that the scheme booklet discloses the characteristics of Ancora TopCo shares and the real risks involved in APM shareholders choosing the scrip consideration.
I also accept that the offer of stub equity would not, in itself, warrant the Court declining to convene the scheme meeting, where the scheme booklet contains detailed and prominent disclosure of the risks involved in APM shareholders choosing to receive scrip consideration, and that there is no public policy reason why an acquirer ought not be able to offer scrip consideration in the form of shares in an unlisted public company, provided adequate disclosure is made of the terms of issue and the risks of an investment in those securities. That conclusion reflects the position taken in previous case law including Re Aveo Group Limited and Aveo Funds Management Ltd [2019] NSWSC 1348 at [34]; Re Bingo Industries Ltd [2021] NSWSC 798 ("Bingo") at [17]-[21]; Millenium at [14]-[17] and McGrath at [21]. However, this matter highlights an emerging need for the Court to be alert to the impact of a stub equity structure on voting majorities at the second Court hearing, where it has the consequence that rolling shareholders are not treated as Excluded Shareholders and are permitted to vote on the scheme, although they will retain a continuing indirect shareholding or at least a continuing economic interest in the scheme company following the transaction. A Court may well need to assess, at the second Court hearing, whether a scheme which provides for the exit of other shareholders in exchange for cash has been approved at the scheme meeting largely or entirely by the votes of larger rolling shareholders who retain their economic interest in the scheme company, and target companies may need or wish to tag such votes in order to ensure that sufficient evidence as to that matter is available at that hearing.
Second, Mr Williams notes that the rights of shareholders in Ancora TopCo are regulated by the Ancora TopCo shareholders deed. He points out that additional rights are afforded to shareholders holding a particular level of interest in Ancora TopCo, including director appointment rights (being a right to appoint one director for each 10% of voting shares held) and a requirement for shareholder approval for certain decisions (with the approval of each shareholder holding more than 10% of voting shares required for some decisions, and of each shareholder holding more than 20% of voting shares for other decisions). Mr Williams submits that the fact that some scheme shareholders may be in a position to enjoy rights in Ancora TopCo by virtue of the size of their holding in that company does not mean that they are treated differently under the scheme nor does it make the scheme unfair. I accept that submission, where these rights are incidents of a shareholding in Ancora TopCo and no shareholder is required to take up such a shareholding, although a condition precedent to the scheme will not be satisfied unless Key Rolling Shareholders choose to do so. However, this matter overlaps with the issue that I noted in paragraph 18 above, and again highlights the possibility that a scheme might be approved at a scheme meeting largely or entirely by the votes of rolling shareholders who obtain such rights.
Mr Williams also submits and I accept that the rights available to and obligations imposed on Ancora TopCo shareholders are not class creating. He submits and I accept that the question whether scheme shareholders are in different classes involves three steps, namely the identification of the rights that existing members have against the company and to what extent are they different; the identification of the extent to which those rights are differently affected by the scheme; and, whether the difference makes it impossible for the members to consider the scheme as one class; and a difference in the commercial value of the same legal rights is not class creating: First Pacific Advisers LLC v Boart Longyear Ltd (2017) 121 ACSR 136 ("Boart Longyear") at [79]-[80]; [2017] NSWCA 116. Mr Williams then submits that the scheme provides all shareholders with the same rights, and those who elect the scrip consideration obtain the same rights under the Ancora TopCo shareholders deed, although I also recognise that those who become larger shareholders in Ancora TopCo will in fact be able to exercise rights that smaller shareholders cannot. I accept that the threshold test for separate classes, as explained in Boart Longyear, is not met where there is no difference in either the existing legal rights of scheme shareholders or the legal rights granted to them under the scheme. It is not necessary to determine whether such a difference in the legal rights afforded to different scheme shareholders would be such that it was impossible for the scheme members or creditors to consult together with a view to their common interest.
Mr William also submits and I accept that differential shareholder rights in stub equity vehicles have been held not to be class creating in other schemes, including Re Capilano Honey Ltd (2018) 131 ACSR 9; [2018] FCA 1568 at [43] and [49], Bingo, Re Healthia Ltd [2023] NSWSC 1296 at [23] and Millenium, although I recognise that each decision must depend on the treatment of shareholders' rights in the particular case. Mr Williams also submits that the same conclusion has been reached in debt-for-equity creditor schemes, but those decisions necessarily also depend on the treatment of creditors' rights in the particular case and arise in a somewhat different context: Re Nine Entertainment Group Ltd (No 1) [2012] FCA 1464; Re Stemcor Trade Finance Ltd [2015] EWHC 2662 (Ch); Re Boart Longyear Ltd [2017] NSWSC 567 at [63]. Although I accept this matter is not class creating for the reasons noted above, it will also be a relevant matter at a second Court hearing, raising the issues that I noted in paragraphs 18 and 19 above.
A related issue arises here in respect of voting by Ms Wynne and her associated companies at the second Court hearing. The Ancora TopCo Shareholders Deed allows specified rights to the "Initial Non-Investor Shareholder", defined as the largest shareholder in Ancora TopCo at implementation holding 30% or more of the voting shares in Ancora Topco other than MDP, in addition to those rights of Ancora TopCo shareholders that depend on the size of their holdings. Mr Williams points out, and the scheme booklet discloses, that Ms Wynne and her associated companies are the only shareholders who can fall within that definition, given the size of her shareholding, although it is not inevitable that she will satisfy the 30% threshold. Section 10.8(c) of the scheme booklet in turn discloses the rights that would be conferred on Ms Wynne as the Initial Non-Investor Shareholder. I also accept that these rights are likely not class-creating, and at least are not such as to make it impossible for Ms Wynne to consult with other scheme shareholders with a view to their common interest in considering whether to approve the scheme. However, APM rightly offers to tag Ms Wynne's votes so that their impact on the scheme resolution can be considered at the second Court hearing. This is, on one view, raises a similar issue to the differential rights available to larger rolling shareholders in stub equity transactions to which I have referred in paragraphs 18 and 19 above.
Third, Mr Williams addresses the funding of the scheme consideration and performance risk. He notes that, if the scheme becomes effective, the maximum cash consideration that will be payable by Ancora BidCo (if only the Key Rolling Shareholders elect Scrip Consideration) is approximately $433 million. The evidence indicates that Ancora BidCo intends to fund that cash consideration through a combination of external debt facilities (subject to meeting the condition precedents to drawdown), funds provided by certain funds managed and advised by MDP and funds provided by Quadrant Manager on behalf of the Quadrant funds (Story [12]). Mr Williams also points out that Ancora BidCo has legally binding equity commitment letters from each of the MDP funds (Story [12(a)]) and these arrangements are disclosed in the scheme booklet. Quadrant Manager on behalf of the Quadrant funds and their affiliates has also provided to the MDP funds an unconditional cash equity commitment of $150,000,000 (the "Co-Investment Commitment") pursuant to an equity contribution commitment letter (Story [12(b)]), as is also disclosed in the scheme booklet. Each of the Quadrant funds and their affiliates will contribute to the Co-Investment Commitment their respective proportion and will be issued shares in Ancora TopCo in accordance with their respective proportion of the Co-Investment Commitment, and this is again disclosed in the scheme booklet. I am satisfied that the evidence of these matters sufficiently addresses the question of funding of the scheme consideration and these matters do not give rise to any reason not to convene the scheme meeting.
Mr Williams also points out that Ancora BidCo and Ancora TopCo have executed a deed poll in favour of persons who hold APM shares at the record date of the scheme (Story [32]; Ex TS-3), by which each of Ancora BidCo and Ancora TopCo undertake to perform their respective obligations in respect of the scheme, including the obligation to provide or procure the provision of the scheme consideration to the APM shareholders in accordance with the terms of the scheme, including issuing all Ancora TopCo shares that are the subject of valid elections by APM shareholders under the terms of the scheme (Story [33]; Ex TS-3). Mr Williams submits and I accept that the deed poll and 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]. I accept that this matter also gives rise to no reason not to convene the scheme meeting.
Fourth, Mr Williams addresses the question of Ineligible Foreign Shareholders. He notes that all Ineligible Foreign Shareholders will receive the cash consideration regardless of any election made. this matter also gives rise to no reason not to convene the scheme meeting.
Fifth, Mr Williams addresses the question of APM equity incentives. He points out that the interests of Ms Wynne and Mr Anghie as Recommending Directors are disclosed in the lead independent director's letter in the scheme booklet and in sections 13.5 and 13.6 of the scheme and include interests relating to the proposed treatment of Performance Rights (as defined). He also points out that APM operates a performance rights plan under which APM has granted or issued Performance Rights, with each Performance Right entitling the holder to be allocated one APM share, subject to the satisfaction of certain conditions (Power [30]). The proposed treatment of the Performance Rights is disclosed in section 13.6(b) of the scheme booklet. Broadly, it is expected that each holder of the FY23 Performance Rights (as defined) and the FY24 Performance Rights (as defined) will agree to the exercise of those Performance Rights conditional on their vesting in accordance with their terms on a Change of Control (as defined), and that all Vested Performance Rights will be settled for $1.45 per Performance Right in cash, part of which will be paid by APM to the relevant tax authorities to meet the relevant holder's income tax liability in respect of that amount, and the balance of which will be paid by APM to Ancora TopCo on behalf of the relevant holder to subscribe for shares in Ancora TopCo.
Mr Williams recognises that, where a director will receive a substantial benefit in relation to a scheme which other shareholders will not receive, that benefit should be disclosed as a matter for shareholders to take into account when considering that director's recommendation, and that a director's recommendation will generally be acceptable if sufficient disclosure of the relevant director's interest in the scheme is provided to shareholders: Re Kidman Resources Ltd [2019] FCA 1226 at [115]; Re DWS Ltd [2020] FCA 1590 at [41]-[49]; Re Oz Minerals Ltd [2023] FCA 197 at [10], [18]. I accept that the benefits to the Recommending Directors arising from these matters are sufficiently disclosed in the scheme booklet.
Sixth, Mr Williams addresses certain payments to APM directors, to which I referred above. The scheme booklet discloses that, if approved by the APM Board and as permitted under the APM Constitution, the IBC Directors are to be paid additional fees in recognition of serving on the IBC, in specified amounts, regardless of the outcome of the scheme meeting and whether or not the scheme is implemented (Power [35]). This matter is sufficiently disclosed and does not give rise to any reason not to convene the scheme meeting.
Seventh, Mr Williams refers to MDP's interests in APM. As at the Last Practicable Date (as defined) Ancora BidCo and its associates hold approximately 29.08% of the APM shares on issue with voting power also at approximately 29.08%. This matter is disclosed in the scheme booklet and Ancora BidCo and its associates are Excluded Shareholders who will not vote at the scheme meeting so as to affect the outcome of that meeting.
Eighth, Mr Williams addresses exclusivity provisions. Clause 11 of the SID imposes a number of restrictions and obligations on APM and the APM IBC in relation to negotiations with third parties such as "no shop" (cl 11.2), "no talk" (cl 11.3), "no due diligence" (cl 11.4) restrictions and a "notification of approaches" obligation (cl 11.6) and a "matching right" (cl 11.7). The "no talk" and "no due diligence" restrictions are properly subject to the APM IBC's fiduciary or statutory obligations (cl 11.5 of the SID). The "End Date" for the "Exclusivity Period" and the exclusivity provisions under the SID is 8 months from the date of the SID (being 31 January 2025) or such later date as Ancora BidCo and APM agree in writing. I accept that a period of 8 months is not an unreasonable period in a reasonably complex transaction, and where about 5 months of that period now remain. The exclusivity provisions are appropriately disclosed in section 13.14(a) of the scheme booklet and this matter does not give rise to any reason not to convene the scheme meeting.
Ninth, Mr Williams notes that, under cl 12.2 of the SID, APM must pay to Ancora BidCo a break fee of $13,470,000 ("APM Break Fee") (Power [20(a)]) in specified circumstances and, under cl 12.3 of the SID, APM must pay to Ancora BidCo a lesser break fee of $6,730,000 ("APM Partial Break Fee") (Power [20(b)]) which is approximately 0.5% of the equity value of APM in other circumstances. Conversely, under cl 13.2 of the SID, Ancora BidCo must pay to APM a reverse break fee of $13,470,000 in specified circumstances ("Ancora Reverse Break Fee"). None of these break fees is payable 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 (Power [23]). The amount of the APM Break Fee and the Ancora Reverse Break Fee is approximately 1% of the total equity value of APM as implied by the scheme consideration, and consistent with the Takeover Panel's guidance. This matter also does not give rise to any reason not to convene the scheme meeting.
Tenth, Mr Williams addresses the process for despatch of scheme documents which is in orthodox form. Eleventh, he addresses other proposed communications by APM with shareholders in respect of the scheme. APM has engaged Computershare Ltd and its subsidiary Georgeson Pty Ltd ("Georgeson") to operate an inbound shareholder information line and a copy of the inbound call script is in evidence and broadly reflects the "Frequently asked questions" section of the scheme booklet. As I noted above, APM has also engaged Georgeson to conduct an outbound call campaign to "high net worth" and retail APM shareholders (Power [42]) and a copy of the outbound call script is also in evidence. Georgeson will also arrange for "Reminder to Vote" email(s) to be sent to APM shareholders who have elected to receive communications from APM electronically and who have nominated an email address for that purpose (Power [43]). Mr Williams submits and I accept that the proposed communications with APM shareholders follow the information in the scheme booklet, are presented in a balanced manner and encourage shareholders to read the scheme booklet in its entirety. Consistent with current scheme practice, APM does not seek orders approving the form of the proposed communications, and there are no issues arising from those communications which I needed to raise at the hearing.

Australian Securities Commission v Marlborough Gold Mines Ltd

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