By Originating Process filed on 3 October 2024, Auswide Bank Ltd ("Auswide") applies under s 411 of the Corporations Act 2001 (Cth) ("Act") for orders relating to a proposed scheme of arrangement and associated orders.
By way of background, Auswide is a public company limited by shares, is listed on the Australian Securities Exchange ("ASX") and provides deposit, credit and banking services to personal and business customers across Australia, but principally located in Queensland, New South Wales and Victoria. It has branches in Queensland, and relies on business development managers in Sydney and Melbourne to undertake interstate business. It predominantly engages in home lending and deposit taking services.
The proposed scheme provides for MyState Bank Limited ("MyState Bank") to acquire all of the ordinary fully paid shares in Auswide. MyState Bank is a subsidiary of MyState Limited ("MyState"). Mystate is a public company listed on ASX and is the non-operating holding company of the MyState group, a diversified financial services group. MyState Bank offers products including home loans, deposit accounts and business banking products and other entities in the MyState group provide financial products, including funds management and trustee services.
On 19 August 2024, Auswide announced to the ASX that it had entered into a scheme implementation agreement ("SIA") with MyState and MyState Bank. The proposed scheme provides that MyState Bank will acquire all of the shares in Auswide and, as consideration, the transferring shareholders will each receive 1.112 ordinary shares in MyState. MyState and MyState Bank have executed a deed poll under which they have covenanted that they will be bound by the terms of the scheme as if they were a participant and undertake to perform all obligations and other actions attributed to them, including those relating to the issue of the scheme consideration. Clause 3 of the scheme sets out several conditions precedent to the implementation of the scheme, including that, before 8.00am on the second Court hearing date, the Treasurer (or the Australian Prudential Regulation Authority (APRA) if the relevant power is delegated) has notified MyState, MyState Bank and Auswide in writing that each of MyState and MyState Bank has been approved to hold a 100% stake in Auswide under s 14 of the Financial Sector (Shareholdings) Act 1998 (Cth) ("FSS Act") and, if that approval is subject to conditions, those conditions are acceptable to MyState, MyState Bank and Auswide. The evidence indicates that there is some uncertainty as to whether this condition will be satisfied within the current timetable for the second Court hearing, and I return to that matter below.
I made the orders sought by Auswide at the conclusion of the hearing on 22 October 2024. These are my reasons for doing so. I have drawn on the helpful submissions of Mr Ahmed who appeared for Auswide in this judgment.
[3]
Affidavit evidence
Auswide reads an affidavit dated 3 October 2024 of its solicitor, Mr Alexander Morris, filed when the application was commenced.
Auswide also reads an affidavit dated 21 October 2024 of Mr William Schafer, who is the Chief Financial Officer and Company Secretary of Auswide. He outlines the nature of Auswide's business and the proposed scheme, exclusivity and break fee arrangements, the treatment of performance rights that have been issued by Auswide, the arrangements in relation to the proposed scheme meeting (including in relation to the proposed chair of the meeting and distribution of material to shareholders), Auswide's verification of the draft scheme booklet, and proposed communications with Auswide shareholders.
Auswide also reads an affidavit dated 21 October 2024 of Mr Brett Morgan, who is the Managing Director and Chief Executive Officer of MyState and MyState Bank. Mr Morgan gives evidence in relation to MyState and MyState Bank, the arrangements in relation to the scheme that concern the MyState group, the verification of information in the draft scheme booklet relating to the MyState group and in relation to certain of the conditions precedent under the scheme.
[4]
Applicable principles and submissions
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 Part 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; the Australian Securities and Investments Commission ("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 Orion Telecommunications Limited [2007] FCA 1389 at [5]; Re Staging Connections Group Ltd [2015] FCA 1012 at [19]; Re Wridgways Australia Ltd [2010] FCA 1187 at [30]; Re Ellerston Global Investments Ltd [2020] NSWSC 879 ("Ellerston") at [25]; Re Vocus Group Ltd [2021] NSWSC 630 at [12].
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. Auswide is a company registered under the Act and a Part 5.1 body. The proposed scheme is an "arrangement" within the scope of s 411 of the Act where it involves the acquisition of the shares in a company in return for consideration being paid to shareholders. Auswide must also prove that the scheme is bona fide and properly proposed, and Mr Ahmed submits that the scheme is a genuine scheme to effect an acquisition of a publicly listed company and the independent expert has expressed the view that the scheme is in the interests of Auswide's shareholders in the absence of a superior proposal. I return to the approach adopted in that report below. Mr Ahmed also points to the disclosure in the scheme booklet and the verification process adopted in respect of the scheme booklet.
ASIC has here had a reasonable opportunity to examine the proposed scheme and scheme booklet, to make submissions and has had the necessary notice of this hearing and has indicated that it does not currently propose to appear to make submissions or intervene to oppose the scheme at this hearing. 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 a notice of the second Court hearing in a national newspaper, where Auswide will publish that notice on ASX in accordance with current scheme practice.
Mr Ahmed recognises that a court will not ordinarily summon a scheme meeting unless the scheme 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. He submits, by reference to authority, that the determination to convene the meeting is preliminary to the final determination which is to be made when the matter comes back to the court for approval after the holding of the meetings that have been directed.
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].
I have summarised the principles which apply to the exercise of the Court's discretion whether to convene a scheme meeting in, among many cases, Re Villa World Ltd [2019] NSWSC 1207 ("Villa World") at [15]-[19] and, in Re Absolute Equity Performance Fund Ltd [2022] FCA 933 at [18]-[22], Halley J summarised these 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]."
Turning now to the exercise of the Court's discretion, the scheme is an orthodox acquisition scheme to effect a merger of two companies. Auswide's directors here recommend that its shareholders vote in favour of the scheme, in the absence of a superior proposal and provided that the independent expert does not withdraw its conclusion that the scheme is in the best interests of Auswide's shareholders. The independent expert, Kroll Australia Pty Ltd ("Kroll"), has expressed the view that the scheme is in the best interests of Auswide's shareholders, in the absence of a superior proposal and that the scheme is fair to Auswide shareholders. This view has been formed using a merger of equals approach, which Kroll considers, on balance, is the appropriate approach. Kroll also expresses the opinion that, if the scheme were evaluated on the basis that it is a takeover or change of control transaction, the scheme is not fair, but it is reasonable and still in the best interests of Auswide shareholders. I return to the approach adopted in that report below. I accept that, subject to several further matters noted by Mr Ahmed that I address below, there is nothing in the terms of the scheme, or in its effect on Auswide 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.
[5]
Further matters
Mr Ahmed also addresses several further matters. First, Mr Ahmed points out that the SIA contains certain exclusivity and break-fee provisions. Mr Ahmed also points out that cll 10.2 - 10.4 of the SIA provide for "no existing discussions" warranties by Auswide and MyState and "no-shop", "no-talk" and "no due diligence" obligations on Auswide, MyState and MyState Bank. Clause 10.5 of the SIA sets out a fiduciary carve out in respect of the "no-talk" and "no due diligence" obligations. Clause 10.6 of the SIA allows an exception for business-as-usual presentations and responses to inquiries that are made, and fulfilment of Auswide's and MyState's continuous disclosure obligations. Clause 10.7 of the SIA requires Auswide and MyState to provide notification if there is an approach with respect to a competing transaction. Clause 10.8 of the SIA creates a "matching right" in respect of any competing transaction. I accept that exclusivity provisions in this form are now commonplace in schemes of arrangement and are not inconsistent with the Takeovers Panel's guidance as to "deal protection": Villa World at [23]. I recognise that the "no talk" and "no due diligence" restrictions are here subject to the Auswide board's fiduciary or statutory obligations and the exclusivity provisions are disclosed in the scheme booklet.
The Court is 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 proposal should be subject to a fiduciary carve out; and the provisions should be clearly disclosed in the explanatory statement sent to shareholders: Re Arthur Yates & Co Ltd (2001) 36 ACSR 758; [2001] NSWSC 40 at [9]; Re TPG Telecom Ltd [2020] NSWSC 772 at [22]; Re Isentia Group Ltd [2021] NSWSC 910 at [23]; Re Asaleo Care Ltd [2021] FCA 406 at [55]. The "exclusivity period" in the SIA extends to 31 March 2025 or such other date as is agreed in writing by the parties. Mr Ahmed submits and I accept that this period is reasonable where significant regulatory approvals are required. These matters give rise to no reason not to approve the scheme meeting.
Second, Mr Ahmed recognises that cl 11.2 of the SIA provides that a break fee of $2 million may be payable by Auswide to MyState in specified circumstances, which do not include a failure by Auswide shareholders to vote in favour of the scheme at the scheme meeting. The amount of the break fee is approximately 1% of the equity value of Auswide of $202.84 million as at 16 August 2024 (being one business day before the date of the SIA). Clause 12.2 of the SIA in turn provides for a "reverse break fee" of $2 million that may be payable by MyState to Auswide in certain circumstances. The contractual acknowledgements provide that the parties recognise that Auswide and its shareholders will incur significant costs if the scheme is not implemented and that the parties have received legal advice on the operation of this clause. I accept that break fees are also common features in schemes of arrangement and will be permitted unless the amount of the break fee is such that it could influence voting at the meeting to be convened or if there are some unusual circumstances: Villa World at [24]. The break fee here represents approximately 1% of the total implied equity value of Auswide on a fully diluted basis, based on the scheme consideration, which accords with the Takeover Panel's 1% guideline. This matter also gives rise to no reason not to convene the scheme meeting.
Third, Mr Ahmed points out that Auswide has put in place arrangements to deal with existing performance rights in connection with the scheme and these matters are addressed in paragraphs 31-37 of Mr Schafer's affidavit. No directors of Auswide are entitled to such performance rights. The scheme booklet discloses that, on 3 October 2024, the Auswide board resolved (subject to the Court convening the scheme meeting) to accelerate the vesting of 80,615 unvested Auswide performance rights issued for the financial year ended 30 June 2023 and these Auswide shares will be able to participate in the scheme. The Board also resolved that the remaining 53,123 unvested Auswide performance rights, issued for the financial year ended 30 June 2022, would lapse for no consideration. Mr Ahmed submits and I accept that this approach provides no reason not to convene a scheme meeting and that holders of Auswide performance rights who are also Auswide shareholders are not in a separate class of members by reason only that they also hold such rights: Re Cashcard Australia Ltd (2004) 48 ACSR 738; Re Foster's Group Ltd (No 2) [2011] VSC 547 at [38]-[43]; Re A2B Australia Ltd [2024] NSWSC 185 at [13].
Fourth, Mr Ahmed addresses the question of performance risk. He points out that MyState and My State Bank have executed a deed poll by which they agree to be bound by the scheme and the terms of the scheme provide that the transfer of Auswide shares is conditional on the scheme consideration being provided. He submits and I accept that this is an accepted manner of managing performance risk in respect of a scheme of this kind: Ellerston at [29].
Fifth, Mr Ahmed recognises that, as I noted above, the independent expert (Kroll) has expressed the view that the scheme is in the best interests of Auswide shareholders on the basis of a "merger of equals" approach, and that, if that approach was not adopted, the independent expert would consider that the scheme is not fair but is reasonable and therefore in the best interests of Auswide shareholders. Mr Ahmed submits and I accept that a scheme meeting may be convened even if an independent expert forms the view that the scheme is not fair but is reasonable and therefore in the best interests of shareholders, since whether the scheme should be approved is a matter for shareholders to determine at that meeting: Re Beadell Resources Ltd [2018] WASC 410 at [59]-[64].
Sixth, Mr Ahmed recognises the uncertainty, which I noted above as to whether the condition precedent as to approval under the FSS Act will be obtained within the timeframes allowed. He submits and I accept that, where the parties have taken all steps within their power to date to ensure that the condition can be satisfied, and it would be premature to conclude that the condition necessarily cannot be met, the Court should convene the scheme meeting, and I note the same approach was taken in Re Capitol Health Ltd [2024] FCA 1120 at [29]-[34]. I also take that approach, noting that Auswide can approach the Court to adjourn the scheme meeting if it is ultimately necessary for it to do so.
Seventh, Mr Ahmed addresses Auswide's proposed communications with shareholders, in addition to the scheme booklet and scheme meeting materials. These communications will take the form of sending reminder to vote communications to members, the establishing an inbound information line to answer shareholders' queries, an outbound call campaign in respect of the largest 4,000 retail shareholders, an engagement process in relation to sophisticated and institutional shareholders and proxy advisors, and the establishment of a website to access the scheme booklet and information regarding the scheme. Auswide also proposes to make ASX announcements relating to the outcome of the first Court hearing, the dispatch of the scheme booklet, the receipt of certain regulatory approvals, and to publish the Chair's address and presentation prior to the scheme meeting. Mr Ahmed notes that Auswide draws these matters to the Court's attention, although in accordance with recent practice, no orders are sought approving the form of these communications: Re InvoCare Ltd [2023] NSWSC 1180 at [26]; Practice Note SC Eq 4 [26(k)].
Auswide's proposes to undertake undertaken unscripted communications with sophisticated and institutional shareholders. Mr Ahmed recognises the Court's observations in Re ResApp Health Ltd [2022] NSWSC 1353 ("ResApp Health") and Re Altium Ltd [2024] NSWSC 736 ("Altium") as to communications of that character and submits that Auswide will keep records of communications with those shareholders that Auswide recognises the practical risks that such communications may pose and intend to take steps to ensure those risks do not manifest here. Mr Ahmed submits that, consistently with ResApp Health at [44]:
"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."
I have addressed this issue in Altium (at [34]) and again in Re Pacific Smiles Group Ltd [2024] NSWSC 812. I accepted an approach of this kind with some reluctance in those cases, although I also there noted that this approach may require the review of communications at these meetings at the second Court hearing and drew attention to the difficulties from unscripted communications that arose, for example, in ResApp Health. There is real importance in consistency in decision-making in respect of schemes of arrangement and I will take the same approach here.
[6]
Exemption under US Securities Act
If the scheme is approved by the Court, MyState intends to rely on the Court's approval of the scheme for the purpose of qualifying for exemption from the requirements of s 3(a)(10) of the Securities Act 1933 (US) in connection with the new MyState shares that will be issued pursuant to the scheme. Mr Ahmed recognises that there are several requirements to come within that exemption, including that the issuer of securities advises the Court before the hearing that it will rely on the exemption in the event the Court approves the scheme: Re Permanent Trustee Co Ltd (2002) 43 ACSR 601 at [11] to [20]. I note this matter which may otherwise be deferred to the second Court hearing.
[7]
Determination and orders
For these reasons, I made the orders sought by Auswide at the conclusion of the first Court hearing on 22 October 2024.
[8]
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: 30 October 2024