Australian Securities Commission v Marlborough Gold Mines Ltd

Affidavit and other evidence

1. Sunland reads the affidavit dated 1 November 2024 of its solicitor, Mr Wrobel, which refers to the execution of a Scheme Implementation Agreement ("SIA") dated 23 October 2024 between Sunland and Sun Holdings and the indicative scheme timetable and exhibits a company extract in respect of Sunland.
2. By his affidavit dated 28 November 2024, Mr Grant Harrison, a director of Sunland and its Chief Financial Officer, refers to the history of Sunland, its entry into the SIA and the structure of the scheme. He outlines the rationale of the scheme, which follows a process by which Sunland completed active projects and sold undeveloped inventory in order to return funds to its shareholders. Mr Harrison also refers to the conditions precedent under the scheme, the structure of the payment mechanism under the scheme, the independent expert report which has been prepared by Grant Thornton in respect of the scheme and the verification process adopted in respect of the scheme booklet. He also addresses the proposed scheme meeting and consents of the proposed chair and alternate chair of that meeting, and Sunland's proposal to announce the amount of any Permitted Dividend paid to shareholders prior to that meeting. Mr Harrison also addresses the financial position of Sunland which is relevant to its capacity to pay that Permitted Dividend and proposed communications with shareholders, including the conduct of a shareholder information line. Mr Harrison's affidavit exhibits a draft scheme booklet and Ms Whittaker, with whom Mr Jameson appeared, took me through the draft scheme booklet in the course of submissions.
3. By an affidavit dated 29 November 2024, Mr Ronny Bakir, who is the sole director of Sun Holdings, addressed the exclusivity provisions contained in the SIA, the verification of information concerning Sun Holdings in the scheme booklet and the execution of a deed poll by Sun Holdings, and noted that the holding company of Sun Holdings has provided the full amount of the scheme consideration to Sun Holdings, which it now holds in its bank account as cleared funds, so as to fund the scheme consideration.
4. By his affidavit dated 28 November 2024, Mr Darren Pereira, also a solicitor acting for Sunland, addressed communications with the Australian Securities and Investments Commission ("ASIC") in respect of the scheme and exhibited marked up amendments to the proposed scheme booklet. By a second affidavit dated 3 December 2024, Mr Harrison referred to the updated draft scheme booklet and corrected one aspect of his earlier affidavit relating to the manner in which votes could be cast by Sunland shareholders in respect of the proposed scheme. Sunland also tendered a letter dated 2 December 2024 from ASIC, in conventional form, which reserved its position as to s 411(17)(b) of the Act to the second Court hearing but indicated that ASIC did not seek to appear at this hearing to make submissions or oppose the orders sought by Sunland.

Applicable principles

1. Ms Whittaker submits, uncontroversially, that the Court's role at a 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. The Court must first be satisfied 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; ASIC has had a reasonable opportunity to examine the proposed scheme and explanatory statement and make submissions, and has had 14 days' notice of the proposed hearing date; 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 Atlas Iron Ltd (2016) 112 ACSR 554 at [30]; Re Villa World Ltd [2019] NSWSC 1207 at [15]; Re Staging Connections Group Ltd [2015] FCA 1012 at [19]-[20]; Re Ellerston Global Investments Ltd [2020] NSWSC 879 ("Ellerston") at [25]; Re Vocus Group Ltd [2021] NSWSC 630 at [12]; Re Pacific Smiles Group Ltd [2024] NSWSC 812 ("Pacific Smiles") at [9].
2. These matters are satisfied here. As Ms Whittaker points out, Sunland is a Part 5.1 body in that it is a company registered under the Act and the proposed scheme is a common form of acquisition scheme that is an "arrangement" between Sunland and its shareholders. There is nothing in the commercial purpose of the scheme, for Sun Holdings to acquire Sunland's shares so as to bring Sunland's brand into the Homecorp family of brands, which is improper or not bona fide. ASIC was provided with relevant documents and there is no reason to doubt that it had a reasonable opportunity to examine the terms of the scheme and make submissions to the Court, as required by s 411(2)(b) of the Act and I have referred to its letter of intent in common form above. Sunland has complied with the procedural requirements under the Rules and Corporations Regulations, with modifications that are now commonly permitted.
3. Where these matters are satisfied, the Court will exercise a discretion whether to convene the scheme meeting, with regard to whether the proposed scheme is fit for consideration at the 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 properly informed as to the nature of the scheme before the scheme meeting: FT Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 at 72; Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485 at 504; Re Foundation Healthcare Ltd (2002) 42 ACSR 252 at [36] and [44]; Re CSR Ltd (2010) 183 FCR 358; [2010] FCAFC 34 at [58]; Re InvoCare Ltd [2023] NSWSC 1180 at [16]-[17]; Pacific Smiles at [10]. Ms Whittaker also refers to Halley J's summary of the applicable principles in Re Absolute Equity Performance Fund Ltd [2022] FCA 933 at [19]-[22], as follows: "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) ... 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]."
4. Sunland's directors unanimously recommend to Sunland shareholders that they vote in favour of the scheme and those directors intend to vote (or procure the voting of) their respective shares in Sunland in favour of the scheme, in the absence of a superior proposal and subject to the independent experts continuing to conclude that the scheme is fair and reasonable and in the best interests of Sunland. I have referred to the conclusion reached by the independent experts' report above. Ms Whittaker submits and I accept that there is no reason to think, as matters stand and subject to the specific matters noted below, that the Court would not approve the scheme under s 411(4)(b) of the Act at the second Court hearing.

Other matters

1. Ms Whittaker also addresses several other matters. First, she addresses the question of performance risk. Ms Whittaker points out that Sun Holdings has signed and delivered a deed poll binding it to comply with its obligations under the SIA and to do all acts and things necessary or desirable on its part to give full effect to the scheme, and Homecorp has also executed the deed poll and undertakes in favour of each scheme participant to unconditionally and irrevocably guarantee the obligations of Sun Holdings. The transfer of Sunland shares to Sun Holdings is conditional upon the scheme consideration having been paid into a trust account operated by Sunland for the purpose of paying those funds to Sunland shareholders. I accept that this is an accepted manner of managing performance risk in respect of a scheme of this kind: Ellerston at [29]. Although Sun Holdings is a special purpose entity, its capacity to make that payment is reinforced by the fact that, on or around 15 November 2024, Homecorp provided to Sun Holdings, in cleared funds, the full amount of the scheme consideration (assuming no Permitted Dividend is declared) from its cash reserves. Ms Whittaker submits and I accept that these steps alleviate performance risk associated with a bid by a special purpose vehicle.
2. Second, Ms Whittaker notes that there is no break fee in relation to the scheme, although the SIA contains 'no shop' (cl 9.2), 'no talk' (cl 9.3) and 'no due diligence' (cl 9.4) restrictions upon Sunland along with a matching right (cl 9.8). The 'no talk' and 'no due diligence' clauses are subject to a fiduciary carve out in cl 9.5. Each restriction applies for the 'Exclusivity Period' which is relevantly the earlier of the termination of the SIA, the implementation of the scheme, and the end date (which means 30 June 2025). 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]. These matters give rise to no reason not to convene the scheme meeting.
3. Third, Ms Whittaker addresses the position as to the Permitted Dividend. She points out that the scheme consideration is $0.0675 per Sunland share (totalling approximately $9.2 million) less any Permitted Dividend of up to $0.0650 per Sunland share. The prospect of the Permitted Dividend being declared and paid is prominently disclosed in the scheme booklet, including in the letter from Sunland's chair (Ex GH-1, 9-14), in the "Frequently Asked Questions" (at section 2) and in the "Summary of the Scheme" (sections 3.3 to 3.4 and 3.10). The letter from Sunland's chair also indicates the range of scheme consideration which is payable by Sun Holdings depending upon the quantum of the Permitted Dividend, between $342,273.79 (if a Permitted Dividend of $0.0650 per share is paid, totalling $8.889 million) and $9,241,392.26 (if no Permitted Dividend is paid). Ms Whittaker also points out that whether or not the Permitted Dividend will be declared and paid is a matter to be determined by Sunland's directors, subject to the requirements of s 254T of the Act and, I should add, their statutory and general law directors' duties. Ms Whittaker also notes that the Sunland directors' current intention is to declare and pay a fully franked Permitted Dividend in the amount of $0.065, paid from drawing down on its current cash and retained earnings, and their determination whether to do so, and if so in what amount, will be communicated to Sunland shareholders before the scheme meeting. The payment of the Permitted Dividend is subject to and conditional upon the scheme becoming Effective (as defined). However, the scheme is not conditional on payment of the Permitted Dividend and, if it is not paid, Sunland shareholders will still receive the total scheme consideration of $0.0675, in that case fully paid by Sun Holdings. Ms Whittaker also points out that the reduction in the scheme consideration payable by Sun Holdings if the Permitted Dividend is paid is commensurate with the reduction in the net assets of Sunland resulting from the cash outflow following the payment of the Permitted Dividend to Sunland shareholders; and that the payment of a Permitted Dividend may have tax benefits for some shareholders depending upon their personal circumstances, as it is expected to be fully franked at the tax rate of 25%.
4. Ms Whittaker submits that, in these circumstances, the payment of the Permitted Dividend does not constitute financial assistance for the purposes of s 260A of the Act. I am inclined to accept that submission, where neither Sun Holdings nor (it appears) any of its associates has a relevant interest or voting power in the target and will not receive the dividend; the decision to declare it remains in the discretion of Sunland's board; and, importantly, where the dividend reduces the cash consideration payable by the bidder, it does so in a manner which is commensurate with the reduction in the target's net assets reflecting the cash outflow from the payment of the dividend: Re Legend Corporation Ltd [2019] FCA 1249 at [74]-[75]; Re Citadel Group Ltd (2020) 148 ACSR 598 at [49]-[52]; Re Origin Energy Ltd [2023] NSWSC 1246 at [38]; Pacific Smiles at [18]. Ms Whittaker also submits that, even if the Permitted Dividend did constitute financial assistance, it would be permitted by s 260A where it does not materially prejudice the interests of the company or its shareholders, or the company's ability to pay its creditors. I am inclined to think that matter is also established by paragraphs 65ff of Mr Harrison's affidavit evidence as to this matter.
5. Ms Whittaker points out that, in correspondence concerning the scheme, ASIC requested Sunland's representatives to provide authorities and previous schemes of arrangement that considered a special or Permitted Dividend that formed a substantial part of the value shareholders would receive under the scheme. Ms Whittaker acknowledges that Sunland has not been able to locate any authority or examples of previous schemes where such a significant dividend has been proposed. However, she submits that: "In any event, the size of the Permitted Dividend is not a reason not to make the orders sought convening the Scheme Meeting, nor a reason why the Scheme will not be approved at the second court hearing, for the following key reasons: (a) First, the Scheme is not dependent upon the Permitted Dividend being paid and the decision as to whether to declare and pay such a dividend is a matter wholly in the discretion of Sunland's board (noting that they presently intend to declare it in the full amount). If it is not declared and paid, Sun Holdings remains obligated to pay the full amount of the Scheme Consideration of A$0.0675. On any scenario, Sun Holdings will pay some amount of Scheme Consideration. For example, if the maximum dividend is declared and pay, Sun Holdings will pay approximately $342,273 whereas if no Permitted Dividend is paid, Sun Holdings will pay the full amount of the Scheme Consideration of $9,241,392. These figures have since been included in the Draft Scheme Booklet, as requested by ASIC, and in recognition of the fact that Sunland shareholders may be interested to know these figures when deciding how to vote. (b) Second, the payment of the Permitted Dividend reduces the cash position of Sunland. It is economically rational that Sunland and Sun Holdings would agree to reduce the [s]cheme [c]onsideration in a commensurate way if such a dividend is paid (and indeed, as the authorities referred to above concerning financial assistance make clear, that is one reason why such a dividend would not be considered to be financial assistance under s 260A of the Corporations Act). (c) Third, the payment of Permitted Dividend may have tax benefits to some shareholders, as appears commonplace in schemes of arrangement where dividends are proposed: Re Blackmores Limited [2023] FCA 624 at [30] …. It may be reasonably anticipated that, provided there is no material prejudice to the company or its shareholders or creditors (as here, as to which Mr Harrison gives evidence), a shareholder may well be agnostic as to whether they receive the economic value of their shares as a dividend or as cash, although they may well prefer the dividend if that had favourable taxation consequences. (d) Fourth, the [s]cheme is occurring in the context of a long-standing and express [s]trategy to return net assets to Sunland's shareholders. In that respect, a total of A$468.9 million net assets have already been returned to shareholders following progressive dividends and capital distributions. In turn, Sun Holding's stated purpose in acquiring the Sunland shares in those circumstances is to be able to continue to use the Sunland brand going forward. In this sense, the [s]cheme has a commercially-rational purpose even if the Permitted Dividend comprises a significant portion of the economic value that the Sunland shareholders are realising. (e) Fifth, notwithstanding Sun Holding's stated purpose, Sunland is projected to retain a positive net asset position after the [s]cheme completes. The projected forecasting by Sunland if the Scheme proceeds, as disclosed in the [s]cheme [b]ooklet, records that Sunland will continue to have net assets of $7.2 million after the [s]cheme is implemented, (assuming that Sunland pays the maximum Permitted Dividend of A$8.9 million). Mr Harrison gives evidence that his best estimate based upon his experience in the market is that the projected defect liabilities remaining with Sunland until the defect periods lapse are approximately $900,000. As such, Sunland retains sufficient cash to pay out those liabilities following the [s]cheme based upon those estimates. (f) Sixth, Mr Harrison explains why the Permitted Dividend may not be able to be paid if the [s]cheme does not proceed (and the [s]cheme [b]ooklet discloses for shareholders' benefit, at section 5.7 (Table 1), the financial forecasting in that scenario). In particular, Mr Harrison gives evidence that Sunland's forecasted operating costs over and above the prospective defect liabilities which are projected to be incurred if the Scheme does not go ahead has the effect that the directors of Sunland would need to consider whether or not to declare such a dividend if the Scheme is not implemented. That is, the directors would need to assess the commercial context in which Sunland finds itself if the [s]cheme does not proceed, before determining whether to declare a dividend and if so in what amount. Whether or not such operating costs are incurred by Sunland following the Scheme is of course a matter for Sun Holdings (and its corporate group that Sunland will become part of following the Scheme). In this respect, Mr Bakir gives evidence that Sunland will be able to take advantage of Homecorp's existing administrative infrastructure to reduce costs that might otherwise be ongoing (including costs relating to insurance). As such, there is a rational commercial reason why the Permitted Dividend is subject to the [s]cheme becoming Effective (noting, as referred to above, that the [s]cheme is not itself dependent upon the Permitted Dividend being declared and paid). (g) Seventh, in addition to the above, the Permitted Dividend and its features are prominently disclosed to shareholders in various places in the [s]cheme [b]ooklet. The directors' decision as to whether to declare the Permitted Dividend, and its amount, will be made and communicated to shareholders before the [s]cheme [m]eeting by way of a notice on Sunland's website. It follows that Sunland's shareholders will be apprised of proper disclosure in the [s]cheme [b]ooklet as to the nature of the Permitted Dividend, the quantum of that Permitted Dividend and the quantum of the [s]cheme [c]onsideration in fact payable by Sun Holdings, before making their decision as to how to vote at the [s]cheme [m]eeting."
6. While I would generally accept these submissions, it seems to me that this question can be resolved more simply. I can see no reason why the approach to a Permitted Dividend should depend on whether it is a larger or smaller proportion of the scheme consideration where, as I noted above, its payment will correspondingly reduce both the assets in the target company acquired by the acquirer and the amount the acquirer pays to acquire them, and that effect will be the same irrespective of its amount; it appears the Permitted Dividend here does not contravene s 260A of the Act; and scheme shareholders will be informed of the amount to be paid prior to the scheme meeting and can take that into account in their vote at that meeting. I can see no reason, in principle, why a larger Permitted Dividend would give rise to any reason not to convene the scheme meeting in these circumstances where a smaller or middle-sized Permitted Dividend would not do so. For those reasons, this matter also does not give rise to any reason not to convene the scheme meeting.

Determination and orders

1. For these reasons, I made the orders sought by Sunland at the conclusion of the first Court hearing on 3 December 2024.

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