- Australian Securities Commission v Marlborough Gold Mines Ltd

Other matters

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.
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.
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%.
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.
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."
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.

At a glance

Court

Decision date

Before

Source

Judgment (7 paragraphs)

Parties

Legislation Cited (2)

Cases Cited (21)

Cited By (3)