Australian Securities Commission v Marlborough Gold Mines Ltd

Affidavit evidence

1. Damstra reads the affidavit dated 21 February 2024 of Ms Alexandra Whitby, a solicitor acting for it in the application, which exhibit a current and historical company extract in relation to Damstra obtained from the Australian Securities and Investments Commission ("ASIC") and the ASX announcement to which I referred above.
2. Damstra also reads the affidavit dated 7 March 2024 of Mr Johannes Risseeuw, its executive director and chair. Mr Risseeuw refers to the terms of the proposed scheme and outlines the contents of the scheme booklet. He identifies the conditions precedent to the scheme and indicates that he is not aware of any matter that is likely to result in the failure of the scheme due to any condition precedent not being satisfied or waived. He also refers to break fees payable in specified circumstances, which I address below. He also outlines the position in respect of incentive plans offered by Damstra, in which participate, and the manner in which Damstra options, Damstra conditional rights and Damstra cash incentives are to be treated under the scheme. Mr Risseeuw also refers to the proposed repayment of a loan facility with a third party in connection with the scheme, and to the terms on which warrants issued to that third party would be terminated in connection with the scheme.
3. Mr Risseeuw also draws attention to Ideagen's entry into call option deeds with entities associated with Mr Risseeuw and Damstra's executive director and chief executive officer, Mr Christiana Damstra, by which Ideagen has acquired call options which, if exercised, would result in it acquiring an aggregate of 15.25% of the issued share capital in Damstra. Mr Risseeuw indicates that the directors of Damstra unanimously recommend that its shareholders vote in favour of resolutions in respect of the scheme and also outlines the process adopted for verification of the scheme booklet, which was in conventional form, and the manner in which the scheme meeting is proposed to be conducted as a virtual meeting. He notes that Damstra proposes to publish an announcement to ASX as to the date of the second Court hearing.
4. By an affidavit dated 7 March 2024, Ms Olivia Blakiston, also a solicitor acting for Damstra, refers to correspondence with ASIC in respect of the proposed scheme and to the manner in which the scheme documents are to be dispatched, which is conventional in character, and to Damstra's intention to operate an in-bound information line for Damstra shareholders who call with questions in relation to the scheme. Damstra made the script to be used in such calls available for review although it did not seek approval of it, and I have reviewed that script and have no concerns with it.
5. By an affidavit dated 6 March 2024, Mr Benjamin Dorks, who is the Chief Executive Officer and a director of Ideagen outlined the verification process adopted by Ideagen in respect of information concerning it contained in the scheme booklet, which was also in conventional form, referred to the execution of a deed poll by Ideagen and the bidding entity in favour of Damstra shareholders, outlined the manner in which Ideagen will fund the scheme consideration and addressed Ideagen and the Ideagen Group's interests in Damstra shares arising from the call options to which I referred above.
6. Damstra also tendered a draft scheme booklet (Ex P1A), and Mr Izzo took me through the contents of that scheme booklet in submissions, and also referred to proposed amendments to the scheme booklet (Ex P1B) which included, inter alia, reference to the Damstra conditional rights which I noted above. Damstra also tendered the final version of the scheme booklet (Ex 1) incorporating those amendments, and a letter dated 7 March 2024 from ASIC which, in common form, reserved ASIC's position under s 411(17)(b) of the Act and indicated that ASIC did not propose to appear or intervene at the first Court hearing.

Applicable principles

1. Mr Izzo submits, rightly, that this scheme is a conventional acquisition scheme which raises not issues of particular novelty. Mr Izzo also rightly points out that the Court's role at the first Court hearing in respect of a scheme is primarily 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; 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 of the 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] and the authorities there cited; Re Vocus Group Ltd [2021] NSWSC 630 at [12]). Mr Izzo also recognises 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 section 411(1) of the Act, and he refers to Halley J's summary of the applicable principles in Re Absolute Equity Performance Fund Ltd [2022] FCA 933 at [18]-[22].
2. Mr Izzo submits and I accept that each of the preconditions to the exercise of the Court's discretion in s 411(1) of the Act is met here. Damstra is a company registered under the Act and a Part 5.1 body and the scheme is an "arrangement" between Damstra and the Damstra shareholders as a single class; Damstra lodged the draft scheme booklet and its attachments with ASIC together with notice of the first Court hearing date and, as I noted above, ASIC has confirmed that it does not currently propose to appear to make submissions or intervene to oppose the scheme at this hearing. The evidence to which I have referred above confirms that the scheme booklet has been the subject of a verification process and the procedural requirements under the Supreme Court (Corporations) Rules have been met, other than to the extent that Damstra seeks common variations of procedural requirements of the Act and the Rules.
3. In order to convene a scheme meeting, the Court must also be satisfied that the scheme is fit for consideration by Damstra's shareholders 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 ("Invocare") at [16]-[17].
4. Mr Izzo here points out that Damstra's board has unanimously recommend that Damstra shareholders vote in favour of the scheme, in the absence of a superior proposal (as defined in the Scheme Implementation Deed) and subject to the independent expert concluding (and continuing to conclude) that the scheme is in the best interests of Damstra shareholders. Each of the directors who holds or controls Damstra shares also intends to vote, or cause to be voted, all Damstra shares held or controlled by them in favour of the scheme. Mr Izzo notes that the directors of Damstra have been issued options, conditional rights and cash incentives under a Damstra incentive plan, and will receive a benefit if the scheme proceeds, by the treatment of their options, conditional rights and cash incentives. That benefit is fairly disclosed in the scheme booklet and does not prevent the directors making a recommendation in respect of the scheme, as I will note below. Mr Izzo also notes that Damstra has obtained a report from Grant Thornton which expresses the view that the scheme is "fair" and "reasonable" and therefore in the best interests of Damstra shareholders in the absence of a superior proposal, having regard to the advantages and disadvantages associated with the scheme and the fair market value of Damstra shares on a control basis, by reference to Damstra's discounted cash flow, revenue multiple, and quoted security price. Mr Izzo submits and I accept that, if the scheme receives the statutory majorities required by s 411(4)(a)(ii) of the Act at the scheme meeting, there is presently no reason to think that the terms of the scheme, or in its effect on Damstra shareholders, would warrant the Court declining to approve the scheme at the second Court hearing. The Court therefore has power under s411(1) of the Act to convene the scheme meeting.

Other aspects of the scheme

1. Mr Izzo also recognises Damstra's ex parte disclosure obligation and draws several aspects of the scheme to the Court's attention.
2. First, he draws attention to the fact that Damstra operates employee incentive plans under which long-term and short-term incentives in the form of options, conditional rights and cash incentives are granted or issued, as disclosed in section 7.4 of the scheme booklet, and that, broadly, the conditions precent to the scheme require that those incentives be cancelled or extinguished. Mr Izzo also notes that the manner in which Damstra intends to satisfy this condition is set out in section 11.3 of the scheme booklet. Mr Izzo recognises that, if the scheme becomes effective, each of Damstra's directors (or entities associated with them) will receive a cash payment as consideration when the options and cash incentives held by those entities are cancelled or extinguished. Mr Izzo draws attention to the case law that has recognised 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 directors are not generally prevented from making a recommendation if such disclosure is made, and directors and employees who receive consideration in respect of the cancellation or extinguishment of their cash incentives are not for that reason alone to be placed in a separate class: 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]; Re Healthia Ltd [2023] NSWSC 1296 at [21]. I accept that the interests of the Damstra directors are sufficiently disclosed in the chairman's letter and in section 11 of the scheme booklet and these matters provide no reason not to convene the first Court hearing.
3. Second, Mr Izzo points out that, as I noted above, entities associated with Messrs Risseeuw and Damstra have each entered into call option deeds with Ideagen by which Ideagen can acquire a total of 15.3% of the issued Damstra shares. Mr Izzo points out that those call options deeds are disclosed in the chairman's letter and sections 5 and 8.6(a) of the scheme booklet and, if Ideagen exercises its right under the call option deeds, it is precluded from voting those Damstra shares in favour of the scheme. Mr Izzo also notes that the call options are exercisable if there is a public announcement of a competing proposal, or an intention to undertake a competing proposal, before 25 September 2024, and their exercise price is $0.24 per Damstra share, which is the same as the scheme consideration. Mr Izzo submits and I accept that the case law indicates that call options to acquire shares at a price equivalent to the scheme consideration, which are triggered by the emergence of a competing proposal, do not give rise to different interests that require Messrs Risseeuw and Damstra or their associated entities to vote in a separate class at the scheme meeting: Re Mitchell Communication Group Ltd [2010] VSC 423 at [35]-[38]; Re MAC Services Group Ltd (2010) 80 ACSR 390; [2010] NSWSC 1316 at [16]; Re Aston Resources Ltd [2012] FCA 229 at [47]. Mr Izzo also submits and I accept that such call options may be regarded as a form of exclusivity provision, but no issue of fiduciary carve out arises and they are sufficiently addressed by disclosure: Re Aston Resources Ltd above at [46]. He also points out that the maximum length of the option period of nine months in this case is equivalent to the period considered in Re Mitchell Communication Group above.
4. Third, Mr Izzo notes that, in reviewing the scheme booklet, ASIC raised some questions with respect to the due execution and enforceability of the deed poll provided by Ideagen in favour of scheme shareholders. Mr Izzo points out that Ideagen is a company incorporated in accordance with the laws of the United Kingdom and, on 6 March 2024, Ideagen executed the deed poll covenanting and undertaking in favour of scheme shareholders that it will, amongst other things, observe and perform its obligations under the scheme. Mr Izzo notes that, consistent with the approach contemplated in Practice Note SC EQ 4 - Corporations List [28(a)] and with case law including Re Blackmores Ltd [2023] FCA 624 at [18]-[19] and [22] and Re Chesser Resources Ltd [2023] FCA 1021, Ideagen has not led evidence of English law as to the due execution of the deed poll by Ideagen. Mr Izzo points out that the case law indicates that, where a deed poll in respect of a scheme contains a jurisdiction clause in favour of an Australian jurisdiction (as it does in the present case) evidence of the enforceability of the deed poll in the relevant jurisdiction is not required: Re BIS Finance Ltd [2017] NSWSC 1713 at [45]; Re Sundance Energy Aus Ltd [2019] FCA 1944 at [46]. I accept that, consistent with the Practice Note, evidence of due execution of a deed poll should only be necessary if a real uncertainty or issue exists in that respect. I proceed on the basis that Damstra and Ideagen do not consider such an uncertainty exists here; there is no reason to think that there is any uncertainty as to the requirements of English law for execution of a deed poll, and I note that Damstra has responded to ASIC's questions as to this matter and ASIC has now provided the letter to which I referred above. This matter does not give rise to any reason not to convene the scheme meeting.
5. Fourth, Mr Izzo draws attention to cl 6 of the Scheme Implementation Deed which imposes several restrictions and obligations on Damstra in relation to negotiations with third parties including "no shop", "no talk" and "no due diligence" restrictions, and a "notification of approach" obligation and a "matching right". The "no talk" and "no due diligence" restrictions and the "matching right" are subject to Damstra Board's fiduciary or statutory obligations. Mr Izzo submits and I accept that exclusivity provisions broadly in the form of this clause are now conventional (or at least commonplace) in schemes of arrangement and are not inconsistent with the Takeovers Panel's Guidance 7: Lock-up Devices; Re Villa World Ltd (2019) 139 ACSR 550 at [23] ("Villa World"). Mr Izzo also draws attention to matters to which the Court will have regard in assessing such provisions, including 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 must be clearly disclosed in the explanatory statement sent to shareholders: Re Asaleo Care Ltd [2021] FCA 406 at [55]. Mr Izzo points out that the exclusivity period here has an End Date (as defined) of 24 July 2024. He submits and I accept that a maximum exclusivity period of about six months is not unreasonable in the relevant circumstances, and I recognise that Courts have previously approved schemes with longer exclusivity periods: Re Tatts Group Ltd [2017] VSC 552 at [36]; Re Sirtex Medical Ltd [2018] FCA 1315 at [37]; Re Trust Co (RE Services) Ltd as responsible entity of VitalHarvest Freehold Trust [2021] NSWSC 108 at [38]-[40]. The exclusivity provisions are prominently disclosed in the section titled "Frequently Asked Questions" and section 11.9(a) of the scheme booklet. Again, the matters do not provide any reason not to convene the scheme meeting.
6. Fifth, Mr Izzo points out that cl 7.2 of the Scheme Implementation Deed provides for Damstra to pay to Ideagen a Break Fee, defined as $690,000, in specified circumstances, provided that Ideagen has validly terminated the Scheme Implementation Deed in accordance with cl 10.2 of the Scheme Implementation Deed ("Damstra Break Fee"); and cl 7.3 of the Scheme Implementation Deed provides for Ideagen to pay to Damstra a Reverse Break Fee, also defined as $690,000, in specified circumstances, provided that Damstra has validly terminated the Scheme Implementation Deed in accordance with clause 10.1(c) of the Scheme Implementation Deed ("Ideagen Break Fee"). Mr Izzo also points out that both the Damstra Break Fee and the Ideagen Break Fee and the specified circumstances in which they are to be paid are disclosed in the "Frequently Asked Questions" and sections 11.9(b) and 11.9(c) of the scheme booklet. Mr Izzo submits and I accept that break fees are 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]. He points out that the Damstra Break Fee and Ideagen Break Fee represent approximately 1% of the total implied equity value of Damstra on a fully diluted basis based on the scheme consideration which accords with the 1% guideline in Takeover Panel Guidance Note 7. This matter does not give rise to any reason not to convene the scheme meeting.
7. Sixth, Mr Izzo notes that Damstra has engaged a third party ("Automic") to coordinate the despatch of the scheme materials to Damstra shareholders, conduct the scheme meeting and engage in other communications with Damstra shareholders. He refers to Ms Blakiston's evidence that Automic will operate an in-bound information line for Damstra shareholders to call if they have questions in relation to the scheme and to the script prepared for use by Automic representatives operating the shareholder information line. As I noted above, consistent with the approach in recent case law, Damstra does not seek the Court's approval of that script, although I have would drawn any concerns that I had with it to its attention: Re Essential Metals Ltd [2023] FCA 240 at [87]-[105]; Re DDH1 Ltd [2023] FCA 982; Invocare at [23]-[26]. This matter also does not give rise to any reason not to convene the scheme meeting.

Orders

1. For these reasons, I made the orders sought by Damstra at the conclusion of the First Court hearing on 8 March 2024.

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: 22 March 2024