Australian Securities Commission v Marlborough Gold Mines Ltd

Affidavit and other evidence

1. Pacific Smiles reads the affidavit dated 11 June 2024 of its solicitor, Ms Whitby which exhibits a company extract in respect of Pacific Smiles obtained from the Australian Securities and Investments Commission ("ASIC") and an announcement made by Pacific Smiles to ASX on 29 April 2024 in respect of the proposed scheme.
2. Pacific Smiles also reads the affidavit dated 24 June 2024 of its non-executive chair, Ms Peach, who outlines the nature of Pacific Smiles' business and refers to the terms of the SID and the Amended SID. She also outlines the background to the scheme, arising from Pacific Smiles' receipt of an unsolicited, non-binding indicative proposal from a third party to acquire its shares for a lesser price than the present scheme, and involving negotiations with and the provision of non-exclusive due diligence access to several parties, resulting in Pacific Smiles' entry into the SID and Amended SID with NDC BidCo. Ms Peach also refers to the scheme consideration and to the Permitted Dividend (as defined), which contemplates that Pacific Smiles may declare and pay one or more fully franked dividends to shareholders of up to A$0.12 in aggregate for each Pacific Smiles share, and the scheme consideration will be reduced by an amount equal to the cash amount paid by way of the Permitted Dividend.
3. Ms Peach also outlines the structure of the proposed scheme booklet and refers to the conditions precedent and break fee arrangements in respect of the scheme; to Pacific Smiles' capital structure; and the treatment of Pacific Smiles' performance rights in respect of the proposed scheme. She also refers to the interests of Pacific Smiles' directors and to the payment of a "special exertion payment" to them from 1 January 2024 to 30 June 2024; to cash rights granted to Mr Vidler, the Chief Executive Officer and Managing Director of Pacific Smiles and how they will be treated under the proposed scheme; the board's recommendation that Pacific Smiles' shareholders vote in favour of the proposed scheme; the board's approval of the scheme documents and the manner in which the proposed scheme will be held; and Pacific Smiles' proposed announcement to ASX in respect of the second Court hearing, in accordance with current scheme practice.
4. Pacific Smiles also reads the affidavit dated 24 June 2024 of Mr Schmidt, who is an investment manager at CCPM and a director of NDC BidCo and its immediate holding company. Mr Schmidt addresses the process adopted for verification of bidder information in respect of the scheme booklet, the entry into a deed poll by NDC BidCo in favour of Pacific Smiles' shareholders, and the funding of the scheme consideration by equity and by a debt facility.
5. By her affidavit dated 23 June 2024, Ms Turner, a solicitor acting for Pacific Smiles in respect of the scheme, refers to correspondence with ASIC in respect of the scheme verification process adopted in respect of the scheme booklet and the dispatch of scheme materials, each of which are in common form, and to Pacific Smiles' intention in respect of reminder to vote emails and letters and a proposed outbound call campaign, shareholder information line and informal engagement campaign in respect of Pacific Smiles' largest shareholders. By a second affidavit dated 24 July 2024, Ms Turner refers to revisions to the proposed scheme booklet and annexes a letter received from ASIC, in common form, which reserves ASIC's position in respect of s 411(17)(b) of the Act to the second Court hearing, and indicates that ASIC did not propose to appear to make submissions or intervene to oppose the scheme at this Court hearing.

Application of the relevant principles

1. Mr Izzo rightly 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 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 section 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].
2. The principles which apply to the exercise of the Court's discretion whether to convene a scheme meeting have been summarised in, among many cases, my decision in Re Villa World Ltd [2019] NSWSC 1207 at [15]-[19]. 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].
3. Mr Izzo also refers to Halley J's summary of the applicable principles in Re Absolute Equity Performance Fund Ltd [2022] FCA 933 at [18]-[22] 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]."
4. Mr Izzo submits and I accept that each of the preconditions to the exercise of the Court's discretion in s 411 of the Act is satisfied in this case. Pacific Smiles is a company registered under the Act and a Part 5.1 body and the scheme is an "arrangement" between Pacific Smiles and its shareholders as a single class. As I noted above, 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 Pacific Smiles will publish that notice on ASX in accordance with current scheme practice.
5. Turning now to the exercise of the Court's discretion, Pacific Smiles' directors unanimously recommend that Pacific Smiles shareholders vote in favour of the scheme, provided that no Superior Proposal (as defined) emerges and the independent expert does not withdraw or adversely change its conclusion that the scheme is in the best interests of Pacific Smiles shareholders; and, subject to the same qualifications, each director of Pacific Smiles who holds or controls Pacific Smiles shares intends to vote, or cause to be voted, those Pacific Smiles Shares in favour of the scheme. In its independent expert's report, Deloitte Corporate Finance Pty Limited has assessed the fair market value of Pacific Smiles shares on a control basis to be within the range of $1.80 to $2.17 after considering a market multiples valuation approach and a discounted cash flow valuation approach; has noted that the scheme consideration of $1.90 falls within that range of values for a Pacific Smiles share; and has expressed the opinion that the scheme is "fair" and "reasonable" and therefore in the best interests of Pacific Smiles shareholders in the absence of a superior proposal. Mr Izzo submits and I accept that, subject to the particular matters that I address below, there is nothing in the terms of the scheme, or in its effect on Pacific Smiles 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

1. Recognising Pacific Smiles' ex parte disclosure obligation in an application of this kind, Mr Izzo draws several aspects of the scheme to the Court's attention.
2. First, Mr Izzo points out that, as I noted above, Pacific Smiles shareholders may be entitled to receive an additional "Ticking Fee" in specified circumstances, broadly, if there is a Court or government agency ruling, undertaking or similar in effect against NDC BidCo or CCPM in effect on 28 September 2024 which restrains or prohibits implementation of the scheme. Mr Izzo submits and I accept that there is nothing objectionable about the proposed Ticking Fee, where it provides an additional possible benefit to Pacific Smiles shareholders, although that benefit is of modest size if the "End Date" of 31 December 2024 is not extended. The case law has previously accepted a contingent uplift or ticking fee in respect of a scheme: Re Village Roadshow Ltd [2020] FCA 1669 at [37]; Re Origin Energy Ltd [2023] NSWSC 1246 at [5], [9], [26], [41]. Plainly, the payment of a Ticking Fee would not avoid Pacific Smiles' disclosure obligation in respect of material matters that might give rise to a restraint on implementation of the scheme, but there is presently no reason to think that it has not complied with that obligation.
3. Second, Mr Izzo, points out that, as disclosed in section 9.2 of the scheme booklet, Pacific Smiles operates short term and long term employee incentive plans. He points out that Pacific Smiles Performance Rights (as defined) are issued under long term incentive plans; different terms and conditions apply to different tranches of Pacific Smiles Performance Rights; and the scheme booklet refers to relevant "tranches" of Pacific Smiles Performance Rights and their proposed treatment under the scheme. He also points out that Pacific Smiles' Chief Executive Officer and Managing Director, Mr Vidler was granted Pacific Smiles Cash Rights (as defined) as a long term incentive, in the context of his appointment at a time that a potential control transaction would likely be considered. Mr Izzo also addresses the proposed treatment of these rights. He also refers to a short-term incentive plan operated by Pacific Smiles, pursuant to which eligible Pacific Smiles employees would receive an award, partly in cash and partly in Pacific Smiles Performance Rights (or, in the case of Mr Vidler, Pacific Smiles Cash Rights), subject to performance hurdles being met over the relevant financial year. Mr Izzo submits and I accept that holders of incentive rights who are (or will become) shareholders are not in a separate class by reason only that they hold those rights, and cash payments to holders of incentive entitlements also do not require the formation of a separate class: Re ELMO Software Pty Ltd [2023] NSWSC 12 at [25]; Re Oz Minerals Ltd [2023] FCA 197 at [63]. Mr Vidler's entitlements are disclosed in the scheme booklet, including in respect of his participation in making a recommendation to shareholders in respect of the scheme.
4. Third, Mr Izzo also points out that, as disclosed in section 5.12(b) of the scheme booklet, in February 2024, the Pacific Smiles board approved the payment of additional remuneration to each of the non-executive Directors for the period from 1 January 2024 to 30 June 2024 in respect of additional time and services provided in connection with the scheme and earlier potential control transaction proposals and, on 21 May 2024, the Pacific Smiles board approved the continuation of the additional remuneration payment until the scheme is implemented or the scheme resolution is not passed by the requisite majorities. The additional remuneration is not conditional on the scheme becoming effective. The case law has accepted that fees of this kind, where disclosed in the scheme booklet, do not prevent directors from making a voting recommendation to the relevant shareholders and do not provide reason not to order the convening of the scheme meeting: Re MyDeal.com.au Ltd [2022] NSWSC 1094 at [41]-[43]; Re Genex Power Ltd [2024] NSWSC 752 at [17]-[18].
5. Fourth, Mr Izzo points out that, as I also noted above, the Amended SID permits the Pacific Smiles board to declare and pay one or more dividends with a maximum aggregate amount of $0.12 per Pacific Smiles share, with a corresponding reduction in the scheme consideration; and the chair's letter and sections 1.1(i) and 2 of the scheme booklet disclose that the Pacific Smiles board currently intends to pay a Permitted Dividend up to that cash amount, to be determined based on Pacific Smiles' profits and equity reserves at the time of declaring it, and subject to the scheme becoming Effective (as defined). Mr Izzo submits and I accept that the payment of the Permitted Dividend does not give rise to any issue of financial assistance by Pacific Smiles to NDC BidCo in its acquisition of the Pacific Smiles shares, for the purpose of s 260A of the Act: Re Blackmores Ltd [2023] FCA 624 at [29]-[30].
6. Fifth, Mr Izzo addresses the question of performance risk. He points out that the scheme requires NDC BidCo to deposit the scheme consideration into a trust account maintained by or on behalf of Pacific Smiles on trust for scheme shareholders, and the transfer of Pacific Smiles shares from Pacific Smiles shareholders to NDC BidCo will occur only after the scheme consideration is received on trust or distributed to Pacific Smiles shareholders. On 21 June 2024, NDC BidCo also 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; and the Deed Poll is governed by the law of New South Wales and contains a non-exclusive jurisdiction clause in favour of New South Wales. I accept that these are well-established means of managing performance risk, although I also note that arrangements of this kind do not fully address the loss of opportunity to shareholders if a scheme does not proceed because the bidder lacks funding to complete it: ELMO at [27]-[28]; Re Altium Ltd [2024] NSWSC 736 ("Altium") at [26].
7. Mr Izzo also notes that NDC BidCo intends to fund the Scheme Consideration through funds received from its ultimate holding company, drawn down under a legally binding commitment letter from that company, which will source its funding from CCPM's current investment vehicle which is a $1 billion fund raised in 2022; and from its direct holding company, drawn down under a legally binding funding commitment letter from that company, which will source its funding from a syndicated debt facility subject to meeting customary conditions precedent to drawdown. The total amount available to NDC BidCo under these commitment letters are in aggregate sufficient to fund the aggregate scheme consideration, including the maximum number of Pacific Smiles incentives which are expected to vest in connection with the scheme and any Ticking Fee which may accrue prior to the End Date, and these matters are, properly, addressed by Mr Schmidt's evidence.
8. Sixth, Mr Izzo addresses the exclusivity period in respect of the proposed scheme. He points out that cl 7 of the Amended SID imposes a number of restrictions and obligations on Pacific Smiles in relation to negotiations with third parties such as "no current discussions" (subject to disclosed existing discussions), "no shop", "no talk" and "no due diligence" restrictions, a "notification of approach" obligation and a "matching right". Mr Izzo submits and 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": Re Villa World Ltd (2019) 139 ACSR 550 at [23].
9. Mr Izzo also recognises that 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]. Mr Izzo recognises that, in determining whether an exclusivity period is reasonable, Courts have taken into account matters including the complexities of the transaction and potential delay in obtaining regulatory approvals, particularly where there are lengthy review periods associated with obtaining such approvals; the period required to actually effect the scheme proposal; the operation of the break fee provisions with respect to the exclusivity period; and the level of control the bidder has over the target's actions by operation of the break fee provisions: Re Tatts Group Ltd [2017] VSC 552 ("Tatts Group") at [38]-[42]; Re Origin Energy Ltd [2023] NSWSC 1246 ("Origin Energy") at [33]. Mr Izzo points out that the "Exclusivity Period" as defined in the Amended SID is approximately 8 months, and I accept that exclusivity period is not unreasonable in the circumstances, and less than the exclusivity periods accepted in some cases, generally involving more complex transactions: Tatts Group at [36]; Re Sirtex Medical Ltd [2018] FCA 1315 at [37]; Re Nzuri Copper Ltd (No 4) [2020] WASC 10 at [29]-[30]; Re Trust Co (Re Services) Ltd as responsible entity of VitalHarvest Freehold Trust [2021] NSWSC 108 at [38]-[40]; Origin Energy at [33]. I recognise that the "no talk" and "no due diligence" restrictions are here subject to the Pacific Smiles board's fiduciary or statutory obligations and the exclusivity provisions are disclosed in the scheme booklet. These matters give rise to no reason not to approve the scheme meeting.
10. Seventh, Mr Izzo addresses a break fee payable by Pacific Smiles to NDC BidCo in specified circumstances, as disclosed in the scheme booklet. 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 Pacific Smiles 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.
11. Eighth, Mr Izzo draws attention to a matter concerning a third party, Genesis Capital Manager I Pty Ltd ("Genesis Capital"), which had previously put two proposals to acquire all of Pacific Smiles' shares and was one of the parties with which Pacific Similes undertook negotiations and provided non-exclusive due diligence access, as described in the chair's letter and section 4.1 of the scheme booklet. Mr Izzo notes that, at the time of its first proposal to Pacific Smiles, and as disclosed to the ASX on 18 December 2023, Genesis Capital held an economic interest in 18.75% of the Pacific Smiles shares on issue pursuant to a cash settled total return swap, which was increased to a 19.90% economic interest as disclosed to the ASX on 24 January 2024. He also points out that: "On 18 June 2024, the Takeovers Panel made a declaration that the circumstances regarding this cash settled total return swap were unacceptable. It is not yet known what (if any) orders the Takeovers Panel will make in respect of this declaration, or whether there will be any application for review (see Scheme Booklet, Chairperson's letter and section 4.1). The Scheme Booklet discloses that Genesis Capital has not made any public statement as to its voting intention with respect to the Scheme (page 5 of Exhibit 1 to the Court Book)."
12. Mr Izzo points out, and I note that, to the extent that any orders made by the Takeovers Panel require supplementary disclosure or are otherwise relevant, they will be drawn to the Court's attention at the appropriate time.
13. Ninth, Mr Izzo addresses communications with Pacific Smiles shareholders. He notes that, inter alia, Pacific Smiles has appointed Morrow Sodali to operate an inbound telephone information line to respond to queries from Pacific Smiles shareholders in relation to the scheme, and a script for such calls is in evidence. Second, Pacific Smiles has appointed Morrow Sodali to conduct an outbound call campaign in respect for the proposed scheme and the script for such calls is also in evidence. Pacific Smiles draws these proposed communications to the Court's attention but does not seek orders approving them, in accordance with current scheme practice noted in InvoCare (at [26]) and Practice Note SC Eq 4 [26(k)]. I have noted these communications and no matters emerge from them which are likely to give rise to difficulty at the second Court hearing and which I should now draw to Pacific Smiles' attention.
14. Mr Izzo also notes that Pacific Smiles' financial advisor in relation to the scheme, Greenhill & Co. Australia Pty Ltd, proposes to conduct an informal shareholder engagement process for the 35 largest Pacific Smiles shareholders, which may also be conducted by Morrow Sodali or members of Pacific Smiles' management. He observes, by reference to Ms Turner's affidavit, that: "It is proposed that these discussions will not depart from the contents of the Scheme Booklet and the Inbound Call Script, and it is proposed that a detailed log or record is kept of each discussion."
15. Mr Izzo also submits that: "Consistently with [Altium] at [34] (Black J), … the proposed Informal Engagement Campaign does not give rise to any reason not to convene the Scheme Meeting but may require that evidence of the matters discussed at those meetings be led at the second Court hearing."
16. I accepted an approach of this kind, with some reluctance, in Altium at [29]ff, 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 Re ResApp Health Ltd [2022] NSWSC 135. There is real importance in consistency in decision-making in respect of schemes of arrangement and I will take the same approach here.

Determination and orders

1. For these reasons, I made the orders sought by Pacific Smiles at the conclusion of the first Court hearing on 25 June 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: 02 July 2024