- Australian Securities Commission v Marlborough Gold Mines Ltd

Particular matters

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.
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.
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.
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].
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].
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].
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.
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].
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.
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.
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)."
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.
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.
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."
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."
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.

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