- Australian Securities Commission v Marlborough Gold Mines Ltd

Supreme Court of NSW|2024-12-23|Before: Black J

Hamilton Locke (Plaintiff) Herbert Smith Freehills (Bidder) File Number(s): 2024/473892

Judgment

By Originating Process filed on 19 December 2024, the Plaintiff, Silk Logistics Holdings Limited ("Silk") applies for orders under ss 411 and 1319 of the Corporations Act 2001 (Cth) ("Act") relating to a proposed scheme of arrangement and associated orders.

Affidavit evidence

Silk reads the affidavit dated 19 December 2024 of Mr Terry Sinclair, who is a director and non-executive chair of Silk. Mr Sinclair refers to Silk's corporate history, its operations, and the terms of the proposed scheme. Mr Sinclair addresses the content of the scheme booklet, the conditions precedent to the scheme and the directors' recommendation that shareholders vote in favour of the scheme. He indicates that he consents to act as chair of the proposed scheme meeting and addresses the treatment of performance rights and options in connection with the scheme and verification of the scheme booklet. He also outlines the manner in which the scheme documents would be dispatched to shareholders and the proposed conduct of an online platform and telephone line to answer questions of Silk's shareholders. Silk has not presently determined whether to conduct a process of outgoing communications with its shareholders in respect of the scheme.
By an affidavit dated 20 December 2024, Mr Stephen Fletcher Moulton, who is also a non-executive director of Silk, and a member of an independent board committee which considered DP World Australia's initial proposal and made a recommendation to the Silk board in respect of that proposal, outlines exclusivity, break fee and material adverse change provisions in respect of the proposed scheme and consents to act as alternate chair of the scheme meeting if Mr Sinclair is not able to do so. He also gives evidence of a meeting of Silk's directors which approved the final scheme booklet and addresses the treatment of performance rights and options in connection with the proposed scheme. The present draft of the scheme booklet was exhibited to Mr Fletcher Moulton's affidavit and Mr Barnett took me through the scheme booklet at the first Court hearing.
Silk also reads an affidavit dated 20 December 2024 of Mr Peter Conomos, who is the Vice President, Finance for Oceania and Asia Pacific of DP World Australia, who addresses the verification process adopted by DP World Australia in respect of matters concerning it contained in the scheme booklet.
Silk reads the affidavit dated 19 December 2024 of its solicitor, Mr Justin Fox, who addresses the verification of the scheme booklet in relation to Australian tax implications and communications with the Australian Securities and Investments Commission ("ASIC") in respect of the proposed scheme. By a second affidavit dated 23 December 2024, Mr Fox referred to the final independent expert's report prepared by Kroll Australia Pty Ltd ("Kroll") in respect of the proposed scheme, which addressed comments raised by ASIC in respect of an earlier version of that report in late December 2024, and he also noted ASIC's indication that it had no further comments in respect of that report. The independent expert report prepared by Kroll has concluded that the scheme consideration of $2.14 per share falls within the expert's assessed value range for Silk's shares and that the scheme is fair and reasonable and in the best interests of Silk's shareholders in the absence of a superior proposal.
Silk also tendered a letter dated 20 December 2024 from ASIC which, in common form, reserved its position as to s 411(17)(b) of the Act to the second Court hearing, and indicated that it did not currently propose to appear to make submissions or intervene to oppose the scheme at the second Court hearing.

Applicable principles

It is, of course, well-established 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 Pt 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 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 Orion Telecommunications Limited [2007] FCA 1389 at [5]; Re Staging Connections Group Ltd [2015] FCA 1012 at [19]; Re Wridgways Australia Ltd [2010] FCA 1187 at [30]; Re Ellerston Global Investments Ltd [2020] NSWSC 879 ("Ellerston") at [25]; Re Vocus Group Ltd [2021] NSWSC 630 at [12].
The Court will not ordinarily summon a scheme meeting unless the scheme 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. He submits, by reference to authority, that the determination to convene the meeting is preliminary to the final determination which is to be made when the matter comes back to the Court for approval after the holding of the meetings that have been directed. 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; [1993] HCA 15; 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].
I have summarised the principles which apply to the exercise of the Court's discretion whether to convene a scheme meeting in, among many cases, Re Villa World Ltd [2019] NSWSC 1207 ("Villa World") at [15]-[19]. Mr Barnett refers to the summary of these principles in Re Absolute Equity Performance Fund Ltd [2022] FCA 933 at [18]-[22], where Halley J observed that: "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]."

Matters relevant to whether to convene the scheme meeting

I am satisfied that each of the preconditions to the exercise of the Court's discretion in s 411 of the Act is satisfied in this case. Silk is a company registered under the Act and a Pt 5.1 body. The proposed scheme is an "arrangement" within the scope of s 411 of the Act where it involves the acquisition of the shares in Silk in return for consideration being paid to its shareholders. Silk must also prove that the scheme is bona fide and properly proposed, and the scheme here provides, in common form, for the acquisition of Silk's shares. Mr Barnett points out that the commercial purpose of the scheme is described in the scheme booklet; an independent committee of non-executive board directors reviewed DP World Australia's proposal and recommended the SID to the Silk board; and the letter from Silk's chair in the scheme booklet sets out the reasons for its directors' recommendation of the proposed scheme. He submits and I accept that there is no reason to suggest that scheme is not bona fide or properly proposed.
ASIC has here had a reasonable opportunity to examine the proposed scheme and scheme booklet, to make submissions and has had the necessary notice of this hearing and, as I noted above, has indicated that it does not currently propose to appear to make submissions or intervene to oppose the scheme at this hearing. The procedural requirements under the Rules have been met, where I will dispense with the requirement for compliance with r 3.4 of the Rules to publish a notice of the second Court hearing in a national newspaper, where Silk will publish that notice on ASX in accordance with current scheme practice.
Mr Barnett also addresses several further matters. First, he addresses the question of performance risk and submits that the "usual" measures to address performance risk have been adopted. DP World Australia and DP World Australia (Holding) Pty Ltd ("DPWAH") have executed a deed poll in favour of all shareholders, by which DP World Australia covenants that it will perform its obligations to give effect to the scheme and DPWAH guarantees the performance of those obligations; and the transfer of scheme shares is conditional upon the scheme consideration being deposited into a trust account operated by Silk and is to occur only after Silk has distributed the scheme consideration to shareholders. I accept that this is an accepted manner of managing performance risk in respect of a scheme of this kind: Ellerston at [29]. Mr Barnett also addresses the question of the funding of the scheme consideration and points out that the funds required for the scheme consideration will be sourced from existing cash reserves and funds drawn from DP World Australia's existing facility with a consortium of Australian lenders and will be held in an Australian ADI prior to the scheme implementation. I am satisfied that these matters give rise to no reason not to convene the scheme meeting.
Second, Mr Barnett points out that there is a break fee ($1,745,119) in relation to the scheme, which is not payable merely because shareholders do not approve the scheme at the scheme meeting. There is evidence that the break fee was the subject of commercial negotiations, represents about 1% of the implied equity value of the scheme and is calculated as a genuine pre-estimate of the bidder's costs and out of pocket expenses and that break fee is disclosed in the scheme booklet. Mr Barnett submits that a break fee of this kind conforms with standard practice and is not a reason for the Court not to make the orders sought for the convening of the meeting. 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]. The break fee is here consistent with the Takeover Panel's 1% guideline. This matter also gives rise to no reason not to convene the scheme meeting.
Third, Mr Barnett notes that the SID contains "no shop" (cl 10.2), "no talk" (cl 10.3) and "no due diligence" (cl 10.4) restrictions, subject to a fiduciary exception (cl 10.5). Mr Barnett refers to Mr Moulton's evidence that he participated in the commercial negotiations concerning these restrictions and believes that these restrictions are reasonable and appropriate. Mr Barnett also submits that restrictions of this kind are common and were disclosed in Silk's announcement of the proposed scheme to ASX. Mr Barnett notes that the SID contains a "matching right" provision in the event of competing proposals, which includes a standstill requirement; an exclusivity period until 30 June 2025 and a right to match any competing proposal. 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": Villa World at [23]. 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]. This matter also gives rise to no reason not to convene the scheme meeting.
Fourth, the scheme contains deemed warranties by which shareholders are taken to have warranted to Silk and the bidder that their fully paid shares are free from any encumbrances or security interests, and these warranties are disclosed in the scheme booklet. The case law has accepted that approach: Re APN News and Media Ltd (2007) 62 ACSR 400 at [57]-[63]; [2007] FCA 770; Re Ardent Leisure Ltd [2018] NSWSC 1665 at [26]. This matter also gives rise to no reason not to convene the scheme meeting.
Fifth, Mr Barnett points out that the scheme consideration of $2.14 per share will be reduced if and to the extent that any Further Dividend (as defined) is declared prior to implementation of the scheme. He submits that such a reduction is appropriate given that the dividend reduces the net assets of the company; that each shareholder will nevertheless receive a total of $2.14 per share; and that no impermissible financial assistance is involved. The case law has recognised that the payment of a dividend of this kind generally does not constitute financial assistance for the purposes of s 260A of the Act, where the decision to declare it remains in the discretion of the scheme company's board and, although 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; [2020] FCA 1580 at [49] -[52]; Re Origin Energy Ltd [2023] NSWSC 1246 at [38]; Pacific Smiles at [18]; Re Sunland Group Ltd [2024] NSWSC 1591 at [15]. For completeness, Mr Barnett also points out that the board of Silk has confirmed that it does not presently intend to declare or pay a Further Dividend and will make an announcement through the ASX at least 10 days prior to the scheme meeting if that position changes.
Sixth, Mr Barnett also addresses the treatment of options and performance rights. He notes that the SID requires that Silk procure the cancellation of all options and, if the scheme becomes effective, all options will be cancelled in return for a cash payment equal to $2.14 less the applicable exercise price. Five of the directors of Silk hold options (as disclosed in the scheme booklet) and ASX has granted a waiver from ASX Listing Rule 6.23.2 to the extent necessary to permit those options to be cancelled for consideration without separate shareholder approval. Mr Barnett also points out that the SID requires that Silk procure the cancellation of all performance rights and, if the scheme becomes effective, all performance rights will be cancelled without any payment, and the bidder will offer new rights to existing performance rights holders. Mr Barnett also refers to the position of Mr Sood, as Chief Executive Officer, as addressed at [9.2.2] of the scheme booklet. Where these matters are disclosed in the scheme booklet, I accept that it is open to the relevant directors of Silk to make a recommendation concerning the scheme: Re Kidman Resource Ltd (2019) 139 ACSR 112; [2019] FCA 1226 at [115]; Re DWS Ltd (2020) 148 ACSR 616; [2020] FCA 1590 at [41]-[49]; Re McGrath Ltd [2024] NSWSC 555 at [25]. Mr Barnett also submits and I accept that the fact that some shareholders also hold options, which will be cancelled for a consideration roughly equal to their value (ie the scheme consideration price less option price, but without regard to time value) does not have the result that those shareholders have rights so dissimilar to the rights of other shareholders (who do not hold options) as to make it impossible for all shareholders (including option holders) to consider the scheme as one class.
Seventh, as I noted above, Silk proposes to establish an inbound shareholder information line and has not yet determined whether to undertake an outbound telephone call program. The scripts for the former were in evidence and no difficulty arises from them. Silk draws these proposed communications to the Court's attention in accordance with the usual practice but no orders are sought approving them: Practice Note SC Eq 4 at [26(k)] and Invocare at [26]. Any outbound communications with shareholders will need to be addressed at the second Court hearing.
These matters, separately and together, give rise to no reason not to convene the scheme meeting.

Exercise of the Court's discretion whether tom convene the scheme meeting

Turning to the wider issues relevant to the exercise of the Court's discretion whether to convene the scheme meeting, Mr Barnett submits that: "The [s]cheme is not inappropriate and is one that sensible businesspersons might consider of benefit, particularly having regard to the substantial premium over the pre-announcement trading price and the opinion of the experts. The Court should be satisfied that the [s]cheme [b]ooklet makes appropriate disclosure and that the [s]cheme is one which the Court would be likely to approve at an unopposed approval hearing."
As I noted above, the independent expert retained by Silk, Kroll, has expressed the view that the scheme is fair and reasonable and Silk's board has unanimously recommended the shareholders vote in favour of the scheme, in the absence of a superior proposal and provided that the independent expert does not withdraw its conclusion that the scheme is in the best interests of Silk's shareholders. No apparent difficulty arises with the disclosure in the scheme booklet and the verification process adopted in respect of the scheme booklet. I am satisfied that there is nothing in the terms of the scheme, or in its effect on Silk's 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.

Orders

For these reasons, I made the orders sought by Silk at the conclusion of the first Court hearing on 23 December 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: 14 January 2025

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