- Australian Securities Commission v Marlborough Gold Mines Ltd

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. 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].
In Re Absolute Equity Performance Fund Ltd [2022] FCA 933 at [18]-[22], Halley J summarised these principles 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]."

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. MSL 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 MSL in return for consideration being paid to its shareholders. Mr Ahmed submits and I accept that the scheme is bona fide and properly proposed, where it provides for the acquisition of shares in an unlisted public company and the independent expert has concluded that the scheme is in the best interests of MSL's shareholders in the absence of a superior proposal. 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 and to make submissions; it has had the necessary notice of this hearing; and, as I noted above, it has indicated that it does not currently propose to appear to make submissions or intervene to oppose the scheme at this hearing. The relevant procedural requirements under the Rules have generally been met, and I will relieve MSL from compliance with Rule 3.4 of the Rules on the basis that an announcement will be published on its website.
Mr Ahmed also addresses several further matters. First, he addresses the question of performance risk and points out that BidCo has executed a deed poll under which it has undertaken to pay the scheme consideration under the scheme if it becomes effective, and to perform all actions attributed to it under the scheme. I accept that this is an accepted manner of managing performance risk in respect of a scheme of this kind: Ellerston at [29].
Second, Mr Ahmed addresses the funding arrangements directed to BidCo's obligation to pay the scheme consideration. Mr Ahmed points out that BidCo intends to fund the scheme consideration with a combination of equity committed by the Adamantem Fund or other Adamantem investors and third party debt financing. On 17 December 2024, Bidco, Green Holdco and the Adamantem Fund entered into a deed by which the Adamantem Fund committed to provide an amount to BidCo which, with the debt financing, is sufficient to fund the scheme consideration. BidCo has also entered into a binding debt commitment letter under which lenders agree to provide a facility of up to $72 million. Mr Ahmed points out that it is expected that, prior to the second Court hearing, this letter will be superseded by a long form agreement and related funding documentation.
Third, Mr Ahmed addresses break fees in respect of the scheme. BidCo and MSL originally contemplated a novel, two tranche break fee, one tranche of which was significantly higher than is ordinarily seen in schemes. If that structure had been pressed, a question of principle would have arisen as to whether it should be accepted, and I would have requested ASIC to appear and make submissions as to that matter; a second question would have arisen as to whether the scheme booklet adequately disclosed the commercial reasons for the departure from previously common scheme practice as to the level of break fees and its implications for shareholders in MSL; and a third question would have arisen whether the somewhat formulaic evidence led in support of the larger tranche of the break fee provided sufficient justification for it. That structure was not pressed at the first Court hearing and the scheme proponents varied their arrangements to adopt a conventional break fee structure. The varied break fee is not payable merely because MSL shareholders do not approve the scheme at the scheme meeting. That varied break fee was the subject of commercial negotiations; it now represents about 1% of the implied equity value of the scheme and will likely not exceed the bidder's costs and out of pocket expenses; and that break fee, as varied, is disclosed in the scheme booklet. I accept that break fees of this size and kind are common features in schemes of arrangement and will be permitted where the amount of the break fee is not such that it could influence voting at the meeting to be convened and there are no other unusual circumstances: Re Villa World Ltd (2019) 139 ACSR 550; [2019] NSWSC 1207 ("Villa World") at [24]. The varied break fee is consistent with the Takeover Panel's 1% guideline and this matter now gives rise to no reason not to convene the scheme meeting.
Fourth, Mr Ahmed addresses exclusivity provisions in respect of the scheme. 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].
Mr Ahmed points out that cll 10.1-10.5 of the SID impose "no current discussions", "no-shop", "no-talk" and "no due diligence" obligations on MSL and cl 10.6 of the SID provides a fiduciary carve out in respect of the "no talk" and "no due diligence" obligations. Clause 10.7 contains notification requirements if MSL makes available non-public information about it to a person in connection with a Competing Proposal (as defined) and cl 10.8 of the SID requires notification by MSL of, inter alia, an approach with respect to a Competing Transaction. Clauses 10.9-10.10 of the SID allow a "matching right" in respect of any Competing Transaction. The "exclusivity period" in the SID extends to 16 June 2025 which is not an unreasonably long period, given the nature of the transaction. These provisions also gives rise to no reason not to convene the scheme meeting.
Fifth, Mr Ahmed also refers to the approach that MSL will adopt in dealing with existing options and incentive arrangements, as set out in paragraphs 36-50 of Mr Toussaint's first affidavit and disclosed in the scheme booklet. Broadly, MSL has an employee share option plan ("ESOP") and a short-term variable remuneration plan, under which executive directors and other members of senior management may be paid cash or issued equity. MSL proposes that MSL options will be cancelled and that option holders will receive the difference between the scheme consideration and the exercise price per share in respect of the options. Mr Erdos, an Executive Director of MSL, will be provided with a cash payment of $855,327 under the short-term variable remuneration plan, if the scheme becomes effective, calculated by reference to deferred performance bonuses for FY2022 and FY2023 and an incentive payment linked to a liquidity event such as the scheme. Mr Yule, the Chief Executive Officer of MSL, will receive a cash payment of $895,778 following the grant of options to him under the ESOP. The interests of directors who hold options, or will receive payments in connection with the short term variable remuneration plan, are disclosed in the Scheme booklet. Attention is properly also drawn to Messrs Erdos' and Yule's interests in respect of the MSL directors' recommendation in relation to the scheme. Where these matters are disclosed in the scheme booklet, I accept that it is open to the relevant directors of MSL 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].
Sixth, Mr Ahmed draws attention to further arrangements made in relation to the MSL options and variable remuneration plan, which are addressed paragraphs 41-50 of Mr Toussaint's affidavit and disclosed in the scheme booklet. I accept these arrangements reflect BidCo's legitimate commercial interest in the retention of key executives, and their incentive arrangements, following implementation of the scheme was an important matter. The effect of the agreement is that several MSL executives ("Committed Individuals") would be asked to commit to subscribe for shares in Green HoldCo on or after the implementation of the scheme, using all or part of the consideration received from the cancellation of equity incentives or the payment of bonus or incentive arrangements by the MSL Group. Other persons who remained employees of the MSL Group and who wished to subscribe not less than $10,000 would also be offered the opportunity to reinvest proceeds from the cancellation of MSL options or from outstanding bonuses in Green HoldCo in shares in Green HoldCo. Mr Ahmed points out that the Committed Individuals, and MSL's Chief Platform Officer, have each executed a deed poll committing to reinvest all or part of the proceeds from the cancellation of their MSL options and/or the cash incentive payments triggered by the change in control of MSL in Green HoldCo, although the amount that will be reinvested is substantially smaller than the amount that they will receive as scheme consideration for the shares that they hold in MSL.
Mr Ahmed here submits that: "… the way in which the [MSL] options and other incentive payments are to be addressed does not give rise to any need to create separate classes, or otherwise provide a reason that the [s]cheme meeting should not be convened. All shareholders of [MSL] will be treated in the same way in respect of the shares that they hold in the company. In particular, all shareholders will receive the same consideration in respect of their shares in [MSL] if the [s]cheme is implemented. As noted above, there are certain employees of [MSL] who hold options and the right to other incentive payments. The arrangements in respect of those options and incentive payments are not the subject of the [s]heme and are instead to be dealt with outside it. As noted above, the amount that they will receive is equivalent to the [s]cheme [c]onsideration insofar as they will receive the [s]cheme [c]onsideration, less the exercise price for the options that they hold. In respect of those persons, they have been or will be offered the opportunity to reinvest some or all of the proceeds from their options and incentive payments into Green HoldCo. This does not give rise to the need to create classes, or any other issues for the following reasons."
Mr Ahmed refers to Re Hills Motorway Ltd (2002) 43 ACSR 101; [2002] NSWSC 897 at [12], where Barrett J observed that separate classes of shareholders are generally only required in a scheme of arrangement where: "… the rights and entitlements of the different groups, viewed in the totality of the scheme's context, are so dissimilar as to make it impossible for them to consult together with a view to their common interest. The focus is not on the fact of differentiation but on its effects. The extent and nature of the differentiation must be measured in terms of the effect on the ability to consult together in a common interest or, in other words, the ability to come together in a single meeting and to debate the question of what is good or bad for the constituency as a whole and where the common good lies. Only if the differentiation destroys that ability - the word used by Bowen LJ is "impossible" - does class distinction come to prevail."
A broadly similar approach was adopted by Beach J in Re Healthscope Ltd (2019) 139 ACSR 608; [2019] FCA 542 ("Healthscope") at [106]-[107]. Mr Ahmed also draws attention to First Pacific Advisors LLC v Boart Longyear Ltd (2017) 121 ACSR 136; [2017] NSWCA 116 at [80], where Bathurst CJ (with whom Beazley P and Leeming JA agreed) noted that: "The test seems to me to involve three questions. First, what are the rights which existing creditors (or members) have against the company and to what extent are they different. Second, to what extent are those rights differently affected by the scheme. Third, does the difference in rights or different treatment of rights make it impossible for the creditors (or members) in question to consider the scheme as one class."
Mr Ahmed also points to the need for caution in creating separate classes, except in a clear case: Healthscope at [118]. He then submits that: "Consistently with this, ordinarily divergent commercial interests that are external to share membership will not be a factor which differentiates classes, although this may be a question of degree. Two, the fact that there is no need for separate classes in this case is supported by the fact that all [MSL] shareholders will be treated in the same way under the Scheme. As noted above, under the [s]cheme, all shareholders will receive the same cash consideration in respect of their shares. The [s]cheme does not otherwise provide for any shareholders to be treated in a differential way. While some executives and management of [MSL] will have the opportunity to reinvest the proceeds arising from the cancellation of their options and relinquishment of other incentive payments, that opportunity does not arise under the [s]cheme and is instead tied to their position as employees of [MSL]… Three, even if one were to focus on the ability of the employees and executives to reinvest in Green HoldCo, that does not mean that they are treated in a way that is so dissimilar to the other shareholders so as to "destroy" their ability to consult with the other shareholders, or to otherwise make such consultation "impossible". This result flows from the fact that under the [s]cheme all shareholders are treated in an equivalent manner. As such, they are each in a position to form a view, using the same basic considerations, as to whether the [s]cheme is to be approved.
Mr Ahmed also points to the relatively small amounts that will be the subject of the proposed reinvestment by the Committed Individuals and the additional executive who has committed to reinvestment and submits that the ability to reinvest these amounts does not make their interests "so dissimilar to other shareholders as to prevent consultation between them." Finally, he refers to other cases, although not in identical circumstances, where employees' ability to reinvest the cash proceeds from equity incentives has not given rise to the need for the creation of classes in respect of voting at scheme meetings: for example, Re Excelsior Gold Ltd [2018] FCA 2064; Re APM Human Services International Ltd [2024] NSWSC 1095 ("APM"); Re Bionomics Ltd [2024] NSWSC 1440.
I accept that these matters do not have the result that the interests of the executives and other MSL shareholders are so dissimilar as to make it impossible for them to consult together with a view to their common interest at a scheme meeting, and do not require separate classes of shareholders. However, as in APM, the votes of the Committed Individuals and other with the opportunity to invest in Green HoldCo should be tagged, so that the Court can assess whether the requisite majorities would have been achieved on the votes of MSL shareholders who did not have that opportunity.
Seventh, Mr Ahmed notes that three MSL executives with substantial shareholdings in MSL have also executed support deeds under which they agree to vote, or procure the voting, of certain MSL shares controlled by them in favour of the scheme, in the absence of a superior proposal. Those shares represent approximately 19.5% of MSL shares. An arrangement of this kind ordinarily does not require the supporting shareholders to vote in a separate class: Healthscope at [117]
Eighth, Mr Ahmed addresses MSL's proposed communications with shareholders in respect of the scheme. MSL proposes to make several announcements to its shareholders concerning the scheme and to establish an inbound shareholder information line. MSL 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]. Mr Ahmed also notes that it is proposed that MSL's Chief Executive Officer, Mr Yule, will make "courtesy" telephone calls to some MSL shareholders prior to the distribution of the scheme booklet to inform them that the booklet will soon be distributed, which will not go beyond matters set out in the scheme booklet, and will focus on the need for court approval, the voting process (depending on the nature of the holding) and the method by which a proxy form may be lodged. This continues a trend to unscripted communications with shareholders in recent schemes. I accept that the content of these calls can properly be reviewed at the second Court hearing.
Ninth, Mr Ahmed addresses the distribution of scheme documents, which will take place to MSL shareholders in accordance with common scheme practice. He points out that 120 persons hold beneficial interests in MSL shares through a custodian and that, although those persons are not shareholders, MSL proposes to provide to them material in relation to the scheme, and information as to how they may provide instructions to the custodian should they wish to direct it in respect of voting on the scheme. Mr Ahmed submits that this method of distribute material to those beneficial holders substantially mirrors the method of distribution to shareholders and I see no difficulty with it.
Tenth, for completeness, I have referred above to the possibility that MSL will pay a dividend in connection with the scheme. 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]; Re Pacific Smiles Group Ltd [2024] NSWSC 812 at [18]; Re Sunland Group Ltd [2024] NSWSC 1591 at [15]. This also gives rise to no reason not to convene the scheme meeting.
These matters, separately and together, give rise to no reason not to convene the scheme meeting.

At a glance

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Judgment (8 paragraphs)

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Legislation Cited (3)

Cases Cited (36)

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