Australian Securities Commission v Marlborough Goldmines Ltd

WHITE J: 1 This judgment concerns an application by RHS Limited (RHS) for an order pursuant to s 411(1) of the Corporations Act 2001 (Cth) that a meeting of its shareholders be convened to vote on a scheme of arrangement and for approval of the explanatory memorandum to accompany the notice of the meeting. 2 RHS is a public company listed on the Australian Stock Exchange. Its registered office and principal place of business is in Thebarton, South Australia. RHS is engaged in the development of advanced patented single cell genomic technologies for use in in-vitro fertilisation embryo screening and in cancer and in prenatal testing. It has approximately 500 shareholders and has issued a little less than 90 million ordinary shares. The market capitalisation of RHS presently is of the order of $24 million. 3 Under the proposed scheme of arrangement, PerkinElmer Holdings Pty Ltd (PKI Holdings) will acquire all of the ordinary shares in RHS in consideration of payment of $0.28 in cash for each share. RHS will then become a wholly-owned subsidiary of PKI Holdings which is, in turn, a wholly-owned Australian subsidiary of PerkinElmer Inc (PKI), a company incorporated under the laws of Massachusetts in the United States of America. 4 Chapter 5 of the Corporations Act contemplates a three-stage process in the approval by the members of a company of scheme of arrangements of the present kind: CSR Ltd [2010] FCAFC 34; (2010) 183 FCR 358 at [7]. The three stages are: (a) the application to the Court for an order for the convening of the scheme meeting and the approval of the explanatory statement to be sent to members concerning the scheme (s 411(1)); (b) the holding of the scheme meeting at which members (or a relevant class of members) vote on the proposed scheme (s 411(4)(a)); and (c) the application to the Court to approve the proposed scheme (s 411(4)(b)). 5 The Court is presently concerned with the first of these stages. The approach at this interlocutory stage is well established. Ordinarily, the Court will not order a meeting to be convened 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 will be likely to approve it on the hearing of an application which is unopposed: FT Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 at 72. The High Court approved that approach in Australian Securities Commission v Marlborough Goldmines Ltd (1993) 177 CLR 485 at 504. 6 There are a number of matters about which the Court must be satisfied before making an order and giving an approval under s 411(1). They are: (a) the plaintiff is a "Part 5.1 body"; (b) the proposed scheme is "an arrangement" within the meaning of s 411 of the Act; (c) the explanatory statement will provide proper disclosure to the members of the company so that, amongst other things, they will have available all the main facts relevant to the making of their decision concerning the scheme; (d) the scheme is bona fide and properly proposed; (e) ASIC has had a minimum of 14 days' notice of the proposed hearing date of the first Court hearing and, in addition, a reasonable opportunity to examine the proposed scheme and explanatory statement, and to make submissions concerning it; and (f) compliance with procedural requirements, including those set out in rr 3.2-3.4 of the Federal Court (Corporations) Rules 2000 (Cth). 7 The Court does not at this stage consider the business or commercial efficacy of the scheme. 8 In order to establish the matters about which the Court must be satisfied, RHS relies on the affidavits of a number of deponents being these: (i) the affidavit of Dr Michelle Fraser, the Managing Director and Chief Executive Officer of RHS, made on 13 April 2018; (ii) the affidavit of Dr David Brookes, its Non-executive Chairman, made on 12 April 2018; (iii) the affidavit of Johnathon Matthews, a Non-executive Director of RHS, made on 12 April 2018; (iv) the affidavits of its solicitor, John Keeves, made on 20 March 2018 and 16 April 2018; (v) the affidavit of Andrea De Cian, the Chartered Accountant within Grant Thornton Corporate Finance Pty Ltd who has prepared an independent expert's report with respect to the scheme of arrangement, made on 16 April 2018; and (vi) the affidavit of Prahlad Singh, the Executive Vice President of PKI, made on 16 April 2018. 9 These affidavits establish the first, second, third and sixth matters listed earlier, and it is not necessary to discuss them further. 10 ASIC has provided a letter dated 16 April 2018 addressed to Dr Fraser and to Mr Wilksch at the solicitors for RHS, in which it confirms that it has had at least 14 days' notice of today's hearing and that it considers that it has had a reasonable opportunity in which to consider the proposed scheme. The evidence establishes that ASIC was provided with a draft of the proposed scheme booklet on 23 March 2018, that since then the solicitors for RHS and ASIC officers have corresponded concerning the terms of the proposed scheme booklet, and that the present draft of the scheme booklet reflects suggestions and comments made by ASIC officers. In those circumstances, I am satisfied that the requirements of s 411(2) in relation to ASIC are satisfied. 11 I am also satisfied that the scheme is bona fide and properly proposed. The price per share to be paid by PKI Holdings is almost twice the price at which shares in RHS traded immediately before the announcement of the proposed takeover on 23 February 2018 and during the periods of one and three months before that date, considered on a volume weighted basis; Grant Thornton has provided an independent expert's report which assesses the fair value of each RHS share at between $0.23 and $0.29 per share; the Grant Thornton assessment is supported by a rationale which, on its face, seems appropriate; a copy of the Grant Thornton report is to be an annexure to the scheme booklet; all of the Directors of RHS recommend acceptance of the PKI Holdings offer and propose voting all the shares which they control (some 14,262,037 shares) in favour of the scheme; and the obligations of PKI and PKI Holdings under the scheme, including their obligations with respect to payment, are supported by a Deed Poll given in favour of RHS and its shareholders. 12 In respect of that last matter, Mr Singh has annexed to his affidavit a copy of the Deed Poll executed by both PKI and PKI Holdings. RHS will provide at the second hearing evidence of the due execution of the Deed Poll in the manner contemplated by Yates J in Re Ecosave Holdings Ltd, in the matter of Ecosave Holdings Ltd [2015] FCA 1121 at [16] and by Markovic J in Re Medical Australia, in the matter of Medical Australia Ltd [2017] FCA 1304 at [27]. As things stand, it seems that the Deed Poll provides, in a conventional way, a safeguard to the shareholders of RHS against so-called "performance risks". 13 Dr Fraser has deposed to the circumstances leading to the proposed scheme. There is no reason to consider that the purposes for which the scheme is advanced are not bona fide. I am also satisfied that there is no reason to think that the scheme booklet will not disclose to members all the matters relevant to their decision concerning the scheme. I note, in addition, in this respect that Dr Fraser, Mr Singh and Mr Keeves have each deposed to aspects of the process of verification of the statements in the scheme booklet and to the satisfaction of the regulatory requirements with respect to the content of the scheme booklet. 14 There are several persons who hold options with respect to shares in RHS. Some of these are its directors. Each of the option holders has executed an Option Cancellation Deed with RHS and PKI for the cancellation of their options, subject to the implementation of the scheme. The consideration to be paid to the option holders under the Option Cancellation Deeds does not exceed the intrinsic value of the options. 15 Counsel for RHS has submitted, and I accept, that the treatment of the RHS shareholders who also hold options does not create a separate class. That is to say, I do not see a basis upon which it should be concluded that the rights and entitlements of the ordinary shareholders, on the one hand, and the shareholders who are option holders, on the other, are so dissimilar as to make it impossible for them to consult together with a view to their common interest: Re Wattyl Ltd [2010] FCA 854 at [15]-[17]; Re SMS Management and Technology Ltd [2017] VSC 257 at [15]. 16 The Scheme Implementation Agreement does provide in clause 14.2 for a break fee of $251,777. That fee is approximately 1% of the market capitalisation of RHS. I accept that it does not become payable only because the members do not approve the scheme. Dr Fraser, Mr Singh and Mr Keeves have deposed, and there is no reason not to accept, that the break fee is the result of a normal commercial arm's length negotiation and that it reflects a reasonable estimate of the costs likely to be incurred by PKI in connection with the scheme and the Option Cancelation Deeds. I am satisfied that the break fee in this case is not likely to be regarded by members of the RHS as being so onerous as to have a coercive effect in their consideration of the scheme. 17 Clause 12 of the Scheme Implementation Agreement provides, in different ways, for PKI and PKI Holdings, to have exclusivity during the period in which its offer is current. These arrangements include a "no shop clause", a "no talk clause" and a "no due diligence clause". I am satisfied that these clauses are operative for ascertainable periods which do not extend beyond those which are reasonable in the circumstances. In addition, clause 12 provides for a carve out so as to accommodate the fiduciary duties of the directors during the periods involved. 18 I see no reason for the Court not to be satisfied that the order pursuant to s 411(1) is appropriate or to consider that the explanatory memorandum should not be approved. In fact, I am positively satisfied that the order is appropriate and that approval should be given to the explanatory memorandum. That being so, I will make orders in the terms of the minutes provided by the Plaintiff, subject to the minor alterations which I will make to the terms of the minutes provided to me and which I have initialled. I certify that the preceding eighteen (18) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice White.