- Australian Securities Commissions v Marlborough Gold Mines Ltd

Supreme Court of NSW|2020-05-19|Before: Black J

Solicitors: Herbert Smith Freehills (Plaintiff) Norton Rose Fulbright (Acquirer) File Number(s): 2020/129431

Nature of the application and background

By Originating Process filed on 30 April 2020, the Plaintiff, TPG Telecom Limited ("TPG") seeks an order under s 411 of the Corporations Act 2001 (Cth) that it convene a meeting of its members to consider a scheme of arrangement between TPG and scheme participants and associated orders. I made the orders sought at the hearing on 19 May 2020 and these are my reasons for doing so.
The proposed scheme relates to a proposal that Vodafone Hutchison Australia Pty Ltd ("VHA"), which is a mobile and broadband provider operating in Australia, acquire all of the outstanding shares in TPG, on the basis that scheme participants (other than "Ineligible Foreign Shareholders" as defined) would receive one share in the merged company in consideration for each TPG share owned by them. The transaction is described by the parties as implementing a "merger of equals".
By way of background, TPG is a public company listed on the Australian Securities Exchange ("ASX") and provides telecommunication services to a range of users, with a focus on fixed line internet services and fibre optic network capacity. VHA is an unlisted company jointly owned as to 50% each by Vodafone Group plc (a UK public company listed in the London Stock Exchange) and Hutchison Telecommunications (Australia) Limited (an Australian company listed on ASX, the ultimate majority shareholder of which is CK Hutchison Holdings Limited, which is listed on the Hong Kong Stock Exchange).

Affidavit evidence

TPG relies on an affidavit of its solicitor, Mr Luke Hastings, dated 29 April 2020 which refers to the background to the transaction.
By an affidavit dated 14 May 2020, Mr Antony Moffatt, who is the group general counsel of TPG, refers to the structure of the proposed merger between TPG and VHA and to the entry into a Scheme Implementation Deed between those entities and associated entities of VHA and to the announcement of the proposal to ASX on 30 August 2018. Mr Moffatt notes that the proposal involves the separation of TPG's Singapore mobile business, and that shares in a new entity holding that business will be distributed to scheme shareholders by way of an in specie distribution. Mr Moffatt also explains the delay between execution of the Scheme Implementation Deed and the application to convene the scheme meeting, which resulted from opposition by the Australian Competition and Consumer Commission to the proposed merger, and the conduct of proceedings in the Federal Court of Australia in which VHA successfully obtained declaratory relief that the merger would not contravene the Competition and Consumer Act 2010 (Cth).
Mr Moffatt also refers to the commercial principles for the merger recorded in the Scheme Implementation Deed, including the parties' agreement as to the amount of net debt and working capital that each would bring to the merged entity, and to the adoption of a "locked box" completion mechanism, which is intended to bring about the economic merger of the businesses at a date close to implementation, relevantly, 30 April 2020. Mr Moffatt notes that the effect of application of those principles is that TPG will be permitted to pay a fully franked cash special dividend to scheme shareholders, expected to be paid on 13 July 2020 subject to the scheme becoming effective and a determination by the TPG board. Mr Moffatt also addresses the mechanism to be adopted for the demerger of TPG Singapore business, by way of an in-specie dividend distribution of shares in Singapore Co, which it is intended will be listed on ASX. An information memorandum in respect of that distribution will be despatched to TPG shareholders together with the scheme booklet in respect of the scheme.
Mr Moffatt's affidavit also addressed the engagement of Lonergan Edwards & Associates Limited to prepare an independent expert's report expressing an opinion as to whether the scheme was in the best interests of scheme shareholders; the consideration of the scheme by TPG's board; the existence and satisfaction of several conditions precedent in the Scheme Implementation Deed; break fees and exclusivity provisions; and the treatment of performance rights, which in this case are held by a number of TPG employees rather than by TPG's directors.
Mr Moffatt also refers to the process which has been adopted for verification of the scheme booklet; to the delivery by VHA of an executed Deed Poll in respect of the scheme, and to the arrangements which were proposed for the scheme meeting by reason of the COVID-19 pandemic. It is presently proposed that a physical scheme meeting will be held, if possible, although scheme shareholders have sensibly been encouraged to vote by proxy and a parallel mechanism has been provided for remote attendance and participation in the scheme meeting. TPG has also introduced a mechanism to seek to address any delays in shareholders receiving scheme documents which are despatched by post, to scheme shareholders who have not previously elected to receive such communications electronically, by providing the scheme documents to such shareholders in electronic form on request.
TPG also relies on the affidavit dated 12 May 2020 of Ms Gemma Coyle, who is a relationship manager employed by Computershare Investor Services Pty Ltd and refers to the process for despatch of meeting materials to TPG shareholders, including by email, and to the engagement of Lumi Technologies Pty Ltd ("Lumi") to provide a secured platform for shareholders to remotely attend the shareholder meeting. The affidavit dated 14 May 2020 of Mr Gavin Reed, who is general manager for Lumi, in turn outlines the operation of that system.
By his affidavit dated 14 May 2020, Mr Brendan Vandervecht, who is the Head of the Strategy, Finance and Sales Legal Team at VHA, addresses the verification process adopted by VHA to verify the information about it contained in the scheme booklet, and also deals with the circumstances in which exclusivity and break fee provisions were negotiated between TPG and VHA.
By her affidavit dated 14 May 2020, Ms Rebecca Maslen-Stannage, who is a partner in the firm of solicitors acting for TPG, refers to the giving of notice of the hearing to the Australian Securities and Investments Commission ("ASIC") and to the approval of the scheme booklet by TPG's board, and minor changes which have been subsequently made and which can be approved under a board delegation of power to make non-material changes to TPG's executive chairman, Mr Teoh. A further affidavit of Ms Maslen-Stannage dated 18 May 2020 refers to amendments to the scheme booklet which were made after TPG received conditional approval from the Infocomm Media Development Authority of Singapore for various matters necessary for the demerger of its Singapore business. The draft scheme booklet was in turn tendered and marked Exhibit A1 in the application.
By his affidavit dated 14 May 2020, Mr Craig Edwards, who is a director of Lonergan Edwards & Associates Limited, exhibits the report which he has prepared in respect of the proposed scheme and confirms that he holds the opinions expressed in that report and confirms compliance with the expert witness code of conduct. That report assesses the relative value contribution of each entity under the proposed merger and concludes that the advantages of the merger significantly outweigh its disadvantages from the perspective of shareholders in TPG, and that the merger is in the best interests of TPG shareholders, in the absence of a superior proposal.
By an affidavit dated 13 May 2020, Mr David Teoh, who is executive chair of the board of TPG, consents to act as chair of the proposed scheme meeting to be held of 24 June 2020. By an affidavit dated 11 May 2020, Mr Robert Millner, who is a non-executive director of TPG, consents to act as chair of the scheme meeting if Mr Teoh is unable to act as chair of that meeting.

Applicable principles

As Mr Williams, who appears for TPG, points out, the court will order the convening of a scheme meeting and approve a draft explanatory statement if it is satisfied that the plaintiff is a Part 5.1 body; the proposed scheme is an arrangement within the meaning of s 411 of the Corporations Act; the scheme booklet will provide proper disclosure to members; the scheme is bona fide and properly proposed; ASIC has had a reasonable opportunity to examine the terms of the scheme and the scheme booklet and make submissions and has had 14 days' notice of the proposed hearing date; the procedural requirements of the Supreme Court (Corporations) Rules 1999 (NSW) 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 Staging Connections Group Ltd [2015] FCA 1012 at [19]-[20]; Re Atlas Iron Ltd (2016) 112 ACSR 554 at [30]; Re Villa World Ltd [2019] NSWSC 1207 at [15].
Mr Williams also rightly submits that the Court will not ordinarily summon a meeting at the first court hearing unless the scheme is of such a nature and cast in such terms that, if it receives the statutory majority at the meeting, the court would be likely to approve it on the hearing of a petition which is unopposed: F T Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 at 72, approved in Australian Securities Commissions v Marlborough Gold Mines Ltd (1993) 177 CLR 485 at 504. Mr Williams also refers to Re Foundation Healthcare Ltd [2002] FCA 742; (2002) 42 ACSR 252 at [36] and [44] (cited with apparent approval in Re CSR Ltd (2010) 183 FCR 358 at [58]) where French J observed that: "… by granting leave to convene the meeting, the court does not give its imprimatur to the proposed scheme. If the arrangement is one that seems fit for consideration by the meeting of members or creditors and is a commercial proposition likely to gain the court's approval if passed by the necessary majorities, then leave should be given: Re ACM Gold Ltd (1992) 34 FCR 530; 107 ALR 359; 7 ACSR 231; 10 ACLC 573 (O'Loughlin J). The court is not required to give close consideration to the effects of the scheme upon individual members of the classes of members or creditors affected. So to do would be to "introduce burdensome and to a large extent ineffectual consideration at this interlocutory stage": Re Jax Marine Pty Ltd [1967] 1 NSWR 145 at 148 (Street J). … The court at the stage of ordering a meeting to approve a scheme does not ordinarily go very far into the question of whether the arrangement is one which warrants the approval of the court … That question is to be answered when the scheme returns to the court for final approval. That is not to exclude the possibility that a scheme may appear on its face so blatantly unfair or otherwise inappropriate that it should be stopped in its tracks before going any further."
Mr Williams also points out that, at the first hearing, the court is not concerned with whether final approval should be given to the scheme, but whether the scheme is one which is adequately explained to those who have a financial interest in it, and whether there is any obvious flaw in the scheme, such that it would be inappropriate even for it to be submitted for consideration: Re Abacus Funds Management Ltd (2006) 24 ACLC 211 at [23]; Re Villa World above at [18]. The court is also not required to be satisfied that no better scheme could have been proposed, but with whether sensible business people might consider the arrangement proposed is of benefit to members: Centrebet International Ltd [2011] FCA 870 at [29]; Re SAI Global Ltd [2016] FCA 1312 at [18]; Re BIS Finance Pty Ltd Finance Pty Ltd [2017] NSWSC 1713 at [22].

Particular aspects of the scheme The conduct of the scheme meeting

Mr Williams addresses several aspects of the scheme in written submissions. In particular, he points out that both the scheme meeting and a general meeting that will follow are to be held as physical meetings (if Government restrictions then in force permit that to occur), but that TPG shareholders will be encouraged to attend online or to lodge a directed proxy in advance of the meetings rather than attend in person. As Mr Williams points out, online attendance at the meetings is permitted by s 249S of the Corporations Act provided the technology used gives members as a whole a reasonable opportunity to participate, and is also authorised by cl 5(1) of the Corporations (Coronavirus Economic Response) Determination (No. 1) 2020 made by the Commonwealth Treasurer on 5 May 2020 under s 1362A of the Act.
The meetings will be held using the virtual "Meeting Manager" system provided by Lumi, a subsidiary of TPG's registry service provider. I have referred to the affidavit evidence dealing with that matter above. If, closer to the date of the meetings, it appears that TPG shareholders would be prevented by Government imposed restrictions from physically attending the meetings, then TPG would make an announcement to that effect to ASX, advising shareholders that they could then only attend the meetings online or using the Lumi application. I can see no difficulty with this approach. Treatment of Ineligible Foreign Shareholders
Mr Williams also addresses the position in respect of "Ineligible Foreign Shareholders" (as defined). In accordance with common scheme practice, the VHA shares to which Ineligible Foreign Shareholders would otherwise be entitled under the scheme will be issued to a nominee and sold on ASX at a price reasonably determined by that nominee, which will remit the sale proceeds for the VHA shares to TPG, which will then remit to each Ineligible Foreign Shareholder the sale proceeds attributable to the VHA shares to which the Ineligible Foreign Shareholder would have otherwise been entitled. This matter does not give rise to any reason not to convene the scheme meeting and I am satisfied that Ineligible Foreign Shareholders do not constitute a separate class for that meeting: Re Hills Motorway Ltd [2002] 43 ACSR 101 at 104. Exclusivity provisions
Mr Williams also addresses the position in respect of exclusivity provisions. As he points out, cl 13 of the Scheme Implementation Deed is an exclusivity provision which includes a "no shop" and a "no talk" restriction, and "notification", "cease discussions" and "matching right" obligations. Mr Williams rightly recognises that the Court will be 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 merger proposal should be subject to a fiduciary carve out; and the provisions must be clearly disclosed in the explanatory statement sent to shareholders. I recognise that provisions of this kind are now commonplace in schemes under s 411 of the Act, and that the provisions adopted here do not infringe the principles indicated by the Takeovers Panel's Guidance Note 7: Lock-up devices; Re Macquarie Private Capital A Limited (2008) 26 ACLC 366 at [18]-[19]; Re Investa Listed Funds Management Ltd as responsible entity for the Armstrong Jones Office Fund and the Prime Credit Property Trust [2018] NSWSC 1766 at [15]; Re Villa World Ltd above at [23]. I am satisfied that the relevant exclusivity restrictions are in effect for no more than a reasonable period capable of precise ascertainment and that they were the product of arms' length negotiations between the parties and are clearly disclosed in in section 13.1.3 of the scheme booklet: Re Arthur Yates & Co Ltd (2001) 36 ACSR 758 at [9]. They provide no reason not to convene the scheme meeting Break Fees
Mr Williams points out that cl 14.2 of the Scheme Implementation Deed provides for a break fee of $50 million potentially payable by TPG to VHA ("TPG Break Fee") in specified circumstances, which is disclosed in section 13.1.5 of the Scheme Booklet. A break fee of $50 million is also potentially payable by VHA to TPG ("VHA Break Fee") is set out in clause 14.3 of the Scheme Implementation Deed, as disclosed in sections 5 and 13.1.6 of the Draft Scheme Booklet. The VHA Break Fee is payable if certain specified events occur, including if certain conditions precedents are not met and if TPG validly terminates the Scheme Implementation Deed.
Break fees are common features in schemes of arrangement and will be permitted unless "the amount of the break fee was such that it could influence voting at the meeting to be convened or if there were some other unusual circumstances": Re APN News & Media Ltd (2007) 62 ACSR 400 at [43]; Re Bolnisi Gold NL (No 2) (2007) 65 ACSR 510 at 513; Re Mosaic Oil NL [2010] FCA 985 at [19]; Re Investa Listed Funds Management Ltd as responsible entity for the Armstrong Jones Office Fund and the Prime Credit Property Trust above at [16]; Re Villa World Ltd above at [24].
Mr Williams submits, and I accept, that the TPG Break Fee is not triggered solely by TPG shareholders failing to approve the scheme and is not a disincentive to shareholders in their consideration of the proposal. I also accept that the break fees were negotiated between the parties in the course of arms' length negotiations in which the parties were represented by experienced advisers and the break fees represents less than 1% of the total equity value of TPG immediately prior to the announcement of the scheme on 30 August 2018, and is therefore not inconsistent with the Takeovers Panel's Guidance Note 7: Lock-up Devices. Financial adjustments and special dividend
Mr Williams also points out that TPG and VHA negotiated and agreed, as part of the merger terms, the net debt balance ("Target Net Debt") and working capital ("Target Working Capital") which each party would contribute to Merged Co on implementation of the scheme, and those amounts are recorded in the Scheme Implementation Deed. Mr Williams notes that TPG and VHA propose to make adjustments to these target amounts to reflect the value of additional spectrum licence payments made by both parties since execution of the Scheme Implementation Deed, as a result of the delay in obtaining merger clearance for the scheme. Mr Williams also refers to the use of a "locked box" adjustment mechanism to ensure that each party contributes to Merged Co its target net debt and working capital amounts, as adjusted for the additional spectrum payments, on implementation of the scheme. It appears that, under this approach, TPG will be in a position to pay a fully franked cash special dividend to TPG shareholders prior to implementation of the scheme, and the amount of that special dividend will be announced at least 10 days prior to the scheme meeting and that special dividend will be paid to TPG shareholders prior to implementation of the scheme.
Mr Williams also points out that VHA expects that the aggregate of its actual net debt balance and working capital as at 30 April 2020 will be more than the target amounts required by the Scheme Implementation Deed, and VHA and its upstream shareholders will reduce VHA's actual net debt by the amount of the difference by way of a restructure of VHA to be undertaken prior to implementation. Details of this matter are set out in section 9.16 of the scheme booklet. Singapore Demerger
Mr Williams also refers to the demerger of Singapore Co on or prior to implementation of the scheme, which is disclosed in section 8.7 of the scheme booklet and is also addressed in a separate information memorandum to be sent to TPG shareholders. I have addressed the evidence as to this transaction above. The scheme is not conditional on this transaction and it provides no reason not to convene the scheme meeting. Performance Rights
TPG has performance rights on issue ("TPG Performance Rights"), held by approximately 120 TPG employees. TPG's board intends to exercise its discretion to approve the early vesting of all TPG Performance Rights in accordance with their terms, so that holders of TPG Performance Rights will receive one TPG share for each TPG Performance Right prior to the scheme record date, and can participate in the Scheme in respect of the TPG shares issued to them on early vesting. Since none of the directors of TPG hold TPG Performance Rights, no question arises as to their making a recommendation about the Scheme on account of any personal interest arising from the treatment of such rights. Despatch of hard copy scheme materials
I note, for completeness, that Mr Williams also addresses steps that are to be taken to mitigate the risk of postal delays as to hard copy scheme documents, particularly for overseas shareholders, arising for the COVID-19 pandemic. Section 411(17) of the Act
Mr Williams also recognises that s 411(17) of the Act provides that the Court must not approve a scheme unless satisfied it is not proposed for the purpose of enabling avoidance of the takeovers provisions in Chapter 6 of the Act or ASIC provides a statement that it has no objection. This matter is properly deferred for consideration at the second Court hearing.

Form of orders sought

TPG seeks, and I will make, an order approving the scheme booklet for distribution to TPG shareholders under s 411(1) of the Act, consistent with the practice in this Court, although I recognise a different practice may have developed in some other Courts: Re DuluxGroup Ltd [2019] FCA 961 at [63]). I will also make an order providing for despatch of the scheme booklet by electronic means to those TPG shareholders who have an electronic address for the purposes of receiving notification of notices of any meeting.
TPG seeks, and I will make, an order largely excluding the operation of r 2.15 of the Supreme Court (Corporations) Rules which would apply former regs 5.6.11 to 5.6.36A of the Corporations Regulations and broadly corresponding provisions in the Insolvency Practice Rules (Corporations) 2016 (Cth) to Court ordered meetings: Re Viralytics Ltd [2018] FCA 637 at [37]-[40]. I will also approve a form of email proposed to be sent to TPG shareholders who had elected to receive shareholder communications by email reminding them of the proxy voting deadline and encouraging them to vote, where the Court has a role in maintaining oversight of communications with scheme members.

Conclusion

For these reasons, I am satisfied that the proposed scheme is of such a nature and cast in such terms that, if it receives the statutory majorities at the meeting of members, the Court would be likely to approve the scheme on the hearing of an unopposed application. Relevant factors include the nature of the scheme; the sufficiency of the disclosure of the terms of the scheme in the scheme booklet and the verification process outlined in the affidavit evidence; and the conclusion reached by Lonergan Edwards that the scheme is fair and reasonable and in the best interests of TPG's shareholders. For these reasons, I made orders in the form proposed by TPG at the conclusion of the first court hearing.

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: 23 June 2020

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