Australian Securities Commissions v Marlborough Gold Mines Ltd

Affidavit evidence

1. AusNet relies on the affidavit dated 11 November 2021 of Ms Meg Winton, a solicitor in the firm acting for it, in support of the Originating Process which exhibits, inter alia, a release made by AusNet to ASX in connection with the scheme on 1 November 2021.
2. AusNet also reads the affidavit dated 30 November 2021 of Mr Peter Mason, the independent chair and a non-executive director of AusNet, which confirms his willingness to act as chair of the scheme meeting. By his affidavit dated 30 November 2021, Mr Robert Milliner, a non-executive director of AusNet, confirms his willingness to act as chair of the scheme meeting if Mr Mason is unable to do so.
3. By her affidavit dated 15 November 2021, Ms Naomi Kelly, the Executive General Manager Governance, Company Secretary and General Counsel of AusNet, summarises the proposed transaction and deals with the verification of the information contained in the scheme booklet for which AusNet is responsible. Ms Kelly sets out the proposed terms of the scheme and provides an overview of relevant transaction steps. She also outlines the contents of the scheme booklet and arrangements for dispatch of the scheme booklet, and, as I noted above, outlines the drafting and verification process for the scheme booklet. She also outlines the terms of and the negotiation of exclusivity provisions and a break fee provided under the SID, and outlines the treatment of certain performance rights and deferred rights granted to AusNet employees under the proposed scheme. Ms Kelly also notes that Mr Tony Narvaez, AusNet's Managing Director, holds performance rights and deferred rights which would vest, subject to the scheme becoming effective, and that the total cash payment to Mr Narvaez in respect of the relevant shares would be $4,409,730.45. Those matters are also disclosed in the chairman's letter and elsewhere in the scheme booklet. Ms Kelly also refers to the proposed conduct of the scheme meeting and the second Court hearing. I was taken through the scheme booklet which is exhibited to Ms Kelly's affidavit in the course of the hearing.
4. By his affidavit dated 14 December 2021, Mr Michael Ryan, the Company Secretary of AEH4 and the Managing Director of Brookfield Infrastructure Group (Australia) Pty Ltd, noted that AEH4 had been incorporated for the purpose of acquiring the scheme shares and referred to the several companies through which it is held, and noted that its ultimate holding company was Australian Energy Holdings No 1 Pty Ltd and that several institutional investors would be the shareholders in that company on implementation of the scheme. Mr Ryan there addressed the process adopted for verification of information relating to AEH4 contained in the scheme booklet and indicated, to the best of his knowledge and belief, that material statements concerning that company in the scheme booklet were accurate and complete, having regard to the verification process. Mr Ryan also addressed the content of, and process for negotiation of, exclusivity provisions and the break fee contained in the SID, and the execution of a deed poll by AEH4. Mr Ryan also addressed the funding of the maximum scheme consideration, of approximately AUD$10.2 billion, using a combination of debt and equity funding. He referred to the execution of an equity commitment letter by entities within the Brookfield Group, and further back-to-back equity commitment letters by the four institutional investors in the Consortium, and also referred to the debt funding to be provided by a consortium of banks in respect of the proposed scheme. By a second affidavit dated 15 December 2021, Mr Ryan identified several further changes made to the bidder information and the approval process for those changes.
5. By his affidavit dated 14 December 2021, Mr Christopher Dedrick, a Relationship Manager with Computershare Investor Services Pty Limited ("Computershare"), set out the services provided by that company to AusNet, and deals with the means by which scheme materials will be dispatched and a virtual scheme meeting be conducted using Computershare's meetings platform and a poll report prepared.
6. By her affidavit dated 15 December 2021, Ms Jaye Gardner, who is a managing director with Grant Samuel & Associates Pty Ltd, deals with the independent expert's report. She confirmed that Grant Samuel holds the opinions set out in the draft independent expert report and that she has made the inquiries that she believes are desirable and necessary for the purposes of preparing that report. That report in turn indicates that Grant Samuel has concluded that the proposed scheme is fair and reasonable to shareholders in AusNet.
7. By his affidavit dated 15 December 2021, Mr Craig Henderson, a partner in the firm of solicitors acting for AusNet, deals with the provision of the draft scheme booklet and other materials to the Australian Securities and Investments Commission ("ASIC"), an application for relief and ASIC's confirmation that it does not currently propose to appear to make submissions or intervene at the first Court hearing. ASIC did not appear at the first Court hearing. Mr Henderson also addresses a proposed amendment to the scheme booklet to record that AusNet would pay an interim dividend on 16 December 2021, for a total amount of approximately $181.9 million, which will be funded from cash on deposit.

Applicable principles

1. Mr Jackman submits, in familiar terms, that the Court will order the convening of the scheme meeting and approve the draft explanatory memorandum under s 411 of the Act if it is satisfied of several matters, namely that the plaintiff is a Part 5.1 body; the proposed scheme is an arrangement within the meaning of s 411 of the 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, and make submissions in respect of, the terms of the scheme and the scheme booklet and has had 14 days' notice of the proposed first Court 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; [2016] FCA 366 at [30]; Re DUET Finance Ltd [2017] NSWSC 415 at [15]; Re BIS Finance Pty Ltd [2017] NSWSC 1713 at [20]; Re Villa World Ltd [2019] NSWSC 1207 at [15].
2. Mr Jackman also rightly submits that, at a first Court hearing, 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 received the statutory majority at the scheme 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. He refers to the often-cited observations of French J in Re Foundation Healthcare Ltd (2002) 42 ACSR 252; [2002] FCA 742 at [36] and [44], approved in Re CSR Ltd (2010) 183 FCR 358 at [58] that: [36] … It is however important to bear in mind 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). [44] 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.
3. Mr Jackman also points out that, at the first Court hearing, a Court is concerned not 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 at [18]. He also points out that the Court is not required to be satisfied that no better scheme could have been proposed, and the question is whether it is reasonable to suppose that sensible business people might consider the arrangement proposed is of benefit to members: Re Centrebet International Ltd [2011] FCA 870 at [29]; Re SAI Global Ltd [2016] FCA 1312 at [18]; Re DUET Finance Ltd above at [14]; Re BIS Finance Pty Ltd above at [22].
4. I am satisfied that AusNet is a Part 5.1 body as defined in s 9 of the Act; the proposed scheme will effect the acquisition by one company of shares in another and falls within the concept of a "compromise or arrangement" within the meaning of s 411(1) of the Act; a draft of the scheme booklet was provided to ASIC more than 14 days before the first Court hearing on 16 December 2021 and ASIC was also given notice of the date and time for the first Court hearing, and ASIC has now advised that it does not propose to appear to make submissions or intervene to oppose the convening of the scheme meeting; and the matters prescribed by the Supreme Court (Corporations) Rules 1999 (NSW) are satisfied. It is proposed that the scheme meeting be held as a virtual meeting at which AusNet shareholders and their proxies, attorneys or corporate representatives may attend online using the Computershare online meeting platform, and AusNet shareholders who participate in the scheme meeting by the online platform will be able to listen to that meeting, cast an online vote and ask questions online. Mr Jackman rightly points out that virtual members' meetings are now permitted by Pt 2G.5 of the Act, and online attendance at the scheme meeting is permitted by s253Q of the Act where the technology used gives AusNet shareholders a reasonable opportunity to participate without physically being present in the same place.
5. Mr Jackman points out that the AusNet directors have unanimously recommended that AusNet shareholders vote in favour of the proposed scheme, in the absence of a superior proposal, and subject to the independent expert continuing to conclude that the scheme is in the best interests of AusNet shareholders. Grant Samuel has concluded, in the independent expert's report, that that the scheme is fair and reasonable and therefore in the best interests of AusNet shareholders, in the absence of a superior proposal. Mr Jackman also observes, uncontroversially, that the Court will address the question raised by s 411(17) of the Act on an application to approve a scheme at the second court hearing rather than at the convening stage: Re Macquarie Private Capital A Ltd [2008] NSWSC 323 at [25]-[37].
6. There is no reason to doubt that the scheme booklet provides proper disclosure to AusNet shareholders and there has been a verification and due diligence process in common form. As I observed in making orders, notwithstanding this is a very substantial transaction, it does not raise issues of legal complexity from the point of view of a Court at a first Court hearing. It involves funding arrangements through a consortium, funding the bidder by equity and by a third party debt facility sourced from a syndicate of banks, but the questions in respect of funding of that character have recently been addressed in other authority that I address below. Subject to the particular issues that I address below, there is no reason to doubt that the proposed scheme is bona fide and properly proposed and could be approved at the second Court hearing if it receives the requisite shareholder approvals. Subject to the particular issues which I address below, I am satisfied that the orders sought should be made in respect of the proposed scheme.

Particular aspects of the scheme

1. Consistent with common and appropriate practice at a first Court hearing in respect of a scheme, Mr Jackman addresses several aspects of the scheme that are appropriately brought to the Court's attention. First, in relation to the question of performance risk, he observes that a practice has developed to address performance risk, by which the transfer of target shares to an acquirer is conditional on the payment of the consideration to target shareholders: Re Ellerston Global Investments Ltd [2020] NSWSC 879 at [29]. He notes that that practice has been followed in respect of this proposed scheme, where the Scheme Consideration will be paid to AusNet shareholders as a cash payment, and the proposed scheme provides that the shares held by AusNet shareholders will only be transferred to AEH4 if it has paid the aggregate Scheme Consideration into the Trust Account (as defined) by the prior day. This approach sufficiently protects AusNet shareholders' position and avoids a risk that they would be left to bring a claim for payment on the deed poll after their shares had been transferred.
2. Second, Mr Jackman addresses the question of AEH4's funding to acquire AusNet's shares under the proposed scheme. He points out that, as disclosed in section 5.3 of the scheme booklet, AEH4 intends to fund payment of the Scheme Consideration using a combination of debt and equity financing, and the amount expected to be available to AEH4 under the debt and equity financing exceed $10.2 billion which is in excess of the maximum aggregate amount of cash payable on implementation of the proposed scheme. Brookfield and Brookfield Super-Core Infrastructure Partners LP have executed an Equity Commitment Letter for an aggregate amount of A$8,167,426,746.50. By cl 8.1 and Schedule 1 item 14 of the SID, AEH4 represents and warrants that it will enforce its rights under the Equity Commitment Letter, and that it will not amend the letter or waive its rights, in each case where that would prejudice its ability to pay the Scheme Consideration or the Bidder Break Fee (as defined) without AusNet's written consent. The Equity Commitment Letter is also enforceable by AusNet because it provides, at cl 4, that it can be enforced by AEH4 or AusNet. By cl 1(a) of the Equity Commitment Letter, Brookfield and Brookfield Super-Core Infrastructure Partners LP have irrevocably agreed, subject to the scheme becoming effective, that they will cause AEH4 to receive the Equity Commitment (as defined) on the business day before the Implementation Date, by way of capital contributions in immediately available AUD denominated funds, for AEH4's use to pay a portion of the aggregate Scheme Consideration. By cl 3 of the Equity Commitment Letter, the Equity Commitment is subject only to the scheme becoming effective.
3. AEH4 also entered a syndicated facility agreement dated 29 October 2021 ("Debt Facility Agreement") under which various financiers have agreed to make a loan facility of up to $2,800,000,000 available to AEH4. By cl 8.1 and Schedule 1 of the SID, AEH4 in turn represents and warrants that it will enforce its rights under the Debt Facility Agreement. The availability of that facility is subject to requirements for drawing and the correctness of several representations and the non-occurrence of several events of default, and I have referred above to the evidence that AEH4 is not aware of the occurrence of any misrepresentations or events of default or any other circumstance that would cause the financiers to withhold their funding. There is no obvious reason why the conditions precedent to the Debt Facility Agreement that were outstanding at the time of the first Court hearing would not be satisfied in due course.
4. Mr Jackman submits, and I accept, that this matter and ordinary financing conditions in respect of a bidder's third party funding are not reasons to not convene a scheme meeting, and that securityholders' interests are sufficiently protected where a deed poll has been executed by the bidding entity, funding arrangements are enforceable by the target entity and there is an opportunity for review at a second Court hearing: Re Spark Infrastructure RE Limited [2021] NSWSC 1385 at [31]-[33]. Mr Jackman also submits, and I accept, that the fact that scheme shares will not be transferred to AEH4 until the scheme consideration is transferred to AusNet eliminates the primary source of performance risk for shareholders, namely a transfer of shares without receiving the scheme consideration: Re Legend Corporation Ltd [2019] FCA 1249 at [35]-[39]; Re Spark Infrastructure RE Limited above at [29]. He submits, and I also accept, that customary funding conditions, which are required to protect the interests of third party funders in respect of large transactions and which continue after a second Court hearing and approval of a scheme, do not necessarily prevent approval of a scheme and that, when deciding whether to approve a scheme, the Court will consider whether there is a material risk that the conditions will not be satisfied: Re Legend Corporation Ltd (No 2) [2019] FCA 1444; Re Spark Infrastructure RE Limited [2021] NSWSC 1564 at [9], [27]-[28]; at [33]. He points out that other schemes have been approved where funding arrangements (comprising equity commitment letters and debt facilities) in connection with the scheme remained conditional after that approval: Re Legend Corporation Ltd (No 2) [2019] FCA 1444; Re Spark Infrastructure RE Limited [2021] NSWSC 1564.
5. Mr Jackman submits that the fact that the Consortium entities are not party to the deed poll and the conditionality of AEH4's funding should not lead the Court to decline to convene a scheme meeting at the first Court hearing in circumstances where AusNet must be paid the Scheme Consideration prior to the transfer of shares held by AusNet shareholders to AEH4, the deed poll has been executed by AEH4, AEH4 and AusNet are able to enforce the Equity Commitment Letter and there is an opportunity to review the funding conditionality (both equity and debt) at the second Court hearing. He submits that the outstanding conditions to the debt funding arrangements are customary for a transaction of this nature and there is no material risk that they will not be satisfied for funding prior to the Implementation Date. I am satisfied that these matters provide no reason not to convene the proposed scheme meeting.
6. Third, Mr Jackman notes that cl 11 of the SID contains "no-shop", "no talk" and "no due diligence" restrictions on AusNet (cl 11.2); an obligation on AusNet to notify the Bidder of any third party competing proposal (cl 11.4); and "matching right" in favour of the Bidder in respect of any competing proposal (cl 11.5). He notes that the "no talk" and "no due diligence" restrictions in cl 11.2 are subject to a "fiduciary carve-out" (cl 11.3), where not taking certain actions would likely be inconsistent with AusNet's directors' duties under applicable law. Mr Jackman submits, and I accept, that exclusivity provisions in this form are now commonplace in schemes of arrangement, and neither the Takeovers Panel's Guidance Note 7: Lock-up devices nor prior authority requires a fiduciary carve-out with respect to "no-shop" provisions: Macquarie Private Capital A Limited (2008) 26 ACLC 366 at [18]-[19]; Re Hostworks Group Ltd (2008) 26 ACLC 137 at [34]-[37].
7. Mr Jackman rightly recognises that the Court will be concerned to confirm that exclusivity restrictions have effect for no more than a reasonable period that is capable of precise ascertainment, and that they be clearly disclosed in the explanatory statement sent to shareholders: Re Arthur Yates & Co Ltd (2001) 36 ACSR 758 at [9]. He submits, and I accept, that the Court can be satisfied of those matters here where the Exclusivity Period lasts for no more than 8 months from the date of the SID, unless a later date is agreed by the parties and the exclusivity provisions are prominently disclosed in the scheme booklet. There is evidence in customary form that the exclusivity provisions in the SID were the product of arm's length negotiations between the parties. This matter provides no reason not to convene the proposed scheme meeting.
8. Fourth, Mr Jackman notes that a break fee of A$101,674,267 is potentially payable by AusNet to AEH4 ("AusNet Break Fee") in specified circumstances as set out in cl 12.2 of the SID and summarised in section 8.12(e) of the scheme booklet. The AusNet Break Fee is not triggered solely by AusNet shareholders failing to approve the proposed scheme and is not a disincentive to shareholders in their consideration of the proposal: Re Adelaide Bank Limited [2007] FCA 1582 at [31]; Re Bolnisi Gold NL (No 2) (2007) 65 ACSR 510 at 513; [2007] FCA 2078. A break fee of the same amount is potentially payable by AEH4 to AusNet ("Bidder Break Fee") as set out in cl 12.3 of the SID and also summarised in section 8.12(e) of the scheme booklet, if AusNet terminates the SID for material breach by AEH4 or a breach of a material representation or warranty by AEH4. There is evidence in common form that the AusNet Break Fee and the Bidder Break Fee were negotiated between the parties in the course of arm's length negotiations in which all parties were represented by experienced advisers. Mr Jackman notes that the AusNet Break Fee represents approximately 1% of the total equity value of AusNet immediately prior to the announcement of the scheme on 1 November 2021, and is therefore consistent with the Takeovers Panel's Guidance Note 7: Lock-up Devices, and that payment of break fees of this magnitude are commonplace in schemes of this kind. This matter also provides no reason not to convene the proposed scheme meeting.
9. Fifth, Mr Jackman notes that the proposed scheme provides for a deemed warranty by AusNet shareholders that their shares will be free from encumbrances (cl 8.4 of the Scheme) and that deemed warranty is appropriately disclosed in the scheme booklet. Sixth, Mr Jackman notes that AusNet proposes to adopt a process for the dispatch of materials, to be undertaken by Computershare, which is consistent with that adopted in Re Coca-Cola Amatil Limited [2021] NSWSC 270 at [26], Re Real Energy Corporation Limited [2020] FCA 1634, Re OneVue Holdings Limited [2020] FCA 132 and Re BINGO Industries Limited [2021] NSWSC 798.
10. Seventh, Mr Jackman addresses the treatment of Performance Rights and Deferred Rights and Restricted Shares issued by AusNet to certain employees under the proposed scheme. The treatment of Performance Rights, Deferred Rights and Restricted Shares is set out in detail in section 8.3 of the Scheme Booklet and paragraph 41 of Ms Kelly's affidavit. These matters give rise to no reason not to convene the scheme meeting. Mr Jackman submits, and I also accept, that holders of Performance Rights who are also AusNet shareholders are not in a separate class by reason only that they also hold those Performance Rights: Re Cashcard Australia Ltd (2004) 48 ACSR 738; Re Foster's Group Ltd (No 2) [2011] VSC 547 at [38]-[43]; Re rhipe Ltd [2021] NSWSC 1170 at [19].
11. Eighth, an issue arises, as in many recent schemes, as to a recommendation made by an interested director in respect of the scheme. The scheme booklet discloses that Mr Tony Narvaez, AusNet's Managing Director, holds 1,507,455 Performance Rights granted AusNet Long Term Incentive Plan in the financial years ending 31 March 2020, 31 March 2021 and 31 March 2022; holds 181,818 Deferred Rights granted under the AusNet Deferred Equity Incentive Plan in the financial years ending 31 March 2021 and 31 March 2022; subject to the scheme becoming effective, all of Mr Narvaez's outstanding Performance Rights and Deferred Rights will vest such that he will receive one AusNet share per vested Performance Right or Deferred Right prior to the Scheme Record Date; and, if each of those AusNet shares continue to be held by Mr Narvaez on the Scheme Record Date, the Scheme Consideration will be payable in respect of those shares on the Implementation Date, and (as I also noted above by reference to Ms Kelly's evidence) the total cash payment in respect of those AusNet shares to Mr Narvaez may amount to A$4,409,730.45. This matter is also disclosed in the chairman's letter contained in the scheme booklet which states that, given the importance of the scheme and Mr Narvaez's role as a director of AusNet and in the management of AusNet and his industry knowledge, AusNet's board (excluding Mr Narvaez) has determined that it is appropriate for him to provide a recommendation to AusNet shareholders in relation to the scheme, notwithstanding the nature and quantum of the benefits he stands to receive if the scheme is implemented.
12. I have addressed issues of this kind in several recent cases and I again propose to adopt the approach which I summarised in Re Afterpay Ltd [2021] NSWSC 1435 at [40]-[43] as follows: "I again prefer the approach adopted in Re SMS Management & Technology Ltd [2017] VSC 257; Re Kidman Resources Ltd (2019) 375 ALR 760; (2019) 139 ACSR 122; [2019] FCA 1226; Re Villa World Ltd [2019] NSWSC 1207 and Re GBST Holdings Ltd [2019] NSWSC 1280 to that taken in Re Gazal Corporation Ltd [2019] FCA 701 and Re Navitas Ltd (No 2) [2019] WASC 218. I have also taken the former approach in Re Coca-Cola Amatil Ltd [2021] NSWSC 270 and Re BINGO Industries Ltd [2021] NSWSC 798, and the same view has recently been taken in the Federal Court of Australia in Re Citadel Group Ltd (2020) 148 ACSR 598; [2020] FCA 1580; Re RXP Services Ltd [2021] FCA 38 and Re Mainstream Group Holdings Ltd [2021] FCA 948. I accept that the interests of [two directors] do not prevent them from making a voting recommendation to [scheme company] shareholders where that interest is sufficiently disclosed in the scheme booklet and [scheme company] shareholders may take it into account in determining the weight to give to that recommendation."
13. Mr Jackman submits, and I accept that, given the disclosure of the benefits which Mr Narvaez would receive if the scheme is implemented in the scheme booklet, the fact that he has made a recommendation to AusNet shareholders is not a reason to decline to convene the scheme meeting.

Orders

1. For these reasons, I was satisfied that an order should be made convening the scheme meeting and approving the scheme booklet for distribution to shareholders and I made the orders sought by AusNet at the conclusion of the first Court hearing.

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