Billabong International Limited, in the matter of Billabong International Limited [2018] FCA 106

Introduction 1 The plaintiff, Billabong International Limited (Billabong), seeks an order pursuant to s 411(1) of the Corporations Act 2001 (Cth) (the Act) that it convene a meeting of its members, other than Excluded Shareholders (as defined), for the purpose of considering and, if thought fit, agreeing, with or without modification, to a scheme of arrangement (the scheme) under which, if approved, Boardriders, Inc. (Boardriders) will acquire all the shares in Billabong on issue at the Scheme Record Date (as defined) other than Excluded Shares (as defined) (the scheme shares) for the consideration of $1.00 per scheme share (the scheme consideration). The terms of the scheme are set out in Annexure B to a scheme booklet which has been tendered as Exhibit 1 (the scheme booklet). The scheme booklet stands as the explanatory statement required by s 412(1)(a) of the Act.

Background 2 Billabong is an Australian public company that is registered in New South Wales. It is admitted to the official list of the Australian Securities Exchange (the ASX) on which its shares are officially quoted. Its headquarters are at Burleigh Heads in Queensland. 3 Billabong owns and operates a portfolio of companies that market, distribute and sell, by wholesale and retail, apparel, accessories, eyewear and hard goods in relation to "board sports" under the Billabong, RVCA, Element, Von Zipper, Honolua Surf Company, Kustom, Palmers Surf and Xcel brands. The majority of its revenue is generated through wholly-owned operations in Australia, North America, Europe, Japan, New Zealand, South Africa and Brazil. 4 As at 9 February 2018, Billabong had 198,079,110 ordinary shares on issue. 5 Boardriders is a United States company, previously known as Quiksilver, Inc. It is an outdoor sports lifestyle company incorporated in Delaware which designs, develops and distributes branded apparel, footwear, accessories and related products. Boardriders does not directly hold any shares in Billabong. However, Boardriders is controlled by funds managed by Oaktree Capital Management, L.P. (Oaktree). Oaktree holds 19.3% of Billabong's shares through controlled entities. The holders of these shares are the Excluded Shareholders. These shares will not be acquired under the scheme and Oaktree will not be voting these shares at the proposed scheme meeting. 6 Oaktree is one of Billabong's two senior lenders under a facility called the Centerbridge/Oaktree Senior Secured Term Loan Agreement (the SSTLA). Billabong's other senior lender under the facility is Centerbridge Partners, L.P. (Centerbridge). One of Centerbridge's controlled entities (CCP II Dutch Acquisition - E, B.V.) also currently holds 19.3% of Billabong's shares. Centerbridge has determined that its commercial interests best lie in agreeing to the scheme and accepting the scheme consideration. 7 On 5 January 2018, Billabong announced to the ASX that it had entered into a Scheme Implementation Deed with Boardriders providing for Billabong's proposal of the scheme. On 17 January 2018, Boardriders nominated its wholly-owned subsidiary Quiksilver Australia Pty Ltd (Quiksilver) as the entity which will acquire the scheme shares. 8 There are no unusual features in the scheme as proposed. Nevertheless, I record the following matters.

Evidence 9 The following affidavits were read: Tracey Lyndell Wood, affirmed 12 February 2018; Ian Alfred Pollard, affirmed 7 February 2018 and 9 February 2018; Howard Leonard Mowlem, affirmed 7 February 2018 and 9 February 2018; Jaye Louise Gardner, sworn 12 February 2018; Ilene Robyn Eskenazi, affirmed 8 February 2018; C. Stephen Bigler, sworn 9 February 2018; and Guy David Alexander, sworn 12 February 2018.

The position of the directors and Major shareholders 10 The scheme is supported by Billabong's directors who have unanimously recommended that members vote in favour of the scheme in the absence of a superior proposal, subject to the independent expert, Grant Samuel & Associates Pty Ltd (Grant Samuel), continuing to hold the view that the scheme is in the best interests of members (see [13]-[22] below). 11 Centerbridge has stated that its controlled entity intends to vote all its shares in favour of the scheme in the absence of a competing proposal (which, in the sole opinion of that entity, is a superior proposal), provided Grant Samuel continues to hold the view that the scheme is in the best interests of members. 12 Gordon Merchant - a director of Billabong who directly or indirectly controls the right to vote in respect of approximately 12.8% of the shares - has stated that he also intends to vote in favour of the scheme in the absence of a superior proposal provided, once again, Grant Samuel continues to hold the view that the scheme is in the best interests of members.

The independent expert 13 Billabong's directors engaged Grant Samuel to prepare an independent expert's report setting out whether, in its opinion, the scheme is in the best interests of members. 14 Grant Samuel has evaluated the scheme as a control transaction and assessed the full underlying value of Billabong at between $0.96 to $1.20 per share, assuming 100% of the company is available to be acquired. This valuation includes a premium for control. The value range exceeds the price at which, based on current market conditions, Grant Samuel expects the shares to trade on the ASX in the absence of a takeover offer. Grant Samuel has assessed the bottom of the range as a threshold price. It has concluded that an offer above that level is fair from a financial point of view. 15 Grant Samuel has reasoned that, as the scheme consideration is fair, the scheme is reasonable. It has identified a number of factors supporting that conclusion. 16 First, the scheme consideration represents a substantial premium over the share price prior to the announcement of the proposal. 17 Secondly, Billabong's major shareholders who will be eligible to vote (Centerbridge and Mr Merchant) have indicated their intention to vote their shares in favour of the scheme, as recorded above. 18 Thirdly, Billabong and its advisers have undertaken a comprehensive process to identify alternative potential acquirers of the shares. While, in this regard, no formal auction process has been undertaken, Billabong and its advisers have assessed a full list of possible acquirers and made direct contact as considered appropriate. No candidate who was approached expressed interest in making an alternative offer for the shares. 19 Fourthly, the short term outlook for Billabong is uncertain. While Billabong has not publicly released earnings forecasts for beyond the 2018 financial year, it is midway through a turnaround that has taken longer than expected to implement. Interest payments, combined with Billabong's high debt levels, will result in ongoing losses. It is not expected that Billabong will pay dividends in the medium term. In these circumstances, and in the absence of the scheme or any alternative offer, it is likely that Billabong's shares, under current market conditions and its current ownership and capital structure, will trade at prices well below the scheme consideration. 20 Fifthly, Billabong's outlook is impacted by its capital structure. The SSTLA matures in September 2019. Billabong has been actively considering options for refinancing the loan but, at present, conditions in the retail industry for refinancing are challenging. Given the degree of leverage, refinancing all the debts with new debt is unlikely to be achievable, necessitating asset sales or equity raisings. Neither of these alternatives is likely to be attractive to shareholders or positive for future share price performance. 21 As the scheme is, in its view, fair and reasonable, Grant Samuel also concluded that, in the absence of a superior proposal, the scheme is in the best interests of its members. 22 Ms Gardner is a director of Grant Samuel and has had overall responsibility for the preparation of the independent expert's report. She has deposed that the opinions expressed in the report are opinions which she holds and that she has not become aware of any facts or circumstances which would cause her to change the opinions expressed in the draft version of the independent expert's report before the Court. She proposes to sign a copy of the draft independent expert's report, which will be included in the scheme booklet.

Exclusivity provisions 23 The Scheme Implementation Deed contains a number of exclusivity provisions. Clauses 12.2, 12.3 and 12.4 contain, respectively, "no shop", "no talk", and "no due diligence" restrictions on Billabong. Clause 12.5 obliges Billabong to notify Boardriders of third party competing proposals. Clause 12.6 confers on Boardriders a matching right in respect of a competing proposal. 24 The exclusivity period applying to these provisions is six months. The period can be extended by agreement between Billabong and Boardriders. Alternatively, the exclusivity period will terminate when the Scheme Implementation Deed terminates in accordance with its terms. 25 I am satisfied that the exclusivity period is capable of precise ascertainment and that the period is, in the circumstances, reasonable. Further, the "no talk" and "no due diligence" restrictions are subject to a fiduciary carve-out. In other words, Billabong is not required to comply with these obligations if its directors (acting on advice) determine that compliance would be likely to constitute a breach of the fiduciary or statutory duties they owe as board members. The exclusivity provisions are discussed in section 8.3(c) of the scheme booklet.

Break fee 26 The Scheme Implementation Deed also provides, in clause 13.2, for the payment by Billabong of a "break fee" of $1.6 million in certain circumstances. However, importantly, the break fee will not be payable by Billabong merely because the scheme is not approved by its members at the proposed scheme meeting. 27 In value, the break fee represents approximately 1% of the equity value of Billabong immediately prior to the announcement on 5 January 2018, having regard to the value of the scheme consideration at that time and disregarding the existing 19.3% held by Oaktree's controlled entity. If the latter holding were to be included, the break fee would represent approximately 0.8% of the equity value. Thus, the amount of the break fee is within the guidance provided by the Takeovers Panel Guidance Note 7 - Lock-up devices. 28 Further, there is evidence before me that the break fee was negotiated between Billabong and Boardriders who were separately advised by independent legal and financial advisers. Ms Wood, Billabong's International General Counsel and Company Secretary, has deposed that she was closely involved in the negotiations on behalf of Billabong and that, in her view, it was necessary for Billabong to agree to the break fee provision in order to secure Boardriders' agreement to the transaction. Ms Eskenazi, Boardriders' Global General Counsel and Head of HR, Americas, has deposed that Boardriders would not have entered into the Scheme Implementation Deed had provision not been made for the break fee. She said that the amount of the costs incurred by Boardriders in connection with the scheme is greater than the amount of the break fee. The break fee is discussed in section 8.3 (d) of the scheme booklet.

Performance risk 29 Performance risk is addressed by the terms of the scheme itself which require the scheme consideration to be paid to Billabong as trustee for the scheme shareholders prior to transfer of the scheme shares to Quicksilver. 30 Further, on 9 February 2018 Boardriders executed a Deed Poll in favour of each scheme shareholder by which it undertakes to procure the observance of the relevant payment obligations. Under the Deed Poll, Boardriders has submitted to the non-exclusive jurisdiction of the courts of New South Wales and has waived any right to object to venue. There is evidence before me that the Deed Poll has been duly authorised, executed and delivered by Boardriders in accordance with Delaware law. A copy of the Deed Poll will be included in the scheme booklet.

Deemed warranty 31 Clause 8.3 of the scheme contains a deemed warranty on the part of each scheme shareholder to the effect that the scheme shares to be transferred will be free of all mortgages, charges, liens, encumbrances and interests of third parties of any kind and from any restrictions on transfer of any kind; the scheme shares will be fully paid on the date of transfer; and that each scheme shareholder has full power and capacity to sell and transfer the scheme shares. The terms of the warranty are discussed in section 3.3 of the scheme booklet.

Options/Performance Rights 32 On 18 September 2013, Billabong granted the Centerbridge entity 2,958,185 options to subscribe for shares in Billabong on a one-for-one basis with an exercise price of $2.50 per option and an expiry date of 3 December 2020. These options have not been exercised. On 5 January 2018, Billabong entered into an agreement with Boardriders and the Centerbridge entity under which, subject to the scheme proceeding, the options will be cancelled on the Implementation Date (as defined). 33 Billabong has granted options to other parties. As with the Centerbridge options, these options are "out of the money". A number of options (8,501,500) have been granted to employees under an Incentive Plan. They are subject to the satisfaction of continued employment conditions. Subject to the scheme proceeding, Billabong intends to exercise its discretion to lapse all these options prior to the Scheme Record Date (as defined). As to the remaining options (11,650,144), Billabong has covenanted under the Scheme Implementation Deed that, subject to the scheme proceeding, it will use reasonable endeavours to enter into a deed with each relevant option holder under which the options will be cancelled for nil or nominal consideration with effect from the Implementation Date. 34 Billabong has granted performance rights under other Incentive Plans. There are approximately 2,578,467 performance rights on issue. Subject to the scheme proceeding, Billabong proposes to exercise its discretion to cancel all performance rights on issue other than certain performance rights held by its Chief Financial Officer, Mr Howell (486,426 performance rights). Unlike other participants, Mr Howell's performance rights are not subject to performance based hurdles. Subject to the scheme proceeding, Billabong intends to exercise its discretion to accelerate the vesting of these performance rights. On vesting, 341,444 ordinary shares in Billabong will be transferred to Mr Howell by the trustee of the Billabong Equity Plans Trust in satisfaction of certain of the vested performance rights and the remaining vested performance rights will be satisfied by payment of $144,982. 35 These matters are discussed in sections 8.5 of the scheme booklet.

Verification of the scheme booklet 36 There is evidence before me that the information contained in the scheme booklet has been verified. Billabong's directors have resolved that the scheme booklet be approved. They have confirmed that the directors do not believe that the information contained in the scheme booklet for which Billabong is responsible (namely, all information in the scheme booklet other than the information contained in section 5 of the scheme booklet and the answer to the question "Who is Boardriders?" in section 2 of the scheme booklet (the Boardriders information)) contains any statement that is misleading or deceptive or likely to mislead or deceive in any material respect. They have also confirmed that they do not believe that there is any omission from this information that would be necessary to ensure that the information is not misleading or deceptive or likely to mislead or deceive in any material respect, or that would otherwise be required to be included. There is evidence before me that the Boardriders information has also been verified and that the relevant information is not misleading or deceptive in any respect and does not contain any material omission.

Chairman of scheme meeting 37 Mr Pollard is an independent non-executive director of Billabong and its Chairman. He has consented to act as chairman of the scheme meeting. Mr Mowlem is an independent non-executive director of Billabong. He has consented to act as chairman of the scheme meeting if Mr Pollard is unable to act. Mr Pollard and Mr Mowlem have made affidavits in compliance with r 3.2 of the Federal Court (Corporations) Rules 2000 (Cth).

Distribution of scheme booklet 38 It is proposed that, in the case of those members who have nominated an electronic address for the purpose of receiving communications from Billabong, an email will be sent containing a link to a website at which the scheme booklet (including a notice of the proposed scheme meeting) and a proxy form can be accessed. I have considered the form of the email to be sent. I am satisfied that, for those members, this is an appropriate means of sending the notice of meeting and the explanatory statement. At a second court hearing, I would expect to receive evidence of the monitoring of the emails that have been sent to demonstrate the efficacy of that form of distribution. 39 Save for these members, the scheme booklet (including a notice of the proposed scheme meeting) and a proxy form will be sent by ordinary post (for members with a registered address in Australia) and by prepaid airmail or air courier (for members with a registered address outside Australia).

Proxy form 40 I have required amendments to be made to the proxy form that is proposed to be sent. As originally drafted, the proxy form made a number of statements with respect to electronic lodgement that represented that a member submitting a proxy form online was, in fact, voting online. This inaccuracy has been corrected. The amended proxy form has been tendered as Exhibit 2.

ASIC 41 The Australian Securities and Investments Commission (ASIC) has provided a letter dated 12 February 2018 in which it acknowledges that the requirement of s 411(2)(a) of the Act (that ASIC be given at least 14 days' notice of the hearing of the application) has been satisfied. Further, for the purposes of s 411(2)(b) of the Act, ASIC has stated that it has had a reasonable opportunity to examine the terms of the scheme and the explanatory statement in draft, and to make submissions to the Court in relation thereto. ASIC did not appear at the first court hearing.

Conclusions and disposition 42 I am satisfied that Billabong is a Part 5.1 body and that the scheme is an "arrangement" for the purposes of s 411(1) of the Act. I am satisfied that the formal requirements that are preliminary to the Court convening a meeting under s 411(1) of the Act have been complied with. I am also satisfied that the proposed scheme is of such a nature and is cast in such terms that, if it receives the requisite statutory majorities, the Court would be likely to approve it on an unopposed application. 43 I am satisfied that the orders, as now sought, should be made. I certify that the preceding forty-three (43) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Yates.