Cathay Pacific Airways Limited v Assistant Treasurer and Minister for Competition Policy and Consumer Affairs [2010] FCA 510

MARKOVIC J: 1 By originating process filed on 27 March 2018, Mantra Group Limited (Mantra) seeks orders pursuant to s 411(1) of the Corporations Act 2001 (Cth) (Act) convening a meeting of its members (Scheme Shareholders) for the purpose of considering and, if thought fit, agreeing, with or without modification, to approve a scheme of arrangement (Scheme) proposed to be made between it and the Scheme Shareholders (Scheme Meeting) and for consequential relief. 2 On 4 April 2018 at the conclusion of the first hearing, I made orders for the convening of a meeting of the Scheme Shareholders. These are my reasons for making those orders.

background 3 Mantra is an Australian public company limited by shares with its registered office in New South Wales. It is admitted to the official list of the Australian Security Exchange (ASX). 4 Mantra is a holding company for a group of companies known as the Mantra Group which is an Australian based hotel and resorts operator currently operating under the brands - "Art Series", "Peppers", "Mantra" and "BreakFree", with more than 135 properties in Australia, New Zealand, Indonesia and USA (Hawaii). It operates the properties in its portfolios using a combination of lease rights, managements letting rights, hotel management rights, management agreements and marketing services agreements. 5 AAPC Limited (AAPC), the acquiring company, is an Australian public company limited by shares ultimately controlled by Accor S.A. AAPC trades in Australia as "AccorHotels" and its business involves the management and operation of hotels and resorts in Australia. There are currently over 200 hotels and over 27,000 rooms in Australia operating under AccorHotels Group's brands with hotel businesses either owned or managed by AAPC and its subsidiaries or operated under a franchise agreement.

the scheme 6 On 12 October 2017 Mantra and AAPC entered into a Scheme Implementation Agreement (SIA). Clause 2 of the SIA provides that Mantra will propose and implement the Scheme in accordance with the terms of that agreement and the Act and that AAPC will comply with its obligations under the Scheme and the Deed Poll and provide reasonable assistance to Mantra in proposing and implementing the Scheme in accordance with the SIA. 7 The Scheme is subject to a number of conditions precedent which are set out in the SIA and the Scheme Booklet. If the proposed Scheme becomes effective and is implemented: (1) all fully paid ordinary shares in the capital of Mantra held by Scheme Shareholders as at the Scheme record date, defined in the SIA to mean 7.00 pm on the third business day after the date on which the Scheme becomes effective (Scheme Record Date), will be transferred to AAPC; (2) on exchange, Scheme Shareholders will receive a total cash consideration of $3.96 per share comprised of: (a) $3.80 per Mantra share payable by AAPC; and (b) a fully franked special dividend of $0.16 per Mantra share payable by Mantra; and (3) Mantra will be removed from the official list of the ASX.

Scheme is recommended by the Mantra directors 8 The Mantra directors unanimously recommend that, in the absence of a superior proposal, Scheme Shareholders vote in favour of the Scheme. Subject to the same qualification, each of the Mantra directors intends to vote in favour of the Scheme in respect of all Mantra shares controlled or held by, or on behalf of, each of them.

Independent expert report 9 Grant Thornton, the independent expert appointed by the directors of Mantra to assess the Scheme, prepared a report. In their report Grant Thornton assessed the fair market value of Mantra shares on a control basis adopting three valuation methodologies: a quoted security price method; the DCF method; and the EBITDA multiple method. On the basis of those methodologies, Grant Thornton valued the shares in Mantra at between $3.86 and $4.53 per share. 10 Grant Thornton concluded that the Scheme is fair and reasonable and thus is in the best interests of Mantra shareholders in the absence of a superior alternative proposal emerging. They reached that conclusion having regard to a number of matters including that: (1) Mantra shareholders will receive a premium for control for their shares under the Scheme which is unlikely to be available to them in the absence of the Scheme or an alternative proposal. In the absence of the Scheme or an alternate transaction, Grant Thornton is of the view that it is likely that Mantra shares will trade at prices below the total cash consideration, at least in the short term; (2) the principal disadvantage of the proposed Scheme for Mantra shareholders is that they will forgo the opportunity to participate in the future potential upside of Mantra and any uplift in the current market conditions. That said, Grant Thornton's valuation assessment based on the net present value of future cash flows reflects the current known growth opportunities which are set out in their report; (3) as at the date of Grant Thornton's report, no superior proposal to the proposed Scheme had emerged; and (4) since the announcement of the proposed Scheme, the share trading prices of Mantra have been substantially in line with the total cash consideration of $3.96 per share which seems to indicate good support from investors for the proposed Scheme, perceived low risk of the Scheme not being implemented and limited expectation for a superior proposal.

legal framework 11 Section 411(1) of the Act relevantly provides that where an arrangement is proposed between a Pt 5.1 body and its members the Court may, on the application in a summary way of the body, order a meeting of the members of the body to be convened in such manner, and to be held in such place as the Court directs. The Court may also approve the explanatory statement required by s 412(1)(a) of the Act to accompany the notice of the meeting. 12 Section 412(1)(a) provides that where a meeting is convened under s 411, the body must, with every notice convening the meeting, send a statement explaining the effect of the arrangement which must state any material interests of the directors and the effect of the proposed arrangement on those interests insofar as that effect is different from the effect on the like interests of other persons. The statement must also set out such information as is prescribed and any other information that is material to the making of a decision by a member whether or not to agree to the arrangement. 13 Section 411(2) provides that the Court must not make an order pursuant to s 411(1) unless 14 days' notice of the hearing of the application has been given to the Australian Securities and Investments Commission (ASIC) and the Court is satisfied that ASIC has had a reasonable opportunity to examine the terms of the proposed arrangement and a draft explanatory statement relating to it and to make submissions to the Court in relation to the proposed arrangement and the draft explanatory statement. 14 The Court would not ordinarily summon a scheme meeting unless the scheme is of such nature and cast in such terms that, if it receives the support of the statutory majority at the scheme meeting, the Court would be likely to approve it on the hearing of an unopposed application. The question for the Court is whether it is reasonable to suppose that sensible business people might consider the arrangement proposed is of benefit to members: see Centrebet International Limited, in the matter of Centrebet International Limited [2011] FCA 870 at [29]; Texon Petroleum Limited, in the matter of Texon Petroleum Limited [2013] FCA 29 (Texon) at [4]. The Court does not need to be satisfied that no better scheme could have been proposed. Ultimately, the question is for the members themselves: Texon at [4]. 15 Given that the application, in effect, proceeds ex parte, it is the duty of the plaintiff to bring to the Court's attention all matters that could be considered relevant to the exercise of its discretion: Permanent Trustee Company (2002) 43 ACSR 601; [2002] NSWSC 1177 at [7]. 16 At the first hearing the following matters need to be established: (1) the plaintiff is a Pt 5.1 body; (2) the proposed scheme is an "arrangement" within the meaning of s 411 of the Act; (3) the explanatory statement will provide proper disclosure to members; (4) the scheme is bona fide and properly proposed; (5) ASIC has had reasonable opportunity to examine the proposed scheme, to make submissions and has had 14 days' notice of the proposed hearing date; and (6) any other procedural requirements have been met, see EcoBiotics Limited, in the matter of EcoBiotics Limited [2017] FCA 643 at [20] and to similar effect Re Orica Ltd [2010] VSC 231 at [7] where Davies J sets out the function of the Court at the first Court hearing and relevantly also notes that the Court should consider whether there may be matters that may make it unlikely that the scheme would be capable of a grant of approval by the Court if, in due course, its approval is sought and so make it futile to put the scheme to shareholders for their vote.

Part 5.1 body 17 The term Pt 5.1 body is relevantly defined in s 9 of the Act to mean a company. The evidence confirms that Mantra is a Pt 5.1 body.

The proposed Scheme is an arrangement 18 I am satisfied that the proposed Scheme is an arrangement between Mantra and its members and that the Scheme involves a single class of members. 19 An "Eligible Person" may participate in the Mantra Long Term Incentive Plan (Plan) which enables Mantra to make grants of performance rights that are subject to vesting conditions based on continuation of employment and performance criteria. 20 The Scheme Booklet discloses that, as at 3 April 2018, there were 1,106,061 outstanding performance rights issued under the Plan, including to Mr Bob East, one of the Mantra directors and the chief executive officer of Mantra. 21 The Mantra board has resolved, subject to Mantra shareholders approving the Scheme, to waive unsatisfied vesting conditions for the performance rights and to accelerate the exercise period such that all performance rights convert or are exercised prior to the Scheme Record Date. This includes waiving all applicable unsatisfied vesting conditions and issuing the holders of the performance rights with the number of shares required by those performance rights on vesting. Those shares will then be subject to the Scheme and will be acquired by AAPC as part of the Scheme and on the same terms as the Scheme. 22 I am satisfied that all the Mantra shareholders will have similar or the same interests and there will be no class issues.

Proper disclosure to shareholders in relation to the proposed Scheme 23 The Scheme Booklet includes the explanatory statement for the Scheme. 24 The information contained in it has been the subject of a verification process as described by Fiona Lucy van Wyk, Mantra's company secretary, and Jennifer Karen Selby, general counsel for AAPC. Ms van Wyk and Ms Selby have deposed, based on their respective involvements in the verification process, that the information contained in the Scheme Booklet is correct and not misleading or deceptive. The verification process undertaken required the persons involved, among other things, to confirm that there was no material omission from the statements required by the Act or any other applicable law or regulation in relation to those statements in the draft Scheme Booklet allocated to them for verification. 25 I am satisfied, on the basis of this evidence, that the Scheme Booklet will provide proper disclosure to the shareholders of Mantra.

Bona fide and properly proposed Scheme 26 The SIA under which Mantra agrees to propose the Scheme and AAPC agrees to take the steps necessary to implement the Scheme is prima facie evidence that the Scheme is bona fide and properly proposed.

Notice to ASIC 27 There is evidence that ASIC has had sufficient opportunity to examine the proposed Scheme and the explanatory statement. There is also evidence that queries raised by ASIC have been addressed by Mantra. By letter dated 3 April 2018, ASIC informed Mantra, among other things, that: (1) the draft explanatory statement was first provided to it on 16 March 2018 and revised versions were provided on various dates with the last revised version being provided on 3 April 2018; (2) it had examined the terms of the Scheme and the draft explanatory statement in accordance with its policy in Regulatory Guide 60 Schemes of arrangement; and (3) it did not currently propose to appear to make submissions or intervene to oppose the Scheme at the first hearing under s 411(1) of the Act.

Other procedural requirements have been met 28 The evidence included a consent to act as chairman and alternate chairman at the Scheme Meeting. I was otherwise satisfied that the various procedural requirements for making the orders sought were met.

Particular aspects of the Scheme 29 The plaintiff drew the Court's attention to particular aspects of the Scheme set out below.

Exclusivity provisions 30 Clause 11 of the SIA is an exclusivity provision. It includes "no shop and no talk" and "no due diligence" restrictions, a "notification of approaches" provision and a "matching right" provision. 31 In Arthur Yates & Co Limited (2001) 36 ACSR 758; [2001] NSWSC 40 at [9] Santow J observed that an exclusivity clause should satisfy the following concerns: (1) it should be for no more than a reasonable period capable of precise ascertainment; (2) where directed at dealing with a solicited or unsolicited alternative merger proposal, it should be framed so that it is subject to a fiduciary carve-out; and (3) such a provision should be clearly disclosed in the explanatory statement sent to shareholders. 32 In this case: (1) the exclusivity period runs from the date of the SIA, 12 October 2017, until the earliest of the date of its termination, the "End Date" or the effective date of the Scheme. Whilst the exclusivity period is relatively lengthy, as submitted by Mantra, it is reasonable in the circumstances. Significant time was needed to obtain merger clearance from the Australian Competition and Consumer Commission which commenced its public review of the transaction on 27 October 2017 and announced that it would not oppose the proposed acquisition of Mantra by AAPC on 8 March 2018; (2) the "no talk" and "no due diligence" restrictions are subject to the overriding obligation that the Mantra directors not breach their fiduciary or statutory duties. Although the "no shop" restriction is not included in the fiduciary carve-out, this is consistent with authority: see, for example, Hostworks Group Limited ACN 008 010 820, in the matter of Hostworks Group Limited ACN 008 010 820 (2008) 26 ACLC 137; [2008] FCA 64 at [34]. Similarly, the "notification of approaches" and "matching right" provisions are not included in the fiduciary carve-out which is consistent with the approach of courts to require a fiduciary carve-out only in relation to "no talk" provisions: see Re Healthscope Ltd [2010] VSC 367 at [18]-[23]; (3) the exclusivity provisions are disclosed in section 1.14(b) of the Scheme Booklet; (4) the SIA was negotiated between commercial parties represented by experienced legal advisors; and (5) the directors of Mantra believe that, in the absence of a superior proposal emerging, the Scheme is in the best interests of Mantra shareholders and represents an attractive outcome for them.

Reimbursement Fee 33 Clause 12.4 of the SIA provides for the payment of a reimbursement fee of $11.8m on the happening of any of the events specified in that clause. Section 1.14(c) of the Scheme Booklet sets out the circumstances in which a reimbursement fee is payable to AAPC. 34 Guidance Note 7: Lock-up devices issued by the Takeovers Panel provides at cl 9 that "[i]n the absence of other factors, a break fee not exceeding 1% of the equity value of the target is generally not unacceptable". Equity value of the target is described as the "aggregate of the value of all classes of equity securities issued by the target having regard to the value of the bid consideration when announced". 35 In the present case, the bid was announced on 12 October 2017 when the SIA was executed. Based on the number of shares on issue - 297,428,917 - 1% of the equity value of the target is approximately $11,778,185. The reimbursement fee exceeds the 1% guideline but not by a material amount. Further, the reimbursement fee is expressed in cl 12.8(f) of the SIA as a genuine and reasonable pre-estimate of the costs set out in cl 12.8(a)-(d). On the basis of the evidence before me, I am satisfied that the clause was negotiated by commercial parties represented by experienced legal advisors and that it takes into account the significant costs that AAPC would have incurred in preparation for the implementation of the Scheme. 36 It is also relevant to note that AAPC has agreed to match the reimbursement fee on the happening of the event specified in cl 12.5 of the SIA.

Performance risk 37 In my opinion, there are appropriate procedures in place to guard against performance risk. They are that: (1) pursuant to cl 4.5 of the Scheme, the Scheme consideration, of $3.96 per Scheme share, minus the per-share cash amount of the special dividend (Scheme Consideration), must be paid by AAPC into a trust account operated by Mantra as trustee by no later than the business day before the implementation date; (2) subject to the Scheme becoming effective, on the implementation date the following will occur: (c) the Scheme Consideration must be provided by AAPC as set out in (1) above; (d) the Scheme Consideration must be paid by Mantra to each Scheme Shareholder based on the number of Scheme shares held by that Scheme Shareholder as at the Scheme Record Date in the manner contemplated by cl 4.7 of the Scheme; and (e) the Scheme Shares will be transferred to AAPC; (1) immediately following receipt of the transfer form from AAPC, Mantra will enter the name and address of AAPC in the register as the holder of all of the Scheme shares; (2) AAPC has made arrangements to fund the Scheme Consideration. Those arrangements are set out in section 4.6 of the Scheme Booklet which provides that Accor S.A. and AAPC intend to fund the Scheme Consideration using either or both cash and cash equivalent investments on hand or debt facilities. As at the date of the Scheme Booklet, the level of cash which Accor S.A. and AAPC will have on hand at the time of implementation was unknown. However, the Scheme Booklet discloses that Accor S.A. has sufficient debt facilities in place to fund 100% of the Scheme Consideration and provides a summary of those facilities which demonstrates that it has sufficient capacity to meet the total Scheme Consideration; and (3) AAPC has executed a Deed Poll in favour of the Scheme Shareholders by which it covenants to perform all actions attributed to it under the SIA and otherwise comply with the Scheme. A copy of the Deed Poll is included in the Scheme Booklet.

Deemed warranty 38 Clause 7.4 of the Scheme is a deemed warranty by the Scheme Shareholders that their shares will be free from encumbrances and that they have full power and capacity to sell and transfer their Scheme shares to AAPC. Clauses to this effect are common place and have been approved in other schemes where they are disclosed to the relevant security holders: see, for example, Re APN News and Media Ltd (2007) 62 ACSR 400; [2007] FCA 770 at [57]-[63]; Tower Australia Group Limited, in the matter of Tower Australia Group Limited [2011] FCA 224 at [13]-[15]. Specific disclosure and appropriate prominence has been given to these deemed warranties in section 1.12 of the Scheme Booklet.

conclusion 39 I was satisfied that the proposed Scheme was of such a nature that, if approved at the Scheme Meeting, the Court would be likely to approve the Scheme on the hearing of an unopposed application. Accordingly, I made the orders sought by Mantra under s 411(1) of the Act to convene the meeting of the Scheme Shareholders for the purposes of considering the proposed Scheme. I certify that the preceding thirty-nine (39) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Markovic.