REASONS FOR JUDGMENT
1 CCI Holdings Ltd (the Company), has applied under s 411 of the Corporations Act 2001 (the Corporations Act) for orders under s 411 of the Corporations Act convening meetings of shareholders of the Company for the purpose of considering a scheme of arrangement between the Company and certain of its shareholders. Under the scheme it is proposed that the Company will become a wholly owned subsidiary of Bureau Veritas Australia Pty Limited (the Offeror). The scheme involves the transfer of all shares in the capital of the Company not already owned by the Offeror, or related bodies corporate, for a consideration consisting of 58 cents per share, less any amount that may be paid prior to the scheme becoming effective by way of a fully franked interim dividend. It is expected, subject to approval from the Australian Taxation Office, that the Company will declare such a dividend of 3 cents.
2 The Company is the holding company of a group of businesses providing a range of services to the Australian and international resource and coal industries. While the coal industry is the Company's major focus, its services are utilised by a number of large industries such as oil and gas, steel, petrochemical and power stations. The Company was listed on the Australian Securities Exchange Ltd (ASX) in 1991. It has experienced rapid growth in revenues since then. In recent years, its growth has accelerated under a new management structure. It has reported record revenues and profits in the recent past.
3 The Offeror is a wholly owned subsidiary of Bureau Veritas SA (Bureau Veritas). Bureau Veritas is a leading international conformity assessment company whose core business is to evaluate compliance in the areas of quality, health, safety, environment and social responsibility. Bureau Veritas offers an extensive range of technical services in the fields of certification, conformity assessment, consulting and training. It evaluates, monitors, inspects or certifies assets as well as projects, products and systems using its own benchmark references or external standards in order to deliver compliance reports.
4 The directors of the Company, with the assistance of advisors, have unanimously recommended that all shareholders vote in favour of the scheme in the absence of a superior proposal. The term superior proposal is defined for the purposes of the proposed scheme as a competing proposal that, if completed in accordance with its terms, would result in a transaction more favourable to shareholders than the transactions contemplated by the proposed scheme.
5 On 12 March 2007 the Company and the Offeror together, with Bureau Veritas, entered into a Merger Implementation Agreement. The Merger Implementation Agreement imposed obligations on the Company to take all necessary steps to propose, implement and complete a scheme of arrangement substantially in the form set out in an annexure to the Merger Implementation Agreement. The Company agrees to do that as soon as is reasonably practicable. The detailed steps required are set out in the Merger Implementation Agreement. In addition the Offeror undertook an obligation to take all necessary steps to implement and complete the scheme. That included, in particular, executing a deed poll whereby the Offeror undertakes to provide the consideration payable under the scheme.
6 The scheme of arrangement is in a not unusual form and provides that, if the scheme becomes effective, the Offeror will provide the scheme consideration in accordance with a regime specified in the scheme. Mechanisms are laid down for cleared funds to be paid into an account under the control of the Company to be held by the Company, as trustee for the shareholders, and to disperse the consideration payable under the scheme if the scheme becomes effective. I am satisfied that the mechanism will operate to ensure that there is no risk that shares would be transferred to the Offeror without the consideration being paid.
7 The Merger Implementation Agreement specified a number of conditions subject to which the scheme is to be made. They are for the most part conditions relating to changes in circumstances or breaches by the respective parties in giving effect to their respective obligations. The Merger Implementation Agreement also contains warranties and indemnities by both parties and contains a guarantee and indemnity by Bureau Veritas in respect of the obligations of the Offeror.
8 Clause 13 of the Merger Implementation Agreement provided for the payment by the Company to the Offeror of a break fee of $750,000 in certain circumstances. The circumstances involve the directors failing to recommend the scheme or making public statements to the effect that the scheme is not supported. The break fee is also payable in the event of a successful competing proposal.
9 Clause 13 of the Merger Implementation Agreement, however, provides that, if it is finally determined that any part of the break fee is unlawful, involves a breach of directors' duties or constitutes unacceptable circumstances within the meaning of the Corporations Act, then the obligation to pay the break fee does not apply to the extent of any impugned amount. Provision is made for refund if such a determination is made after the break fee has been paid. The rationale for the break fee is that the parties will incur significant costs, expenses and outgoings if the scheme is not successful. It is not possible to ascertain those costs accurately and the break fee represents a genuine and reasonable pre-estimate of the internal/external advisory and financial costs of the Offeror in relation to the proposed scheme.
10 By a proposed deed poll, the Offeror will covenant, for the benefit of the Company and all shareholders who will be subject to the scheme to pay the scheme consideration in accordance with the regime laid down in the scheme of arrangement.
11 It is proposed that the scheme booklet to be sent to shareholders will contain a report by Messrs Forsythes providing a broad outline of the main Australian income tax and capital gains tax implications for shareholders of the Company in the event that the scheme is implemented as outlined. Messrs Forsythes have consented to their report being included in the scheme booklet. Their report describes in general terms the tax consequences for shareholders according to whether or not shares by them are held on revenue account or capital account.
12 The directors have also engaged PKF Corporate Advisory Services NSW Pty Ltd (PKF) to prepare a report in respect of the transaction. The purpose of the report is for PKF to express an opinion as to whether or not the scheme is in the best interests of, and is fair and reasonable to, the shareholders of the Company. The report will be included in the scheme booklet. PKF have reported that, in their opinion, the scheme will be in the bests interests of, and will be fair and reasonable to the shareholders of the Company, if the consideration offered by the Offeror is greater than or equal to the fair market value of shares in the Company, assuming 100% ownership and the advantages of approving the scheme outweigh the disadvantages of not approving it. They also expressed the view that, should the consideration not be fair, the scheme may still be reasonable if the advantages of the proposed transaction outweigh the disadvantages, including any shortfall in consideration.
13 The consideration payable under the scheme is above PKF's assessed fair market value range of a share in the Company and is, therefore, considered by PKF to be fair from the perspective of the shareholders. In their report, PKF set out what they consider to be the advantages of approving the scheme and the disadvantages of approving the scheme. Their conclusion is that the scheme is, on balance, fair and reasonable and in the best interests of the shareholders. They confirm that the value of the consideration, inclusive of a premium for control, exceeds their assessment of fair value of the shares in the Company. Further, on balance, they consider that the advantages of approving the scheme outweigh the disadvantages to the shareholders and that the disadvantages of rejecting the scheme outweigh the advantages of rejecting it. They have prepared a very detailed analysis of the Company's business in the course of assessing the value of the shares.
14 The consideration of 58 cents represents a premium on recent market prices. It represents a premium of 23% over the last offer price of shares on ASX on the trading day prior to the announcement of the proposed scheme on 9 March 2007. It represents a premium of 31% over the volume weighted average share price of the Company's shares in the one month prior to the announcement and a premium of 48% over the volume weighted average share price of the Company's shares in the three month period prior to the announcement.
15 Mr David Butel is the chief executive officer of the Company. He currently has 1,500,000 options to acquire shares in the Company. The options are not covered by the scheme. However, a cancellation of options deed, to be entered into between Mr Butel and the Offeror, provides that he will release the options in consideration of compensation agreed with the Offeror.
16 On 9 March 2007 Australian Laboratory Services Pty Limited (ALS) entered into a pre-scheme option deed with the Offeror. Under that deed, ALS granted to the Offeror the right to purchase 27 million shares in the capital of the Company for a price equal to the price at which the board recommends the scheme. The Offeror may exercise the option by giving notice in writing to ALS during the call option period as that term is defined. In effect the option must come to an end no later than 31 August 2007, although the period may terminate earlier than that time.
17 By clause 4 of the pre-scheme option deed, ALS agrees to vote in favour of the scheme at the meeting of shareholders convened to approve the scheme. However, nothing in the deed restricts the ability of ALS otherwise to exercise the votes attaching to the option shares in its absolute discretion. On 29 March 2007 the Offeror and ALS acknowledged that the obligation to vote in favour of the scheme was intended to apply only to the 27 million shares that were the subject of the option deed.
18 The existence of the pre-scheme option deed creates a relevant interest in the Offeror in 27 million shares. At present neither the Offeror nor any related body holds shares in the Company. It is intended that, if the Offeror does acquire shares, it will not be permitted to attend the meeting to consider the scheme of arrangement. However, the Company is concerned at the possible consequences of the existence of the pre-scheme option deed, containing, as it does, a promise by ALS to vote in favour of the scheme. It therefore proposes that there be two meetings, on the basis that ALS constitutes a separate class, at least in respect of 27 million shares.
19 I have some reservation as to whether a single shareholder can be treated as a separate class in respect of some shares. The aim, ultimately, of a separate meeting of shareholders, who have a different interest, is to ensure that the Court will be satisfied that members whose interests do not coincide will be given the opportunity of expressing support or opposition to the scheme separately. I indicated in the course of the hearing that I would be disposed to conclude that there was no separate class; so long as it was possible to establish, at a second hearing to approve a scheme, what shares have been voted in favour and what shares have been voted against the proposal to agree to the scheme, that is all that would be necessary.
20 The logistics of the proposal are such, however, that the Company prefers to retain the form of notice that has been prepared. It is important to endeavour to have the scheme approved, if it is to be approved prior to the end of the financial year on 30 June. It is therefore proposed that there will be separate meetings. One meeting will be of ALS in respect of 27 million shares. The other meeting will be of all shareholders, including ALS, but limited to shares that it then holds in excess of 27 million. As I have, said the Offeror and any related corporation will not participate in either meeting.
21 The Australian Securities and Investments Commission has written to the Company's solicitors indicating that it does not currently propose to appear to make submissions or intervene to oppose the proposed scheme at the hearing today. I am satisfied that the scheme as proposed is one that reasonable shareholders properly informed might agree to. It is also a scheme that, if agreed to by the requisite majority of shareholders, the Court would be likely to approve on the hearing of an unopposed application. In all of the circumstances I propose to accede to the Company's application to convene meetings in the manner proposed in the application.
I certify that the preceding twenty-one (21) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett.