REASONS FOR JUDGMENT
1 The plaintiff, Centrebet International Ltd (Centrebet), seeks orders under s 411(1) of the Corporations Act 2001 (Cth) (the Act) to convene meetings to consider two schemes of arrangement with its shareholders and performance right holders (Securityholders) and certain associated relief. The schemes involve the acquisition by Sbet Australia Pty Ltd (Sportingbet) of all of the shares and performance rights issued by Centrebet.
2 Centrebet is the parent company of a group of companies (the Centrebet Group). The Centrebet Group, which conducts business through wholly owned subsidiaries, is engaged in business activities concerned with online wagering and gaming. The core business divisions of the Centrebet Group are:
wagering, in which fixed odds online betting is offered on a wide variety of Australian and international sporting, racing, entertainment and political events;
gaming, involving online poker and casino products; and
providing business-to-business fixed odds wagering management services to third parties.
3 Centrebet is incorporated in Australia and has been listed on the Australian Securities Exchange since July 2006. It operates in Australia, Norway and Denmark, as well as in Greece and other European markets. Centrebet describes itself as a major online bookmaker. It has been conducting wagering and bookmaking businesses since obtaining a sports bookmaking licence in Australia in 1992. In 1996, it became one of the first licensed bookmakers to offer online sports wagering.
4 Sportingbet was registered in New South Wales on 1 March 2011 for the purpose of acquiring the issued shares and performance rights under the proposed schemes. Sportingbet is a wholly owned subsidiary of Sportingbet PLC, an online sports betting and gaming group focusing on the Australian and European markets, which is listed on the London Stock Exchange. Sportingbet PLC and its subsidiaries (the Sportingbet Group) facilitate online sports betting, casino, poker and gaming through a range of branded websites in 21 different languages, targeting 23 countries. They accepts bets in some 34 different currencies. The Sportingbet Group holds betting and gaming licences and approvals in Alderney, Antigua and Barbuda, Australia, Malta, South Africa and the United Kingdom. The head office of the Sportingbet Group is in London.
5 Centrebet's issued share capital is presently 87,764,414 ordinary shares. In addition, it has 3,742,903 performance rights and 1,163,215 options on issue. Under one of the proposed schemes, Sportingbet will acquire all of the issued shares. Under the other, it will acquire all of the existing performance rights. Both shareholders and performance right holders will receive a cash consideration of $2 for each share or performance right held. That values Centrebet at approximately $184 million. The options are to be dealt with by contractual arrangements between each of the nine option holders and Centrebet.
6 An unusual aspect of the schemes is that each holder of shares or performance rights will receive a litigation claim right and a litigation claim unit in respect of each share or performance right held. The litigation claim rights and the litigation claim units will entitle the holders to a sum equal to 90 per cent of the potential net proceeds of a litigation claim in relation to a refund of goods and services tax (GST) that is to be prosecuted against the Commissioner of Taxation.
7 The cash consideration payable under the schemes is to be provided to Sportingbet by Sportingbet PLC. Sportingbet PLC has undertaken a capital raising in order to raise the required funds to satisfy the cash consideration. Sportingbet PLC raised approximately £65 million by way of an issue of ordinary shares, and a further £65 million by way of an issue of convertible bonds. Allowing for costs, approximately £118.5 million has been raised. The net proceeds of that raising are currently held in cash in sterling. Sportingbet PLC has made exchange rate hedging arrangements to protect that sum against currency fluctuations. On that basis, it is clear enough that Sportingbet will be able to pay the cash component of the consideration when it is due under the terms of the schemes.
8 The directors of Centrebet have retained Lonergan Edwards & Associates Pty Ltd (Lonergan Edwards) to provide a written report as to whether the schemes are fair and reasonable to Securityholders. Lonergan Edwards' report will be included in the proposed scheme booklet. Lonergan Edwards assessed the market value of Centrebet by aggregating the market value of its business operations together with the realisable value of any surplus and other assets, and by deducting net borrowings and other liabilities. The valuations were made on the basis of market value as a going concern. The primary valuation method used was the capitalisation of future earnings. The value of the Centrebet shares on a 100 per cent controlling basis, excluding any entitlement in relation to the litigation claim, to which I shall refer shortly, was calculated as between $177.8 million and $199.8 million, or $1.92 to $2.16 per share. As the cash consideration of $2 per share, which excludes any possible benefit from the litigation claim, is within their assessed valuation range, Lonergan Edwards concluded that the cash consideration is fair.
9 Lonergan Edwards assessed the schemes both with the litigation claim and without the litigation claim, on the basis that a commercial person would assume a relatively low probability of the litigation claim being successful. They assessed the market value of the litigation claim at between $6.5 million and $9.6 million and concluded that the mechanism under which Securityholders will receive any potential net proceeds under the litigation claim did not materially impact upon their overall opinion of the schemes. Their conclusion was that the schemes are reasonable, and are in the best interests of Securityholders in the absence of a superior proposal.
10 The Centrebet board has unanimously recommended that, in the absence of a superior proposal, Securityholders vote in favour of the schemes. In that regard, a particular arrangement involving the managing director of Centrebet, Mr Michael McRitchie, requires special mention. Under the terms of his service agreement, Mr McRitchie is entitled to receive a payment of $600,000 if there is a change of control of Centrebet, as will occur if the schemes are implemented as contemplated. Mr McRitchie, at the time of Centrebet's 2010 Annual Report, was deputy managing director of Centrebet. His remuneration was then $350,000 per annum, with an incentive opportunity up to 35 per cent of that remuneration, subject to net profit after tax meeting budget. The service agreement provided for an increase in the remuneration package from $350,000 to $450,000.
11 In connection with the proposed payment of $600,000 to Mr McRitchie, the directors obtained an opinion from Egan Associates, who have had considerable experience as remuneration advisers. Egan Associates were asked to provide their written opinion as to whether the change of control element of Mr McRitchie's service agreement is appropriate, reasonable and not above market practice. Egan Associates concluded that, at the time when Mr McRitchie's service agreement was entered into, a key additional and onerous accountability of Mr McRitchie was a project for change of control of Centrebet. They concluded that it is evident that a key accountability of Mr McRitchie was to facilitate a change of ownership for the benefit of the present shareholders of Centrebet.
12 Egan Associates had regard to the fact that the $2 per share cash consideration represents a premium of some 35 per cent over the closing price of shares prior to speculation in relation to a change in control initiative, and a 28 per cent premium on the six month volume weighted average price prior to Sportingbet's proposal of 11 May 2011. They also had regard to the fact that, in the context of Mr McRitchie's assuming a vital role in securing a significant transaction for the benefit of shareholders, his incentive approximates 1.5 per cent of the improved value in Centrebet since the time he assumed responsibility for managing its business in an ongoing context and additionally assumed the onerous responsibility of delivering a transforming initiative for the benefit of existing shareholders. They concluded that the reward arrangement is appropriate, reasonable and not above market practice. Having regard to that conclusion, and the fact that Mr McRitchie will receive the same consideration for his securities as other shareholders, it is not proposed to treat him as a separate class for the purposes of the schemes. That arrangement has been disclosed in the proposed scheme booklet to be sent to Securityholders.
13 Under a scheme implementation agreement (the Implementation Agreement) entered into between Sportingbet, Sportingbet PLC and Centrebet, as amended on 5 July 2011, a number of provisions are directed towards protecting the proposal and giving effect to it. Under clause 9.4 of the Implementation Agreement, Centrebet agrees to pay a break fee of one per cent of the cash consideration if the schemes do not proceed in certain circumstances. There are also provisions generally described as no shop, no talk, no due diligence and notification obligations, with a qualification to ensure compliance with fiduciary obligations of directors. All of those provisions are disclosed in adequate detail in the proposed scheme booklet.
14 Mr McRitchie and two other directors of Centrebet, Mr Con Kafataris and Mr George Kafataris, were directly involved in negotiating the Implementation Agreement on behalf of Centrebet, including the provisions to which I have just referred. Centrebet's financial advisers, Greenhill Caliburn, and legal advisers, Clifford Chance, were also involved in the negotiations. Negotiations on behalf of Sportingbet were conducted by Sportingbet itself, and by its financial advisers, Ernst & Young, and its legal advisers, Addisons. In conducting the negotiations with Sportingbet and Sportingbet PLC, Centrebet's advisers were instructed to secure the best outcome possible for Centrebet and the Securityholders. The provisions to which I have referred were insisted upon by Sportingbet and Sportingbet PLC, and Mr McRitchie believes that the provisions do not operate against the interests of Securityholders.
15 It is significant is that the break fee is not payable if the Securityholders do not approve the schemes. It would be payable in circumstances, for example, where the schemes do not proceed by reason of default on the part of Centrebet or by reason of the failure of the directors to recommend the scheme to Securityholders. There is a further quid pro quo, in that, in certain circumstances, a similar fee is payable by Sportingbet to Centrebet.
16 Under the Implementation Agreement, Centrebet must use reasonable endeavours to ensure that all holders of options agree in writing with Centrebet and Sportingbet to cancel their options or transfer them to Sportingbet. It is presently expected that all option holders will enter into arrangements with Sportingbet and Centrebet, pursuant to which their options will be cancelled with effect on and from the implementation date under the schemes. None of the options has an exercise price greater than $2. The consideration to be provided is a cash amount equal to the difference between the cash component per share of $2 and the exercise price of the option, together with one litigation claim right and one litigation claim unit. The aggregate cash consideration payable in respect of the cancellation of the options will be $559,250.
17 An unusual aspect of the proposed schemes is the arrangements relating to the litigation claim against the Commissioner of Taxation. On 27 April 2010, a subsidiary of Centrebet lodged a notification with the Australian Taxation Office of an entitlement to a refund of GST on the basis that it had incorrectly calculated its global GST amount for the tax period from 1 April 2006 to 31 March 2010. The subsidiary subsequently applied to the Commissioner of Taxation for a private GST ruling on the issue. On 9 September 2010, the Commissioner of Taxation published a ruling that was unfavourable. Centrebet's subsidiary has now commenced a proceeding in the Federal Court, challenging the Commissioner's ruling and seeking declaratory relief in respect of two sample transactions. That application is listed for a first directions hearing on 18 August 2011.
18 If the claim for refund of GST is successful, the Centrebet subsidiary may be entitled to a cash refund of up to $10.5 million. A residual amount of up to $80.2 million may also be recoverable progressively, as carry forward losses are set off against any global GST amount payable in the future. Details of the proposed conduct of the litigation claim are set out with some particularity in the proposed scheme booklet. The conduct of the litigation claim is the subject of a separate agreement (the Litigation Management Deed) between Centrebet, Centrebet's subsidiary, Sportingbet, Sportingbet PLC, and a number of other parties. The Litigation Management Deed establishes procedures for conducting the litigation claim, and governs how the litigation claim will be funded and how the value of any benefits received as a result of the litigation claim will be distributed to holders of litigation claim rights and litigation claim units.
19 The Litigation Management Deed will only become effective, in relation to its substantive operative parts, if and when both schemes become effective. It provides that the litigation claim is to be managed by a claim committee consisting of two members nominated by Centrebet and two members nominated by Sportingbet. The initial members nominated by Centrebet will be Mr Con Kafataris and Mr George Kafataris, who are both currently directors of Centrebet. The decisions of the claim committee will be made by a simple majority, except that any decision to settle or withdraw the litigation claim or to file an appeal in relation to the litigation claim will be made solely by the members nominated by Centrebet, who must, however, provide material information relating to those decisions to the other members. The Litigation Management Deed also contains provisions regarding meetings of the claim committee, the duties and obligations of the claim committee members, and a procedure regarding the making of a decision in the event of a deadlock.
20 The Litigation Management Deed contains provisions regarding the funding of the litigation claim. In order to fund the conduct of the claim after the effective date of the schemes, Centrebet has deposited a sum of $924,000 into a dedicated bank account (the Costs Account), opened by Centrebet, which will be operated and managed by the claim committee. Any amounts in that account, including accrued interest, may be applied towards the payment of costs associated with prosecuting the litigation claim, taxes incurred by the parties to the Litigation Management Deed, and any other costs or disbursements of various other parties. In addition, Mr Con Kafataris has entered into an indemnity agreement, pursuant to which he has agreed to indemnify the various parties to the Litigation Management Deed for costs associated with conducting the litigation claim that are in excess of the amount of $924,000. The amount of the indemnity will be agreed between the claim committee and Mr Kafataris. If there is a dispute with respect to the amount, the amount will be determined by an independent expert.
21 If the litigation claim is successful, Sportingbet will make payments in accordance with the arrangements set out in the Litigation Management Deed. Any cash refund amount, any carry forward loss amount, any interest on those amounts, any unused balance of the initially deposited sum, and any award of costs received in connection with the litigation claim are to be paid by Sportingbet in a prescribed order. First, Sportingbet must pay any tax liability of Centrebet or any of its subsidiaries, or Sportingbet PLC or any of its subsidiaries, incurred as a result of receiving any portion of those amounts. Secondly, it must pay costs relating to the prosecution of the litigation claim and the operation of the Costs Account, and other fees and expenses of the other parties involved in the litigation process. Thirdly, it must pay into, or retain in, the Costs Account any moneys that the claim committee considers may be required to cover future costs or taxes associated with the litigation claim. Fourthly, it must reimburse Mr Kafataris for any amounts paid into the Costs Account pursuant to the indemnity arrangement. Finally, it must pay 10 per cent of the remaining amount to Centrebet and apply the residual 90 per cent for the benefit of the holders of litigation claim rights and litigation claim units on a pro rata basis.
22 A litigation claim right is a contractual right entitling the holder of the right to receive the value of any amount that the collection agent receives from Sportingbet under the Litigation Management Deed on a pro rata basis. The Litigation Management Deed appoints a collection agent, who is responsible for the receipt, administration and distribution of any funds to holders of litigation claim rights. The collection agent has entered into a deed poll in favour of each holder of litigation claim rights, under which the collection agent confirms that it will hold assets attaching to the litigation claim rights as agent and bare trustee for the holders of those rights. Any payments made by Sportingbet between the implementation date of the schemes and the fifth anniversary of that date, or such other date as may be determined by the claim committee members nominated by Centrebet, will be made to the collection agent, who will hold the funds as agent and bare trustee for all holders of litigation claim rights. The collection agent will distribute any funds it receives from Sportingbet pursuant to the Litigation Management Deed in the manner that I have indicated.
23 Litigation claim units are units in the litigation claim unit trust. The litigation claim unit trust is established under the litigation claim unit trust deed, under which a trustee (the Litigation Claim Trustee) is appointed. The litigation claim unit trust deed governs such matters as the terms of the litigation claim unit trust, the issue of and the rights attached to litigation claim units, the Litigation Claim Trustee's powers and obligations, and payment of the Litigation Claim Trustee's fees and expenses. It is proposed that any payments made by Sportingbet after the expiration of the five year period to which I have referred will be made to the Litigation Claim Trustee, rather than to the collection agent. The Litigation Claim Trustee will then distribute the funds of the litigation claim unit trust to all holders of litigation claim units on a pro rata basis.
24 Centrebet has also appointed PT Limited as security trustee under the Litigation Management Deed and a security trust deed. The role of the security trustee is to enforce, on behalf of the holders of litigation claim rights and litigation claim units, all obligations owed by Sportingbet, the collection agent, the Litigation Claim Trustee, Centrebet or its subsidiaries under the Litigation Management Deed, the litigation claim unit trust deed, the collection agent deed poll, and various other instruments, in the event that any such obligations are breached. If enforcement action is brought by the security trustee, the security trustee will hold any proceeds of that action on trust for the holders of the litigation claim rights and the litigation claim units, and will distribute the proceeds to them on a pro rata basis, after deducting the costs and expenses incurred in any such action.
25 It is apparent from what I have said in describing the litigation claim that the rights of the holders of litigation claim rights and litigation claim units are dependent upon performance by the respective parties of their obligations. The rights of the holders of those interests are not secured until such time as funds are actually received by the collection agent or the Litigation Claim Trustee, as the case may be.
26 The schemes provide for the issue of litigation claim rights and litigation claim units, as well as for the payment of the cash consideration. The schemes are in similar terms and provide a structure whereby the cash consideration and the litigation claim units and litigation claim rights must be provided prior to the effective transfer of shares or performance rights, as the case may be. There is therefore no performance risk involved. That is to say, if there is a failure to comply with the requirement to provide the cash component or the litigation claim rights or litigation claim units, there will be no transfer of shares or performance rights to Sportingbet. Assuming, however, that the consideration is provided, the effect of the schemes is that the shares and performance rights will be transferred to Sportingbet without the need for any further act on the part of Securityholders.
27 The performance rights arise under a long term incentive plan established by Centrebet. Under the terms of the plan, the holder of a right is entitled to be allotted a share in the capital of Centrebet without the payment of any further consideration. However, the performance rights issued will not vest unless and until the third anniversary of the issue date of the right has passed and certain performance hurdles have been satisfied. The performance hurdles involve a minimum return to shareholders arising from their holding of shares, valued against an index of ASX listed companies chosen by the directors of Centrebet. The performance rights have not vested. However, under the terms of their issue, the board may, from time to time, amend the vesting provisions. The board has, in fact, amended the vesting provisions to ensure that all performance rights will vest. The rationale for that decision is that the proposed cash consideration represents a significant step on the way to satisfying the performance hurdles.
28 The proposed scheme booklet contains particulars as to the quantum of the premium involved in the proposed cash consideration. Putting aside the value of the litigation claim, the premiums that are implied by the cash price are as follows:
26 per cent on the closing price on 10 May 2011, the last trading price prior to the announcement of the proposal;
28 per cent on the six month volume weighted average price up to 10 May 2011;
24 per cent on the three month volume weighted average price up to 10 May 2011; and
22 per cent on the one month volume weighted average price up to 10 May 2011.
The price also represents a 35 per cent premium on the closing price of $1.48 on 5 March 2010, the last trading day prior to initial speculation regarding the receipt by Centrebet of a proposal for a control changing transaction. Those premiums are higher if one takes into account the assessed value of the litigation claim to Securityholders. That, of course, involves considerable speculation as to the likely success of the proceeding against the Commissioner of Taxation.
29 In determining whether it is appropriate to summon a meeting under s 411, the Court would generally need to be satisfied that the proposed scheme is of such a nature and cast in such terms that, if it receives the requisite statutory majority, the Court would be likely to approve it on the hearing of an unopposed application. The Court is not required to be satisfied that no better scheme could have been proposed. The question is whether it is reasonable to suppose that sensible business people might consider the arrangement proposed is of benefit to members. I am satisfied that the scheme is one to which the holders of shares and performance rights in Centrebet, if properly informed, could agree.
30 I am satisfied that Centrebet is a Part 5.1 body. Each scheme is clearly an arrangement within the meaning of s 411 of the Act. I am satisfied that the Australian Securities and Investments Commission has had an appropriate opportunity to consider the proposed scheme booklet, and that s 411(2) of the Act has been satisfied. Accordingly, I propose to accede to the application by Centrebet to convene meetings of Securityholders for the purpose of considering the proposed schemes.
I certify that the preceding thirty (30) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett.