ENT Pty Ltd v Sunraysia Television Ltd

JUDGE: JACOBSON J DATE: 25 JUNE 2013 PLACE: SYDNEY

Introduction 1 On 13 May 2013 Farrell J made orders convening a meeting of shareholders of the plaintiff company, PR Finance Group Limited (PRF) for the purpose of considering a scheme of arrangement proposed between PRF and its members under which the whole of the issued capital of PRF is to be acquired by Keybridge Capital Limited (Keybridge). 2 Her Honour's reasons for judgment in respect of the first court hearing describe the scheme and the perilous financial circumstances of PRF which resulted in Keybridge's offer: see PR Finance Group Limited, in the matter of PR Finance Group Limited [2013] FCA 504. 3 The orders made by Farrell J provided for the scheme meeting to be held on 14 June 2013. However, shortly before that date, on the afternoon of 12 June 2013, the Australian Securities and Investments Commission (ASIC) wrote to PRF indicating that ASIC intended to withhold the usual "no objection" statement under s 411(17)(b) of the Corporations Act 2001 (Cth) because ASIC considered that PRF had failed to disclose material information to members. 4 The information which ASIC contended to be material was the audited financial statements of PRF for the financial year ending 30 June 2012. Significantly, section 5.5 of the scheme booklet contains a disclosure that the audited financial report for that period had not been completed, but went on to say that the report would be lodged with ASIC not less than 10 days before the scheme meeting. 5 Notwithstanding the absence of the audited financial report the scheme meeting was held on 14 June 2013. The scheme was approved by a very large majority of members, both in number and in value. Even if the votes of the two directors who have an ongoing financial interest in the success of the scheme are excluded, the statutory majorities have been comfortably satisfied. 6 Members who were present at the scheme meeting were informed that ASIC intended to withhold its "no objection" letter and that ASIC had stated its intention to appear at the second court hearing: …to make submissions as to the adequacy of the information provided to shareholders with respect to the provision of FY12 audited financial accounts. 7 PRF took other steps to inform shareholders of the position taken by ASIC. It posted the details of ASIC's position on the PRF website on the night before the meeting and it also emailed or wrote to all shareholders after the meeting informing them of ASIC's position. 8 The substance of PRF's post-meeting correspondence with shareholders was to invite them to contact PRF or to appear at the second court hearing if they considered that the new information would have affected the way in which they voted at the meeting, or if they did not vote, that they would have voted in a particular manner. 9 No shareholder of PRF contacted that company before the meeting in response to the communication. Nor did any shareholder appear at the second court hearing to object to the scheme. 10 However, ASIC appeared at the hearing and opposed the grant of approval to the scheme. It maintained the position taken by ASIC prior to the scheme meeting that all information material to the making of the decision has not been provided to members, that is to say, the audited 2012 financial report of PRF. That is the central issue that was raised in the second court hearing.

The evidence as to the failure to complete the accounts 11 The Chief Financial Officer of PRF gave evidence as to the failure to complete the accounts. The evidence given by Mr Wise was in my view unsatisfactory. 12 Mr Wise was responsible for the statement in the scheme booklet that PRF's audited financial report for the year ended 30 June 2012 would be lodged with ASIC, and hence available to shareholders, 10 days before the meeting. 13 Mr Wise did not enquire with PRF's auditors before he made the statement whether, in their opinion, the audited accounts would be available within the time stated. 14 By the time the scheme booklet was prepared the accounts were long overdue. They were due to be lodged with ASIC by either 30 September 2012 or 31 October 2012 (the debate between PRF and ASIC as to which was the correct date is immaterial). An extension of time was apparently obtained from ASIC but the extension appears to have been granted only until 31 December 2012. 15 Mr Wise prepared a draft of the financial statements on or about 26 April 2013. His evidence was to the effect that he believed that the auditors would be able to give their certificate upon the basis of that draft. However, the auditor, Mr Zimmerman, gave evidence of a conversation with Mr Wise that took place only a few days after 26 April 2013. It seems to me that the conversation should have alerted Mr Wise to the fact that there were differences between the directors of PRF and the auditor as to a number of material matters. 16 One of those matters was the amount of the impairment of the value of certain assets, but there were other issues including the issue of whether it was appropriate to prepare the amounts on a going concern basis. 17 Moreover, on the evening of 8 May 2013, the auditors sent Mr Wise an email containing a list of audit requirements needed to complete the 2012 audit. That email was received by Mr Wise before the first court hearing but he gave evidence that he did not read it until after the hearing. I accept his evidence that he did not read the email until the end of the week of 13 May 2013 but, this does not alter the view I have reached that he ought to have been aware at that time that the audited accounts would not be available. 18 The auditors' requirements included the preparation of standalone financial statements for the main operating subsidiaries of PRF. The auditors also required a significant amount of further or updated information about PRF. Whether or not the auditors had required that information in previous years is not to the point. It is plain that Mr Wise knew, no later than the end of May, that the audited accounts would not be prepared before the meeting. 19 What is more, Mr Wise acknowledged that before the end of May 2013 he had informed one of the directors of PRF, Mr Llewellyn of that fact. 20 I accept that Mr Wise is under considerable pressure due to the financial position of PRF. But I do not accept that he had a reasonable basis for making the statement in section 5.5 of the scheme booklet that the audited accounts would be available by 4 June 2013. Nor do I accept that it was appropriate for PRF to simply remain quiet about the issue until the evening before the scheme meeting. 21 In my opinion it is clear that PRF failed to conduct any due diligence in relation to the issue of the production of the audited accounts. The failures occurred prior to the first court hearing and again in the period leading up to the time when the scheme meeting was due to be held. 22 I accept Mr Oakes SC's submission that the failure to address this issue was not brought about by any sinister desire to withhold the information. But that does not alter the fact that there was a non-disclosure in the scheme booklet and the Court was not alerted to it when PRF became aware that the audited accounts would not be made available. 23 Mr Wise's evidence was that he did not recall until 12 June 2013 the statement made in the scheme booklet that the audited accounts would be lodged 10 days before the meeting. I am, with some reluctance, prepared to accept that evidence but it does not alter the critical fact that he was aware, by at very latest the end of May that the audited accounts would not be available at all. Mr Llewellyn was also aware of that. 24 The difficulties were compounded by the fact that PRF's solicitors failed, due to an omission in their own due diligence, to include in their checklist the requirement that the audited accounts be lodged by 4 June 2013. Their omission is unfortunate but it does not detract from my finding that PRF was aware well before the meeting that the accounts would not be produced. Mr Wise was aware of the importance of audited accounts. The directors must also have been aware of that fact. 25 Nevertheless, PRF took no steps to alert their shareholders to the position until it received the letter from ASIC. Moreover, PRF took no steps to approach the Court before the meeting was held. The first occasion on which the Court was alerted to the absence of the accounts was the afternoon before the second court hearing when written submissions were received from ASIC and PRF. 26 After the meeting, PRF sent to all shareholders the communication which I described in the introduction at [7]. In effect, that communication invited any dissatisfied shareholders to appear at the second court hearing on 20 June 2013.

Materiality 27 It is fundamental to the exercise of the discretion to approve a scheme of arrangement that there be full disclosure of all material facts to shareholders. Where, as here, the scheme is in the nature of an acquisition, appropriate safeguards, analogous to those which apply to conventional takeovers should be applied: Re NRMA Ltd (2000) 33 ACSR 595 at [16] per Santow J. 28 Materiality is a question of mixed fact and law which depends upon the facts and circumstances of the particular case: Pancontinental Mining Ltd v Goldfields Ltd (1995) 16 ACSR 463 at 466. 29 I accept that in the context of a scheme, the extent of disclosure that is required depends not only on the nature of the scheme but on the total context in which information is presented or omitted: Zenyth Therapeutics Ltd v Smith (2006) 60 ACSR 548 at [85]; see also Re Crusader Ltd [1996] 1 Qd R 117 at 126. 30 The object of the requirement is to put shareholders of the target in possession of information that will enable them to make an informed and critical assessment of the offer. Information is material if it could affect the shareholders' assessment of whether the offeror is likely to improve its offer, or the prospects of a competing offer: Pancontinental at 467. 31 If a deficiency in disclosure is identified, the Court considers whether there is any reasonable ground for supposing that the deficiency would cause shareholders to vote, or to abstain from voting, under a serious misapprehension of the position: ENT Pty Ltd v Sunraysia Television Ltd (2007) 61 ACSR 626 at [20] and the authorities there cited; see also Re Castlereagh Securities Ltd [1973] 1 NSWLR 624 at 636. 32 Mr Oakes submits that the absence of the 2012 audited accounts is not material to the decision of the shareholders to vote on the scheme in the facts of this case. He points to the disclosure in the scheme booklet of the unaudited accounts prepared as at February 2013. 33 He also points to the evidence given in the course of the hearing that the audited accounts as at 30 June 2012 are likely, if anything, to be worse than the position disclosed in the scheme booklet. In addition, Mr Oakes points to the evidence of the independent expert that he would be unlikely to alter his opinion even if the audited accounts were available. 34 It may be true that upon the basis of the evidence given by the auditor, the presence of the audited accounts would not assist the shareholders in coming to a view as to whether Keybridge may be prepared to pay more for the PRF shares. It may also suggest that the fair value of the PRF shares is less than that which was assessed by the independent expert, thereby bearing upon the question of the fairness of the offer. 35 But what seems to me to be critical is that the consideration which is offered is part cash and part shares in the bidder company. If the scheme is approved PRF will become a wholly owned subsidiary of Keybridge. Thus, the true value of the consideration to be paid by Keybridge will be affected by the value of its holding in PRF. 36 A relevant question in assessing materiality is whether the information would assist the shareholders to assess critically the attractiveness of the offer: Pancontinental at 467. Here, the attractiveness of the offer is dependent in a substantial part on the true value of PRF to the extent that the shareholders have what is in effect a continuing interest in the true worth of that company. 37 It is no answer, as PRF seeks to press upon me, that there has been disclosure of the position post 30 June 2011 to 28 February 2013. Nor is it an answer that the independent expert has made his own independent assessment of the value of PRF by reference to the value of lease assets and legal assets. Ultimately, his assessment placed some reliance on the position as at 30 June 2012, as to which there are no audited accounts. 38 I reject Mr Oakes' submission that it is open to PRF to rely upon the statutory window which enables audited accounts to be provided by 30 September or 31 October in a given year. The short answer to his submission is that the window only applies to accounts for the most recent financial year. 39 In the present case the window closed no later than the date to which ASIC extended the deadline for the provision of the accounts. That date was the end of December 2012. On any view the accounts were long overdue when PRF sought orders at the first court hearing concerning a meeting of shareholders. 40 The importance of the statutory accounts was recognised by Farrell J in her reasons for judgment. Her Honour noted at [9] the statement by the directors of PRF that the audited accounts would be filed before the scheme meeting. 41 It is in my view not open to PRF to avoid its statutory duty to lodge its audited financial accounts by suggesting that in the context of the scheme the audited accounts were not material. 42 Nor is my conclusion on this affected by the terms of the opinion expressed by the independent expert. It is true, as the independent expert observes, that if the scheme is not approved Keybridge will be in a position to appoint a receiver to PRF. It is also true that considerable efforts have been made, without success, to try to obtain a better offer. But that is no answer to the proposition that material information has been withheld from the shareholders. 43 In coming to that view, I have taken into account the possibility to which the independent expert has referred that, if PRF is placed into receivership, the shareholders may receive less than the value of the scheme consideration, or indeed nothing at all. 44 It is for the shareholders to have the opportunity to consider that question in light of the audited accounts. 45 I should add that the belated disclosure to shareholders on the eve of the scheme meeting and the post-meeting disclosure of the absence of the audited accounts do not alter the view that I have reached. The shareholders were entitled to the audited accounts and they were told they would be provided by the time of the meeting. The short answer is that the accounts were not provided and the communication with shareholders did nothing more than inform them of the position taken by ASIC.

The possibility of conditional approval 46 Bearing in mind the matters which were emphasised in the independent expert's report and his oral evidence as to the reasons why the scheme is reasonable and in the best interests of shareholders, I suggested to all parties, including ASIC, that I may be prepared to give conditional approval to the scheme. I suggested four principal conditions as follows: the holding of a further meeting of shareholders at a time when the audited accounts for the year ended 30 June 2012 are available; the audited accounts are to be lodged with ASIC not less than 10 days before the date of the further meeting; the further meeting be held not later than 15 August 2013; and the scheme consideration is not to be provided, nor are share transfers to take place until the further meeting has occurred and members have voted in favour of the scheme. 47 ASIC has stated that it would be content for me to make orders to that effect. It suggests two further conditions. The first is that at the newly constituted meeting shareholders must vote in favour of the scheme by the required statutory majority. The second is that the audited accounts be provided to shareholders with a supplementary scheme booklet. 48 However, in spite of the concession made by ASIC both PRF and Keybridge opposed conditional approval of the scheme.

Conclusion 49 In exercising its discretion whether or not to approve a scheme the Court exercises a supervisory jurisdiction: Re Seven Network Ltd (No 3) (2010) 267 ALR 583 at [31], citing Re NRMA Ltd (No 2) (2000) 156 FLR 412 at [22]. 50 As I said at [27] above, disclosure of all material facts is a fundamental consideration in determining whether to exercise the power of approval. That consideration has been emphasised in numerous authorities. 51 Whilst the Court relies heavily on counsel, disclosure of relevant information is ultimately the responsibility of those who propound a scheme. The exercise of careful and thorough due diligence is fundamental to the accuracy of the information provided to the shareholders and to the Court. 52 There is no contradictor when schemes are proposed. The position is quite different from that which occurred when contested takeovers were the norm and the statements made in takeover documents were the subject of hard fought battles, often in the context of adversary litigation. 53 As Santow J said in Re NRMA Ltd at [16], schemes of arrangement have increasingly stretched the envelope in terms of process and content and the courts must be vigilant to ensure proper safeguards. 54 What often seems to occur is that pro forma procedures are adopted by those propounding schemes of arrangement. This approach seems to have been applied not only to issues such as lock-up devices and break fees, but at least in this case, in the approach to due diligence. 55 The result in the present case is a series of non-disclosures to the shareholders and to the Court. The first was in section 5.5 of the scheme booklet and in what was (or was not) conveyed to the Court on 13 May 2013. It should have been plain to PRF that the audited accounts were unlikely to be available. 56 Second, the Court was not approached at the end of May when, on any view, Mr Wise and Mr Llewellyn were aware that the audited accounts would not be prepared. 57 Third, the shareholders were not provided with audited accounts at the scheme meeting. Instead, a last minute attempt was made to rescue the position by informing shareholders of ASIC's position in relation to the unavailability of the accounts. 58 In those circumstances, I am unable to exercise the jurisdiction of the Court to approve the scheme. The Court is not a rubber stamp to approve a scheme even in the present circumstances which might, on one view, leave the shareholders in a situation where they will be worse off. 59 However, in an effort to strike a balance between the regulatory position properly advanced on behalf of ASIC and the underlying commercial considerations emphasised by PRF I am prepared to adjourn the present application to a date in August. This may give the parties an opportunity to address the present unsatisfactory situation. 60 In the absence of any additional material facts which emerge prior to the adjourned date, I would be prepared to approve the scheme provided by that date, the following has occurred: a further meeting of shareholders is duly convened and held at which the resolution to approve the scheme passed on 14 June 2013 is ratified; the meeting is held at a time when the audited accounts for the year ending 30 June 2012 are available; the audited accounts must have been lodged with ASIC not less than 10 days before the meeting; any material matters in the audited accounts to which attention should be drawn should be provided by way of a supplementary scheme booklet; the resolution ratifying the earlier resolution in favour of the scheme must be passed by the majority stated in s 411(4)(a)(ii) of the Act; and the meeting should be held no later than 15 August 2013, or such later date as the Court may approve. 61 If these matters are satisfied, I would be prepared to consider exercising my power under s 411(10) to order that the Court's order approving the scheme take effect as from the record date specified in the scheme booklet. 62 This would mean that the scheme would take effect prior to 30 June 2013. That may enable Keybridge to obtain any taxation advantages arising from consolidation of the accounts as at that date. Of course, I do not express any opinion as to whether Keybridge would be entitled to do so.

Orders 63 The order I will make is that the application is adjourned to a date to be fixed in August 2013. I certify that the preceding sixty-three (63) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jacobson.