F T Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd

Introduction 1 The plaintiff, BigAir Group Limited (BigAir), seeks an order under s 411(1) of the Corporations Act 2001 (Cth) (the Act) that a meeting of its members, other than Superloop Limited (Superloop) and any subsidiary of Superloop, be convened for the purpose of considering, and if thought fit agreeing, with or without modification, to a scheme of arrangement. The effect of the proposed scheme, if agreed to by the requisite majorities and approved, will be that BigAir will become a wholly-owned subsidiary of Superloop (the scheme).

Background 2 BigAir owns and operates Australia's largest metropolitan fixed wireless broadband network. It provides data solutions through its partners, which include Tier 1 and Tier 2 carriers and IT service companies, and through its own corporate solutions team. BigAir also provides cloud-based managed services and campus solutions. It is admitted to the official list of the Australian Securities Exchange (the ASX). 3 Superloop is a telecommunications company which owns and operates underground fibre-optic cable networks in Australia, Singapore and Hong Kong. It leases connectivity circuits from other carriers and providers to interconnect these networks. Superloop seeks to interconnect the locations within these markets that have high connectivity requirements (for example, data centres, submarine cable landing stations and major enterprise buildings). It generates revenue through the provision of network infrastructure and high-speed data services. It is also admitted to the official list of the ASX. 4 On 13 September 2016, BigAir and Superloop entered into a Scheme Implementation Deed (the SID), which was subsequently amended by a side letter dated 26 October 2016 in respects which need not be detailed in these reasons. The SID provides for BigAir to propose and implement the scheme and for Superloop to assist BigAir to do so.

The scheme 5 In essence, the scheme provides for Superloop to acquire all of BigAir's issued ordinary shares, other than those shares already owned by Superloop and its subsidiaries, for the scheme consideration, which comprises shares in Superloop (0.371 Superloop shares for each BigAir share (the scrip consideration)) or, at the election of a scheme shareholder, cash and Superloop shares ($0.70 and 0.118 Superloop shares for each BigAir share (the mixed consideration). If a scheme shareholder fails to make a valid election, the shareholder will receive the scrip consideration. 6 The mixed consideration is subject to a cash cap and scale-back mechanism. Evidence has been provided of the source of the funds to be used for the cash component of the mixed consideration. 7 A scheme shareholder whose address, as recorded in the BigAir share register as at the Record Date (as defined in the scheme), is a place which Superloop reasonably determines is one in which it is unlawful or unduly onerous to issue Superloop shares (when the scheme becomes effective), is classified under the scheme as an Ineligible Foreign Shareholder. Superloop will be under no obligation under the scheme to issue Superloop shares to such a shareholder. Instead, unless Superloop and BigAir agree otherwise, Superloop will issue the Superloop shares to which Ineligible Foreign Shareholders would be entitled to a nominee for sale on the ASX (or another prescribed financial market), with the proceeds of sale of such shares (after the deduction of any applicable brokerage, stamp duty or other selling costs, taxes and charges) being remitted to Superloop for subsequent payment to each Ineligible Foreign Shareholder proportionately. 8 Following implementation of the scheme, BigAir will be de-listed.

The explanatory statement 9 The explanatory statement required by s 412(1)(a) of the Act is contained in a scheme booklet which has been tendered as Exhibit 1.

Directors' recommendation 10 BigAir's directors have considered the advantages and disadvantages of the scheme (which have been set out in the scheme booklet) and have unanimously recommended that shareholders vote in favour of the scheme, in the absence of a superior proposal. The directors have also confirmed that, in relation to the shares controlled or held by them or on their behalf, they intend to vote in favour of the scheme, in the absence of a superior proposal.

The indepenDent expert's opinion 11 BigAir's directors have requested Lonergan Edwards & Associates Limited (LEA) to prepare an independent expert's report expressing an opinion whether the scheme is fair and reasonable and in the best interests of BigAir's shareholders. 12 LEA has expressed the opinion that the scheme is fair and reasonable and in the best interests of BigAir's shareholders, in the absence of a superior proposal. LEA has valued 100% of the shares in BigAir at between $0.99 and $1.06 per share. LEA has also assessed the value of the scheme consideration. It has assessed the value of the scrip consideration at between $1.08 and $1.15 per share and the mixed consideration at between $1.04 and $1.07 per share. As the value of the scrip consideration exceeds the assessed valuation range for BigAir shares on a 100% controlling interest basis, LEA has expressed the opinion that the scrip consideration is fair. As the value of the mixed consideration is towards the high end of the assessed valuation range for BigAir shares on a 100% controlling interest basis, LEA has expressed the opinion that the mixed consideration is also fair. 13 Australian Securities and Investments Commission (ASIC), Content of expert reports, RG 111, 30 March 2011 provides that a transaction is reasonable if it is fair. LEA has expressed the opinion that if the scheme is reasonable, it must also be in the best interests of shareholders, in the absence of a superior proposal. 14 The independent expert's report is included in the scheme booklet and the opinions expressed in it, which also include an analysis of the advantages and disadvantages of the scheme, have been verified by Mr Edwards, one of the co-authors of the report.

Performance and service rights 15 BigAir operates the BigAir Equity Incentive Plan under which it makes grants of BigAir Performance Rights (the performance rights) and BigAir Service Rights (the service rights), which are subject to vesting conditions based on continuation of employment and performance criteria. As at 26 October 2016, there were 917,040 performance rights and 166,515 service rights on issue. Each performance right and each service right entitles the holder to receive one share in BigAir. There is no exercise price. It is a condition of the SID, and a condition precedent to the scheme coming into effect, that, before the second court hearing date (appointed for 9 December 2016), arrangements must be in place so that all the performance rights and service rights are vested, cancelled or have lapsed before the Record Date. I accept that no class-creating concerns arise in respect of the performance rights and service rights given that the holding of these rights does not of itself confer an entitlement to vote at the scheme meeting. 16 The existence of the performance rights and service rights are disclosed and discussed in the scheme booklet, including the condition precedent to which I have referred.

Options 17 On 13 September 2016, on the date that the SID was entered into, Superloop entered into option deeds with certain shareholders. The options are call options exercisable by Superloop in respect of each relevant shareholder's shares in BigAir. The exercise price is the same as the scheme consideration and the shareholders in question have the same ability to elect to receive the mixed consideration. Therefore, these shareholders will only receive the benefits received by other shareholders under the scheme. The deeds expressly provide that these shareholders do not have the right to obtain any benefit or suffer any detriment that is different when compared to other shareholders. Further, it is significant that the shareholders who are subject to the options are not restricted in the way they are entitled to vote at the scheme meeting. 18 I am satisfied that the existence of the call options, and the treatment of the shareholders who are subject to these options, do not raise class-creating concerns: In the matter of Hostworks Group Ltd [2008] 26 ACLC 137; FCA 64 (Hostworks) at [42]-[45]. 19 The existence of the options are disclosed and discussed in the scheme booklet.

Lock-up provisions 20 The SID contains exclusivity provisions which include "no shop", "no talk" and "no due diligence" restrictions, a "notification of approaches" obligation and an obligation allowing Superloop to respond to any competing proposal. Such provisions are now commonplace. The Court's concern is to ensure that the relevant exclusivity period is capable of precise ascertainment and is no more than is reasonable in the circumstances; that any clause directed at dealing with an unsolicited alternative merger proposal should be subject to a "fiduciary carve-out"; and that the relevant provisions should be clearly disclosed in the explanatory statement: Re Arthur Yates & Co Ltd (2001) 36 ACSR 758; [2001] NSWSC 40 at [9]. 21 In the present case, the exclusivity period is capable of precise ascertainment. It will be the earliest of certain dates or events identified in the SID. The latest date appears to be 15 March 2017, although this date is capable of variation by agreement in writing between the parties. I am satisfied that the exclusivity period is no more than is reasonable in the circumstances. The "no talk" and "no due diligence" restrictions and the "notification of approaches" obligation do not apply to the extent that they restrict BigAir or any BigAir director from taking or refusing to take any action with respect to a competing proposal, provided the competing proposal is bona fide and is made by or on behalf of a person that the BigAir board considers to be of reputable commercial standing and the BigAir board has determined, after consultation and receiving certain written advice, that failing to take the action or refusing to take the action would be likely to constitute a breach of the fiduciary or statutory obligations of the board. Although the "no shop" restriction is not included in the fiduciary carve-out, I accept that this is consistent with authority: Hostworks at [34]; Macquarie Private Capital A Limited [2008] 26 ACLC 366; NSWSC 323 at [19]; Re Healthscope Limited [2010] VSC 367 at [19]-[22]; Re AXA Asia Pacific Holdings Ltd [2011] VSC 4 at [29]. 22 The existence of the lock-up provisions are disclosed and discussed in the scheme booklet.

Break fee 23 Clause 11 of the SID provides for the imposition of break fees in certain circumstances. BigAir and Superloop each have the benefit of a break fee of $2.1 million on the happening of the events specified in the relevant sub-clauses. Relevantly for present purposes, the break fee potentially payable by BigAir does not exceed the 1% guideline contained in Takeovers Panel, Lock-up devices, GN 7, 11 February 2010. Clause 11.3 of the SID contains an acknowledgement by the parties that this break fee is a genuine and reasonable pre-estimate of the costs that Superloop will suffer if the scheme does not proceed and payment of the break fee is triggered by clause 11.4. Further, there is evidence before me of the negotiation of the break fee and of the fact that Superloop would not have entered into the transaction but for the payment of the break fee. 24 The existence of the break fee is disclosed and discussed in the scheme booklet.

Performance risk 25 I am satisfied that appropriate safeguards against "performance risk" have been provided for in the scheme. As is now usual, the scheme shares will not be transferred until the scheme consideration has been provided by Superloop in the manner contemplated by clause 5 of the scheme. The cash component of the mixed consideration must be paid by Superloop into a trust account operated by BigAir as trustee on the business day before the Implementation Date (as defined in the scheme). On the Implementation Date, BigAir is to pay or procure the payment of the cash component of the mixed consideration to each scheme shareholder who has validly elected to receive the mixed consideration. Moreover, on the Implementation Date, Superloop will allot and issue the scrip component of the scheme consideration. 26 I note that Superloop has executed a deed poll in favour of each scheme shareholder in which it covenants to perform all actions attributed to it under, and otherwise comply with, the scheme, as if it were a party to it. 27 A copy of the deed poll is included in the scheme booklet.

Deemed warranties 28 The scheme includes deemed warranties by the scheme shareholders that their shares will be free from encumbrances (as more particularly described in clause 8.5(a) of the scheme) and that they have power and capacity to sell and transfer the scheme shares (as described in clause 8.5(b) of the scheme). Such warranties are now customarily included. The Court's concern is to ensure that the existence of such warranties is clearly brought to the attention of the scheme shareholders. The existence of these warranties is referred to in the scheme booklet in a number of places. I am satisfied that they have been clearly brought to the attention of the scheme shareholders.

ASIC 29 A letter dated 27 October 2016 from ASIC to BigAir's directors is in evidence. In that letter, ASIC advised that it did not propose to appear to make submissions, or otherwise intervene to oppose, the scheme at the hearing to which these reasons relate. 30 Section 411(2)(a) of the Act requires that ASIC be given at least 14 days' notice of the hearing to which these reasons relate, unless the Court permits a shorter period. ASIC has acknowledged that this requirement has been satisfied in respect of the present application. 31 Section 411(2)(b) of the Act requires that the Court be satisfied that ASIC has also had a reasonable opportunity to examine the terms of the scheme and the draft explanatory statement, and to make submissions to the Court in relation to the scheme and the draft explanatory statement. ASIC has acknowledged that it has had a reasonable opportunity to examine the terms of the scheme. It has also acknowledged that it has examined the draft explanatory statement provided to it. The evidence shows that various drafts of the scheme booklet have been provided to ASIC for this purpose.

Verification 32 Extensive evidence has been placed before the Court dealing with the verification of the statements made and opinions expressed in the scheme booklet. I note that in accordance with discussions at the hearing, a supplementary affidavit has been made by Mr Condoleon, a partner in the firm of solicitors acting for Superloop. This affidavit deals with Mr Condoleon's presence at a meeting of Superloop's directors on 26 October 2016 at which the directors resolved that the statements referred to in the affidavit as Board Verification Statements were not incorrect or misleading or deceptive (including by omission) in the context in which they appear in the scheme booklet. I will treat this affidavit as having been read in open court.

Generally 33 I am satisfied that BigAir is a Pt 5.1 body and that the scheme is an "arrangement" for the purposes of s 411(1) of the Act: Re Foundation Healthcare Ltd (2002) 42 ACSR 252; [2002] FCA 742 at [39]; Re MIA Group Ltd (2004) 50 ACSR 29; [2004] NSWSC 712 at [2]-[9]; Re Sino Gold Mining Ltd (2009) 74 ACSR 647; [2009] FCA 1277 at [4]. 34 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 satisfied. 35 I am 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: F T Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 at 72; Centrebet International Limited, in the matter of Centrebet International Limited [2011] FCA 870 at [29]. 36 Subject to my consideration of any matter that might be raised at the second court hearing, I am satisfied that the scheme booklet sufficiently discloses the detail and effect of the scheme to enable shareholders to make an informed decision on how to vote. 37 I have been assisted in my consideration by detailed written submissions provided by BigAir and, separately, by Superloop. These submissions will be placed on the court file.

Disposition 38 Orders, substantially as sought, should be made. The orders recorded on the cover sheet of these reasons represent the form of the orders extant at the time of publication. Two minor variations were made following the original pronouncement of orders on 28 October 2016. I certify that the preceding thirty-eight (38) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Yates.