By Originating Process filed on 23 September 2022, the Plaintiff, PTB Group Limited ("PTB"), seeks orders under ss 411(1) and 1319 of the Corporations Act 2001 (Cth) ("Act") that it convene a meeting of its members to consider and vote upon a proposed scheme of arrangement between PTB and its shareholders. That scheme, if implemented, will result in the acquisition of all the ordinary shares in PTB by a wholly owned subsidiary of PAG Holding Corp ("PAG") and the subsequent delisting of PTB from the Australian Securities Exchange (ASX).
By way of background, PTB is an Australian public company limited by shares and its securities are listed on the ASX. PTB is global provider of maintenance, repair and overhaul services for turbo prop aircraft engines, aircraft and engine leasing, and aircraft and engine spare parts. On 18 August 2022, PTB's board resolved to enter into a scheme implementation deed ("SID") with PAG, which was executed on that date, which provides for PAG or a wholly-owned subsidiary of PAG to acquire all PTB's shares by a scheme of arrangement. The proposed transaction was announced to ASX on 19 August 2022, and that announcement confirmed the unanimous recommendation of PTB's directors in support of the scheme, in the absence of a superior proposal and subject to the independent expert concluding (and continuing to conclude) that the scheme was in the best interests of PTB's shareholders. Under the terms of the proposed scheme, PTB shareholders will receive $1.595 per PTB share, and the total scheme consideration is $202.9 million. PTB may also declare and pay a $0.03 per PTB share fully franked dividend, conditional upon specified matters.
By her affidavit dated 28 September 2022, Ms Sandra Aofia refers to service of the Originating Process and supporting affidavit in respect of the proceedings upon the Australian Securities and Investments Commission ("ASIC"). PTB also relies on the affidavit dated 6 October 2022 of its solicitor, Mr Oliver Talbot which sets out corporate information in respect of the PTB Group and addresses correspondence with ASIC in respect of the proposed scheme. By his second affidavit dated 7 October 2022, Mr Talbot exhibits (Ex OT-2) a complete copy of the scheme booklet, including appendices which had been inadvertently omitted from the copy contained in an earlier exhibit. He also annexed a letter dated 7 October 2022 from ASIC which indicated that ASIC did not seek to appear at this hearing and reserved its position in respect of s 411(17) of the Act to the second Court hearing in accordance with its usual practice.
By an affidavit dated 6 October 2022, Mr Craig Baker, who is the chair of PTB, provides information as to the nature of PTB's business. Mr Baker set out the details of the proposed scheme in his affidavit, including the scheme consideration of $1.595 cash per PTB share, amounting (as I noted above) to a total consideration in excess of $A202.9 million, and to the fact that PTB may, in its absolute discretion, pay scheme shareholders a fully franked dividend of $0.03 per PTB share conditional upon specified matters. Mr Baker also addressed the negotiation of the break fee and exclusivity provisions in respect of the proposed scheme, and the arrangements for the scheme meeting to proceed as a hybrid meeting which can be attended by shareholders in person or online. Mr Baker also confirmed his consent to act as chair of the scheme meeting, and addressed the proposed process for dispatch of documents relating to the scheme to shareholders and the due diligence and verification processes adopted by PTB in respect of the scheme. By his affidavit dated 6 October 2022, Mr Andrew Kemp, who is an independent non-executive director of PTB, consents to act as alternate chair of the scheme meeting, if Mr Baker is unable to act as chair of that meeting.
By his affidavit dated 6 October 2022, Mr Matthew Whittaker, who is a chartered accountant and director of BDO Corporate Finance Ltd ("BDO"), refers to the engagement of BDO to prepare an independent expert's report in respect of the scheme and confirms the opinions expressed in that report.
By her affidavit dated 6 October 2022, Ms Kathleen MacIntosh, who is the chief financial officer of PAG, refers to the verification process adopted in respect of the bidder information contained in the scheme booklet, which was conventional in character and raises no difficulties in respect of the proposed scheme. By his affidavit dated 6 October 2022, Mr David Mast, who is president and chief executive officer of PAG and one of its three directors, addressed the resolution passed by PAG to authorise the execution of the deed poll by PAG and his signature of that deed poll. Mr Mast also refers to the exclusivity and break fee provisions contained in cll 10 and 11 of the SID respectively, and the nature of the costs incurred by PTB for which it would be compensated by payment of any break fee. By his affidavit dated 6 October 2022, Mr Jeffrey Wolters, who is an attorney in Delaware in the United States, gives evidence in respect of his legal opinion provided as to the enforceability of the deed poll executed by PAG.
Mr Oakes, who appears for PAG, submits and I accept that the affidavit evidence establishes several factual matters that are necessary for approval of a scheme, namely that PTB is a Pt 5.1 body; PTB has committed itself to propounding the scheme and the terms of the proposed scheme; the scheme booklet has been verified by PTB and PAG; PTB's board has resolved to approve the scheme booklet; a deed poll has been executed in favour of PTB shareholders; Mr Baker has consented to act as chair of the scheme meeting and Mr Kemp has consented to act as alternate chair of the scheme meeting; and ASIC has been given notice of the scheme and has provided its "usual" letter for a first Court hearing. I will address several of these matter below.
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Applicable principles
Mr Oakes submits and I accept that the jurisdiction under s 411 of the Act has often been used to effect a change of control transaction. He points out that s 411(1) of the Act confers a power on the Court to order a meeting of members to be convened, where, relevantly, a compromise or arrangement is proposed between a Pt 5.1 body and its members or any class of them; application for that order is made in a summary way by the body or by a creditor or member of the body; 14 days' notice of the hearing of the application, or such lesser period of notice as the Court or ASIC permits, has been given to ASIC; the Court is satisfied that ASIC has had a reasonable opportunity to examine and to make submissions regarding the terms of the proposed compromise or arrangement and the accompanying explanatory statement.
Mr Oakes also submits and I accept that each of these matters has been satisfied with respect to the scheme. PTB is a Pt 5.1 body for the purposes of s 411 of the Act. The proposed change of control transaction under the scheme is an "'arrangement" within the meaning of s 411 of the Act. PTB has applied, by way of the Originating Process, for an order under s 411(1) of the Act. The Originating Process and a draft of the scheme booklet (including all appendices) were provided to ASIC on 23 September 2022, more than 14 days before the first Court hearing and, as I noted above, ASIC has provided its "usual" letter indicating that it does not currently propose to appear to make submissions or intervene to oppose the scheme. Accordingly, Mr Oakes submits and I accept that the Court has power to convene the scheme meeting.
Mr Oakes then submits that, once the preconditions to the exercise of the power under s 411(1) of the Act are satisfied, it remains for the Court, in the exercise of its discretion, to determine whether that power ought to be exercised. He submits that the Court will not ordinarily convene a scheme meeting unless the scheme is of such a nature and cast in such terms that, if it receives the statutory majority at the meeting, the Court would be likely to approve it on the hearing of an application that is unopposed: F T Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 at 72. He draws attention to the often-cited observation of French J (as his Honour was then) in Re Foundation Healthcare Ltd (2002) 42 ACSR 252 at [36] and [44] that:
"… It is however important to bear in mind that, by granting leave to convene the meeting, the court does not give its imprimatur to the proposed scheme. If the arrangement is one that seems fit for consideration by the meeting of members or creditors and is a commercial proposition likely to gain the court's approval if passed by the necessary majorities, then leave should be given ... The court is not required to give close consideration to the effects of the scheme upon individual members of the classes of members or creditors affected. So to do would be to "introduce burdensome and to a large extent ineffectual consideration at this interlocutory stage" ...
The court at the stage of ordering a meeting to approve a scheme does not ordinarily go very far into the question of whether the arrangement is one which warrants the approval of the court … That question is to be answered when the scheme returns to the court for final approval. That is not to exclude the possibility that a scheme may appear on its face so blatantly unfair or otherwise inappropriate that it should be stopped in its tracks before going any further." [citations omitted]
Mr Oakes points out that PTB's directors have, as I noted above, unanimously recommended that PTB shareholders vote in favour of the scheme at the scheme meeting in the absence of a superior proposal; the independent expert has concluded that the scheme is fair and reasonable and therefore in the best interests of PTB shareholders in the absence of a superior proposal; and the independent expert's report has been verified by affidavit. He submits, and I accept, that the proposed scheme is fit for consideration by a meeting of PTB shareholders and reflects a commercial proposition that, if passed by the requisite majorities, is likely to be approved by the Court on an uncontested application, and there are no discretionary matters warranting a refusal by the Court to convene the scheme meeting.
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Particular issues
Mr Oakes rightly recognises that an applicant for ex parte orders pursuant to s 411(1) of the Act "carries the responsibility of bringing to the court's attention all matters that could be considered relevant to the exercise of discretion": Re Permanent Trustee Co Ltd (2002) 43 ACSR 601 at [7].
First, Mr Oakes briefly addresses several matters where he submits that the practice in respect of schemes is now settled in the case law. That approach seemed to me to cause no difficulty, at least in this case which involves a relatively straightforward cash acquisition scheme. In respect of "performance risk", he pointed to the conventional drafting of the scheme, under cl 4.2(a) of the scheme, which provided that the scheme consideration would be provided before the share transfer occurs. In respect of exclusivity arrangements, he pointed to the conventional "fiduciary carveout" in cl 10.2 of the SID, although the Court will of course also consider, and I have considered, the scope of and length of those provisions and whether they have been sufficiently disclosed in the scheme booklet. He noted that cl 13 of the SID provided for a "break fee" payable in connection with the scheme, which is less than 1% of the scheme consideration and, consistently with the case law, is not payable merely because PTB shareholders vote down the proposal. He also pointed to the affidavit evidence that the "deal protection clauses", comprising the exclusivity provisions and the break fee, had been the subject of arm's length negotiations. Mr Oakes also pointed out that a deemed warranty, which is now invariably adopted in schemes, was included in cl 8.2(b) of the scheme and was disclosed at section 4.9 of the scheme booklet. None of these matters gave rise to any reason not to convene the scheme meeting.
Second, Mr Oakes addresses, in greater detail, the question whether an interested director can properly make recommendations in respect of a scheme, which has received some focus in recent years. The position in this Court as to that question is now well settled, although there have been differences of view as to the question between different judges in the Federal Court of Australia. Mr Oakes refers to my observations as to this issue in Re Villa World Ltd [2019] NSWSC 1207 as follows:
"[W]here a director will receive a substantial benefit in relation to the scheme that other shareholders will not receive, then that benefit should be fully and prominently disclosed as a matter for shareholders to take into account when considering that director's recommendation…
I am not persuaded that there is or should be any general rule or principle that it is preferable that a director should not make a recommendation to shareholders on the basis of an interest in the outcome of the scheme arising from incentive or performance rights or the like. It seems to me that in many, or most cases, shareholders will benefit from such a recommendation, with appropriate disclosure as to the nature of the interest to allow them to assess the weight to be given to it…
It seems to me that, where a director was entitled to and did participate in a decision that a company should go forward with a scheme, there would be little utility and real inconsistency in then preventing that director from making a recommendation to shareholders consistent with the view that he or she took as a member of the board, subject to appropriate disclosure of his or her personal interest in the explanatory materials for the scheme."
Mr Oakes also points out that reg 8301(a) of Schedule 8 of the Corporations Regulations 2001 (Cth) provides relevantly that the scheme booklet must set out 'whether the director recommends the acceptance of the Scheme or recommends against acceptance and, in either case, his or her reasons for so recommending', unless the director does not consider himself or herself justified in making a recommendation. The approach adopted in Villa World has also been adopted in this Court and the Federal Court in cases including Re GBST Holdings Ltd [2019] NSWSC 1280 at [24]-[30]; Re DWS Ltd [2020] FCA 1590 at [41]-[49], Re BINGO Industries Ltd [2021] NSWSC 798; Re RXP Services Ltd [2021] FCA 38; Re Mainstream Group Holdings Ltd [2021] FCA 948 and, more recently, Re MyDeal.com.au Ltd [2022] NSWSC 1094 at [43] and Re Tassal Group Ltd [2022] NSWSC 1414 at [27].
That question arises, here, because a director of PTB, Mr Steven Smith, is entitled to a retention bonus of $245,000 if the scheme is approved and stands to gain by the implementation of the scheme. Mr Oakes points out that Mr Smith's interests in the implementation of the scheme are fully and prominently disclosed to PTB shareholders in the scheme booklet as a matter for them to take into account when considering his recommendation. I accept that his making a recommendation in relation to the scheme does not give rise to any reason not to approve the scheme.
Third, Mr Oakes notes that PTB's board has resolved that, subject to the scheme being approved, certain PTB senior management and employees will become entitled to a transaction bonus, and the recipients of that bonus have been nominated by PTB's Remuneration Committee. Mr Oakes notes that votes cast at the scheme meeting by Mr Smith and senior management and employees who will receive such a bonus will be reported to the Court at the second Court hearing, and that Mr Smith has already disclosed that he will vote in favour of the scheme. I accept that approach sufficiently addresses that issue and it is not necessary for those persons to vote in a separate class at the scheme meeting.
Fourth, Mr Oakes notes that PTB has proposed to hold the meeting as a hybrid meeting, which has been common practice in recent schemes. He points out that, to the extent that the meeting will have a virtual component, s 249R of the Act and cl 9.1 of PTB's constitution permit meetings to be held by virtual meeting technology and there is evidence that the system to be adopted will give all persons entitled to attend a reasonable opportunity to participate, vote, speak, and appoint a proxy. That also gives rise to no reason to decline to convene the scheme meeting
Fifth, Mr Oakes points out that the effect of COVID-19 on PTB's business is addressed in the scheme booklet at section 8.3(a) as a risk factor going forward, and that question is plainly relevant where PTB operates in the aviation field. I recognise that in an earlier decision, Re Windlab Ltd [2020] NSWSC 571, I had noted the relevance of whether COVID-19 might have affected the value of scheme consideration, although that decision was delivered when the pandemic was developing and the significance of that matter obviously depends on the extent to which a particular industry or company is exposed to that risk.
Sixth, Mr Oakes points out that s 411(1) of the Act provides that, if the Court has made an order convening a meeting or meetings of members or creditors, the Court "may approve the explanatory statement". He notes that the practice of courts varies in this respect: Re Dulux Group Ltd [2019] FCA 961 at [63]. He notes that, although it is a matter for the Court whether or not it will make an order approving the explanatory statement, PTB does not seek an order approving the scheme booklet, and I need not make that where it is not sought.
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Orders
For these reasons, I made the orders sought by PTB at the conclusion of the first Court hearing on 10 October 2022.
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Decision last updated: 04 November 2022