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

Affidavit evidence

1. InvoCare read the affidavit dated 23 August 2023 of its solicitor, Mr Michael Prickett, which exhibits an organisational extract obtained from the records of the Australian Securities and Investments Commission ("ASIC") in respect of InvoCare.
2. InvoCare also read the affidavit dated 19 September 2023 of its General Counsel and Company Secretary, Ms Heidi Aldred, which outlines the background to the proposed scheme. Ms Aldred noted certain conditions precedent to the proposed scheme, and her evidence was that she was not aware of any fact, matter or circumstance which is likely to result in the scheme not becoming effective due to a condition precedent not being satisfied or waived. She also addressed the view formed by InvoCare's board that the scheme is in the best interests of InvoCare shareholders and its recommendation that those shareholders vote in favour of the scheme in the absence of a superior proposal and subject to the view of the independent expert. That view is expressed in respect of the all cash consideration option in the scheme, and she noted that InvoCare's board makes no recommendation in relation to scrip consideration options under the scheme.
3. Ms Aldred also addressed the interests of InvoCare directors as disclosed in the scheme booklet and referred to exclusivity provisions in cl 12 of the SID, with the end date for exclusivity being 31 December 2023 or such date as is agreed between InvoCare and TPG. Those exclusivity provisions are also disclosed in the scheme booklet. Ms Aldred also addressed the provision for a break fee payable to TPG in specified circumstances in cl 13 of the SID and set out the process adopted by InvoCare for verification of the scheme booklet, which was in common form. Ms Aldred also gave evidence, on information and belief, as to the consent of the proposed chair and alternate chair of the scheme meeting to performing those roles, and as to the absence of any conflict of interest or duty which would affect their performance of those roles. She also addressed the fact that 12 key executives of InvoCare had entered into a Retention Agreement Letter Deed with TPG and noted that 9 of those 12 key executives had agreed to elect for scrip consideration in respect of at least 50% of the InvoCare shares that they would receive on acceleration of share rights or performance rights that they hold. Ms Aldred also noted that InvoCare proposed to make announcements on the ASX in respect of the date and location of the second Court hearing in respect of the potential approval of the scheme.
4. By her affidavit dated 19 September 2023, Ms Lucy Chiu, who is a Client Relationship Manager at Link Market Services Ltd ("Link"), described the process which would be adopted for the dispatch of hard copy and electronic copies of scheme documents, including the scheme booklet, to InvoCare shareholders and noted that a reminder email would be sent to InvoCare shareholders in late October 2023. I have had regard to the terms of that reminder email which cause no difficulty.
5. By an affidavit dated 19 September 2023, Mr Steven Fulton, who is Head of Advisory Services at Orient Capital Pty Ltd, a subsidiary of Link, noted that Orient Capital would, on InvoCare's behalf, arrange outbound telephone calls to InvoCare shareholders who had not lodged a proxy and would also respond to inbound telephone calls in order to assist InvoCare shareholders with voting, lodging a proxy and understanding the scheme. I will briefly address the case law in respect of that issue below.
6. By an affidavit dated 21 September 2023, Mr Nicholas Kay, who is Managing Director, Head Transactions Counsel (Asia-Pacific) at TPG Asia in turn addressed the SID, the structure of entities within the TPG corporate group involved in the transaction, the manner in which the scheme consideration and scrip consideration would be funded, the due diligence process which had been undertaken in respect of information concerning TPG contained in the scheme booklet and the entry into a deed poll in favour of InvoCare shareholders.
7. InvoCare also read the affidavit dated 22 September 2023 of Mr Peter Sise, a solicitor acting for it in the scheme, which noted that the draft scheme booklet, independent expert report and documents relating to this hearing had been provided to ASIC; noted that amendments were made to the scheme booklet in response to ASIC's comments; noted minor changes that needed to be made to the proposed script for inbound telephone calls to InvoCare shareholders; exhibited the current draft of the scheme booklet and independent expert report; and confirmed the independent experts' position as to their report.
8. Mr Thomas in turn took me through the scheme booklet and independent expert report in the course of his submissions. In the independent expert report, Ian Jedlin and Celeste Oakley of Kroll Australia Pty Ltd express their opinion that the all cash consideration option is fair and reasonable and therefore in the best interests of InvoCare shareholders, in the absence of a superior proposal. They express no opinion on the options that involve scrip consideration. These conclusions are disclosed in section 3.2(b) of the scheme booklet. Mr Thomas notes that, consistent with paragraph 25(d) of Practice Note SC Eq 4, InvoCare has not filed an affidavit from a representative of the independent expert verifying their report. There is no difficulty with that approach.
9. InvoCare also tendered a letter from ASIC, in customary form, noting that it had examined the terms of the scheme and draft explanatory statement and did not currently propose to appear to make submissions or intervene to oppose the scheme at the first Court hearing.

Applicable principles and determination

1. Mr Thomas points out that, subject to the matters in s 411(2), s 411 of the Act confers a power on the Court to order a meeting of members where a compromise or arrangement is proposed between a Part 5.1 body and its members or any class of them (s 411(1)); an application for the order is made in a summary way by the body (s 411(1)); 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 (s 411(2)); the Court is satisfied that ASIC has had a reasonable opportunity to, first, examine the terms of the proposed compromise or arrangement to which the application relates and a draft of the explanatory statement relating to the proposed compromise or arrangement and, second, to make submissions to the Court in relation to the proposed compromise or arrangement and the draft explanatory statement (s 411(2)).
2. Mr Thomas submits and I accept that each of these matters has been satisfied with respect to the scheme. InvoCare is a Part 5.1 body for the purposes of s 411 and a scheme for the acquisition by one company of shares in another is an "arrangement" within the meaning of s 411 of the Act. InvoCare 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 more than 14 days before the first hearing date; the draft scheme booklet was subsequently amended to take into account ASIC's comments; and ASIC was provided with all Court documents filed in this proceeding. As I noted above, ASIC has also provided its customary letter indicating that it does not currently propose to appear to make submissions or intervene to oppose the scheme. I accept that the Court has power under s 411(1) to convene the scheme meeting to enable the scheme to be considered by InvoCare shareholders.
3. Mr Thomas points out that, once the preconditions to the exercise of the Court's power under s 411(1) of the Act are satisfied, it remains for the Court, in the exercise of its discretion, to determine whether the power ought to be exercised. It is well-established that the Court "will not ordinarily summon a meeting unless the scheme is of such a nature and cast in such terms that, if it achieves the statutory majority at the creditors' meeting the court would be likely to approve it on the hearing of a petition which is unopposed": F T Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 at 72.
4. Mr Thomas submits and I accept that the proposed scheme is fit for consideration by a meeting of InvoCare 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. He submits and I also accept that there are no discretionary matters warranting the refusal by the Court to convene the scheme meeting. He points out that the directors of InvoCare have unanimously recommended that InvoCare shareholders vote in favour of the scheme in the absence of a superior proposal and subject to the independent expert continuing to conclude that the scheme is in the best interests of InvoCare shareholders, with that recommendation being made only in relation to the all cash consideration option, which is the default option unless an InvoCare shareholder elects otherwise. He also notes that InvoCare's directors intend to vote, or procure the voting of, all InvoCare shares in which they have a Relevant Interest (as defined in ss 608 and 609 of the Act) in favour of the scheme in the absence of a superior proposal and again subject to the independent expert continuing to conclude that the scheme is in the best interests of InvoCare shareholders. He also points out that, as I noted above, the independent expert has concluded that the all cash consideration option is fair and reasonable and therefore in the best interests of InvoCare shareholders.
5. Mr Thomas also addresses several particular matters in accordance with InvoCare's ex parte disclosure obligations. First, Mr Thomas notes the provision for the possible declaration of a special dividend, which I noted above. He submits and I accept that, consistent with authority, a special dividend of this character dos not amount to financial assistance within the meaning of s 260A of the Act, because the reduction in the consideration payable by the acquiring entity is commensurate to the reduction in cash and value arising from the payment of that dividend: Re DuluxGroup Ltd (2019) 136 ACSR 546; [2019] FCA 961 at [52]; Re Citadel Group Ltd [2020] FCA 1580 at [52]-[53]; Re RXP Services Ltd [2021] FCA 38 at [55]-[56]; Re Asaleo Care Ltd [2021] FCA 406 at [58]-[61]; Re Huon Aquaculture Group Ltd [2021] FCA 1170 at [36]; Re Uniti Group Ltd (2022) 160 ACSR 602; [2022] FCA 671 at [54].
6. Second, Mr Thomas points out that, as I noted above, twelve key executives of InvoCare have entered into Retention Agreement Letter Deeds with InvoCare and HoldCo (amongst others) on 9 August 2023, which were expected to be amended and restated on 29 September 2023 in respect of nine of these executives. These deeds grant the nine executives (including one director) put options to require HoldCo to acquire all of the Class B Shares in Holdco that may be held by them for Fair Market Value (as defined), that may be exercised in specified circumstances, and also grant HoldCo a call option to purchase the Class B Shares in HoldCo held by those executives at Fair Market Value in specified circumstances, in each case only if the scheme becomes effective. Those deeds also contain other provisions, including a forfeiture condition by which the executives must forfeit their Class B Shares for nil consideration in specified circumstances, and the deeds are disclosed in section 7.2(d) of the scheme booklet. Mr Thomas points out that the put options and call options arise from the deeds entered into by the executives, rather than from the scheme, and are directed to Class B Shares in HoldCo rather than shares in InvoCare. He submits that the benefit provided to the executives by the put and call options are also offset by the detriment of the forfeiture condition, although this is plainly not a matter of precise equivalence.
7. Mr Thomas submits that the grant of put and call options to the nine key executives and the forfeiture condition do not give rise to class issues; that the executives' rights as members of InvoCare are the same as those of other InvoCare shareholders; and the existence of a commercial arrangement that may involve acquisitions or disposals of shares in the acquirer after the scheme is implemented does not make their rights as against InvoCare "so dissimilar as to make it impossible for them to consult together with a view to their common interest", adopting the language of Sovereign Life Assurance Co v Dodd [1892] 2 QB 573 at 583. I accept this submission, and this issue is sufficiently addressed by the fact that InvoCare proposes to tag any votes cast by the nine executives at the scheme meeting so that their impact may be assessed at the second Court hearing.
8. Third, Mr Thomas notes that r 3.4 of the Supreme Court (Corporations) Rules 1999 (NSW) provides that, unless the Court otherwise orders, the plaintiff must publish a notice of the hearing of the application for approval of a scheme of arrangement in a particular newspaper. InvoCare seeks a dispensation from that rule and draws attention to paragraph 25(f) of Practice Note SC Eq 4 which provides that: "The Court will generally be prepared to dispense with the publication of a notice of the second Court hearing in a newspaper, if notice can be given by an announcement made on the Australian Securities Exchange or by an announcement on the scheme proponent's website if it is not listed."
9. As the affidavit evidence indicates, InvoCare proposes to provide notice of the second Court hearing by an announcement on the ASX and its website shortly after the Court makes any orders convening the scheme meeting. I am satisfied that course is more likely to draw that hearing to shareholders' attention than a newspaper advertisement and that I should take the approach noted in Practice Note SC Eq 4. I have had regard to, but do not consider it necessary to address, any wider debate as to the manner of publication arising from Re Vita Group Ltd (2023) 165 ACSR 576; [2023] FCA 400 ("Vita Group") on the one hand and Re Tesserent Ltd [2023] FCA 969 on the other.
10. Fourth, Mr Thomas addresses the question of communications with InvoCare shareholders. This matter has recently become the subject of an unexpected controversy in the case law. On or about 23 October 2023, a reminder email will be sent by Link to those InvoCare shareholders who have not yet lodged a proxy, and the text of that email is exhibited to Ms Chiu's affidavit. As I noted above, InvoCare also proposes that Orient Capital will arrange outbound telephone calls to those InvoCare shareholders who have not lodged a proxy and receive inbound telephone calls from InvoCare shareholders concerning the scheme, and the scripts for the inbound and outbound telephone calls are exhibited to Mr Fulton's affidavit.
11. Mr Thomas refers to recent cases in the Federal Court of Australia which have considered the question of communications between a scheme company and shareholders, including Re Essential Metals Ltd [2023] FCA 240 at [87] - [105] and Vita Group at [27] - [34]. Mr Thomas also refers to Re DDH1 Ltd [2023] FCA 982 at [22], where Colvin J observed that: "… [i]n essence, when asked to make an order that a meeting be convened to consider a scheme, the Court should be informed about any plan in relation to communications with members (or creditors). Further, the proponent of the scheme must proceed on the basis that, at the time of moving the Court for orders approving the scheme, the Court will need to be informed about any relevant matters that have arisen from the manner in which communications have occurred in the period leading up to the meeting. However, there is no requirement for all such plans (or the scripts to be used) to be approved by the Court at the time of considering whether to order a meeting to be convened."
12. I should address this issue, given the focus upon it in recent case law, although I do so only briefly. First, it is well-established that the Court's approval should be sought for a supplementary explanatory statement to be sent to securityholders in a scheme: Re Centro Retail Ltd and Centro MCS Manager Ltd in its capacity as Responsible Entity of Centro Retail Trust [2011] NSWSC 1321 at [10]-[11]. Second, the case law has not required the Court's approval of scripts for addressing incoming calls from shareholders: Re Westfield Holdings Ltd (2004) 49 ACSR 734; [2004] NSWSC 458 at [12]; Re ResApp Health Ltd [2022] NSWSC 1353 at [39]ff. Third, a practice has developed by which scheme companies have made proposed reminder emails to shareholders and proposed scripts for outbound telephone calls available for Court review at the first Court hearing, so that the Court will have the opportunity to review them and raise any concerns with them, whether or not they are expressly "approved" by the Court. Although the Courts have frequently reviewed such communications (and, on occasion, approved them if asked to do so), it also does not seem to me that such approval is strictly "required". The case law has recognised that any failure to bring such communications to the Court's attention will not necessarily lead the Court to refuse approval for a scheme at the second Court hearing, and the Court will there consider whether the content of such communications has undermined the integrity of the scheme process in determining whether to approve the scheme: Re Walsh & Company Investments Ltd [2020] NSWSC 1746 at [66]ff; Re ResApp Health Ltd [2022] NSWSC 1014 at [16]; Re Res App Health Ltd [2022] NSWSC 1353 at [33].
13. While I am inclined to think that a scheme company's intended communications with securityholders should be disclosed at the first Court hearing, I would prefer to characterise that as an expectation of the Court rather than a requirement. It may be that little turns on the difference between the two, since it is not easy to see why scheme companies or their advisers would prefer to leave securityholder communications to be reviewed only at a second Court hearing and risk the prospect of failure of a scheme at that hearing if those communications have undermined the integrity of the securityholder vote, rather than making those communications available for review at the first Court hearing while there is still time to correct any difficulty with them. In this case, unsurprisingly, InvoCare disclosed the content of its proposed reminder email and the scripts for its communications for both outbound and inbound calls at the first Court hearing. I reviewed those scrips and had no difficulty with them and I record that matter in this judgment.

Orders

1. For these reasons, I made the orders sought by InvoCare at the conclusion of the first Court hearing.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 29 September 2023