Fairfax Media Limited, in the matter of Fairfax Media Limited [2018] FCA 1610

GLEESON J: 1 On 12 October 2018, I made orders pursuant to s 411(1) of the Corporations Act 2001 (Cth) ("Act") after a first hearing in relation to a proposed scheme of arrangement. These included orders that the proposed scheme meeting be convened and the scheme booklet, that is, the explanatory statement required by s 412(1)(a) to accompany notices of the scheme meeting, be approved. 2 These are my reasons for making those orders.

BACKGROUND 3 Fairfax Media Limited ("Fairfax") is an Australian public company listed on the Australian Stock Exchange ("ASX.") Fairfax operates a diversified portfolio of media and digital assets. Its portfolio comprises six primary business units across Australia and New Zealand: (1) Domain, which offers residential, commercial and rural property marketing services and search tools. (2) Australian Metro Media, which includes metropolitan news, sport, lifestyle and business media across various platforms including print, online, tablet and mobile. Its publication assets include The Sydney Morning Herald, The Age and The Australian Financial Review. (3) Stan, a joint venture with Nine, a streaming service which offers a broad range of local and international programming to subscribers for a fixed monthly subscription fee. (4) Macquarie Media, a national news, talk and sport radio network. (5) Australian Community Media, which is a leading rural, regional and agricultural newspaper, digital media and events business. (6) Stuff NZ, an integrated multi-media business with brands across multiple platforms including newspapers, magazines, events and digital. 4 Fairfax's issued securities are: (1) 2,299,475,546 ordinary fully paid shares in the capital of Fairfax ("Fairfax shares"), including restricted shares issued by Fairfax under its Equity Incentive Plan Rules ("Fairfax restricted shares"); (2) 16,154,370 options issued by Fairfax over Fairfax Shares under the Fairfax Transformation Incentive Plan ("Fairfax options"); (3) 9,559,247 performance rights issued by Fairfax under the Fairfax Equity Incentive Plan Rules ("Fairfax performance rights"); and (4) 281 convertible notes, issued by Fairfax under the Terms and Conditions of Debentures dated 11 December 1991 in connection with an earlier recapitalisation of Fairfax, each of which can be converted to one Fairfax Share ("Fairfax convertible notes ").

Proposed scheme 5 On 25 July 2018, Fairfax entered into a scheme implementation agreement with Nine Entertainment Co. Holdings Limited ("Nine") under which Fairfax agreed to propose the scheme to Fairfax shareholders. 6 On 26 July 2018, Fairfax and Nine announced that they had entered into a scheme implementation agreement under which the companies would merge to establish Nine as "one of Australia's leading independent media companies". The announcement stated that the proposed transaction would be implemented by Nine acquiring all Fairfax shares by way of a scheme of arrangement. 7 If the scheme is approved and implemented, eligible shareholders will receive 0.36 ordinary shares in Nine and $0.025 cash for each Fairfax share held. 8 Following completion of the scheme, Fairfax shareholders will own 48.9% of the combined group and Nine shareholders will own 51.1%. 9 On 9 October 2018, Nine gave written notice to Fairfax pursuant to cl 2.3 of the Scheme Implementation Agreement that Nine had elected to nominate Petelex Pty Ltd, a wholly owned subsidiary of Nine, to acquire the Fairfax shares under the scheme. 10 By letter dated 11 October 2018, the Australian Securities and Investments Commission ("ASIC") confirmed compliance with s 411(2)(a) of the Act and expressed the view that ASIC has had a reasonable opportunity to examine the terms of the scheme and the scheme booklet for the purposes of s 411(2)(b). 11 The directors have unanimously recommended that shareholders vote in favour of the scheme at the proposed scheme meeting, 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 Fairfax shareholders. Each Fairfax director intends to use the voting rights attached to any Fairfax shares held or controlled by him or her to vote in favour of the scheme. 12 It is proposed to hold a single scheme meeting on Monday, 19 November 2018 at 10.00 am.

12 October 2018 trading updates 13 The evidence included trading updates published to the ASX by each of Fairfax and Nine on the morning of the hearing. 14 The Fairfax trading update stated: • FY19 year-to-date overall group revenues are 5% below last year. Across our reporting segments: • Domain digital revenue is up 6% and total revenue is 1% lower. • Metro Media is down around 1%, with Metro publishing flat. • Australian Community Media is down around 10%. • Stuff (New Zealand Media) is down around 16% including currently impact (down around 15% in local currency NZ$). • Macquarie Media is up around 3% (up 4% on a continuing business basis excluding the impact of disposals). • Across the Fairfax Group we continue to implement cost savings measures. 15 The Nine trading update stated: Since the end of FY18, while the Metro FTA advertising market has been slightly softer than expected, Nine's share has been ahead. As a result, for the September quarter of FY19, Nine's Metro FTA advertising revenue was broadly flat on Q1 FY18, adjusted for the one less week in FY19. Nine's digital revenues were around 10% ahead for the September quarter. Nine continues to expect FY19 Group EBITDA of $280-300m, before Specific items.

Independent expert report ("IER") 16 The independent expert appointed by the directors, Grant Samuel & Associates Pty Ltd ("Grant Samuel"), has prepared a draft report, revised on 12 October 2018 and referred to as the "further updated IER", concluding that the proposed scheme is in the best interests of Fairfax shareholders. Grant Samuel's director, Jaye Gardiner, has affirmed three affidavits in this proceeding, including an affidavit on 12 October 2018 which states her intention (subject to any matters raised by the Court) to sign a copy of the report in the form of the further updated IER for inclusion in the scheme booklet. 17 The further updated IER includes the following: The Scheme brings together two traditional Australian media groups with complementary businesses to create a leading integrated, diversified Australian media business with multiple digital and traditional assets. It involves Nine acquiring 100% of the shares in Fairfax but, while the Scheme is technically a control transaction, the commercial reality is that, from a shareholder's perspective, it is a merger. Fairfax shareholders will, in aggregate, own 48.9% of the Combined Group and Nine shareholders will own [51.1%]. Accordingly, the analysis of fairness is different to that for a conventional control transaction. Rather than estimating the full underlying value of Fairfax including a control premium, the Scheme will be fair to Fairfax shareholders if the share of the value of the Combined Group received by them is equal to (or greater than) their proportionate contribution of value. Specifically, Grant Samuel has considered the relative contributions of sharemarket value and fundamental (underlying) value. On the basis of sharemarket value, the aggregate interest of Fairfax shareholders in the Combined Group is materially favourable in comparison to the share contributed by them (reflecting the premium inherent in the Scheme terms at the time of announcement). Based on share prices over the three months prior to announcement of the Scheme on 26 July 2018, Fairfax shareholders are contributing approximately 45% of the value but are receiving a 48.9% share of the value. The outcome is similar in terms of relative contributions of fundamental value. Based on Grant Samuel's estimate of fundamental value, Fairfax shareholders are contributing approximately 45% of equity value compared to the 49.5% of that value they will receive (i.e. 48.9% of the Combined Group plus 2.5 cents per Fairfax share). In effect, Nine is "paying away" synergy benefits arising from the merger to Fairfax shareholders to enhance the attraction of the transaction to Fairfax shareholders. The premium also provides Fairfax shareholders with some level of "insurance" against any post announcement weakness in the Nine share price. 18 The further updated IER also expresses the view that, in any event, the advantages and benefits of the scheme for Fairfax shareholders outweigh the disadvantages, costs and risks. 19 Senior counsel for Fairfax, Mr Jackman SC, informed the Court that the most recent amendments to the further updated IER were a consequence of volatility in the share market on the day prior to the hearing. Ms Gardiner affirmed that the amendments had no impact on the conclusions in her report and there was no matter that she considered to be of significance that had been omitted from the further updated IER.

Australian Competition and Consumer Commission ("ACCC") review 20 Mr Jackman SC noted the conditions precedent to implementation of the scheme (identified at section 12.2 of the scheme booklet) include the absence of any regulatory intervention to restrain or prohibit the scheme, as at 8.00 am on the second court date (that is, 27 November 2018). 21 The ACCC has commenced a review of the proposed merger on 16 August 2018 and has set a provisional date for the announcement of its decision on 8 November 2018. The scheme booklet states: At this stage of the process, the ACCC has not identified any areas of continuing inquiry that cause it preliminary competition concerns in relation to the Implementation of the Scheme.

EVIDENCE AND SUBMISSIONS 22 Fairfax relied on the following evidence in support of the application: (1) an affidavit of Nicholas Falloon, non-executive director of Fairfax, chairman of Fairfax's board of directors and proposed chairperson for scheme meeting, affirmed 10 October 2018; (2) an affidavit of James Millar, non-executive director of Fairfax and proposed alternate chairperson for scheme meeting, affirmed 10 October 2018; (3) two affidavits of Gail Hambly, group general counsel and company secretary of Fairfax, affirmed 11 and 12 October 2018, together with exhibits marked "GH-1" and "GH-2"; (4) three affidavits of Jaye Gardner, director and representative of Grant Samuel, one affirmed 10 October 2018 and two affirmed 12 October 2018, together with exhibits marked "JLG-1", "JLG-2 (10 October 2018)", JLG-2 (12 October 2018)" and "JLG-3"; (5) an affidavit of Alexander Morris, partner of King & Wood Mallesons ("KWM"), Fairfax's solicitors, sworn 31 August 2018; (6) an affidavit of Timothy Bednall, partner of KWM, sworn 10 October 2018, together with an exhibit marked "TGB-1"; (7) an affidavit of Bryan Zekulich, partner of Ernst & Young, affirmed 10 October 2018; and (8) two affidavits of Rachel Launders, general counsel and company secretary of Nine, sworn 10 and 12 October 2018 together with an exhibit marked "RL-1". 23 The scheme booklet appears behind tab 4 of exhibit "GH-2". 24 Fairfax provided written submissions dated 11 October 2018. The written submissions set out the relevant legal principles and identified the evidence in support of the various matters about which the Court was required to be satisfied. 25 In addition to the written submissions, Mr Jackman SC made oral submissions and identified important aspects of the evidence. 26 Senior counsel for Nine, Dr Kristina Stern SC, made no submissions.

ISSUE FOR DECISION 27 At the first hearing, the Court's task is to decide whether to approve both the convening of the proposed scheme meeting pursuant to s 411(1) and the scheme booklet, that is the explanatory statement required by s 412(1)(a) to accompany the notices convening the scheme meeting. 28 The relevant legal framework is set out in the submissions filed by Fairfax. It is also explained in Re Staging Connections Group Limited [2015] FCA 1012, particularly at [18] to [31].

Part 5.1 body 29 The term "Part 5.1 body" is defined in s 9 of the Act to mean, relevantly, a company. The evidence confirmed that Fairfax is a company and therefore a Pt 5.1 body.

Proposed scheme is an "arrangement" 30 Generally, almost any arrangement otherwise legal which touches or concerns the rights and obligations of the company or its members, and which is properly proposed, is an "arrangement" within the meaning of s 411: see Re NRMA Insurance Limited (No 1) [2000] NSWSC 82; (2000) 156 FLR 349 at [20] per Santow J. The text of the scheme (annexed to the scheme booklet) provides prima facie evidence that the proposed scheme is such an "arrangement". Fairfax committed itself to propounding the scheme by the scheme implementation agreement, and the directors have unanimously recommended the scheme on the basis set out above. I accepted that these matters also provide prima facie evidence that the scheme is bona fide and has been properly proposed.

Scheme booklet will provide proper disclosure to members 31 A draft scheme booklet was first provided to ASIC on 14 September 2018 and amended drafts were provided on 5, 9 and 10 October 2018 following correspondence between ASIC and KWM. 32 The affidavits of Ms Hambly and Ms Launders set out the processes undertaken for verification of the scheme booklet. 33 At a meeting of the Fairfax board on 9 October 2018, the board members who were present relevantly: (1) approved the scheme booklet (in near final form) for lodgement with the Court (subject to (a) confirmation from the due diligence committee established by Fairfax in connection with the transaction that the booklet had been fully verified; (b) ASIC having no further comments; and (c) any changes to the scheme booklet being authorised by the sub-committee referred to below) and, subject to the orders of the Court, despatch to Fairfax shareholders; and (2) authorised a sub-committee consisting of the chairman, the chief executive and the company secretary to make any non-material changes to the scheme booklet required before submission of the booklet to the Court. 34 On 9 October 2018, the due diligence committee confirmed that the scheme booklet had been fully verified, subject to qualifications explained in Ms Hambly's affidavits. 35 On 10 October 2018, ASIC confirmed that it had no further comments on the scheme booklet. 36 On 11 October 2018, the Fairfax board approved changes to the scheme booklet in the light of the Fairfax trading update and the Nine trading update. 37 In her second affidavit, affirmed on the date of the hearing, Ms Hambly stated that she is not aware of: (1) there being any statement in the information included the scheme booklet, comprising each material statement except for information provided by Nine, the independent expert report and the independent limited assurance report, that is or is likely to be false, or misleading or deceptive, either in isolation or in the general context or form in which the statement appears; (2) there being any material omission from that information included in the scheme booklet in the form presented to the Court; or (3) anything which caused her to believe that the issue of that information (as part of the scheme booklet) may involve conduct by any person that is misleading or deceptive or that may be likely to mislead or deceive. 38 On the basis of the evidence set out above, I was satisfied that there is prima facie evidence that the scheme booklet will provide proper disclosure to members.

Other procedural requirements have been met 39 Division 3 of the Federal Court (Corporations) Rules 2000 (Cth) ("Corporations Rules") applies relevantly to an application for approval of an arrangement between a Pt 5.1 body and its members (r 3.1). 40 The affidavits of Mr Falloon and Mr Millar met the requirements in r 3.2 of the Corporations Rules (concerning nomination of the chairperson for the scheme meeting). 41 The proposed orders were in a form that met the requirements of r 3.3 and provided for publication of a notice that is appropriate and justified the order dispensing with compliance with r 3.4.

Proposed electronic notification of shareholders 42 Fairfax proposed to email those shareholders who have elected to receive notices by email with links to the scheme booklet. There was no reason why this should not be permitted. 43 Sections 249J(3)(c) and (ca) of the Act contemplate sending notices of meetings to members. Rule 3.3(2) of the Corporations Rules requires, in the absence of Court orders to the contrary, that a meeting of members ordered under s 411 must be convened, held and conducted in accordance with the provisions of Pt 2G.2 of the Act (in which s 249J appears) and Fairfax's constitution (to the extent that it is not inconsistent with Pt 2G.2). 44 Article 13.1(a)(1) of Fairfax's constitution provides for the giving of notice to a member by communication to the electronic address (if any) nominated by the member. 45 Electronic mail-out orders are now commonly made in relation to scheme meetings: see, for example, Re David Jones Limited [2014] FCA 530 at [34]-[37]; Re Staging Connections at [49]-[52]; Re Signature Gold Limited [2017] FCA 1481 at [55]; and Re Intecq Limited [2016] NSWSC 1429 at [21]. 46 The proposed form of notification conforms with the requirement that information concerning the scheme booklet precede any invitation for shareholders to act (for instance, by submission of proxy forms): see David Jones at [37] per Farrell J.

Other matters 47 There was no apparent reason why the scheme should not receive the Court's approval if the necessary number of votes are achieved. 48 I was satisfied that there was no order sought which goes beyond current accepted practice. 49 I was also satisfied that the proposed scheme is of such a nature and is cast in such terms that, if it were to receive the requisite statutory majority, the Court would be likely to approve the scheme on the hearing of an unopposed application. 50 Acknowledging 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 Company Limited [2002] NSWSC 1177; (2002) 43 ACSR 601 at [7]), Fairfax drew five matters to the Court's attention. I accepted that none of them justified the Court declining to grant the relief sought. 51 For completeness, Fairfax's written submissions on the five matters are set out below:

Performance risk Courts on several occasions have considered the extent to which a bidder will comply with its primary obligation to pay the scheme consideration to scheme members: see eg SFE Corporation Ltd (2006) 59 ACSR 82 at [4]; Re Brambles Industries (2006) 59 ACSR 501 at [9]; Re APN News & Media Ltd (2007) 62 ACSR 400 at [23]; Re Macquarie Capital Alliance Ltd (2008) 67 ACSR 484 at [43]; Re Simavita Holdings Limited [2013] FCA 1274 at [43] - [44]. The issue does not arise in the present case due, inter alia, to the combined operation of cll 5.2, 5.3, 5.4, 6.1, 6.2 and 6.3 of the proposed scheme. Pursuant to those clauses, Nine must: (a) deposit in cleared funds two business days prior to the Implementation Date the Cash Scheme Consideration into a trust account operated by Fairfax as trustee for the Scheme Participants; and (b) issue to Scheme Participants (and the Sale Agent) the Scrip Scheme Consideration on the Implementation Date. In addition, Nine has executed a Deed Poll [annexure D to the scheme booklet] in favour of Scheme Participants, in which it promises to comply with its obligations under the Proposed Scheme. Materially identical arrangements have been held to be sufficient in previous cases: see eg Re APN News & Media Ltd (2007) 62 ACSR 400 at [23]; Re Hostworks Group Ltd (2008) 26 ACLC 137 at [32]; and Re Coles Group Limited (2007) 25 ACLC 1380 at [38]; Re Westfield Corporation Limited [2018] NSWSC 584 at [31] - [32].

Exclusivity provisions Clause 9 of the Scheme Implementation Agreement is an exclusivity provision, which includes 'no-shop' and 'no-talk' restrictions. The no-talk restriction is subject to a 'fiduciary exception'. The period during which the exclusivity provisions operate is defined in a manner capable of precise ascertainment and is a reasonable period in the circumstances: see eg Re DUET Finance Ltd [2017] NSWSC 415 at [23]; Re Westfield Corporation Limited [2018] NSWSC 584 at [33]. Exclusivity restrictions in the form just summarised are now commonplace in s 411 schemes. The restrictions are consistent with the terms of Takeovers Panel Guidance Note 7. Neither the Guidance Note nor prior authority requires a fiduciary carve-out with respect to 'no-shop' provisions: see eg Macquarie Private Capital A Limited (2008) 26 ACLC 366 at [18] - [19]; Re Coles Group Limited (2007) 25 ACLC 1380 at [62] - [63]; Re Hostworks Group Ltd (2008) 26 ACLC 137 at [34] - [37]; Guidance Note 7 at [20]. Clause 9 also includes a 'matching rights' regime (cll 9.7 - 9.9) pursuant to which Fairfax is obliged to give Nine notice of an actual, proposed or potential Competing Transaction and Nine has the ability to provide a matching or superior proposal in response. While the Takeovers Panel has noted the possibility that matching rights can be anti-competitive, the notification of Competing Transactions would be expected to occur under Fairfax's continuous disclosure obligations in any event: see Re DUET Finance Ltd [2017] NSWSC 415 at [24]; Re Westfield Corporation Limited [2018] NSWSC 584 at [34]. Further, the process provided for in cll 9.7 - 9.9 corresponds "to the course that a prospective bidder would expect [Fairfax] to take, even without such a provision, in order to obtain the best possible offer if competing bidders emerged": Re DUET Finance Ltd [2017] NSWSC 415 at [24]. Matching rights are also increasingly commonplace in schemes of arrangement: Re Veda Group Ltd [2015] FCA 1506 at [10]; Re Toll Holdings Ltd [2015] VSC 123 at [35]-[36]; Re BigAir Group Ltd [2016] FCA 1296 at [20]; Re SAI Global Ltd [2016] FCA 1312; Re Westfield Corporation Limited [2018] NSWSC 584 at [34]. The existence of the exclusivity provision is given adequate disclosure in the Scheme Booklet [in sections 7.3.6 and 14.8.1].

Break fee Clause 10 of the Scheme Implementation Agreement provides for the payment of a $20 million break fee by Fairfax in certain prescribed circumstances. Break fees are common features in schemes of arrangement and have not been an obstacle to the making of orders under s 411(1) of the Act: Re APN News & Media Limited (2007) 62 ACSR 400 at [43]. A break fee will be permitted unless "the amount of the break fee was such that it could influence voting at the meeting to be convened or if there are some other unusual circumstances": SFE Corporation Pty Ltd (2006) 59 ACSR 82 at [6] - [7]. Neither of these concerns arises in the present case. First, the break fee is not payable if the meeting of Scheme Participants do not approve the Proposed Scheme: cf Re Bolnisi Gold NL (No 2) (2007) 165 FCR 45 at [2]. The existence of the fee can therefore have no influence on voting at the meeting. As Lander J noted in Re Adelaide Bank Limited [2007] FCA 1582 at [31]: [T]he break fee is not payable in circumstances where the members vote not to implement the scheme. In those circumstances, the break fee is not a disincentive to the shareholders in their consideration of the proposed merger. See also Re Hostworks Group Limited (2008) 26 ACLC 137 at [40]. Secondly, the size of the break fee is consistent with the Takeovers Panel's guideline of 1% of equity value: Guidance Note 7: Lock-up Devices at [9]. The 1% yardstick has been adopted with approval in numerous cases: see eg Re APN News & Media Ltd at [55]; Re Macquarie Capital Alliance Ltd (2008) 67 ACSR 484 at [46]ff; Re Hostworks Group Limited (2008) 26 ACLC 137 at [40]ff; Re Coles Group Limited (2007) 25 ACLC 1380 at [74]; Re Macquarie Private Capital A Ltd (2008) 26 ACLC 366 at [21] - [22]; Re MBF Australia Ltd [2008] FCA 428 at [36]. Thirdly, the fee is disclosed in the Scheme Booklet: see sections 6.39, 7.3.7 and 14.8.1.8. Fourthly, Fairfax was able to negotiate a reverse break fee in the same amount to be paid by Nine in certain prescribed circumstances. Sixthly, Lindgren J in Re APN News & Media Ltd identified several matters upon which evidence ought be adduced by a plaintiff before a break fee will be permitted: at [55]. Those matters are addressed in the affidavit of Gail Hambly affirmed 11 = October 2018 at [22]-[30].

Deemed warranty Clause 5.6 of the Proposed Scheme contains a 'deemed warranty', by which each Scheme Participant warrants that, inter alia, all their Scheme Shares transferred to Nine will be fully paid and free from all Encumbrances and that Scheme Participants have full power to sell and transfer their Scheme Shares to Nine under the scheme. Clauses in these terms are permissible and now common-place: see eg Re APN News & Media Limited (2007) 62 ACSR 400 at [62]; Re Hostworks Group Ltd (2008) 26 ACLC 137 at [41]; Re Coles Group Ltd (2007) 25 ACLC 1380 at [45]; Re Adelaide Bank Ltd [2007] FCA 1582 at [33]; Re Orion Telecommunications Ltd [2007] FCA 1389 at [9]; Re Macquarie Private Capital A Limited (2008) 26 ACLC 366 at [14]; Re Mitchell Communication Group [2010] VSC 423 at [10]-[12]; Re Westfield Corporation Limited [2018] NSWSC 584 at [37]. Consistently with the observations of Lindgren J in Re APN News & Media Ltd at [63], the existence of the deemed warranties will be disclosed in the Scheme Booklet.

Options, restricted shares and performance rights Section 14.1.6 sets out information with respect to outstanding Fairfax Options, Fairfax Restricted Shares and Fairfax Performance Rights. Subject to the Proposed Scheme becoming effective, the Fairfax Board will: (a) accelerate the vesting of all outstanding Fairfax Restricted Shares with effect from the Effective Date in order to allow the beneficial holders to receive the Scheme Consideration; (b) cancel all outstanding Fairfax Options with effect from the Effective Date in exchange for an approximate aggregate cash payment of $7.5 million; (c) cancel all outstanding Fairfax Performance Rights with effect from the Effective Date in exchange for an approximate aggregate cash payment of $4.5 million. The course set out above is not class-creating. This is because each Scheme Participant will receive the same benefit under the Proposed Scheme in respect of the shares held by the participant as at the Record Date. The mere fact that some Scheme Participants enjoy options, restricted shares and/or performance rights that will be accelerated or cancelled after the Proposed Scheme is approved, but before it becomes effective, does not prevent those persons from consulting together at the scheme meeting with their fellow shareholders: see eg Re Foster's Group Limited (No 2) [2011] VSC 547 at [42] - [43]; Re Aston Resources Limited [2012] FCA 229 at [36] - [39]; Re Sirtex Medical Limited [2018] FCA 1315 at [24].

CONCLUSION 52 Accordingly, I made the orders sought by Fairfax. I certify that the preceding fifty-two (52) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gleeson.