First Pacific Advisers LLC v Boart Longyear Ltd

Affidavit evidence

1. Cirrus Networks reads the affidavit dated 4 October 2023 of its solicitor, Ms Sleiman, which refers to the background of the proposed scheme and exhibits a company extract for Cirrus Networks obtained from the Australian Securities and Investments Commission ("ASIC").
2. Cirrus Networks also reads the affidavit dated 13 October 2023 of its Chief Financial Officer, Mr Matthew Green. Mr Green refers to the nature of Cirrus Networks' business; to the background of the transaction; to the consideration alternatives in respect of the proposed scheme, to which I also referred above; and to the position in respect of Ineligible Foreign Shareholders, although it appears that only four shareholders in Cirrus Networks fall in that category, and in respect of Unmarketable Parcel Shareholders. Mr Green also addresses the approach which will be adopted by Cirrus Networks in respect of equity incentives, consisting of options and performance rights, which will be cancelled for a specified cancellation price.
3. Mr Green outlines the consideration of the scheme by Cirrus Networks' board and notes the board has formed the view that the scheme is in the best interests of Cirrus Networks' shareholders and unanimously recommends that shareholders vote in favour of the scheme, conditional on there being no superior proposal (as defined) and the independent expert report continuing to conclude that the scheme is in the best interests of Cirrus Networks' shareholders. Mr Green also refers to the independent expert report which Cirrus Networks has obtained from Lonergan Edwards & Associates, who have concluded that the scheme is fair and reasonable and in the best interests of Cirrus Networks' shareholders. Mr Green also addresses the position in respect of conditions precedent, exclusivity provisions and break fee provisions and to the verification process which Cirrus Networks has adopted in respect of the Cirrus Networks Information (as defined) in the scheme booklet, which is in customary form. He outlines the manner in which the meeting will be held, as a physical meeting, and addresses the interests of, and consents by, the chair and alternate chair of that meeting, and the manner in which Cirrus Networks proposes to dispatch documents to shareholders, including those who have elected to receive documents in hard copy or in electronic form and those who have made no such election. Mr Green also addresses Cirrus Networks' intention that Automic Pty Limited ("Automic"), its share registry provider, operate an inbound shareholder information line in respect of the proposed scheme and indicates that it proposes to make an announcement to the ASX giving notice of the second Court hearing. Mr Green also exhibited the then draft of the scheme booklet and Mr Williams has taken me through that scheme booklet and through Lonergan Edwards' independent expert report in the course of submissions.
4. By a second affidavit dated 16 October 2023, Ms Sleiman refers to amendments which have been made to the scheme booklet at the request of Bidder and ASIC, from the draft scheme booklet exhibited to Mr Green's affidavit, and to correspondence with ASIC in respect of the proposed scheme. That affidavit exhibited several amended pages of the scheme booklet to which I have had regard.
5. By his affidavit dated 17 October 2023, Mr Stephen Kowal, who is the Chief Executive Officer and an Executive Director of Atturra and Bidder, referred to the structure of the Atturra group; to the execution of the SID by Cirrus Networks, Bidder and Atturra and the amendments to it, which I have noted above; to the execution of a deed poll by Atturra and Bidder in favour of Cirrus Networks shareholders; and to the process adopted by Bidder and its advisers for verification of the Atturra Information (as defined) contained in the scheme booklet, which was in customary form, and noted an amendment in the scheme booklet which has been made as a result of that process.
6. Cirrus Networks also tendered a letter dated 17 October 2023 from ASIC, in its customary form, which reserved its position under s 411(17) of the Act to the second Court hearing and indicated that ASIC did not seek to appear to make submissions or intervene to oppose the scheme at the first Court hearing.

Role of the Court at the first Court hearing

1. Mr Williams rightly submits that the Court will not ordinarily make orders for the convening of a scheme meeting unless the scheme is of such a nature, and cast on 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 was not opposed: FT Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 at 72. He also refers to my summary of the applicable principles in respect of the Court's role at a first Court hearing in Re Ellerston Global Investments Ltd [2020] NSWSC 879 at [25]-[27], to which I also referred to in Re Beyond International Ltd [2022] NSWSC 1649 at [25] as follows: "It is, of course, well-established that the Court will order the convening of a scheme meeting and approve a draft explanatory statement if it is satisfied that the plaintiff is a Part 5.1 body; the proposed scheme is an arrangement within the meaning of s 411 of the [Act]; the scheme booklet will provide proper disclosure to members; the scheme is bona fide and properly proposed; ASIC has had a reasonable opportunity to examine the terms of the scheme and the scheme booklet and make submissions and has had 14 days' notice of the proposed hearing date; the procedural requirements of the Supreme Court (Corporations) Rules 1999 (NSW) have been met; and there is no apparent reason why the scheme should not, in due course, receive the Court's approval if the necessary majority of votes is achieved… The Court will not ordinarily summon a meeting at the first court hearing 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 a petition which is unopposed… At the first hearing, the Court is not concerned with whether final approval should be given to the scheme, but whether the scheme is one which is adequately explained to those who have a financial interest in it, and whether there is any obvious flaw in the scheme, such that it would be inappropriate even for it to be submitted for consideration … The Court is also not required to be satisfied that no better scheme could have been proposed, but with whether sensible business people might consider the arrangement proposed is of benefit to members."
2. Mr Williams also points out that, if the preconditions to the exercise of power under s 411(1) of the Act are satisfied, then it is necessary for the Court to consider whether the Court should in its discretion exercise its power under s 411(1) of the Act, and also refers to Halley J's summary of the applicable principles in Re Absolute Equity Performance Fund Ltd [2022] FCA 933 at [18]-[22].
3. Mr Williams submits, and I accept, that each of the preconditions to the Court's exercise of power under s 411(1) of the Act is met in this case. Cirrus Networks is a company registered under the Act and therefore a Part 5.1 Body and the proposed scheme is an "arrangement" between Cirrus Networks and its shareholders as a single class. Cirrus Networks has made the draft scheme booklet available for ASIC's review and I referred above to the letter from ASIC in customary form which Cirrus Networks tendered at the hearing. I have also referred above to the evidence of the verification process in respect of the Cirrus Networks Information and the Atturra Information in the scheme booklet. The procedural requirements under the Supreme Court (Corporations) Rules 1999 (NSW) ("Rules") have been satisfied, including by the tender of the company search for Cirrus Networks from the records maintained by ASIC; the evidence led by Mr Green on information and belief as to the interest of and consent by the proposed chair and alternate chair of the scheme meeting; and the form of proposed orders to convene the scheme meeting. Cirrus Networks seeks, and the Court will ordinarily grant, dispensation from r 3.4 of the Rules where notice of the second Court hearing will be given by an announcement made on the ASX instead of by newspaper publication, as contemplated by paragraph 26(b) of revised SC Eq Practice Note 4, which became effective on 18 October 2023 and implemented Practice Note - Harmonisation in schemes of arrangement as developed by the Committee for the Harmonisation of Rules of the Council of Chief Justices of Australia and New Zealand ("Harmonised Practice Note"). As I noted in Re InvoCare Ltd [2023] NSWSC 1180 ("InvoCare") at [22], that course is more likely to draw the second court hearing to shareholders' attention than publication of a newspaper advertisement.
4. Mr Williams also points out that Cirrus Networks' directors unanimously recommend that Cirrus Networks shareholders vote in favour of the scheme, in the absence of a superior proposal and subject to the independent expert concluding (and continuing to conclude) that the scheme is in the best interests of Cirrus Networks shareholders. As I noted above, the independent expert report prepared by Lonergan Edwards expresses the opinion that the scheme is fair and reasonable and in the best interests of Cirrus Networks shareholders, having regard to Lonergan Edwards' assessment of the value of a Cirrus Networks share on a 100% controlling interest basis. Mr Williams also notes that, where the value of the scheme consideration to be received by Cirrus Shareholders largely exceeds Lonergan Edwards' assessed valuation range for Cirrus Networks shares on a 100% controlling interest basis (although the low end of the assessed value of the share consideration is marginally below the high end of the assessed value range), Lonergan Edwards also express the view that the scheme is "fair" and "reasonable" and therefore in the best interests of Cirrus Networks shareholders.
5. I accept that the nature of the scheme is not such that the Court would decline to convene the scheme meeting so as to permit its consideration by Cirrus Networks shareholders.

Particular matters

1. Mr Williams recognises Cirrus Networks' ex parte disclosure obligations and draws several aspects of the scheme to the Court's attention.
2. First, he draws attention to the scale-back provisions for the Maximum Scrip Consideration and Maximum Cash Consideration to which I referred above which, as I also noted above, have the effect that the cash and scrip components of the scheme consideration are less than the maximum amount of cash consideration available of $44,568,422.54 and the maximum amount of scrip consideration available, namely 16,616,677 New Atturra shares. Mr Williams also notes that the operation of the scale-back provisions are explained in sections 4.4 and 4.5 of the scheme booklet. He submits and I accept that schemes of arrangement involving alternative consideration options, subject to scale-back provisions, have been approved in prior cases, including Re Australian Leisure and Entertainment Property Management Ltd [2021] NSWSC 1421 ("Australian Leisure") at [21] and the cases which I there noted. Mr Williams also submits and I also accept that the fact that some Cirrus Networks shareholders may elect one form of consideration over another does not create a need for separate classes at the scheme meeting, where the existing rights of all Cirrus Networks shareholders are the same; the rights afforded to them under the schemes are the same; and there is no impediment, let alone impossibility, to all Cirrus Networks shareholders consulting together with a view to their common interest: First Pacific Advisers LLC v Boart Longyear Ltd (2017) 121 ACSR 136 at [80]; Australian Leisure at [21].
3. Second, Mr Williams notes that Cirrus Networks shareholder will receive the Default Consideration, being a mix of cash consideration and scrip consideration, unless he, she or it makes a valid election to receive a different form of consideration. He submits and I also accept that a Default Consideration structure, comprising a mix of scrip and cash, has been a feature of some prior schemes, and he refers to Re Murchison Metals Ltd [2014] NSWSC 951 ("Murchison Metals"), Australian Leisure and Re Over the Wire Holdings Ltd [2022] FCA 26 in that regard. Mr Williams recognises that, in Murchison Metals at [6]-[9], Brereton J expressed reservations as to attributing an election in favour of the mixed consideration option to non-electing shareholders rather than in favour of the cash option, where the independent expert had there expressed the view that the 100% scrip consideration option was neither fair nor reasonable. I would share those reservations in such a case. As Mr Williams points out, this is not such a case, since the independent expert, Lonergan Edwards, has here concluded that the scheme is "fair" and "reasonable" and, accordingly, in the best interests of Cirrus Networks shareholders as the value of the scheme consideration largely exceeds its assessed valuation range for Cirrus Networks shares on a 100% controlling interest, including in respect of the Default Consideration.
4. Third, Mr Williams addresses the position as to Cirrus Networks performance rights and options and recommendations made by its directors who hold such rights and options. Mr Williams points out that section 10.2 of the scheme booklet indicates that Cirrus Networks operates employee incentive arrangements under which performance rights or options are offered to executive directors and employees ("Equity Incentives"). Clause 5 of the SID requires Cirrus Networks to take all actions necessary to ensure that there will be no outstanding Equity Incentives on issue as at the implementation date for the scheme, and Cirrus Networks proposes to enter into an arrangement with all holders of Equity Incentives, by which those holders agree to the acceleration of all unvested Equity Incentives and cancellation of their Equity Incentives at a price of 0.063 per Equity Incentive.
5. Mr Williams submits and I accept that holders of performance rights or similar rights to receive Cirrus Networks shares, who are also Cirrus Networks shareholders, are not in a separate class of members by reason only that they also hold such rights: Re Cashcard Australia Ltd (2004) 48 ACSR 738; Re Foster's Group Ltd (No 2) [2011] VSC 547 at [38]-[43]; Re ELMO Software Pty Ltd [2023] NSWSC 12 ("ELMO") at [25].
6. Mr Williams also notes that three directors of Cirrus Networks hold Equity Incentives, comprising options or, in the case of one director, options and performance rights. Mr Williams rightly recognises that the case law indicates that, where a director will receive a substantial benefit in relation to a scheme which other shareholders will not receive, that benefit should be disclosed as a matter for shareholders to take into account when considering that director's recommendation, and a director's recommendation is acceptable if sufficient disclosure of the relevant director's interest in the scheme is provided to shareholders: Re Kidman Resources Ltd (2019) 375 ALR 760 at [115]; Re Intega Group Ltd [2021] NSWSC 1434 at [22]; Re Kyckr Ltd [2022] NSWSC 1316 at [18]; Re Pendal Group Ltd (No 2) [2022] NSWSC 1648 at [25]. I accept that the relevant directors' Equity Incentives are sufficiently disclosed in the Chairman's letter and in sections 1.5 and 10 of the scheme booklet.
7. Fourth, Mr Williams addresses the treatment of Ineligible Foreign Shareholders. He points out that a Cirrus Networks shareholder will not be entitled to the scrip consideration if they are an Ineligible Foreign Shareholder and will instead be entitled only to the Maximum Cash Consideration. If an Ineligible Foreign Shareholder elects a form of scheme consideration other than the Maximum Cash Consideration or fails to make an election, any New Atturra Shares it would otherwise be entitled to be issued will be issued to a nominee who will sell them on behalf of that Ineligible Foreign Shareholder and provide the Ineligible Foreign Shareholder with the net proceeds of the sale, under cl 6.4 of the scheme of arrangement. Mr Williams notes that, as at 10 October 2023, there are only four Ineligible Foreign Shareholders, representing 1.33% of the Cirrus Networks shares on issue, although I recognise this matter will still be important to those four shareholders. In any event, as Mr Williams points out, the proposed treatment of Ineligible Foreign Shareholders accords with common practice adopted in schemes of arrangement where scrip comprises (or is a component of) the proposed scheme consideration and does not give rise to a need for those shareholders to meet together as a separate class: Re Hills Motorway Ltd (2002) 43 ACSR 101; Re Vault Intelligence [2020] FCA 1342 at [69]; Re Telstra Corporation Ltd [2022] NSWSC 1180 at [32].
8. Fifth, Mr Williams addresses the treatment of Unmarketable Parcel Shareholders in respect of the scheme. He notes that an Unmarketable Parcel Shareholder who does not give an Opt-in Notice (as defined) will receive the Maximum Cash Consideration for their shares under cl 6.5 of the scheme of arrangement, and that Unmarketable Parcel Shareholders who complete an Opt-in Notice can elect to receive New Atturra Shares as part of their scheme consideration under cl 6.13 of the scheme of arrangement. I accept that provisions dealing with unmarketable parcels of shares are not and do not give rise to a need for those shareholders to meet together as a separate class: Re Edge Minerals Ltd [2022] WASC 395 at [87].
9. Sixth, Mr Williams addresses performance risk and points out that the scheme adopts the conventional step of making the transfer of Cirrus Networks shareholders' shares to Bidder subject to the payment of the scheme consideration, under cll 5.2 and 6 of the scheme of arrangement, and that no transfer of shares may occur unless and until the total scheme consideration to which Cirrus Networks shareholders are entitled has (in respect of cash consideration) been paid into a trust account for the benefit of those shareholders and (in respect of scrip consideration) by a specified time, been issued to Cirrus Networks shareholders and the register of Atturra updated accordingly. Mr Williams also points to the deed poll that has been entered into by Bidder and Atturra in favour of the scheme shareholders. I accept that these steps are well established means of managing performance risk: ELMO at [27]-[28]. They also give rise to no reason not to convene the scheme meeting.
10. Seventh, Mr Williams addresses the exclusivity provisions associated with the scheme. Clause 10 of the SID includes "no shop", "no talk", "no due diligence", "notification" and "matching right" obligations, and the no shop, no due diligence and no talk restrictions in cll 10.2 and 10.3 are subject to fiduciary and statutory carve outs in cll 10.4 and 10.5. The "Exclusivity Period" as defined in the SID is capable of precise ascertainment, being the period from and including the date of the SID and ending on the earlier of: the termination of the SID; the Implementation Date (as defined); or the End Date, defined as 23 December 2023 (or such other date as agreed in writing by Cirrus Networks and Bidder), subject to a provision for deferral of the Implementation Date. I accept that the exclusivity provisions are sufficiently disclosed in sections 1.4(c) and 10.4 of the scheme booklet and that the case law has accepted exclusivity provisions of this kind: ELMO at [29].
11. Eighth, Mr Williams addresses the position in respect of a break fee payable under the scheme. He points out that cl 11.2 of the SID provides for Cirrus Networks to pay Bidder a break fee of A$500,000 (excluding GST) in specified circumstances, and that a break fee is not payable merely because the resolution submitted to the scheme meeting in respect of the scheme is not approved by the requisite majorities. Mr Williams points out that the break fee and the circumstances in which it is to be paid are disclosed in sections 1.4(d), 4.12 and 10.4(e) of the scheme booklet. I recognise that that break fee represents approximately 1% of the equity value of Cirrus Networks (based on the total scheme consideration provided under the Scheme), and is consistent with the 1% maximum guideline in Takeovers Panel Guidance Note 7: Lock-up devices. Mr Williams also notes that cl 12.2 of the SID provides for a reverse break free of $500,000 (excluding GST) where Cirrus Networks validly terminates the SID for material breach by Bidder or where Bidder does not comply with its obligations to pay the scheme consideration. I recognise that the fact of a reverse break fee is relevant to establishing the reasonableness of a target break fee: Re Intecq Ltd [2016] NSWSC 1429 at [18]; Re Viralytics Ltd [2018] FCA 637 at [50]. These matters also give rise to no reason not to convene the scheme meeting
12. Ninth, Mr Williams notes that Cirrus Networks has engaged Automic to dispatch documents relating to the scheme meeting to Cirrus Networks shareholders in respect of the scheme. The manner of dispatch of those documents is addressed in the proposed orders.
13. Tenth, Mr Williams addresses the question of shareholder communications. In InvoCare at [25]-[26], I reviewed the case law and observed that: "[w]hile 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."
14. Paragraph 26(k) of the Harmonised Practice Note provides that: "[t]he Court expects that the Court's approval should be sought for a supplementary explanatory statement to be sent to securityholders in a scheme. The Court also expects that the nature of the scheme proponent's intended communications with securityholders should be disclosed at the first Court hearing. Parties may also wish to continue the existing practice of drawing the Court's attention to material communications to securityholders after the first Court hearing, at least by a communication to the chambers of the judge hearing the application, to reduce the risk of difficulties arising at the second Court hearing."
15. Here, Cirrus Networks has engaged Automic to host an inbound shareholder information line. The scripts for the proposed inbound calls are in evidence and I have no difficulty with them.

Orders

1. For these reasons, I made the orders sought by Cirrus Networks 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: 31 October 2023