First Pacific Advisors LLC v Boart Longyear Ltd [2022] NSWSC 1094 | Case summary

Affidavits

MyDeal relies on the affidavit dated 9 June 2022 of Ms Catherine Merity, who is a partner in the firm of solicitors acting for MyDeal, which refer to MyDeal's announcement of the proposed scheme to ASX on 20 May 2022 and annexed the SIA, the scheme of arrangement and the form of deed poll as annexed to the announcement made by MyDeal to ASX.
MyDeal also relies on a lengthy affidavit dated 29 July 2022 of Mr Paul Greenberg, who is the non-executive chair of MyDeal, which outlines the history of MyDeal and refers to the structure of the proposed transaction. Mr Greenberg refers to the structure of the initial proposal put by Woolworths Group to MyDeal in about September 2021, which contemplated that Key Management Personnel (as defined) would continue to be involved in MyDeal's management and operation and would retain a significant equity interest in MyDeal following the proposed acquisition. That aspect of Woolworths Group's proposal is reflected in aspects of the transaction structure. Mr Greenberg also refers to his understanding that a scheme of arrangement was seen as the optimal way of achieving the intended commercial outcome, which he understands may not have been able to be achieved under Ch 6 of the Corporations Act 2001 (Cth) ("Act") without significant modifications to relevant provisions of the Act by the Australian Securities and Investments Commission ("ASIC").
Mr Greenberg refers to MyDeal's announcement of the proposed transaction to ASX on 20 May 2022 and notes that the cash consideration of $1.05 per share payable by Woolworths Group represented a substantial premium to the last closing price of MyDeal shares at the time the transaction was announced. He also outlines the intention of MyDeal's directors in respect of the proposed transaction and notes that two major shareholders of MyDeal have executed voting intention statements indicating their intent to vote in favour of the transaction in the absence of a Superior Proposal (as defined). Mr Greenberg notes that Mr Senvirtne, who holds a relevant interest in over 49% of the issued share capital of MyDeal and is MyDeal's founder and chief executive, has granted an option to Woolworths Group to purchase 19.9% of the issued share capital of MyDeal, which is exercisable upon Woolworths Group becoming aware of, or the announcement of, a Competing Proposal (as defined). I will return to the significance of that arrangement below. Mr Greenberg also outlines the conditions precedent to the scheme which include, importantly, Woolworths Group receiving notice in writing from the Australian Competition and Consumer Commission ("ACCC") that it does not propose to intervene or seek to prevent the acquisition of the MyDeal shares by Woolworths Group.
Mr Greenberg also addresses the arrangements for payment of the scheme consideration, the terms of a break fee payable by MyDeal in certain circumstances under cl 10.2 of the SIA and the circumstances in which that break fee was negotiated. He also refers to a range of exclusivity provisions in respect of the proposed transaction, including "no shop", "no talk", "no due-diligence" provisions, with the "no-talk" and "no due diligence" restrictions not applying in specified circumstances where, broadly, a failure to respond to a competing or potentially competing proposal would be reasonably likely to constitute a breach of the fiduciary duties or statutory obligations of the MyDeal board. Mr Greenberg notes that those exclusivity provisions are disclosed in the scheme booklet. I will return to the length of the exclusivity period below.
Mr Greenberg also addresses the circumstances in which the SIA may be terminated by MyDeal or Woolworths Group and the proposed treatment of incentive plan options issued by MyDeal, which would be cancelled pursuant to their terms rather than dealt with under the proposed scheme. Mr Greenberg set out the shares held by MyDeal's directors and also referred to the treatment of incentive plan options held by MyDeal's directors, with the result that Mr Senvirtne would be paid about $1.15 million and other directors would be paid modest amounts on cancellation of those options. He also referred to the payment of special exertion fees to directors other than Mr Senvirtne in connection with their work as members of an independent board committee in respect of the scheme, which is also disclosed in the scheme booklet. Mr Greenberg also referred to MyDeal shares held by or controlled by Key Management Personnel, including Mr Senvirtne, to the extent to which they would retain such shares under the proposed scheme, and to post-implementation agreements between Woolworths Group and those Key Management Personnel. He referred to the role of an independent board committee in considering the scheme and noted directors' intention to recommend the scheme, in the absence of a Superior Proposal and subject to an independent expert continuing to conclude that it was in the best interests of MyDeal shareholders, and the reasons why directors took that view. Mr Greenberg also referred to other aspects of implementation of the scheme, the conduct of the proposed scheme meeting and the conduct of due diligence and verification, and confirmed his consent to act as chair of the proposed scheme meeting.
By his affidavit dated 28 July 2022, Mr James Joughin, who is a non-executive director of MyDeal, indicates his consent to act as alternate chair for the scheme meeting.
By his affidavit dated 28 July 2022, Mr Simon Quodling, who is a client services manager at Boardroom Pty Ltd ("Boardroom"), refers to the engagement of Lumi Technologies Pty Ltd ("Lumi") to provide registration and vote-counting services at the scheme meeting and the extraordinary general meeting ("EGM") of MyDeal shareholders for the purposes of item 7 of s 611 of the Act. Mr Quodling notes that the proposal for the scheme meeting and the EGM to be conducted as hybrid meetings on 6 September 2022, and also outlines the manner in which the in-person aspect of those hybrid meetings will be conducted. By an affidavit dated 29 July 2022, Mr Oliver Bampfield, who is the managing director for Lumi in Australia, referred to its engagement by Boardroom to provide registration and vote counting services at the scheme meeting and to the manner in which the Lumi online system would be used for the virtual conduct of the meeting.
By his affidavit dated 29 July 2022, Mr Andrea De Cian, who is a partner of Grant Thornton Australia Ltd and an authorised representative of Grant Thornton Corporate Finance Pty Ltd, addressed the terms of his independent expert report in connection with the proposed scheme. Mr De Cian noted that he and Ms Jannaya James of Grant Thornton had overall responsibility for the preparation of the independent experts report, and had regard to ASIC's Regulatory Guides 111 and 112 which deal with the content of expert reports and the independence of experts; and he confirmed the correctness of the information contained in the report, to the best of his and Ms James' knowledge and belief, and that they continued to hold the opinions expressed in that report. He also confirmed that he had made all inquires that he believed were desirable and appropriate and that neither he nor Ms James had become aware of any factual circumstances since the date of the report which caused them to change their opinions expressed in it. Mr De Cian also addressed the position in respect of a proposed shareholders agreement, which was one of the post-implementation agreements with Woolworths Group, and the consideration which would be received by Key Management Personnel for their Excluded Shares (as defined) if that option under that agreement was exercised. The independent expert report prepared by Grant Thornton was exhibited to Mr De Cian's affidavit.
By an affidavit dated 29 July 2022, Mr Christopher Mills, who is the head of mergers and acquisitions at Woolworths Group, addressed the terms of the SIA and the verification of information concerning Woolworths Group in the scheme booklet, and also referred to the exclusivity provisions and break fee under the SIA. Mr Mills' evidence (Mills 29.7.2022 [26]-[27]) was that: "The Exclusivity Provisions and Target Break Fee were included in the SIA as the result of what I consider, based on my experience, to be normal commercial negotiations between the parties. I was involved in those negotiations, including in respect of clauses 8 to 10 of the SIA. Ashurst assisted and advised Woolworths Group in those negotiations. Woolworths Group considered that, before committing to the SIA, it was necessary that clauses 8 to 10 were included in order to provide satisfactory protection of Woolworths Group Group's interests by obtaining reimbursement of a reasonable estimate of the significant costs that Woolworths Group would occur in the event that the Scheme is not implemented in the circumstances set out in clause 10.2 of the SIA." I do not doubt that the exclusivity provisions reflected the result of arm's length negotiations between the parties, but I will return to an issue as to the length of the exclusivity period below.
By his affidavit dated 1 August 2022, Mr Ron Smooker, who is a partner in the firm of solicitors acting for MyDeal, referred to correspondence with ASIC concerning the scheme booklet and notice of the proposed scheme hearing; to correspondence with ASX in relation to a waiver required in connection with the transaction; and to a letter dated 14 June 2022 issued by the ACCC seeking views from interested parties as to the proposed scheme. Mr Smooker also exhibited a final version of the scheme booklet, which was amended further in several respects in the course of the first Court hearing. The correspondence between MyDeal's solicitors and ASIC addressed, at some length, the commercial reasons for the structure of the transaction, and the exclusion of some of management's shareholding from the scheme. Dr Austin, with whom Mr May appears for MyDeal, drew attention to the explanation provided for that structure and other aspects of the proposed transaction in the course of the first Court hearing.
By his second affidavit dated 2 August 2022, Mr Smooker referred to further correspondence with ASIC; noted an amendment to the scheme booklet to include the executed deed poll and also addressed a correction to Mr Greenberg's affidavit in respect of the percentage as to which one of the Key Management Personnel would participate in the scheme. Mr Smooker also addressed the length of the exclusivity period in respect of the scheme, as follows: "I was involved in the negotiation of the [SIA] on behalf of MyDeal, particularly in relation to the conditions precedent and the exclusivity period. The [SIA] is conditional on the ACCC providing a 'no objection' letter. There were discussions between Woolworths Group and MyDeal as to the length of time it would take the ACCC to deal with the application given timetable outcomes in prior transactions and current heightened levels of market activity potentially impacting on the ACCC's workload, resourcing and turnaround time. Having regard to those matters, Woolworths Group and MyDeal ultimately agreed on an exclusivity period of 12 months to allow sufficient time for regulatory approvals under the [SIA] to be obtained." Again, I do not doubt the rationality of that agreement from the perspective of MyDeal or Woolworths Group, although I return below to the question whether that period of time would have been reasonable, particularly having regard to Woolworths Group taking a call option over some 19.9% of MyDeal's shares.
By a further affidavit dated 2 August 2022, filed after the length of the exclusivity period had come into question at the first Court hearing, Ms Melissa Fraser, who is a partner in the firm of solicitors that acts for Woolworths Group in the transaction, outlined the likely process for the ACCC's review of the proposed transaction. She noted that the ACCC had published on its public informal merger review register that the provisional date for the announcement of its findings in relation to the proposed transaction is 1 September 2022. That provisional date is consistent with the anticipated timing of the scheme as set out in the scheme booklet, which contemplates the scheme meeting and the second Court hearing taking place in early September 2022, although that timetable is fairly qualified by a recognition of the fact that it may be affected by regulatory developments. Ms Fraser noted that there are a range of potential outcomes when the ACCC makes its announcement of findings in relation to the proposed transaction, which could include an extension of the review period and revision of the ACCC's provisional decision date; the making of a final decision that the ACCC did not propose to intervene or seek to prevent the transaction; or the release of a statement of issues indicating areas of competition law concern in respect of the proposed transaction and inviting market participants to make further submissions, in a process known as a "Phase 2 review". Ms Fraser referred to an example of a Phase 2 review which had taken approximately 10 months from announcement of the transaction to the point at which the ACCC informed Woolworths Group that it did not propose to intervene or seek to prevent the acquisition. It is, of course, difficult to generalise from a single transaction which took 10 months to any view that Phase 2 reviews generally take that period, and I recognise that the length of such a review would necessarily be uncertain in the circumstances. I return to the question of the length of the exclusivity period in this matter below.

Specific issues arising in the scheme The treatment of Excluded Shares

Pursuant to cl 2.3 of the SIA and cl 5 of the scheme, the scheme applies to Scheme Shares (as defined) held by Scheme Shareholders (as defined). A "Scheme Share" is defined in the SIA as, broadly, a fully paid ordinary share in MyDeal other than an "Excluded Share." An "Excluded Share" is defined, broadly, as 48,997,216 My Deal shares held by one or more entities controlled by Mr Senvirtne (being 18.9% of issued MyDeal shares); 1,316,942 MyDeal shares held by one or more entities controlled by Ms Dockery (being 0.5% of issued MyDeal shares); 1,043,377 MyDeal shares held by one or more entities controlled by Mr Ramler (being 0.4% of issued MyDeal shares); or any MyDeal shares held by a member of the Woolworths Group and its subsidiaries (together, "Bidder Group") or any person who holds those shares on behalf of, or for the benefit of, any member of the Bidder Group and does not hold those shares on behalf of, or for the benefit of, any other person, which will not be transferred to Woolworths Group under the proposed scheme. The Excluded shares are excluded from voting at the scheme meeting to consider whether to pass the resolution approving the proposed scheme and their holders will not participate in the proposed scheme nor will they receive the cash consideration of $1.05 per Scheme Share. The holders of Excluded Shares (other than the Bidder Group) will retain an approximately 19.8% minority shareholding in MyDeal, and will remain involved in the management of MyDeal, with Mr Senvirtne remaining as chief executive officer. This structure reflects the Woolworths Group's commercial objectives in the acquisition and the identification of Mr Senvirtne, Ms Dockery, and Mr Ramler as Key Management Personnel for the purposes of the SIA and in the scheme booklet.
In giving effect to this structure, 60% of Mr Senvirtne's current MyDeal shares and 70% of each of Ms Dockery's and Mr Ramler's shares are treated as MyDeal Participating Shares (as defined) for the purposes of the proposed scheme. It is proposed that these shares will be voted at the scheme meeting (although MyDeal has undertaken that their votes will be tagged) and receive the cash consideration if the proposed scheme becomes effective. This structure is disclosed in section 4.1 of the scheme booklet. I address the question of classes in respect of the scheme below. This matter otherwise gives rise to no reason not to convene the scheme meeting. Call option agreement
On 20 May 2022, on the same date as the SIA was executed, Woolworths Group entered into a call option agreement with Mr Senvirtne in his capacity as trustee of the Kandy Temple Trust, by which, broadly, Mr Senvirtne irrevocably granted it an option to purchase 51,506,634 shares held or controlled by him (which is 19.9% of the issued capital of MyDeal) on the earlier of (i) Woolworths Group being aware of the receipt by MyDeal of a competing proposal, or (ii) the announcement of a competing proposal. Clause 2 of that agreement relevantly provides that Mr Senvirtne is eligible to receive an additional amount above the option consideration (which would otherwise be equal to the scheme consideration) if Woolworths Group on-sells the relevant MyDeal Shares within twelve months of the exercise of the call option. That agreement is disclosed in sections 4.1 and 6.6.1 of the scheme booklet.
Mr Greenberg's evidence is that he understood that the grant of the call option was the result of commercial discussions between Woolworths Group and Mr Senvirtne, and that Woolworths Group requested the grant of that option to demonstrate Mr Senvirtne's commitment to the proposed scheme (Greenberg [31]). That agreement plainly also reduces the risk of a successful competing third party bid for MyDeal, and I address its implications for the exclusivity period in respect of the proposed scheme below. Courts have, on several occasions, considered call option agreements which grant a bidder with the option to purchase up to 19.9% of a target's issued share capital upon the emergence of a competing proposal. The case law indicates that the fact that such an option, if exercised, may give rise to a blocking stake, is not in itself a sufficient reason to decline to convene a scheme meeting or approve a scheme, and I should not depart from that approach where it is long established: Re Hostworks Group Ltd (2008) 26 ACLC 137; [2008] FCA 64; Re MAC Services Group (2010) 80 ACSR 390; [2010] NSWSC 1316 ("MAC Services"); Re Cellestis Ltd [2011] VSC 284 ("Cellestis"). Post-Implementation Agreements
Item 8 of cl 3.2 of the SIA provides that one of the conditions precedent to the transaction is that certain Post-Implementation Agreements (as defined) are agreed and remain in Agreed Form (as defined) as at 8.00 am on the Second Court Date (as defined). Woolworths Group and the Key Management Personnel also entered into a Process Deed containing obligations to negotiate the Post-Implementation Agreements in good faith and as promptly as possible. The Post-Implementation Agreements include a shareholders agreement, including put and call options in relation to the remaining shareholding in MyDeal to be retained by the Key Management Personnel; employment agreements with each Key Management Person; documentation relating to a management incentive plan which is to be implemented by MyDeal on the Implementation Date (as defined); and partnership agreements to be entered into between Woolworths Group and MyDeal on the Implementation Date. These agreements are described in section 9 of the scheme booklet and Mr Greenberg's evidence (Greenberg 29.7.22 [114]-[115]), on information provided by Mr Senvirtne, is that those agreements are accurately described in section 9 of the scheme booklet; the terms of those agreements have been substantially agreed; and Woolworths Group and the Key Management Personnel have agreed that the latter will not participate in the management incentive plan.
Dr Austin recognises that, by reason of put and call options taken by Woolworths Group under the shareholders agreement, it will acquire a relevant interest in MyDeal within the meaning of Pt 6.1 of the Act, where it already has a relevant interest and voting power in respect of 19.9% of MyDeal shares because of the call option it took from Mr Senvirtne, to which I referred above. That matter will be addressed by an EGM held after the scheme meeting at which MyDeal shareholders will consider a resolution to approve the grant of the put and call options for the purposes of item 7 of s 611 of the Act. Mr Greenberg recognises, in his affidavit, the possibility that Key Management Personnel will receive more than the scheme consideration in relation to the Excluded Shares held by them depending on the financial performance of MyDeal after the Implementation Date. However, they also take the risk of MyDeal's future performance in that regard. Details of the put and call options and the EGM resolution are described in the chairman's letter, section 4.1 and section 9.2.1 of the scheme booklet, and the notices of meetings are Attachment 4 to the scheme booklet. Incentive plan options
Dr Austin points out that, in the period up to 24 January 2022, MyDeal has issued 12,925,696 incentive plan options to subscribe for MyDeal shares, which are not quoted for trading on any stock exchange. Clause 2.8 of the SIA requires that MyDeal must ensure that by no later than the Effective Date (as defined), there are no outstanding incentive plan options and Schedule 2 to the SIA provides that the incentive plan options are to be cancelled as at the Effective Date, and on cancellation MyDeal will pay each option holder an amount equal to the scheme consideration less the exercise price for the option. The arrangements for the incentive plan options are summarised in sections 5.3.1 and 10.2.2 of the scheme booklet. Performance risk
Dr Austin rightly recognises that it is common to provide a mechanism to address the issue of "performance risk" in a scheme, namely any risk that the acquirer will not comply with its obligations to pay the scheme consideration to target shareholders, and a practice has developed to address the risk whereby the transfer of target shares to an acquirer is conditional on the payment of the consideration to target shareholders: Re Skilled Group Ltd (No 1) [2015] VSC 789 at [32]; Re Legend Corporation Ltd [2019] FCA 1249 at [34]-[38] Re QMS Media Ltd [2019] FCA 2172 at [39]; Re Ellerston Global Investments Ltd [2020] NSWSC 879 at [29].
Dr Austin points out that cl 5(a) of the scheme relevantly provides that, on the Implementation Date and subject to the provision of the Scheme Consideration in the manner contemplated by cl 6.1, and Woolworths Group having provided MyDeal with written confirmation of the provision of the Scheme Consideration, the Scheme Shares, together with all rights and entitlements attaching to the Scheme Shares as at the Implementation Date, must be transferred to Woolworths Group. Clause 6.1(a) of the scheme provides that Woolworths Group must, by no later than the business day before the Implementation Date, deposit, or procure the deposit, in cleared funds an amount equal to the aggregate scheme consideration into an Australian dollar denominated trust account with an AFI operated by MyDeal as trustee for the Scheme Shareholders. Clause 6.1(b) of the scheme provides that on the Implementation Date, and subject to funds having been deposited in accordance with cl 6.1(a), MyDeal must pay the scheme consideration from the trust account referred to in cl 6.1(a) to each Scheme Shareholder in respect of their Scheme Shares. Mr Greenberg's evidence is that he has been advised by MyDeal's chief financial officer that steps are being taken to establish the trust account, and that this will be in place prior to the Effective Date. This mechanism should have the result that Scheme Shares will not be transferred to Woolworths Group until the scheme consideration is first transferred to a trust account operated by MyDeal as trustee for the Scheme Shareholders. Woolworths Group has also executed the deed poll, which provides that Woolworths Group covenants in favour of MyDeal shareholders to observe and perform the steps attributed to it under, and otherwise to comply with, the scheme, subject to and in accordance with the terms of the scheme.
Dr Austin submits and I accept that these mechanisms adequately address the issue of performance risk in respect of the scheme. Exclusivity provisions
Dr Austin points out that cl 8 of the SIA contains exclusivity provisions including (at cl 8.2) "no shop", "no talk", and "no due-diligence" restrictions to the effect that MyDeal must not solicit, initiate, participate in or encourage any competing proposal to the proposed scheme. These restrictions are subject to a "fiduciary exception" in cl 8.3 of the SIA. The SIA provided that these exclusivity provisions continued for the "Exclusivity Period", defined as the period commencing on the date the SIA was entered (20 May 2022) and ending on the earliest of: when the SIA was terminated in accordance with its terms; the Implementation Date (as defined); or the End Date (being 20 May 2023, 12 months after the date of the SIA). Dr Austin also draws attention to paragraph 10.7.3(f) of the scheme booklet which deals with the position if a condition precedent to the scheme is not satisfied and he submits that if, for example, the scheme was not approved by the requisite majorities at the scheme meeting or the EGM Resolution (as defined) was not passed at the EGM, MyDeal would have the right to terminate the SIA after a process of consultation if no alternative means of implementing the scheme is agreed. He notes that the Court addressed a somewhat similar provision in Re The Trust Company (Re Services) Ltd as responsible entity of the VitalHarvest Freehold Trust [2021] NSWSC 108 at [40].
Dr Austin submits that exclusivity restrictions of this kind are now commonplace in schemes of arrangement, and have not been regarded as an impediment to the convening of a meeting to approve a scheme, subject to appropriate disclosure in the scheme booklet: Re TPG Telecom Ltd [2020] NSWSC 772 at [22]; Dragontail Systems Ltd, in the matter of Dragontail Systems Ltd [2021] FCA 834 (Dragontail). Dr Austin also refers to Re Arthur Yates & Co Ltd (2001) 36 ACSR 758; [2001] NSWSC 40 at [9], where Santow J observed that exclusivity provisions should exist for no more than a reasonable period capable of precise ascertainment; be subject to the directors' fiduciary duties and not be otherwise unlawful; and be given adequate prominence when disclosed in the scheme booklet.
But for a change in the approach adopted by the parties at the first Court hearing, I would have been troubled by the length of the 12 month exclusivity period contained in the SIA and may well have had to reserve judgment to address that issue. The length of that exclusivity period would have been of greater concern where Woolworths Group, as I noted above, has also taken a call option over 19.9% of the shares in MyDeal from Mr Senvirtne, exercisable in the event of a competing offer, which would be a substantial practical obstacle to a competing takeover bid by a party which sought to acquire all the shares in MyDeal. As I noted above, the case law in the scheme context has permitted acquirers to take that approach. However, the length of a reasonable exclusivity period here needs to be considered in the context of the protections that are already available to Woolworths Group, in a commercial sense, by reason of its right to acquire such a stake in the event of a competing offer.
Dr Austin fairly drew attention to the range of case law which has considered the lengths of exclusivity periods, and a useful table of cases and corresponding exclusivity periods is contained in Mr Damian's and Mr Rich's book Schemes, Takeovers and Himalayan Peaks (Herbert Smith Freehills, 4th ed, 2021) at pp 990-994. Numerous cases have considered the length of exclusivity periods, which have ranged from just under 5 months, to up to 12 months in three cases there referred to and 13 to 14 months in several others. I also recognise that affidavit evidence was led to support the longer exclusivity period of 12 months which was initially sought. The affidavit evidence referred to the fact that it resulted from commercial negotiations between the parties, undertaken at arm's length, and I recognise the significance of that matter. I also recognise the significance of the fact that the exclusivity period was agreed in circumstances that shareholders will obtain what may be, from their perspective, an attractive offer. The opportunity to consider that offer is, of course, obtained in part in exchange for the giving of an exclusivity period. However, that does not have the consequence that the Court will adopt any exclusivity period of any length as agreed between the parties, where the case law has recognised that exclusivity periods must be for no more than a reasonable period in the relevant circumstances.
Ms Fraser's affidavit, to which I referred above, provides some basis for a longer exclusivity period. As I noted above, she recognises that the ACCC's consideration of the proposal may be completed promptly and within the time contemplated by the timeline in the scheme booklet, to allow a scheme meeting to take place on 6 September 2022 and a second Court hearing on 13 September 2022, long before the 12 months initially sought for the exclusivity period. Ms Fraser also points to the fact that that process may take longer and, on one possibility, up to 10 months. However, that must also be read in the context that, even if that process extends over that longer period, Woolworths Group is still protected by the call option which it has taken over 19.9% of MyDeal shares, should a competing offer be made.
It is, of course, understandable that Woolworths Group, from a commercial perspective, would seek a longer exclusivity period, and indeed it is also understandable that MyDeal, and its directors and those advising it, may have been prepared to give that longer exclusivity period in the relevant circumstances, in order to achieve the benefit of Woolworths Group's offer for their shareholders. Having said that, the Court ultimately has a supervisory jurisdiction, and there would have been a difficult question as to whether, in the relevant circumstances, a 12 month period was justifiable, including by reference to the several cases which had allowed longer periods to which Dr Austin had referred, which must each be understood in light of their relevant facts and circumstances. It would have been necessary to bear in mind, in that respect, the risk of a gradual increase in the length of exclusivity periods, to which I have referred in earlier decisions, where each case refers to the longer exclusivity periods in earlier cases, and then seeks to lengthen them further. I would have had difficulty in accepting any general proposition that, even in a moderately complex acquisition scheme, and in a matter where competition issues might arise, an exclusivity period of 12 months should ordinarily be accepted, particularly in circumstances where, as here, the acquiring entity has other protections available to it, including the call option to which I have referred above.
Happily, it is not necessary to address these issues further, because MyDeal and Woolworths Group sensibly indicated, in the course of the first Court hearing, that they would amend the SIA to reduce the exclusivity period to 9 months and offered an undertaking to the Court to do so, and this has now been done. It seems to me that that period is justifiable, first, by reference to the matters disclosed in Ms Fraser's affidavit, since it involves a fair recognition, on the one hand, of the potential for the transaction to be delayed by the ACCC's review of its implications for competition; and, on the other hand, the interests of MyDeal and its shareholders in not being left in a position where that scheme has neither proceeded, nor been terminated, for a lengthy period. I also bear in mind that several cases have accepted exclusivity periods of 9 months, although I recognise also that those cases must be read having regard to their particular facts. The reduction in the exclusivity period allowed me to be satisfied, at the conclusion of the first Court hearing, that that exclusivity period would not prevent approval of the proposed scheme at the second Court hearing, if it receives shareholders' approval at the scheme meeting. Break fee
Dr Austin points out that, under the SIA, MyDeal must pay Woolworths Group a break fee of $2,850,000 (exclusive of GST) in specified circumstances. That break fee is not payable if the proposed scheme is not approved by the requisite statutory majorities at the scheme meeting. Mr Greenberg's evidence (Greenberg 29.7.22 [58]) is that the amount of the break fee represents approximately 1% of the equity value of MyDeal as at that date. Mr Greenberg and Mr Mills also give evidence of the negotiation of the break fee between the parties, and the parties had regard to the Takeover Panel's guidance in Guidance Note 7: Lock-up Devices (GN 7) in that negotiation (Greenberg 29.7.22 [59]; Mills 29.7.22 [26]-[27]). Dr Austin also points out that break fees are common features in schemes of arrangement, and the authorities suggest they are acceptable provided they: are a genuine pre-estimate of the internal and external costs that would be incurred by an acquirer in respect of a scheme, including opportunity costs; are not payable if the members do not vote in favour of the scheme; and are unlikely to influence voting at the scheme meeting: Re Vocus Group Ltd [2021] NSWSC 630 at [18] and the authorities there cited. Dr Austin also submits and I accept that the arrangements concerning the MyDeal break fee are not such as could influence voting at the scheme meeting, where that voting against the resolution placed before the meeting will not trigger payment of the fee, and that the fee matches the 1% limit accepted by the Takeovers Panel with respect to transactions under Ch 6 of the Act. This matter does not give rise to any reason not to convene the scheme meeting. Deemed warranties
Clause 9.2(b) of the scheme provides that each MyDeal shareholder is deemed to have warranted to Woolworths Group that all their Scheme Shares (including any rights and entitlements attaching to those shares) will, at the date of their transfer to Woolworths Group, be fully paid and free from all mortgages, charges, liens, encumbrances, pledges, security interests and interests of third parties of any kind, whether legal or otherwise, and restrictions on transfer of any kind; that each MyDeal shareholder has full power and capacity to transfer their Scheme Shares to Woolworths Group together with any rights and entitlements attaching to those shares; and they have no existing right to be issued any MyDeal shares or securities. Dr Austin submits and I accept that such warranties are acceptable provided that the attention of members have been drawn to them and their rationale is to ensure that scheme participants whose shares are subject to an encumbrance are not unfairly advantaged: Re APN News & Media Ltd (2007) 62 ACSR 400; [2007] FCA 770 at [57]-[63]; Re Sino Gold Mining Ltd (2009) 74 ACSR 647; [2009] FCA 1277 at [29]-[31]; Dragontail at [39] and the authorities there cited. This provision is appropriately disclosed in the scheme booklet and provides no reason not to convene the scheme meeting. Independent board committee and director recommendations
Dr Austin points out that, in the light of Mr Senvirtne's interest in the proposed scheme, the board of MyDeal established an independent board committee ("IBC") to consider and negotiate the terms of the proposed scheme with Woolworths Group, comprising the non-executive directors of MyDeal. The members of the IBC (and entities controlled by them) were not party to the Post-Implementation Agreements and did not receive any benefits under them. However, the non-executive directors of MyDeal are eligible to receive "special exertion fees" in relation to their work as part of the IBC, totalling $195,000. This payment is disclosed in section 10.2.3 of the scheme booklet and is not conditional on the Court approving the proposed scheme.
The chairman's letter in the scheme booklet indicates that MyDeal's directors, including Mr Senvirtne, unanimously recommend the proposed scheme to MyDeal shareholders. MyDeal directors other than Mr Senvirtne will be entitled to receive modest payments in relation to the cancellation of the incentive plan options held by them of between $5,500 and $10,000 each and, as I noted above, they will also be eligible to receive special exertion fees in respect of the role on the IBC which do not depend on the outcome of the scheme. This is disclosed in the chairman's letter and in the scheme booklet in sections 5.3.2, 10.2.2, 10.2.3 and in several footnotes. Mr Senvirtne will receive more substantial benefits which I have noted above and which are also disclosed in the scheme booklet. Mr Greenberg's evidence (Greenberg 29.7.22 [125]-[126]) is that the IBC members' consider that, despite Mr Senvirtne's interests in the outcome of the proposed scheme, it is appropriate for him to make a recommendation on the proposed scheme given his management role and role in the operation of the proposed scheme; and he has been informed by Mr Senvirtne that Mr Senvirtne also considers that it is important and appropriate for him to make a recommendation to MyDeal shareholders in relation to voting on the proposed scheme, given its importance and Mr Senvirtne's role as a director of MyDeal.
I adopt the approach taken in cases including Re SMS Management & Technology Ltd [2017] VSC 257; Re Kidman Resources Ltd (2019) 375 ALR 760; (2019) 139 ACSR 122; [2019] FCA 1226; Wellcom Group Ltd, in the matter of Wellcom Group Ltd [2019] FCA 1655 ("Wellcom"), which dealt with a director's recommendation in a somewhat similar transaction; Re Villa World Ltd [2019] NSWSC 1207; Re GBST Holdings Ltd [2019] NSWSC 1280; Re Citadel Group Ltd (2020) 148 ACSR 598; [2020] FCA 1580; Re BINGO Industries Ltd [2021] NSWSC 798; Re RXP Services Ltd [2021] FCA 38 and Re Mainstream Group Holdings Ltd [2021] FCA 948. I accept that the interests of the MyDeal directors including Mr Senvirtne do not prevent them from making a voting recommendation to MyDeal shareholders where those interests are sufficiently disclosed in the scheme booklet and MyDeal shareholders may take them into account in determining the weight to give to that recommendation. This matter also does not provide any reason not to order the convening of the scheme meeting. Class issues
Dr Austin rightly points out to the test for identifying a class, for the purposes of a scheme of arrangement, as set out in Sovereign Life Assurance Company v Dodd [1892] 2 QB 573 at 583, where Bowen LJ observed that: "It seems plain that we must give such a meaning to the term 'class' as will prevent the section being so worked as to result in confiscation and injustice, and that it must be confined to those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest."
Dr Austin also rightly points out that, in applying that test, courts are conscious that if shareholders are split into classes, the effect may be to give a minority group an effective veto over the wishes of the majority: Wellcom at [43]. He also refers to the observation of Bathurst CJ (with whom Beazley P and Leeming JA agreed) in First Pacific Advisors LLC v Boart Longyear Ltd [2017] NSWCA 116 at [80] that: "The test seems to me to involve three questions. First, what are the rights which existing creditors (or members) have against the company and to what extent are they different. Second, to what extent are those rights differently affected by the scheme. Third, does the difference in rights or different treatment of rights make it impossible for the creditors (or members) in question to consider the scheme as one class." Dr Austin submits that Bathurst CJ here separated the first step in Bowen LJ's test into two components, namely an identification of the pre-existing differential rights, and then a consideration as to what extent those rights are differently affected by the scheme. Dr Austin submits, and I accept, that this test is the correct test to apply to determine whether to subdivide a group of shareholders or creditors into separate classes for voting purposes, and that it is not necessary to subdivide shareholders or creditors into separate classes if the only basis for differentiation is their respective interests rather than a differentiation concerning rights.
Turning first to the position of holders of incentive plan options, Dr Austin recognises that there are cases that suggest that the holders of options issued by a scheme company over its shares are to be treated, for the purposes of s 411 of the Act, as contingent creditors of the company: Re Coventry Resources Ltd [2012] FCA 1252 at [18]. On that basis, a scheme of arrangement that involves an adjustment of the rights of option holders (such as existing options being cancelled or new options being acquired) will require a separate creditors' scheme of arrangement to adjust the option holders rights in addition to a scheme for the members. He submits, and I accept, that result does not arise here, where the scheme of arrangement does not modify the rights of the Incentive Plan Option holders, and their prospective right to shares will be cancelled by termination under the Plan Rules (as defined) before the record date for calculating entitlements under the proposed scheme. He submits, and I also accept, that the interests of MyDeal shareholders who are also holders of incentive plan options are not so different as to make it impossible for them to consult with the other members of MyDeal for the purposes of voting on the proposed scheme, and that no separate classes are required on that basis: Cellestis at [12]-[18]; Re Xplore Wealth Ltd [2020] FCA 1868 at [37]; Sienna Cancer Diagnostics Ltd, in the matter of Siena Cancer Diagnostics Ltd [2020] FCA 899 at [76]-[81].
Turning now to the position of Key Management Personnel who hold Excluded Shares, Dr Austin submits that the structure of the proposed scheme is that Woolworths Group will only be acquiring the Participating Shares (as defined, equal to 80.2% of the MyDeal Shares on issue); each holder of Participating Shares will be entitled to receive the scheme consideration and that consideration will be the same for each participating share; and the Excluded Shares are not eligible to participate, and will not participate, in the proposed scheme and will not receive the scheme consideration. He submits that the holders of the Excluded Shares are not being provided with different opportunities under the proposed scheme than other MyDeal shareholders and that, if economic benefits subsequently flow to holders of Excluded Shares under the put and call options taken by Woolworths Group as part of the Post-Implementation Agreements, these are separate transactions not forming part of the proposed scheme rather than collateral benefits within the control transaction. Dr Austin submits that these do not differentiate the rights of the Key Management Personnel as against MyDeal from those of other shareholders and do not provide a basis for the Court to order that they vote in a separate class at the scheme meeting. He also refers to the treatment of a similar issue in somewhat similar circumstances in Wellcom, where it was possible that the shares excluded from the scheme could later be acquired at a price higher than the scheme consideration. O'Bryan J there held (at [47]) that this was not sufficient to exclude a commonality of interest with other shareholders at the proposed scheme meeting, or require that those shareholders vote in a separate class, for reasons including that the independent expert had assessed that an appropriate EBITDA multiple for the valuation of Wellcom shares was in a specified range and the EBITDA multiple that was to be used to calculate the higher option exercise price in the option deed was in that range, and that the growth achieved over the term of the option deed was not assured, so the excluded shareholder in that case had to forego the opportunity of receiving cash consideration under the scheme that could be reinvested.
Dr Austin points out that, here, the independent expert has been asked to express a view as to whether acquisition of a relevant interest in MyDeal shares by Woolworths Group is fair and reasonable to MyDeal's shareholders that are not associated with Woolworths Group and the holders of the Excluded Shares for the purposes of item 7 of s 611 of the Act and has observed, inter alia, that the exercise price of the Excluded Shares will be determined based on substantially the same transaction multiple implied in the scheme consideration, although by reference to the then gross transaction value. Dr Austin also points to the independent expert's observation, at page 21 of the independent expert's report, that: "There is no certainty that the K[ey] M[anagement] P[ersonnel] will be able to realise a higher value on the sale of the Retained Shares than the [s]cheme [c]onsideration… we note that the KMP are effectively swapping the certainty of the [s]cheme [c]onsideration for a potential future higher return if they deliver into the agreed business plan. At the same time, if the performance of the business does not meet expectations due to specific circumstance of M[y]D[eal] or for deteriorating market conditions, the KMP may sell the Retained Shares at a lower value than the [s]cheme [c]onsideration."
Dr Austin submits and I accept that separate class meetings are here not required in respect of the Key Management Personnel or associated entities for substantially the same reasons they were not required in Wellcom. For completeness, the call option that Woolworths Group has taken from Mr Senvirtne over 19.9% of the shares in MyDeal also does not give rise to a class issue, and it is not to the point that Mr Senvirtne may receive a higher consideration if that option is exercised and the shares are on-sold, than he would under the proposed scheme, since any difference arising from that potential outcome is a difference of interests, not of rights: MAC Services at [23]; Cellestis at [20]. However, it is appropriate that votes cast by Mr Senvirtne and other Key Management Personnel and their associated entities be tagged, as MyDeal has accepted, so that the Court can assess whether the scheme would have been approved if those votes were disregarded, which will be relevant to the question of fairness at the second Court hearing: Re SFG Australia Ltd [2014] FCA 831 at [26]. Dispatch of scheme documents and hybrid meeting
The manner in which scheme documents will be dispatched to MyDeal shareholders does not give rise to any issues of controversy. It is proposed that the scheme meeting and the EGM will take place as hybrid meetings, with shareholders and their authorised proxies, attorneys and corporate representatives be able to attend the meetings either in person or online by way of live webcast. Dr Austin points out that cl 13.2.1 of MyDeal's constitution provides that "[t]he Company may hold a general meeting at two or more venues, including by way of virtual or hybrid meeting, using any technology that gives shareholders as a whole a reasonable opportunity to participate". He also points out that s 249R(b) of the Act permits a meeting to be held as a hybrid meeting; s 249S(1) provides that a company that holds a meeting of its members must give the members entitled to attend the meeting, as a whole, a reasonable opportunity to participate in the meeting; and s 249S(7) requires that the technology used in a virtual meeting must be reasonable, and allow the members who are entitled to attend the meeting, and do attend the meeting using that virtual meeting technology, as a whole, to exercise orally and in writing any rights of those members to ask questions and make comments. Those requirements are satisfied and the use of hybrid meetings is now common in schemes of arrangement: Re Mortgage Choice Ltd [2021] NSWSC 553 at [25]; Re AGL Ltd [2022] NSWSC 576 at [24]; Re Humm Group Ltd [2022] FCA 614. The order of the meetings, with the scheme meeting preceding the EGM, is also in accordance with previous authority: Re Link Administration Holdings Ltd [2022] NSWSC 650 at [35].

First Pacific Advisors LLC v Boart Longyear Ltd

At a glance

Court

Decision date

Before

Catchwords

Source

Catchwords

Judgment (8 paragraphs)

Parties

Legislation Cited (1)

Cases Cited (42)

Cited By (7)